This is Why You Stay the Course

The past couple of months have seen a sharp recovery in the Indian markets and even more so for Marcellus’ portfolios driven by the return of FIIs (Foreign Institutional Investors) who have pumped in $5bn this financial year after selling north of $30bn over the previous 18 months. However, investors’ activity measured by flows into MFs and PMS prior to this recovery seem to be waning with net inflows slowing dramatically implying significant redemptions as well. It is the unfortunate feature of markets that investors enter and exit at just about the wrong times. Simply because it is hard to time them anyway. No one saw the foreign flows coming back so strongly in the past two months just as they didn’t see them exit in the preceding 18 months. For exactly this reason, staying the course is most important, brilliantly put by Ben Carlson in this blog:

“Call it recency or loss aversion or some other Daniel Kahneman bias but for some reason, our brains are hard-wired to assume big losses will be followed by additional losses (just like we assume big gains will be followed by additional gains).

The thing about big losses in the stock market is sometimes they are followed by big losses…but sometimes they’re followed by big gains.”

He then shows why our ability to predict one way or the other is so terrible, including and especially the so called experts. He shows how institutional brokers cut their estimates for S&P500 in 2023 after the weak 2022 to the extent the current rally has busted all but one estimate already, triggering these ‘experts’ to revise their targets upwards now.

“The point of this exercise is to prove how difficult it is to make predictions about the future, especially as it relates to short-term movements in the stock market.

When stocks fall, our emotions make us think they will fall even further. And when stock rise, our emotions make us believe they are going to rise even more.

This is why I’m such a big proponent of having an investment plan that you can stick with through a wide range of market and economic environments.

Staying the course means going against your own emotions at times.

Staying the course means thinking and acting for the long term even when it doesn’t feel right in the short-term.

Staying the course means preparing not predicting.

Staying the course means doing nothing when that’s what your plan calls for.

Unfortunately, doing nothing is hard work because markets are constantly tempting you to make changes to your portfolio.

There’s an old parable about a locksmith who had a tough time picking locks when he was just a lowly apprentice learning on the job. He would have to use all sorts of tools and it took him a long time to open doors when people locked themselves out of their cars or homes. But people saw him sweating it out and the effort was evident so they tipped him quite well.

But as he slowly but surely learned the tricks of the trade he was able to pick locks quicker which much less effort. The problem is his tips went down because he got people into their vehicles or houses much faster. He made it look too easy.

There is a good investing lesson in this story.

Intelligent investors realize effort is often inversely related to results in the market. Just because you do more or try harder doesn’t guarantee better results. In fact, doing more is more often than not damaging to your investment performance.

Doing less or doing nothing at all most of the time is the right way forward for the majority of investors.

This is why you stay the course.”

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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.