Risk vs Uncertainty







Jayant Pai | jayant@ppfas.com

Quick question: When was the last time you woke up in the morning and felt completely certain about the way your day would pan out? Sure, you may have aimed at accomplishing a series of tasks and also meticulously planned your path. Despite this, you tacitly knew and acknowledged that there was always the possibility that things may not turn out as planned. This, however, did not paralyse you and make you sit at home.  Continue reading

Does “Experience” really help while investing?

Jayant Pai | jayant@ppfas.com

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.

Wor(l)dy Wise……

Jayant Pai | jayant@ppfas.com

I saw a programme on a business channel a few days ago. It was an event organised by a brokerage house, wherein three eminent stockmarket personalities were the panelists.

It appeared that they had only a one point agenda : “Talk up the markets”. According to them, India was infallible and the future could not be brighter. Some of the points that they mentioned are contained below. More than the contents, it was the smugness in their tone which was disconcerting.

  • India would be a USD 5 trillion economy over the next few years. Growth of 9-10% p.a. was a given….Further, assuming a market capitalisation/GDP ratio of 1:1 our markets could easily move up three times from here.
  • India’s savings would cross the USD 1.50 trillion mark. There would be such a wall of money that we would fall short of financial institutions to manage the glut (Wow. This is the ultimate statement). After that there were statements like “Even if 5% of such savings comes into stocks, imagine the impact on stock prices” and “Indians will have no other option but to invest in stocks”.

First, stockmarket performance is more related to the performance of the corporate sector and less to overall GDP growth. Second, relying on Indian investors to invest out of a sense of compulsion, irrespective of valuations, is underestimating their intelligence.

They then stated that the USA currently saves less than 1.2 trillion USD and that meant India’s savings would outpace the USA. This statement will hold true if the current high savings rates are maintained. But that is a big IF, considering that the credit-culture is taking firm root out here.

  • The topic then shifted to infrastructure spend. A speaker quoted that in the year 2000, it was predicted that India’s infrastructure capex would amount to 6% of the GDP in 2010 but current statistics showed the figure actually came in at 8%. This was touted as a plus point and a key enabler to India achieving double digit GDP growth rates.

    However, they neatly skirted the question of the outcome of such spending? Are you and I able to see the benefits? At least in the urban areas, we are having to put up with decaying infrastructure, shoddy implementation and padding of costs. I think these speakers should get some feedback on the near inhuman conditions in which their own colleagues (blue collar and lower management workers) or domestic help travel to work and their living conditions?

It is very easy to sit in five star hotels and talk glibly about how India is superior to other countries and how we can one day match China. China has succeeded in radically reducing poverty levels over the past two decades. On the other hand, we are only seeing an increase income inequalities. It appears that India is slowly being split into two : One, which lives in style (including custodians of public money such as fund managers), talks big numbers and virtually condenses everything into excel sheet projections. The other are the teeming millions beset with the struggle for survival and battling corruption, terrorism and other problems considered too mundane by the first segment. This segment is being denied basic rights such as the right to education and decent healthcare.

India features at the bottom of the table in several human development indices, be it nutrition, child literacy or infant deaths. Only some African countries and low-income Asian countries feature below us, hardly the sign of an emerging superpower. If these Indians at the bottom of the pyramid are polled, their viewpoint would be the exact opposite of the “opinion makers”.Inequality exists in all countries. However, as is everything in the case of India, the gap and the sheer numbers are frightening.

I am not making a case for the socialists through this blog post. In fact, as a regular investor in stocks and equity mutual funds over the years, such “talking up” ought to be music to my ears and there is a temptation to blindly believe it. I am also not specifically targeting this particular event. Since the bull run began many market “experts” are involved in talking up the markets. Maybe they unconsciously do this owing to the “Endowment Effect”. They take our growth for granted and (maybe) believe that growth will take care of all of India’s problems. However, at the back of my mind there is a very real fear that if we do not address social inequalities our investments will suffer drastically (unless you believe that equities will function in a vacuum).

Maybe enlightened self-interest is the answer. In doing so, various stakeholders will act in the overall interest of society as their own well-being will depend on that.

I look forward to your thoughts on this subject…..