To relearn, unlearn

If you are an Indian investor, asking the right questions now is the most important thing. The logic is simple – when the going is too good, it is important to question the sustainability of good times. The stock markets have done extremely well in 2017. This is evidenced in performance across equity categories. But, investor interest has been fixated mainly in select areas – the balanced, mid-cap and small cap funds. 2017 has predominantly witnessed domestic capital flow into these areas.

Risk taking which worked well in 2017, may not find it as easy in 2018. The reasons are simple. First, business performance is likely to change as economic growth patterns evolve. Next, investment performance will always chase emerging business performance. More importantly, when some sectors have been punished badly in one year, they could show improved stock market performance in subsequent years.

Investors must note that the equity categories which worked very well for two or three years at a stretch tend to stagnate thereafter for a while. In the dynamic investment environment that we live in, it is essential to capture the emerging dynamics, invest in areas where time corrections are likely, and to bet on the ensuing structural improvement of the economy.

Given the investment track record of 2017, this isn’t going to be easy. To walk away from immediate successes of the past towards what will succeed in the distant future is going to be challenging. Investing is about working towards the future. Only investors with a yearn for risk will find the right path to future investment success. Every December, savvy investors relearn the same lessons.

 

Risk means more things can happen than will happen. – Howard Marks 

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