The caption of this article has been titled for the average investor who in his quest for financial freedom allocates maximum amount to equities so that he makes enough for Monday mornings to feel as good as Friday evenings. It is true that equities outperform all asset classes over a period of time but not all the time. To outperform all asset classes an investor has to be invested in a bunch of stocks that are in demand during that time. This seems cruel to the bottoms up, diversified value investor who will provide you with several reasons for his stock picks and a few ones to justify his patience. However the ultimate index of an investor’s intellect is the returns that he generates and not the arguments that he provides. In this context an investor who has been able to align himself with the flavor of the season while looking at turning points with a curiously open mind has a definite probability of outperforming all asset classes compared to another investor who is betting on a diversified group of stocks (Sensex) in a bottoms up approach. Strange as it may sound the average investor who has followed a broad-based strategy of investing without any investment thesis has lost more than he thought even while the Sensex has returned 16.7% since inception.

Instead of solely blaming the investor one should look at the overall character of the Indian market (in terms of investor choices). Seventy five percent of the stocks listed in India are not fit for long term investing either in terms of management or business character or in many cases both. Most manufacturers including Textiles, Cement, Power, Shipping, Metals, Infrastructure, Capital goods, Oil and Gas, State owned units (PSUs) do well for a couple of years and than fizzle out thus doing what equities are not supposed to do - reward the short term punter and penalize the long term investor.

Long term is infinite in case of stocks that do not outperform other stocks and asset classes and a few years in case of stocks that do. There is no standardized definition of a long term. A standard thought that most market participants use is that “in the long term equities outperform all asset classes” and to prove their point they talk of a 200 year cycle but the audience who is already in their 30's have just 10% (20 years) of time left to become rich. That 200 year chart is of little use for market participants except that it helps to show the historical intellect of the speaker. A study on how many times equities have NOT outperformed all asset classes within a Ten and Twenty year period throws surprising results.

Over the past ten years Indian equities have under-performed Gold! A decade back Gold was at US$ 310/ounce whereas the Sensex was at 3355. Today Gold is up more than five times in Dollar terms and more in rupee terms (due to rupee depreciation) and has outperformed the Sensex over a 10 year period (2002-12).

Let's rewind back into the earlier decade (1992 - 2002) where the Sensex did nothing. Iin this time span Bank FDs beat the Sensex hands down. For 20 years (1992 - 2012) the Sensex has returned a CAGR of only 7% which is lower than FDs. If this is not long term what is?

From 15th May 1982 Sensex has returned a CAGR of 15.25% which has beaten all asset classes but the coupon on Bonds for the first 20 years of this time span was close to 15% so the risk premium hasn't been high. "Thirty years" is the elusive long term that a person wishing to buy a diversified set of businesses (Sensex) has to wait if he wants to beat all asset classes. Say this to an investor the next time he wants to put some money in a stock!

However in these 30 years there have been extraordinary bouts of money making with multiple stocks turning out 100 baggers. From Colgate, HUL, ITC,Nestle, Hero Motors, Sun Pharma, ACC, Tata Steel, Infosys, Zee TV, Wipro, HDFC twins, Bharti, Pantaloon, Unitech, Titan, Page Industries, Jubilant Foodworks, TTK, Hawkins etc focused investors trying to bet on a few sectors and stocks have made money like bandits through short bursts of a 3-5 years of holding. This data emphasizes that it has always been a stock picker's market instead of being a broad-based investment game for anyone wishing to make money.

Surprisingly most of these stocks (good businesses) appeared very expensive for the entire length of their bull run. One of the classic traits of a leading bull market stock is that it has to appear expensive to the "naked" eye.

Most investors that I come across keep buying some stock from all the sectors in a bid to outperform the market. Many greedy investors focus exclusively on the absolute small caps which they hope would become the large caps of tomorrow. More than 75% of the small caps remain small caps and never graduate to the next big league but strangely an investor who was happy with a 9% interest in his Bank FD undergoes an expectation upswing and wants nothing short of a multibagger the moment he enters the market. No wonder most people give back to the market more than they take away from it. Without necessary expertise and skill it makes zero sense to be in stocks. If you do not understand the game very well a Bank FD is a lot better!

Think about this the next time you call your Broker.

Emphasis mine.

Good article Basant
the word "Long term" is actually a relative concept and not an absolute one, relative to the person who it applies to. For a business owner long term can be 8-10 years. For an investor it can be 2-4 years. But the basic fundamental is of any term (not just long) as you rightly mentioned is not optimism but the accuracy of prediction of personal conviction. If i can just predict the revenue and bottom line growth for next 3 quarters and no further than that then that would surely be my long term.

It very very true when you say “strangely an investor who was happy with a 9% interest in his Bank FD undergoes an expectation upswing and wants nothing short of a multibagger the moment he enters the market”. I was myself griped in this malice a few years ago. The general middle class mentality here is like “if you want a steady flow got o an FD or NSC but if you want a bumper amount then go to the stock market.” Even property and real estate doesn’t come close to this myth. People are mostly willing to buy and hold property for 4-5 years before selling  it off. And their buy decisions are very very articulate. Perhaps because property investment in at minimum in upper lakhs and not just thousands. But when it comes to share market, the patience, the primary quality of a successful investor , is what most of the investors don’t have. Their basic notion of investing is that stock market = bets. Make a better bet, collect the money and exit.  They don’t see it as an investment but a gamble. No matter what they say about your style they do it a gamble. It’s true that majority on the investors in today’s market are like this, and this apparently gives an impression that the market tries to favor the short term punter. Fuelled with the basic mis-understanding “that every small cap will be a mid-cap one day” and “there is the next Infosys hidden in these following small cap technology stocks” people plunge without thinking. The main driver for such investors is the expectation to multiply the money in short term, most of the time from 6 months to a year. I have seen friends who called his broker daily after 3 -4 months for the so called “status update” because his portfolio was doing 10% or so down. Then after another quarter or so he sold off everything at a marginal loss. Over a bottle of whisky he went at lengths to defend his decision of selling and crazed the broker like anything. I kinda felt pity for him.

I believe over the long term (4-5 years) investors like the ones on TED would fare out well from the ones punters. The risk involved in punting in indian markets is far too much for the rewards.