E13: Five Common Mistakes Investors make in Falling Markets

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In the thirteenth edition of Insider Investing, we discuss the top 5 mistakes investors make during stock market crash or corrections. Our co-founders Sandeep Jethwani and Vaibhav Porwal share how to avoid these common pitfalls & strategies for long term investing through market volatility.


0:00 - Episode introduction

0:37 - What's happening

3:05 - Panic selling to come back in later

6:05 - Holding back fresh investments

9:55 - Holding on to poor quality

14:33 - Checking your portfolio too often

17:37 - Thematic investments

20:33 - Closing thoughts

Episode Transcript


Hello, everyone, welcome to episode 13 of insider investing on this very lucky episode, we are talking about the stories of the mistakes that people make when markets fall, Vaibhav and I rely on our previous experience of working with the ultra wealthy, to tell you what are the top five mistakes we can make when markets fall, so you don't have to repeat those  

Hi Vaibhav, Welcome to Episode 13. You know, 13 is a lucky number and which is why we are going to discuss the massively falling markets. Right now.  You know, the last few weeks have been fairly interesting. Suddenly, people are starting to send us those signals, right? I was told that somebody sent me a nifty chart, that nifty has dipped three times now. And a fourth very deep correction is coming in. I asked why do you say that? Because they said it's exactly the same thing that will happen in 2020. Right. And now people are trying to find patterns to say that, okay, markets are going to fall. You know, you were telling me about this telegram group you're on where somebody was telling you that nifty will hit 14,000. What exactly is happening?


Thanks, Sandeep, glad to be back. Really excited to join this podcast. This is my favorite topic. And every time we see it, whenever markets are going up, people have different targets, versus whenever markets are going down. I think you've seen it enough number of times, as you know, started our careers long back. And I've seen enough cycles to realize that these things keep happening. And most of it happens because we are too preoccupied with the short term movement of the market instead of focusing on long term investment objectives.  I'm really excited. Hopefully, we'll be able to gather some learning out of this podcast and share some experiences that we have accumulated over time to market corrections.


So I thought it'd be a good idea to, you know, frame this, and say that, what I mean, we see a lot of mistakes happen when markets are falling, right, because it's natural human beings, we react to panic in different ways. And  I thought it'd be a good idea to cover the top five mistakes that we can avoid, as investors when we are in a market correction, right? And I think the biggest thing for us to realize is that everyone is playing a different game, right? Your game is of a long term investor, there are traders, so there will be other noise, etc. But what we are trying to do is make sense of the top five mistakes that you can make as a long term investor for somebody who wants to invest for the next 5,10,15 years of their life. 

Let's start with mistake number one, which is, you know, when typically, when markets are falling, one of the most common things we hear is, let me sell everything right now and come back later. Right. And this is something that we saw very closely in 2008. You know, I had one of our largest investors at that time, who currently lives in Singapore. And he called me from there and said that Sandeep, this was late. I think it was November, December 2008. And let's sell everything for once. And I will come back later. I think that the markets can continue falling. And this, by the way, was when nifty had already gone down to almost like 3000 nifty. From a peak of 6000 Earlier that year. So this is a very common mistake that a lot of people make. And I think you would have also seen it very closely.


Yeah, absolutely Sandeep. Similar thing happened with me also. In 2020 March, one of the clients decided to liquidate all his equity positions, even before the lockdown was announced. And I still remember he sold out all of his equity positions when nifty was at 8000 and nifty kept going up after that. And unfortunately, once you're sold out at 8000, nifty and nifty starts going up, you start believing that nifty is going up for the wrong reasons. And it should come down for sure which is what we call confirmation bias. You're always looking for evidence to confirm our biases. And the other thing is, I was looking at some data on Amphy website the other day, you won't believe equity mutual funds AUM cumulative AUM of all the equity mutual fund schemes put together was higher in December 2007. Then in December 2013. So imagine for five years people did not come back. That clearly tells you that it's Very difficult to make a comeback in the equity market once you're liquidated your position. So there is what we call the behavioral gap in the performance. Once you liquidate out of the market, it's impossible to make a comeback, especially in an environment where markets are going up. If markets are going down, you will believe that they will go down further so you don't invest. If markets are going up, you will believe that they should correct and therefore you don't invest.


Yeah, I think the biggest thing is that the sense of disbelief is very high, right? When you sell out, and markets move up, you start feeling oh, this is gonna fall. Now, again, it'll come back and I will come back in at that point in time. And sometimes you never get that opportunity, you end up actually buying at a level much higher than the one you sold at. 

So that is mistake number one, which is to sell today, in the hope of coming back in later. 

Let's move to mistake number two, we are all long term investors. And you know, we make savings out of our annual or monthly salary, etc. The ideal thing that we know is to keep investing periodically. But one of the most common mistakes during market falls is to hold back on fresh investments. And the common thinking is let things settle, I will come back after that. And you are potentially missing on a biggest dollar cost averaging opportunity when it comes to your portfolio. But why do you think people do this?


