Which of these situations is better for an equity investor: a predictable crash or an unpredictable up and down market which stays unpredictable for years? The answer does not actually matter, because it's not as if we have a choice. Still, asking ourselves the question helps us understand the future better.
There's supposed to be an old Chinese curse, 'May you live in exciting times'. Now that the Chinese virus has successfully made the entire world so interesting, we have to figure out how to cope with the aftermath. Back in February 2020, the prospect for business and investors seemed dire but predictable. It appeared to be self-evident that investment markets around the world would crash and stay crashed till the virus story ended. How it would end was not clear at the time. March bore out these expectations but the story went off-script in early April 2020 and has basically remained unpredictable at a broad level since then.
I won't go into the reasons as to why this has happened right now, but it's undeniable that there is a widening gulf between the economic reality that businesses and individuals are facing and the behaviour of the stock markets. It is true that a course has been set for recovery and large parts of the global economy have set sail on it. However, it is equally true that not only has there been huge economic damage since February 2020, but the damage is continuing, albeit unevenly. There are businesses and entire sectors that are now back to normal for all practical purposes. At the same time, there are businesses whose entire future is questionable.
Not just that, it would be a mistake to think that even the first category will not suffer from the investors' point of view. Everyone has lost time. Even the least impacted businesses will be, at a minimum, a couple of years behind what they would have been had China not unleashed this virus on the world.
In any case, the sharp split between this undeniable reality and the relative good times on the equity markets is increasingly becoming a worry for investors. Anyone who is even a little sensible and thoughtful about what drives stock prices is apprehensive about the situation. Whenever there is a battle between stock prices and economic reality, you know which side wins. What should an individual do about this? Should you cut and run and come back when the dust has settled, or should you be brave and take each day as it comes?
As our long-term readers may have expected, we answer this question by not answering it! In the Value Research way of thinking, any solution to any investing problem that requires a prediction of what will happen is a non-starter. I'll put this in words that will make sense to everyone: do you try to predict who, among the people who will come near you, have COVID and then decide to wear or not wear a mask on that basis? I hope not. It's the same principle at work. The markets could crash, or drift one for a long time, or whatever. We investors need to go about our business of investing while taking all due precautions and keeping it all possibility in consideration.
However, given the disconnect between economic reality and stock prices, investors definitely need to make sure that their defences are strong. To go back to the mask analogy, investors need to treat this market as if they are going into a COVID hospital. A regular cloth mask will not do. Wear a top-quality N95 mask and a face shield. How do you do that? Make sure there are no festering mistakes in your investment strategy and portfolio. Obviously, the best way of doing that is to read the cover story in the August 2021 issue of 'Mutual Fund Insight' and implement what is recommended.
This editorial appeared in Mutual Fund Insight August 2021 issue. To read the cover story and other insightful analyses, columns and articles