The next decade will be exactly like the last one—full of surprises that make a mockery of forecasters. How can you ensure that they do not make a mockery of your investments? Follow these simple investing principles and you will do far better than the so-called experts

The Past Is the Future

This is a true story. At the start of the past decade, one of India’s leading financial brains, who started with investment banking and now has a bank, insurance company and a broking business, wanted to get his son initiated into financial markets and investing. He gifted the shares of two companies to his son. One was Infosys and the other was Hindustan Unilever. Surely, they were great choices. These were blue-chip companies that were destined to grow and grow, thanks to a great business model, excellent management and great governance. Well, Infosys fell off the cliff in March 2000. It was quoted at Rs1,726 at its peak in March and, by 2003, when this financial wizard narrated the story, the stock was down to Rs400, having touched a low of Rs276 earlier. More than three years after buying Infosys that was supposed to ride the tech boom to great glory, the stock was down 77%. It took Infosys another three years to get back to the March 2000 highs and is now at Rs2,600, a return of 51% over a decade from its peak level. That is not so great, coming from one of the fastest-growing and best-run companies in one of the fastest-growing sectors. Other stalwarts of the tech scene, Wipro and HCL Technologies, will take many more years to go back to their peaks. The story of Hindustan Unilever is no better. The stock was at Rs270 in 2000 and is at the same level after 10 years! The only thing shareholders got was dividends. We have narrated this story to underline only one thing—how experts get it wrong very often. And the longer the period, the worse is the accuracy.

The coming decade will pose exactly the same challenges. Investors would want to know what to buy. Forecasters are always there with their ‘expert’ views on the likely direction of the markets and the economy, occupying television screens and newspapers. Their unwavering confidence and reasoning appear impressive. We as investors will forget that these are the same intelligent, sane voices that failed to see every significant market-changing event of the previous decades. Would you bet your money on some random comments and ideas without accountability? Public memory is short and the popular media do nothing to remind you of the many monstrous gaffes of forecasting, miscalculated estimates and misplaced optimism.

We are not predicting what will happen over the next decade or even the next year. Of course, we believe that it is worth trying to make informed short-term forecasts because merely describing the past is useless and extrapolating from it is a sure way to disaster. The future, we believe, is a combination of short-term events as they unfold and impact the economy, sentiment and markets. Markets react in an instant to the events and adapt. We can only hope to be nimble, open-minded and as quick as the markets—by applying the principles described here. These will help you to take advantage of nasty downturns and sudden rewards that come from the repeated volatility of different asset classes over a decade. The next decade, as the previous ones, will comprise many such cycles. Be prepared to change your beliefs, question everything and, above all, look only to buy cheap.

Wrong, Wrong and Wrong Again
To learn how forecasts go repeatedly wrong, why adaptation is far more important than correct calls, let’s replay the past decade. At the start of the decade, the hype surrounding the tech bubble of 1999-2000 had gripped us in frenzy. The Nasdaq Composite, which was lingering at around 1,400-1,500 until October 1998, saw a whirlwind rally that took it to 5,130 in March 2000, a leap of 242% in little over a year. By this time, the US tech story had reached a euphoric stage. The decade ahead, the start of a new millennium, looked great. But, in late March 2000, the bubble burst and, in just one year, the Nasdaq plunged to where it started its rally from; some stocks lost 99% of their value. Many companies went bankrupt. The relentless growth of technology companies turned out to be merely a lesson in excessive speculation—wondered about by many, predicted by very few and acted on by even fewer. More shocks were to follow. From the cupboards of the corporate and financial giants of a country that lectured the rest of the world on governance, a procession of skeletons tumbled—frauds at US energy giant Enron, telecom company WorldCom—as well as the sickening role that analysts, investment bankers and fund managers played in dumping hollow stocks on investors, all for their bonuses. An even more unexpected blow was the gigantic 9/11 attack on America that brought markets, all around the world, to their final lows. Nobody had predicted any of these devastating events between March 2000 and September 2001 that led the market down one leg at a time. Meanwhile, those who had believed in the long-term future of stocks in the new shiny millennium…

To revive the economy, the US kept interest rates artificially low for a long period. Again, a rare few predicted that this would lead to a bubble; but nobody predicted of what kind. It was a housing bubble—fuelled by a corrosive mix of complex financial products, fraud and regulatory laxity. This led to the global credit crisis of 2008. For the US investor, this decade has been the worst period, ever, for owning stocks. Did it seem like this in early 2000?

Parallelly, emerging markets such as India and China were a surprise package, recording eye-popping growth. In India, the Sensex shot up from 5,005 in December 1999 to reach 17,465 by December 2009, a rally of 249%. Nobody had predicted this. Until 2003, the Indian economy was also reeling under the prolonged lull, following the bursting of the global tech bubble, high interest rates and poor export growth. Inflows of foreign money were a trickle. The consensus was that we were in for a sustained period of low growth. What followed was a complete surprise. The economy switched gears and zoomed up several notches at a time, supported by huge pent-up demand, low interest rates and government pump-priming. Exports accelerated and foreign exchange reserves soared. Equity markets suddenly ascended to a new high as foreign inflows touched record levels. GDP growth clocked 9%. In how much time did all this happen? Just eight months. Between May and December 2003, the Sensex went up from 2,905 to 6,249, an all-time high. Just after this, in 2004, the BJP was routed (it was widely assumed that the Party would return to power) and the market crashed when a coalition government came to power, but the rally actually gathered momentum under the new government (another surprise).

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