Throwing in the towel

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-2%

-28%

-48%

This is what you have lost in the last three years if you invested in nifty 50 (large cap), Nifty Midcap 100 and Nifty Small cap 100. Even these numbers understate the actual losses. Large caps appear to be a safe haven, but even that is driven by a handful of companies.

One can find comments on media, comparing equities with other asset classes such as fixed deposit, gold etc. and implying that equities are doomed to perform poorly in the future.

I think such people are too lazy to look at the data. Equities over a 3, 5 and 10 year periods outperform all other asset classes. What is not stated that equities DO NOT outperform in ALL 3,5 and 10 year periods. This difference may appear to be subtle, but the effect of it is not.

The probability of equity underperforming other asset classes is as follows

3 Year rolling buckets     :             25%

5 Year rolling buckets     :             18%

10 Year rolling buckets   :             10%

What the above stats mean is that for every 3-year rolling period, equities can underperform other asset classes such as fixed income, one out of three times. The recent 3- and 5-year period has been one of those times. This is another representation of risk, namely that a particular asset class will underperform from time to time.

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If you are losing patience with equities as an asset class, there are two questions you need to answer for yourself

Do I believe equities as an asset class will deliver high returns in the future?

The way to look at this question is to look at the last 100+ year of data across countries. This data supports the view that equities do outperform all other asset classes over the long run. However, there are periods of underperformance which test the patience of almost all investors.

Do I believe the fund manager can deliver above returns?

The way to look at this question is to look at the performance of this individual/fund house over the long run (across market cycles). Different styles are in favor at different points of time. 2014-2017 saw small and midcaps do well. Large caps, especially quality has done well in the last two years. In order to eliminate the chance of luck, look at the performance of the manager over a 5 to 10-year period and check if the investment approach makes sense to you (and suits your temperament).

Also Read on FinMedium:  What We're Reading

There is no magic pill which will convince you to invest in equities. Data can help you make a rational decision, but at different points of time in your investment journey, you will need some blind faith to keep going.

I have been through such periods in the past (in different aspects of life including investing) and often faith supported by data has worked for me.

The post Throwing in the towel appeared first on Value Investor India.



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Rohit Chauhan
Investment Manager at RC Capital Management
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