Manage instability with stable investment

We are living in a VUCA world. Volatility, Uncertainty, Complexity and Ambiguity have been hallmarks of the stock market all the time; but now, the economy, business and even politics have been gripped by the VUCA phenomenon in an unprecedented manner. In this VUCA world, where crude is more a financial asset than a commodity, crude price can crash by 30 percent in 6 weeks, throwing monetary policy management into confusion. Hawkish policy stance can turn dovish within 2 months. Currency markets can turn out to be almost as volatile as the stock market. An invincible leader and political party suddenly appear vulnerable and a languishing party, rises phoenix like, to resurgence.  How should investors manage this VUCA environment?

There is a long-term trend for economic growth, corporate earnings and market appreciation. If we take the last 25 years, India’s nominal GDP has grown by 13%, corporate earnings by 15% and market-cap by 16% a year. This is the long-term trend. But in the short-term, occasionally even in the medium-term, this long-term trend may be disrupted. During booms, the growth in corporate profits and rallies in the market would be disproportionate and vice versa during slowdowns and crisis. Sometimes, there can be extended periods of poor performance by the market and sometimes bull runs will defy economic logic and rationality for long. That’s the nature of the beast! The only way an investor can manage this volatility is by remaining calm and responding rationally through systematic investment. When market irrationality brings prices of quality stocks down, ‘the intelligent investor’ would turn aggressive and grab the opportunity. As Warren Buffet famously said,”when it is raining gold, reach for the bucket, not the thimble.” At other times, stick to the basics, that is, buy and hold.

Data on the long-term returns from important asset classes in India are revealing: For the period March 1981 to March 2018, the average annual returns from gold, bank FDs, PPF and Sensex were 8.46%, 9.11%, 9.64% and 16.49% respectively. After discounting for inflation of 7.04% during this period, the real returns were:gold (1.42 %), bank FDs (2.07%), PPF (2.60%) and Sensex (9.45%). The message is clear and simple: in the long run, stock is the only asset class that can beat inflation and give decent returns to investors. But, “there is no gain without pain”; and the pain is the short-term negative returns and high volatility. Investors would benefit handsomely if they understand and appreciate this simple lesson from financial history. These are unstable times; the best way to manage this instability is through a stable strategy of systematic investment.

This issue of Geojit Insight carries interesting articles on the economy and markets. The cover story is on the emerging investment scenario for 2019, by Vinod Nair, Head of Research, Geojit. There is an interesting article on approach to investment by Rahul Singh, CIO-Equities, Tata Mutual Fund; ‘Smart Talk’ by Prashanth Pimple, Senior Fund Manager – Fixed income, Reliance Mutual fund and articles by our in-house experts.

Best wishes for successful investing and Happy New Year!