Think again!

The holy grail of stock market investing has always been the futile attempt to predict the market—its direction, its magnitude, its mood swings. Yet, as countless studies show, trying to do this has roughly the same odds as calling a coin toss. Or, as Bollywood legend Don might put it: “Don ko pakadna mushkil hi nahin, namumkin hai.”

Unfortunately for those of us who took Amitabh Bachchan (or Shah Rukh Khan, depending on your vintage) at his word, Don eventually was caught. So, difficult? Yes. Impossible? No. But predicting the markets? That’s still in the “impossible” bucket. So much for putting faith in heroes—be they from markets or movies.

Markets can’t be predicted. But behaviour can.

What we can do, however, is observe how people react to markets, or rather what peoples’ behaviour and reaction to markets suggest, and that is a good hint to what markets are doing and can potentially do. Why talk of “other” people? I am also part of the “others”, and my own reactions to markets tell me a lot about where markets are and where they could be headed. Not “them,” but us. Because we are those very “others” that Warren Buffett referred to when he said: “Be greedy when others are fearful, and fearful when others are greedy.”

Most people focus on the words greedy and fearful. But the most important word is “others”, and the lynchpin of stock market investing success is to avoid being part of the “others”.

Enter metathinking

Humans, it seems, have this one distinct advantage over animals. The advantage of “metathinking”. Metathinking, or thinking about thinking, can be a powerful tool for understanding one’s own thought processes and reactions to market movements. By doing so, investors can identify patterns in their behaviour and make strategic decisions based on these insights.

For example, if you find yourself panicking during every market dip, metathinking allows you to recognise that pattern and build safeguards. You could diversify better or set pre-decided rules for buying and selling to take emotion out of the equation. Emotions—greed, fear, envy—cloud judgement, especially at extremes. So it’s useful to know your emotional trigger points. Ask yourself: what level of loss or gain causes discomfort or overconfidence? Once you’ve identified that threshold, avoid allocating in a way that brings you close to those emotional limits. That’s metathinking in action.

An investor can draw inferences on markets, market levels and possible future direction by thinking about how they thought and felt about markets at different junctures in the past.

The 2013 lesson that stuck

I have worked with renowned people, and observing my then-boss in 2013 taught me valuable lessons in metathinking and markets. In August 2013, the Nifty was around 5,300 levels, with the taper tantrum, the India Against Corruption movement, the fragile five labelling of the Indian economy, the rupee hitting Rs 69 to the USD, and so on. For reference, the Nifty was around 6,700 levels in January 2008, and the rupee was around Rs 63 to USD even in 2018. And here we were in 2013; Nifty was over 1000 points lower after five and a half years passed and Rs 6 lower to the USD than what it would be even five years hence!

Amidst this depressing environment, on the way back from a meeting, my boss told me, “Aashish, I think markets are close to the bottom”. I was perplexed, and I asked him what made him think so, considering the world, at least as it applied to Indian markets and, in my limited wisdom, was falling apart. His reply was, “Because now even I am getting fearful”.

Those who track markets know what happened after this. Markets bottomed around that level, and with a new, highly credentialed RBI governor, Dr Rajan, at the helm, the announcement of the BJP’s prime ministerial candidate, Mr Modi, and the subsequent win of the NDA with high expectations – markets rallied almost non-stop all the way to 8,900 by March 2015. My boss did not seem to make a raw prediction about the markets; his own reaction and what he saw around people’s reactions told him the market was getting too pessimistic and couldn’t last that way for long. A classic example of metathinking.

Don’t go all in. Think in continuums.

Returning to the point above, it is essential to calibrate investments by considering your own emotions and observing the reactions of those around you, as well as the flow of funds into markets. Also, watching markets as a continuum and calibrating the pace of investing as well as asset allocation all along that continuum could be more useful than looking for extreme points of the markets and making binary decisions of 100 per cent invested or 100 per cent cash position in or out of any asset class of your asset allocation construct. Balanced advantage funds, multi-asset funds, and equity savings funds are categories which calibrate equity investment and see various market levels and valuations in a continuum. Doing so is a good modus operandi to execute this.

Avoiding lumpsum investment altogether, except for extreme “blood-on-the-street” panic situations to be taken advantage of, could also be a great tool because the best of intentions and investment plans come under question if one witnesses a significant depreciation of anything more than 10 per cent from the point of entry. Even the longest of long-term investors would prefer markets moving up after they enter, just as you would like the train to whistle and move onward the moment your luggage is stacked and you take your seat by the window!

Investing in liquid funds or ultra-short-term funds with entry smoothed over a 3, 6, or even 12-month period amidst uncertain circumstances will help one ensure their boat enters the waters with the least turbulence and enables them to stay put, enjoying the sights. After all, we can’t trust a person to be calm and composed once we have seen their anger or emotions under duress.

Avoiding market predictions and deterministic thinking, preferring investments that smoothen your investment journey by calibrating allocations, avoiding exposing oneself to extremities of markets that call emotions into question, always ensuring a smooth entry and consistently thinking about your thinking, will help you form a lasting relationship with your investments. A precursor to lasting success in investing.

Aashish P Somaiyaa spearheads WhiteOak Capital Asset Management Limited as their CEO.

Also read: Embracing uncertainty