Are Corrections good for Investors?

Relatively new investors, Suresh and his wife Shanti Menon rushed to our office & were kind of panicked on witnessing the current correction in equity markets. We had a good discussion as we tried to explain them that – just like the famous surf excel advt. which said “Daag ache hote hai” …similarly corrections too are healthy for investors in the long term.

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I shared with them about that I recently attended the online meeting of Nick Murray – a veteran & well respected US based investment advisor, author and trainer. In the meeting he said one of the key characteristic for a successful investor is how anti-fragile he can be especially when markets are going thru corrections referring to Naseem Taleb’s book Anti-fragile. An anti-fragile investor is one who is well planned to grow substantial wealth & prepared for navigating the ups and downs of markets; infact he/she emerges better after ever such correction.?

Shanti asked: it is common knowledge that equity markets have the potential to grow fast; but can you please share more details?

I said if we look at the history of Nifty (since 1990) of 34 years; almost every year on an average NIFTY has seen an intra year correction of 10-20%; almost every block of 5 years on has seen a correction of average 30% or more and? NIFTY has halved or fallen more than 50% 3 times since 1990….(1993, 2001 and 2009) but despite of all these corrections NIFTY has grown approx. @ 14% p.a. and has multiplied wealth 80 times in 34 years. This is the power or magic of compounding. Any investor intending to create wealth through equities will have pay premium in the shape of withstanding such volatilities and relish the magic of compounding in the long term.

Suresh jumped with in with a smart question: Would it not be better that when the market peaks we move out and again buy when the markets are at bottom – Would we not make more money in that case?

I smiled and said: it is very easily said than done because it impossible to assess the peak or bottom of stock market…just in 2019 NIFTY had touched 12,000 and now it has doubled to 23,500 (in spite of Covid and 2 ongoing wars) – people who must have booked at 12,000 may never get the same opportunity again. Similarly, it is impossible to predict the bottom of the market & more importantly the best days to invest are the days just next to the bottom…which is kind of impossible to predict. So the best option for an investor is to invest in equities for long term and at the same time always keep some cash in hand anticipating falls, invest more and grab the opportunity. This is what Naseb Tableb refers to as being anti-fragile, not only being calm, resilient but emerging a better self after every adversity.

Menon's finished their coffees; smiled and went home relaxed and better prepared for their investing journey. Happy Investing.