The Sensex was down 700 points yesterday. It’s down 250 points as I write this today.
Whenever we get days like this — like when the Sensex is down 500 points or more — my phone begins ringing with inquiries from friends and relatives.
They always ask the same question: “What should I be doing now?”
Even my wife has this question every time she sees the markets fall like this.
“What are you doing now?” she asks me.
You see, this is ‘not’ the right question to ask in such times.
The right one is: “What should I have done in the past to prepare for an event like today?”
The bottom line remains that investing is a proactive — not reactive — endeavour.
“But then, isn’t this a natural human behaviour – being reactive and not proactive?” my wife asks.
Indeed, it is!
You see, most of us are not particularly good at taking charge of our future, our health, our relationships, our career, our finances…our life.
We tend to spend our life reacting to events, situations and circumstances, rather than creating and shaping them.
We get overweight (and scared)…and then we make a decision to start an exercise program to get healthy (reactive).
We have a nervous breakdown (and get scared)…and then we decide to manage our stress and cut back on work (reactive).
We crash our car and nearly kill a child (and get scared)…and then we decide to drive slower and be more responsible (reactive).
We get caught telling a lie (and get scared)…and then we decide to always say the truth (reactive).
We make wrong investment decisions and almost lose everything in a crash (and get scared)…and then we promise ourselves to be sensible in investing (reactive).
Yes, taking a corrective action is always a good decision to improve our future…but it all should have been made before reality punches us in the face.
A life that is based on reactive decisions, largely made out of fear, is never going to be our path to our best life. But that’s what many of us do.
You see, being reactive is boring, frustrating, painful, and unfulfilling.
Being proactive is amazing, rewarding, and challenging.
In investing, if you respond to every jerk, every headline, every move of the stock ticker, you will be ruined.
That is not the way to invest, like it’s not the way to live life worrying over things that are out of your control.
Major tremors, like the current crash in stock prices repeat every few years. You know that!
So why be surprised by them?
So, what should you do?
The key is to be proactive.
And the best way for you to be proactive is to construct an investment plan that allows you to ride out these events without panic. You need a plan that anticipates such regular occurrences.
What this simply means is that whenever you invest, always keep a margin of safety – a buffer that will save your investments even when your stocks crash.
And how do you do this?
Simply by buying quality businesses at prices less than 60% of their intrinsic values.
In simple words, if a business’s intrinsic value is Rs 100 per share, and it’s a good business, you must buy its stock only when the price is Rs 60 or lower.
I strongly believe that you are capable of doing this for yourself without paying anyone a fat fee.
All it requires is a little intelligence, some homework, a bit of planning…and some change in your behaviour.
Be proactive, not reactive.
Choose and do…before you have to.
Dear Vishal,
In individual stocks, if you have done your investment after doing proper study with Margin of Safety, you will always welcome the stock crash to buy more of that stock (subject to you do have money to buy more). Unfortunately, most of investor (I am also included) are unable to find the intrinsic value and MOS and therefore the problem of worrying about stock crash.
If I am going to invest my regular monthly income in Mutualfunds (equity and debt and gold) & stocks for my retirement and long term goals that is 10 – 20years away, I should happily accept the fall without worrying about the fall in folio value. If you follow a simple assest allocation for personal investment, you will always welcome a crash and you will do well on long term.
If I am a monthly saving investor who plan to invest for 10 – 20 year period, I should be very happy to see a falling market so that I am able to buy more with my regular income. The only time I should be concerned about the market direction is at actual time of redemption is due to meet my goals. Here too asset allocation plan will help you to get there.
I agree with your views, Ajay. In fact, if one expects to be a net buyers of equities over the next few years, he must be happy at the sight of a falling market. But then, even long term investors fall into this trap of short term volatility and lose their senses and saving. Here, as you rightly mentioned, a proper asset allocation strategy is really helpful. Regards.
Dear Vishal,
When we buy gold or Real Estate, No body thinks of selling. Selling takes place once in a blue moon out of necessity for majority of Investors. But in stock, we think of exiting once our target is reached or money gets doubled. Why? is it because of excessive coverage? You frequently mention about Buffet. He has mentioned that he rarely sells. Can we think of few stocks ( without commitment) basing on the past history. People who have made big money are long term Investors. so is the case for gold. But I am coming this type of situation very rarely in stock market. why this ? Honestly telling, I bought HDFC Bank about 2000 shares almost from the time of listing at a very attractive price just because I loved the HDFC Management. I had very limited knowledge about stocks then. But that gave me fantastic return and I could build my first floor with that money. Some times ignorance is good especially in long term investing in stocks – right ?
Regards
Sankar N
dear vishal,
was greatly impressed by your analysis of bhel. it was great.
i had sought a similar appriasal of itc, which has high pe and would fit into philip fisher list of good stocks but considering graham would it not be high priced.
i did not get a response
vinay kala may 31,13