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Stock Market Crash & Me: How did I handle as an Investor and as a Professional?

A little more than a month ago, stock markets in India and all over the world were at their all time highs. Suddenly, in a matter of few working days markets crashed at a speed that wasn’t seen before, including at the time of financial melt-down and recession of 2008-09. Until the end of first week of this month, I believed, in my life time I’ll never again see 2008-09 kind of crash. No living person then and today so far remembers experiencing any bigger stock market crash of a magnitude of 2008-09. Well, for Indians, it was the only biggest crash people have seen. In USA, something bigger had happened during ‘great depression’ of 1929, when Indian Stock Market was practically non-existent (though BSE is more than century old, there is no data, benchmark whatsoever for those dates). During 2008-09 I was still amateur investor with little money. That situation should have been much better for me, if had not done a bad financial decision just few months before the recession took entire world (mainly India) in its flames.

End of 2007 saw peak of growth in every aspect – countries and world’s GDP growth, Industrial Output, Automobile Sales and Stock market. Well, at that point of time I did not observe all this. I did not have that frame of mind, interest and even the acumen to do that. I was rather focused on building a career in my then main (now erstwhile) career (Mechanical Design Engineering). Then the following year 2008 turned out to be bad year for the stock market. When I look back today those times, I kind of get surprised and appreciate the effect of momentum and get confused all at a time. It is said that stock market is usually ahead of the times by at least 6 months. That means stock market starts pricing-in economic effects of every possible event in the foreseeable future. The root cause of the 2008-09 great global recession was Sub-prime crisis in the US. Sub-prime issue peaked in year 2006 and the crisis first became more visible in 2007. However, stock markets globally continued to rally till the end of year 2007. Further, even after stock market started pricing-in the crisis, tough lately, rest of the economy and consumption pattern continued with the frenzy. That was perhaps huge momentum that was gathered over multi-year bullish economy world over. Personally for me also, that was time (1-July-2008) when I got a big break in the career, resulting in doubling my salary to about 50K per month. That was indeed lot of money for me at that time when I was single and did not have any household financial commitments or liabilities (my father took care of them). I did not understand at that time that though it was lot of money for that day’s expenses but just enough or little money if I had to save adequately for my future financial goals. As a result, even being a frugal person usually (that I consider myself to be), I couldn’t resist the temptation of indulging in buying my wants (beyond needs). I did not have a proper financial plan. I had term insurance and SIP’s at that time however, which were subscribed to without any goal in mind or proper calculations. I however was capable of calculating effective rates of return to avoid Insurance policies as investment. Term Insurance and SIP’s were great things that I did right from my first job days, which were unusual for youngsters at that age those days. I subscribed them thanks to the awareness I had acquired while studying for licentiate exams for Life Insurance and Mutual Funds. I took and passed those exams as stop-gap things after my college and first job and also to help my mother to transfer her legacy business in Mutual Funds to my name to continue to earn the commissions. Further, I was prudent enough to put unspent (I spent very little, as I did not have personal mobile, bike, foul habits or girl friend) money in SIP’s, though with no goals earmarked to them whatsoever.  Looking back I could realize, if I had financial plan, money should have got channelized to more important needs of the future. Well, coming back to “inner urge or temptation” of exercising and experiencing new-found financial exuberance, soon after getting first salary of my new job, I bought a bike. Just three months later I booked & bought a car with about 30% down payment and 70% car loan at peak rates of interest. Unfortunately little I knew that financial earthquake (fall of Lehman Brothers) was already happening / happened while was I busy exercising and experiencing my new-found financial exuberance. The shockwaves hadn’t reached India yet or Tsunami had not hit Indian shores yet as consequence of the earthquake that happened elsewhere. Just 2-3 months later recession hit. Auto sales tumbled, so auto companies slashed the prices of the cars to push-up the sales, banks steeply reduced the loan interest rates. Stock market crashed. Companies started laying-off and even I closely escaped losing the job. Needless to say I regretted in many ways.
  • Why did I buy the car? Why was it ‘needed’? Why did I take a loan? What if I could have even delayed buying just couple of months – I mostly wouldn’t have done it in first place or even if I had, I would have got it for cheaper price and cheaper loans.
  • Stock market had crashed. Every stock including all of blue-chip stocks were available at throw-away prices. What if I had conserved all that money I spent buying bike and car and instead bought these stocks? What if I could have borrowed for investing in stocks than buying car? I would have been paying EMI’s for appreciating wealth than depreciating, very little needed thing.
Well, however I managed to invest some small amounts (less than 1.5 Lakhs) by scraping all my bank accounts, taking some 20K interest free loan from employer (max that was allowed) and some other 50K borrowed outside. [It is told one should not borrow to invest. No bank will give you loan to invest. In fact they take a declaration while disbursing personal loan that you are not borrowing for investing. Sometimes I wonder why?! If they can give loan to buy automobiles, home appliances etc and to buy a 2nd, 3rd, 4th property for investment purpose, why not they give loan to invest in securities market. Well, I know the reason, but couldn’t fully agree with them.]

