Never waste a down-turn!

Invest when pessimism is all pervasive.

These are golden words, but only with respect to past corrections. But not so golden for the current one. When you read it in the investment biopics or in blog posts about past corrections, these words hit you with such an inspiration that you get locked and loaded for the next correction. But, ironically, when the next correction comes and presents opportunities, one sees more desperation than inspiration. The golden words are no longer cool when it comes to the present corrections. Why?

May be because, one sees happy ending in the past corrections or in investment biopics. But, present corrections are not about past, they are about future. When future is unclear, it is not as inspiring, though we all know the ending will be no different from past corrections. No down-cycles in the past had ended in any other way, however long they were. Yet, narrative is so negative that it numbs one into inaction and more often into despair. It is always both fascinating and amusing at once, to see this diverging psychological trend between past and present corrections.

Now, let us take a look at the below chart.

BizNotes_Oct19_Rev1

This is not a complex chart. It is a simple one with a clear underlying pattern that runs for fifteen long years. As per this, every time, when small-cap index has fallen by a significant percentage, the subsequent three-year return for the index has been equally substantial. There is no reason to believe that coming years will be any different. One should expect a sharp bounce in small-caps in the coming years.

If there is going to be such a big pay-off, why there is no mad rush? May be everyone is,

  • Waiting for the cloud to clear
  • Waiting for the bottom
  • Waiting because of inability (emotional) to digest notional losses
  • Waiting for others to make the first move
  • Waiting for stability

No one wants to do the waiting that is most crucial. That is, waiting in the market. That is key to value creation. As they say, money is made in waiting, not outside, but inside the market. As the past cycles indicate, by waiting outside, very big part of the rally will be missed when the music starts. It eventually ends up either as a perpetual wait or as a punishing late entry. Either way one misses out the large part of the upside.

Want to end this note with my favorite quote from Morgan Housel. It said, “All past corrections look like an opportunity, while all present and future corrections look like a risk”. At some point in future, the current correction in small-caps would be seen as a one-time life-time opportunity for sure. Do you want to see it as a missed one or amassed one? Of course, if anyone lets it slip, there will be no one else to blame but himself.

Happy Value Investing!!

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