Doomers and gloomers

Every once in a while, perceptions about what exactly is happening in the equity markets start diverging sharply. At the same point in time, there are investors who are in a bear market frame of mind, while there are others who feel that the situation is OK - not great, perhaps not even good, but at least OK. The media is riding on top of the mix, which generally leans towards the negative side. Currently, we're squarely in the middle of such a period.

By itself, for savers and investors who are managing their investments well, this divergence should not matter. However, in social media, as well as the mass media, negative voices always get amplified much more than positive ones. This affects savers and puts them in the same frame of mind. Some of them go so far as to stop investing - and if you are investing for years, stopping when the markets look weak is absolutely the worst thing to do.

This time, the divergence of viewpoints appears to be a side-effect of the divergence we are seeing between Indian and US markets. With the continued dominance of the US-centric view on what might be called 'Investment Twitter', 'Investment Instagram' and so on, savers feel doom and gloom. Investment Twitter is dominated by questions like how long will the bear market last, what if interest rates keep rising, what happens if there's a recession, can stocks bounce back long term, and if I sell now, when do I buy again?

These are hardly the questions that you or I need to concern ourselves with. This dichotomy is all the more jarring because the divergence between US markets and Indian ones is quite sharp and quick. Over the last six months, the Sensex is essentially flat (down 1.6 per cent), while the S&P 500 has lost a fifth of its value (down 19.6 per cent). The psychological impact of a 20 per cent decline is huge. In the media, when you are absorbing the mindset of US investors, you are getting input from someone who feels that they are in serious trouble. Don't absorb this pessimism and let it influence your thinking.

Of course, we may just be behind the curve - in a few weeks or months, the Indian equity markets could be heading the same way. In fact, there are many experienced investors who believe that strongly. Nothing new there - there is always uncertainty about what is going to happen. There is always a gloom-and-doom scenario that can be justified. The result is that pessimists always seem knowledgeable.

However, my point is that it does not matter. Yes, there is risk going forward, but risk is not a good investment characteristic. Instead, it is always a function of when you have invested, at what price, and when you are going to need the money back. We are looking at a period of uncertainty, which is not the same thing as risk. In fact, if and when stock prices fall, good stocks will become less risky.

Of course, I'm just describing what is implied by the famous saying that when there's blood on the streets. For a given investment, as long as your judgement of that investment does not change, it's true that the higher the price, the higher the risk. The corollary of that is that the lower the price, the lower the risk. From that, it follows that when the markets start getting weaker, then the risk is lower.

At this juncture, the question is why the headlines and social media always say and imply the opposite. They do so because they're taking the punter's view, not the investor's. The idea that uncertainty (and volatility) is not the risk is hard to absorb, but it's important to do so, especially because formal definitions of risk always focus on volatility. That also feeds into investors' knee-jerk psychological responses. Being a smart investor means guarding against that.

Suggested read: No case for panic