The Economic Times
English EditionEnglish Editionहिन्दीગુજરાતી
| E-Paper

    Fresh answers to cliched investment questions


    There are questions that a lot of investors ask without thinking, but the answers are still worth a lot of careful thought.

    Getty Images
    What does matter is how well equity does when compared to the inflation rate and to fixed income returns.
    ET Calculator Banner
    By Dhirendra Kumar

    I’m beginning to become a little allergic to the word ‘sector’. Over the past three weeks, I have participated in four long online Q&As about investing. In three of these, I was the person answering the questions and in one, I was in the audience. In the last one, which I wrote about a week ago, the questions were being answered by the redoubtable Nassim Nicholas Taleb.

    In all four interactions, someone asked the standard Indian equity investment question about sectors, “Which sectors will do well now?” The problem with this question is not that it can’t be answered, but that it should not be asked. Imagine someone who could see into the future perfectly and actually provided you with the correct answer. How would that help you in actually making a sensible investment over the coming months and years and then actually generate good returns from it?

    It wouldn’t because you have to invest in companies and not in sectors. As long-time investors have all experienced, there are great companies in all but the worst of sectors and awful companies in sectors that are doing great. In fact, these exceptions are often true outliers by their very nature. That is to say, companies that are doing well in a sector that is down in the dumps are likely to be great wealth-generators while the opposite, badly run companies in good sectors will be great wealth destroyers. The deviation from the norm of the sector will prove to enhance the effect.

    I’m not making any predictions here (that would be absolutely contrary to the spirit of this article) but do not be surprised if you see this being played out in sectors like travel and banking, where everyone thinks that the future is much more clearly mapped out than in many other sectors.

    At the end of the day, equity investing is a bottom-up activity and not a top-down one. Mutual funds are the opposite but that’s a discussion for another day, perhaps next week. You make money by being right about companies and their stocks. In sharp contrast, being right about industries, sectors, national economies and even the global economy is of only negligible advantage, if any. This makes almost the entire conversation about economies that is currently going on of questionable value from an investment perspective. I do not mean, even for a moment, that the question of economic revival is not important—it is of the greatest importance to our lives and jobs and businesses. However, asking that question does not help you as an investor.

    In my last week’s Q&A with investors on the Value Research YouTube channel, there was another question that looks facile but is worth a little bit of a dig. One person asked what would be the returns of large cap, mid cap and small cap stocks over the next 25 to 30 years. At first sight, it’s easy to dismiss such a question. I too started my answer by pointing out that I was not an astrologer. However, even though the returns are not predictable, there is a framework within which one can think of such a question. The starting point would obviously be the previous 30 years. During this time, the BSE Sensex is 37 times of what it used to be, up from 800 points on 1 June 1990. Is there any basis of thinking that such a performance could be repeated?

    I don’t know and it doesn’t matter actually. What does matter is how well equity does when compared to the inflation rate and to fixed income returns. During the quarter century past, there was a period when fixed income returns were enormously high. I remember a time when Government of India tax-free bonds were offering an interest rate of 11%. We were a high-inflation, capitalstarved economy where the numbers just kept ballooning anyway. This inflation rate and the fixed income return was a cushion under equity returns which made the numbers look large without that much real value being added.

    In the quarter century to come I would be happy if we had an inflation rate of 2-3% and equity returns of 6-8%upwards. That may look niggardly in comparison to the past but would be quite a bonanza.

    (The author is CEO, Value Research)
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of

    Also Read

    1 Comment on this Story

    Dacid Robert40 days ago
    Dear Sir,
    We are Titanium Trading Ltd with UK Company Registration
    N0: 09298674. We are the owner and seller of Gold Bullion Bar,Gold Dore Bar and Rough Diamond in small and large quantities.
    We are searching for customers /representatives/ brokers/ sellers or buyers mandates who can help us establish a medium of getting to our customers all over the world.
    Please, if you are interested in transacting Gold Bullion Bar,Gold Dore Bar and Rough Diamond business kindly contact us via our email address for our FCO as we are ready to sign long lasting gold supply contract with the end buyers World wide.
    We are also in Joint Venture (JV) with a financial instrument provider company for BG,SBLC,MT109,MT799,MT760,discounting and project funding.
    In addition,we have an excellent professional relationship with many banks,stock brokers, financial institutions and consultants all over the globe. We have a proven track record of Excellence, speed and reliability. Accept our kindest regards as we move your business to the next level. Our banks will send pre advice without any upfront charges for Purchase and Lease. So if you have any gold bullion buyers that is looking for BG/
    SBLC,DLC/LC provider that will issue him BG/SBLC to buy our gold bullion let us know for more details as our Joint Venture(JV)financial instrument company will handle same.
    We will be glad to share our working procedures with you upon request to help us proceed towards closing deals effectively.
    David Ashley Robert Me
    The Economic Times