For the best of traders and investors, year 2020 must have been as confounding as it was nerve-racking. Had you bought the Sensex in January and held on to it, you would have earned 14.5%, excluding dividends. That is an extremely good return in any given year. Of course, had you bought at the bottom of March 2020, you would have earned 83%, but that is a big “if”. Here are 7 important investment lessons that year 2020 taught us. These are nothing new, but the chaos of 2020 reinforced these valuable lessons.
In investing, let the head rule over the heart
That is easier said than done. How many investors can keep their sanity and balance when the markets fall vertically by almost 40% in less than 2 months? If you go by your heart, it is easy to act in haste and make wrong decisions. That is where; your head must come in and apply cold logic. Is this the end of the Indian economy? Obviously not. Are the top 20 Indian companies going to vanish overnight? Obviously not. Should you buy good stocks at lower prices? That is a logical way to look at it.
Diversification is still the best strategy
You got 14.5% on the Sensex in 2020 with a lot of tumult and heartburn. But gold gave you 30% for the last 2 years in succession with a very passive approach. Even government bond funds have yielded 10-11% due to a sharp fall in yields. The moral of the story is that there is place for all these assets in your portfolio. Diversification is not a choice; it is mandatory.
Perfect timing is an impractical idea
Had you bought the Sensex on 23rd March, you would be sitting on 83% returns by December. But the fact is you did not buy on 23 March; either because you did not have the money or the stomach to buy. Buying at the bottom and selling at the top is not a bad idea; it is just an impractical idea.
One way to address this challenge is through the SIP approach. Would SIPs have worked? Take the best performing large cap fund of last year, Canara Robeco Blue Chip. On a YOY basis, the fund delivered 22% returns. Instead had you done a monthly SIP, the IRR on the SIP would have been 54%. The moral of the story is not to fret about timing; SIPs still work.
Doing nothing is also a strategy
If you thought that you must decide between buying and selling stocks at any point of time, you are mistaken. Had you just stayed invested in the volatile market, you would have still ended up with solid returns. The problem arises, when you try to play the volatility and then double your bets to recover losses. In a volatile and unpredictable market, doing nothing can be a useful strategy.
Be greedy when others are fearful
Warren Buffett has always maintained that you must look at stocks exactly the same way as you look at a bargain sale. The year 2020 showed that if you wait patiently and buy stocks when everyone else is paranoid, you will get hold of very good stocks at atrociously low prices. HDFC Bank was available at a P/E of 16-17 this year. These are opportunities you surely don’t want to let go.
Good things can get better and bad things can get worse
This is something every investor would have faced this year. When markets fell sharply in January, aggressive investors doubled their bets. But prices kept falling vertically. On the other hand, when the recovery started in April, most investors rushed to take profits at the first opportunity. In both cases, you would have been awfully disappointed.
The golden rule to remember is that when there is a major disruption followed by a sharp recovery; you must never be in a hurry to enter or to exit. Wait for the volatility to subside and then look for the best ideas.
Put your trust, because pessimists never prosper
You would have seen bulls and bears make money or traders and investors make money. But it is really hard to find a pessimist who makes money. That is because any investment decision requires you to connect the dots and that requires that you trust something.
You either got to trust your skills, or your gut or you got to trust the intrinsic value of the company or the business model that you are investing in. Any investment decision needs trust. During 2020, most pessimists would have told you in March that markets were finished and in August they would have told you that markets are overheated. Year 2020 taught us, above all else, that to be a good investor we need to put our trust. Being pessimistic really does not get us too far in investing.