Will Russia's ruble troubles set off a big correction in the Indian stock market? Are falling global oil prices good for India and or bad news? What will it mean if the US Federal Reserve doesn't wait for a 'considerable time' before it hikes rates? Tune in to any business channel or newspaper now and you will find these questions hogging the headlines, with panels of experts busily debating these topics.
If these discussions make you conclude that you don't understand head or tail of equity investing; take heart. In the long run, all this may not matter at all.
Ignore the noise
In February this year, I interviewed one of India's top stock-pickers, K N Sivasubramanian (CIO Equities for Franklin Templeton India), just before he retired from a 20 year stint as a fund manager. What he said then could have well been tailor-made for today's markets.
"99 per cent of the information you get every day in the market is noise. If you look back at newspaper headlines over the last five years, how many of them have had any real impact on stocks over time?" Asked how Franklin India Bluechip Fund had managed to multiply investors' money 53 times in its 20-year history, he said that creating wealth in stock markets was more a matter of discipline than intelligence. It depended on your ability to ignore the noise.
So while 'global cues', macros and other events that bombard us every day create a lot of stress for investors, he said, they actually have no bearing on long term returns. The investors who created the most long term wealth were the ones who were able to ignore all this and stay focussed on selecting quality stocks (or funds) for their portfolio.
Remember Greece?
He is quite right. Only last year, everyone in the market was worried about Argentina and its problems with vulture funds. In 2010, Greece made Page One with its sovereign default. In 2009, Dubai defaulting on $59 billion of debt contracted by a large state-owned company hogged the airwaves and caused global jitters. But how many of us even recall these events now?
In retrospect, none of these events, which seemed cataclysmic at that time have really had a lasting impact on Indian companies. In fact, Indian investors who were brave enough to invest in equities during those episodes, would now have handsome returns to show for it.
Fundamentals Vs Sentiment
So does this mean that you ignore everything that is happening around you when you invest in equities? Not at all.
If you are a direct investor in stocks, you need to be able to sift between the events that really make a difference to the fundamentals and profits of the companies you invest in and those that don't. Trying to base your decisions on liquidity and sentiment can prove counter-productive.
To explain, the recent fall in crude oil prices does have the potential to reduce raw material costs and improve profit margins and earnings of a range of Indian companies in sectors such as paints, lubricants, FMCG and many others. If you can identify the stocks to gain the most from this development and bet on them, good for you.
But trying to predict what oil prices will do to FII flows over today or tomorrow isn't as straightforward, given the multitude of factors that affect them. Therefore, timing your investments to an up day or down day in the markets is a futile exercise. Five years later, what will matter is the stocks you bought and not whether you bought them five rupees cheaper!
Of course, even quantifying the impact of a development such as falling oil prices on individual companies is quite a difficult task. It will require you to devote time and effort to understanding global oil economics, company P&Ls, their cost structures and so on.
If you don't have the time to do this, equity funds (make sure you pick only the ones rated highly by our rankings) are your best bet. After all, if you were gung-ho about buying equity and were just waiting for a correction just two weeks ago, why should you now change your mind? After the recent correction, the chosen funds should look even more attractive to you than two weeks ago. Ignore the noise, buy those funds and create long-term wealth.
This article was originally published on December 19, 2014.
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