Smart to be a 'dumb' investor

Last year, I met Rajesh Sinha, whom I can only describe as a really 'smart' person. Professional, erudite and on the top of his chosen profession. He was on many company boards. He believed in studying the market, investing when the time was right and getting out when the market looked overpriced. He had already made a fair bit of money on his investments by following this method. He was lamenting the fact that the market was kept up ‘artificially by those stupid’ investors who were pouring in around $ 1 billion into the equity markets every month through systematic investment plans. Sinha was confident that these investors would eventually burn their fingers and retire hurt from the market. 

I was reminded of Sinha when the markets went up to record levels after the exit polls universally anointed the existing NDA regime as the winners of the 2019 election. Another friend, Hemant Roy, personally felt that the exit polls were overstating the margin of victory, and the markets would correct sharply if the victory were not as emphatic. I asked Roy what he would do with the money he got from selling the shares. Although he had no real use for the funds, his point was let’s sell the equity holdings while the market is high, and we can repurchase after the market corrects (according to him). In other words, another smart investor like Sinha. 

My point to Roy was simple. He is not Nostradamus to accurately predict what will happen in the future. Neither is he an expert on exit polls nor did he (unlike Sinha) have a deep understanding of the markets. Forget earning money, he could also incur a loss in trying to buy back the same equity at much higher rates, in case the markets went up rather than down. 

I knew that Roy’s equity investments were all for his retirement and only child’s higher education overseas. Both of these goals are at least 10-15 years away. He was investing systematically every month, according to a pre-fixed plan based on a pre-agreed prudent allocation of his investments between equity and debt. I rechecked his investments. The proportion of equity and debt was very much within the plan. I told him to sit tight and not do anything. Continue investing monthly. Ignore all the noise. As his asset allocation was within his pre-agreed limits, he should let the market take care of itself. The only thing you ought to do is look at your asset allocation and correct it only if it is not according to plan. 

Converting investing into a rote and formula-driven thing sounds rather tame and dull. As Sinha would say, it is a rather ‘dumb’ thing to do. It’s not the hot stuff and can be annoying as well. But every study shows that such ‘dumb investors’ who follow a formula-driven approach beat most (not all) of their so-called smarter active counterparts like Sinha over long periods of time, provided they can stay off the temptation to make a quick buck based on their intuition. The ‘dumb’ investors may really be the smart ones.

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The writer is a Sebi-registered investment advisor