When will the long term cometh


_ Anand James

Nifty saw record peaks being registered on successive days in January… Is this the long term that we have been long anticipating?

Short answer is long term, never cometh.

How long is long? “Death and Taxes”, the two things in life we can be certain of, gives us an angle to this question, like no other. On one end, you have the inevitability of death which ensures that you would want your returns as early as possible, if not today, so that you may enjoy the riches while you can. On the other end, the pull of taxes ensures that you would want to push your accruals to be made at a point in future that takes the least toll on you in terms of taxes.

This, however, is not a binary concept though. In youth, when we continue to grow bigger and stronger every day, when cells repair faster and we recover surely from ailments, and income is on an upward slope, life also seems linear, looks set to climb till perpetuity, and saving and investing for the latter years surely will be among the last on one’s plans. So, it is usually a little later that you get a view of the horizon, and approach savings and investments with seriousness. Once the bulk starts to form its tax planning that gives it shape. For FY18, listed equities and equity mutual funds had a zero long term capital gain tax, and short term capital gains attracted 15%. Short term here meant one year. For bonds too, the long term period was more than one year, while it was three years for debt mutual funds. So, the concept of long term investment makes start here, though it does not fully explain it.  In other words, the one year period becomes a minimum holding period, so as to shake off the tax burden for equity, bonds or equity mutual funds, so the next question is how far such holding period can be stretched to get the best returns. Let us see if the financial markets provide us any other clues.

Personal and business loans are usually for five years, educational loans 15 years, housing loan around 30 years. Sukhanya Samriddhi, EEE rated and the highest yielding plan among small saving schemes runs for 21 years. Commodity cycles are usually 10 years, while agricultural returns are likely to be cyclical meaning that a few years of productivity may be followed by a few years of poor returns. Why, El Nino climatic conditions occur every two to seven years. Instructive to note that none of these examples bring up the one year number; hence isn’t it unrealistic to expect businesses to weather the storm of such market cycles and terms and provide satisfactory returns in the span of just one year or a few years? Let us see if there are reasons for pushing the holding for longer than one year.

What merit does long term hold? The fragrance that is in the perfume bottle can be characterised by the three notes that make up the fragrance, namely, the top note, middle note and the base note. Top notes are the one that we sense first, and usually ends up as the deciding element in the developing a like or dislike towards the fragrance. It is produced by volatile ingredients that usually dissipates quickly, which is when the middle note gets noticed. The middle note along with the base note serves as the bulk of the fragrance. The base note gives depth and solidity to the smell, but may be unpleasant, which is masked by the middle tone. In equity investments, capital gains could be compared to the top note, which is in fact the most visible trait of a stock that attracts an investor to it. Today, with other asset classes becoming less attractive due to various dis incentives, the surge of money that has gone into equities has ensured that quick gains have become a yardstick for stock selection. So much so that, with focus unduly skewed towards such gains, the other traits of a good stock are long lost, which results in investors dropping stocks in shorter period, in favour of seemingly better stocks.

Technical analysts use wave patterns to understand crowd behaviour in financial markets which manifests as ebbs and flows in price patterns. In Elliot wave theory, the first wave in an uptrend follows a sustained period of downtrend and pessimism, which means that optimism fails to dominate over caution and only few are brave enough to participate during such stage. All these also mean that such a move, the second wave, is brief. However the winning trade, and the profits made, emboldens the first wave investors into taking higher bets soon, and the word is soon out about an up move in place. This confidence, the rise in participants, and the spread of the word ensures that the third wave that follows will be stronger and lasts longer. As a stock market investor such a third wave is one of the sweetest passages of play to be in. But the trick is not in picking a multi bagger, but about waiting long enough for the bags to appear. The windfall gains which may arrive in terms of bonuses, rights, dividends, sharp capital gains, are only for the ones who wait. But, waiting is a relative concept. Waiting necessitates having an endpoint. Having an end point runs contrary to the expanding nature of stock market. Businesses are considered to be going concerns, that is, they are assumed to run for the foreseeable future without the threat of liquidation. If that be the case, why should their stocks have limiting holding period? From that angle, shouldn’t long term mean “in perpetuity”. Anything before can be considered as short term which is guided by cost or tax considerations.

So the thumb rule for stock market investment is to stay, with a quarterly or half yearly check on result and performance. Not before.




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