By Uma Shashikant
Whenever the equity markets crash, voices that call for the
long-term view come back. There is an aura of nobility to longterm investing,
and many like to belong to that club. But it is not an easy thing to do.
Whatever is your view, if you find your investments losing value soon after you
have invested, you cannot help regret the wrong timing.
Since no one knows what is the bottom, and since only luck
can ensure you actually catch it, it is tough to invest in a falling market. So
what does it take to be a longterm investor?
First, long-term investing is more about ability than
willingness. You may have all the risk appetite that is needed, and the
fearless attitude to take chances with the market. But if your financial
position is such that you have to dip into the money you invested, even before
it can begin to perform, it is tough to be long-term oriented.
It is important that you have a regular and sufficient
income; are able to save consistently, indicating that you do not need all of
the income you make; and have enough assets to back you up if this round of
investments turn bad. You may like to take a long-term view, but you won't be
able to do it if your finances are shaky. Identify that portion of your income
that you can actually invest and forget about for the long-term. Be honest
about that decision.
Second, long-term investing is an attitude and a tough one
to develop. Many of us who have children like the notion that "they will
all be fine in the end," but we do doubt that conviction quite often. We
cannot magically become someone else when it comes to money. If we tend to be
secretive, suspicious, control-oriented and performancedriven, failure of our
investments will keep us anxious.
Even if we are otherwise positive and optimistic, we will
hate our inability to do anything when the market crashes and erodes the value
of what we have. We may dislike ourselves for the choices we made. We may allow
the regret of the loss to eat into our confidence. We need to truly believe in
positive long-term outcomes and not be eager to meddle too much, so we do not
fix what has not gone wrong.
Third, long-term investing requires a value orientation. The
dominant story in the Indian equity markets is about small businesses that grow
big and become multi-baggers. In an economy like ours there is always the
opportunity to solve a new problem, and do well enough so that a large amount
of wealth is created for promoters and investors.
Therefore, investing in growth stocks that show spectacular
potential, even if at higher prices, is a very preferred route to investing.
Fund managers are lauded for such "finds" that become big winners. It
is also the case that we love the run up in price of stocks, which makes
momentum investing a favourite. In all this noise of winners, the good stocks
that do well over the long-term are not big heroes. Long-term investing needs a
strong belief in value.
Fourth, selection is a key process in longterm investing. It
is not uncommon for investors to pick up something for a quick buck, and then
console themselves that over the long-term things would get better. IPO investors,
who began with a very shortterm view of selling off on listing, typically end
up holding the stock when it fails to list at a premium. I know of some
investors who are still in deep losses, in fond hope of recovery.
If you are holding junk, it is unlikely to become gold only
because you gave it time. What you hold has to be good, and you need to
consistently check that it remains good enough to hold on to. If you can select
good stocks, excellent; if not, you should be able to throw out what is not
working. To assume that long-term investing is about picking up a few stocks
and keeping them forever, is a mistaken notion. No one is entitled to riches by
simply sitting around!
Fifth, the long-term tests the best of notions. In the
1980s, banking was dominated by the public sector. No one expected the private
sector to have any role in a sensitive sector like banking. The task of taking
on the public sector seemed too tough. Thirty years later, the top performing
banks are all in the private sector. No one could have seen it coming.
The best names of the 1980s such as Century Textiles,
Hindustan Motors, GE Shipping and ACC are not the leaders or winners today. To
be a long-term investor, you need the humility to build a portfolio of stocks
with the understanding that some of your stories will not play out. Blind
bravado is the trait of an entrepreneur who invests in one stock, and slogs to
make it big. Investors, who take the easy route of just putting in the money,
need a portfolio to hedge.
Sixth, stories about how the indices moved up dramatically
over the years guise an important fact. The stocks in the index have been
replaced to ensure that only winners remained. In real-life investing, some of
the stocks you own will lose money, and you would not replace them in fond hope
of a revival.
The more losers you hold, the worse your performance. If you
do not have the ability to accept your mistakes and take corrective action, you
can be a long-term investor, but your portfolio may not do too well. It is not
easy to select a set of stocks, review them regularly, and take calls on what
is not working.
Mutual funds are the best bet for a simple long-term
investor, since the fund managers do all this for you. Investing into a
diversified equity fund, which has a mix of large and mid-cap equities, across
sectors, is a good route to long-term investing. Ensuring that a small amount
that you do not need immediately goes into such funds need no market timing.
How much of your money will be allocated for the long-term in a personal
decision, that critically depends on your income, your assets, your ..
