what do you want - linear or non-linear

This is what we saw over the weekend:

And we will see what will happen to S&P 500 today when the markets open.

This is what we are seeing now:

Investors are fearful about prospects in China.

And they are fearful about India too:

As we see both Sensex and Nifty are down over 5%, and individual stocks are hit more severely. 

The reasons reported include Oil prices, China slowdown, FII sell off, Fed actions and more. The biggest price-setters in the markets are the institutions, who are driven by the institutional imperative. Their life is measured in quarters; for them long term is a quarter; and they usually trade more often. It is natural for them to pull off if they sense any danger in the near term. 

What are investors to see in the current markets? There is never a linear movement in equity markets anywhere. They fall, they rise, they fall steeper, and they rise much higher; and over a long period, markets always move upwards. We can check it with the historical numbers. 

If equities are going to give returns much above inflation rates over long term, the compounded gains are going to be more than satisfactory. If we accept this argument, a logical action during market pessimism is the investor's optimism. Higher purchasing power during market downturns makes it easier for the investor to load up on quality stocks at bargain prices. I am not saying that a 5-10% correction from current levels would give us bargain stocks. At least it is going to make our research easier. 

Therefore, instead of following the herd and becoming fearful, it is wise to look at the long term economics of the businesses behind stocks, and then make a call on investment. 

If we ever want a linear return on our investments, we should be looking at bank deposits, and may be any fixed currency instruments held until maturity. Heck, this will not assure us of beating inflation rates and increasing our purchasing power. Equity investments are more likely to give us non-linear yet adequate returns over the long term. Think about it.