Investing Lessons From 2020

Tumultuous, frustrating, and utterly unpredictable – 2020 has left more investors flummoxed than any other year in recent history. From the precipitous fall in March to the jaw-dropping rally that has followed, the year has served as a valuable reminder of some age old, simple investing tenets that trump complicated investing algorithms and formulae any day of the week! As we move into a new year, its worthwhile revisiting some of them; and committing them firmly to memory. Here are the top four lessons in our book.

Crisis equals opportunity

While equities were melting into oblivion as the world faced off against the COVID crisis in March, I recall sounding off our clients with an email that boldly stated that “Crisis equals Opportunity”. This remains one of the eternal truths about equity markets – they are seldom fairly priced. In the words of investing maestro Benjamin Graham, the tempestuous Mr. Market’s moods oscillate between depression and euphoria, and this was proven to be true… yet again. Coming from a point of stretched valuations, the crisis triggered a panic selloff of catastrophic proportions, bringing equities into a fair value zone for the first time in years. Many of our clients who heeded our call to action are booking impressive profits at this time. The event served to reinforce our belief in the inevitability of mean reversion, and in the fact that exogenous shocks (such as COVID) typically make for excellent entry points into any asset class.

Stopping & starting your SIP’s is never a good idea

The entire Mutual Fund industry was hit by a tidal wave of SIP Stoppages in from March onwards as investors panicked, and a sense of doom and gloom eclipsed investor sentiment. Despite our frenetic efforts to explain to clients that these depressed months were in fact what lend the “rocket fuel” to SIP investments, we bore some of the brunt as well. The fundamental problem with stopping and starting our SIP’s in an effort to capture the most opportune growth phases is the fact that we end up going against the most fundamental principle of SIP investing – that is, the fact that markets are by nature completely unpredictable and chaotic in the short run, but predictable in the long run. In other words, the best way to earn long term risk adjusted returns is to be dispassionate, and allow rupee cost averaging to work its magic.

“Time in the market” beats “Timing the market”

Investors who started their SIP’s on the back of 2017’s excellent rally in small and mid-caps found themselves deep in the clutches of the loss-aversion bias by the middle of the year. Many of them were questioning their decision to choose risky assets; after all, it’s not easy to invest for nearly two and a half years, only to see your portfolio still in the red. Interestingly, it’s taken a mere 90 days for those two and a half years of negative CAGR to turn not just net positive, but to the tune of a healthy double-digit growth rate! When you compare these portfolio returns to those earned by investors who exited during the crash and sat on the fence, only to make FOMO-induced purchases after the markets had already rallied, you’ll probably discover that they’re a lot superior. Time in the market really does beat timing the market, nine times out of ten.

Goals make all the difference

If there’s one thing that 2020 reinforced, it’s the fact that goal-based investing makes us much better investors. The one thing we noticed in our investors who had clearly mapped goals in place, was the literal absence of panic induced (and hence, regrettable) portfolio choices. For instance, an investor who is investing into equities via SIP’s for his retirement two decades away, will be a lot less prone to irrational decision making than an ad-hoc investor who is just “investing for returns”. Similarly, an investor who needs access to capital in a year’s time would not be invested into equities in the first place; and hence, unaffected by all the hysteria and headlines. So, as we move into 2021, do make sure you’ve aligned your investments to clearly defined, time bound goal posts. This simple act will make a world of difference to your investing experience.