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Danger, Analyst!

Experts may well have damaged the fortunes of small investors

For a very long time now, the generally-held consensus view on where the investments markets were going has been wrong. Not just wrong, but spectacularly wrong. Through the crash of last year and the revival of the last few weeks, everything has been a surprise to professionals who try to figure out where the markets are about to go to. This has been specially damaging to the small investor who tries to time his investments in equities and mutual funds according to what he sees and hears, rather than follow time-tested principles of continuous and steady investments.

The general election results look all set to perpetuate this pattern. I have lost count of the number of people who were waiting for a ‘post-election dip’ to buy into stocks or put in their mutual funds investments. It’s an old cliché that this kind of market timing doesn’t work, and like most clichés, it is true. External events affect markets regularly and severely and they are not predictable.

This election has proven it so strongly that I hope they will convert a new crop of market-timers to the ranks of steady mutual fund investors.

A whole lot of investors seemed to have convinced themselves that these elections were so pre-ordained that it was hardly worth the trouble of holding them. However, like almost every externality that has impacted the investment markets in the last few years, this election has proven to be a shock. Not just investors, even politicians were shocked. No matter what they claim now, till Friday evening all political parties, including the Congress, were preparing for five more years of roughly the same situation as had been thrown up by the 2004 election.

Now, an astounding rally has been foretold. Within hours of election results being revealed, I was hearing magical Sensex numbers like 18,000 and 22,000 in investment managers’ predictions in the months to come. It seems that at 9:55 a.m. on Monday morning, a new golden age was about to dawn in this country. Now, I’m as eager for golden ages as the next Indian, but I wouldn’t think it wise to plan one’s investments around it. I’ve said this in bad times and I’m saying it in good, for an individual mutual fund investor, the only thing that makes sense is to figure out a way of investing that is independent of downward surprises like the global financial crisis as well as upward surprises like these elections. In the short-term, the world is not a predictable place and it’s counter-productive to try and invest as if it is.

A few weeks ago I wrote that the widely announced death of investing principles had turned out to be heavily exaggerated. With this election result, the fact has been underscored even more heavily. As stock prices have recovered, long-running systematic investment plans (SIPs) have again returned to positive territory. I have no doubt that this trend will continue.

However, as we go forward into the new government’s five-year term, there will be successes as well as failures. Just like in the past, investment markets will make moves up as well as down. Given that the global recession is still in full spate, some of the down moves could be quite severe. If you are still one of those who are trying to read either tea leaves or headlines, do yourself a favour. From now on, ignore what’s happening and just invest regularly.