We can now connect cause to an effect retrospectively. What happened to India? Are we going to Nifty 4,500 or is Nifty at 8,000 still running? Apart from the ongoing payment crisis that dampens confidence, the rupee scare, the falling Nifty, there are actually job losses and downsizing. So, the ongoing seasonality could be serious.
Can you be insulated?
If you thought you were out, currency does it for you. If you thought that also did not matter, it was a job loss. If you still overcome it, then it could be onions. You are basically trapped, with nowhere to go. We are in difficult times and there are no two opinions about that. Ultimately, it's a concerted effort (polycentricism) that can take us from point A to point B. But this is still cause and effect. Excesses happen because humans extrapolate a trend (run after winners and shun losers), build in capacities and this prices the whole industry out, forcing a balancing decay. However, just like growth, all decay and difficult times end, so this will end, too. The idea is what differently we do now, which makes us better prepared next time.
From an investor perspective, there is a jargon you should understand. If you are not diversified (multi assets), if you are not looking at more than a few years of holding, if you are worried now about the Nifty (down 12 per cent for the year), and you will be more worried if it reaches 4,500 you are an active investor who has low tolerance for a loss.
There is nothing wrong in being an active investor; the majority of us don't look beyond a year. A few who looked beyond a year got trapped in the 2000-2010 decade and refuse to go passive again. So, the passive-active make up changes, depending on how the markets surprise us. I have met a few passive investors who don't feel trapped but understand the game and the risk that comes with it.
The problem with active
Active investing today is like an unorganised sector. The tool kit is large; just fundamentals; just technical; just quantitative; fusions; neighbours advice; a mixture of objective and subjective system or no system. A system is essential not only because it can be tested but because there are clear rules. Markets are emotional systems. This is why the need for non-emotional systems. It's not hard to make systems; it's hard to follow these.
Now anything can be a system, but one that works should be scalable across assets, across regions, is standardised, something that can be whetted, customisable. As today's active is far from all the above, this is why today's active money management style is under attack.
A few quotes from the web, "Despite the indexing revolution that started 40-odd years ago with the quaint idea of saving money and buying the market, active funds continue to pillage the accounts of the unwary"; "Active Management: Back to stone age". A lot of criticism is true against Active Management, but using this criticism to sell passive is another and working on it to create "The New Active" is another.
Why can't we move out of Stone Age?
If active investment does its job, it should avoid 2008 outliers. If an active can't avoid a crash, it's Stone Age active. Come to think of it, any long only portfolio from 2003 that could have avoided 2008 would have made more money than the market because it knew when to go cash. And because we are in Stone Age active, our active systems don't know how to go cash and this is why the fear of what will happen if Nifty goes to 4,500. Nothing will happen; the new active will be sitting on cash.
Can you be insulated?
If you thought you were out, currency does it for you. If you thought that also did not matter, it was a job loss. If you still overcome it, then it could be onions. You are basically trapped, with nowhere to go. We are in difficult times and there are no two opinions about that. Ultimately, it's a concerted effort (polycentricism) that can take us from point A to point B. But this is still cause and effect. Excesses happen because humans extrapolate a trend (run after winners and shun losers), build in capacities and this prices the whole industry out, forcing a balancing decay. However, just like growth, all decay and difficult times end, so this will end, too. The idea is what differently we do now, which makes us better prepared next time.
From an investor perspective, there is a jargon you should understand. If you are not diversified (multi assets), if you are not looking at more than a few years of holding, if you are worried now about the Nifty (down 12 per cent for the year), and you will be more worried if it reaches 4,500 you are an active investor who has low tolerance for a loss.
There is nothing wrong in being an active investor; the majority of us don't look beyond a year. A few who looked beyond a year got trapped in the 2000-2010 decade and refuse to go passive again. So, the passive-active make up changes, depending on how the markets surprise us. I have met a few passive investors who don't feel trapped but understand the game and the risk that comes with it.
The problem with active
Active investing today is like an unorganised sector. The tool kit is large; just fundamentals; just technical; just quantitative; fusions; neighbours advice; a mixture of objective and subjective system or no system. A system is essential not only because it can be tested but because there are clear rules. Markets are emotional systems. This is why the need for non-emotional systems. It's not hard to make systems; it's hard to follow these.
Now anything can be a system, but one that works should be scalable across assets, across regions, is standardised, something that can be whetted, customisable. As today's active is far from all the above, this is why today's active money management style is under attack.
A few quotes from the web, "Despite the indexing revolution that started 40-odd years ago with the quaint idea of saving money and buying the market, active funds continue to pillage the accounts of the unwary"; "Active Management: Back to stone age". A lot of criticism is true against Active Management, but using this criticism to sell passive is another and working on it to create "The New Active" is another.
Why can't we move out of Stone Age?
If active investment does its job, it should avoid 2008 outliers. If an active can't avoid a crash, it's Stone Age active. Come to think of it, any long only portfolio from 2003 that could have avoided 2008 would have made more money than the market because it knew when to go cash. And because we are in Stone Age active, our active systems don't know how to go cash and this is why the fear of what will happen if Nifty goes to 4,500. Nothing will happen; the new active will be sitting on cash.
The author is CMT, and Founder, Orpheus CAPITALS, a global alternative research firm