The 15 months between Jan 2022 to end Mar 2023 saw the market taking a protracted time correction, and the patience of investors who entered the markets during this period was severely tested. That said, the investor who showed the maturity and patience to stay on course, has been justly rewarded in the last 3 months from April 2023 to June 2023, through the sharp up-move.
But, as usually happens in typical boom markets, there are still investors hopping onto this bus. For these investors who are entering the markets now, the following 3 pointers would be pertinent to remember, as you experience the various shades of the market over the next few quarters.
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This Diwali, we were back to the “Old Normal”. But this article is not about this Diwali or how it was, but more about a fascinating aside that unfolds every Diwali – the late night card parties. A popular (and simpler) Indian version of Poker is played in these parties, called Flush or Flash in English but ubiquitously known as “Teen Patti” among most Indians.
A ring-side view of a Teen Patti game in progress provides fascinating insights on human behavior under risky conditions. While there are many nuances to the game, at a simplified level, most Teen Patti players that you will come across can be categorized into broadly three types. Interestingly, these types are also found in investors in the market.
Read about these types and how you can identify what type you are, in our latest article, published on Moneycontrol.
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In the past weeks, the 32nd Olympics, Tokyo2020, provided the world with sporting excellence and entertainment on display across a range of disciplines. For avid sports fans, these two weeks were exciting days, merrily switching live-streams across events as diverse as hockey, gymnastics, track & field, badminton and golf.
While there were winners, we discovered there were many more heroes, some whose names we heard for the first time, but will remember for long. The Olympics provided some memorable moments but also lots of food for thought. Here are a few observations, particularly pertinent in these raging bull markets.
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A friend was talking to me recently about an interaction he was having with some others, where there was a furious debate on about where to invest, as well as which asset classes including geographies would deliver better returns going forward. As you would agree, this particular topic of debate is not uncommon at all and today’s information-empowered world has led to both more aware investors as well as more confused investors.
Investors usually seem overtly focused on “returns” and are always keen to know where to put their money next. This is especially so during a bull market, and when the recent past has given very good returns. But, excessive focus on returns is usually a function of “not enough focus” on a few other important yet ignored aspects. Focusing adequately on these other aspects leads to enough and more clarity on which asset class an investor should choose and what “returns” the investor should expect going forward.
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Enough has been spoken about the markets in last few months, including the never-seen-before kind of drops and recoveries. In such times, one would have assumed that retail investors would have beaten a hasty retreat, hoping to come back when markets seem a bit saner.
Surprisingly, that is not the case. The below 2 published data points indicate otherwise.
New demat account openings for most brokers have surged, with anywhere between 50 to 200% increases being reported, many of them first-time users.
Retail participation in markets has increased during the lockdown months, with retail share in turnover increasing much more than institutional trading.
What this seems to indicate are 2 things
Retail investors took advantage of the available time (due to the lockdown) and the valuations (in March & April post the ~ 35% crash) to enter and invest in the stock market to make some “quick” returns
Considering that the bulk of these new additions are online, it can be presumed that the average new investor is young and technology-savvy, while not afraid to take risks while seeking to make a quick buck
Is this good news? Well, it depends on how one looks at it. History indicates that institutional investors are generally smarter than retail, who usually enter late to the party. The average holding returns of mutual funds is significantly higher than the average investor returns in the same funds, underscoring this fact.
On the other hand, the fact that the market participation is broadening and that too in times of market distress is heartening and shows some maturity in the mind of the average retail investor. This millennial generation is possibly different and smarter than its precursors. They are also adopting the new “do-it-yourself” way, already popular in developed countries.
That said, trading in the stock market for short term gains is fraught with risks, and can result in substantial capital loss, if one doesn’t have a good hang of what one is doing. Having an Investment Framework based on the following 4 levers can possibly help today’s investor to increase his or her chances of success in the stock market.
