The past 5 weeks have been most horrific period for investors in
financial since the five week period in September-October 2008. A colossal
destruction of investors' wealth has already taken place.
There is an argument that this destruction is only a notional
mark to market (MTM) loss if the investors' continue to hold the securities, as
the prices will certainly recover as soon as the COVID-19 is contained; may be
in 3-6 months. The proponents of this view are cautioning the investors that
selling the securities at this point in time will convert the temporary MTM
losses into permanent erosion in wealth.
Some readers have asked about my view on this argument. I have
already expressed my views on this issue multiple times in past few months.
Nonetheless, I do not mind a reiteration.
I believe that the market cycle in India that started from 2013
has definitely ended. Historically, the sectors and stocks that lead a
particular market cycle, are not found to be leaders of the subsequent market
cycle. Commodities in the early 1990s, financials in the mid-1990s, ITeS in the
early 2000s, infrastructure in the late 2000s, and consumers in the past five
years are some examples. Many star performers in these cycles (Andhra Cement,
SAIL, VLS Finance, IFCI, IDBI, DSQ Software, Pentamedia, Suzlon, BHEL, Reliance
Infra, JP Associates etc) did never recover their losses. Irrespective of the
fact whether the investors sold these stocks during panic periods that marked
the end of respective market cycles or held these stocks for many more years,
their losses have been permanent in nature. In fact holding these stocks longer
has only exacerbated the losses.
In my view, we would need to distinguish between the investors
in mutual and investors who like to invest in securities directly.
Ideally, those investors who have invested in a mutual fund
should not be worried, because the professional fund managers managing their
money must recognize the need and time for change and adjust the fund
portfolios accordingly. For example, most mutual funds today are not holding stocks
of ADAG, JP Group, Suzlon, etc. Most of them would have sold the embattled Yes
Bank, Vodafone, Zee Entertainment etc. also. By not redeeming these mutual
funds during panic bottoms, investors may hope to recover their temporary MTM
losses in due course.
However, this may not be true in the case of individual
investors, who refuse or fail to effect necessary changes in their security
holdings with the changing times. From my experience I know that many investors
are still clinging on to the stars of previous cycles, which have become duds
with almost no chance of recovery. For such investors, not selling during the
times of panic may actually result in higher permanent losses.
It is also important to note that not selecting a good mutual
fund manager may also result in MTM losses becoming permanent losses. A fund
manager who is not dynamic and pragmatic enough to read the economic and market
trends quickly may remain saddled with the non-performing assets for long, thus
causing material permanent losses to the investors both in terms of erosion in
portfolio value and opportunity cost.
Personally, I would therefore not buy or keep holding something
just because it has fallen 50-60% from its recent highs. My portfolios of my
mutual funds will definitely adjust as per the times, because I am confident
about quality of my fund managers. My direct equity and debt holdings, I have
already changed.
I read your post and got it quite informative. I couldn't find any knowledge on this matter prior to. I would like to thanks for sharing this article here.permanent laser hair removal online in USA
ReplyDelete