The Virtue of Not Reacting

THERE IS A short story written at the time of the Great Depression that began in 1929 in the USA. It was preceded by a boom in the stock market unlike any the country had ever seen. As with all bubbles, people were making money left, right and centre. A man who had no money to invest imagined that he owned a few stocks and noted it down in a book. He kept track of the portfolio and saw it steadily increasing in value. He soon became an imaginary rich man. Then the bubble burst, the stock market tanked and shares in his book went down to nothing. He was now bankrupt on paper. As numerous investors who became bankrupt in the crash committed suicide, he too jumped off a building.

Investing in the stock market is as much a test of your behaviour as financial skill. One of the reasons Warren Buffet is said to be a great investor is that he sold off almost all his shares when the US market peaked in the mid-1980s. And then on October 19th, 1987, Black Monday happened and the Dow Jones Index had its biggest fall in history. Buffet who had been sitting on a pile of cash began to buy. He made a lot of money but it wasn’t a trick he was able to pull again. For all the stock market crashes that happened subsequently, he suffered the pain just like any other investor. What actually makes him a great investor is his psychological approach to these reversals—they left him without a whisper of emotional pain.

He has often explained why it is possible to have this attitude—with every purchase, he is not buying a stock but a business, and so daily movements are irrelevant. Just as you wouldn’t keep on buying and selling a piece of land you own because its price keeps changing, so also with stocks. For any business that he bought, he was fairly certain that it would do well in about 10 years, which was all that he was looking at. And so he slept easy in times of panic which were inevitable.

It is a good lesson to go back to as the stock markets nosedived this week, a single day seeing 2,900 points lopped off the Sensex. If you were invested and saw your net worth tank, then look at the businesses that you have. If they don’t survive the coronavirus, then you probably shouldn’t have owned it at all. But if they are fundamentally resilient, then the original reason you bought it still holds and time will make it valuable again. If you have enough cash in hand, there might even be an opportunity. You could get more pieces of the same business cheaper still.

Whatever be the case, panic can only make it worse. The lesson can be extended to all the different anxieties that surround you as Covid-19 creeps nearer. Besides elementary precautions, if there is nothing that you can do, then doing anything will only make it worse.

About The Author

Madhavankutty Pillai

Madhavankutty Pillai has no specialisations whatsoever. He is among the last of the generalists. And also Open chief of bureau, Mumbai  

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