Who Is A Cheerful Pessimist?

The Sensex crossed the new milestone of 70000. It is the lifetime high level for the Sensex. Everyone is excited. TV commentators and so-called market experts are euphoric. IPOs are getting over-subscribed. Every day the market is scaling a new high. Liquidity is at its peak. The portfolio of retail investors is in green and hence they are happy. It’s party time. 

With the 70000 level achieved, people have already started talking about the level of 100000. The excitement is at its nadir. It is always been like that. This is not the first time and certainly not the last. The market has crossed many such milestones in the past and will cross many in the times to come.

A large number of investors have joined this party post-COVID. The increase in the number of Demat accounts is eye-popping. Look at the figures. This tally has skyrocketed from 4.1 Crores pre-covid (Mar 2020) to 12.97 Crores by Sep 2023. A staggering increase of more than three times. 

These new investors have not seen any meaningful correction in the market. They are accustomed to seeing only the bull phase. They are yet to experience the painful market crash and the prolonged bear phase. Such investors need to be more careful. 

However, the experienced investors, who have been in the market for the past ten years have seen bear phases, market crashes, and extreme volatilities. But, it is the human tendency to forget the bad days and overlook the fearful past. We tend to forget the past in the exuberance of the present. 

History repeats itself. The only question is when? 

Does that mean the market will crash tomorrow?

The truth is, “no one knows.” But the probability of a crash always exists.

The market is always unpredictable, nonlinear, and harsh. Many times the market behaves the same way as life. There are many parallels one can draw between the journey of Sensex and life.

When we feel that we are on top of our life something unexpected will hit us from nowhere. Untimely death, accident, hospitalization, job loss, sudden debacle, or setback is always waiting at the blind corner. That is the nature of life. And the same with the market.

It is better to keep in the back of mind that unforeseen events can create chaos and spoil the party. So, when we are on top, maybe in our personal life or the market, and everything seems to be going picture-perfect, it is good to follow these two things. 

The first is to have an attitude of gratitude. 

When you wake up daily, thank the universal energy for everything that you have received. Be humble. Be grounded. 

Secondly, always have this wisdom that anything can go wrong at any time.

Be ready for such unexpected eventualities. Once your mind is prepared for such sudden shocks, the aftereffect gets minimized. Even if such things do happen, you will not be affected much. The severity will reduce significantly. 

The idea is to be alive to fight another day. 

Better be prepared than sad.  

So, is there a risk in the market?

Yes. It is always there. It will always be there. 

I am fortunate to have witnessed the Sensex since the level of 4000. Thanks to Harshad Mehta. It was the year 1992. I was studying in Engineering college. One day all newspapers flashed the story of the Harshad Mehta scam on their front pages. In one day the Sensex crashed by 577 points, a staggering fall of about 12%. 

In the next few months, the Sensex tanked from the lifetime high of 4600 to 2000 level, which is more than 50%. Many investors lost their hard-earned money. It was a sad story.

In a way, the most disastrous crash in history was my first introduction to the stock market. This event is engraved on my mind deeply and I do not allow myself to forget this event.

In about thirty-one years, the Sensex scaled from 4000 to 70000. That is more than seventeen times. However, this journey of thirty-one years is not smooth, straightforward, and unidirectional. It is a rollercoaster ride, highly unpredictable in the short term. During this journey there were many occasions when the Sensex crashed severely, destroying the wealth of investors and forcing them to quit the market. 

Let’s look at this journey of Sensex from 4000 to 70000. Let's for some time forget the narrative and just focus on the data points.

The table shows the realistic behavior of the market. In the past thirty years, there were more than ten occasions when the market crashed significantly creating fear among retail investors. 

So, what is the learning?

1. The market can crash at any time up to 50%. The market does not need any reason to crash. Market crashes first and the reasons are found later.

2. Be mentally prepared for such a crash and be ready to see notional losses in your portfolio.

3. If you are invested in equity, be aware that you may have to sustain a loss of up to 50%. 

4. If you cannot visualize this red bloodbath in your portfolio, you are not hardwired for equity investment. Better move out of equity and shift to safe heavens of mutual funds.

5. Even if you are invested in mutual funds, be prepared to see losses in your portfolio, which may be less than equity.

6. Invest only that much amount in the stock market by which your daily life is not affected for the next five years. In other words, invest only that amount which you do not need for the next five years. 

7. If you are working in the private sector, have an emergency fund equal to twelve months of monthly expenses in safe instruments like a bank FD, post office, or liquid funds.

8. Do not invest 100% in equity. Diversify into bank, post, debt funds, hybrid funds, and equity mutual funds.

9. Never stop ongoing SIP.

10. By seeing such frenzy, never invest surplus amounts at life-high levels. Wait for at least 30% correction and then deploy. Avoid mimicking the herd. 

11. Remember that the market is driven by two factors, one is greed and the other is fear. Keep yourself isolated from these demons. 

If you follow these simple rules, I am sure you will create enough wealth to lead a happy and comfortable life.

Here are two wisdom quotes from Charlie Munger to ponder:-

1. Assume life will be really tough, and then ask if you can handle it. If the answer is yes, you've won. 

And

2. Is there such a thing as a cheerful pessimist? That's what I am.

Me too !!! 

Are you?