Emotions and investing how did you fare in 2012

Written by Brijesh Damodaran | Updated: Dec 4 2012, 06:33am hrs
History repeats itself and you are condemned to repeat history. This sounds disconcerting as well as comforting, depending on what side you are. The BSE Sensex has delivered year-to-date returns in excess of 24.5% as of November 20, 2012. The year began with pessimism of the extreme kind and equity was the last thing a majority of the investors had in mind. It was all fixed income and risk aversion, which ruled the roost.

In the 11 months of this year, equity delivered an absolute return, beating the fixed income returns by more than two times. As an investor and an advisor, I will refrain from making predictions. But I will advocate asset allocation, as a strategy which needs to be followed and implemented in your income generation and wealth creation journey.

Your behaviour in the year gone by It is said that your attitude determines your altitude. Similarly, your behaviour (emotional quotient) in the investment journey determines your success or failure in the journey of wealth creation. It is easier said than done and developing a strong inner strength requires an attitudinal shift. Why is it that as an retail investor, you always end with the tailwind of gains Why is it that you enter the equity markets when the cream is already on the verge of finishing

In the three months to March this year, the Sensex delivered an absolute return in excess of 12%. Now, at this time, some of the bravehearts would have taken baby steps and invested. A few of them would have had an higher exposure. The often repeated remark would be, well, I missed the January rally. So, let me not miss any more. This is where investing becomes gambling. And a gamble is all chance and luck.

The next quarter was a period of consolidation, with the Sensex being very volatile. In this, your investments would have delivered a negative return if you had entered in March. And, a few would have exited at a loss.

Now the period between July-September, especially September, had the Sensex galloping, courtesy the spate of reforms initiatives announced by the Centre. So, those who exited earlier in the quarter would be cursing and the case of grapes being sour comes into play.

And in the months of October and November, the Sensex actually consolidated. So, there is no particular pattern and for those who had come in for quick gains would have actually lost. The herd mentality, which we all follow, since as human beings, we want confirmation of our actions from our fellow beings, does not support you in the wealth creation journey.

Learnings for next year

Investing is a process, a very boring one at that. Its a journey and not a destination. Do revisit your process and look at investment as a piece of ownership of the business. This outlook, though a more rigorous and tedious process, will definitely be your friend for life.

The checklist, which is part of the process, will ensure that you invest only if the conditions noted are in place.

So, when there was extreme fear in the beginning of the year, you would have partly increased your equity exposure and, similarly, in other quarters, too. This is where you use the hindsight effect in future investing. With an asset allocation in place, you should have rebalanced the portfolio or would have continued your existing investing methodology, if there was a process.

This is what separates the retail investors (who invests without a process) from the other investors. Nothing is still lost. You could set time aside and revisit your investment philosophy and begin the new year of 2013, with a definitive action plans and at the top of it note it down I will invest with a definitive game plan with a process in accordance with my Investment Policy Statement which will be the guiding document for investing.

India is at a stage wherein growth, in spite of the souring world economic environment, would see a strong momentum. A youthful country having strong consumption needs and growing infrastructure would itself provide growth.

A knee-jerk reaction would definitely take your investments down. However, you should develop strong emotional strength and look at investing as building a business rather than as a roulette.

The author is founder and managing partner of Zeus WealthWays LLP