Focus on the long-term trend

Ralph Wanger, the portfolio manager of the Acorn Fund, once summed up the stock market with an analogy about walking a dog:

The market is like an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all the market players, big and small, seem to have their eye on the dog, and not the owner.

This humorous but true description of the stock market is highly instructive. It is extremely difficult, almost impossible, to predict the day-to-day market movements. In the very short-term, market movements will be influenced by many technical factors that won’t have any bearing on the fundamentals. But in the long run, fundamentals will dictate market trends. That’s why Benjamin Graham famously said, “in the short run the market is a voting machine, but in the long run the market is a weighing machine.”

During times of unusual uncertainty and high volatility, like now, the market will behave like the dog described by Ralph Wanger. Investors need not bother about the lurch of the dog. What is important is the direction the dog is taking.

The Sensex has appreciated from 100 in 1979 to above 60000 now giving an average annual return of around 15 percent. The journey has not been smooth. It has been highly erratic and unpredictable like Wanger’s dog. But the long-run direction has been steady and predictable. Economy’s growth and corporate earnings will dictate the direction.

With around 7 percent GDP growth estimated for FY23 India is presently the fastest growing large economy in the world. India is expected to retain the fastest growing large economy status in FY24, too. There is a global consensus now that India has the best runway for sustained growth for many years to come. World’s third largest economy status by 2028 and a near $8 trillion dollar economy by 2032 are achievable for India. This will facilitate unprecedented wealth creation through the stock market. It is this direction and trend of the economy and markets that investors should focus on and not the day-to-day random moves of the market.

The most important factor swaying equity markets globally in the coming months would be market expectations regarding the trend in inflation and interest rates in the mother market US. Now, there is no clarity on whether the Fed will succeed in soft landing the economy or not. For a while, there will be both positive and negative signals. When global markets correct, India too will be impacted. Ignoring the short-term gyrations of the market, investors should continue to invest systematically.

Stock market history teaches us that disciplined investing is the key to wealth creation. As Warren Buffet said, “We don’t have to be smarter than the rest; we have to be more disciplined than the rest.” So, ignore the random lurches of the dog; focus on the long-term direction and trend.

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