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  1. Investing in stock market? Know the difference among volatility, risk and uncertainty

Investing in stock market? Know the difference among volatility, risk and uncertainty

Unlike the last two years, the markets are not really on a roll this year. Crude oil prices are inching up, there’s a looming US-China trade war and the US Fed is reducing its balance sheet.

By: | Published: June 12, 2018 3:49 AM
stock markets, investments If you need the money in less than two years, the said investments should be in liquid funds, which will ensure that the capital is not eroded.

Unlike the last two years, the markets are not really on a roll this year. Crude oil prices are inching up, there’s a looming US-China trade war and the US Fed is reducing its balance sheet. On the domestic front, Reserve Bank of India hiked the interest rate, elections will take place in three key states which could determine the current policies or realignment of policies as also the coming together of political parties.

So, there’s a lot of uncontrollable factors on the plate of investors. Investors who had invested in 2016 and 2017 have noticed their portfolio value reaching dizzying heights and a drawdown from the peaks. But still, if the schemes and stock were chosen right, the portfolio still could be in green, in majority of the cases.

This will not be the case with those who invested towards the end of 2017 or in 2018. The drawdown must be making the investor nervous. And continuously monitoring the markets is not going to help the situation.

Dealing with volatility, uncertainty and risk

First and foremost, all three are different. But most investors consider these to be the same. And that is where the pitfall begins. That’s why it becomes paramount that as you start investing you have a plan, a time horizon with liquidity and cash flow needs in place.

If you need the money in less than two years, the said investments should be in liquid funds, which will ensure that the capital is not eroded. Only that much money which is not required for over four years should be in equity. Remember, in the long term, the markets are a weighing machine. You will love the weight.

In the short-run, the market is a voting machine. In 2018, BSE Sensex moved south in February and March only to move north by more than 6% in April and ending in green in May. Is this risk or uncertainty?

Risk is when you invest in high beta or high PE or penny stocks during these times. Uncertainty is when you cannot predict the stance of RBI in determining the interest rates. One should not confuse between these two terms.

Keep patience, rest will follow

As Munger says, the most important thing in investing is patience. And that is one quality which is today extinct and only the rare few have. As an investor , this is one quality which sits on the top of the checklist an investor needs to have.

Getting to know oneself as an investor is very important. In this journey, the emotional quotient of self is the key factor . And not the intelligent quotient. If you like to analyse too much, and cannot execute the final decision, then you are a classic case of ‘analysis – paralysis’, in motion. Take the decision and live through it.

It is rightly said that in the investing journey there be periods of high returns, no returns, low returns and negative returns. As an investor, one has to go through all such periods to get long-term returns. No investor has been spared of it. Ask Buffett, Pabrai and a whole lot of marquee investors.

As an investor get to know yourself better. Having a checklist and process in place is the beginning of the investment journey. Does stock price dictate your holding period? If so, you are not an investor, but a trader in the garb of an investor.

The writer is managing partner, BellWether Advisors LLP

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