Interview: Adil Rustomjee, Author Of 'Running Behind Lakshmi', Explains How Investors Should Approach Stock Market

Every day, millions of Indians continue to flock to the stock market in search of wealth. Noted share market expert and author Adil Rustomjee urges investors to move beyond popular myths surrounding quick profits and guaranteed long-term returns.

In an interview with ETV Bharat, the author of Running Behind Lakshmi: The Search for Wealth in India’s Stock Market reflects on the role of human behaviour, the dangers of herd mentality and the historical forces that fuelled India’s remarkable share market rise over the past three decades.

He also explains why the extraordinary gains of recent decades may be difficult to replicate and why investors must adapt to a more efficient and competitive market environment.

ETV Bharat: Many people enter the stock market hoping to make quick money. Is that the biggest mistake investors make right at the beginning?

Rustomjee: Somehow entering the market to make quick money goes against middle-class tropes and is frowned on. But the number of successful technical traders in the markets is quite surprising; these are almost all quick traders.

Human nature plays a big role in all this. Better to find an approach that gels with one’s nature. On balance though, the longer the time frame, the better the chance for mistakes and bloopers to even out, through the power of compounding and the dividend cushion.

ETV Bharat: You've studied historical market trends extensively. What are three lessons history repeatedly teaches investors that they often ignore?

Rustomjee: That going with the crowd has to be done at certain times, and yet at turning points, it pays to lean a little against its madness. That buying stocks priced a little cheaper than the market with growth rates a little higher works in the long run, but not necessarily in the short run. Every age has its own conventional wisdom, which is usually wrong after a while.

ETV Bharat: If someone had invested regularly and stayed invested over the last 20-30 years, what would that journey tell us about the power of long-term investing?

Rustomjee: They are lucky in historical terms. It would have worked stunningly well in the time period you refer to, and in fact that is how many of the dervishes of Dalal Street made their fortunes. Unfortunately, if you’d tried it in the 20-30 years preceding the period you refer to, it would have been a disaster.

Adil Rustomjee (Source: Hachetteindia.com)

Much of what we call long-term investing success is due to the one-time market upswing from the late 90s. Lots of things came together. The real economy opened up and moved to a higher growth path; the microstructure improved which removed the suspicion element, and mutual fund legislation kickstarted that industry; FIIs entered for the first time and since they were in their accumulative phase, they bid up stocks; household savings rose, and in the later stages were channelised through the SIP into the markets, which also bid up the overall market; the range of companies improved, and so on.

All this took place in compressed and telegraphic form in the past 25 years.

ETV Bharat: Why do investors tend to panic during market corrections and what should they do instead?

Rustomjee: They should panic given the track record of stocks losing 70 to 80% during downturns! But that’s becoming rarer as the domestic buy side comes into its own. They have simply too much invested in the markets to let it happen nowadays; the SIP provides a cushion that works till it works.

ETV Bharat: How can an ordinary salaried individual use the stock market to build wealth without taking excessive risks?

Rustomjee: The SIP used to be a useful instrument, but it needs steadily upward-trending markets. In trading range markets, the hidden opportunity cost of SIP investing may come out in the years ahead. This, the book predicted when it was finished some years back, and the trading range markets seem to be here.

Whether fund manager skill at stock picking can compensate enough for the trading range markets that raise the opportunity cost of SIP investing is unclear.

Alternately, it’s best to ignore the markets most of the time, and wait for occasions like 1995, 2002, or 2008, to commit massive sums to the market and then forget about it. This is needed only occasionally over an investing lifetime (maybe as few as two or three times) for it to work.

But these occasions are becoming few and far between as markets get upside-rigged to the point where prolonged downturns become difficult. Since 2008-09, there has been no prolonged downturn.

Also, educating oneself on the nuances of investing and running a small portion of your corpus to see if you have the ability to pick stocks also works.

Running Behind Lakshmi: The Search for Wealth in India’s Stock Market (Source: Hachetteindia.com)

ETV Bharat: For a first-time investor with limited savings, where should they begin and what should they avoid?

Rustomjee: Finding a decent financial advisor and listening to them is one way to go about it. Alternately, picking two or three diversified equity mutual funds avoids many of the pitfalls retail investors face. Doing this for about half to two-thirds of available savings, and leaving the rest in fixed income is asset allocation.

