Earlier this week, on New Year's Day, many newspaper readers noticed Honda Scooters' full page advertisement that was headlined 'Happy 2009'. I assume that the advertisement was intended to draw attention by making readers think that this was an error. I certainly thought so, if only for a moment before I read the rest of the ad and saw that it was about some technology that Honda had introduced in 2009 and others were introducing only now.
Inspired by that ad, I've decided to headline this piece 'Investing Strategies for 2009', except that the point here is quite different from the kind that Honda was making--I could change the title to 'Investing Strategies for 2019' or 2025 or anything else and it would still say, essentially, the same thing. In fact, if there was to be an investing strategy that would fit only the events in one particular year, it would be pretty much useless. The reason is obvious--formulating such a strategy correctly would involve predicting the future. If we look back at the various New Year's Days since we began investing and think of what the coming year appeared to hold, it's quite clear that such predictions are effectively random.
In fact, this represents two completely opposite views of the basis on which investors should decide how to invest. One is based on predicting the future--you peer into 2019 and try and figure out what will happen. If you are right, you will make money and if you are wrong you will lose money. This does not work as there are always surprises. Some of the surprises are small and some are big, some are pleasant and some are unpleasant. Inevitably, sooner or later, there's a surprise that is both very big and very unpleasant.
By the predict-and-invest school of thought, if one accepts the inevitability of nasty surprises, then one should not be investing at all. But that's not all, even the good stuff is not predictable. Over the last quarter of a century, there are so many things that have transformed the Indian economy for the better and it's these things that are the ultimate source of returns for us investors. How much of this was forecast? In the late eighties, did anyone foresee the astonishing rise of the Indian software services? Was the rise in urban Indian living standards predicted by anyone? Was the coming drop in interest rates and the easy-money economy predictable in 1995? Was the resultant housing boom predictable? In 1996, when a cheap, basic mobile phone cost 20,000 of those days' rupees, did anyone make a correct prediction of how many mobile connections India would have in 2018? Was the near collapse of the global financial system in 2008 foreseen two years before that?
So how are we to invest then? As Nassim Nicholas Taleb (who is THE authority on the impact of big, unpleasant surprises), "...while there is a lot of uncertainty and opacity about the world, and an incompleteness of information and understanding, there is little, if any, uncertainty about what actions should be taken based on such an incompleteness..." Let's read that once again, carefully and slowly, for even though this sounds like a hard thing to do, it's actually quite simple at a long enough horizon.
So here's some thoroughly dull, boring, repetitive and useful advice. Savers should map their future financial needs along a time-scale. This is not difficult as major expenses tend to be predictable. All money that is likely to be needed less than five years in the future should be kept in fixed income investments. These could be government small-savings schemes or debt mutual funds. All investments intended for a longer period should be invested in a small (four or five, at most) number of diversified equity funds and balanced funds. These investments should obviously be made not in a fits and starts but gradually, using an SIP.
This was the right advice for 2009. More interestingly, it was also the right advice for 2007 or 2008 when the global financial meltdown was a part of the unpredicted future. It's also the correct advice for 2019 or 2029. That's one prediction that I'm reasonably confident about!