Mar 02, 2017 03:13 PM IST | Source: Moneycontrol.com

Why you should not become a noise trader?

Most of the noise we hear would be guesstimates of the impact, at best. Ultimately, most opinions are hypothetical and rarely do events pan out as advised in the short term.

Why you should not become a noise trader?
Ramesh Bukka

Come New Year, Union Budget and Diwali, we are deluged with a plethora of investment ideas sourced from various talking heads or ‘experts’. Unlike 10 to 15 years back, for good or for bad, reams of macroeconomic information is now available to investors at the click of a few buttons.  

Here’s a list of ‘significant’ events over the last few years – QE taper, collapse of commodities, fear of sovereign defaults, Brexit, crash in Chinese markets, depreciation of yuan. Events like demonetisation of high value currency, worrying about the pace of US Fed rate hikes and anticipating Trumponomics only add to the chaos and confusion.

Most of the noise we hear would be guesstimates of the impact, at best. Ultimately, most opinions are hypothetical and rarely do events pan out as advised in the short term.

Flashback over the last 10 years and you will find 16 instances where equity markets have corrected more than 5% in a single day. These could include the US slowdown, Bear Sterns salvage, the Lehman collapse et al.

To add a domestic flavour, it could have been the Reliance Power listing stumble, the 2009 budget or more recently, sharp corrections of PSU Bank stocks on the back of large write off, due to rising NPAs. From a level of 4300 in March 2015, the NSE PSU Bank Index halved by the same time in 2016, only to recover 50% from the lows, in less than a year.

Imagine if an investor were to follow these events and churn portfolios multiple times a year, outcome at the end of the year would be an overdiversified, unresearched and tax inefficient portfolio.

While these events would cause short term volatility, will it alter the long-term course of India’s economic trajectory? Definitely not. History shows that markets have sharply rebounded whenever these negative events played out and earnings are back on track.

Despite the steep abyss, the market sunk into post Lehman, in less than 2 years it did a Phoenix act of rising from the ashes to reach a new high in 2010.

The taper tantrum of 2013 created significant volatility globally, as well as locally. However, within a year, this extreme pessimism turned into extreme optimism, on the euphoria of a new government. This propelled the market to rise over 50% and hit an all-time high in 2015.

Why do most investors get into this mode? Probably it is the urge to do something rather than being patient, focused and disciplined

If one looks at the programming available in the mainstream media, most of the focus is on a short term/trading perspective. Don’t be surprised to know that long term programming forms possibly less than 10% of overall coverage.

Sentiments play a significant role in investment decision making. Most investors tend to over react to both positive and negative news.  While all is not noise, tuning out unwanted information can result in long term investing success

Cut to 2017, sentiment is weak owing to downgrades on economic growth, lack of visibility in earnings, near term disruption due to GST and the big question mark over what Trump would do.

While today, market is focussed more on the negatives, the long-term benefits of demonetisation, GST as well significant public spending plans on infrastructure, railways and defence would lead to eventual portfolio gains.

Acting or reacting to noise will only divert you from your long-term goals. Alternatively, such noise generates so much heat that it turns the market volatile, thereby creating good buying opportunities.

A perfect recipe for investment noise cancellation would be to ignore all the noise and focus on long term wealth creation by way of being disciplined and sticking to asset allocation

In a not so lighter vein, noise cancellation head phones are quite literally the best to have, whenever there is too much talk on temporary market disrupting events!


The writer is Director & Co-Founder of Entrust Family Office Investment Advisors.
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