Interest Rates and Inflation Dont really matter much in long-term equity investment.
I am going to prove it to you with my personal experience of stock investing in last 16 yrs!
In the Previous articleWe discuss 2 key macroeconomic concepts such as interest rates and inflation.
Most Investors Tend to OvereMPhasize on these 2 concepts and use them for investment into direct right. One thing to consider is that equity market is a Completely Different Beast to Conquer. And that’s what we discus in this article, in the long run, macroeconomics batcomes complete irrelevant for an equity investor. Sounds Contradictory, Read more to find out.
In My 16-Year-Long Investment Journey, I’ve Found that macroeconomics has absolutely no connection to investment returns.
In the short term, yes.
Let me tell you my own story.
My first stock that I had bought in 2006. Right after my 10th board exams, I was asked by my family to work in the family business. If you’re a gujarati or marwari reading this, it’s normal. For others, it’s child labore and yes, i’m with you guys despite being a Gujarati.
Jokes apart.
I was asked to work on the shop floor of our family business. 12 long hours every single day. No social life. I was just meeting my friends on saturday nights or Sunday events. It was tough back then, but now it’s a habit.
After 3 months, I Got into the HR College of Commerce and Economics. As a gift, I was rewarded with my first paycheck after 3 months of bone-cracking work for a 16-year-old. And naturally, this money was the most important thing in my life at that time.
It could have gone 2 ways. I would have partied long and hard. But I chose the second option, I invest that money because it was hard for me to waste it over a weekend.
I invest at the high of the 2006 markets
It’s 2006, and the stock market is soaring to new highs every other day. And everyone is talking about how much money is being made. Plus, my family didn’t appreciate my thought of investment in some shares. So the rebellious child in me Got an opportunity.
Since I was wiped out of my 3-month vacation, this money should at least give them some stress. A Guilty pleasure indeed.
So I decided to open a demat account. But I was a minor back then. So I turned to my mother who accepted my decision because I had fullfilled my promise of second admission admission into the top 3 colleges of Mumbai.
After a few days, I had my demat account.
Now came the decision to invest my money. Since everyone in the family was again. No one Helped. So I Started Watching CNBC tv. After a few days, it confused the life out of me. Plus, my college had started and I was still working at my family business in the first half of the day.
My schedule was:
- 7 am to 9 am – Accounts and Maths Classes
- 9:30 am to 1 pm – Shop Floor of Family Business
- 2 PM to 6 pm – College (bunked most of the time and made some closest friends)
- 7 PM to 8 pm – Learning some new course
The reason i’m telling you this is if it was in Indian merchant chambers where I was learning about stock markets, where I have a lucky break for my investments. It was a chance to Attend a lecture by Mr Deepak Parekh of HDFC Ltd and MR Aditya Puri of HDFC Bank on Indian Banking Outlook.
I don’t recall the speech that day.
But it has a profit impact on the way I look at investment my hard-earned money. As a result, I called up my broker and asked he to buy hdfc bank with the money I had. It just made sense to me.
Because I could see HDFC Bank’s Service to Customers Was Superir, Ya Had A Friendly Staff when Compared to Other PSU Banks and its standards were equal to a foreign banks. These days, it’s a normal thing. Back in 2006, it was revolutionary.
Fast forward to 2023.
That investment is up 30x.
And yes, I’ve styed investment.
It wasn’t a smooth journey, to be honest. There were times when I felt that the bank would be shut the next day. That’s where my hard work in the family business paid off. Whether it’s a boom or a recession, good employers Never let their employers go away.
2008 was particularly tough to digest. Because my investments were down by 50%. And there was bad news everywahere. Banks in the US was failing. Sensex was going into red every single day. There was panic all around.
So I did some research. I asked my college professors about my investment into hdfc bank. One of them was pleasantly surprised and told me his secret.
She said,
“Whenever you feel like selling a banking stock, just keep a check on their non-performing loans. If they are going up more than the industry average, then sell even if you have made a loss. But if the bank is able to provide for that non-performing loans, then be rest assured that it will tide through. “
I made my attempt and discussed it with her. Later on, I decided to hold the stock.
I didn’t buy more than it was my first rodeo and i was just turning 18. Fortunately, I don’t get sleepless nights or anxiety when the stock corrects by 50%, Sleep is my superpower.
