Thursday Trivia ~ Should the relationship between economy and stock market matter to your investment outcomes?

To become Invincible at Life : Create your own T
September 28, 2020
Thursday Trivia ~ How Envy makes sure that you make below average LIFE returns!
October 8, 2020

Thursday Trivia ~ Should the relationship between economy and stock market matter to your investment outcomes?

Allow me to ask you a question that has been in my head since a long time. I want to go to Pune. I stay at Tardeo. Then at what time should I leave my home to reach Pune to have a more comfortable drive and without traffic. What’s the optimum time?

Think about it. 

I’m not going to relate this question of mine to ‘Disasters of Timing the Equity Market’ today. Enough has been written about it.

It’s a genuine curiosity of mine. In my experience, it’s always been escaping Mumbai’s traffic that has been an issue. Mumbai-Pune Expressway has been kind. At times, we have experienced traffic near Lonavala too. A couple of years ago, my colleague Saurabh (Founding Partner of Circle Wealth Advisors) and I left for Pune around 6 am in the morning. By 9 we were still at the outskirts of Pune. The reason is one breakfast break and 40-minute traffic near Khandala ghaat. There was a little more shock left for us. It was 9:30 am when we reached Pune city and suddenly there was traffic on the street because Punekars (residents of Pune) were leaving for their office. You can’t beat traffic! Just can’t. If you beat Mumbai, then Pune catches you.

Here’s the catch. I can’t leave for Pune after 9 am from Mumbai. It will take me forever to beat the traffic in the city. In the evening too, rush hour traffic should be avoided at every cost. The only space left now is afternoon from 2 pm to 4 pm odd. Try to leave immediately post lunch and reach Pune before the rush hour begins for people on their way back home. But that now kills my business day too.

Now let me tell you the reason behind this dilemma. 

Latha Venkatesh of CNBC TV-18 recently shared her understanding about stock markets being forward looking for common folks like us. It was an instant hit. As usual like her other educational videos, this one made complete sense too. 

She explained why there is a glaring disconnect between economy and stock markets. Although a little problem occurred after that video was released. It seems that many retail investors have taken it a bit differently. Many folks have started feeling that equity market will continue to go up despite a shock in our economy. Why? Because the two are not related and stock markets are forward looking or discounting mechanisms. 

There has been enough debate on whether markets are forward looking or mean-reverting! Since, it’s not the topic of our discussion today, let’s leave it for another Thursday Trivia.

What bothers me is that should retail investors like you and me, who have a long term horizon be really bothered about the connect or disconnect between economy and stock markets? 

Just like, when we leave for Lonavala from Mumbai, should we bother so much about traffic? Isn’t it sort of understood that we will have to navigate it and despite our best attempts, we just can’t beat it.

So, what should you do?

There are hundred ways to reach heaven. 

We at Circle Wealth Advisors too believe that there is a glaring disconnect between economy and stock markets. Think about the 2008 crash for a moment. Economy was doing very well, much better than what we have been seeing off lately. On the other hand, we have March 2020, where markets fell. As an economy, we were having troubles with after effects of Demonetization and implementation of Goods and Services Tax. Yet, Nifty soared to nearly 12,000 before correcting. 

Now Nifty is back to 11,000 levels. While economy is struggling.

To solve this disconnect and make money in the stock market, some folks approach it as buy for the long term. Some follow index investing, where they invest in Nifty index, Nifty next 50 index, Pharma index and so on. While some opt for Coffee Can Investing too. Money can also be made in micro caps, small caps and mid cap investing, if you have the adequate skill.

Different strokes for different folks.

At Circle Wealth Advisors we follow the Price to Earnings (P/E) ratio of Nifty to ascertain whether valuations are high or not. Our proprietary bands allow us moving in and out of equity mutual funds. This simple method has helped our investors create substantial returns with extreme low volatility in their portfolios.

Our difference is that while we understand markets are forward looking. We will not overpay for anything in stock markets. The reason for this is our love for discounts and times of pessimism in the market. I jokingly tell my friends that its due to our genes, especially since we are from Marwari-Kutchi background. Valuations and price theory is inbuilt in us.

Recently, I had a conversation with a dear friend of mine. He told me, why are you sitting in debt fully when everyone around is so bullish? My answer to him was that P/E of Nifty is 30 and I’m uncomfortable. So I will sit out. He was shocked. It can’t be that simple was his answer. 

He said, what if Nifty’s P/E become 50 and Nifty touches 15,000. What will you do? My reply was the same, I will sit out – no need to overpay. But yes, if P/E goes below 20 and Nifty touches 15,000 then I will be the happiest.

This went for another hour. At last, I asked him the same question that I started this article with. When should I leave for Pune if I want to go?

During a conversation, Jeff Bezos asked Warren Buffett why his investment strategy was hardly used by anyone else despite being simple. Buffett responded, “Because no one wants to get rich slow,” according to Chesky in a 2013 PandoMonthly interview.

On a similar note, there is no point in worrying about traffic en-route Pune. It’s going to be there. Same for predicting the future in stock markets, there will be a few jolts. Keep it simple. Drive carefully, don’t over-speed and in investing, don’t do short term trades to make a quick buck. Stick to your asset allocation and you will be fine.

It’s important to enjoy the journey rather than constantly being worried about predicting it.


Leave a Reply

Your email address will not be published. Required fields are marked *