Good returns are seldom made on investments made in good times.
Rather, good returns are typically made on investments made in adverse times.
There is a fair value for listed companies, just like for companies that are not listed. In good times when the stock markets are doing well, companies typically trade above fair values and in adverse times when markets are not doing well they tend to trade below fair values. In the long run, markets do not sustain at either overvalued or undervalued levels, rather move close to fair values. This is why investments made in adverse times typically yield above average returns and vice versa.
These are not my words but match my views or vice versa 🙂 This is written by Mr Prashant Jain, CIO, HDFC Mutual Fund – “Its tomorrow that Matters”.  You can download the complete note from end of this post. I thought it is really important to share this report with you at this point of time.
Relation between Market Valuation & Performance
Besides, the fair value of markets / companies is not stagnant; rather it is increasing at roughly 15% p.a. This rate is broadly the same as the nominal growth rate of GDP since companies in aggregate represent the economy itself. India’s nominal GDP growth rate (real growth rate plus inflation) has been 14.1% p.a. since 1979. Current GDP growth rates over last 3 years of 16% p.a. (7.9% p.a. real growth and 8.1% p.a. inflation) are similar. It is not surprising therefore, that the Sensex has yielded nearly 15% p.a. returns from inception in 1979 till date. (At 16.6% CAGR over 1979 – 2012, 100 has become 16000 (160 times). This is the magic of compounding and that’s why it is said that time in the markets is more important than timing the markets.)
Collective expertise at mistiming
Buy low and sell high is what everyone suggests and that is what everyone would like to do.
The reality however for a typical investor in equity markets / equity mutual funds is somewhat like this – buy high, buy more higher, buy even more even higher, buy less when market falls, buy lesser if markets fall more and buy nothing when markets are really down.
This behavior is best illustrated by the following table.
This pattern of an overwhelming majority of investors mistiming the markets repeatedly and consistently is a key reason for the unsatisfactory experience of the majority from equities and for the poor equities ownership in India.
While there can be many reasons for this collective expertise at mistiming, the key reason probably is:
A majority of investments in equities are not done with a long term view, despite the fact that the best that equities have to offer is only over long periods. This is unfortunate, as by investing with a short term view, investors are not benefiting from the compounding potential of equities.
Sensex Vs Gold
Difficult markets or bargain markets?
Bargains are available only in challenging environments / in markets characterized by weak sentiment and seldom when the going is good / sentiment is strong. That’s why, from an investor’s perspective, a more appropriate way to describe the current markets would be bargain markets and not difficult markets.
Times such as present, when the markets are not doing well should actually be looked upon as a window of opportunity for savers to invest more into equities, so that when the good times come, there are meaningful investments in equities to reap the benefits from. The lower the markets are, the bigger is the opportunity and the longer the markets remain depressed, better is the opportunity for savers. In a lifespan of investing of say 30-40 years, it is unlikely that the markets will provide many such windows. In the last 20 years there have been only 3-4 such windows.
Sir John Templeton “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
Needless to say, pessimism is all that one sees all around.
Download Full Report “Its tomorrow that Matters” (Disclaimer as per the attached document.)
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