The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "Two roads diverged in a wood and I took the one less traveled by, and that made all the difference." ~ Robert Frost

Bear Stock Markets Are An Investor's Delight

Globally, the stock markets are in a turmoil. In just a matter of weeks, millions of share market investors have seen their portfolio value erode by billions of dollars.

You will never make money in equity, if...
... if you think that this is "bad news".

On the contrary, fall in share prices are always a great opportunity.

I will not talk of the reasons, why stock markets are tumbling like nine pins. I don't consider them relevant at all.

I will limit my discussions to India. I don't want to get into global issues and dilute the focus of this article.

First, the present correction in the Indian stock market, is merely a pendulum coming back to its mean:

Indian economy is growing at around 7-8% p.a. This typically translates into about 15-16% growth in the company profitability. Accordingly, 17-18 market PE ratio is considered as the fair market value. Let us term this as the MRP (Maximum Retail Price).

The euphoria generated by the Modi Govt. coming to power in May 2014, saw a sharp rise in the Indian Stock Markets. As such, by end-2014 and early-2015 the markets were trading at around 24-25 PE. Clearly, the markets were over-valued vis-a-vis the MRP.

Since the economy did not improve to the extent anticipated, company profitability too remained subdued throughout 2015. Therefore, as earnings have not caught up with the enhanced value, share prices are falling to bring the markets back to fair value. Thus, after the recent fall, the PE ratio is now around 19.

In other words, the present fall from the peaks is merely removal of the froth. There is no damage to the real value.

Read: Historic crash in stock markets? Oh, I didn't know that.

dont-fear-bear-stock-markets
Intelligent Investors do not Fear the Bear Stock Markets. They love them. 

Second, every company's share has an MRP:

Please remember that companies are not merely a name on the paper. They are a business. When businesses generate profit, they add value to the economy. Therefore, investing in businesses in not a gamble. Instead, it is investing in a wealth-creating opportunity, which benefits not only the promoters, but also the employees, the suppliers, the Government and the shareholders.

Read: Why investing in equity isn't the same thing as gambling?

It is this profitability and ability to grow in the future, that determines the MRP or the true value of any business. Since the economy is highly dynamic, it is difficult (but not impossible) to assess this true value. It not only requires expertise, but also intuition... and some risk taking too. 

Therefore, I have always advocated that retail investors should not directly buy stocks. Instead, they would be much better off, if they invest in equity through the mutual fund route.

Read: Qualities of an equity share that can deliver stunning returns

Third, for any product that you buy, you never pay more than the MRP:

Then, why pay more for the stocks?

Whenever there is buoyancy, the stocks tend to become overvalued. Whenever there is bearishness, the stocks tend to become undervalued.

Therefore, bear markets are the perfect time to invest in stocks. Unfortunately, most investors become fearful and sell when the prices are tumbling. You will become the most successful stock market investor, the day you conquer this fear.

Read: Markets don't make millionaires. Only good businesses do.

Fourth, don't worry, sooner or later the markets WILL go up:

Companies are growing (though slower than expectations). So the profits are also growing. Hence, after some time (maybe in a year or two), the earnings will exceed the prices. As such, by virtue of increased earnings and falling / stagnant share prices, the market will automatically become undervalued. This, in turn, will generate buying interest. Share prices will move up again, so that the market PE reaches its MRP.

This yo-yo in prices, is the very nature of the stock market. The day you develop patience and discipline to follow this price volatility "correctly", you will immensely profit from investing in stocks.

Read: Are you buying equity shares using rear-view mirror?

Concluding:

No experts, no advisers, no brokers can ever make you rich. Only YOU and your "mental framework" will determine whether you will become a crorepati by investing in the share market.

You Learn A Lot By READING... And Even More By SHARING.

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Ignorance is like a SIGNED BLANK CHEQUE... anyone can MISUSE it.

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