Keep it calm and simple

It's a pretty cliched and tired joke to call every sharp drop in the equity markets either a buying opportunity, a learning experience or both. I know because I do it every time the market falls suddenly and sharply. However, I say it with the utmost sincerity because, after a few decades of investing, I genuinely believe in this. Every time the market falls sharply, you will come out of it a more experienced investor. Moreover, if you make the correct decisions, you will make some excellent new investments.

But we all know this is easier said than done. On June 4, 2024, when the Sensex was down 8.17 per cent at one point, hardly any investor was thinking of buying opportunities. Everyone thought only of how much they would lose and how long the carnage would continue. That's normal, of course. And yet, there exist different categories of investors. There were those who were worried and those who were in a blind panic.

This distinction is crucial, as it often determines who will ultimately benefit when the market recovers. Remember, history has repeatedly shown that those who keep their cool during downturns often come out ahead. Warren Buffett famously said investors should be "fearful when others are greedy and greedy only when others are fearful." Sensible, informed investing, grounded in fundamental analysis, tends to weather the storm far better than speculative gambling on market whims. The merely worried were those who had invested sensibly and understood the logic behind their investments.

Understanding your investments and why you are investing in them is the key. How one can identify a characteristic that always distinguishes the two types of investors depends on the simplicity of their investing choices. In stocks as well as mutual funds, there are investments that are easy to understand and whose investment case is obvious.

However, simplicity is easy to talk about and difficult to practise. We live in an environment where complexity and features are worshipped. No matter what product or service we buy, we are often most impressed by features, jargon and complexity. Our modern technological world has conditioned us to believe that the latest marvels are too intricate for the average person to understand and therefore, complexity equates to quality. However, in personal finance, this notion is dangerously misguided.

Regarding investments, simplicity isn't just beneficial; it's essential. The reason is straightforward - if an investor doesn't fully comprehend a financial product or service, they can't determine if it's even remotely suitable, no matter how highly the seller touts it.

Unfortunately, the logic of the market and product design have ensured that mutual fund companies are launching ever more complex products. Each of these makes decision-making difficult for the investor. Of course, in our view, it's actually quite easy to make the decision - is the fund easy and simple to understand? If not, then it's a no for the investor.

So, how can you ensure you understand everything? The simplest way is to keep things straightforward. Unfortunately, the prevailing message is quite the opposite. When I look at today's market for savings and investment products and the resulting portfolios that people are accumulating, it's evident that there is a need for self-awareness and assertive minimalism.

Of course, that's where Value Research comes in.

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