Around nine months later, Jain once again shared his views in “Its tomorrow that matters”. He continued with the above theme and urged investors not to flee from the equity market in bad times.
Good returns are seldom made on investments made in good times. Rather, good returns are typically made on investments made in adverse times.
Here’s what he stated:
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.
With the help of data, he made a few acute observations.
- 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 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.
- 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.
- When markets are moving up, the news flow is generally good and vice versa. Therefore, generally, in rising markets the perceived risk is low whereas the actual risk is higher as valuations are high. On the other hand, in adverse times, when the markets are not doing well and the news flow is not good, the perceived risk is high whereas the actual risk is lower as valuations are attractive.
When Jain wrote this note in May 2012, the stock market was going through a very difficult phase. The Indian market was hit by global turmoil but more so by domestic issues such as a high fiscal deficit and current account deficit, and a depreciating currency.
He reminded advisers and investors that bargains are available only in challenging environments and markets characterised by weak sentiment. Hence, from an investor’s perspective, a more appropriate way to describe the current market would be ‘bargain market’ and not ‘difficult market’.
In a recent interaction with India Infoline, Jain stated that he believed that the ‘tomorrow’ he wrote in about over 2 years ago has finally arrived. The current account deficit has improved sharply, the fiscal deficit has come down, inflation has dipped, and Europe has survived the crisis. Fundamentals have improved both globally and locally between 2012 till date. Panic and pessimism of 2012 has since been replaced by rising confidence and optimism for the future. The Sensex is up 64% since May 24, 2012 till October 2014.
He asserts: "The key message of the note - that the best investments are made in tough times - though greeted by skepticism then, has been largely vindicated. "
Next:
Prashant Jain on investing now
