As the Sensex sailed past 30,000 today I was amazed to note the absence of volatility in the market in the last few years.
The market has marched steadily upwards in the last five years or so and these days are quite reminiscent of the pre 2008 crash market days where you used to meet a lot of people who had never experienced the pain of a market crash in their life, and believed in the inevitability of the market always going up.
I was reminded of this because I read Warren Buffett’s letter to shareholders last Sunday, and although nothing new, he did emphasize the same important things he has been saying for a very long time now.
Here’s a small snippet from the report:
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
No one is talking about volatility or risk these days because we have not experienced that in the recent past. Whether or not we experience it in the near future is anybody’s guess but the main thing is to have a plan of action when you do experience that volatility, specially with the Nifty P/E around 24 which is at the higher end of the scale.
The important thing is not to mistake the volatility for risk when you are faced with it. If you plan to hold stocks for very long periods of time like a decade or till your retirement then they are very safe options as we have seen over the past 25 years or so since India’s liberalization. We have had a lot of ups and downs, pretty severe recessions, busts, terrible governance, and still the market has been smiling to people who have been patient with it.
That’s the key lesson to remember and although you may not need to put it to use right away, you will need to put it to use sooner or later.