‘Patience is not simply the ability to wait. It’s how we behave while we are waiting.‘ – Anonymous.
It’s easy to plan for the long term. It’s difficult to walk the long walk. The ride could be bumpy, but that doesn’t mean you should leave the path, because you know it takes you to the destination you want. This summarizes the gist of our experiences during the past month or two with a few clients.
It is a fact that equity as an asset class delivers good returns in the long term. In fact, in the long term, this is the only asset class that has delivered superlative returns consistently. Yes, when road becomes bumpy, fear sets in. We look for stability. But there is always a reward for the difficult path chosen and trod well. What one needs is the stomach for a little temporary anxiety.
Our take on the market and economy.
The last 18 months have seen only a very narrow rally in the stock market. Only about 10-12 stocks (HDFC, HDFC Bank, Reliance, TCS etc.) have moved up narrowly to push the index higher. Almost 75% of the stock prices are closer to 52-week lows. The NBFC crisis has also done damage to confidence and liquidity in the system.
The Economy is going through a little strife. Demand has slowed down on account of low liquidity. Market was expected to be better after the election results. But that hasn’t sustained. Perceived impact of Budget is not reflecting for short term gain as the government is placing emphasis on structural reforms. The broader economy is going through transition from unorganised to organised due to GST.
The government’s thought process is that India should be not only consumer demand driven but capital intensive, investment driven economy. Hence there is emphasis on infrastructure. They are thinking for very long term, even the next election term. Though government has promised reforms, its impact is not seen much in the nearer term. Government is also borrowing large money from outside India for the first time to boost the economy. This may bring down the interest rate in economy as liquidity will increase.
All these will take time. Our guess is another 6 months-9 months. Till then, the velocity of uncertainty keeps going up. If I look at it from the investing angle, probably this is a period for accumulation for any long term investor. India is a diverse economy and growth rates will be back up by 2020.
How to deal with trap of Fear and greed
We know the human mind is restless. When it comes to money it’s even more. While planting the sapling, you know it will take time to bear fruits. So, we wait. If you try to pluck the plant to see if roots have grown, what will happen? Definitely Very little good! Same thing goes with investments. If you try to check and see again and again the portfolio and analyze how it has performed, when market is volatile you are in for disappointments.
‘Growth in Equity is not linear’.
You have invested for the long term. But recent performance weighs your decision. You quickly want to pull the saplings out and put it into another pot to help it grow faster and bigger. And so you change asset allocation from equity to debt in search of stable good returns. Unfortunately, this is poor investment strategy. You are changing the manure in pot. You are cultivating it differently. Naturally, the fruit will be different. Last month, we saw two-three bizarre incidences of money shifting to Debt from Equity. The money was for Long term.
Warren Buffett says – ‘Be greedy when others are fearful…” But it is difficult to practice for all. Ironically when market is upswing, it may not necessarily be a good time to invest. But people will flock. There are numbers of highest ever investments done when markets are at their peak. At that moment Greed knows no bounds. We have had these periods. Everyone wants to board the train. But here I am saying train will go to places, it has come downhill, get in now.
In such a scenario, what’s the prudent course of action?
If the pace of uncertainty increases, how will we behave defines the final outcome of our long term goals. As uncertainty increases the key to tackle this uncertainty well is to follow the right decision making process. Decision making under conditions of risk and uncertainty is the key to successful outcomes. Believing is the answer, And not constant questioning short term, which is born out of the cycle of greed and fear.