Focus On Absolutes, Not Relatives

As the global markets slip into a spectacular collapse, comparisons to the financial crisis of 2008 were inevitable. It was with a feeling of déjà vu that many investors went to bed by 2 a.m., after having watched the Dow fall by more than four per cent points and then were up just a few hours later to see the Nikkei open about four per cent down. It was just like the bad old days of September 2008. Or not. There are two ways one can react to having lived through some great disaster. Either, you can stay permanently scared, going into a panic every time the conditions resemble the original disaster. Or, as a bona fide survivor of the original you can be wiser and more confident of facing up to whatever the future can throw at you.

It should be self-evident that the worst thing to do now would be to panic. We’ve had a few weeks of unalloyed bad news domestically, as well as globally. It’s easy to get influenced by all this talk, especially because of the noise emanating from the investment media. However, you must remember that most of that noise is targeted at short-term traders. If the FIIs are shorting the indices over the next few days or if they are going to pull out cash for a month or so, then it matters to these people.

For long-term investors in equity funds who are investing regularly (either through SIPs or directly), none of this should matter. We need to remind ourselves that things in India are bad only on a relative scale. Relative to the rest of the world, relative to what they could have been, even relative to what they should have been. However, in a crisis like this, you need to focus on the absolutes, not the relatives. Worst case, this is still an economy that’s growing faster than much of the world and will continue to do so for a long time. There are plenty of businesses of all sorts that will generate wealth. Our job, as long-term investors, is to make sure that we can reap the rewards by investing steadily for the long term.

You see, the lesson of 2008-09 is absolutely clear. Back in 2008-09, the only investors who lost out were the ones who stopped investing when the markets plunged and then stayed away. In the long run, all that happened was that when the buying opportunity was at its best, they were running scared. Eventually, the only winners were the ones who let their SIPs continue, taking advantage of the low NAVs.

In fact, there’s one new twist in this tale that makes it all the more important that you don’t start running scared. 2008-09 was a crisis. I suspect that what is setting in now is not a crisis but a permanent condition. That was like having an accident but this is like getting diabetes. It’s a chronic condition, and you need to restructure your life around it. After all, what part of what is happening around the world do you realistically expect to change? Is America going to start galloping at 5 per cent growth? Are the Europeans going to magically find a cure for the half a dozen sick economies in the EU? At home, can you rationally think of a scenario whereby the government magically shakes of its sloth on letting infrastructure be built? Do you see growth without high inflation?

Be realistic, these things are here to stay. The question is not how long you’ll have to wait for this crisis to end, the question is how long before you realize the truth and get on with your (investing) life.