We just witnessed the biggest one-day fall for the Sensex and the Nifty indices on 12th March 2020. There seems to be no shortage of bad news. With the number of cases of Covid-19 on the rise in India and across the globe, oil prices tumbling to over $30 a barrel, and the rupee depreciating to a point where it nearly reached its all-time low, we figured it was the right time to give a follow-up to our previous article – The End of the World is Here, or Is it?

Now, you might be thinking. With everyone selling their stocks because of the uncertainty around, why should I invest unless I am sure that there will be a recovery and everything will be back in its place. And of course, the near-future has more questions than answers which makes this anxious time for all of us. However, there is a key difference between the behaviour of everyone else and long-term investors.

It does sound counter-intuitive to invest when everyone is panicking and selling. However, the difference is something we’ve all heard in one way or form. “Time is money”. As investors, your time horizons are much different from what they are for analysts, traders and even individuals.

Analysts look for returns within 6-12 months in the market. Analysts usually work for asset management companies that look to outperform the market so that they can achieve the expected annual returns of a fund or a stock. They focus more on the short-term performance to keep attracting fresh investors.

  • Traders use daily data of the buyers and sellers of the stock market and try to predict which stock will be bought the most during the day/week.
  • Individuals usually participate in the market because of FOMO (Fear of Missing Out) and tend to act on the basis of so called “tips” or insider scoops from peers. This pushes them to overreact to good or bad news because they try to time the market.
  • Investors spend more time defining their financial goals and how much time they have to get there. This usually gives them a longer investment horizon of 5 years and above. This already makes investors the wealthiest as they are the ones with the most amount of time in the market.

The table below illustrates an outlook of today’s market in the next 8 years:

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Let’s say, an investor paid ₹10 for every ₹1 of the company’s income as their investment. If we assume that in the Y1, the company’s income falls by 20% (due to Covid-19 and its effects across the globe), this would result in a price fall of 36%.

This is the reason most analysts, traders and individuals are panicking. There is no doubt there will be an impact on the revenues of companies and we are not disputing that. If someone is looking at making good returns within a year, it is a bad idea for them to invest now.

Having said that, we expect a sharp income recovery of over 35% and good returns in the long-term

This is a fair assumption as we do see markets recover much faster after a fall as discussed in our last article.

  • The companies we invest in are done through thorough research that picks companies with a great track record of withstanding difficult market environments.
  • We also expect these companies to grow at around 15% annually because of their competitive edge over their companies, when the market situation falls back to normalcy.
  • There is a strong correlation between the growth in income of the company and its stock price. With the increase in income in the company, its stock price rises to ₹37 in Y8 from a price of 10 that was invested. This gives a return of 18% per year.
  • If an investor invested another 20% of his/her investment after the crash in Y1, there is an additional 9% increase in the returns making it 27% per year which further demonstrates the opportunities in the market.

Is this the end of the world? Or is this similar to the 2012 apocalypse that never happened?

Nobody knows for sure. We believe the second is far likely than the first. What we do know for sure is that investing has not been this cheap in a long time. All the quality stocks that were too expensive to buy are suddenly cheap because people with myopic vision of the stock market see a bump in the road. It’s time to look further, at the destination that you’re looking to reach.

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