{"id":406915,"date":"2025-03-01T16:43:46","date_gmt":"2025-03-01T11:13:46","guid":{"rendered":"https:\/\/zerodha.com\/z-connect\/?p=406915"},"modified":"2025-03-03T17:18:49","modified_gmt":"2025-03-03T11:48:49","slug":"here-we-go-again","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/subtext\/here-we-go-again","title":{"rendered":"Here we go again…"},"content":{"rendered":"

Hi there. It\u2019s been a while since we spoke. Or at least it feels that way.\u00a0<\/span><\/p>\n

When we <\/span>last spoke<\/span><\/a>, things were less bad. I\u2019m not just talking about The Cheeto Salesman becoming the president of the Disunited States of Amrika \u2014 I\u2019m talking about the <\/span>markets<\/span><\/i>. Two months ago, when I last wrote here, the dying embers of the bull market were still hot. But now, those embers are, well\u2026 <\/span>just look at this damn chart<\/span><\/i>:\u00a0<\/span><\/p>\n

\"\"<\/a><\/p>\n

Yeeep<\/span><\/i>. It\u2019s a bloodbath.\u00a0<\/span><\/p>\n

So\u2026 how are you doing? Is your mental health OK?<\/span><\/p>\n

Look, I\u2019ve been writing about bear markets since 2022. Don\u2019t judge me. I don\u2019t <\/span>want<\/span><\/i> your financial ruin \u2014 I just think it can happen. I\u2019m not an astrologer either. You don\u2019t need magical powers to see that lines on a graph can go down some day. I haven\u2019t been calling for bear markets, nor have I been predicting them.\u00a0<\/span><\/p>\n

I\u2019ve just been oozing my wisdom on <\/span>how to survive<\/span><\/i> a bear market when it finally came, all through this blog:<\/span><\/p>\n

How to survive a bear market? \u2014 February 14, 2022<\/a>
\nGod, give me the strength to buy and hold\u2014April 25, 2024<\/a>
\nYou have to get punched in the face to know how it feels\u2014May 24, 2024<\/a><\/p>\n

Basically, whenever the markets felt jittery, I would thrash out long blogposts dripping with my juicy, moist wisdom (<\/span>Fiiine, I know I’m being disgusting, I\u2019ll stop<\/span><\/i>) to save retail investors from their thoughtful and well-planned stupidity. And then\u2026 nothing. It didn\u2019t matter if Russia threatened to flatten Europe, Iran threatened to launch nukes, or Israel tried its best to kickstart WWIII \u2014 the stonk market continued hurling itself towards the dark side of the moon with great enthusiasm.\u00a0<\/span><\/p>\n

My wisdom-ous posts, oozing with sticky advice (<\/span>Haha psych! Ok, this is the last one, I promise<\/span><\/i>) on how to survive the bear market, were all left unheeded. But finally, dear people who are disappointed that the stonk market has the temerity to fall, it seems like the bear market I was watching out for is finally here.\u00a0<\/span><\/p>\n

I know you are in a state of disbelief. There\u2019s been so much to process:\u00a0<\/span><\/p>\n

    \n
  1. You\u2019ve finally discovered that the stock prices can actually fall.\u00a0<\/span><\/li>\n
  2. You learnt that when the market falls, so do all those \u201cfundamentally great\u201d stocks you picked after your thorough, time-consuming, research process of asking your friends and listening to mouth-breathing internet idiots.<\/span><\/li>\n
  3. You learnt that it was a bad idea to pick stocks after watching Reels in which a Haryanvi guy spat out words like \u201cmomentum\u201d and \u201csupport\u201d, while his fingers danced angrily from north, to south, to east, to west.\u00a0<\/span><\/li>\n<\/ol>\n

    Don\u2019t worry. I am here for you.\u00a0<\/span><\/p>\n

    I mean, I\u2019m not gonna give you <\/span>money<\/span><\/i> or anything. But I will, if you\u2019ll permit me (actually, I don\u2019t care either way) offer you some gyan. See, there are five states of grief. First comes denial, then anger, then bargaining, depression, and finally acceptance. Right now, you\u2019re probably early in this process. Maybe you\u2019re raging at me for even suggesting that things are bad.\u00a0\u00a0<\/span><\/p>\n

    But don\u2019t worry. The markets are <\/span>probably<\/span><\/i> going to get much, much worse before they get better.\u00a0<\/span><\/p>\n

    Hey, nobody ever said the \u201cIndia growth story\u201d will be painless.\u00a0<\/span><\/p>\n

