Over the last weekend, I attended a lecture on the doctrine of Karma, read couple of books on philosophy of investment, and observed zillion of nuggets of investment advice, apparently written by highly successful investors and/or advisors, on my social media timelines. Admittedly, all this was quite befuddling for me. Everything, I read or heard caused an overflow of conflicting thoughts and emotions. I spent the entire Republic Day holiday in extricating the entangled thoughts. I am not sure, if I attained any degree of success in my endeavour. Nonetheless, I understood the following very clearly–
(i) Like any other
Karma, the process of investing in financial products is personal to every
individual. No two individuals will have exactly same investment plan –
strategy, goals, process and outcome. The similarities between religion
(morality, ethics etc.) and investment end here.
(ii) Investment
advisory issued (free) to common public is mostly a redundant function,
inasmuch as it does not take into consideration the individual circumstances of
an investor.
(iii) Financial
investment is a tiny subset of the one’s overall life. The life path one sets
for himself does impact the investment plan. But vice versa may not be true. If
investment plan (strategy, goals, process and likely outcome) begins to drive
the life (cart before the horse), it is a huge problem.
Doctrine of Karma
Karma is perhaps the most popular word of Indian origin that has
been incorporated in global lexicon. This is despite the fact that the doctrine
of Karma is intrinsic to Indian belief system of rebirth and salvation and does
not fit the practice of Abrahamic religions (Islam, Christianity and Judaism)
and most other traditional religious belief system across Africa and Latin
America.
By most simplistic definition, Karma means Acts performed by a
living being. The doctrine of Karma says, insofar a living being is engaged in
the eternal cycle of rebirth, the condition of present and future lives is
determined by his/her Karma of past and present life.
While performance (or otherwise) of Karma is completely
individual, the common goal of all Karma, performed by all living beings is to
obtain release (salvation or Moksha) from this eternal cycle of rebirth. Each
one has to accumulate enough good Karma that will be sufficient to secure a
release from this cycle of rebirth.
The doctrine of Karma is thus motivation to live a moral &
ethical life. This also explains the pain, suffering and existence of evil.
Investment advisory
Investment advisory is function of formulating a financial plan
for a person or group of persons. This involves, evaluating the financial
conditions of a person, setting investment gaols, making an investment strategy
to achieve these goals, and assisting the person(s) in executing the plan.
Investment advice thus is very personal service. It is less
likely that an investment advice shall be equally relevant for two persons or
group of persons. It is therefore very important that while accepting a
“common” investment advice, one needs to be extremely careful. Let me explain
this by way of an example:
A “common” investment advice is that by investing in an Index
Fund (passive investment), one can earn a steady return over a much longer
period of time. Nifty has given CAGR of ~9% over past 30years. These 30yrs have
seen extreme volatility, many wars, multiple scams, global crisis, pandemic,
many droughts, extreme political instability (and stability), etc. Even in USD
terms, CAGR of Nifty over past 30yrs is close to 5%. This sounds very good.
Now consider the following:
(a) Nifty witnessed
18 corrections of over 10% in these 30years. These corrections ranged 10 to 60%
from the peak level before correction. (See the chart from latest CLSA report below)
If a person had the investment plan period of less than 30yrs,
there was a decent chance that he would have made much lower returns. For
example, If someone invested in Index ETF in April 1992 (Nifty 1281) and
redeemed his investment in September 2001 (Nifty 854), he would have lost over
30% on an nine year investment. Similarly, investment made in Nifty ETF in
January 2008 (Nifty 6279) would have yielded just 1.5% CAGR if redeemed in
March 2020, a good 12years later.
I appreciate that taking peak and bottom level of indices to
state my point may not be appropriate. But it does not change the point.
Investment in financial products is not like Karma. One wants to see the
outcome of investments over a finite period, usually not as long as 30years.
We do not invest in stocks, with the idea that the profits will
come, if not in this birth, may be in next birth; May be I would die before
enjoying the fruits of my investment, but my grandchildren will certainly enjoy
it. This may be an eventuality. But this is usually not the plan.
Therefore, while investing in an index fund, I must be mindful
that only that part of my investment should go in Nifty ETF which I would not
be forced to redeem in case of an emergency or contingency, especially if this
emergency happens to be a macroeconomic event that might cause a sharp
temporary fall in equity prices.
(b) One must realize
that protecting the savings from inflation is one of the primary goals of
financial investments. In past 30years (and even in past 10years), India’s
average consumer price inflation rate has been above 7%. Adjusted for this
Nifty 30yrs CAGR may be under 2%. Does not look glamorous by any imagination!
The short point is that “common” (free) investment advice might
be applying the doctrine of Karma to financial investment also. It may be
assuming equity investment to be a perpetual endeavour, lasting for
generations. Unfortunately, it is not the situation in most cases. People
usually invest in stocks for generating some additional income (dividend plus
capital gains) in foreseeable future. Their investment plan needs to be
prepared accordingly.
