Investment

An experiment by Ralph Wanger is perhaps one of the most relevant trials ever conducted in the investing world.

Ralph Wanger is not only a great investor but a great investment writer and is known for unifying his observations into his writing.

And here is one of his most interesting observations, where he analogizes the stock market to a man walking with the dog. This man has been doing the same walk for years.

But if you have walked a dog, you’ll know it doesn’t walk in a straight line. The dog hops forward and backwards, from one direction to another either to smell something or bark at other creatures. The dog also jumps on you for no reason, and even sometimes jump randomly on benches and other things.

In short, there’s no way to predict what dog will do and which way he’ll walk.

But if you know that the owner of a dog is heading northeast at about three miles per hour, towards the museum, you will eventually also know where the dog is heading towards – because that’s where the owner is taking him.

Wanger further adds, “What is astonishing is that almost all investors, big and small, seem to have their eye on the dog, and not the owner.”

What we are trying to deduce here is that, as an investor, we often end up following the dog (markets/ticker price) than the owner (businesses behind the stock).

It’s never been easier to stay on top of day-to-day fluctuations as we see them everywhere. Twitter is shouting out loud about all the daily events, there are online forums, there’s information bombardment on your mobile through various app notifications, the journalists are busy talking about the movements of stock markets and then there are WhatsApp groups, etc.

Definitely, data or information is not the privilege anymore as everyone has access to real-time data.

And as markets go up and down every year, every month or every day, the question is not about whether you have information on the market. The advantage lies in leveraging your astute judgement to understand whether the business is heading towards the growth path to give you sustainable returns over the long run.

Since 1999, we have witnessed many micro and macroeconomic events that impacted the markets favourable and unfavourable. Witnessed natural catastrophic events, trade wars, high inflation, stock market scams, global recession, and the list goes on. And even as we underwent all this, Nifty delivered an impressive 12.7% every year. Isn’t that amazing?

However, this 12.7% returns was never linear. That is, you should know that markets never delivered 12.7% returns in a straight line like this:

  • Up 12.75% from 1063 to 1198 (Nifty was at 1063 on 1st April 1999)
  • Up 12.7% from 1198 to 1350
  • Up 12.7% to 1522
  • Up 12.7% to 1715
  • Up 12.7% to 1933
  • Up 12.7% to 2178

And so on till Nifty reached levels of 11623 on 31st March 2019

In reality, stock markets never function like this and in reality gives returns like this:

  • Up by 43.74%
  • Down by 27%
  • Down by 0.7%
  • Down by 18%
  • Up by 80%
  • Up by 12%

(Note: The above are the actual returns delivered year on year by Nifty during 1st April 1999-31st March 2005.)

The market goes through cycles, and not all years are the same. There are years of blockbuster returns, there are years of subdued growth, and then there are years where we see a drop. But even if you’re investing in the worst possible time, history says that you’ll be able to do well. The key? Time in the market and the ability to follow businesses and not the ticker price.

But to achieve such returns, you’ve to be a long-term investor who can sit tight even when markets are not right. Easier said than done, I’ve seen many investors withdrawing their investments at the first sign of worry.

But they tend to overlook the flip side: If everything in the stock markets remained glory and alright, they did get expensive day by day. And that would mean, you wouldn’t be exposed to lucrative opportunity to buy more quality businesses at low prices.

However, if you’ve been only following a dog (ticker price), you’ll miss out on substantial returns delivered by good owners (businesses).