Financial Opportunities Forum (March 23, 2012): Mr. Parag Parikh explains “Derivatives” in an offbeat manner and also dissects the Union Budget in his inimitable way.
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Jayant Pai | firstname.lastname@example.org
Last week, a friend of mine (Mr. X) introduced me to another acquaintance (Mr. Y) of his in the following manner “Meet Jayant, he is involved with the stock market in various capacities since 1990”. Y was impressed on hearing this. He said that he was meeting such an “experienced” investor for the first time in his life. He was implying that since I was at it for a long time I ought to be an expert at the game. As it often happens, he continued by asking me for a tip or two….
This set me thinking. In the stock market, does mere tenure imply proficiency? During the first half of my tenure I oscillated between trading in stocks based on technical analysis and fundamental analysis before giving it up in 2002 after losing a lot of money. It was truly frustrating to see the index triple from 1990 till 2002 without me really making anything out of it. In fact, for around eight years beginning 1997 I benefitted more as a sub-broker rather than an investor. I then realised that the limitation lay in my temperament and since then began investing through Systematic Investment Plans (SIPs) in mutual funds. This has stood me in good stead since then.
In the world of science, law or performing arts, experience and practice plays a pivotal role. That is why experienced doctors and lawyers are accorded a lot more importance than rookies. In these disciplines there is a formal body of knowledge which one must master first. After that it is a matter of keeping oneself updated and building one’s contacts. For instance, a lawyer who us a constitutional expert needs to keep track of the amendments therein without revisiting the basic body of knowledge too often. This may apply to performing arts too, albeit to a lesser extent. For instance, you do not become an acclaimed opera singer or Indian classical singer without years of ‘riyaaz’, unless, of course, you are a prodigy.
I wonder if experience can be accorded the same weightage in a field as dynamic as “Investing”. I for one, never consider myself as a good stock picker despite my years of experience. I simply lack the temperament for it. While I do enjoy reading books on investing, I do not have the patience to ferret through loads of data (Turning over rocks to quote Peter Lynch) in order to locate hidden gems.
I think a person who is at it for many years but who lacks the temperament need not necessarily be better than a beginner who begins on the right foot. For instance, while “Investing” may lack a formal body of knowledge and is never taught in classrooms, there are several good books written on valuation and investing by industry stalwarts. A beginner who devotes time to read up the basics before beginning her journey as an investor may do as well (if not better) than a person having years of experience but lacking the temperament.
At best, having some experience may prevent you from making certain mistakes. However, it is not necessary that certain events will have the same outcome at different points in time. Many a time, history will not repeat itself but will rhyme.
For instance from 2003 to 2007 many experienced market participants made less money than many newcomers because they were unable to fathom the extent of the bull run in stocks, as their vision was coloured by the market correction which took place in the years immediately preceding. They were bearish merely because indices were moving quickly towards the highs attained in the year 2000. They ignored several fundamental changes which were driving stocks. On the other hand, newcomers who were armed with knowledge of valuation metrics plunged in as valuations were compelling during the first half of this bull run. Unlike other disciplines, the market does not lay great store by historical performances (both good and bad).
I therefore feel that knowledge and temperament play a greater role in success rather than mere tenure/experience. Hence younger investors could beat older hands at the game.
Knowing that I am involved in the stock market (even though in a rather peripheral way) many acquaintances often pop the question “So which stock looks good today?”. My standard answer to this is that I only purchase mutual funds by availing of the Systematic Investment Plan (SIP) facility and that I usually do not buy individual stocks.
In the rare case when I do mention a stock or two worth purchasing, I notice that very few of them actually follow my advice. On being asked for the reason, there are two standard comments which I hear. One, “I want to buy but these are such uncertain times for the stock market. I am waiting for things to settle down before I purchase anything”. The second one (loosely related to the first) is “The market is too volatile for my comfort right now”. I get the same response even when I suggest that they commence investing in a few good equity mutual funds through the SIP route.
I think such people will be waiting forever. Volatility will remain a permanent feature in stock markets. Stock prices are the distillate of two primary stimuli : company & macro-economic fundamentals and human sentiment. The advent of internet trading, the rise of business channels, blogs and better communication facilities mean that any perceived change in fundamentals is quickly acted upon by the large mass of traders. The share of human sentiment in stock price determination is rising steadily. Everyone is out to squeeze out the last bit of returns through the use of every trading technique possible. When several traders behave in a concentrated way, prices are bound to react in a more magnified manner.
But this is no reason to stay away from stocks. After all, despite the heartburn that they often give in the short term, they are still the best vehicles for a lay person to participate in the country’s growth. As investors we can only try to manage this volatility either by purchasing stocks at reasonable prices or through modes such as SIPs and Value Averaging. Complete avoidance is neither possible nor desirable, as the non-volatile investments such as fixed deposits and bonds usually offer a very low yield post inflation and post-tax. Besides, there are many studies, both, in India and the USA which have shown that longer the holding period, lower the volatility.
Finally for those who are adamant on investing in stocks only when everything looks good, I can only think of Warren Buffett’s quote “You pay a very high price in the stock market for a cheery consensus”. Also, in a lighter vein I tell them that volatility is zero, only over the weekend when the stock market is closed.