The 4 most dangerous words in Investing

Amar Pandit , CFA , CFP

A lot has been written about how the 4 most dangerous words of investing are “This time it’s Different”. I agree that these 4 words can be dangerous for investors in the way they are interpreted and implemented. However, the most dangerous words that have cost investors around the world big time are “Let Everything be Normal”.

I promise I will explain what I mean by this. I was speaking with a friend’s retired uncle Mr. Ajay Solanki who wanted to get my opinion on where the stock market is headed. We had an interesting conversation (won’t get into the details as it is the subject of yet another interesting post) and he said “I think this quarterly result will be bad. Things are bad. Let Everything be Normal.”.

I asked, “What do you really mean “Let Everything be Normal?” There was a long pause and he could not answer the question clearly. He then said, “I think the market will go down”. I told him “That’s fantastic. This means you will get to buy Lower. At what level will you start buying?” There was a long pause again and Mr. Solanki said, “I don’t know if things will be normal then”.

At that point of time, I told him that you need to clearly define what “Let Everything be Normal” means.

a) Does it mean that I will invest if the Sensex hits 30000 or even the previous low of 25000+?

b) Does it mean that I will invest when the Sensex goes up to 40000 and everyone is cheerful, and I will invest? (as this will give me comfort that there are many more buyers in the market)

c) Does it mean I will invest the day a Vaccine is found irrespective of the market levels?

d) Does it mean I will invest the day everything (The Economy) returns to Pre-COVID levels like it was before?

What does “Normal” really mean?

I further added that there is nothing called “Normal in the market”. In fact, the reality is that Normal = VUCA. The Markets will always react to News as the world is Volatile, Uncertain, Complex and Ambiguous (VUCA) and it will continue to be that way. Today it is COVID-19, tomorrow it is the US Election, day after it will be the geopolitical risks arising out of US-China war for Dominance, or Inflation or Oil Prices spiking up or even COVID – 21, the point is we have to unemotionally define our Actions.

Here are a few thoughts (if you have liquidity and are wondering what to do, like Mr. Solanki).

  1. Our goal is to buy lower. It is not to buy the lowest as we might be lucky once or twice in a lifetime but that will not move the needle for us (if we wait 15 years to buy the lowest).
  2. We must stay invested for compounding to do its magic.
  3. We rebalance once a year or if the asset allocation has gone beyond your tolerance bands. By this I mean, if your target asset allocation was 80% Equity and 20% Debt and if it is now 60% Equity and 40% Debt, you will sell 20% Debt and buy 20% Equity (Sell High and Buy Low).
  4. If you have Rs.100 long term money to invest today, Start with 30% or 40%. Keep investing in a staggered way on dips (if the market declines further). This is the only way to overcome the emotional response of waiting for normal. Yes, you can do a Systematic Transfer Plan (STP) whether weekly, monthly, or quarterly.
  5. You can keep what I call as Emotional Comfort Cash (ECC – higher than normal) to take advantage of any sharp corrections. You got to be careful here though. If the markets do indeed go down sharply, you should unemotionally deploy your majority of your ECC to take advantage of the fall.

I will tell you an interesting thing that happened with a friend who has been waiting to invest since a year. He told me “I am still waiting to invest and if the market goes down to March levels, let me know and I will invest”. I told him “Well why didn’t you invest in March?” He said “Things were not normal then, so I waited. I realize the mistake that I should have invested then, and I do not even know that I will have the courage to invest if the markets go down to March levels. What should I do?”

I told him “There is nothing wrong with how you are feeling but there is no reason to invest out of fear of missing out or out of regret. We must never invest emotionally. However, the reality is that we live in a VUCA world now and that is our New Normal. The only way to achieve investing success here is to follow the process of financial planning and top it up with loads of behavioural discipline.

Remember the legendary fund manager Peter Lynch’s quote “Far more money has been lost by investors trying to anticipate corrections, than lost in corrections themselves.