Autobiographies are wonderful morale boosters. It helps etch one’s own role models, or winning formula, depending on what you are looking for. Irrespective of which age it is written on, or by whom, one cannot help but notice that there is a common thread to them all. It is that they all portray how the author has prevailed over difficult circumstances. But the trials and tribulations are not very different, even as there are changes in the scenarios and sceneries. The actors in these plays enact almost similar scenes, and all of them, in spite and despite the similarities, lift the spirits of men and women, and act as an armour or a spear or as a beacon of light in their own battles and journeys. If you look at stock markets too, over the decades, the main actors have remained the same, be it the black swan events when few are able to spot value and fewer are able to grab them, or the cycles when few remain patient and fewer are able to spot winners, and so on. Despite this, the stock market is often looked upon as a pit of unpredictability and uncertainty. Over all these years, we can see that only the names of the winners have changed, while other actors have continued to re-enact their parts, day after day, year after year, decade after decade. It is natural, hence, to ask why stock remains unpredictable.
Stephen Hawking writes in A Brief History of Time: “We could still imagine that there is a set of laws that determines events completely for some supernatural being, who could observe the present state of the universe without disturbing it. However, such models of the universe are not of much interest to us mortals. It seems better to employ the principle known as Occam’s razor and cut out all the features of the theory that cannot be observed.” Applying Occam’s razor to stock markets, the unpredictable nature of stock markets could be explained by the fact that man’s response to fear and greed has remained the same through time. If that is the case, then maximising stock market gains by attempting to control our responses during such situations may be an onerous task, as history has shown us that precious little has changed to man’s basic responses to the same. But when we say that it is difficult to pick tops and bottoms, it may not be as much difficult to act a bit after the top or bottom is formed. It is fair to say that the experienced traders have been able to master as much. But that is still not a recipe for ensuring success.
“Well begun is a half done” is an adage that is perhaps among the few that does not hold true in stock markets, as much as it does otherwise. Why? It is because, as much as difficult a good entry is, a good exit is even scarcer. Main reason is that bear market bottoms are usually preceded by weak sentiments across board, which leads to stocks turning higher almost at similar times. Unfortunately, greed does not act in the same manner as fear. Once bull market takes off, individual stock fundamentals gain currency, and soon earnings expectations increase rapidly, but at varying degrees for different stocks. Therefore, stocks top out at various time points. This means, perfect exit or picking the top is very difficult for stocks, and almost impossible for portfolios. For all the talks about the riches that are available to be reaped from the stock market investments, none of them matter without a satisfactory exit. Anecdotal evidence points to the fact that the more one looks to time markets, the further away the portfolio returns go from ideal or satisfactory figures. In other words, the reasons that ultimately prevent riches on the bourses turning to losses, are most often unrelated to stock. For example, some investors may have a minimum holding period or trading restrictions by virtue of their employment agreement or regulation, that makes them hold the stock for a longer period and resist the urge of hunting for tops. Or, risk management measures, wherein Funds have sectoral caps that prompt them to reduce positions, if such investments appreciate beyond a certain percentage. In individuals’ case, it is most often one’s personal needs that does this. Here is where financial planning makes sense for individuals. In short, in a VUCA environment (volatility, uncertainty, complexity, and ambiguity), it is important to unburden the exiting decision from time and returns. This is when the stock market journey becomes a personal one. Else it remains a story.