With the elections drawing near and the political fights becoming fierce we see fluctuations in the stock markets. Swayed between greed and fear volatility in-creases and is here to stay. People are worried as to what will happen to the markets. Will it go up or down. They wager their bets on which political party will win and how would that impact the markets.
I would call this as the noise of the markets. It tends to distract you. Frankly no one knows what is going to happen. It is all guess work. However it is impor-tant for you to know some time tested wisdom of investing.
Investing is an act of faith. When we invest in Indian companies we have faith in the Indian economy and are confident of the long term success. Yes short term upheavals could be there as we have seen in the last five years, but that is no reason to lose faith in the India dream. All throughout the past we have seen fluctuating fortunes for the investors and the faith of Indians in investing has waxed and waned due to the various bull and the bear markets. What can shake our faith in the promise of investing? Another economic shock triggering a de-pression or an unforeseen calamity. Perhaps excessive overconfidence in smooth seas can blind us to the risk of storms. History has shown that excessive exuberance of investors and enthusiasm has driven equity prices to such heights due to brute speculation only resulting in huge losses . The recent IT , Infra-structure, Real estate booms are examples. They were speculators in the guise of investors. There is little certainty in investing.
But as Long Term Investors we cannot afford to let such possibilities frighten us away from the markets. Without risks there is no return. Some wisdom and common sense will help us to understand the law of investing which is linked to the law of nature. You cannot sow a seed and reap tomorrow. The seed has to go through the various seasons like spring, autumn, winter, summer before it turns in to a fully grown tree and starts giving fruits. Now this takes time. It does not happen in the short run. Many of us forget that nature and society are one. Like nature our economic system remains stable in the long run and we must not be unduly perturbed. We welcome the inevitable seasons of nature but we get upset by the inevitable seasons of our economy. At present we are going through one of the most difficult seasons of our economy but that will also change as nothing is permanent. In 1991 we were in a much worse situation but we bounced back.
Within this repeated cycles of colourful autumns, warm summers, vibrant springs and harsh winters our stock markets have shown a rising trajectory. From 1980 till this date the BSE sensex has returned approximately 16 % per annum compounding. But did all investors reap this benefit? No. It is only the long term investors who have been able to reap such rewards. Why? Because they had the courage to sit tight through all the seasons and had conviction in the India story. Those who came to the markets as speculators with an idea to make quick gains had to embrace bankruptcy and exit the markets.
The following chart shows the sensex movement from 1999 to 2002. This was the Internet boom followed by the bust. A steep fall and we know of the way people lost money.
Then we come to the chart below from 2007 to 2009. A steep fall during the global meltdown. The subprime lending defaults and the fall of Lehman Brothers. The world was shaken and the markets all around tumbled.
The above two charts give a shocking display as to what can happen to one's wealth. It can just get wiped out. This fear in the minds of the investors make them believe that investing is a very risky proposition. That can be true if you entered the market as a speculator looking at quick short term profits. Those who entered the IT boom as speculators lost money. Similiarly in 2007 we had the infrastructure, power and the real estate boom where stocks of these sectors were commanding hefty valuations. Then came the global melt down and the markets crashed.
However if you were a long term value investor you would not be perturbed with these short term disturbances. On the contrary you would look upon them as opportunities. Now see the chart below. These are the sensex returns from 1980 to 2013 over a much longer period of time. Observe the trajectory; it is moving upwards.Observe the period 1999 to 2001. Can you identify the big panic and the fall that followed. The global meltdown of 2008/2009 is evident but does not look as scary as what it looks in the chart above.
Do you find equity investing risky? Equities have returned around 16% annual compounding from 1980. If you are a long term investor you cannot go wrong. But to be an astute investor you require discipline and patience. Go through the seasons of the market with equanimity. Have conviction in what you do.
To invest with success you must be a long term investor. The stock markets are unpredictable in the short run but their long term patterns of risk and return have proved durable enough to serve as the basis for a long term strategy that leads to investment success.
