Chasing the market's tail

If you stand at the bus stop long enough, you'll get a bus. But if you keep running from bus stop to bus stop, you may never get a bus.

That's something Howard Marks wrote about equity investing, and he could have been writing about what is happening in India now, even though he wasn't. Howard Marks has been a successful fund manager who is also known as a good writer about investing. His writing is mostly in the form of well-known memos on investing that he sends out. No less than Warren Buffett has said that when a memo from Marks arrives, he drops everything to read it.

This quote is from the latest memo he wrote, 'I Beg to Differ', released last month. Since Marks is a fund manager, his memos are more relevant to equity investors than Buffett's far more famous shareholder letters. The current memo is almost entirely about the twin follies of investors paying too much attention to macro events and being too focused on short-term investing and not enough on the longer term.

As for the irrelevance of macro events, Marks has this pithy comment in his memo, "When asked whether we're heading toward a recession, my usual answer is that whenever we're not in a recession, we're heading toward one. The question is when." This is not just a witty, throw-away line. It's a more astute and useful comment than it looks at first reading. Marks is saying that there is no point in determining if negative events will happen.

Here in India, I can say with complete confidence that within our investing lifetime, we will see periods of great economic crises, recessions, high inflation, high-interest rates, general loss of business confidence and great market crashes. Remember those days in early 2008 when even the large-cap indexes were hitting downward circuit breakers? Those days will come again, no doubt about it. However, Marks says, "The possibility - or even the fact - that a negative event lies ahead isn't a reason to reduce risk; investors should only do so if the event lies ahead and it isn't appropriately reflected in asset prices."

The central problem in stock investing is not making economic predictions but identifying good companies. None of these macro threats in the future is under your control. What the RBI or the Fed does to interest rates or what calamity befalls in some geopolitical arena is outside your ambit. Common sense dictates that investors should focus more on what they can control. You have control over when you invest, what you invest in, and what price you invest. You can control whether you invest it in great excitement in some bubble or whether you invest systematically and gradually. You also have complete control over the money you are going to invest. You also - hopefully - have a realistic idea of your own financial needs and capabilities. Those are the things to focus on.

At this point, many investors in India are in the mood to rush from bus stop to bus stop, as Marks puts it. Something different is always in favour or out of favour. Large caps, mid caps, this sector, then that sector, something or the other is always at the top of the charts. The nature of this bus stop chase means investors always rush to whichever bus stop the bus last stopped at. However, given the nature of the markets and the principle of reversion to mean, this always gives worse results. If you stay at the same bus stop and wait patiently - meaning have an investment plan and stick to it - then the chances of catching the bus are much higher.