WHO IS CAPABLE OF SHORT TERM ENDURANCE?
The market is full of people who are always asking you to commit to the long term. Whether it is the Amfi-sponsored jingle (Mutual fund sahi hai) or quotes of Warren Buffet or lip service by ‘knowledgable ‘investors, everyone is advising you to stick to a long term outlook if you want to succeed in the market.
Granted, it is good advice. Time is a fantastic tool to have on your side. This is why they also ask you to start early in a career in investing, so that you can bring to play the power of compounding. Everything sounds fine and logical and there are of course those few role models to flash (and they are really a few), like movie stars, that we are supposed to look at and get inspired. But just as we seldom get inspired by Shar Rukh asking us to shop at Natures basket, wanting us to believe that he personally goes there and selects the vegetables and lentils that he eats daily, we also don’t get inspired by photos or quotes of WB!
Why is this? After all, SRK or WB are successful icons of their line of work, people who have done something right (and continue to do so) in their line of work. So there is no reason why we should not get inspired by them. Or their standins line Ranveer Singh or Virat Kohli or some such. The main reason, according to me, is that while planning and thinking about long term periods of 5 and 10 years is fine, it is the difficulty of living thru those 5 or 10 years that is the real problem.
Morgan Housel writes:
It’s wrong – dangerous – to assume that because you have a long time horizon you can ignore the short run. If you ignore something, you’re unprepared for it. And when you’re unprepared for it it will eventually take advantage of you. The beauty of a long time horizon is capturing a compounding effect that others who quit before you forgo. But that only works when you’re keenly aware of, and prepared for, and managing for, the kind of short-term stuff that people with shorter time horizons don’t want to deal with.
The real problem therefore is lack of preparation. The real problem is the sense of complacence that the long term will always work in your favor. The real problem is believing that you have the capability of withstanding the gyrations of the short term.
2017 was a year of FOMO- the fear of missing out. Lack of meaningful correction lulled most people into a sense of complacence too- a feeling that the market is on a permanent roll. Everyone looked at the US market for validation and how the trend there has been rolling along for a decade or more now and began extrapolating that here. As a result, everyone rushed into buy in early 2018 when markets pulled back. But then, the ‘pullback ‘ has kept going and has now taken a heavy toll on those who invested late in the cycle! Now for some, even looking at stock prices seems painful.
This is then the real deal- the ability to withstand the gyrations of the short term. When the ‘short term ‘seems to keep extending, what do you do? For example, now we are ten months into the declining phase. Does one exit? Does one reduce the positions? Should one put in more money?Will market go lower? Can it make a bottom here? Many may have a long term focus- but who can be immune to these questions? Problem also is that no one has answers to these questions and all of us have to decide for ourselves. Difficulty is also that the long term has to be lived thru a series of short terms. Have we learnt how to do that? Not really. Is there a way to do that? Actually there is- and it is called technical analysis. But do people see technical analysis from such an angle? Unfortunately not. Most people perceive it as something to be used for trading. But what it really does is address the trends in any time frame of your choice. No other form of analysis can address that.
TA, when used in the correct manner can tell you how the present is unfolding. And if we structure that well, we can create a context that will also tell you how the expected future (which you used to create your investments) is playing out. It tells you whether your expectations are going to unfold in the way you visualized or in some other manner. You can then plan how you would like to proceed. Merely hoping for the best is not a strategy- it is laziness, it is foolhardiness. A stock may be a good one but if it undergoes 20-30% erosion, it IS going to impact your portfolio. Except for a few people,, that kind of erosion is meaningful. The other problem is how much more time it would take for a recovery to occur. This means that a plan made for a payback in a year actually extends to two or three years. Returns, then, go for a toss.
The biggest worry for a fund manager is the redemptions that hit the fund when it is under pressure. Even if the FM has a a long term vision, it is difficult to mollify anxious investors who cannot endure the current pressures of the market. Something along those lines is happening currently. FIIs are pulling out money on reasons that are other than related to earnings of companies. But the downdraft that has been created is causing a different pressure on investors. Learning endurance of the short term is the biggest education that an investor needs to acquire. TA is best suited for this. Care has to be taken to learn it from a proper teacher- those that can impart this aspect of TA rather than those hyping the trading aspect of TA.