Strong Knowledge-based Investment Hypothesis
Know each stock you invest in. Spend time on research, make sure you understand the company and its prospects, and do not get lured by tips and penny stock advice. This is fundamental to your framework and dilution here is akin to having a rotten foundation, leading your structure to fall, sooner or later.
Laid-down Investment Horizons & Goals
Even the best race-car driver needs a destination, a target. Similarly, map your purchase to an outcome based on your investment hypothesis, with a time-horizon in mind. Tie it to a goal, so that neither does your horizon become a moving target, nor are you tempted to exit early during adversities, impacting your goal.
Clear & Documented Process for Exits
Based on your investment hypothesis, you will know when you need to book profits, in case your target/goal is met. Similarly, however good your investment hypothesis might have been, factors change and hypotheses fail. So have a clear plan to exit in case things don’t play out the way you saw them. Having a documented process for both value-based and time-based exits, with clear rationales, is a good way to both, limit your losses and not fall in love with your darlings.
Diversify Adequately
However good your stock selection maybe, expecting each to be a winner is unreasonable. Diversification is a hedge against both, failed hypotheses as well as capital loss. Build a portfolio of 15-20 stocks over time and have a cap on each stock as a % of your portfolio. 6 winners out of 10 is a good enough ratio for the portfolio.
Dear retail investor, Success in the stock market is an outcome of 3 factors – Relevant Knowledge, Robust Process and Resilient Temperament. Please use the above-mentioned levers to build a personal Investment Framework and whenever you feel swayed by emotion, go back to it and read it. You will find that not only is it helpful in the stock market, but in everyday life too. Happy investing!
Image credit: MayoFinance, Unsplash
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families invest for their financial needs, follow their passions and achieve financial independence.
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A slightly modified version of this article was published recently on fpstudycircle.com.
In the last couple of years, there has been a lot said and done with respect to categorization of mutual funds. The regulator has attempted to put some structure in place for fund houses and managers through the categorization guidelines, in order to help investors make informed choices.
That said, it can still be quite confusing for the lay investor to understand these categories. Thankfully, there is something else that is universally understood. Cricket! And within it, IPL!
Fans know every team’s strengths and weaknesses while having his or her favourite teams to root for. So, if equity mutual fund categories were IPL 2020 teams, who would they be?
Read our latest article, published on Moneycontrol.
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families invest for their financial needs, follow their passions and achieve financial independence.
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The last few months have seen market volatility at never-seen-before levels. We saw the sharpest drop ever, with nearly a 30-35% drop in key indices less than a month. Yet, before one could even say “bear”, the fastest-ever recovery also followed in the next 3 months, with most indices recovering smartly from their March bottoms, to be close to their pre-COVID highs.
For customers, emotional reactions are completely understandable. On one hand, there is loss-aversion at work, and on the other, there is the fear of missing out, or FOMO.
So, coming back to the question, how does one handle such situations? Is there a way to navigate markets, especially when they go through such roller-coaster rides?
Read our latest article, published on Moneycontrol, to help you wade through this emotional jungle and take the right decisions.
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.
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Last week, I did a financial well-being session at a well-known corporate, the participants being predominantly women in their 30s. While they were all keen on taking charge of their finances and made for an attentive audience, most of them were extremely risk-averse.
This was startling, since women, usually, are not in a hurry. They are very patient, and once they understand the way a product is built and have realistic expectations of the short-term as well as long-term performance, they wait out the turbulent times patiently and truly stay put for the long term.
Given this fact, it was surprising to see that most of the women mentioned earlier were shying away from equity since they perceived the volatility in the short term as risk. There are several compelling reasons for women to take more interest and understand the best options available to them when it comes to investing. Here are three big ones.
Read our latest article, published on Moneycontrol.
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The last 18 months have not been kind to investors in the stock markets. Depending on which period you are looking at, there have been severe corrections, across all market-caps. When mid and small-cap indices fell severely from their Jan 2018 highs, large-cap indices still held on and posted marginal gains. But post the budget presented in July 2019, they too have thrown in the towel.
