Markets

Learnings from Samvat 2074: Go passive on equity, think long term

By Nikhil Kamath

Diwali brings in festivities and an opportunity to look back and pick up the learnings for the Samvat year gone by. With most market voices generally over-emphasizing downtrends and underplaying uptrends, we live in an environment where a 10 per cent correction in something that has gone up 50 per cent begins to sound like the world is coming to an end.

Retail participants are generally long on the market, and do it always by being leveraged. Even a little volatility on either direction generally forces them to close their positions, even if they may have called the medium-term trend correctly.

Its impossible to call an extremely short-term trend at play, and retail participants would do best to avoid the derivative market altogether and opt for medium-term bets with enough margins in place to absorb short-term volatility.

The problem is inherent, with retail users entering the market with expectations far exceeding reality. A 15 per cent return compounded over five years could substantially increase wealth, but most first-time entrants look to double money quickly by using leverage. Leverage is not a prudent way to approach a market like ours, with so much inherent volatility.

On hindsight, the Indian stock market has grossly outperformed over the past two decade, giving over 16 per cent annual compounded returns. An investor, who could employ a passive strategy, control any additional costs that are not essential and stay put would have generated considerable wealth relative to a bank fixed deposit or any other asset class available.

On this festive occasion, we would like to advise new entrants in the market to pick blue-chip stocks in industries they understand and are bullish on, with at least a five-year investment horizon. Globally, passive investing has mostly outperformed active fund managers and advisers, where the costs add up with time, making a dent on overall performance.

The biggest point here is to come to terms with the fact that no one can accurately predict what will happen tomorrow. So the most cost-efficient way of approaching tomorrow would be the most prudent strategy to follow.

Sectors and companies trading at crazy price multiples might not continue to do so forever; stay cautious while entering the sectors that are the fad today.

(Nikhil Kamath is Co- Founder of Zerodha. Views are his own. Investors are advised to consult their financial advisers before taking any investment decision based on the observations made in this writeup.)

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