Bear markets build wealth--if you let them

When markets decline as they did in 2020 or more recently from October 2021 until June 2022 or, like right now, from September 2024 until March 2025, we can have lengthy discussions about how ugly the rear-view mirror (the result of past investment) looks. Still, the following rules about investing in equities are eternal: When the rear-view mirror looks disastrous, that's when the windscreen starts to brighten up, although you may not immediately see it that way. People who invest when the results of existing investments look great and hold back when the results of existing investments look bad will never create wealth. Contrary to perception, wealth is not created in bull markets; wealth is created by investing in bear markets, which shows up in the appreciation of the investment reports when bears go into hibernation. The last 32-year CAGR (annual return) of India's nominal GDP growth is around 12.5 per cent, the annual returns of corporate earnings of indices like Sensex are around the same, and the growth in Sensex value is of a similar magnitude plus dividend yield, say 14 per cent annual return. So, if the last 32 years of compounded growth of the economy and markets are an average of 12.5 per cent and 14 per cent, respectively, how can you earn more than 14 per cent on your investment if you were to buy just the index? Arithmetically, suppose you invest when the recent average is well below 14 per cent. In that case, you stand to gain because somewhere in the near future, the average has to go above 14 per cent to reconcile with the long-term average of 14 per cent! But how do investors respond to volatility and decline in markets? Let me share that with my persona