    By the time you finish reading this post, I\u2019ll <\/span>hopefully <\/span><\/i>drag you \u2014 like a petulant child who doesn’t want to eat vegetables \u2014 from being angry, to being depressed, to accepting that this too shall pass.\u00a0<\/span><\/p>\n

    \n

    How bad are things?\u00a0\u00a0<\/b><\/h1>\n

    First, let\u2019s take a step back and understand where we are.\u00a0<\/span><\/p>\n

    You\u2019ve probably already seen how far the big headline indices have fallen. At the point at which I\u2019m writing this, Nifty 500 is down 15%, Nifty midcap 100 by 17%, and Nifty smallcap 100 by 20%. It\u2019s not a pretty picture. But we won\u2019t re-hash that. Instead, let\u2019s drill down further.\u00a0\u00a0<\/span><\/p>\n

    Here\u2019s the distribution of drawdowns <\/span>within<\/span><\/i> the Nifty 500. The average drawdown of the index is 30%, but this average hides a lot of variation. Dig deeper, and you\u2019ll see that some stocks are down by as much as 60%. This is across the board: good stocks, bad stocks, low valuation, high valuation \u2014 it doesn\u2019t really matter. There\u2019s been a correction across the board.\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    This is the story of every sector. I\u2019ve grouped the NSE 500 stocks by industry and plotted the average drawdown, just to give you a sense of how <\/span>uniformly<\/span><\/i> terrible things are:<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    Another way of seeing this is to look at sector and thematic indices. Everything looks bad. But a few indices \u2014 defence, realty, media, PSU banking, and oil \u2014 have been a real dumpster fire.\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    Ultimately, while some segments of the markets are worse than others, it\u2019s been bad all around. You could look across the breadth of the market to see how things have been. The smart way to measure breadth is to look at the number of stocks above their 200-day moving average, but\u2026 I\u2019m too lazy to do that.\u00a0<\/span><\/p>\n

    A quick and dirty way to do the same thing is to look at how equal-weight indices are performing. Here\u2019s Nifty 100 market cap weighted vs. Nifty 100 equal weight. The cap-weighted index is down 16% while the equal-weighted index is down 19%.\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    So, no matter how you slice things, the markets are in bad shape. We\u2019re in a <\/span>real<\/span><\/i> bear market.\u00a0<\/span><\/p>\n

    But bear markets come in all sorts of shapes and sizes. For all I know, the markets might recover <\/span>next week<\/span><\/i>. But they could also go south for a long while. How bad can it get? Well, let\u2019s look at some charts.\u00a0<\/span><\/p>\n

    Here\u2019s a drawdown chart of Nifty 500, Nifty Midcap 100, and Nifty Smallcap 100. Look at the dotted lines at the bottom of the chart; they represent the worst falls we\u2019ve ever seen.\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    I know things look bad right now. But I want you to zoom out and really <\/span>look<\/span><\/i> at that last line. See how far it is from the dotted line at the bottom. And then, think of how much further it can go. Sure, your portfolio looks bad today, but it could\u2019ve been much worse. The funny part is we saw worse just a few years ago \u2014 when the COVID-19 pandemic just began \u2014 but things bounced back up so fast that we\u2019ve already forgotten about it.\u00a0<\/span><\/p>\n

    Another way of looking at this is the <\/span>length<\/span><\/i> of the drawdowns. That is, how long have indices spent below their peak?\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    Look at that tiny triangle at the very end. That\u2019s where we are. Right now, we\u2019ve only seen about 150-odd bad days. I know that\u2019s about 5-6 months, but I say \u201c<\/span>just about<\/span><\/i>\u201d because, going by what people were saying only a few months ago, I\u2019m assuming most of you invest for the \u201clong term\u201d and don\u2019t think 6 months is long term.\u00a0<\/span><\/p>\n

    You don\u2019t,<\/span> right<\/span><\/i>? I mean, I would be <\/span>terrified<\/span><\/i> for you if you did.\u00a0<\/span><\/p>\n

    You might already be tired of the markets looking red all the time. Doesn\u2019t matter. A quick look at the past would tell you that things can stay bad for years at a stretch. You have to be prepared for <\/span>anything<\/span><\/i>.\u00a0<\/span><\/p>\n

    \n

    Why are the markets falling?<\/b><\/h1>\n

    Psst<\/span><\/i>, I know the real answer. But you\u2019re not going to like the answer. Are you ready? <\/span>Drumroll please<\/span><\/i>. The markets are falling becaaaaause\u2026<\/span><\/p>\n

