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The more things change...

With time many fads come and go, but sticking to the core principles of investing gets you the best results

The more things change...

Are you familiar with Michael Burry? If you have watched that great movie about the 2008 financial crisis, 'The Big Short', you must surely remember him. He was the crazy fund manager who foresaw the housing crash and made a huge amount of money shorting housing-market-based securities. In the movie, the Burry character was portrayed as not being the normal finance kind of person. He had a full drum set in his office and would play it as an accompaniment to the heavy metal music in his headphones. Apparently, this was not accurate - the real Michael Burry plays electric guitar in his office. The movie is available on Prime Video and you simply must watch it.

Because of his clear foresight about the 2008 crisis - as well as his distinctive character - Burry is something of a legend now. For some time now, he has been saying in no uncertain terms that globally, we are in the midst of a large asset bubble again. Of course, just because Burry was right about 2008 does not mean he is right now.

It's hard to disagree with the idea itself, except that just like 2008, and like every other time, it's an uneven bubble. There's no telling when it will pop or it will pop at all. However, now that more than a decade has gone past and we have seen all kinds of other crises come and go, one thing is clear - a crisis like this is not a violation of the fundamentals of investing, but an affirmation of those rules. When we were in the midst of the 2008 event, it felt like every investment, regardless of its real qualities, would sink forever. However, as the weeks and months and then years passed, we realised that everything had gone exactly as expected, as it should have.

Those who had held on to high-quality, fundamentally sound investments that had been bought at reasonable value had come through fine. Those who had chased questionable investments simply because they had momentum and they were part of some fad or the other had their investments wiped out. I do mean really wiped out. Remember the fever around stocks like Reliance Infra? And yet those who had bought, for example, something like HDFC Bank and accumulated it through the years came through just fine. Michael Burry's premonition of disaster in 2007 was relevant, but not that relevant for people who had invested by following the old and inviolate rules.

Are things any different now? Of course not, although the madness in some parts of the financial universe does feel completely insane. For example, when you look at the madness around cryptocurrencies, which are essentially worth zero, you might suspect that the rules have been suspended but trust me, they haven't.

To be fair, it's hard to resist the mood of the day and stay aloof from whatever feverish momentum is building up. Nor is it necessarily a disastrous idea to use momentum to make some money. After all, that's what we are all here for. However, what is necessary is to understand what is real investing and what is momentum chasing. Not just that, even momentum chasing also has to be done with continuous self-awareness. I've seen many investors have a bad time chasing the fads of the day only because at some point they started believing in the nonsense that was being spouted by those pushing those stocks.

They would have done better if they had operated with complete cynicism and constantly told themselves that the stock made no sense and that they would quit after they made X amount of money or lost Y amount of money. Of course, it does not have to be that bad - you don't actually have to invest in what were called SMS stocks and are now called WhatsApp stocks. There can be some method, some logic, some element of quality to such investments too. One variation of the idea is actually built into our Value Research Stock Advisor service. You can read about it on valueresearchstocks.com.

It's now been 15 years since the first issue of 'Wealth Insight'. We've seen not just 2008 but many large and small crises, not the least being China's virus. The one enduring lesson of these years has been that things may look abnormal, but they actually never are.

This editorial appeared in Wealth Insight July 2021 issue. To read the cover story and other insightful analyses, columns and articles

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