My Bullet Proof Investment Strategy to Dodge US Banking Crisis 

Dear Viewers

The Indian stock markets have been facing one event after the other that is making Mr Market nervous.

First it was Adani saga.

The recent events of failure of SVB and Signature Bank , and now the concerns related to Credit Suisse are again feeding the fear element in the stock markets.

Last time the global banks failed, we witnessed a correction across global including Indian stock markets.

From what I see and gather, the crisis this time is not that deep.

Especially Indian banks that are in a much better health than ever to withstand such macro occurrences.

That said, these events influence money flow around the markets, including Indian, and liquidity in the markets impacts short term returns.

Now there is no crystal ball to gaze how various known and unknown factors combine and of their cumulative impact on the markets in the short term.

So without any attempt to predict the near term market levels, here's my view on how you should approach investing amid these macro events.

Before I go ahead, I have a question for you.

If I offer you a bunch of fundamentally strong companies at fair valuations, run by solid management teams, would you consider investing in them when the Sensex trajectory looks like this? This is the Sensex performance over 15 years.

Performance Over 15 Years

I would not be surprised if you are hesitant. Psychologically, when you see markets at all-time highs, especially after a big fall that seems like deep crevice, you may want to wait for a better time.

I know a few of Equitymaster's subscribers are wondering, from the queries I have recently received. The essence of this queries is something a lot of us can relate to :

Should I wait for the markets to correct to buy stocks, considering the fears of a global slowdown?'

But waiting for a better time or timing the markets is not the best strategy as we will see in the next few slides.

First, some comments about this slide. The time period you see is not the latest 15 years. The time period under consideration in thus charts is January 2000 to December 2014. Notice the green triangle marking the big fall.

Here's what the long-term performance, including from the peaks in December 2014, until 2023 looks like...

This timespan includes events that compete for being the worst investors' nightmare - Subprime crisis, demonetization, the pandemic, and the ensuing inflation and supply chain distortions.

The CAGR (compound annual growth rate) returns from the peak in the previous chart until now are clearly better than being in the cash or staying on the side-lines.

What looked like a deep crevice in the first chart seems like a blip now, that you might not even notice had I not placed the green triangles to mark those periods.

In fact, you need not go even that far in the history. Covid correction and the rally thereafter is a good example of why it does not make sense to obsess too much over market course in the near term, as long as you are investing in quality stocks with margin of safety.

Do note that this is the trajectory of the benchmark index. In last 10 years, the stock markets have witnessed stocks like Astral, PI Industries, Bajaj Finance multiple their worth by over 10 times. The bottomline is - A careful selection of quality businesses at reasonable, if not cheap valuations could have landed you multibagger stocks returns irrespective of how markets behaved in the near term.

Theoretically, you could have made better returns indeed by entering at later corrections. But that's assuming the quality stocks did correct to the same extent, and had you not been paralyzed by 'What if things go worse' or 'Let me wait for a better entry point'.

Here's the thing. No one can time the markets perfectly all the time. Those who are right, are often so by chance (it's always a 50% probability).

Even if you have the rare foresight to connect all dots and variables to know market moods, it would be challenging to replicate this exercise for the individual businesses and stocks in the short term.

Coming to the view on the markets...

We are currently at the right most point in the chart above. Depending on the Fed's stance and the global economic events, there could be a near term correction due from here. There's almost a 50% chance of this happening.

But considering the structural shifts and policy tailwinds in India, I would expect history to repeat itself.

That is, a few years from now, the current levels of Sensex could be dwarfed by the fresh peaks in future.

As I have shared before, in my view, the base case scenario could be a 15% CAGR growth for earnings. At median PE multiple of 20x for the Sensex, this amounts to over 1 lakh level for the Sensex in 5 years.

That's a CAGR of 13%. The upside in individual stocks, that rank higher on quality and growth prospects, could be much higher.

However, for this style to work for you, it goes without saying that your investment strategy needs top be long term oriented, for five years or more.

This is a long enough time for noise to get cancelled, and for business specific fundamentals to have a higher weightage in the stock price and valuations. In other words, while sentiments dictate the market movements in the short term, it is the fundamentals that drive valuations in the long term for a specific stock.

Let me share quantitative proof of the same.

I have pulled out Sensex history since 1986 until the end of latest calendar year December 2022. And calculated Sensex returns over four different time intervals - 1 year, 3 years, 5 years, and 10 years for each year since then.

So over the 36 years, had you invested with a time horizon of one year, you would have face 10 years of losses and 26 years of gains. So in 10 out of 36 intervals you would have booked losses.

As the investing horizon increases, the incidences of losses decline.

So had you been investing with time horizon of 3 years, you would have witnessed losses 4 times out of 34 times.

Over 5 years, the instance of loss comes down to 3 times out of 32 such intervals.

And over 10 year horizon, you would there is not a single phase of loss over 27 intervals of 10 years.

Here's another interesting data for you.

The chart below shows the maximum and minimum gains or losses that you would have incurred under different investment horizons.

Do note that anything above one year is a CAGR return., i.e it has been annualised.

For instance, 50% CAGR under 3 years will amount to an actual gain of 238% over 3 years. Similarly, 43% annualised gain in 5 years implies 498% gain over five years. And an annualised gain of 24% over 10 years implies point to point return of 759% over 10 years.

As you can see in the chart, for investors with shorter time period, the chances of big losses are higher.

For instance, you would have witnessed a maximum fall of 52% with one year investment horizon. And a maximum gain of 82%.

With three-year investment horizon, your maximum CAGR gain would be 50% and worst loss is 12% on an annualised basis.

The interesting part is, for an investor with a 10-year horizon period, the worst return still a positive, a 3% CAGR. And the max gain is 24% CAGR.

Now do note that this exercise is for Sensex. The fate of individual stocks could be different depending on management quality, business fundamentals and margin of safety at the time of buying stocks. As long as you pick stocks while keeping these three factors in mind, you are likely to beat Sensex over the long term, irrespective of the global banking crisis or market sentiments.

Last but not the least, Long term investing requires capacity to suffer since there are bound to be years when markets are panic stricken. If you don't have the temperament to be stoic amid crazy times, you can end up exiting exactly at the wrong time. A prudent asset allocation to equities and individual stocks goes a long way in maintaining the discipline and helping you stick to long-term investing strategy. So be mindful of the allocations.

That's all for today. I hope it allays your concerns amid the ongoing macro events. Do let me know through your comments and likes/dislikes on the video. For more such inputs on investing, subscribe to Equitymaster Youtube channel.

Thank you for watching. Goodbye.