Never Waste a Good Crisis as Investor

Never Waste a Good Crisis as Investor

"Never Waste a Good Crisis" or "Never let a good crisis go to waste" is often attributed to Winston Churchill, although if you dig a bit deeper you'll find that he actually never said it! Anyway, it is a lesson that in challenging times, the one who stands firm and keeps his head cool, wins the battle. Various crises in financial markets have taught this lesson again and again.

Recent History of Stock Market Crises

The financial markets have seen many incidents in history which eroded the wealth of investors. We will take a look at some recent historical events that created panic in the financial markets. But they were all followed by a sharp correction in equity markets. In other words, the markets fared vibrantly in a short period after the crisis events subsided.

Examples of Stock Market Crises

As an example, take a look at the table below of the NIFTY 500 TRI (Total Return Index), a major index of the NSE (National Stock Exchange) of India. In the table several financial crisis events are captured that impacted badly on this index (the impact on other global indexes was similar).

The index market drawdown figures depict the crisis took place in percentage terms from its historic peak value as on the crisis day. Stock market is a zero sum game. On one side there are investors who have sold those stocks and on the other side there are investors who have purchased them at equivalent value on that day. Such investors have gained substantially in a single year and after that, even after year on year. Their CAGR (Compound Annual Growth Rate) figures reflect the returns generated by them.

PANIC – The most killing factor

The above examples underline the importance of keeping a cool head and the importance of opportunities existing in a stock market crisis.
The investors who invested in the stock market for the long term, see their investment getting erased sharply during the crisis phase of the stock market. Many of them unfortunately panic and quickly redeem their investments at the falling prices thinking to reduce their piling losses. Sometimes their fear becomes so severe that they exit from the stock market altogether and never return again. Because so many investors overreact they in fact make the crisis situation worse.

BUYING OPPORTUNITY – Rock bottom low prices

When there is panic in the stock markets, it may seem that professional investors become greedy. But what they really do is trigger their investment plan and apply regular shopping behavior. After all, people get tempted to buy something if it is on sale for say a 20% or 50% discount in a store. Similarly, when stock indices start touching their bottom levels, it really is the best time to buy.
Note that it is quite possible that prices drop even further, but if you wait too long, trying to time the market for the absolute bottom, you are likely to miss the buying opportunity as the market may quickly bounce back to previous levels. It is hard to catch a falling knife.
Hence you must start buying at some discount level viz. 20% and increase your investment with every next fall, instead of waiting for the rock bottom level. No one knows how deep the market will fall ultimately. The worst fall may by 30%or 50% or more as we have witnessed in 2008. Investors must create their own strategy to deal with that fact of life. A strategy could be to invest first 30% corpus during the first 20% drop, followed by an additional 40% during the next 10% drop and so on. Different strategies yield different results. But always such buying must take place in a falling market. Markets have always rebounded and rewarded investors like this.

LESSON – Never waste a good crisis

Seasoned, professional investors who survived similar crisis situations before wait for opportunities like these and never let a crisis go waste. With a cool mind they see the low, rock bottom prices as an excellent buying opportunity. Even premium assets become available for purchase at heavily discounted prices as even such fundamentally sound companies lose their glow. After the attack on the World Trade Center, the Global Financial Crisis, and the Covid-19 outbreak stock markets overreacted to drop too far from their peak valuations, but they recovered in a short period thereafter.

So remember, economic crises happen from time to time. Investors lose confidence and panic in such situations. They forget the basic discipline and principles to be followed during such crises. Only a few investors follow financial discipline and benefit from crises. This cycle repeats with every new financial crisis.