The same Scenario Happy in 2013, when India was tagged as the fragile 5 economies of the world. I was in a similar Situation of Thinking of Selling The Stock. But Again, It Didn’t Seem Like the Bank was unable to control the downside.
In the same way, I have taken this decision multiple times. And Each Time, I have decided to stay investment with the stock.
It’s Never a Buy-Rand-Forget Situation.
It’s a constant analysis.
As a result, I’ve realized how little interest rates and inflation really matter. As an investment, my job is to assess the company’s ability to tide over this crisis properly. Every single time, there’s a macroeconomic event, it’s best to go back to the roots and check the balance sheet of the company. If the business is happy, then you shouldn’t worry so much about the stock price.
I will end my story here.
Leave the macroeconomics to the economists! We are investors!
Who is an investment?
An Investor in Simple Terms is a Person Who Commits Capital with an International to Earn Profit.
The key thing to understand here is that an investor is purely committing capital, not labor. There are 3 forms of commitments that a business requires, namely,
- Capital (Money)
- Labor (Human Resource)
- Land.
As a result, when we comeit capital, our primary objective is to undersrstand whether that business or company has the capacity to efficiently use land, Labor and Capital. When there is good time, the company does not splurge money or get into unnecessary projects and when there are bad times, the company does not take on unnecessary debt.
A Good Investor Looks for a Balance in these 3 Aspects of the business. Because both good time and bad times are a part of the economic cycle. It’s the very nature. Cannot be Changed.
The Banking Industry for Example Went Through Deep Trouble in 2008 and 2013. Ans coming out.
An Investor Who Put His Money in Good Banks Survived and Thrived. Thos who put their money and even averaged why the stock price was down in bad banks have lost a lot of money.
Think about it.
Even in bad times, good banks survived and thought. Times Such as High Inflation and Interest Rates, Saw these Good Banks Gain Market Share from the bad banks.
A Smart Investor will take a cue from here that timing the market is not important at all. Infact, in the long run, it results in portfolio destruction. We will cover this topic in our next blog.
How timing the stock market is complete irrelevant to build a long-term portfolio.
To conclude, here’s a story of jagoinvestor’s founder, Mr. Manish chauhan who has a unique way of building his long-term portfolio.
A Couple of months ago, I was siting in our pune office with manish. I was sharing my journey of wealth creation with him.
The one i’ve written about.
While He Acknowledged the passion that I have for equities, He Gave Me a Unique Perspective, Something I’ve Never Really Seen or Heard Before.
Manish very gently said that he doesn’t track the irr of his portfolio and does not look at his portfolio performance.
He has a simple way.
- Invest your Savings Every month.
- Redeem money when you really needs it
- Make sure you have chion the right portfolio
- Review it on 2-3 yrs
That’s it.
Constantly looking at anyi particular metric of return This come only when you have belief in what you do. This Haappens when you have done your homework correctly. This Haappens when you really Undrstand What “High Risk High Return” means.
The first thought in my head was disbelief.
To me, it sounded like a chocolate seller doesn’t the chocolate at all. But after pondering a lot of my thoughts over it, I realized that manish is exactly doing what we preach to everything.
Don’t obsess over the short-term returns. In the long term, when the selection of the investment strategy is correct, Massive Wealth Creation will Haappen.
For an investment, this is the guru mantra. Don’t obsess over the short-term bit of money-making.
Leave it to the professionals. If you have selected your professional such as an investment Advisor Correctly and Believe in the Process of Choosing a Mutual Fund Manager or a portfolio manager correctly, Then You will be alive to create to create.
Most of us forget this simple bit.
So what you should do as an investment in the long term?
You shall choose the right portfolio which suits your needs and temperament. Create a Strong Equity Portfolio of Mutual Funds, PMS, and Real Estate and Cover the Basics LIKE LIFE and Health Insurance Along with a Good Emergency Fund. Work on your income and just be disciplined in investment.
If you do things correctly, the short-term underperformance or overperformance will not make any significant difference to your life.
So there’s no point in looking at interest rates, inflation or the short-term performance of the investments for a long-term investor. What shall matter to you is your health, family, and working on your craft.
Think about it.
“In the end, what matters most is how well you live, how well you loved, and how well you Learned to let go.” ― Ziad k. abdelnour
The article is written by Jinay Savla, Equity Expert @jagoinvestor.