Don't try to second-guess the big events

The ferocity with which the stock markets have risen in response to the tax cuts is unprecedented. Whether these tax cuts have the desired impact on the economy remains to be seen, but those investors who had given up on the markets and moved out have surely been caught out badly. If nothing else, this shows that equity sentiment can turn very sharply, very rapidly and trying to keep up with it is a fool's errand. There were a lot of investors who had decided to 'sit out' the stagnant phase of the equity markets and had decided to invest again when the direction of equity prices changed. Well, on Friday morning they got perhaps two minutes warning, surely not enough to terminate their sitting out in the way they had hoped to.

Investing well and getting good returns requires a combination of skills of different kinds. Broadly, these can be broken up into figuring out which stocks or funds will do well on the one hand and figuring out broader, market-wide or economy-wide trends on the other. After years of observing the markets and investors, I have formed a firm belief that while the former is well within the capability of many investors-both amateur and professional-the latter is practically impossible to do on a sustained basis. The current episode that commenced with Ms Sitharaman's blockbuster may look like an exception but it's actually not.

What makes this important is that investors who do the first part right often lose money and give up gains by trying to do the second part. In theory, this boils down to choosing the right funds and then trying to redeem when you think the broad market is going to go down. On the way up, this means sitting with cash, waiting to invest till the last moment before the markets start rising. In practice, for most investors who try and do this, it means selling their funds after the markets have crashed and buying them back after they've shot up. The period starting last friday's press conference may have seen a particularly severe version of this cycle but actually this is a fairly routine event.

Interestingly, this is not limited to individual investors. Professional investment managers too make such mistakes with great regularity. The reason is simple, yet a little hard to accept. It isn't all that difficult to identify a good stock or fund, but predicting general ups and downs is complicated. In fact, it is arguable that general ups and downs are not predictable with any degree of useful certainty. More importantly, I've observed that there's no commonality between stock- or fund-picking skills and the skill of being able to figure out broad movements. Someone could be a great investment analyst but that doesn't say anything about his or her ability to pick out broader trends.

What this means is that as an investor, one should accept that its best to stay invested and keep investing at all times. Choose good funds, choose good companies and keep investing to get in at a good average price. Improving one's returns by timing the broad markets is an illusion and there is no point in trying to chase it.

Not just that, it's now doubly difficult because of this government. The Narendra Modi government seems like a special case here because of its propensity of taking bold actions and its ability to keep things secret till a time of its own choosing. All kinds of people, in our country as well as our next door neighbours, are finding this out the hard way--so don't make you investments more complicated by trying to second-guess what this government will do. Stick to the knitting, everything else will work out.