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An Investing Hack to Avoid the Impact of Global Banking Crisis

Mar 21, 2023

An Investing Hack to Avoid the Impact of Global Banking Crisis

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 Silicon Valley Bank (SVB) and Signature Bank , and now the concerns related to Credit Suisse are again feeding the fear element in the stock markets.

So far, the state machinery has stepped in to make sure these events don't end up in a contagion.

The US bank deposits have been insured.

And Credit Suisse has been pushed into the embrace of its Swiss rival UBS bank.

It is difficult to say how bad this banking crisis is. Apparently, a lot of private jets are descending on Omaha. It is speculated that it is the regional bank CEOs flying to meet Warren Buffett.

And while that could just be a rumour, it is real news that Buffett is in talks with Biden team for possible investments and guidance.

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

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

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

That said, these events impact sentiments and do weigh on money flow around the global markets. And liquidity in the markets impacts short term returns.

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He also showed how this leap could potentially generate wealth at a scale we have probably never seen before.

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Frankly, I do not know how various known and unknown factors will combine and of their cumulative impact on the markets in the short term.

But I strongly believe that a few years from now, the current levels of Sensex could be dwarfed by the fresh peaks in future.

Let me share quantitative proof of the same.

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

Over this duration, one can test data for 36 intervals of one year time horizon, 34 intervals of three year time horizon, 32 intervals of 5 year time horizon and 27 intervals of 10 year investment horizon.

The chart below shows how investors would have fared across different investment horizons, for all these intervals.


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.

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

Had you invested with time horizon of 3 years, you would have faced losses in 4 of 34 such intervals.

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

Over 10 year horizon, you would see that there is not a single phase of loss over 27 intervals.

Conclusion: In a growing economy like India, where the future looks promising than the past, your investment strategy needs to be long term oriented, for five years or more.

For one, it will help you capitalize the wealth making opportunities in Indian markets. Second, it will allow you to be stress free over factors and events not under your control. These events could range from subprime crisis , demonetization, liquidity crisis to pandemic, rate hikes, global wars and the global banking crisis.

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.

In fact, you need not even go too 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 the market course in the near term, as long as you are investing in quality stocks with enough margin of safety.

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By the way, there is more to this analysis.

The chart below shows the extreme gains or losses that you would have made on Sensex under different investment horizons from December 1986 to December 2022.


Do note that any return 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. The maximum gain is 82%.

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

For five years, the maximum CAGR you could enjoy is 43%. The worse loss is 2% CAGR.

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

Now do note that this exercise is for Sensex. The fate of individual stocks could vary depending on the 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.

In Hidden Treasure, I have witnessed this phenomenon for more than a decade. The stocks we recommend do react to market sentiments and short term movements. However, in the long term, fundamentals define the performance.

The long term strategy has helped the service outperform benchmark indices by nearly 3x. As per verified track record, Hidden Treasure has 26.1% internal rate of return (IRR) since inception in February 2008 until December 2022. This includes all stocks recommended since inception until December 2022

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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 calm 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 sticking to long-term investing strategy. So be mindful of the allocations.

As the mainstream media obsesses over what could go wrong in the near term over ongoing global developments, I hope you use long term investing horizon to dodge anything that could go wrong, without losing your sleep over it.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

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