I have always believed that “equity investment” is a serious business but mostly done in a casual manner. In past three decades I have observed that most investors take equity investment decisions based on factors that are not related to the underlying business of the company they are investing in. While this may be more true for the small household investors (Retail) and High Networth Individuals (HNI); the professional fund managers (Institutions) and large traders are also seen taking decisions based purely on factors like politics, geopolitics, and monthly or weekly data (trade, jobs, production), etc. No wonder the “breaking news” on TV channels causes more volatility in stock prices than the management guidance about the business of the company.
I have seen many Retail and HNI investors spending less effort
and time in taking equity investment decisions than they would normally spend
on buying a shirt. And worst, they spend much less effort and time in taking a
decision to dispose an investment than they would do for disposing an old
shirt.
From the interviews and comments of some reputable professional
fund managers it appears that they usually assign significantly higher
weightage to the macro factors, especially political promise of policy reforms
etc., than required, especially when the empirical evidence is materially
against placing reliance on such political promises.
I am raising this issue this morning, because I believe that
even in normal times, investors face numerous uncertainties and challenges. The
consequences of these uncertainties vary vastly and are difficult to assess.
Investors have to consistently struggle to assess the impact of fast changing
technologies, markets, processes and methods on their investment portfolios.
The consistently changing macro environment, e.g., interest rates, inflation,
liquidity, demand etc., needs to be incorporated in assessing the sustainable
valuations of their portfolio. The information asymmetry, regulatory changes,
product innovation and debasement of governance standards at business entity
level, are some of the regular challenges that an investor has to face. The
challenges rise multifold in the uncertain times, like the present one.
The outbreak of pandemic has created enormous uncertainty in
almost all spheres of life; especially businesses. A large number of businesses
are struggling for survival. Multifaceted challenges have subjected a host of
businesses (and some industries) with extreme uncertainties having material and
severe consequences. Unlike the previous crises (dotcom bubble of 1999-2000 and
global financial crisis of 2008-09), which mostly impacted one set of
businesses, this crisis is more pervasive.
The impact of crisis led disruption is exacerbated by the fact
that prior to the crisis the global economy was witnessing massive technology
transition. Artificial Intelligence and clean fuel technologies were changing
the landscape for many businesses. To make the matter more complex, the
widespread trade war (involving USA, China, Japan, EU, and UK) was redefining
the global trade and terms of trade. As per some reports, the IMF’s GDP
contraction forecast for 2020 is more than double the estimated contraction
that took place in 2009, the worst year of the global financial crisis.
The equity investors in India have made sub-optimal returns in
past five years. Many investors are indicating that the past five year returns
for them are in low single digits, with some reporting even negative return for
past three years. In these circumstances, it is critical that investors make a
holistic review of their investment process. Especially, those investors who
have made material changes in their portfolio in view of the 2014 & 2019
India general elections and 2016 & 2020 US general elections, need to
immediately sit with their respective advisers, if any, and make necessary
amends.
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