“Investing is not supposed to be easy, and anybody who finds it easy is stupid.” These words of Charlie Munger were highlighted by Howard Marks in a recent lecture to India’s value investing community. This set me wondering again about the current narratives that dominate the Indian investing space. Post-2014 elections, equity has been an asset class that has delivered better returns than any alternative. Other asset classes don’t seem to be anywhere near returning to a position where they even generate normal returns. Infact, It will be a surprise if other asset classes return even as much as the prevailing inflation. With such visible lack of choice, It appears that equity is the only choice. And, even lay investors seems very aware of this reality and are strongly receptive to equity. The all time high fund flows into equity mutual funds and PMS schemes reflects this perception. The argument in favour of equity is sound. But, one must always find the right valuations to make equity investing succeed. Investing at any valuation is not a good idea. This is how investment mistakes always happen. Investors now have a peculiar challenge where they need to allocate a lot of capital, savings have very few competing alternatives and equity valuations look stretched. The challenge before an investor is to go against the market and make contrarian investments in undervalued parts of the market. Or, one must keep saving money, accumulating them in short term liquid funds and be investing through corrections. Investors need to show extraordinary patience in times when finding investment opportunities with the right valuation fit is difficult. Investing at any valuation simply wont do. Getting the valuation right is the priority now. Quoting Howard Marks “When there’s nothing clever to do, it’s a mistake to try to be clever.”
Global factors keep returning again and again to haunt our markets. Just when we believed that we are de-coupled from global markets, we had a sharp dip due to a Trump win in November, 2016. De-monetisation also added to the market’s woes. 2017 started on a low and has seen a steady recovery to near all-time highs. The past few weeks saw confidence return to domestic markets. Investors were aggressively deploying capital in domestic equities without much worry. Markets kept rising right through February. The previous F&O settlement closed firm and the next one too opened on a strong note. Domestic fund flows are currently at all-time highs.
But, are market participants sure of a further rise in equities? While there is enormous amount of hope and positivity among market players, one does not see too much confidence. There is no discernible consensus either. The focus clearly will shift to global factors and what happens in global markets will influence our market’s direction in the coming weeks. The results of France’s election will affect global market sentiment especially if Le Pen wins. The political results in India’s largest state, Uttar Pradesh will also have a bearing when they release on 11, March, 2017. The markets are set to have a somewhat tentative fortnight and will take a clear direction only after putting these outcomes behind.
“Buy not on optimism, but on arithmetic.” – Benjamin Graham
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.