The Indian Election verdict

The electoral verdict and the markets

Indian stock markets exhibited over the past couple of days a flavour of what markets do at times. Hugely up on a single day, crash on the next. What led the market up was not fundamental to corporate earnings in any way: Exit polls predicting a landslide victory for the ruling party. What led the markets to crash on a single day was also not fundamental in any way to corporate earnings: The reality that this was not an absolute majority as predicted. The gyrations in the market were led by expectations and not much else. Brings back to mind the sentence that it is not the reality itself that is important but the perception of the same.

While the market allowed itself to generate optimism of a greatly enhanced government coming back to power, it showed its disappointment at not delivering the same a day later. It is very important to note the following:

1. Short term volatility caused by events are just what they are: Short term. Longer term wealth is generated by companies that generate robust earnings over periods of time. Stock markets over time are a slave to earnings.

2. Investors are human beings given to emotions and do not act with rationality and price the market depending on their mood. Thankfully their mood keeps changing perpetually. One should invest for the long term based on data and conviction and not rely on mood and emotion

3. An astute investor instead of being afraid of these gyrations will make use of them and buy when others are fearful and sell when others are euphoric.

Sadly, there is a minuscule minority that applies point no. 3. Because, point no. 2 is more the norm for all market participants. Very few investors are able to make the distinction and are given to their emotions and act on them.

So rather than discuss the event (since these will continue to happen in an investors life) it is pertinent to discuss the purpose of equity investing and the character required to generate wealth in the same.

Indian equity investors should realise that they are on the cusp of unprecedented growth in the economy in the next decade and that a long term approach with reasonable return expectation over this time is required. And this will be in the face of intermittent volatility regardless of cause in the interim over this period.

Focus on the long term

This is the only message we have for this week and emphasise the need to know one’s own emotions, guard against acting on the same and choose a method of keeping a clear head when all around us are losing theirs.