TRIKAAL’S INVESTING AND TRADING WEEKLY
Topics
|
Hi all and welcome to the first free issue of this newsletter!
“THIS TIME IT IS DIFFERENT” is a very common reason mentioned by governments and experts during fear of recessions to convince people that there is nothing to worry about. You might have recently read in various media that this time it is different for India, it is now in a very strong financial position and will not be much affected by the risks of global inflation and recession!
Though it is true and factual that India is in an economically better position then many of the developed countries to face the inflation, but can we conclude that this time it is different and we will not be much affected by the doom and gloom spreading all over the globe?
Let us explore. The chart below gives movements of stock market indices of major countries for last 25 years –
Purple – IBOVESPA Brazil
Red – Dow Jones US
Gray – DAX Germany
Blue – SENSEX India
Black – SSE China
Green – JKSE Indonesia
The chart shows the two recessions in this duration, in 2000, and in 2008 (shown by two red squares). In both cases, experts had said that India is in a better position this time, and it will not be affected much. In fact, it was popular to say those days that “India has decoupled from the rest of the world” – it will grow even during global recession. But both times, our stock markets crashed almost as much (in % terms) as that of the other countries – as you can clearly see in the chart above.
Developed, as well as developing, both types of countries had faced nearly similar level of declines. As far as history goes, Indian markets have always followed others in case of global recession. Though it can be different this time, but so far that looks difficult.
India is a secular bull market?
You will find that there are mainly two types of people who are always bullish on India –
- Ruling party politicians
- Mutual fund and broking industry persons
It is very simple to understand why they are always bullish. Can you imagine our prime minister or finance minister to say that economy is under risk, there may be a decline in stock markets? They can never do that, they have to portray an optimistic picture, otherwise there will be panic in the country. They act like parents consoling their children that all is well.
In case of the second category, they earn only when people invest. Mutual funds earn when we remain invested, brokers earn whenever we buy or sell stocks. If we fear recession and stay away from markets, their income will be seriously affected. If you pay close attention, you will notice that these people are almost always bullish.
So, trust these two categories of people at your own risk. You need to read the views of unbiased people (like us).
Indian growth story is still intact, BUT, external global factors can create hurdles, as has happened so many times in past. This belief leads to an obvious question – If India’s long term growth is certain, then shouldn’t we just invest and forget? Let us find more about this topic.
In the long term it is always profitable to stay invested?
There are five serious problems with this approach –
1. Severe mental stress plus setbacks to health: Ask any senior investor who has faced 1992 scam, 2000 dotcom bust, and 2008 financial crisis, how it feels to helplessly watch your stocks crash and your hard-earned money losing value drastically. The b category people (MF and brokers) will fight tooth and nail to not let you exit your portfolio, but if there is a recession, it will be you who will suffer, not they. Even if the markets recover after few years, you may not recover from health setbacks (diabetes, heart problems, depression, …).
2. You always make money if you stay invested for long: The b category people have this strong weapon – “in past, the markets have always recovered after 1-2 years, so stay invested for 5 to 10 years and you will create great wealth”. The fabulous 100 years chart of US Dow Jones Index below (Source: Chris Kacher, managing director of MoKa Investors) shows that recessions and recovery can last for very long period.
During the first 100 years of this chart, US markets spent 60 years (19+25+16) in recession and recovery only! Although this chart is for US, but the stock markets move together all over the world.
This great chart hows clearly that it is extremely risky to assume that recessions last just 1 or 2 years.
It is necessary that we remain prepared for the worst by learning from the history.
3. Even recovery from a recession may not increase your portfolio value much: Major recessions in past have caused great decline in stock values, as you can see below –
1890 to 1896 bear market : Dow falls 63%
1906 to 1915 bear market : Dow falls 48.5%
1919 to 1921 bear market : Dow falls 46.6%
1929 to 1932 great depression : Dow falls 89%
1966 to 1974 inflation : Dow falls 45%
2000 to 2003 dotcom bust : Dow falls 38%
2007 to 2009 financial crisis : Dow falls 54%
Source: Closing milestones of the Dow Jones Industrial Average – Wikipedia
A 50% or more decline in your wealth can be quite devastating, but the sad thing is that most retail investors do not believe it can happen. Even after recovery (which may take years) you may not become wealthy in the time frame you had planned.
4. Your portfolio may suffer more than the Index: It is an empirical fact that the stocks almost always fall more than the Index. During the 2007 recession, most mutual fund schemes were down by over 80 to 90%, while index was down by about 50%. Another grave problem is that during recessions it always happens that some companies are totally wiped out. If you own any such stock then your portfolio will suffer even more.
5. Long term index returns are not real: Those who say stay invested will give example of Sensex returns in long term. But these returns will be very low if Nifty or Sensex constituent stocks were not changed! Several of Nifty50’s old constituents have almost vanished or crashed like Satyam, R Power, Unitech, Suzlon, JP Associate, Reliance Capital etc. So, it is not true that if you buy and hold for long term you will always be profitable. It mainly depends on your stocks.
These points should make it clear that investing for long term may not be beneficial all the times. When all indicators are flashing a serious warning, we should exit from stocks. The problem with exiting is that most of the times people do not believe that a serious market crash can happen, and there is a recent and highly interesting study by two world renowned economists that explores this topic, it is mentioned below.
Does history repeat itself – or, is it different this time?
Throughout history, rich and poor countries alike have been lending, borrowing, crashing—and recovering—their way through an extraordinary range of financial crises. Each time, the experts have chimed, “this time is different”—claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters.
You will be surprised to know that leading economists Carmen Reinhart and Kenneth Rogoff have written a book exactly titled “This Time Is Different”! It is a breakthrough study on this topic and they have definitively proved that it does not work.
Covering sixty-six countries across five continents, “This Time Is Different” presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes—from medieval currency debasements to today’s subprime catastrophe. The authors draw important lessons from history to show us how much—or how little—we have learned.
Reinhart and Rogoff prove that crises do recur and a false optimism causes big loss to investors.
Next Week
We will focus on two points in next week’s newsletter –
- How long can this inflation last
- What are the best ways to protect and grow your wealth during this turbulent period
Conclusion
It may not be concluded that this time it will not be different, but as of now there are not enough reasons to believe that India will not be much affected by global turmoil.
We will keep you updated about the inflation storm, whether it will gather steam or will decline. Stay tuned and feel free to message your queries.