Moneycontrol Pro Panorama | How to be long term greedy

Investment decisions are not just influenced by short-term events, but long-term calculations and judgements.

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John Maynard Keynes coined the sublime line “In the long run we are all dead” in 1923 when the average life expectancy was somewhere 25-50 years. Of course, this was not the context of Keynes’s statement, but it is nevertheless important.

Today, human life expectancy is far higher and retirement plans abound for funding our lifestyle beyond the 90s. Therefore, investment decisions are not just influenced by short-term events, but long-term calculations and judgements. Moreover, we do not want to retire comfortable, but retire rich. The aspiration of a higher economic reality now not only is the premise of youth but also of veterans.

This assumes significance at a time when the proportion of elderly in India's population will double as this article points out.

Welcome to long-term greed. A glimpse of this was given by US President Donald Trump’s move to allow 401(k) pension investments to have access to esoteric private equity, private credit and even bitcoins. Goldman Sachs will offer private investments as mass market financial products to everyone in the US soon as this FT article, free to read for Moneycontrol subscribers, explains.

In India, we have yet to embrace risk taking in greying ages, but that does not stop us from making efforts early on to retire with style and riches. Unfortunately, a lot of this pop up as reckless investment decision making, and we see this every day in markets. It is not lightly said that markets are capricious and change course instantly because the belief of getting rich is as fragile as the odds of staying rich.

Perhaps this is behind the braking of a full speed market rally fuelled by the goods and services tax (GST) yesterday. The recalibration of GST rates is a step to fix the lacklustre private consumption demand in the economy by leaving more cash in the wallets of households. But tax changes are nine times out of ten structural in nature and the GST step is no different. So, how should we decide our equity investments now? Ananya Roy has a ready explanation here as to why markets rejoiced about GST changes first and then just shrugged it off. Roy rightly points out that the fiscal boost to consumption will work and has been timed right just when festival sugar rush begins.

Of course, there are some GST changes that were surprising such as categorisation of some products under a higher 40 percent. But the tax changes were aimed at boosting mass market consumption which they will do. This is where long term sets in. The reduction of taxes on a pile of mass market consumer goods will ensure that the bottom layers of the economy are fortified. This in turn can lift revenues of not just large FMCG players -- as the market has seen instantly -- but also smaller ones. It also will encourage formalisation of small businesses.

But domestic taxation changes have come at a time when globally foreign goods are being taxed or in other words tariffed. America’s tariffs will have long-term effects on trade, and this is reason enough to excuse investors from dancing on GST reforms. Madhuchanda Dey presents a trusted ally to long-term investments: the focus on earnings in her piece here. “Seen in this context, Nifty’s current valuation at 22.3x one-year forward earning is at an 8 percent premium to its long-period average, and leaves room for correction in the current environment,” Dey writes.

That brings us back to greed in long-term investments. Should investors look elsewhere for making more money? Or should they be smart pickers from the existing lot?

The time-tested model for long-term riches has been diversification. In other words, investors must have a handful of stories to believe in and not believe in just one story. After all, valuations are today’s levels multiplied by a story about tomorrow. It pays to believe in companies but only up to a price point and the same is the case with believing in the stability of gold or the dollar. Market corrections offer opportunities to put money into stories that have greater odds to turn true.

Keynes is of little help here because in the long run we all retire. How we do it is up to our belief in these stories.

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Aparna Iyer
Moneycontrol Pro