Needless to say, that was greatest investment. It’s not because I had great investment acumen but just combination of time, courage and cash.
For a great investment that will make you rich quickly 3 things are needed:
  1.  Incredible, Life Time Opportunity (Unfortunately this will always come in the guise of something bad)
  2. Courage to Exploit the Opportunity
  3. Sizable [varies from person to person and his/her aspirations & definitions of becoming rich(er)] amount of Cash in hand / bank account
I had first 2 and little of 3rd one.

I felt, I failed to exploit a life time opportunity.

OK, fast forward to today. It felt like I was getting another life time ‘opportunity’.

Unfortunately, we forget the past or remember faintly and misinterpret, compare inaccurately the past similar events to present situations.

When the present market crash started, initially thought it is like a good correction and opportunity to accumulate or add to equity assets. Bigger & bigger daily falls started make me salivate and I felt like I am getting second chance like 2008-09 and I shouldn’t miss exploiting now. In fact, I really invested until 9th March. Next day, I kind of woke up and started doubting and thinking about the background of the crash and it’s potential. I started thinking & doubting is it something much bigger? Then, has it just started and lot more to come? Even if it is a kind of lifetime ‘opportunity’ (crash) I missed in 2008-09 to exploit, why I am pouring money at the beginning without waiting for more significant fall?  If it feels like more to come, then isn’t it wiser to protect further downside or hit to the accumulated corpus of me and my clients?

Unlike 2008-09 or 1929 great depression, or to be more India specific, unlike the market crashes of 90’s after Harshad Mehta, Ketan Parekh’s stock market crashes, this hasn’t originated from financial (mismanagement or scam) reasons. This crash is consequential effect of social problem. It is also different from past market crashes due to other social problems like terrorist attacks or natural calamities. Though many of those are also ‘unknown – unknowns’ or ‘black swan’ events, they kind of keep happening at some long intervals of time. But this Novel Corona Virus is indeed novelty..its different. We all considered it similar to other examples of earlier epidemics like SARS, MERS, Nipah, Ebola, Swine Flu etc., which also hit the world / humanity at some long intervals of time. Indeed it is the sibling of SARS or MERS because virus belongs to the same family of  Corona Viruses. But this one is much bigger than those...massively bigger. [It has deceptive characteristics, symptoms etc. It has far lesser 'kill rate' (fatal) than SARS and MERS;  but this has extremely crooked way of spreading exponentially than its other predecessors. It infects far too many people than other diseases with higher kill rate that it ends up killing far more people than any other disease.]   Also, I feel yet again stock-market missed being ahead of the curve, even the society and other parts of global economy in responding and reacting to a problem. Covid-19 was there for 2 months before stock markets started crashing; perhaps they all confused it for other break-outs like SARS, MERS, Ebola etc. Society’s response was even more delayed! However, this time the whole period of delay is compressed in just few weeks than several months at the time of 2008-09. That’s why the speed of reaction (and hence all the graphs) look so steep and sharp.

So, my ‘Fear of Missing Out’  (or greed perhaps) the second chance also, blurred my vision to distinguish this kind of event from other events that were more connected to finance and economics and then suppressed my common sense to fairly guesstimate the magnitude of the problem and distinguish it from other earlier epidemic break-outs. But that wasn’t for very long and very next business day and next couple of days, I significantly reduced the equity allocation for most of my clients and myself. Unfortunately, market was falling at such a pace that, lot of damage on portfolios had already happened, though I was able to limit / minimize the further losses. Because lot of transactions for many clients had to be done, I quickly defined the order of priority based on
  • Life Stage of the Client (whether earning fresh money / income regularly or not),
  • Percentage of Allocation to Equity in the overall portfolio of the client (derived mostly based on my understanding of ‘Wallet Share’ – which means how much of his / her total assets client has allocated to us for investing in equity mutual funds),
  •  Existing Portfolio to SIP Amount Ratio and absolute value / size of the portfolio at that point of time.
Clients with bigger portfolio and wallet share and who are not generating fresh income / money to take advantage of the fallen market were given the first priority then others (including myself) were given next priority. However in 3 working days most of the switches (from Equity to Liquid / Ultra Short Term Debt) were executed.
Meanwhile on WhatsApp I continued to see optimistic and confidence boosting messages floating. For example I am mentioning few below and then in the brackets I mention how I was feeling reading them
  •  “This too shall pass” (Yes, perhaps this passes before I or my wealth pass-away)
  •  “Correction is Temporary, Growth is Permanent” (Could me, my business, my clients faith & confidence withstand this ‘temporary’ phase of loss of income and wealth?)
  •  “Be greedy when others are fearful; be fearful others are greedy” (Yeah…I am fearful because most of the people seem not to be fearing!...everyone is seeing only opportunity, like I too initially)
Then I had to answer few typical questions few clients had. Below I mention in Q&A format, the questions I answered on phone & WhatsApp.