So, how badly has equities done, and how much has it actually impacted investors? To put things in perspective, a diversified multi-cap index portfolio has fallen approximately 12%, both from the market peak in January 2018 (approx. 18 months back) as well as from the recovery peak in August 2018 (approx. 12 months back). The below table gives the details.
Of course, this varies across market capitalizations, with large-caps still managing to hold on, losing only between 4-9%, mid-caps dropping 18-22% and small-caps plummeting as much as 28-40%.
So, in such a situation, what should one do? Is the market likely to drop further, and if yes, should one exit one’s portfolios? Are equities not the right asset class to invest now?
In the short-term Equity is volatile. In the long-term, Equity builds wealth!
There are enough and more market news and views answering the above questions, with necessarily no improvement in clarity post reading them. I do not intend to add more to this confusion by also pitching in. Rather, in my view, the best thing to do in such situations is to go back to the “wise men” and learn from them on how to handle such situations. So, let’s see what five such wise men have to say.
You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you are not ready, you won’t do well in the markets – Peter Lynch
The first lesson is about having the right attitude to invest in equity. Be prepared to travel the roller-coaster ride that it will take in the short term and to be unpleasantly surprised despite precautions. Building the temperament needed to invest in the stock markets takes time, so invest only what you can bear and slowly increase it over time as you get comfortable.
The stock market is filled with individuals who know the price of everything but the value of nothing – Benjamin Graham
Markets gyrate excessively, basis the laws of demand and supply, which in turn are driven by sentiment, fueled by a continuous dose of “news”. If you have the temperament and the knowledge, volatility can be an opportunity. That said, timing the market is tough and not advised and for the average retail investor, these are the times when your SIPs and STPs MUST continue, and if possible, topped-up, to take advantage of rupee-cost averaging.
Only when the tide goes out do you discover who has been swimming naked – Warren Buffett
When markets take a dive, the natural response from a retail investor, even some of the experienced ones, is to sell the stocks (or funds) that are holding on while retaining the stocks that have crashed, since they want to “wait for it come back up”.
It is pertinent though to remember that in good markets, even the mediocre performers get “swept up by the tide”. It is when markets go down that these average performers get called out. Also remember, every growth cycle has a different set of dominant contributors. So, use downturns to get rid of your not-so-good stocks while retaining the ones that are still good, thereby building a future-ready portfolio. While the urge to wait for markets to come back up is high, remember, that the good stocks by then would have run up even more.
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent – Charlie Munger
Building a good, long-term, high-quality portfolio takes time and requires pain-staking effort. Make sure you are taking advice from a qualified investment advisor, whose interests are aligned to yours. But once done, sit back and enjoy the view. The key to benefiting from good equity investments is allowing them time to grow and compound. So, stay the course, and don’t take recourse to stupidity, such as exiting perfectly good portfolios just because the prices are down.
If you don’t know who you are, the stock market is an expensive place to find out – George J W Goodman
Lastly, investing in equity without having sight of what you are hoping to achieve, and over what time-frame, is fraught with risk. The danger is that since you do not know either, you will tend to over-track and get impacted by short-term volatility and performance. Anchor your investments to a goal, and you will suddenly see the big picture, and will not get swayed by what happens during the journey. A good financial planner will help you identify the right investments for your goals and will also help you course-correct over time, and ensure that your portfolio is always future-prepared, thereby allowing you to have peace-of-mind and enjoy the present.
In summary, use the below 5 inferences as guard-rails to both smoothen as well as make safe your equity investing ride.
1.Build the temperament to invest in equity, by gradually increasing your investments
2.Volatility is good. Ride it out, and if anything, use it in your favour through your SIPs
3.Use downturns to clean up your portfolio and make it future-prepared
4.Once you have a future-ready portfolio, stay the course, and avoid short-term decisions
5.Finally, know why you are investing. Anchor your investments to your goals
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.
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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.
