- Global conflict triggered market panic, equity free fall.
- Investors panicked, sold assets at first sign of drop.
- Unrealistic expectations and short-term reactions cause losses.
The US-Israel-Iran war started some 6 odd weeks back on February 28. It was a lovely morning. Suddenly this monster which we had all imagined we had buried some 5 months prior to that, resurfaced. Although a large number were sure it was coming but the scale was a lot more than they had imagined. The large-scale bombing and the annihilation of the Iranian top order was definitely not within our grasp. The consequent meltdown of the markets: equity went into a free fall, crude shot up, precious metals and commodity prices melted and general panic set in. This was playing out in repeat mode, after the Russia-Ukraine conflict.
Indian markets wore the torn tattered look for the next fortnight. Every day the media screamed many lac crores lost in value dilution. Wealth advisors, asset managers and the general investing public had a rude hark back to the new reality. The phones and messages were coming thick and fast. Nervousness and doomsday prophecies swirled around. And then the daily reports showed a vicious tide of exits. Again, investors were losing money and they chose to exit at the first drop.
Where do so many investors go wrong??
And this is majorly true of the well heeled, educated, aware and well paid ones. The feedback I have is the following.
Knee jerk reaction: The middle class and the upper ones are aware of breaking news 24/7. And they act on whims. The reactions are generally instinctive ones and lack a thought out process. Awareness of recent history is relegated to the back and only current situations make it to the actionable mind-scale matrix.
Exit from the capital market is the easiest process. It is done over phone, screens by way of messages or self administered. Using the most liquid and transparent option as the first exit route. However the most illiquid and least transparent and the most cumbersome options are left untouched. Real estate, private, unlisted stakes in other “bhai-bandhu” companies, and myriad other options are left for later. And they never happen. Worst is taking money out from equity and putting in debt. Not realising that nothing makes up equity drawdowns better than equity.
I am continually surprised at the lack of awareness of so many HNI investors on what the equity markets can do. They had lost money chasing unrealistic goals many times but steadfastly refuse to learn. Investing in water, air, garbage, spaceships, art, dubious bonds, heavy flavour of the season allocations, you name it and they have done it and lost money. One would expect wisdom to dawn after such repetitive errors, but no.
The root cause is Unrealistic expectations from such low awareness. These expectations set in during bull phase of the markets, And the normal assumption is to make a killing as a matter of routine. Not realising the nominal growth rate is the benchmark to get close to and anything above is a bonus, a one time bonus. Risk return trade-offs are conveniently forgotten. Past bear market sequences and spans are overlooked. And very importantly, the way out of the bear market phases seated atop the equity gravy train is completely forgotten. The cycle of lower level returns are repeated ad infinitum.
Time and time again, it has been pointed out by numerous studies, case studies and history mapping that time is the best friend in the equity stakes. Patience is key to wealth. So many learned people quote John Bogle and Warren Buffet at the drop of a hat.
But the key learning they have highlighted, time and patience, is hardly ever followed. Considering so may factors I always look at my mom’s portfolio for inspiration and learning. She has been keeping aside some small amounts for her grand kids and after two decades plus, the portfolio is still doing close to 15 per cent+. CAGR. And that will help the grandkids A LOT!!!!!
And that brings me to a major gap – Not staying the course and lack of planning. For every time I have heard of “my friend made —-” and a rupee received for each such instance, would have made me a lot of money. The basic of every activity is the same for it to be successfully done – Plan the work, Work the plan. The hard work in portfolio creation and the resultant value growth happens in small increments. Boom and busts will come. It is a cycle. When these happen, why these happens is not within our control and it makes zero sense to predict it or even attempt to. If we spend a small fraction in understanding our needs and time frame and act accordingly, it will make a huge difference.
And to give a feedback, S&P 500 is already near its pre war level. DO YOU THINK INDIA WILL NOT FOLLOW??
(The author is the Founder & CEO, Plexus Management Services)
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