Should I Redeem (I want to redeem all my investments)?

If protecting the investments from the market crash is the intention then instead of redemption switch to debt schemes is enough. However, for the same reason we’ve already switched large portion of your investments to Ultra Short Term and Liquid Funds. We’ve left some 20%-40% amount still in the equity with the view that in case our opinion about further market fall goes wrong and stock market bounces back, the portion of equity allocation will still be able to capture the rally. No one can be 100% sure about market direction, though considering the gravity of the problem, I feel, worst is yet to come.

Why you feel more is yet to come? Already market has fallen significantly and in fact market has started rebounding. Shouldn’t we start to make re-entry?

Never ever a market rally or crash will be happening linearly in one direction until the tips of top or bottom are reached. In an up-trending market there will be some strong falls and in crashing market there will some spikes of recovery. For better understanding have a look at Sensex graph during biggest market crash in the past during 2008-09. While Sensex fell more than 60% during that crash phase, in between within the same phase there were brief spikes to the tune of 20%. Same is the case for during market recovery/bull phase also.

Interestingly, it is puzzling to me and everyone I talked to, why on earth market bounced and rallied sharply after hearing the announcement of ‘Lock-down’?!! Please make me understand if you can explain. Well, this 15% of pull back in 3 trading sessions may not necessarily be reversal in the broader trend. That doesn’t also mean for sure market is bound to hit new lows. Whatever quantum of past track record may not give indication about the direction of the present and future market trend. All the point I am trying to make is that this pull back for sure can’t be considered as confirmation of the reversal of the trend. To understand where likely market is headed we have to actually see the factors that are affecting the market trend.
The single biggest reason now for the present mayhem in the market is Break-out of Novel Corona virus or Covid-19. Look at the statistics related to rise and spread of covid-19 and you’ll understand that it is still all powerful and spreading at exponential pace. Only country looks to be out of danger is the country where it originated – China. Even China had to pay huge price (almost 2 months lock-down) before things are LOCALLY starting open up. Everywhere else it is not under control yet. World’s major economies (US, Europe, China, India) have imposed lock-down of several weeks. Only Japan is still denying locking down, citing the reason of huge economic losses; perhaps they are going to pay bigger price later, as their infected population number is rapidly increasing even though they are not very transparent & proactive in publishing the data.  World is unlikely to work normally in full capacity for at least another 6 months. Until all major countries / economies get rid of corona virus or until a proven vaccination is developed, business is unlike to be as usual. As long there is just one major economy (developed or developing) has this Covid-19, world will not work as usual. Nevertheless world will find alternative & new ways and methods to connect, communicate, negotiate, collaborate and work as team. However, those ways and methods will also take time to evolve and become efficient to produce the same result as normal ways & methods.  Until then every country’s and hence global growth and hence corporate profitability & growth and hence their stocks and stock markets will limp. Developing a reliably tested and proven vaccination takes at least 2 years.
If you wish to get the feeling what it may mean to the economy of a country and world, consider refreshing your memory about the economic impact we suffered (in fact continue to suffer) because of disruptions like demonetization and  GST implementation. Both of those did not lock-down, they just restricted and disrupted the business as usual. Lock-downs don’t allow business to happen in first place. 
So, unfortunately I don’t see things turning to better any time soon. I wish and pray my hypothesis is proved wrong, I am proved wrong, let me miss the opportunity of investing, let the world and humanity get back to normalcy.

Should I stop my SIP’s (I want to stop all my SIP’s for some time)?

SIP’s, STP’s  (Systematic Investment and Systematic Transfer Plans) do their best job at times like this. Every fresh money you put during the falling market takes the advantage while accumulated corpus takes the hit. SIP’s, Fresh inflows capturing lower prices (NAV’s) help reduce the impact on the accumulated corpus. A person who has newly started investing or the one having little or smaller accumulated corpus relative to his / her fresh flows including SIP / STP in to equity funds should not bother at all and in fact be very happy for having active SIP / STP’s running at this phase of time. I would love to be in their shoes at this phase of time. A person with significant amount of accumulated corpus relative to his / her fresh inflows or no fresh inflows, should be a worried person, as his corpus will only take the hit and has little or no opportunity to take advantage or fallen / falling market. [But however, for such persons also we have already moved majority of his / her corpus to liquid / Ultra Short Term debt, though after taking some initial hit; so no reason to worry for further market fall.]
Let me explain with some simple analogy. Imagine you’ve just enrolled to a systematic gold buying scheme. Say, monthly systematic plan to buy or accumulate Rs. 10,000 worth gold on a given date every month. Assume, gold price suddenly, for some reason, crashes by 25-30%. How will you feel? Obviously you feel happy, because now, your monthly installments are buying more grams of gold for the same amount of money than earlier months. Now, alternatively think that you had been accumulating gold like this for long, say for last 10 years. In this situation, you would have already accumulated huge quantity of gold. So, when price crashes, value of your accumulated gold also falls sharply and your further installments could do very little to normalize the value destruction. Though continuing further installments helps improving the situation slightly, stopping will not help at all. So, in either case stopping SIP or further installments, when prices have crashed, is not a good idea.