Occasionally buying mutual fund units in the same fund when markets crash is basic timing that should work over the long run. In this case, only security selection gets left to the fund manager, which is as it should be.

ETV Bharat: In today's environment where social media is full of stock tips and influencers, how can investors separate genuine advice from noise?

Rustomjee: That is a good question. It is becoming impossible to separate noise from sound advice. Unfortunately, this is the situation in the entire country, and the political side is no different. Finding professional services that have reputations to protect is one way to go about it; but most charge.

Alternately, buying a range of investing and personal finance publications and going through them should give one an idea. Best of all is reading the basic works in the field, of which there are multiple lists on the web. Reading this book should also help.

ETV Bharat: What are the most common behavioural mistakes that repeatedly cost retail investors money?

Rustomjee: There’s a full chapter in the book that deals with them. The book also looks at participant behaviour through the cycle, so reading about what others do should help. The application of psychology to finance is a big growth area in academic treatments of the market.

Overconfidence is a big issue with Indian investors; most don’t pause to ask themselves what advantage they have over more well-informed investors. Anchoring is a big deal, understandably among retail investors, but one is surprised at the problem’s extent with the analyst fraternity itself.

Stereotyping, through representativeness, is an issue as well. “A good company is representative of a good stock”; not really, it also depends on the price. But the biggest issue is loss aversion, and the inability to cut losses; this usually comes from confusion over trading vs investing mindsets.

ETV Bharat: Is diversification still the golden rule of investing? How should investors think about building a balanced portfolio?

Rustomjee: Diversification is the one free lunch in all this. Why not take advantage of it? And yet, how to overcome the itch of doing your own thing?

Putting investible capital in diversified mutual funds, fixed income, and leaving a small corpus in a “funny money account” for the investor to do his own trading/investing is one way to go.

But for the “funny money” account, a strict money management rule is required; periodic skimming away of profits, with no addition to it in the case of losses. If it draws down with losses, the investor must use his skill to get to break-even and then a surplus profit, which can then be taken out for the annual holiday, Chotu’s motor bike, a better car, etc.

If you don’t want to reward yourself and take money off the table, that’s fine too. In that case, it means your flair for trading/stock picking is confirmed (for the moment).

ETV Bharat: How much of an individual's savings should ideally be invested in equities and does this change with age and financial goals too? Also, are younger investors taking too much risk, while older investors remain overly conservative?

Rustomjee: Risk profile is largely a function of life stage. The young have more time to recover from the bloopers, and as said earlier, the power of compounding and the dividend cushion both cover many things.

But both factors need time to work their magic, and time is the one thing the young have; because of that, starting early is usually the best and only advice needed.

Older investors need to be more conservative, though less so in India, because many Indians live in old age with children close by. Because of that, intergenerational transfers of wealth and risk preference have different repercussions here. The inherent safety net in such arrangements means that older investors don’t need to be as conservative as made out to be.

ETV Bharat: How should investors prepare for uncertainties such as inflation, geopolitical tensions and global economic slowdowns?

Rustomjee: Stocks are themselves the best hedges against inflation, which leaves geopolitical tensions and global economic slowdowns as the remaining factors in your question.

These phenomena may result in a flight-to-safety trade, which usually bids up gold. Now Indian households have among the largest holdings of the “barbaric relic” in the world; always have. So, the safe-haven flight to gold is something they benefit from; but most don’t recognise the implicit hedge against uncertainty gold gives them.

The lack of capital account convertibility here means that moves into the Swiss franc, or (in this case) the dollar, don’t really work in this country. Commodities are also not in most folios.

Of course, the best hedge is holding 5% of the Indian market in your folio (this is the rough proportion of India in global equities) with the remaining 95% from other world markets. That’s how most global asset management works, but here people would find the idea eccentric. FIIs do just that, though; there’s always a bull market somewhere.

Remember, however, that basic allocation kicks in here. If the factors you cited lead to severe downturns, then liquidating some of the fixed-income portion (which will have grown proportionately) and buying stock will improve future returns.

Also Read:

1. Crude Prices Drop, Most Stocks Rise On 'Positive' US-Iran Talks
2. SEBI To Reintroduce Open Market Share Buybacks Via Exchanges; Eases Intra-day Borrowing Rules For MFs