While libraries across the world are full of topics which tell investors on what to do when making portfolio decisions – I believe “what not to do” is equally important – because it is your “No” call that ultimately defines your journey as an investor. It is often the difference between a peaceful investment journey and one which is pock marked with challenging times.
Most new investors have had a good ride till around 6 months ago – which is when the “Tide of Liquidity” has started running out, there are signs of fatigue creeping in. The cheerful news that brought them to the markets was the revival of the economy post the challenge posed by COVID. The news today, however, is rife with fears of Global Inflation, with both the US and Euro Zone hitting inflation numbers not seen over the past 30 years. Coupled with that we have the war in Ukraine further choking supplies of energy. Wheat and commodities like palladium etc., and the Chinese lockdown aggravating the choked supply line situation even further.
The above set of news is bound to rattle any seasoned investor, but the question is, should it make him act on his portfolios?
In a study done in the US in 1984 by Fidelity Investments on which client accounts did the best, what they found was very interesting as well as hilarious. The best performing accounts were those where investors had forgotten that they had those accounts. I am sure if the same study were done today, the results would not be very different.
A lot of the above stems from a few behavioral aspects of most investors, which I will put down under a few questions:
Fallacy of the question – Market ka kya lagta hai? Investors are too focused on market levels. They forget that markets are actually made of businesses. There have been lots of volatility, crisis, wars, and they will be there in future as well. Still in the long term, markets will go up because businesses, good ones, tend to do better with time. If one was to look at the Sensex starting from 1979 at 100 points (Sensex was officially started in 1986 with the base value of 100 from 1979), today the Sensex itself has gone up by approx. 600 times. And I can assure you that no one has had a complete ride. Yes, we have had and will have volatility in between – at times, which is excruciatingly painful, but if all of those investors were to look upon these corrections as opportunities to increase investments, rather than exiting the markets, the investors return would be way higher – this is where investor behavior comes into the picture. Most fund managers over time can manage investment volatility but it is the investor behavior that makes the investor lose out on investment returns.
Avoid trying to time the markets: Invest every single month. With interest rates moving up, we are all in uncharted territory, this is possibly a difficult time that a lot of first-time investors will be facing. Only message is “Don’t try and time the market”– nobody can do that. As Peter Lynch famously said, “More money has been lost in trying to time the markets than lost in the market corrections”. This is one good tenant that we are seeing in the Mutual Fund space – Over the past 4-5 years whether for a lack of other avenues or due to investor education, the sustained push on SIPs has created a kitty of Rs 12000 crore per month. Main message here is – Stay the course. Build a portfolio for the Long Term.
Don’t listen to Social Media or any opinion that is freely floating on Twitter or any other social media. If it is floating out there, there is someone voicing his opinion who may not have your risk appetite or worse maybe he is “unqualified” to give an opinion. Engage with your Portfolio managers and advisors.
Invest, Don’t speculate: Ignore the urge to take action on your portfolios. A lot of time investors seek to see action on the portfolios – action at times is confused with work that has been done by the advisor on the portfolio. The same is true with even companies in your portfolio. The longer you hold companies, the better will most companies do with time.
Do not put all your eggs in one basket: Diversification across Asset classes will help normalize your returns – It is very important to diversify into Asset classes which have little correlation. If all your Asset classes are doing well or badly at the same time, your portfolio is not diversified. Everyone says that they have diversified but very few actually do. Many investors think of Diversification just as Bonds and Equity, forgetting Precious Metals.
Few other things on the TO DO LIST of investors that are important —
* Greed and Fear: The easiest thing to mention is another one of Buffet’s quotes. “Sell on greed and buy when there is blood”. But this is the most difficult to implement. This is where maximum losses happen when people try to time the markets. Eg. – What is the definition of a Stock which has gone down by 90%? A stock which lures investors when it is 80% down and then falls another 50% from your purchase price. One can overcome these kinds of potential challenges only by investing on a regular basis.
* Practice delayed gratification: By practicing delayed gratification, you will have more money at your disposal that you can use to invest. Teach your kids delayed gratification at an early stage. Studies suggest that time spent in the markets determines your returns. The more time you spend, the bigger your returns.
* Index investing is a very good tool: Don’t underestimate the power of low-cost index investing. A wiser thing to do is to invest in a low-cost index fund if you are not being able to beat the index.
* Margin of safety: Always look for the best value for your money. Be it while shopping at discounts for your clothes, buying a house and the same is true for stocks as well. This has proved to be right, right through history and will be proven right again in the future. Unless you buy a thing worth Rs 100 at Rs 30, you will not make money.
* While Investing what should be your goal? While goals for individual investors will differ but for a long-term investor the future income from your assets (Dividends) should exceed your monthly household expense. It will surely take time. Be frugal in your expenses and invest wisely and regularly. All the smartest investors have done this.
* The most important point: Discipline. Discipline is the key to your success in investing. Avoid Leverage. Think Long Term. Buffett is 93 years old, and he still thinks long term, none of us have the right to think short term as investors.
* Lastly – Creating wealth is a long-term process – the more patient you are, the more joyful and stress-free it will be.
(By Siddhartha Bhaiya, Director & Fund Manager at Aequitas Investment Consultancy Private Limited)