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Why The Panic and What To Do Now?

Posted On: 2020-03-19 10:16:41


- Vijayanand Venkataraman, CFA (Formerly a Hedge Fund manager focussed on Absolute Return investing)

Many of you that are invested in Equity Mutual Funds and Equities would have felt the pain and must be thinking on what your next steps could be.

Particularly for the first-time investor, this could be a nasty surprise, whereas seasoned investors who would have witnessed this a few times in the past might have been surprised by the speed of the fall.

There are multiple factors in play.

The first one is the effect of CoronaVirus. It does not seem to be just another virus, but more complicated. What could eventually happen is anyone's guess and a lot depend on how the public health systems and governments/ populations across the world respond to the crisis. In the short term, we could see clamp downs in various countries that could have short term impact on services related business like travel, hotels etc and could also lead to a slowdown in manufacturing due to supply chain disruption from China and elsewhere. In the long term, most of the companies are likely to evaluate risk to their supply chain and will likely diversify their vendor facilities/ supply chain sources. This is quite important from India's perspective. As you will recollect, Indian Government had reduced taxes for new manufacturing companies and many US companies have shown inclination to invest in India due to the then prevailing US-China trade tension. This is now likely to only happen faster, and more companies are likely to set up in India. But all this post in a period when pandemic eases.

The second factor is oil price war. This is a bigger factor in our mind and has more serious implications. We underestimate the impact Oil has on the regional (Middle eastern) and global politics and economics. We will take a long time to understand the implications and oil price war could even lead to election of a new president in the upcoming Elections in the US. Now that is one reason for global markets to really worry about. The bigger fall happened on the day after Saudi Arabia announced the Oil price cut.

WHY DO WE PANIC

As a retail investor, we panic when we see such significant falls. The prime reasons that we panic based on my interactions with retail investors over years are
1. Traditionally we have invested in Real Estate (Land) and Gold and there is family knowledge about them. Imagine telling your grandparents about selling your house or gold, they will rubbish it and call you insane.

2. Our investments in Land / Real Estate is not liquid and we do not see daily prices. For eg: I do not know, what the price of my house was on Feb 15, 2020 (a month ago) and what is the price today (Mar 15, 2020) and even if I want to sell now, I may not find a buyer. This has a significant impact on our decisions.

3. And more generally, we are less certain about the future than we were in the past. The world is a much better place than we imagine (Read Factfulness by Alan Rosling - Amazon India). Most of our opinions are shaped by what gets shared on Social Media and media editorials now are more biased than ever in the past.

IS IT TIME TO PANIC

Before we answer that lets look at what we know and what we do not know

1. We do not know what Corona Virus can do to us and the economy, although disruptions in the short term are likely and we may have to contend to live with the virus.

2. We do not know when the impact of Corona Virus or Oil Price war will be fully known

3. We do not know when the market fall would stop and market would bottom out

So what is that we know,

1. Equity markets recover after most corrections, but could take time to recover.

Equity Markets recover after correction

2. Investing during market corrections generates much better returns than investing when equity markets are performing, even if its not investing at the bottom.

Investing during market corrections

Do we think, we get back to a correction like the Great Depression of 1920's. At the moment, do not think so. But remember to change your view when data presents otherwise.

So bottom line now is not to panic.

WHAT SHOULD AN INVESTOR DO NOW

1. Take a holistic view of investments - including PF, PPF, FDs, Gold, Real Estate, Bonds, Stocks etc. - The moment you see this, you would realise there may not be much impact on your overall wealth.

2. Check if you have money that is required in the next 5 years for their children's higher education or marriages in VERY LOW RISK Debt Funds/ EPFs/ Savings Accounts?

3. If you have started SIPs recently continue them - as you see above investing in these markets are more rewarding than investing in a market that is moving up steadily.

Remember, businesses may suffer in the short term, but good business with strong managements would come out stronger.

The author's Twitter ID: @vijayvenkatram


Source: Equity Bulls

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