With markets undoubtedly cracking over the last quarter, it is a good time to look back at the lastthree years and review our frame of reference for equity investing. We saw a global pandemic wreak havoc with lives and supply chains. The war in Ukraine exacerbated global trade problems and drove up commodity costs. The actions of central banks to ease monetary conditions helped create the conditions for increased inflation (which we called out in the past).

The one lesson this period has clearly driven home is that you cannot predict the future. There is no value in thinking, “Oh, I should have sold in February 2020 and bought back in April and sold again in Jan 2022.” It is well understood by professionals that rather than attempting to control the uncontrollable, it is better to look inwards and work on their mindset, thinking and processes. We must follow this principle in investing as well.

One application of this principle is the setting or resetting of our expectations from investing. It is very important to have reasonable expectations from equity investing. Unreasonable expectations or goals lead to excessively risky decisions.

Neighbour’s Envy

Just because the market or your neighbour’s portfolio returned 30, 40 or 50% for a couple of years, does not mean that this should be the benchmark over the long term. Consider this: the NIFTY Index, over the last 26+ years, has returned about ten-and-a-half percent, annualised. Even if we add 1.5 percentage points of dividends each year, that’s a total annual return of about 12%. This simple geometric average over time – which even some investment professionals avoid mentioning, perhaps because it’s not attractive – should be the anchor in any process of setting expectations for a stock portfolio.

The bitter truth is that most active investors do not even beat this benchmark over time. The good news is that if we start from a place of humility and remind ourselves that it’s not a free lunch, we can build (or buy) a robust investment process that produces satisfactory results over the long term.