Equity Investors: Three Learnings

“Buyer beware” is biggest fear echoing in the minds of equity investors. Based on an in-depth research on equity as an asset class, for individuals with a long-time horizon, stocks may be the least-risky asset of all. They deliver better returns and long-term capital gains tax is nil. Over 10 to 20 years, stocks/equity are a better choice versus most investment avenues. Last year, a Morgan Stanley report on Indian investments stated that equity delivered the best returns over various time periods. Over a 20-year period, equities returned 12.9%, gold – 8.4%, bank fixed deposits – 5.5% and property – 6.2%.
So if you’re a long term investor, stocks actually may be the least-risky asset of all, even though it’s contrary to common sense. Let numbers do the talking, check out India’s stock market. On January 1, 1990, the Sensex closed at 783.35. On Jan 2016, it closed at 26,160.90. Over this span of time, the stock market would have witnessed the most hostile volatility: Persian Gulf crisis (1990), Harshad Mehta scam and global recession (1992), Asian financial crisis (1997), dotcom meltdown (2000), the India-Pakistan stand-off that brought both sides close to war and the Ketan Parikh scam (2001), the 9/11 terrorist attacks on the Twin Towers in New York (2001), war in Iraq (2003), the political uncertainty in 2004 which saw the Sensex slip from 5,400 (May 13) to about 4,500 in four days, and the weak macroeconomic fundamentals that instilled fear even in the most religious equity investors (2013).
Over these decades, the volatility would have been tremendous. But over these 26 years, investors who held on would be sitting on a nice pile of wealth. An investor who invested in the Sensex on January 1, 1990 would have made an absolute return of over 3,000% which is around 15% annualised return. Let’s not forget that top equity mutual funds have beaten the index by a decent margin.
One of the keys to being a successful equity investor is not to flee when the journey gets rough. Psychology plays a very significant role in investing behaviour, Investors feel the pain of a loss of investment twice as much as they feel the pleasure of the gain. This is the reason they exit from equity the moment the ride gets choppy, ironically that’s the best time to invest more. Instead of riding through the storm, they opt out with losses. This is detrimental to an investor’s portfolio and a prime cause for disenchantment with equity. Later, they blame equity for their losses.
A smart investor must have the ability to suffer through periods of bad performance. For instance, if the manager of an equity fund sticks consistently to his investment style, there would be periods when his portfolio is terribly out of favour relative to the forces that are driving the market at the time. You will be able to stay the course if you have the “ability to suffer”. And you can have that only if you invest for the long haul and have a strong thesis as to why you have invested in that fund in the first place.
Do remember, a significant portion of risk in equity comes from the behaviour of investors. So guard against that.
To conclude, three learnings for an equity investor are.
1. Over the long term, equity is not risky as risk gets mitigated.
2. Short-term volatility in equities does exist, don’t have a negative long term outlook.
3. When the market falls, the losses are just paper losses that will not materialize unless the investor sells.