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The Great Market Crash of 2020

So far, 2020 hasn’t been kind to investors


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Nithin Sasikumar

3 years ago | 4 min read

Is this a bear market? A bear market is often characterized by a brutal sell-off in the first phase, followed by a pullback or a bounce and then a meltdown. This happened in 2008.

So far, 2020 hasn’t been kind to investors. While the market is jittery, the fear hasn’t creeped in and investors are ‘buying the big dip’ if we can put it so lightly.

The Sensex had erased 31.5% of its value by March 19th of 2020 and there have been wild single day swings in the market. There has been a pullback of sorts since then but it’s too soon to say if a meltdown is on the cards.

For all we know, the spread of Covid19 flattens out due to social distancing measures and a vaccine is created and the impact on the world economy is not as bad as feared; the market rejoices and bounces back to the pre-Covid times.

Or maybe, the market is still underestimating the impact of consumption being postponed, businesses being shut down and people losing their jobs leading to a recession.

We’re not trying to tell you what to expect from the coronavirus because we frankly don’t know and we don’t expect that a lot of people do either. And we do realize that in times like these, readers and investors are looking for a conclusive answer — either it’s a yes, we’re all screwed or no, we’re going to make a lot of money from here.

So, depending on what you want to believe (and we’re all biased that way), you’ll spend a lot of time reaffirming your negative belief by reading pessimistic outlooks which forecast the collapse of economic systems or you’ll read commentary from people telling you that the Covid19 is nothing for economies to fear and that the correction is a money making opportunity.

We can find enough data to support either argument by the way.

Let’s assume we buy the argument that it’s a great money-making opportunity. And we all love looking back with the benefit of hindsight and saying, IF we had invested at this bottom, we would have doubled or tripled our money in a couple of years.

So, if you had invested all your money on 18th March ’08 after the Sensex fell close to 30% from a peak, you would’ve doubled it in 6 years (which is a 12% compounded return) and almost tripled it in 11 years (9.5% compounded return).

If you wonder why it didn’t grow more, it’s because the Sensex in 2008 fell by over 50%. So even though you participated after the initial correction of 30%, the returns didn’t create the riches that we dream about.

Today, there are a few options,

a. We believe this is the bottom and we invest all our cash into equities. The market continues its fall and we can’t keep buying because we’re fully invested. Even if a recovery from the bottom is swift, we don’t end up making much money.

b. We’re fully invested after the 30% correction. The market rebounds and recovers sharply after the contagion slows and economy quickly bounces back. So, we’ve caught the bottom and we make money.

c. We’re not sure if this is the bottom so we keep staggering our investments. And close to the bottom, we’re fully invested. We have a great chance of making money when the markets and economy recovers.

d. We invest part of our money today and the market experiences a pull back recovery. We feel that we missed out and should’ve invested completely so in order to not miss out further, we invest the rest of our money at a higher level. And then, the market crashes again.

e. We deploy part of our money today because we’re ensure as to the economic implications of the pandemic. However, the recovery is quick and there is no further fall. We continue to sit partly on cash because we don’t want to invest at a higher level. Despite catching the bottom, we don’t end up making much money.

The thing is no one knows the answer for sure and reading about these more isn’t necessarily going to improve your odds.

What we will tell you is simple:

a. If you’re already invested, don’t rush to pull out money thinking you will wait for the bottom and then invest. It’s not going to happen and you will probably invest at a higher level because fear has taken over.

b. If you have cash or liquidity, don’t deploy it all at once. Be patient. The objective isn’t to attempt and make supernormal returns but to make sure your capital is protected and you still get the opportunity to grow the money.

In hindsight we will know which was the bottom. Today, all we can do is make a calculated guess and that would be that we are probably underestimating the impact of the pandemic on global economic activity.

But then, the markets have a mind of their own and often times, runs contrary to the economy in the short run.


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