    \u2026there are more sellers than buyers!\u00a0<\/span><\/i><\/p>\n

    Didn\u2019t like the answer?<\/span><\/p>\n

    Ah, well. If you prefer being <\/span>precisely wrong over being roughly right<\/span><\/a>, let me give you all the other sexy \u2018analytical\u2019 reasons that you\u2019ll hear from other people.\u00a0<\/span><\/p>\n

    Reason 1: The Indian markets are bloody expensive<\/i><\/b><\/h2>\n

    For a few years, the post-pandemic returns of the Indian markets were spectacular, to say the least \u2014 especially when you looked at mid- and small-caps. If you blindly picked random stocks in late 2020 or 2021 and held on to them, you would\u2019ve made some serious money. In fact, you would have to do something spectacularly stupid to lose money \u2014 and it would\u2019ve been tough even then.<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    Thanks to this spectacular performance, the Indian market is now among the most expensive in the world.\u00a0<\/span><\/p>\n

    You might be thrown off a little if you use PE ratios of Nifty indices for this purpose. There was a recent methodology change there. They went from using standalone earnings to consolidated earnings. Basically, a P\/E ratio divides a company’s stock price by its per-share earnings \u2014 only, they started adding the earnings of subsidiaries and associates to the denominator as well, which made these ratios all look smaller. I\u2019m not sure that looking at this data is of much use any more.\u00a0<\/span><\/p>\n

    Luckily, professor Aswath Damodaran does God\u2019s work, calculating this manually<\/a> for the entire aggregate market \u2014 and not just by index.\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    In the post accompanying this data, here\u2019s what he wrote:\u00a0<\/span><\/p>\n

    The perils of investing based just upon pricing ratios should be visible from this table. Two of the cheapest regions of the world to invest in are Latin America and Eastern Europe, but both carry significant risk with them, and the third, Japan, has an aging population and is a low-growth market. The most expensive market in the world is India, and no amount of handwaving about the India story can justify paying 31 times earnings, 3 times revenue and 20 times EBITDA, in the aggregate, for Indian companies<\/span><\/i><\/span><\/p>\n

    Now, all valuation indicators have their own issues. But among the bunch, I prefer looking at the cyclically adjusted price-to-earnings ratio (CAPE), which averages inflation-adjusted earnings. Professor Rajan Raju of IIM <\/span>also <\/span><\/i>does God\u2019s work by <\/span>calculating<\/span><\/a> this for the Indian markets. Here\u2019s the latest reading: at 40, the Nifty 500 CAPE ratio is far above its long-term averages.<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    As Larry Swedroe says, valuations are a <\/span><\/iframe>self-healing mechanism<\/span><\/a>. When valuations are high, future returns are low, as the markets adjust. We\u2019re probably seeing some of that play out right now. Conversely, low valuations lead to high future returns. This chart shows the starting P\/E ratio of Sensex and the future 5 and 10 year returns. As you can see, low starting valuations tend to result in higher future returns and vice versa. This relationship isn’t ironclad and there are outliers. Having said, it’s a reasonably good heuristic to get a fuzzy sense of where we are in the market cycle and what return to expect. However, if you think you can time the markets based on valuations, you will be sorely disappointed. Like\u00a0you will be poor\u00a0<\/em>disappointed.\u00a0<\/span><\/p>\n

    \"Starting<\/a><\/p>\n

    Here’s the same chart across multiple time frames. In the short run, markets tend to be random and there’s no strong relationship between valuations and returns. In the long run, however, valuations are like gravity.<\/p>\n

    \"\"<\/a>

    Sensex starting valuation and futurereturns<\/p><\/div>\n

    Reason 2: Foreign investors are selling like there\u2019s no tomorrow<\/i><\/b><\/h2>\n

    I\u2019m reliably told by the super-expert folks on Twitter \u2014 who seem to be experts on everything from epidemiology, to archaeology, to sociology, to finance \u2014 that Indian markets are falling because <\/span>white<\/span><\/i> people are selling Indian stocks.<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    After the pandemic, FIIs fell in love with the <\/span>India growth story.<\/span><\/i> It was a whirlwind romance. They pumped in \u20b92.44 lakh crores, DIIs bought \u20b910.44 lakh crores, and individuals bought\u00a0 \u20b94.55 lakh crores of Indian equities. Everything looked wonderful. The markets peaked in September 2024.\u00a0<\/span><\/p>\n

