Fear vs greed: Stock market crash is a chance for Indian investors to seek considered wisdom amid confusion.
Firstpost
March 13, 2020
What exactly is the coronavirus or COVID-19 trying tell investors as it shakes the planet in which bears take over from bulls in a matter of weeks? What do we say on a day when India's stock exchanges halt trading for 45 minutes after a crash of about 10 percent in the National Stock Exchange's (NSE) benchmark Nifty -- only to rebound when trading resumes?
Profound and philosophical as it may seem, it makes sense to view the disease, officially declared a pandemic by the World Health Organisation (WHO), as more of a life event than one restricted to the economy, even if the economy is what weighs on one's mind for the investor. Many must have lost hard-earned savings invested in the markets, whether directly or through indirect vehicles like mutual funds. It is time for contemplation.
Benchmark indices have crashed to levels comparable to 2008 when the world financial crisis hit the markets to lead global markets into what is now called the Great Recession. But then, that was a purely an economic event caused by the imprudent behaviour of financial entities that created sub-prime (bad loan) mortgages that legendary investor Warren Buffett called "weapons of mass destruction."
However, this time, the enemy is an invisible virus with no known vaccine, not easily amenable to financial intervention, though cushions such as the US Fed's overnight decision to pump in $1.5 trillion for the economy to weather the impact of the Chinese-born pandemic do help. This is a way more about health than wealth, making us remember the old maxim about how the former is actually the latter.
For India, there is a double-whammy situation. The economy has already been growing through six-year lows amid a demand crunch hampering industrial expansion. The coronavirus throws a new question: Has the growth curve really bottomed out as the government claims? It would appear not, given the virus is still roaming the planet like an unfriendly alien.
Buffett, ever the man to be contrarian, is famous for his advice to investors, asking them to be fearful when others are greedy and greedy when others are fearful. That spirit also arrives in the form of WhatsApp messages, one of which this week says: "Two-thirds of India equity universe is cheaper than their own decade valuation average. Cheapness emerges in the carnage." Another one goes: "If you wait for clarity, you will miss a lot of opportunities arising out of the confusion."
Every time the stock market booms, there are optimists who say it is sustainable, with famous words that become notorious later: "This time it is different." Can one apply the same yardstick to a crash? Is this time different? Honestly, we can never be sure. We are in a perfect instance of Wall Street intellectual (if there is such a term) Nassim Nicholas Taleb described as "The Black Swan" -- as a metaphor for improbable events that take us by surprise but leave a lasting impact.
The point is that the latest coronavirus falls in Black Swan territory based on non-economic factors, in the zone that former US secretary of defence Donald Rumsfeld famously described as the "unknown unknown." When you do not know what the next quarter's Gross Domestic Product (GDP) growth will be, it is a "known unknown" -- but when it is a deadly virus that hurts the economy, it should be among unknown unknowns.
This is the moment for investors to take lessons from soldiers, who cope with terror attacks, landmines, and enemy ambush. They know up close what an "unknown unknown" is all about. You have to save your life before you go for higher stakes. In some ways, a market crash is like a war zone.
What does this mean for smaller investors? Say, middle-class savers fed on a steady diet of 'gyan' by financial advisors who talk of investing through systematic investment plans (SIPs) into mutual funds. Is the current three-year-low in key market indices different for them from high net-worth individuals? Would that still be separate from mutual fund managers and then hedge fund traders?
The answer should be an emphatic yes. Just like an air force pilot fighting a war has to worry more about the enemy radar while the infantry soldier has to be careful about landmines, in a state of financial turmoil, it makes sense to measure one's own position and risk appetite (or lack of it). It is partly about one's life situation and partly one's psychology.
Knowing your own terrain and life situation is where wisdom might lie amid the confusion, while others talk of opportunities that might probably lurk in the crashed markets. If you have children to put through college education, a home loan to pay back, parents to take care of or savings needed for your retirement, it all depends on your age, income, the current state of wealth and financial goals. Warren Buffett's maxim of being greedy when others are fearful may not equally apply to all. Those who are thinking short-term to meet personal financial goals (say, a likely wedding) are not in the same boat as a skilled millennial recently out of college for whom the long-term might mean a decade rather than a year.
India's economy, though an emerging one with high-growth prospects, need not be the same as an advanced one, be it in terms of size, competitiveness or middle-class ideas of risk and opportunity. It pays to also ask oneself if financial advisors are mapping one's risk appetite with objectives and age/wealth/income profile.
The current situation may well be the opposite of what former Fed chief Alan Greenspan called 'irrational exuberance.' Is overstated pessimism the current flavour? You never really know in a situation where the Black Swan may change the way people think about economics. The future by its definition hides both threats and opportunities, based on emerging situations. Looking both within and without may well signal wisdom. Sometimes, markets make us say things that are usually the prerogative of spiritual gurus.
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