Most people make investments because they want to. They often ignore & overlook whether they actually need to. Investing works very well only if one questions himself on the need. When the need is not clearly identified, the investing is goal-less. Often when we invest without goals, there is a tendency to make decisions without serious reasoning. Most people who bought suburban apartments expecting to benefit from appreciation are now staring at the prospect of selling them off. Why? Because, either the returns are insignificant or losses are staring at them. With returns failing, they see no further need to retain the apartment and incur running and maintenance costs.
If only investors had reasoned out seriously on the actual need before looking at returns, they would have saved themselves a whole lot of trouble. If the need is only to generate returns, financial instruments are far superior investment vehicles. They are easy to acquire, simple to maintain and easily saleable. Here, the need is well defined – one needs financial security, quick liquidity and superior returns. The definition of the need and the clear process employed in making the investment decision will always lead to successful investing. Planning is a natural expansion and a logical approach prevails over the entire investment process. Without a well-defined need, investing mostly takes an impulsive direction and emotions prevail as the dominate decision variable. Decisions happen in haste without due process and this leads to long repentant phases. Surely, one must learn to avoid that if he is to create, grow and safeguard his wealth in a sensible manner.
There is something about history. It often repeats itself. It has a pattern. Market cycles have a classic repetitive pattern too. Investors make the same mistakes cycle after cycle. Just that a new set of people come around with every cycle to make the same mistakes. Governance too follows the same pattern. Nations adopt new policies for years only to return to the old. Reversion in economic thinking happens all the time. As the world turns protectionist, governments have two priorities. Keeping their own domestic demand and investment buoyant. Enticing overseas investment. It remains to be seen how the world reacts to this new order where global trade is unwelcome but global capital is most welcome. It is in this milieu that every big economic idea will be tested very badly even before it gets enough time to prove itself. Yet, governments will have to bet on big economic ideas just to keep their economies going. Governments will still be running to stay in the same place. When India’s FM rises to present his budget, he would need to pitch aggressively just to make sure that India stands strong in the new era of de-globalisation. Importantly, he would be focusing on domestic confidence more than ever before. That is great news for every Indian.
Events and expectations lead markets into pricing every positive development in.
There is something about how retail investors measure performance. First, they anchor performance to their own expectations. Secondly, they want their whole portfolio to do as well as the market’s best performing fund. Finally, they believe that their portfolio performance should be independent of the market’s. You will notice that all three reflect linearity of thought. In this calculus, risk and macros hardly find a place. Investors also tend to slight processes in their quest for performance. This usually leads to wrong expectations, behavioural asymmetry, and ordinary returns. Having the best advisor may still not help an investor if he does not show the right mindset and investment behaviour. Another common phenomenon is the calculation of fees and comparing its computing versus returns. As an equity investor, I never measured stock performance Vs management remuneration. What is important is how the business is run. Similarly, investors need to appreciate how their investment process is run. If one finds a mature, measured approach, it is best to leave the rest to the advisor. Often role play works to the detriment of portfolio performance. A typical example is “I will give you more money if you perform well for one year.” Most investors say this at a time when one should be aggressively investing. Little do people realise that when portfolio performance is exceptional, it maybe the time to recalibrate portfolios and not to pump them up in a hurry with more money. Markets rarely give time to investors to ponder over their own behaviour. When they do, like in the present, it will be every investor’s calling to utilise the window of opportunity. One year is too short a time in markets. You don’t need to be a wizard to know that.
You can be sure of an investment idea. But, you are never sure of the investment horizon.