IIPM : EXECUTIVE EDUCATION
Going against Buffett’s mantras, A. Jainani claims that active trading, instead of taking long-term positions, is the right strategy in a volatile capital market...
Equities always outperform all other asset classes over the long term. Market experts do not tire in telling that to an investor day in and day out. They go on endlessly describing the virtues of long-term investing. Our analysis of the returns over the last twenty years of the two most important equity indices of the world – the Sensex and the Dow Jones Industrial Average – shockingly reveal that there is nothing which can universally be called as long-term and the returns during different long-term intervals within long term are anything but predictable.
Different set of investors have differing notions about the concept. For a savvy trader, one month is a very long term; for institutional investors and taxmen for the purpose of computation of capital gains tax, even one day more than one year is long term; and for insurance companies, five years is fairly long enough to be called as long term. But no one tells you how long should the long term be and that is applicable to all investors across stages in life and whether the time horizon of investment has anything to do with one’s risk appetite. Worse, they do not even say that you have to carry that much risk on your head, and also on your finances, for an inordinately long period since equities are commonly perceived to be riskiest assets of them all.
Our analysis of the Sensex returns during various time intervals of five, ten and entire period of last twenty years show that there are pretty long periods within which the equities actually do nothing. In fact, the interest accumulated on term deposits, 23.8% is higher than cumulative returns from the Sensex, which were negative 35% over three years from 2000 to 2002. The critics may also consider the 20-year trend witnessed in returns by the DJIA, which is considered to be the most developed market in the world. During the last decade (1999 to 2008), the returns from DJIA were -4.4% whereas the 10-year American treasuries gave cumulative returns of 46.8%.
The horrific results of the long-term investing can not be forgotten by the one who invested at the peak of the dot-com bubble in January 2000. More often, even though the Sensex is able to go back to previous levels witnessed in the bull market, many stocks, even blue chips, find it hard to climb back to those levels even after a very long term. It took full four years for the Sensex to retrace the fall and come back to the level seen in early 2000. Whereas, blue-chips such as Dr Reddy’s Lab, Hindalco, Wipro, Ranbaxy, Ashok Leyland, Indian Hotels, MTNL and many other stocks have given poor to negligible returns if one held them for these nine years. Currently, after nine long years, the Sensex is trading at 8,900 yielding an appreciation of just 65% over January 2000 levels.
The advocates of long-term investing say you can win without taking risk of repeated entry and exit. Their advice is simply to buy and forget it. Few, however, take the opposite route, and take the risk of riding the waves by timely entry and exit – in other words, actively trade. Though, it is possible to cut one’s personal risks to a minimum by being passive long-term investor, and in the process abandon all hope of becoming anything but a face in the crowd. To make any kind of gain from the stocks one must place some of the material and emotional capital at risk and resist the passive philosophy of long-term investing.
Going through the above arguments, one can conclude that the sensible way to manage one’s hard-earned savings and investments is not to shun the risk of trading but to expose oneself to it deliberately. Join the game, with care and thought. To trade in such a way that large gains are more likely than large losses.
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Source : IIPM Editorial, 2009
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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