What windscreen wipers teach you about investing behaviour…

It’s quite pertinent to note that while the stock markets are based out of Mumbai, Mumbai is also endowed or cursed as the case may be with very heavy rainfall. As a result, Mumbaikars are very clued on to the wild gyrations of the stock market index and also used to sitting through hours in the traffic amidst heavy rainfall and water-logging.

Many years back, on one frustrating rainy evening journey circa 2002-03 from South Mumbai back home to the suburbs along with office colleagues the conversation veered towards the general apathy in the markets, the impact on investor sentiment and associated investor psychology.

Just a couple of years earlier there was a frenzy to buy equity funds in general and technology funds in particular. As a trainee in 1999 end - early 2000 I had myself witnessed an event for the launch of a technology fund where the projector did not work for a product presentation (so much for the technology) and still pretty much everyone in attendance invested basis some half-baked communication and flyers circulated. At another city close to Mumbai, the fund had not opened local collection accounts and still, investors decided to purchase demand drafts and anyway go with the investment at additional cost to their pocket. Such was the conviction level that selling effort was pretty much not required. It's well-known that technology investments took 10 years to produce returns eventually – and one can use that experience as a positive example of the “waqt har zakhm ko bhar deta hai” type or one can use that experience as a negative example of the "aaj ek dua aur maang lo, aaj ek aansoon aur pee lo, aaj ek zindagi aur jee lo, kya pata, kal ho naa ho..." types…

And here we were in 2002-03, where the general belief appeared to be like the world was coming to an end and there was no “kal” (tomorrow). How can beliefs swing so wildly? We were just discussing the behaviour and a fresh downpour caused my friend at the wheel to turn on the windscreen wipers. Staring blankly at the screen amidst a gloomy mind frame further compounded by the external gloom, an unlikely analogy struck my mind.

Since then I have been telling investors not to behave like windscreen wipers. While the downpour wets the whole windscreen, the wipers oscillate left to right and back in their own kind of quarter-circular cross breed elliptical kind of path. But what’s obvious is that there’s never a moment where the screen is wiped dry with the vision for the driver being completely clear. When the wiper is at one end of its trajectory, the water obviously wets the other end and by the time the wiper comes back there at that end of the trajectory, the former end is wet again. Net-net, water keeps pouring and the wipers keep moving from one end to other, tirelessly, at the mercy of the water and the driver.

Market participants and investors’ behaviour appears quite like this wiper each time I hear some of the recent commentaries. Equity has given negative returns so let’s put money into debt. Active funds have underperformed so let’s buy the index, small and midcaps have caused losses so let’s buy large caps, Fund XYZ which was number 1 on 1-year basis is not there anymore so let’s buy the new number 1.

Don’t be a wiper. Ascertain the causes of something going against you, how long has it been and is likely to work against you, understand the causes and then decide whether it’s time to come back and double down or just stay at rest or not to come back, stay away and bail out.

Just like the wiper function has a cycle to it, the stock markets are also cyclical – asset classes, market caps, fund flows, investing styles and philosophies et al. But your objective is to create wealth over the long term, not to wipe water over a windscreen, with great urgency; lest your master’s vision be hampered.