It was another hell of a week and we hope you are doing well.
I am writing this to share with you a personal experience from 2008-09 meltdown and the intent of the same is to help act rationally and not panic during market corrections.
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So, coming back to the 2008-09 correction, as you might be aware, frame of reference is an important concept in Physics and we believe it has its own significance in the world of investing:
To illustrate with an example: Assume a train is passing a platform at a speed of 100 km/hr. For a person sitting inside the train, rest of the passengers sitting inside are stationary i.e. they are not moving. However, for a person standing on the platform, the same passengers inside the train are moving at a speed of 100 km/hr.
So, while the situation remains the same, the assessments are different as for the person sitting inside the train, the frame of reference is the train itself and that’s why he finds everyone to be stationary and for the latter one, it’s the platform.
Coming back to my experience of 2008-09, I was still in 3rd year of B. Tech and had started earning minuscule sums by writing blogs on stocks. Yeah, so as I come from a family of stock brokers and investors, I was always interested in investing and had some idea about market cycles and the potential for long term wealth creation.
In 2008, the news was bad all around. Bear Stearns had collapsed, Lehman filed for bankruptcy and the markets were going down like anything assuming other would follow suit. The news of market crash had made way from Business Newspapers to General English and Hindi Newspapers with headlines reporting massive loss of wealth by investors.
While I wasn’t personally invested in stocks in early 2008, as an outsider, with no personal stakes involved, I started looking at the crash as an opportunity and finally decided to open my own Demat account in Nov’08 to invest the small savings I had accrued till then.
Frankly, I had no idea about macros or how and why the economy would turn around, but just had some basic idea about market excesses (on both sides), the cycle of correction and recovery and obviously didn’t expect the world to end and the markets to go to zero.
I am sure, a lot of investors who started investing in 2006-07 and were fully invested by 2008 must have been thinking differently (end of markets, doomsday, etc) and many may have even sold their holdings at 50-70% loss with a vow to never return back to the markets. They were not exactly wrong in their thinking because that’s what market volatility does to you; sucks you in at peaks (fear of missing out) and throws you out at lows.
Luckily, as we know, markets did eventually bottom out in Mar’09 and staged a massive recovery in subsequent months and years. Similarly, post the Mar'20 covid-19 induced correction, markets again staged a strong recovery till Jan'22.
It’s important to change your Frame of Reference
As we speak to our members, it has come to our notice that those who started investing in 2021 or 2022 have sort of started panicking.
At the same time, some lucky ones (like I was in 2008-09) who for some reason were out of the markets and flush with cash are thinking in terms of good opportunities at low price.
That’s why in times like these or even when things are going great, the concept of frame of reference becomes important for an investor to assess the situation rationally.
We believe fully invested ones can think in terms of what would they have done had they been holding decent cash? Would they still be selling or rather deploying more in markets?
Remember though that just because a stock has fallen 20-30% from peak doesn't make it investment worthy. You will still have to do proper due diligence of businesses, assess opportunities for growth and finally buy those that offer reasonable margin of safety.
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