Beat the market in 2022 with focused investment in three sectors – Economic Times
Unprecedented retail participation and cheap money have come together to push most markets to record highs in 2021. The strength of the mother market, the US, is imparting resilience to other developed markets and emerging markets like India. The exuberant retail participation is a totally new development that has made market prediction extremely complex.
A couple of data points that throw light on the unprecedented retail exuberance and its impact on markets would help us to get the issue in perspective. In 2021 alone, US investors have downloaded 15 million trading apps and invested $1 trillion in equity. This investment is higher than the cumulative investment made during the last 20 years. Retail investors in the US now own 12 times more stocks than hedge funds. Cheap money has provided a favorable context for investing/ trading in stocks.
This explosion in retail participation is a global phenomenon triggered by the pandemic. In emerging markets, this trend is conspicuous in India. Retail participation is desirable but the concern is about exuberance and total disregard for valuations.
Massive crashes are followed by sharp rebounds
An important lesson from stock market history is that a sharp crash is followed, more often than not, by a sharp rebound. Stock market often overreacts: both on the upside and the downside. During the euphoria of a bull market, valuations reach unsustainable levels, leading to a sharp correction. The panic during a crash takes valuation to very low levels, which in turn leads to buying, triggering recovery. This pattern repeats. This has implications for investors.
Let’s take the history of recent market crashes and the rebounds from the crashes. During the tech bubble of 1998-2000, valuations reached unsustainable levels triggering a massive crash of 49 per cent from the 2000 peak. The market consolidated for a while, and then, there was a sharp rebound of 140 per cent in 9 months during 2003-04. One of the worst crashes in stock market history happened in 2008 during the Global Financial Crisis. The crash was a massive 65 per cent. Then, from the lows of March 2009, there was an impressive rebound of 180 per cent in 15 months. The crash of 40 per cent following the outbreak of the pandemic in March 2020 was swift and huge. This was followed by a sharp rebound of 135 per cent in 18 months.
What is the lesson from this trend? Stock market returns come in fits and starts. There will be periods of euphoric rise, sharp corrections and consolidation. Big money is made not by buying at the peak of the bull market, but by systematically and patiently investing through a bear market. More importantly, superior returns are generated by a simple investment strategy: Investing in high quality stocks that consistently generate …….