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Crisis Investing

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Crisis Investing research & ranking 2016

“Be greedy when others are fearful”

A very popular stock market adage given by the legendary investor Warren Buffett. What Warren meant here was pretty simple:

When share prices are falling due to widespread panic in markets, there will always be some fundamentally strong companies, whose shares are available at unreasonably low prices. This is when an intelligent investor goes out and buys those shares to benefit from increased prices in future.

And this is exactly what Buffett did all through his life and today, he is worth more than $66 Billion. Now he being himself, he may have a lot of things that might work for him. But what about you?

Can being greedy when others are fearful, work for you too?

That demands the question ‘When exactly are others fearful?’

People are fearful and tend to react in irrational ways when adverse economic, political or global events lead to temporary crises for businesses. But if problems are temporary and there is no change in actual business fundamentals, then an intelligent investor uses these opportunities to buy shares at reduced prices and benefits later (when markets realize overcome their fears which lead to a rise in stock prices).

To prove that investing during crisis works, let’s see how investors have reacted to major crises in the past and how those who invested during the crises got rewarded.

Here are two of the most recent crises:

  • The Dot-Com bust of 2000 & 9/11 Attacks in US: After the run-up in technology shares, the crash of 2000 was one of the worst ever. The 9/11 attacks further increased the fear in the market in short term.
  • Global Recession of 2008-09: Spooked by bursting of US housing bubble and credit crisis, the world slipped into recession with major markets falling more than 50% in a matter of few months.

Let’s now look at what happened after these crises:

Focus on the column with header ‘Upside’. As you can see, the return percentages are mind-boggling. Money multiplying 6 to 8 times in around 15 years – This is the real power of long term investing and specifically so when investing in times of crises.

The above examples are only of broader indices like Sensex. The success stories of investing in individual stocks are even more astonishing.

Just look at the number of companies that have turned multibaggers after various crisis Investing:

And it is not that only the shares of small- and micro-cap companies became multibaggers. Some very well known, efficiently run businesses have seen their shares run up many times over:

All these examples clearly indicate one simple thing: Investing in fundamentally strong companies at bargain prices during crises WORKS.

It can create a lot of wealth for someone who can stay invested and more importantly, invest more during bad times.

When others are exiting markets to preserve their wealth in safer options like debt, banks deposits, etc., a smart investor goes out and buys shares of good companies aggressively.

Winston Churchill once said: “Never let a good crisis go to waste”.

The quote is indeed quite applicable to stock markets.

In times of crisis, common investors doubt whether markets will ever recover. However, markets always recover and when they do, common investors fail to benefit from the opportunity that crisis brought (i.e. shares available at low prices).

Now lets come to the present scenario.

After installation of the new government at center in 2014, there was a general optimism about India’s future but unfortunately, people underestimated the structural problems of Indian economy and overestimated the abilities of new government to solve them.

Domestic reasons like the political logjam in passing GST bill, growing NPAs of PSU banks, lack of credit demand from private sector, etc. all added towards problems of the economy. Several external factors too had detrimental impact on market sentiments – Chinese slowdown, Brexit, shocking surprise in US elections, steep falls in crude oil and commodity prices, fear of a global slowdown, etc.

Result was that between May 2014 and Jan 2016, markets had given zero returns (negative if inflation is taken into account).

All this looks like a crisis-in-making.

But in reality, all these problems were temporary in nature. All these could be, and many were solved in due course of time. Fast forward to today (2017), markets have given great returns since start of 2016. So those smart investors are patting themselves who bought heavily when others were fearful due to temporary problems.

Crises have occurred regularly in past and will continue to do so in future too.
People are prone to panicking in such times and that is what leads to steep fall in markets but those who understand that historically markets have always rebounded from every crisis, are the ones who can purchase shares at a bargain price and earn above-average returns.

So if your faith is shaken due to temporary problems being faced by Indian economy in recent past, keep in mind that those who kept faith in markets during all the past crises were the only ones who were handsomely rewarded.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

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