Flawless to hopeless! Don't trade reasons, just invest for long season

R. Venkataraman, IIFL | Mumbai | January 20, 201614:20 IST

To quote Marks, “One of the most notable behavioural traits among investors is the tendency to overlook negatives or understate the significance for a while and then eventually to capitulate and overreact to them on the downside.”

The latest memo from Howard Marks of Oaktree Capital, has very interesting piece of advice, which is valid for investors of all classes, especially in current times.
 
The month of January has been dramatic for markets. We have seen massive erosion of investor wealth not only in India but across the globe. Market after market is seeing steep declines. Chinese market hit low circuits and then the rules were changed so that there were no lower circuits. If you look at markets across the globe, in the first fortnight of January, all of them have fallen; Dow Jones by 8%, Nikkei by 10%, China’s Shanghai by 22% and India’s Nifty by 7.5%.
 
Interestingly, none of the problems, which investor’s cite for the recent decline of the markets are new. The more things change the more the reasons remain the same - depending upon your perspective. The usual suspects are falling crude prices, falling commodity prices, slowdown  in global economy, problems in China, Fed rate hike,  geo- political risks, war in Middle East, failure of Narendra Modi government to bring about major reforms, inflation, deflation, PSU banks and NPAs, fund flows to emerging markets, and so on.
 
To quote Marks, “One of the most notable behavioural traits among investors is the tendency to overlook negatives or understate the significance for a while and then eventually to capitulate and overreact to them on the downside.”
 
For example, the NPA problem and the slowdown in economy - both these issues are known to everyone on the street, and that too from last year. Till December, we choose to ignore it and suddenly in January, we are now overreacting to such an extent that the market cap of all public sector banks is equal to HDFC Bank’s market cap or Kotak Mahindra’s market cap. We are seeing a huge divergence in valuations.
 
We have reached a stage in which the Sensex and Nifty are back to May 2014 levels. In 2014, when Modi ascended as the Prime Minister of the country, people had become very optimistic. They believed he had a magic wand, and that a knight in shining armour has come who will solve all India’s problems, and that too in a second. Two years later, the market seems to have concluded that Prime Minister Modi is not doing anything, he is not good enough and that we are doomed. Both the extremes are wrong and the truth is somewhere in between.
 
Again to quote from Mark’s note, “But in the world of investing, perception often swings from flawless to hopeless.”
 
He has concluded beautifully that “Thus while this may be the time to buy, I'm far from suggesting that this may be the time”.
 
My advice to investors is, first and foremost, buying at 7500 Nifty level makes more sense than buying at 9000. Second, only invest that amount of money which you can afford to lock in for almost say 5-10 years without worrying. Lastly, do not lose your sleep over daily newspaper headlines or flashing business news tickers on TV channels.
 
Many years ago, while I was an IIT aspirant, I had the privilege to meet one of the high rankers of JEE. All of us were milling around him, thinking that a mere touch will ignite our brain cells and make us worthy of getting into IIT. I have never forgotten his advice, which is summarised as follows – To do well academically and to get into IIT, you do not need a strong brain but a strong bum. You have to sit on your bum on a chair and solve problems day and night.
 
Similarly, to make money in stock markets, you do not need a strong brain but a strong stomach so you can handle volatility so as to not overeat or puke out your portfolio at the wrong time.
 

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