It goes back to the feeling of disbelief Sandeep. If you look at data historically,  SIP numbers have moved in tandem with markets, if markets go up as SIP numbers and equity mutual fund inflows go up, markets go down equity mutual fund inflows and SIP numbers go down. It's largely a function of relying too much on historical performance. And we discussed it enough times that the performance of the corpus is very different from the performance of the fund. So what I mean here is, for example, if you're invested in equity mutual fund that has delivered 20% return year on year, but when you look at the performance of the investors, AUM or Investors corpus it will be very different from the performance of the fund not happens because every investor keeps changing their goal posts or objectives depending on the market. And that is something which is extremely important for investors to realize that your investment objectives have to remain static. The market will never remain static.


And if markets were stable, then there would be no return. Because you are getting rewarded for the risk that you're taking. If that risk were taken out of the market, then there would be no return, you would get FDA type returns, which is where there's no risk free returns.

So I think that is one big realization that we have to make when markets go down and risk goes up. That is the time potentially that you can actually make higher long term returns because now you will be rewarded for taking that risk over a period of time. 


And honestly, Sunday risk goes down when markets are going down. You're buying cheaper. Technically, if you look at this as a principle of buying something cheap, if you buy something cheap, that means you're taking lesser risk. Unfortunately, people look at it the other way around. People believe that when things are moving up, risk is lower. But unfortunately, that's not true. In fact, when markets are lower, stocks are cheaper, you can buy stocks at much lower valuations and therefore your risk is much lower, your margin of safety is much higher. 


Correct. I think the question is, if perceived risk is what the markets are falling we perceive risk to be more than what it actually is. And there is a difference between actual risk and perceived risk. Actual risk is much higher when markets are in a tear or upwards. And perceived risk is much higher when markets are on the way down. I think we are often rewarded for taking perceived risk, right? Because if everyone is fearing the market, everyone is worried when the perceived risk numbers are that high. That is potentially the time to continue doing your regular investments and hopefully you will make money in the long term. So, that is you don't mistake number two. 

Now let's come to mistake number three Vaibhav,  and you know this is something that we see very often, especially on the back of a bull market. In a bull market, you end up accumulating a lot of poor quality stocks in your portfolio, and it's natural, somebody has told you something, you know, you've reacted to that situation and you bought, what we clearly know is not high quality investments. There is a tendency in investors that when markets fall, you freeze when it comes to those poor quality investments, you feel that let it recover, I will sell it at that point of time, how should investors react to this situation.


So, loss aversion kicks in. And there is a saying in the market that in a bull market, everyone is a fund manager. And every other person that you meet in the bull market will recommend you some stock ideas. And because you see a high rate of success on these ideas, you are quite tempted to act to it. And in the process, you end up accumulating many stocks or many schemes, which are not of great quality, they were doing well, because liquidity flow was strong, and everything was doing well in the market. It's very important to segregate your winners and losers and winners not in terms of price performance. But in terms of quality of investments that you are invested in. What happens to Sandeep, typically is on the downside, everything converges, good quality stocks, bad quality stocks, everything will fall. But on the upside, you will see significant divergence. So whenever markets recover, you will see the divergence between good companies and bad companies. And which gets amplified over time. So if you go back in time, what would have worked in 2006 & 7, most of these stocks are still down 97-98%. Right? From those peaks. But good companies have recovered. But, if you see the correction of 2008, all the companies fell together. So it's important that you're able to make that distinction. And that's where sometimes there is no harm in taking advice from an expert.


Yeah, I think, you know, there are two things here, if you break it up, right. One is, we all know that we end up selling our winners, and holding on to our losers. Because when the winner is up, you feel like oh, I have to book profits. So I'll keep selling it. Whereas what is in a loss? You keep holding on to that. Yeah. Second thing is that we get married to our decision. And one of the best examples of people who do not do that are very successful investors. You know, I was in February of 2020, when just before I mean, COVID was beginning to rear its head, etc. Warren Buffet was on CNBC, and the CNBC reporter asked him, What will you do if markets fall in a big way? He said, I can't tell you what I will do. But I will tell you what I will not do. He said I will not sell when markets are down. Now, march 2020 has happened. The whole world came crashing down. Globally locked down happened, things shut down. What did Warren Buffet do? He sold all the airline stocks. Yeah, a month back, he had said I will never sell. Yeah, a month later, he realized that was a mistake. And he corrected that mistake. I think good investors correct their mistakes and move to quality, especially during down markets. Because like you rightly said, when the markets go up, the good quality will do better than the poor quality. And there is no better time to sell poor quality than when markets are down.


So other things to add to what you said, good investors don't react to the prices, they react to the fundamentals. So on this, in this example of what Warren Buffett did, he didn't react to the price, he reacted to the fundamentals.


