“Behind every stock is a company. Find out what it’s doing.”

– Peter Lynch

This question is the most asked these days. The question betrays a sense of anxiety, not because investors are worried about the economy or of corporate profits but of portfolio values that they see daily. It reminds investors of the opportunity loss they perceive currently. In the near-term stock prices are affected by a host of factors that are not related to fundamentals, which means that the investor who asks this question should revisit his investment thesis. If one is convinced about the long-term potential of the equity asset class, this question is irrelevant as over the long-term markets always increase in value related to the concurrent rise in corporate profits.

An opportunity to hear Mr. Morgan Housel[1]presented itself and some home truths were re-iterated. While most of his thoughts are well articulated in his famous book, “The Psychology of Money” a must read for all investors, a few pertinent points in the latest interaction that I thought was relevant to the scenario today:

Question: The NASDAQ is down 14% from its peak – does this indicate a trend and that this is a signal for continued bearish sentiment? Should I sell? His answer was enlightening – While all data and statistics agree to the fact that equities are the highest yielding asset class over a long period of time – what gives you the right to accept these without any cost? What have you signed up for? he asked. If one were to get the higher returns without any volatility, then why would anyone allocate to fixed income or put money in fixed deposits? The volatility is the cost of holding this asset. It comes with the territory and the fundamental nature of equities is what investors sign up for. It cannot be wished away. The investors have signed up for it. If one has not signed up for it – one has been mis-sold on the opportunity in equites.

The second question was: What has behavioral finance taught us? Are there investors who look at the current volatility without missing a heartbeat? Am I wrong in feeling fearful? MH had a wonderful response. He emphasized that while he is not an academic, nor an expert on behavioral finance, there appears a gap between the concepts of behavioral finance and popular adoption of its precepts. He stated that the large-scale subscription to day trading strategies, speculation in cryptocurrencies etc. denote that investors are yet lured into “get-rich-quick” stories ignoring the longer-term potential in equities. He further explained that it is perfectly natural to second guess our choices of equities when a market downtrend begins and persists. He shared that he too experiences anxiety when he looks at his portfolio value and that is but natural.

When asked about his own investment strategy: He confirmed that he only buys low-cost equity-oriented ETFs and stays invested.

What does one make of the current trade turmoil?

How can one shut out the noise?

For this MH had a wonderful suggestion. He asked the audience to imagine life in ten-year terms, or if that’s a stretch in five-year terms. No matter how bleak the current situation is, whether it is the COVID pandemic, the GFC or the Asian crisis, allow yourself to believe that over a five-year period we will all be in a better place. The world fueled by the ingenuity of human beings will become a better place to live and more enriching as we progress forward. This is the fundamental premise.
For means of shutting down the noise – I think we all can find our own ways. Since we all are different individuals and we react to different triggers, it is best that we devise our own methods for dealing with it. Whatever we can visualize that helps us see the longer-term vision

Suggested reading

• The Psychology of Money, Morgan Housel
• A Random Walk on Wall Street, Burton Malkiel
• Fooled by Randomness, Nicholas Nissim Taleb

“Activity is the enemy of investment returns.”

– Warren Buffett

Mr. Tushar Pradhan
Chief Mentor – Investment Strategy, EPSILON MONEY INVESTMENT MANAGEMENT & Director – HXGON Partners LLP

Disclaimer-This newsletter is being curated by HXGON Partners LLP, a knowledge partner of Epsilon Money. This newsletter is not intended to be used as a recommendation and is generic in nature. Investors should follow the advice of a qualified investment advisor before making any investment decisions and should read all investment related documents and risk disclosures.
Epsilon Money Mart Pvt Ltd (Epsilon Money) having its registered office in Mumbai, Maharashtra India, is an AMFI registered Mutual Fund distributor and IRDAI registered Corporate Agent and associated with SMC Global Securities Limited as a Sub-Broker for investments opportunities in Direct Equities. Epsilon Money acts as a referrer to the Product and Services Providers who have obtained the required license to offer a suite of wealth management products which may not be directly offered by it. Epsilon money does not guarantee the validity/compliance of license of Product and Services Providers. Clients may conduct their independent due diligence before investing. The insurance products offered are underwritten by the respective Insurance Partners only. Epsilon Money does not underwrite the risk or act as an Insurer. Mutual Fund investments are subject to market risks. Please read all the offer-related documents carefully before investing. Past performance may or may not be sustained in future. To view the Full Disclaimer Click Here