Points to Ponder. Athmanirbhar Investor?

Covid and China seem to have brought the importance of self reliance into focus and the buzzword right now is Athmanirbhar. When it comes to investing, an increasing number of retail investors seem to have imbibed the spirit of self reliance, a sort of do-it-yourself attitude. And this has come about at a time when net inflows into equity mutual funds have slipped 95% in June from the previous month. Equity schemes saw a net inflow of only Rs 240 crore in June through the lump sum route. It’s the lowest monthly inflow in the last four years.

On the other hand, a record number of demat accounts were opened during the lockdown. More than 1.2 million demat accounts were opened in March and April 2020. This is a record jump considering that 4.2 million new demat accounts were opened in the 11 months between April 2019 and February 2020. Retail participation has risen to 72% of the total cash market turnover in July (till 20^th July 20). This level is the highest since 2005.

Being self-reliant and choosing to invest directly in equities isn’t bad at all. But even the best of investors concede that they haven’t got the full measure of the beast (aka stock markets). So Before anyone takes the plunge in the market, it is absolutely necessary to realise that there is no substitute for homework, the ability to know one’s own biases and control emotions. If the entry into equity markets is prompted by the “free time” and the gap in income due to lockdown, then the ‘investor’ has to think again. If one goes by past data, nearly 90% of new traders don’t make it to their second year. These new batch of traders always loose out to the professionals in the end. So a new investor needs to constantly update his knowledge of the markets and has to have exceptional patience even in the face of gut wrenching volatility. The speed and depth of the fall in share prices that took place in March this year and the sharp recovery that has taken place thereafter would have left very few, except the cautious and patient, investors unscathed. The following table which covers market crashes since the construction of Sensex, would hopefully provide some perspective

An important take-away from the above table is the fact that the duration of recovery, that is time taken to surpass the previous peak is far longer than that of the fall. Hence to create wealth, the investor has to spend time with his investments. Longer the time spent, the greater could be the wealth generated. It is worthwhile to recall the famous Fidelity study. The fund did an internal review to figure out which type of investors received the best returns between 2003 and 2013. The audit revealed that the best investors were either dead or inactive!

Take the case of Mirae Emerging Bluechip Fund which has just completed 10 year track record. The fund has raked in an impressive first decadal performance, logging in gains of 18% CAGR, almost twice as good as the benchmark index. In an era where ‘Alpha’ (outperformance) is shrinking faster than ever before, it is indeed a splendid performance.

Unfortunately, there aren’t a lot of investors the fund can share this joy with. Of the total number of investors on its roster today, only 0.1% of them have stayed put in the firm in its entire 10-year journey. Put differently, a whopping 99.9% haven’t earned these mouth-watering returns.

Worth repeating Benjamin Graham, who in his introduction to “Intelligent Investor”, observed:

We have seen much more money made and kept by “ordinary people” who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had an extensive knowledge of finance, accounting, and stock market lore.

But if you are one of those restless souls, who loves buying and selling in the market, it may be may be a good idea to put in place a discipline that ensures that you buy low and sell high. You could do this by arriving at a fixed allocation, in synch with your risk profile, between equities and bonds. Let us say, you decide on an allocation of 50:50 and keep rebalancing it at predetermined intervals of time. Now if the stock market goes up and the  allocation ratio becomes 60:40 in favour of equities, you move money out of stocks and put it into bonds. And if the stock market goes down and ratio becomes 40:60 in favour of bonds, you can take money out of bonds and put it into stocks and restore the ratio of 50:50 again. In effect this approach enables you to sell stocks when they have gone up and buy them when they have come down. In fact, this approach comes highly recommended by Benjamin Graham who even recommended a 75:25% split between stocks and bonds. If the markets are low, you go 75% into stocks and once they turn expensive, you go 75% into bonds.

Further Reading: 1.The Intelligent Investor by Benjamin Graham (Collins)            .                            2.Thinking, Fast & Slow by Daniel Kahneman (Penguin)

Emerging Technologies – Quo Vadis?

The economies of the world, particularly those of the US and China, are vying  for leadership in exploiting, what may be called the fourth industrial revolution, whose foundation includes new technologies like 5G telecommunication, Artificial Intelligence (AI) and robotics. But the beneficial impact of emerging technologies can be optimized only through the adoption of common standards  which calls for consensus among all major players in these technologies. But geopolitics is making adoption of such universal standards difficult.  The US FCC (Federal Communication Commission) has issued orders declaring  both  Huawei and ZTE, the  Chinese  companies in the forefront of  5G technology, as being national security threat. And now the UK has announced that Huawei will be completely removed from the county’s  5G networks by the end of 2027, after a review by UK’s National Cyber Security Centre (NCSC).  This, of course, is likely to benefit Japanese NEC and the European players Nokia and Ericsson.

But why is 5G regarded as cutting edge technology by major economies and why does China wield such a significant clout in this field? This is because it will enable/enhance other frontier applications, such as IOT (Internet of Things), autonomous vehicles and smart cities. But to optimise global impact of these applications, as already mentioned, calls for adoption of universal standards. As far as  5G technology is concerned, it will be difficult, if not impossible to formulate standards without Chinese involvement, since China owns almost one-third of the patents pertaining to 5G technology. It is alleged that China has reached this stage by spying and clandestinely acquiring technology being developed in other major developed economies, while at the same time shutting out rest of the world from access to its own economy.

In the wake Galwan attack , India has banned the use of 59 Chinese apps. Some like TikTok,  have over 30% Indian users, which would surely impact its valuations.  India is world’s largest vaccine producer (over 50% of world’s market share) and supplies 20% of the global pharmaceutical needs. But two-thirds of raw material required for its pharma production  comes from China.

So as things stand today, our “global village” is like a house of cards, where displacing one card could bring the whole edifice down. So disengagement of economies will be slow and painful and in the long run will result in diminishing people’s welfare across the globe. As financial commentator J Mulraj says, it seems like a tale of two futures a la Charles Dickens’ Tale of Two Cities: It is the best of times, it is the worst of times; it is the age of wisdom, it is the age of foolishness, it is the spring of hope, it is the winter of despair …………..