“Environment is stronger than Willpower”
— Paramahansa Yogananda Ji
No matter how strong your will power is you can’t achieve what you want to, very smoothly if the environment is not conducive.
This statement holds true for various facets of our life including our Investment Journey.
Similar to Macro Environmental scenarios, in Financial Markets too, we experience low return environments and there aren’t always great things to do. However, we hear of various instances where investors in their pursuit to generate higher absolute returns, in a low return environment bear the consequences of increased risks (often unknowingly) and find themselves in uncomfortable positions. The markets are not a very accommodating machine… it won’t provide high returns just because you need them.
At any particular point in time the Investment Environment is a given, and we have no alternative other than to accept it and invest within it. In such low return-high risk environment, we maximize our contribution by being discerning and relatively inactive. Patient Opportunism, i.e., waiting for bargains is often claimed to be the best strategy.
But why do we prefer doing something to doing nothing? — THE ACTION BIAS
If we look at today’s generation for how long are we able to sit quietly at one place without doing anything? May be 5 minutes or 10 or half an hour maximum, before we tend to get bored. We feel restless if we are not doing anything, because we all love action and we have a constant need to do something or the other.
This is where the Action Bias plays in!
It is essential for investment success that we make every effort to recognize the condition of the environment and decide on our actions accordingly.
The Low return-high risk market environments, is one of those times when you should be sceptical of your actions.
Actions aimed towards pursuing high absolute returns in a low return — high risk environment is often compared to a very famous terminology used by the bond market investors, i.e., “Reaching for Yield”. It classically consisted of investing in riskier credits as the yields on safer ones declined as the markets were accustomed to those returns before the market rose. The motto of those seemed to be: “If you can’t get the return you need from safe investments, pursue it via risky investments”
“Patience is a superpower” more so in the world of investing! And inaction requires patience….
One simply cannot create investment opportunities when they are not there. The dumbest thing one can do is to insist on perpetuating high returns and giving back your profits in the process. If it’s not there, hoping won’t make it so.
One of the greatest things about investing is that the only real penalty is for making losing investments. There is no penalty for omitting losing investments of course just rewards. And even for missing a few winners the penalty is bearable.
As Warren Buffett says, ‘It is better to make errors of omission rather than those of commission’
Standing at the pitch with the bat on your shoulders is Buffet’s version of Patient Opportunism. The bat should come off your shoulders when there are opportunities for profit with controlled risk, but only then.
On the other hand, high return-low risk environment provides us with ample opportunities at low prices, that too with lower risk! This would mean a scenario where prices have been beaten down irrationally and everyone is fleeing away from any risk.
This is the time when investors should not shy away from taking a little risk and getting into action. Because it is our behaviour at these times which determine our Investor Returns which are often different from Investment Returns.
Hence, one should always attempt to know where you stand today with respect to the market environment and decide what implications should that have on your actions.
In volatile environments like these which we are in today, every rupee saved is a rupee earned and Patient Opportunism, i.e., waiting for the best bargains and letting our bat down only for opportunities with controlled risk will help us generate superior risk-adjusted returns.
Because sometimes Inaction may be the Biggest Action!
Article by:
Sneha Kochar — Sneha, an Investment Advisor has been associated with Sapient for over 3 years and takes care of the Research Division for the North East Region. She is a Chartered Accountant & a Chartered Financial Analyst . Her hobbies are reading, music and travelling.