Correct. And fundamentally, at that point of time, there was no visibility of the world opening up again. And he saw that there was a change in reality, right. Yeah. Now. And if there's a change in reality, you need to react to that. Yeah, absolutely. Yeah. And probably different things will do better. So let's come to the fourth mistake, and this is something that I personally feel I'm also guilty of right, which is when markets are down, we check our portfolios very often. It's a natural tendency. You know, and I think there is this thing that smartphones cause you to do. When you open the smartphone in the morning, the phone recommends to you which app to open. And in my case, it's money control, because probably it is realizing that I open it every morning, and especially in tough markets, you know, your network is falling rapidly, there is this tendency of okay, let me open it and see what is happening. And maybe I can do something, maybe I can react to it. How do we avoid that temptation?


It's a tough one, Sandeep, and all of us are guilty of that. But honestly, as I said, if you stay too preoccupied with the day to day price movement, it will fuel anxiety, and you will end up compromising on your long term investment objectives. I've done it in the past and if I go back to 2008, I made the same mistake. So that was my first bear cycle in the market. And because I was looking at the markets on a daily basis, the bad thing about bear markets is every news that you will receive will be negative, right? And it reinforces the belief that something really bad is going to happen or things are not going to improve, but things improve suddenly. And the classic case is how markets recovered in 2009. One election outcome of UPA two getting selected and markets were up 20% in a day's time, imagine you're out of the market. And in one day's time you lost out on 20% returns. So that's what happens. So it's a futile exercise to look at markets on a daily basis, it's only going to fuel anxiety and which will force you to react adversely.


Yeah, I think and this is one thing that we have tried to, you know, learn from our own mistakes and incorporate in the dezerv platform is that we focus on the future of your portfolio, rather than focusing on what's happening in the near term. So how we report data is linked to how the portfolio can do in the future, depending on the previous movements of the markets. And that, to me, gives me a lot of assurance that I am on the right path, Even though short term portfolios will be down. So I think as people in the industry industry, we owe our responsibility to make sure that we are not encouraging this behavior of constantly checking the portfolio, because that can actually cause significant damage to our investors. 

Vaibhav, let's come to the fifth and final mistake, right. And I think this is something again, that happened very actively in this last Bull Run, which is thematic investments. And we all know that the themes that bode well in the first run may not be the themes, which will do well in the second run, what is the mistake that investors make when it comes to thematic portfolios.


So thematic investors are a baby of a bull run. In 2000, we saw everyone wanting to invest in tech stocks. In 2006. Seven everyone wanted to invest in infra stocks in 2013-14, everyone wanted to invest in pharma stocks 2019-20, everyone wanted to invest in consumer discretionary, or new age technology companies. So the thing is a particular market environment supports these themes, if there is any change in the market environment that he may or may not play out. If you look at today's data, and if I was holding on to the same portfolio that I was invested in 2007, then my portfolio does still be negative. Because the most popular theme then was investing in real estate companies and infrastructure stocks. And those stocks have not yet recovered. Without 2013-14 pharmaceuticals, the pharma index is still down 35-40% from 2013-14 levels. So it's important that you don't get married to a theme. That theme does really well because the environment was conducive. And the narrative gathers so much conviction because everyone is talking about that narrative. And you end up investing in that narrative and that creates a virtuous cycle for the performance of that thing. But the moment there is a change in the fundamental or economic environment, that theme may or may not recover. So it's important that you stay away from investing in thematics, thematic places and reassess your portfolio. As I said, No deserve or you know, the way we have designed the portfolio. We don't believe in any thematic investing. We believe that narrative Based Investing is only for a short period of time and for you to time. The Entry and Exit perfectly is extremely difficult. So it's important that you stay away from these kinds of investing.


You're absolutely We've spoken about this earlier, even when the bull run in one of our previous podcasts about how thematic investment is potentially a very concerning trend that we're seeing, hopefully with markets correcting some of that will also stop. Thematic investment is a bad idea at any market cycle not only when falling. So, I think that was interesting. So those are our top five mistakes, 

1. Selling to come back in later. 

2. We will not do fresh investments till the market settles. 

3. Holding on to poor quality, and waiting for the recovery to happen to churn your portfolio.

4. Checking your portfolio too often. 

5. Thematic investments. 

So, you're and one of the things we get asked very often is, well, markets recover from here, you know, and I'm reminded of this Morgan Housel response and we will customize it to India. If somebody asks you or talks to you about will markets recover? You should ask them will it rain in Mumbai this year? It will certainly rain in Mumbai this year. The only question is when? And I think we just have to be patient.


Yeah. Great, great Sandeep. Nice chatting. As always, I believe our listeners will benefit because of this. And, there would be many more such mistakes that people would be making, we could cover 5 and these are a part of our experiences that we accumulated over time.


Thank you. We really enjoyed this. I hope everyone recovers from this market correction with their sanity intact and portfolios doing well. 

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