It was Siberian-cold midnight of 14th April 1912. The 1st World War was just 2 years away. Believed to be unsinkable, The Titanic was on its maiden voyage towards New York. At 26 miles per hour, she was invading through the harsh and crazy temperatures at her full speed.
Meanwhile, Chef Charles reached his compartment from the kitchen after a day-long tiring work. And a few minutes after he fell into a deep sleep, he was awakened by a massive blow at 11:40 PM. In his night-suit, he headed back to the ship deck where something strange was waiting for him.
“Titanic has been hit by an iceberg“, said one of his co-workers. That’s something he had never expected. He always believed that Titanic was made to sail, not sink.
He observed that minute-by-minute, ice-cold water was gushing into the ship at an enormous rate. First. Second. Third. One-by-one, the compartments were getting drowned. Realizing that The Titanic was doomed to sink, he started preparing for a survival plan. He went back to his cabin and gulped down a huge quantity of Whiskey.
With new energy, he teamed up with his co-workers and brought as many loaves of bread as he could from the kitchen. Besides pushing women and children into the lifeboats, he started putting 3-4 loaves of bread in each one of them. Knowing the fact that there were only a few lifeboats, he began throwing deck objects in the ocean. Chairs. Cushions. Wooden Blocks. Whatever he could lay his hands on. In a hope that people would be able to use them as rafts once the ship sank.
Image: Reel Life Chef Charles When Titanic Tilts at 90° | Source: Youtube
Eventually, the ship went deep inside the Atlantic. Along with The Titanic, not so blessed were his co-workers and hundreds of other passengers. They all had died of hypothermia (low body temperature). That too within 15-minutes after they jumped into the water. On the contrary, at -2°, Charles kept swimming in the ocean for the next 4-5 hours before he was finally rescued by another ship.
By downing whiskey, he made his body produce heat much faster than it could lose in the bone-chilling cold water. By downing whiskey, he didn’t let his body temperature fall down below 37°. By downing whiskey, he had survived the unplanned.
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The fear and greed of investors make financial market highly uncertain. When it’s going to sink like Titanic, no one knows precisely. Same holds true for the stocks. We have seen that in past during the Dot-Com era, 2008-World Crisis, and at various other instances. And we’ll continue observing it in the future as well.
The small-&-midcap rally, that was expected to stay forever like Diamonds, has taken a backseat since the onset of 2018. Investors who were sure of doubling their money every other day are waiting impatiently for their return of capital. Let alone return on capital. The stocks that once looked dearer to eyes have changed the way they used to behave in 2017.
Now the question arises how to survive such chaotic and unplanned circumstances? What can a retail investor do to avoid falling in such a trap? Well, listed below in red are 3 strategies that I believe should help in enduring such turbulent times. I have been following the same and intend to obey the same rules in the future too. And I really believe that these should help you too.
Invest what you don’t need for the next 15-20 years. Even a paltry amount of Rs.2,000, when invested every month, can produce magical results. And this is something we fail to understand while living in an era where everything is just a finger touch away. Be it Uber or Dominos Pizza, we just spend on it without giving it a second thought. But when we compare someone with a huge amount coiled with a short-term temperament, we’ll see that the market remarkably favors the person who invests with a long-time horizon. Doesn’t matter even if it’s a small amount.
Out of all the complexities in finding the next HDFC or Nestle, let’s consider the case of investing in Franklin India Bluechip Fund. With the onset of 2000, the Billionth citizen of India was born. If her parents, on her behalf, had continued investing just Rs.2,000 on the 1st date of every month, she would have been sitting on a pile of Rs.28L today. A rate of around 17%.
During this time, numerous unplanned events shook the World. Our financial capital was attacked by terrorists. Lehman Brothers filed for bankruptcy. Interest rates were hiked and lowered. LTCG was introduced. But none could stop the compounding engine. If continued for the next decade, this may end up with Rs.1.8 Cr.
Image: Invest What You Don’t Need | Source: Value Research
Charlie Munger once said that one should never interrupt the compounding unnecessarily. This statement really makes sense to me. By investing what we really don’t need for the next few decades, we can let it compound enormously. Without worrying about how severe the future decline is going to be, we can avoid taking irrational decisions of selling our equity holdings in the sense of panic. History proves that sooner or later, the market eventually recovers. Something that we had witnessed after 2008-Depression.
Without giving a damn to what happens in the World when the USA sneezes, continue investing for the next few decades. Don’t get scared of the volatility in the market. Ride the roller-coaster ride. It’s the ticket to the treasure trove. Believe me, you’ll love the end result.
Save. Save. Save. This is one of the simplest and easiest ways to survive a catastrophe. Besides investing what we don’t need for the next few decades, we must save a portion of paycheck that can be used during emergencies. Emergencies like job loss during a recession. Erosion of returns during downturns. Such tough times may compel us to liquidate our equity holdings unnecessarily.
One of the key benefits of having huge savings is that it takes care of daily routine expenses in the absence of a main source of income. That too for a long period of time. Whenever a panic strikes in the future, a savings portfolio is what will never let us force-sell our quality holdings. This way, we can give maximum time to our holdings to compound. And eventually, survive the unplanned circumstances that may create an environment of fear and gloom.
Buy a diversified set of quality companies. The recent carnage in many companies due to fundamentals and corporate governance issues has made many investors lose their pants. Many of them are the first-timers who jumped into the rally at its peak. A rally where even fundamentally weak stocks had only one way to go – up. The investors who had built their portfolios of such companies are finding their investing experience extremely painful.
Out of more than 800 small-cap stocks, nearly 500 have lost their market value by more than 30%. Not only that. More than 60 have lost their shine by more than 50%. Was it a planned move? Of course not. But such unplanned events pose a threat to the survival of an investor. Corporate governance issues and financial manipulations are mostly observed in micro-cap and small-cap stocks. Investing in such companies requires continuous monitoring, deep research work, conviction to hold and patience to ride the volatility.
Image: Small-cap Stocks Down from 52-week Highs | Source: Equitymaster
As retail investors, we should prefer investing in companies that are financially strong. The ones with positive free cash flows. Zero or minimal debt levels. Increasing revenues with an increase in operating profit margins. The companies where management walks the talk and has skin in the game.
These are the businesses that have tasted the success post the aftermaths of undesirable situations. And will continue doing so under the guidance of an intelligent fanatic. The quality blue-chips and mid-caps that look promising to become future large-caps should be considered for investment at reasonable valuations.
And by diversifying investments across various such companies, we can avoid losing a huge chunk of our hard earned money. Not all can falter financially at the very same time. And even if one falls down like a pack of cards, the others will continue to sustain the portfolio. Besides, no matter how significant the correction is. Good quality companies turn out to be the top-most contenders to recover. Really fast. And quick.
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As a practitioner, I believe these strategies are going to stay relevant in the future too. No matter what happens, a cool and composed behavior is the key to make the investing experience really enjoyable. Next time, whenever you find yourself in an unwanted situation, don’t rush to sell. Dig a little bit deeper and analyze if the fundamentals are still intact. Ask yourself: Is panicking really worth the moment?
The longtime partner of Warren Buffett, Charlie Munger, once said:
“If you can’t be calm and composed when you see a market decline, then you’re not fit to be a common shareholder, and you deserve the mediocre result that you’re going to get.”
The above quote pretty sums up this post 🙂
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Related Post: Being Fearless Is The Way To Go
The cover image has been taken from Ted.com
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