Electing a bright future

The dance of democracy is in all its glory. Political parties of all stripes have spread far and wide to campaign. Even the corners of India, where life barely stirs for extended periods, are now blazing with ambition and heat. This is how elections happen: the heat of political discourse often gets hotter than the heat of the peak summer sun. But beneath the rhetoric of a politician is an overworked mind, constantly second-guessing its every move to impress its electorate. Second-guessing comes in various guises. Come to think of it, elections and stock markets are not too dissimilar. Uncertainty unites both, and both can be prisoners of the moment. Just like during elections, prices in the stock market are often dictated by the collective consciousness of investors. News, earnings reports and even rumours can decide the fate of a stock, regardless of the company's fundamentals. Since elections worldwide have the same beats, Benjamin Graham, hailed as the father of value investing, once remarked: "In the short run, the (stock) market is a voting machine." It aptly described how investors and voters make their choices partly on reason and greatly on emotion over a short period of time. Over the long term, the market is a weighing machine Divining the market's near-term movements is devilishly difficult. One day, it is scaling new peaks; the next day, it is a sea of red. This is where we need to act like a weighing machine. Just as voters weigh a candidate that matches their long-term vision for the country and not based on individual charisma, caste or creed, investors need to play the long game in the market. Over longer periods, the odds move in your favour. If you look at the last 45 years of Sensex - a proxy for the Indian stock market - the chances of losing money over five years is a mere 7 per cent and a lousy 1 per cent over a decade. In other words, there is only a one in a 100 chance you'd have lost money if you trusted the Sensex for a decade. Even better, there is a 76 per cent chance - more than three out of four times - you'd earn double-digit returns over 10 years. In sharp contrast, there's a whopping 41 per cent chance of losing money if invested for just a month. So, what makes markets tick in the long run? Simply put, profits and massive infusion of investor's money. As long as companies' profits grow collectively, so will the market. In the past, market downturns in India were often triggered by foreign capital flight. Today, the balance of power has shifted. Domestic money is quickly proving to be a bulwark against market instability. We are now witnessing steadfast, long-term capital infusion, notably from domestic giants such as the NPS (National Pension Scheme) and EPFO (Employees' Provident Fund Organisation). The NPS has been putting money in the top 200 companies, while the EPFO has been steadily investing in equities since 2015-16 through Nifty and Sensex ETFs (exchange-traded funds). This money is in the market for the long haul. Crashes and hiccups don't matter to them, making the market less reliant on foreign money. Moreover, retail investments - monthly SIP (systematic investment plan) inflows are nearing the Rs 20,000 crore m

This article was originally published on April 15, 2024.