When will the market recover?

Will the markets recover?

This question is the most asked these days. The question betrays a sense of anxiety, not because investors are worried about the economy or of corporate profits but of portfolio values that they see daily. It reminds investors of the opportunity loss they perceive currently. In the near-term stock prices are affected by a host of factors that are not related to fundamentals, which means that the investor who asks this question should revisit his investment thesis. If one is convinced about the long-term potential of the equity asset class, this question is irrelevant as over the long-term markets always increase in value related to the concurrent rise in corporate profits.

An opportunity to hear Mr. Morgan Housel(MH)[1] presented itself and some home truths were re-iterated. While most of his thoughts are well articulated in his famous book, “The Psychology of Money” a must read for all investors, a few pertinent points in the latest interaction that I thought was relevant to the scenario today:

Question: The NASDAQ is down 14% from its peak – does this indicate a trend and that this is a signal for continued bearish sentiment? Should I sell? His answer was enlightening – While all data and statistics agree to the fact that equities are the highest yielding asset class over a long period of time – what gives you the right to accept these without any cost? What have you signed up for? he asked. If one were to get the higher returns without any volatility, then why would anyone allocate to fixed income or put money in fixed deposits? The volatility is the cost of holding this asset. It comes with the territory and the fundamental nature of equities is what investors sign up for. It cannot be wished away. The investors have signed up for it. If one has not signed up for it – one has been mis-sold on the opportunity in equites.

The second question was: What has behavioral finance taught us? Are there investors who look at the current volatility without missing a heartbeat? Am I wrong in feeling fearful? MH had a wonderful response. He emphasized that while he is not an academic, nor an expert on behavioral finance, there appears a gap between the concepts of behavioral finance and popular adoption of its precepts. He stated that the large-scale subscription to day trading strategies, speculation in crypto currencies etc. denote that investors are yet lured into “get-rich-quick” stories ignoring the longer-term potential in equities. He further explained that it is perfectly natural to second guess our choices of equities when a market downtrend begins and persists. He shared that he too experiences anxiety when he looks at his portfolio value and that is but natural.

When asked about his own investment strategy: He confirmed that he only buys low-cost equity-oriented ETFs and stays invested.

What does one make of the current trade turmoil?

How can one shut out the noise?

For this MH had a wonderful suggestion. He asked the audience to imagine life in ten-year terms, or if that’s a stretch in five-year terms. No matter how bleak the current situation is, whether it is the COVID pandemic, the GFC or the Asian crisis, allow yourself to believe that over a five-year period we will all be in a better place. The world fueled by the ingenuity of human beings will become a better place to live and more enriching as we progress forward. This is the fundamental premise.

For means of shutting down the noise – I think we all can find our own ways. Since we all are different individuals and we react to different triggers, it is best that we devise our own methods for dealing with it. Whatever we can visualize that helps us see the longer-term vision.

Suggested reading

The Psychology of Money, Morgan Housel

A Random Walk on Wall Street, Burton Malkiel

Fooled by Randomness, Nicholas Nissim Taleb

[1] Special guest at event organized by Cafemutual in Mumbai, March 5, 2025, Sahara Star