An occasional crash in markets is good. Once in a while, a tough business environment is good. These are things to be welcomed, not feared. Occasional stress is good for the markets, good for investments and good for businesses.
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Junk gets cleared up
A lot of froth collects on the top when the markets are in a strong bull phase. Companies with fundamentally weak businesses are able to create an illusion of being much stronger and their stocks do well. Punters are eager to buy anything that may trend higher soon so it’s easy to boost undeserving stocks. In the 2001 bear market, all kinds of fake tech companies got cleaned out. In 2008, it was the turn of over hyped infra and many other sectors. This time, if the bear market runs longer, sham new age ‘digital’ businesses will get wiped out. Discarding non-performers is as important a function of properly functioning capital markets as rewarding high-performers.
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Performers perform
All businesses suffer in economic downturns but the strongest ones suffer less, adapt better and recover faster. As a result they come out on the other side even further ahead of their competitors. Typically, the better managed businesses react better to the crisis and make themselves even more efficient. Later, when the opportunities for growth open up, the measures they take bring a windfall. The crisis serves the same purpose that a hard training session does for an athlete.
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Lessons for investors
When stock markets are doing well, the froth gathers in every portfolio. Experience is the best teacher and in equity investing, bad experiences are much better teachers than good experiences. In fact, good experiences, unless mixed with bad ones, are likely to teach the wrong things. If one starts investing and only good times follow for a while, then one gets a distorted view of reality. One keeps investing and the money keeps growing at a fast clip and the mind tends to normalise this.
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Risk control
You start feeling like an investing genius, and start thinking that this is the way things are going to be. And then the bad times hit. Depending on how bad they are, the shock could be small or big, or even huge. However, there’s no avoiding it. It comes in the life of every investor, usually several times. Here’s the key thing—unless you have been unwise enough to wipe yourself out, it always works out for the better. The basics of risk control, of diversification, of buying into only fundamentally good stocks, when learned from hard experience, are never forgotten.
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Bitter truth
So all things considered, it’s good that the markets are declining a bit and investors are going through an uncertain time. It’s like a bitter medicine that will actually bring great benefit. (Text by Dhirendra Kumar, CEO, Value Research/ET Contributor)
