Address structural issues for infra boost

Govt's focus area is infra, which is underperforming. Incremental approaches haven't paid off so far

The great John Maynard Keynes once said long-term investing was like judging a beauty contest, whereas trading was like betting on a beauty contest. A long-term investor searches for businesses likely to deliver outperformance. A short-term trader second-guesses investors to figure which stocks investors might pick.

Both strategies carry risks. A long-term investor will try to identify good businesses and buy when the valuations seem attractive. He will hold for long periods, and possibly increase stake during deep corrections. Most investors don't set explicit timeframes for unproductive investments. Nor do they set explicit loss limits. The long-term investor can, therefore, make expensive mistakes. Big losses - 50 per cent of an investment, 75 per cent of an investment- are not uncommon. In some cases, long-term investors hold through massive draw-downs and eventually receive handsome returns. This can happen with a cyclical business, for example. The investor might buy at a high price, close to the top of a given cycle, then hold through the next trough, suffering big paper losses, and receive good returns when the cycle peaks again.

A trader, on the other hand, sets stop-losses and explicit timeframes. This limits losses on any given trade. However, traders pay much more brokerage. Most use leverage (investors rarely do). Leverage can lead to huge losses. Derivatives are also popular trading instruments and lose all value on expiry. Trading is also less tax-efficient. A long-term investor might not pay any tax whatsoever. In India, dividends are also not taxed in the hands of a recipient. A trader will rarely receive dividends and a successful one will generally pay high short-term capital gains.

Empirically, we know a fair number of long-term investors make money, while a few actually do make money consistently. That suggests the mechanics and frictions of trading - leverage, higher brokerage, higher tax incidence, are more difficult to master. Ability at selection seems to have relatively little to do with success at investing, though this is what most investors (and traders) focus on. The passive index investor who doesn't select anything will still beat inflation (and most active investors) in the long run. Even two persons who hold the same portfolio could have dissimilar returns. They might have bought the same stocks at different moments in the cycle. They could have very different returns, though their portfolios are similar. Conversely, two persons who hold very different portfolios might receive similar returns.

What seems the biggest determinant of success at either investing (or at trading) is temperament. Individuals who trust their judgement and display patience tend to be more successful. At the same time, successful investors and traders are aware of their own propensity to error. That self-awareness seems important. Right now, there's an interesting judgment call for long-term investors. The Modi Sarkar has been in power for a year. So, we have a measure of its policy stances and operating style. One stated focus area (and rightly so) is infrastructure, which is underperforming and beaten-down. Incremental approaches have not delivered much.

Can power, roads, mining, urban infrastructure, etc, be turned around? Quite apart from power stocks, miners and urban service providers, a turnaround will automatically lift prospects for multiple industries. For example, construction companies, lenders, capital equipment manufacturers, producers of steel, cement, geo-synthetic materials, etc, would all be beneficiaries of infra turnarounds. On the other hand, without turnarounds, infra-related stocks could dip further.

A certain type of investor might choose to make big bets on infra turnarounds. Another type could choose to stay with safer consumption-driven segments such as fast moving consumer goods, pharmaceuticals, information technology, automobiles, etc. A third type might mix and match some safe investments and some risky infra bets. Any of these decisions could be right.

Although infrastructure is long-gestation by definition, turning things around will not be purely about timeframes. There are known structural issues, which have become apparent over the past decade. But these are not easily dealt with - else, they would have been. The sector will turn around only if the government can tackle the issues that have caused logjams. There could be movement in certain areas and not in others, if policy changes address some problems. The traders will, of course, wait for investors to make decisions about these areas and then make short-term bets in infra that follow the long-term money.