By E. A. Sundaram
If meeting our financial goals is the destination, then investing sensibly is the journey. The first thing about any journey is to get a firm grip on where we are, before we decide on how to reach our destination.
Of the many fallacies that have found their way into the investment world, one of the most popular —and also one that probably causes the maximum heartburn—is the belief that the investor (or fund manager) should be able to predict exactly how the market, or individual stocks would move.
The ability to predict the movement of the stock market is considered an important ingredient in investing.
Let us first understand why the price of a share goes up. It rises because a majority of active investors believe that it will rise further. Its movement in the short-term is determined by the sentiment of thousands of investors, which in turn is determined by hundreds of variables. These can be political or geopolitical events, national or international news, natural disasters, a statement by a political leader, RBI governor or any monetary authority in any major economy of the world, news of a scam, sharp movements in currencies or commodities and the impact of all these things on corporate earnings.
Predicting short-term movement of any stock or the market in general, not only calls for an ability to correctly predict all these parameters but also an ability to predict how the majority of investors would react to each of these events. It is beyond the scope of almost all investors to correctly and consistently predict these things.
Things that investors can control
So why predict at all? One of the most important reasons for predicting the market’s movement is that several investors believe that the only time to invest in the market is when it is going up. When the market falls, such investors would like to stay away and return only when they are confident that the market would rise again. The recent rise in the popularity of SIPs is a welcome step in negating this belief, but it still very much exists.
While we as investors should certainly plan for our future, we should also stop hallucinating about our ability to accurately predict it. The world does not move the way we want it to, and it is surely in our interest to accept this fact, as early as possible.
Besides, predicting the “market” means predicting how the stock market index moves. And as we have seen repeatedly, the “market” is not a monolithic entity, and all components of the market do not move in tandem. For instance, the “market” peaked in February 2000 and regained that level only in December 2003. Similarly, it peaked in December 2007 and regained that level only in May 2014. However, there were individual stocks that did much better or much worse compared to the market.
“It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go,” Charlie Munger.
Let us just focus on the things that we can control. Any investment plan (or product) has a greater chance of success if the investor follows a disciplined approach to each of these factors. The investor’s interest is better served by choosing investment products that are different from each other, but where each of them is doing its best to control these factors in its own steady way.
This way, all investment products need not rise and fall together. They can have their own trajectories of returns, which is a wonderful thing, really.
(The writer is Executive Director & CIO,Equities, DHFL Pramerica Asset Managers)