Not the first time | Value Research There’s nothing new about the ongoing market correction. As in the past, it should be welcomed, not feared.
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Not the first time

There's nothing new about the ongoing market correction. As in the past, it should be welcomed, not feared.

This is the 16th-anniversary issue of 'Wealth Insight' and hardly the first one where the equity markets are a bit shaky. In fact, pretty early in the history of this magazine, my team and I prepared the 2008 anniversary issue, which was obviously a really bad time. I have a rather amusing memory of that year. I remember a CEO telling me proudly in an interview that his parent company in Europe was unaffected by the global financial crisis. However, by the time the interview was published, the company was defunct. So, by that standard, what is happening now is hardly a blip. Still, everyone hates market crashes. Not just actual crashes but even more modest bear markets, such as the one we are going through now. Actually, I should say 'almost everyone'. There are many investors who are not bothered by bear markets and actually welcome them and I'm one of them. Bear markets are good, an occasional crash is good too and once in a while a really tough business environment is also good. These are things to be welcomed, not feared. Here's why.

The garbage gets cleaned out: When the markets are in a strong bull phase, or even when they are just generally doing well, a lot of froth collects on top. Companies with fundamentally weak businesses are able to create an illusion of being strong and their stocks do well. Punters are eager to buy anything that may trend higher, so it's easy to boost garbage stocks. When the markets turn downwards, those who invested in them get cleaned out. It happens every time. All kinds of fake tech companies got cleaned out in the 2001 bear market. In 2008, it was the turn of overhyped infra and many other sectors. This time, if the bear market runs longer, these sham new age 'digital' businesses will get wiped out. Despite the long faces you see every time, this is actually a good thing to happen. Punishing non-performers is as important a function of properly functioning capital markets as rewarding high-performers.

The good become even better: There's a hackneyed saying that 'when the going gets tough, the tough get going', but it's probably hackneyed because it's true. All businesses suffer in economic downturns, but the strongest ones suffer less, adapt better and recover faster. As a result, they will come out on the other side even further ahead of their competitors. Typically, the better-managed businesses proactively deal with problems and make themselves even more efficient. Later, when the opportunities for growth open up, the measures they take bring much greater gains. For them, the crisis serves the same purpose that a hard and difficult training session does for an athlete.

Investors learn an invaluable lesson: When times are good on the stock markets, the froth gathers in every portfolio. Experience is the best teacher and in equity investing, bad experiences are a much better teacher than good experiences are. In fact, good experiences, unless mixed with bad ones, are likely to teach the wrong things. If one starts investing and only good times follow for a while, then one gets a distorted view of reality. You keep investing and the money keeps growing at a fast clip and the mind tends to normalise this. And then the bad times hit. Depending on how bad they are, the shock could be small or large, or even very large. However, there's no avoiding it. It comes in the life of every investor, usually several times. The basics of risk control, diversification, buying into only fundamentally good stocks - these things, when learned from hard experience, are never forgotten. So, all things considered, it's good that the markets are declining a bit and investors are having an uncertain time. It's like a bitter medicine that will actually bring great benefit.

Of course, while all this is going on, it's good to have an experienced guiding voice next to you. That's the role 'Wealth Insight' plays. Even more than any normal issue, the July 2022 anniversary issue is dense with ideas. Crashes will come and go and some will be worse than others. However, the value of investing ideas will be permanent.

Suggested read:

It's (not) different this time too

Good times in the stock markets

This editorial appeared in Wealth Insight July 2022 issue. To read the cover story and other insightful analyses, columns and articles

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