Pessimists sound smart | Value Research It’s one of those phases in the equity markets when pessimists sound really smart, and optimists…
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Pessimists sound smart

It's one of those phases in the equity markets when pessimists sound really smart, and optimists...

As in every weak period in the market, there are those who are calm and collected and those who are in a panic. For the most part, this boils down to time and experience. On social media, there are any number of investors expressing worry and panic about the fall in the equity markets. One typical part of such messages is that there hasn't been such panic for two years, specifically since March 2020. The equally typical response of the experienced investor is equivalent to this kind of view is a derisive "So?"

Indeed, for someone who has seen past crashes and invested through them, it's hard to figure out what the panic is about. At this point in time, the large-cap indexes are green by about 7.5 per cent over the last one year. All that has happened is that gains made during the last 10 months have disappeared. For anyone who has chosen their stocks carefully and has invested in them gradually while keeping value in mind, there is nothing happening, there is no crash.

So if the headlines and the social media panic are making you worried about the alleged crash in the equity markets, step back and take a larger view. The first thing to pay attention to is that across any reasonable period of time - two years, three years and above, equities are in a healthy gains region. There is nothing unusual about what is happening now. In fact, business fundamentals are better now, in direction and momentum, than at any point in the last few years. In a way that often happens during crises, COVID has forced companies to focus on the fundamentals of their businesses and work to improve their financial and operational parameters.

So as an investor, what should you do about this so-called market crash? Put within this context, the answer is clear - this is an opportunity to invest more, or at the very least, to keep investing. This is very much a back-to-the-basics moment. The foundations of great returns are always laid in the stock markets' weak periods. I have never been able to understand - I say this with all honesty - if you were willing to invest in a good stock a month ago then surely you should be much more willing to buy it today? Why would anyone think the opposite?

One reason is that everyone who is arguing that the stock markets or the economy or the businesses of the world are in for a torrid time, sound like they have a well-reasoned case. It's all to do with wars and inflation and interest rates and energy prices and things like that. That's all fine and very important. However, remember one thing that someone said: pessimists sound smart, optimists make money. Why do pessimists sound smart? Because they are full of facts and trends and numbers etc, of the kind I've quoted above.

Optimists also do this, but they are far more reliant on appealing to principles and faith in human endeavour, especially beyond the immediate future. Pessimists will say something like - interest rates are going to rise from X to Y and therefore Z per cent of companies will see their finance cost go up by Rs W crore. Sounds really smart. An optimist will say yes sure, but you know what, well-run companies with competent management will find a way to deal with this and still do well because they have done so in the past.

The optimist sounds really lame here, like someone who doesn't have the requisite knowledge or facts and is just cheerleading. Except that the optimist is more likely to be correct and more likely to make money, both as a businessman and as an equity investor. Be a realist in the short-term and an optimist in the long-term. That's the unbeatable formula.

Suggested read:

Ignore the war

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