What’s the Real Problem?

Amar Pandit , CFA , CFP

I had written one of the ideas of this post in a previous Nano, but it is so powerful and in sync with the thoughts I wanted to write on this week, I thought of covering it again. In case you want to refresh your memory, here goes the link: The Next 300%. Even if you don’t, this post will do the job and be like the dose of Vitamin C that we all need on a regular basis.

I have asked this question to many people now.

“Can the stock market go down 300%?”

Many have said “Yes”.

What do you think?

I am going to wait for you to answer this one.

Counting 1,2,3…….10.

The correct answer is “No”.

Did you answer this and are you sure?

Yes.

That’s a great start.

But can it go up 300% though?

Yes, certainly.

Are you sure?

Yes, certainly once again.

In the above set of questions, we know that the stock market cannot go down 300% but it can certainly and definitely go up by 300%. Park this thought in your mind.

Let’s now repeat the same set of questions for 100%.

Again, the responses are the same. The stock market cannot go down ever by 100% but it can certainly and definitely go up 100%.

What about 90%?

I guess the same answer.

Wow, isn’t this an amazing risk reward ratio? I know I managed to squeeze in some technical jargon risk reward ratio. But I know you understood this.

The stock market can’t go down 300%, 100% or even 90% but it can certainly and definitely go up by the same amount.

Run the questions with these percentages – 500% and 1000% – too, and you will get the same answer.

If that is indeed true (which it is), what is the real problem?

The real problem lies in the answer to 2 words – by when.

We just don’t know by when the markets will go up if they ever go down. The uncertainty of not knowing by when.

Now let me ask another set of questions.

Can the market go down by 50%?

This time the answer is different. Don’t be tempted to say no because they certainly can.

By When?

This no one knows. But it actually doesn’t matter as you will realize from the next point.

Even if it goes down 50% (assuming the idiotic gloom doom gurus are right whose business is to instil fear and get people give up their ownership of companies), will it stay there permanently?

I am asking again.

Will it stay there (down) permanently?

I hear you answering, “most certainly and definitely not.”

If this is also true, then what is the real problem?

Why are you then worried about the market going down when you know certainly (and definitely) these 2 things:

  1. The stock market will not stay down permanently.
  2. The stock market will advance 100%, 300%, 500% and 1000%+

What do you think is the answer (for investors to be worried about this)?

The answer once again is “by when – we don’t know when”. We don’t know the exact dates by when this will happen.

Because we are so used to Fixed/Term Deposits that tell us exactly when we get interest, we simply fail to understand one of the most important things in investing – Just not knowing “by when”, rewards the real investor handsomely/beautifully (whichever word you choose).

Now, imagine if you knew that even if the stock market went down by 50% in the next 2 months, but in the next 2 years, the stock market will be up 100% from the levels we invest at, would you be really worried about investing now?

I know the answer (Hint: No), but I will still let you answer this one.

I will however answer on behalf of the people I have spoken to. The answer was “No” because they exactly know “by when” things will happen. In short, there is certainty now. There is no uncertainty. And as humans we crave for this certainty.

While the stock market will never give you the “by when” certainty, there are 2 certainties that it has always given.

I repeat them again.

  1. Declines are Temporary. They are never permanent.
  2. The Stock Market resumes its advance once the decline is over and scales new highs.

If that’s a certainty (and it is), then what’s your real problem?

What’s stopping you from investing now?