Monday, February 11, 2019

My Assumptions about Equity Investing

From 1991 to till 2018, there have been three major corrections in the Indian Stock Market. 

The first one was caused by the Harshad Mehta Scam of 1992, the second one was the Dotcom bust of 2000 and the third one was the major correction in 2008.

Each of these scams shaved off huge amounts of investor wealth. A number of investors were driven out of the market due to these brutal corrections, never to return again. These people have become strong votaries of Bank Fixed Deposits, despite their tax implications and the vagaries of inflation. 'I still have my capital in my bank account' is their constant refrain. 

I am currently reading the book 'Four Pillars of Investing'. It is an amazing book, which should be in the reading list of any person who wants to invest their money. In this book  the author, William J Bernstein discusses the real losses that accrued to people during the multi year corrections in the stock market. The losses have been stomach churning. In the 1929 correction people lost upward of 80% of their wealth.

If you are planning an ‘all equity retirement strategy’, when markets fall, you are hit with a double whammy. One is that you have to withdraw more of your savings to maintain same level of expenses and two, you will have less savings to recoup your losses during the eventual reversal. That made me scared.

In the last one year, my portfolio has seen a loss of about 20 - 30%. But still I continue to remain invested in the stock market. What am I thinking?

What are the assumptions that I am making while I remain invested in the market.? Here are a few.

  • Global Growth Assumption: Global economy is poised to enter a long-term growth phase.
  • India Growth Assumption: I believe that Indian economy is poised for a major leap and Indian stock market is poised for a multi year bull run in the next five years. 
  • 'Mother of all bull runs' Assumption: Every expert and his mother in law on TV talks about how India is on the cusp of MOABR. Wild projections of Sensex and Stoke dote the landscape wherever you look. You can't afford not to be a part of this. What if it doesn't happen? I feel India is in the middle of a bull market, not as wild though.
  • Quick Recovery's Assumption:  Stock markets might fall, but they will recover quickly.
  • Sufficiency Assumption:  I have sufficient savings in equity market for my retirement planning. I will be able to fund my son's higher studies, if he requires funding.
  • Risk Tolerance Assumption: I believe that I have a higher risk appetite and can withstand losses much better than others. I will not freak out with a huge fall in the market. I will not make any hasty moves like abandoning the market or make 'Tracking Error' decisions like exiting the under performing asset classes and buying into over performing asset classes. 
  • Positivity Assumption: I am an eternal optimist and believe that there will not be a major correction any time soon. Even if there is correction, I will be able to tide over that.
  • Smart Guy Assumption: I am smart and intelligent and learn quickly from my mistakes and from other people's mistakes. Mistakes is what others make. I have enough intellect not take any unnecessary risks.
  • Knowledge Assumption: With an MBA in finance and with years of investing experience, I believe that I know all that is there to know about equity investing. I know how to anticipate the downturn of an industry, I know how to identify if the correction in stock price is temporary or permanent and take decisions accordingly. I also know my limitations.
  • Decision Maker Assumption: I am a decision maker and make unemotional and objective decisions based on available facts. I do not fall in love with my stocks (HUL, you didn't read this...). When data asks me to sell, I sell.
  • Market Timer Assumption: I will be able to exit the market at or near the peak of a bull run and move bulk of my investment into bonds
  • Satisfaction Threshold Assumption: I will be satisfied if I get X times return on my investment and X is an achievable goal. 
  • Tax handling assumption: I am ok to handle tax complexity inherent in the investment operations. 
Backed with these assumptions, I am making some real life choices. If any of these assumptions prove to be wrong, I will be devastated.

What are the investment assumptions that you are making?

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