    But then, our love story with white people ended in a bitter break-up. After that, foreign institutional investors (FII) sold over Rs 1 lakh crore worth of Indian equities. Meanwhile, domestic institutional investors (DII) have bought over Rs 3.4 lakh crore.\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    Reason 3: Corporate earnings are weak<\/i><\/b><\/h2>\n

    Over the last few quarters, the earnings growth of listed companies slowed down dramatically. With such weak earnings, how can Indian stocks justify their lofty earnings?\u00a0<\/span><\/p>\n

    Here\u2019s the revenue and profit growth of all listed companies. As you can see, there\u2019s been a significant decline in revenue and profit growth over the last few quarters. The last quarter i.e., the December quarter, was marginally better \u2014 but nobody knows if revenues, profits and margins will see more sustained growth.\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    Now, the aggregate numbers can be skewed by some sectors, so here\u2019s a disaggregated view of revenue and profit growth by sector:<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    \"\"<\/a><\/b>Reason 4: The Indian economy is in terrible shape.\u00a0<\/i><\/b><\/h2>\n

    India\u2019s GDP growth has moderated. Inflation has taken a toll on Indian households. Urban consumption has fallen off a cliff. Even the government has cut back on spending. Barring the rural economy, most of the Indian economy is in terrible shape. People are not consuming, and companies are not investing.\u00a0<\/span><\/p>\n

    With all this carnage, \u201c<\/span>how will the stocks go up?<\/span><\/i>\u201d ask all the <\/span>experts <\/span><\/i>with \u201cmacro-\u201d something in their Twitter bios.\u00a0<\/span><\/p>\n

    Reason 5: The end is near. We\u2019re 5 minutes away from Rome burning, and Nero has picked up his fiddle.\u00a0<\/i><\/b><\/h2>\n

    Since 2020, the proverbial shit has hit the fan so often that the fan is now dark brown, encrusted in dry shit. It started with the pandemic, then Russia invaded Ukraine, then the entire Middle East turned into a <\/span>Call of Duty<\/span><\/i> trailer, and now we finally have good ol’ Donny speed running America\u2019s civilizational decline. Is this the end of the world?<\/span><\/p>\n

    I\u2019m reliably told by the experts that the end of the world is, on the whole, rather bad for markets.\u00a0<\/span><\/p>\n

    So, what\u2019s the REAL reason?<\/i><\/b><\/h2>\n

    Told you: there are more sellers than buyers!<\/span><\/p>\n

    Look, I\u2019m not just messing around. There are only two people who know why the stock market goes up or down: God and a liar. Think of the <\/span>absurdity<\/span><\/i> of the questions. Every day, millions of people buy and sell stocks. Just like you and I do. To think that one can compress the decisions of millions of market participants into one or two neat reasons is the height of fantasy.\u00a0\u00a0<\/span><\/p>\n

    \n

    All of that\u2019s fine, but look, I\u2019m scared. What should I do?\u00a0<\/b><\/h1>\n

    See, you probably know whatever I’m about to say. But maybe you need to hear it in a different way. So let’s play a game of <\/span>I’m going to tell you what you already know with data rangoli.\u00a0<\/span><\/i><\/p>\n

    Breaking news: The stock market has suddenly become risky! Shocking!<\/i><\/b><\/h2>\n

    As Mahatma Gandhi once said, the returns you make in the stock market are proportional to your ability to resist peeing your pants once the market falls 20%.\u00a0<\/span><\/p>\n

    (If you think he didn\u2019t say it, <\/span>prove it<\/span><\/i>!)\u00a0\u00a0<\/span><\/p>\n

    Investing is both easy and hard at the same time. Surprising as it may sound, figuring out <\/span>what<\/span><\/i> to invest in is the easy part. The hard part is holding on to that investment in times like these.\u00a0<\/span><\/p>\n

    Here\u2019s something counterintuitive: the stock market spends <\/span>most<\/span><\/i> of its time in a drawdown. For the Nifty 500 that happens 90% of the time. A drawdown happens when the market or an investment is below its previous peak. So, the BSE Sensex spends 90% of its time below the last peak.\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    \"\"<\/a><\/p>\n

    What should that tell you? Well, the stock market basically falls <\/span>all the time<\/span><\/i>.\u00a0<\/span><\/p>\n

    Of course, most of those falls are fairly small. But <\/span>bad things happen<\/span><\/i>, and they happen regularly.\u00a0<\/span><\/p>\n

