Investment for future generations

Yes, it has been a long time as I have posted something, I was recently tested positive for corona virus but now I am fit and fine as used to be. A sincere request to all those reading is to take care as much as possible.

So I have been peeping into the history to understand the human behavior of herd mentality in the markets, for as of now I would be first explaining the current market scenario and to make it easier as to why and how the markets are performing globally.

Current Scenario

In the current scenario what I have observed that mostly the markets are driven by institutional investors and then come the retail investors wherein both the types of investors follow herd mentality. What I mean to tell is just looking at the prices and the P/E ratio of the current markets is not called investing but understanding the business as well as knowing the repercussions of the decisions as well as weight-age given by the majority of the investors to particular sectors, individual persons as well as the government focus for the next 5 years.

As we see that global market was in shock and is still very volatile, the markets think of the impact of 2 years ahead of what we are doing now, for e.g: Trump has been tested positive for corona virus and is being treated, just the information of this has given multiple repercussions.

So the question is how does this things work, now let me explain that as Trump is a Republican, the Republicans have certain agendas, as it is 4 year tenure in USA let us consider 4 years agenda. Here, the government would have focused on some particular sectors such as healthcare, infrastructure, another bilateral agreements with countries etc. All these things can be impacted of something happens to the president. Similarly businesses are the main thing in the markets.

Now, since long time or we can say traditionally people have invested mostly in 60% of their funds in equity and the remaining 40% in bond markets and other alternative funds such as real estate and hedge funds, though still it is going on and my research and observations gave me conclusion that most of the investors buy when the Asset prices go UP and sell when the Asset prices go DOWN.

This is the worst mistake investors can do.

What to do?

While there are various methods, I would say principles that needs to be followed as the financial markets have changed considerably since years have passed and all these bubbles which were formed in 2000, 2008 financial crisis were generally because of the incentive schemes to mutual fund managers to sell more products at no matter what price and than these bubbles created liquidity problem in the markets.

Investing in Bonds:

Investing in bonds is generally considered safer option and are generally risk free, while the interest rate is a thing that needs to be checked upon, one can look at Treasury bond yields for 10 years as they are considered risk free bonds and check the GDP growth ratio. Even though GDP ratio is not a proper comparison of the bond market it is much better to know how the sectors are performing.

Investing in bonds are also of two types wherein the first I told are government bonds which are risk free, the second are corporate bonds which offer premium interest for the risk of default.

1. Things that are to be considered while investing in corporate bonds are, higher interest rate does not guarantee that the bonds will not default. It is better to consider the seniority of the bond rate and then think of investing
2. Investing in senior level bonds is always desirable even though interest might be bit less but considering situations such as the corona it would be much easier to find senior bonds at higher interest rates.

These are the two main factors while considering the future market, I would still opt for medium term bonds such as 5-7 years rather than 10 year and more, because there would be interest rate as well as other factors which would be changing in the near future.

Investing in Equities

These is the best form of investing as I am totally investing in business and have quiet reasonable understanding of the particular businesses in which I am investing.

1. Have sectoral preference as you might not know every industry and how it works but some industries and definitely few companies.
2. Have patience while investing, while most dont have it, it is because it is relatively very easy to sell on DEMAT A/C as compared to selling same real estate. You wont be selling your house for 70 lacs if your just bought it for 1 Crore, you would probably wait to get atleast 20% out of it.
3. Investing is for longer terms, for short terms it is called speculations and you are bound to lose money in it.

There are lots of things which I can go on but as I mentioned earlier I have to explain history also for better understanding of herd mentality and how the markets react during such times.

Irisih Famine Lesson

The Irish Famine that happened caused shortages of potatoes which were staple food, as the Laissez~Faire economy was there meaning there was no proper control by the government but the markets were running purely on demand and supply. Also, gold standard system was going on and thus leading investors to ask money in gold rather than in paper form.

As you can see in the above mentioned image that the taxes were increased because of the famine situation and the grants which were given were converted into loan form. If we compare it with the Indian markets this is the exact same situation happening wherein the taxes on fuel prices have led to increase in inflationary prices as well as the grants being provided to the businesses were provided with very strict criterias in the form of loans.

The bond markets were revolting during the famine as well as the preference for liquidity changed among-st the consumers leading to increase in gold prices which has happened in the global markets. As the Britain was not financially as strong as it is now, it raised tremendous amount of external debt and thus money was flown into the system to stabilise things.

As the gold was tied to US dollars in the 19th Century we can see that the Irish taxed hiked themselves many a times and controlled the liquidity flow as gold standard practice was going on.

Similarity

As we saw that there was similarity we can also look at the references of Spanish Flu that occurred in 1918 wherein the markets performed in a similar fashion and the insurance companies settled the claims. It was also interesting to see that during such times the companies were offering equities as well as bonds at a bargain price and many investors doubled their income in terms of valuation as well in terms of having fixed regular incomes if they remained invested for more than 10 years time.

Conclusion

So, the history has repeated itself but thank god the corona virus is not as deadly as the Spanish Flu and similarities gives us chance to understand the investor herd mentality.