India's Third Giant Leap
This Could be One of the Biggest Opportunities for Investors
An Investor's Controversial Prediction: No More 40%, 50%, or 80% Market Drops
I've always loved veteran investor Shankar Sharma's colourful analogies. His most recent has him comparing a brutal bear market to the iconic villain Gabbar Singh.
Just as Gabbar Singh was tamed at the end and was whisked away by the police, humanity has figured out way to tame even the most brutal bear markets as per Shankar.
He is of the view that while we may have seen huge market crashes of 40%, 50% and even 80% in the past, there is unlikely to be a crash of similar magnitudes in the future.
Yes, that's right.
As per Shankar, the mother of all bear markets is not ahead of us. Instead, it has died and may never come back to haunt us again.
Please note that Shankar is not saying that the markets may never go down again. As per him, there will be small corrections in the future but no big, fat bear markets.
In other words, market could correct a bit every now and then, but no such correction will snowball into a crash of a significant size.
Now, that's a big statement to be honest. It needs a lot of conviction and deep understanding to announce publicly that the days of brutal stock market corrections are behind us.
So, what's exactly behind Shankar Sharma's assertion of this kind? What makes him think that humanity has sounded the death knell for the big bear?
Well, he credits our ingenuity and our ability to learn from our mistakes for this. He is of the view that we humans are learning organisms, and we get better at dealing with difficult situations once we are exposed to these situations.
Like for e.g. consider the valuations at the peak of some of the previous bull markets like the 2007-08 crash or even the dot com bubble. Here, one could clearly make out that valuations had gone way out of whack with reality.
Some of them were astronomical to be honest and had only one way to go from there i.e. down. However, there is no such valuation excess in the current bull market.
At the Nifty or the Sensex level, markets could be trading at above normal valuations, but they are nowhere near bubble territory.
Same thing can be said about the US where tech stocks may have become more expensive as compared to the past, but they are nowhere close to the dotcom bubble.
So, we have certainly learned to be more reasonable when it comes to assigning valuations.
Take the case of wars. We have two wars going on at the moment with their epicentres being in Israel and Russia and guess what, both Israeli as well as Russian stocks haven't collapsed.
On the contrary they have rallied. Thus, even a prolonged war isn't leading to a long-lasting bear market as investors know that someone would eventually step in and broker peace.
Last but not the least, the crash that happened due to the Coronavirus pandemic.
Now, this was unprecedented. There was no blueprint of how the government, or the stock market investors should deal with the pandemic and yet, we found a solution in the form of a vaccine in about 6 months.
The stock markets recovered even fast. The correction lasted all of a month and by the end of March 2020, we had embarked on a new, fresh bull market.
Hence, as Shankar Sharma has rightly pointed out, we have learned our lessons from all of the past market crashes and have taken adequate steps to ensure that our mistakes are not repeated.
Thus, he concludes that unless there is a nuclear war where the whole world gets wiped out, we may not see big, brutal corrections going forward.
Put differently, we have managed to tame all risks - known as well as unknown - in a short span of time and therefore, contain the overall damage.
I believe that the gentleman has made a lot of valid points. There is no doubt that historical crashes were brutal, and that we learned our lessons and implemented effective solutions.
However, to conclude that our learning ability and our ingenuity can restrict the magnitude of the future crashes is taking it a little far in my view.
Einstein once famously observed that everything that counts cannot be counted and everything that can be counted does not count.
I would put stock market crashes in the former category. Market corrections are a result of human fear and greed, and we haven't got devices yet that can measure these emotions.
Who is to say that a slight overvaluation does not turn into a significant overvaluation and a small correction into a big one.
Hence, to put limits on them and argue that we may see a small correction but not a very big one, is wrong in my view.
For when fear grips and there is a mass market sell-off, rationality goes for a toss and our primal instincts take over. These instincts do not care whether the market has fallen 15% or 30% from the top.
All they want to do is exit and somehow survive the carnage. Hence, it could be hard to assert like Sharma did that we could only see a small correction and not a big one.
What does not change however is our response to these corrections. As value investors, we should take advantage of these corrections by scooping up stocks that may have gone well below their intrinsic or fair values.
We should not worry too much about whether they will fall further or go on to turnaround from there and start going up. Knowing when a stock is undervalued and then buying it are the things in our control.
But whether its price will start going up right now or later is not in our control. And as investors, we should always try to control what we can and not worry too much about the uncontrollable.
Happy Investing.
Warm regards,
Rahul Shah
Editor and Research Analyst, Profit Hunter
What are the 3 main types of stock? Research Private Limited (formerly What are the 3 main types of stock? Agora Research Private Limited) (Research Analyst)
Recent Articles
- A Smallcap Proxy Stock Riding the Rise of Wind Energy in India November 8, 2024
- The policies, performance and order books of leading players in wind energy suggest it could be the theme for this decade.
- Active Versus Passive Investing: Which is Better for You? November 7, 2024
- Is it better to invest passively instead of actively picking stocks?
- Should Banks and NBFC Stocks Fetch 2018 Valuations? November 6, 2024
- September quarter results of banks and NBFCs seem to bring back memories of 2018.
- This PSU Stock has Made a Big Turnaround. What About the Future? November 5, 2024
- The stock of NTPC has been in the news due to anticipation about the upcoming IPO of its green energy subsidiary. Read on for my view on the stock...
What are the 3 main types of stock? requests your view! Post a comment on "An Investor's Controversial Prediction: No More 40%, 50%, or 80% Market Drops". Click here!
Comments are moderated by What are the 3 main types of stock?, in accordance with the Terms of Use, and may not appear
on this article until they have been reviewed and deemed appropriate for posting.
In the meantime, you may want to share this article with your friends!