Recently, while rereading parts of Nassim Nicholas Taleb's first book, Fooled by Randomness, I came across his assertion that the public perception of the state of the investment markets is driven more by the media (now social media too) than by actual data. He pointed out that in the months following the 9/11 attacks, there was a great deal of coverage and public conversation about the extremely volatile state of the equity markets. And yet, the 18 months following 9/11 actually had lower volatility than the 18 months preceding it. One can't say that 9/11 reduced volatility because 'correlation does not imply causation', but it certainly didn't cause it either. There's no substitute to actual measuring things.
I won't comment (yet) about what's happening in the stock markets currently, but about the general lack of awareness that many investors have about their own investments. I'm reminded of an acquaintance who told some years ago that a couple of real estate investments he had made had done much better than his stock investments ever had. Around 1990, he bought two plots of land in Gurgaon, still an industrial township on the road from Delhi to Jaipur, for a total of Rs three lakh. About two decades later, when the real estate sector was in one of its frequent deep panics, he sold off both for Rs 67 lakh. By his own account, this was a distress sale. Nonetheless, he considered this to be a great investment, having turned his 3 lakh into 67. He says that in sharp contrast, he had dabbled in a lot of stocks over the years and only some of them did well. He had invested various sums of money ranging from 1 to five lakh at various times and taken out different sums of money, some to invest again and some to use for other purposes. Some of these investments made very good gains, other turned out kind of okay and still others were losses. When he started narrating this story to me, his strong impression was that his real estate investments did very well but the stock investments were by and large a disappointment.
After irritating my friend with far too many probing questions, and uploading the data into the Portfolio Manager on Value Research Online, I calculated that he had earned returns of 18 per cent per annum on his stock investments and about the same on his real estate investments. Of course, the two investments had vastly different time horizons, liquidity and manageability characteristics so they're not interchangeable, but similar rates of return came as a shock to my friend.
The moral of the story is that you can't manage what you don't measure. With our investments, we do measure, but just the bare minimum. We know how much we put in and (sometimes) we know how much things are worth. When we sell investments, we obviously come to know how much we have earned out of them, but that's about all. The most crucial thing - the ability to know how well an investment is doing in a way that makes it comparable to other investments is unknown to most investors.
Unless we can measure the returns that our investments are giving us, in a form that make them comparable between different investments, it isn't possible to know what is a better investment and what is not. Such measurements and analyses are not difficult. The basic rates of returns need a spreadsheet and for detailed portfolio analyses there's ValueResearchOnline.com. There's no excuse for allowing the fog of numbers to prevent you from knowing what is really going on with you investments.