I Am My Own Risk

The now infamous article titled “The Death of Equities” from Business Week published August 13, 1979, made the following case for equities being a dead asset class:

  • 7 Million investors have defected from equities over the past decade;
  • Institutions have been given the go-ahead to shift more money from equity and debt to other asset classes;
  • Few corporations can find buyers for their stocks, forcing them to add debt to a point where balance sheets seem permanently out of whack. 
  • Further, this “death of equity” can no longer be seen as something a stock market rally—however strong—will check.
  • Only the elderly who have not understood the changes in the nation’s financial markets, or who are unable to adjust to them, are sticking with stocks.
  • Says Alan B. Coleman, dean of Southern Methodist University’s business school: “We have entered a new financial age. The old rules no longer apply.”

Not surprisingly the next 30 years post this article produced the biggest stock market rally with S&P 500 delivering a staggering 1225% return.

Investing is a hard Game

Given below are some Excerpts from an article by “microcapclub.com” titled “Ïnvesting is hard”

On June 30th  1997, Amazon.com was trading at a split adjusted $1.50 per share and was valued at $7000 Mn. That day the stock traded 228,900 shares in a range of $1.48-$1.59. I’m sure someone traded in and out of a great business that day, not knowing that the stock was about to up 1,000X.

Bernard Baruch once said. “Nobody ever lost money taking a profit”. I don’t know about that> Investing is hard.

On April 1st 1976, Steve Jobs, Steve Wozniak, and Ronald Wayne founded Apple. Wayne drew the first Apple logo, wrote the three men’s original partnership agreement, and wrote the Apple 1 manual. Jobs and Wozniak each owned 45% and Wayne 10%. Two weeks later, he sold his 10% interest for $800. This 10% interest would be worth $90 billion today. He was closer than anyone to the visionaries of Apple, and he still sold.

It doesn’t matter how close you are to a story. Investing is hard.

In 1963, American’s smoked so many cigarettes that it was equivalent to every adult in the United States smoking over half a pack a day. 43% of American adults were active smokers. By 2014, this number dropped to 18%. But the Altria stock is up 71,000%

Sometimes the facts mislead us. Investing is hard.

Issac Newton & South Sea

“Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price – and lost £20,000 (or more than $3 million in [2002-2003’s] money.

A prime example of how even the smartest of human being are not immune to “behavioural mistakes”.

What does all of the above tells us

Even though data tells us that markets always goes up in the long term, in the short to medium-term, it goes both up and down.

However the nature of markets is such that it could stay up and keep going up as well as stay down and keep going down longer than you can anticipate thereby creating depressing and exuberant emotions to drive decision-making

Behavior, Behavior, Behavior

  • The Mutual Fund inflows in Indian MF in January 2018 was INR 23,000 crores and the same number for December 2018 is 6600 crores;
  • A pre-dominant part of these inflows were going into mid and small cap funds.
  • What’s changed for the mid/small segment during this period is that the small cap index price to earnings ratios have changed from 93.38 in January, 2018 to 43.33 as on December 2018 while the same for mid-cap index has changed from 55.66 to 40.04.
  • In simple words while the risk-reward has improved dramatically the investments have gone down.
  • The same investors who were so eager to invest in January are now running away from the markets;
  • Just when the time was right, investors are not only investing less but are even redeeming significantly.

This just defies all logical explanation of investing principles but does tell us that “outcome orientation” and “performance chasing” defines investing behavior.

Just like the “death of Equities” article, anyone can build a pessimistic case; let me give you an example:

  • General elections are coming and what if the ruling party loses majority; doesn’t come back or comes in a coalition; it would not be good for the country;
  • Interest rates are too high;
  • There are no capital investments in the country;
  • Fiscal and current account deficit is unsustainable;

Etc., etc., etc.,

You see how easy as well as rationale sounding it is.

However what matters and the only thing that matters is your risk-reward and the expected performance of the businesses that you or your fund manager owns.

What can you do?

  • Develop simpler principles of investing decision making;
  • Reviewing the entire portfolio and performance rather than focusing only on the declining asset-class;
  • Review and question your investment thesis defined at the time of original investing periodically with your advisor to ensure you are on the right path;
  • Be patient and get your initial price right and then forget about mark-to-market losses till the your initial investment thesis remains valid.

Ultimately remember there are no right or wrong answers or outcomes; there are only right or wrong processes and your discipline in living with them.

Your process defines your behavior and that in turn will define your long-term outcomes



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