There were many dire predictions about the equity market in the wake of Demonetisation. It also coincided with Donald Trump’s victory. Some of these predictions even looked correct and sounded intelligent when we heard or read it. It was proved right when I saw the S&P 500 immediately collapse 5% on the evening of the election results. Similarly I saw my own portfolio (nudged by Cholamandalam, Asian Paints, Mahnidra Hol Resorts, and Equitas) fall by about 4%. Then, miraculously, the S&P 500 came right back and is about 2% higher than the election day. I got a chance to buy Coromandel International, Infosys, Indigo, Equitas, Kwality, Intellect, etc. at far better prices – and I have been a beneficiary of the demonetisation reaction. Honestly, I have no clue what demonetisation will do for the economy in the short run or in the long run. Like all fair minded people, I hope that it has a good impact on the legitimate part of the economy. I am still collecting data on what good can happen. Honestly I do not know.

Global stocks too have not changed much in the aggregate and emerging market stocks are ACTUALLY down almost 10% over this period. In fact I bought Infosys because I saw the US $ strengthening – and of course it had nothing to do with Demonetisation. So, depending on which markets of the world you invest, these predictions could have been right or could have been wrong.

Barry Ritholtz, says that this proves we don’t “know anything” and that “forecasters are terrible”. Such comments are probably true to some degree, but it does not mean we should not forecast at all. The short term forecast is far more difficult to make – it depends on the investing behavior of almost the whole world. However, in the longer run (say 5 years) the market is a clear slave of EPS, PE and the reputation of the management (PE reflects this too). The ONLY and the real lesson from the market’s reaction to ANY even is not that forecasting is stupid or wrong or nobody can do that. The real lesson is:

No one know what shares/ bonds will do in the short-term. (Too many variables, impossible to quantify)
Good research people think in terms of probabilities, and think Micro.

I could see that a strong US $ as a good news for Infosys, TCS, Hcl Tech and Wipro. Which share to pick was sheer gamble. I picked all. Made much more sense.

I knew Asian Paints would go down – knee jerk reaction to ‘attack on black money’ and like Nestle recovered after the Maggi debacle, it was obvious that AP would recover. Hdfc bank will post a glorious quarter – with the cash rationing that they are doing – but we have no clue how RBI is going to suck out the cash from the banks. Also the impact of E wallets, enhanced usage of debit cards, etc. will have to be seen.

HOWEVER , in the long run Hdfc bank, AP, Infy, TCS, WILL continue to do well and give good results – and there are no LONG TERM worries. A Coromandel fertiliser bought at 239 is ripe for sale at 275. Not bad for a monthly return, right?

Increasing the time horizon reduces the randomness of the share market’s negative performance because you’re improving the odds that your portfolio’s performance will correlate with the EPS, currency, and PE that your portfolio deserves. FII inflows do play an important role, but that number is available on a day to day basis – and allows you to react. Since good companies do well, and pay out cash as dividends over the long-term, share valuations tend to reflect this. The share price movement of INFOSYS and the EARNINGS GROWTH of Infosys is a perfect CONGRUENCE – not just a look alike. Its more like a clone. Look at trying to predict the long-term performance of a 10 year G-Sec. Try predicting its day to day price over the next 10 years, and you will fail miserably. However every investor knows that interest and maturity amounts will come ON EXACTLY the same due date. By increasing your time horizon you remove the manic overreactions of media guessers. Asset allocation is about asset and liability mismatch and your success depends on your ability to understand the mismatch between those assets and liabilities.

The intelligent investor cannot ignore company forecasts or assume that everybody is guessing / bluffing. Instead, they should apply a sensible approach to excel models and use probability MORE than fixed formats and do it over a realistic time horizon. I might not (actually do not)  know what the market will do today, tomorrow or next year, but I know that equity is a long-term instrument that will have a high probability of paying out positive future cash flows if I hold it for a long enough time horizon. I also realize that the cost of acquisition has to be sensible, and when it reaches a pre-determined level, I might decide to de-caliber or let the share go.

So, the lesson from the Trump election/ demonetisation  is very simple:

I DO NOT KNOW WHAT THE Market will do in the short run. In the long run it will do well. I also remember that the optimism caused in the markets in the 1990s WILL take 10 more years to wear off. All the best.