    Yet, through war, disease, terrorist attacks, political assassinations, scams, Rohit Shetty movies, and other assorted catastrophes, the Indian stock market has steadily gone up. Here\u2019s some proof:<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    Looking at this graph, it almost <\/span>feels<\/span><\/i> like bad things are the norm and good things are the exception \u2014 but it isn\u2019t. Paradoxically, the fact that we\u2019re so resilient in the face of bad news is the best news of all.\u00a0<\/span><\/p>\n

    The only certainty in the market is uncertainty!<\/i><\/b><\/h2>\n

    The legendary Howard Marks <\/span>said something beautiful<\/span><\/a> that stuck with me:<\/span><\/p>\n

    In the investment business, there’s no place for certainty. And Mark Twain said, it ain’t what you don’t know that gets you into trouble. It’s what you know for certain that just ain’t true. And so you can have opinions, but you should never be certain that you’re right. And you should never arrange your financial affairs on the assumption that your forecast is right because it can be right intellectually or factually or rationally, but just take a long time to materialize. And if you can’t survive between when you take your position and when your expectation comes true, then obviously it’s not something you should do. And one of my colleagues once wrote a note to his clients, he says, if you name a price, don’t name a date. And if you name a date, don’t name a price.<\/span><\/i><\/span><\/p>\n

    Think about why you invest in equities in the first place. It\u2019s because they have the highest probability of high returns, right? You want some of that equity action <\/span>precisely<\/span><\/i> because it\u2019ll probably earn you better returns than a government bond.\u00a0<\/span><\/p>\n

    But if that\u2019s the case, how can stocks not be risky? Stocks offer higher returns <\/span>precisely<\/span><\/i> because they are risky. Think of a world where that wasn\u2019t the case. If stocks were not risky, those high returns would be arbitraged away. People would load up on more and more stocks, to a point where it would be foolish to expect returns higher than on a government bond. Sure, valuations would perennially be high \u2014 but you wouldn\u2019t find any opportunity to actually make money. Because the return would be so certain, someone with bigger pockets than you would already have bought that opportunity.\u00a0<\/span><\/p>\n

    If someone offers you low risk and high returns, you\u2019re being scammed.\u00a0<\/span><\/p>\n

    Volatility is the price of admission in the stock market. Do you want higher returns than a fixed deposit? The price you pay for that is feeling shitty in bad times, like this one. If you don\u2019t want this volatility, then you should have lower equity exposure. All of this is bloody obvious, but it bears reminding, because people keep getting carried away.\u00a0<\/span><\/p>\n

    Uncertainty isn\u2019t a bug \u2014 it\u2019s a feature of the stock market. Get used to it or get out.\u00a0<\/span><\/p>\n

    20% falls are far more common than you think<\/i><\/b><\/h2>\n

    As I write this post, the broader Nifty 500 is down about 15-16%.\u00a0<\/span><\/p>\n

    If that seems scary, then I have news for you: 20% falls are more common than you think. Even in years when the stock market went up, you\u2019re practically guaranteed to see at least one 10%+ fall.\u00a0<\/span><\/p>\n

    \"\"<\/a><\/p>\n

    Here are some stats:<\/span><\/p>\n

      \n
    1. We have about 45 years of Sensex data. Of this, it went up in 35 years (75%) and went down in 12 years (25%).<\/span><\/li>\n
    2. The best year was 1991 with 95.88% returns. The worst year was 2008 with -51.61%.\u00a0<\/span><\/li>\n
    3. In all these years, the average drawdown was 20%, and the median drawdown was 16%.\u00a0<\/span><\/li>\n
    4. In 75% of years, investors experienced drawdowns of at least 11%<\/span><\/li>\n<\/ol>\n

      Can things get worse? Absolutely!\u00a0<\/span><\/p>\n

      Will they? I am not an astrologer.<\/span><\/p>\n

      What I do know is that Sensex returns have been positive for 9 straight years. If I remember my biology class correctly, trees don\u2019t grow to the sky, and the stock market doesn\u2019t go to the moon. We were <\/span>bound<\/span><\/i> to see a bad time eventually.\u00a0<\/span><\/p>\n

      \"\"<\/a><\/p>\n

      We had only seen good times for a long while. Things were bound to change. Everything in life is cyclical \u2014 especially the stock market. Good times are always followed by bad times and<\/span> vice versa<\/span><\/i>. If you only want to see good times, the stock market is the wrong place. You\u2019re better off researching psychedelic substances.\u00a0<\/span><\/p>\n

