Angry Investor. Good Returns a Birthright. Feature not Bug

Many investors are angry. And many more are just plain disappointed.

And why not?

All those high returns that they came to identify equity with… are suddenly gone.

In fact, just in the recent past, things were so rosy. Isn’t it?

Have a look at the 2016-2017 period below – making money in equities was so easy then:

It wouldn’t be wrong to say that by the end of 2017, it seemed that a small section of investors (or let’s just call them market participants to avoid corrupting the word investor), started believing that high equity returns were their birthright! It’s like they started believing that equity is a fixed deposit that will give 15-20% returns every year! 😉

And if you were active on Twitter then, you would agree with me that it was so hilarious to see so many people (many famous PMS fund managers and others selling stock tip kind of s*** services) sharing the new highs their portfolios were making every day. It is understandable why they were doing it. The show-off was to attract new clients. But come on. It was so stupid!

ROFL 🙂 🙂 🙂 🙂

Without trying to say here that I got it right or something like that, it was clear by the end of 2017 that the party of 2017 was heading for a bad finish. And if you understand valuations and how it impacts future returns (this detailed study), then you too would have realized it.

Let’s move forward.

This is what has happened since January 2018. Have a look at the below table and graph:

Many of those angry investors are now sitting on large cuts in their portfolios and more sadly, with their confidence shattered. I do not want to blame them or anyone here. No point doing that.

And if we compare both the table together, it would be clear how dramatically the market returns have changed for those equity-cannot-fall believers.

The angry market participants need to realize that Equity is Equity for a reason. It is not a bank FD that will give you fixed straight-line returns. It will have good years (like 2016-17) and bad years (like 2018-19). You cannot avoid bad years (unless you are a perfect timer). This is how equity markets are structured. This volatility is a feature of the market and not a bug. This has remained for decades and will continue to remain in future decades too.

Understand it like this – Fixed Deposit is a safe asset. Right? And because it is safe, it gives constant but low returns. That is the cost of safety. But equity is a volatile asset. And because this volatility can be perceived as risky, it compensates this by giving comparatively higher average returns than FDs. Note that I used the term higher ‘average returns’. It means that where FD gives you 5-7% average annual returns, equity will give 12-15% average annual returns. But where things differ is that it will not give 12-15% every year. Some years you might get +40% and in other years you may get -17%. So a sequence of such up down years will be about 12-15%. Equity gives better average returns but not in a straight line.

I was reading a post by Safalniveshak (here) where he talks about value investing and says – Value investing doesn’t always work. The market doesn’t always agree with you…there are periods when it doesn’t work. And that is a very good thing.

I think this is a good reminder for equity investors in general.

When you begin investing, sooner or later, there will come a time when markets will not perform as you want them too. You may begin to feel that it isn’t working. But that doesn’t mean that it will never work again. It is how the markets are built. They will fall and they will rise. You might feel that it (equity investing) is ‘not working’. But remember that it works in the long term because it sometimes does not work (in the short term). And ‘not working sometimes’ is a feature and not a bug – and this is what most unsuccessful market participants fail to realize.