How much more it may fall? When will the market recover? Is it good time to invest or make re-entry? What is the right investment strategy now?

Well I am not sure whether it will fall further from here or not, leave alone how much. Market has crashed heavily and swiftly already and brought itself into very attractive valuation and buy zone. But usually when markets fall like this, they far exceed what is reasonable. And yes, as per my thought process, it looks more fall is in store, though I am not sure of it. My thought process, opinion and actions and investment decisions are based on what I think about what could go wrong. I have no hesitation in acknowledging I could be wrong –this time and any other time.
Three things needed for great investment are:  Great Opportunity (Extremely Low Price / valuation), Courage to Buy substantial quantity during low price (almost all the great opportunities come with uncertainty) and Availability of cash to buy substantial quantity. Out of these 3, first one is here almost, though we aren’t very sure whether we get better bargain (lower price than this) or not. 2nd and 3rd parts depend on you. However, we have ensured 3rd Point (having enough cash) by switching out to liquid funds. Now, I am not sure whether you have the courage to invest all of if it right now and how will you take or sustain it, if market falls by another 25-30% from here, and I’m also not sure whether you patiently wait for next 2-3 years or more until market recovers and reaches far more higher than the level of your entry point. Actually it will certainly go far higher than current levels because market is undervalued today. But maybe it will dip further before it starts going up. And in the mean time during that phase you may get upset, feel bad to see losses (notional) in your portfolio the way exactly you felt when your portfolio took some good hit before we protected and moved it to safety (notwithstanding the fact that we saved it from lot of further fall). So, we need to balance between 1st (Lowest Price) and 2nd (Courage to Invest) points. For that,
1.       We shall (re)invest the earmarked money in 3-5 tranches whenever market falls significantly from here or on every sign we get that market is getting stabilized and geared up to take-off. We shall finish all investing in the deep value zone.
2.       Alternatively, as the above one is little tricky as it is manual process, we may choose an appropriate (again subjective and ‘tricky’) period from now, say 3 or 6 months and set-up STP (Systematic Transfer Plan) on Daily / Weekly Basis.
3.       Or we do combination of both above. That means set up a daily / weekly STP for 50-60% of the earmarked amount and balance amount will be switched on ad-hoc basis, as said in point no.1

Why did not you switch to Debt earlier? (Why didn’t you, being and expert and full timer in the profession couldn’t foresee it coming? Corona Virus Pandemic brouhaha was going on for 2 months prior to this crash.  Your more timely actions should have saved me from huge losses.)

As I told you earlier, candidly and humbly, I could go wrong at times and do mistakes at times though this is my full-time job. I am and will be successful as an investor and professional, as long the occasions ‘I am right’ are more than ‘I am wrong’. Yes, I was wrong or had not been able to recognize that it is different from other financial crisis and it is bigger than other pandemic break-outs in the past. I also had no idea of the fall at this pace, as this is the fastest fall ever in the stock market history in India (perhaps in the world as well). However, it’s not just me, but the whole world and almost whole lot of professionals. Many professionals did not do when I did it or even till today. And you know, everyone is intelligent after the event has passed. Corona Virus was there and limited to China for first couple of months after break-out and they had locked-down the affected region. During the same period Indian stock markets, especially Mid and Small Caps were rallying after 2 years of gap. Then market fall started suddenly. 10-15% market correction is given in normal conditions also. We don’t usually bother or take any actions for that quantum of falls. You shouldn’t be investing in equity if you are not prepared to or get used to such falls, which will be frequent in the stock market. For me it’s a serious matter deserving deeper thought and inquiry when market falls beyond that point. And I have exactly taken the action right at that point. Now that the fall looks as part of much bigger 35% fall, you feel like asking this, that how come I wasn’t able to see such a big crash coming and I should have exited equity at the beginning  of the (0-5%) fall only.

I learned you’ve reduced equity allocation to my other friend who is also your client; why didn’t you do it for me?

Yes sir. That is because your portfolio did not call for such action because of the reasons I’ve explained earlier, like, accumulated corpus is relatively far smaller compared to your ongoing fresh investments (which will take care of the problem themselves), your allocation to equity out of your total asset allocation is already very low or your portfolio is already constructed conservatively, unlike your friend’s. 


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