      \"\"<\/a><\/p>\n

      Luck of the random<\/i><\/b><\/h2>\n

      In any given year, the stock market behaves like a drunk man finding his way home in the dark. That is to say, it\u2019s all over the place \u2014 it\u2019s <\/span>random<\/span><\/i><\/a>. You just have to get used to it.\u00a0<\/span><\/p>\n

      Check out the annual returns of the Sensex, for instance:<\/span><\/p>\n

      \"\"<\/a><\/p>\n

      There\u2019s no obvious pattern in the data. However, if you fit a trendline through it, it slopes downward \u2014 indicating declining returns over time. You can see this in the size of the return circles as well.\u00a0<\/span><\/p>\n

      In a loose sense, this randomness is a feature, not a bug. If the stock market was predictable,<\/span> everyone<\/span><\/i> would invest. And the more that money entered the market, the lower your future expected returns would go. Many people can’t stomach the randomness of the stock market, preferring certainty. <\/span>That is where your opportunity lies. <\/span><\/i>Weak hands panic, sell equities and give up the equity premium. Strong hands earn it.\u00a0<\/span><\/p>\n

      If you are young, be happy.<\/i><\/b><\/h2>\n

      The great William Bernstein <\/span>once said<\/span><\/a>, \u201cIf you are young, you need to get on your knees and pray for a bear market.\u201d This stuck with me because it\u2019s so true.\u00a0\u00a0<\/span><\/p>\n

      Host:<\/i><\/b> From Rational Expectations, you said something along the lines of young investors should be praying for long extended bear markets.<\/span><\/i><\/span><\/p>\n

      William Bernstein:<\/i><\/b> Yeah, of course. And that gets to radical issue called return sequence, which is that if you are in an accumulation phase of your investing career, you’re saving periodically, then you should get down on your knees and pray, as I wrote, for awful returns, awful bear markets, great volatility, so you can accumulate shares at low prices. On the other hand, if you were a geezer like me, you don’t want to see bad returns right off the bat, you want to see good returns right off the bat. So you can build up your nest egg a little more for so when the bad times come, you’ve got plenty of cushions. So how risky stocks are depends more on where in your investing lifecycle you are. If you have more human capital, that investment capital, you want bad returns and the opposite is true.<\/span><\/i><\/span><\/p>\n

      When the markets fall sharply, so do valuations. And that means the future expected returns go up. If you\u2019re young, you shouldn\u2019t be afraid of a bear market, but happy. The entire stock market is on a clearance sale! When valuations are low, you are, in essence, paying less for every rupee of a company\u2019s earnings \u2014 which is ultimately what you\u2019re investing in. You\u2019re buying the same tiny piece of a company either way, but in a bear market, you get a nice discount.<\/span><\/p>\n

      The opposite applies as well. If you buy things at ridiculous valuations, your future expected returns tend to be low. Over the long term, there is a <\/span>significant statistical relationship<\/span><\/a> between starting valuations and future expected returns. Low valuations mean the odds of future returns are higher, and vice versa.\u00a0\u00a0\u00a0<\/span><\/p>\n

      \"\"<\/a><\/p>\n

      Be careful, though: <\/span>you can\u2019t time markets based on valuations.<\/span><\/i> In fact, of all the ways you can time markets, valuations tend to be the worst. Stocks can stay overvalued, or undervalued, for long periods of time.\u00a0<\/span><\/p>\n

      The only thing valuations are good for is helping you get a sense of the returns you can hope for, going forward. This lets you tweak your asset allocation to a degree, but it doesn\u2019t mean you can take all-or-nothing calls with valuations.\u00a0<\/span><\/p>\n

      \n

      Know what to worry about<\/b>\u00a0<\/span><\/h1>\n

      You think losing 15% hurts?\u00a0<\/span><\/p>\n

      If your answer is \u201cyes\u201d, you clearly <\/span>have no clue<\/span><\/i> about how bad things can get. Here\u2019s one chart that\u2019s forever etched into my brain \u2014 where Bridgwater lists the worst market crashes in history. This is beyond depressing; I don\u2019t know enough English to describe this.\u00a0<\/span><\/p>\n

      \"\"<\/a><\/p>\n

      Indian investors have been blessed with good returns for a long term. We\u2019ve never seen market phases where returns have been negative for decades. Here\u2019s some data from a <\/span>post I wrote<\/span><\/a> last year with some gyan on how to prepare for a bear market:<\/span>
      \n<\/span><\/p>\n