Investing in Equity is the Art of Judgement
Why the success of stock market play is more dependent upon one’s judgement than the fundamentals of a stock alone
In everyday society, investment in equities brings forward multiple different expressions. Some regard it as gambling or “Satta Bazar”, others regard it as a genuine source of wealth creation within a legal framework. On the other hand, there is another debate going on, which is that while investment in equities is widely recognised as an art, one school of thought believes it to be a science, and still others think of ir a game of consciousness - ‘Atam chintan’. However, I believe that it is an art – the art of judgement.
Why investment in equities is not gambling or “Satta Bazar”
By definition, gambling is a game of betting or staking of something of value, with consciousness of risk and hope of gain, on the outcome of a game, a contest, or an uncertain event whose result may be determined by chance or accident. In other words, gambling is a game of sheer chance or luck, without any effort or skill. It may or may not require any pertinent study or knowledge. Gambling is just betting. Nobody could say with surety the outcome of a bet, notwithstanding the fact that speculation is an integral part of any stock market. According to Ben Inker, “Much investing activity contains some speculation, and it is hard to imagine the functioning of an equity market in which speculation was entirely absent.” In fact, speculation requires some sort of understanding and knowledge of a particular event, so investment in equities may least fall in the category of gambling – since, indeed, the deployment of capital in stock market is an investment, with certain degree of conviction, to perform an economic activity.
It may be worthwhile to mention here that in the stock market, investments broadly are of three types. One, the primary investment through the Initial Public Offering (IPO) of equities, or the New Fund Offer (NFO) in case of mutual funds. Secondly, dealing in listed securities in the cash segment, and thirdly, dealing in derivatives, which include future and options. The latter is much more speculative and riskier, akin to gambling. Nevertheless, for playing in the cash segment of the stock market, information and knowledge holds the key, supported by the skill of judgement. With adequate knowledge and dependable information, one may not be hundred per cent sure for favourable outcome, but could win to a good extent with much better result and returns!
Why investment in equities is not a science
Stock markets are marked by uncertainty, volatility and lack of any unidirectional trend for long. Many sectors are cyclical, where fortunes shift far more swiftly. For example, take the case of metals in general, and the steel sector in particular, which for long had been in the bearish phase, and currently has become a hot commodity in the grip of the bulls. Stock markets are beset with unlimited ups and downs every day and most of the time. It is also beset with sectoral rotation quite commonly. In fact, stock markets are mostly and vastly unpredictable. Quite often the value of a stock may not be because of its better fundamentals and technicalities, but because of emotions and sentiments, and in the hope of unpredictable predictions and expectations. Such happenings are not exceptions, but rules in the stock market. Thus, being subject to such a fluid situation quite often, it is hard to qualify investment in equities as a science.
This is also because, by definition, science is a branch of knowledge or study dealing with a body of facts or truths systematically arranged and showing the operation of general laws. In other words, science means fact, the firm and clear explanation of a thing. The meaning and explanation of a particular thing remains same most of the time, as a matter of science, which is not the case with equities.
But by any imagination, is it ever possible to say firmly and with surety that a particular stock will perform, or the Nifty or Sensex will have a definite level and trend on a particular day or in a time span? Certainly not! And even if this does happen for a moment, nobody knows if it will turn fortunes the next. Even on a particular moment or a day, the opinion of different experts and agencies or brokers vary widely with respect to a particular stock, stocks or sectors. So does the performance of a particular stock. Knowing this, how can investment in equities be called a science?
Furthermore, the fact that the stock market is driven more by emotions and futuristic expectations or forecasts does not allow it to be called science.
How and why investment in equities is the art of judgement
Picking up of a stock is based on available information about the company, its promoters, products, future plans, policy framework etc. One could identify a promising stock, but to invest into it also requires understanding of how its peers are performing, future plans and policies of the corporate and government regarding such products, the market nerve – both national and international – and to judge whether the chosen stock holds promise and is worth investing for a short or long term. Hence, investment in equities may safely and surely be called the art of judgement. In other words, agreeing with Vijay Kedia and others, it may well be regarded as a game of consciousness, which is akin to the art of judgement, for logical wealth creation within the legal framework.
To prove my point that investing is the art of judgement, let me cite certain glaring examples both from mutual funds (MF) and the stocks. One very glaring and convincing example from the MF arena is a unique and far-sighted launch of a triplet fund by Tata MF comprising Banking and Financial services Fund, Consumers Fund and Digital Fund – a rare experiment by Tata. The futuristic scheme was launched in December 2015 with a price of Rs 10 per unit for each fund. My judgment was that all these funds would perform exceedingly well, all being devoted to very promising and sunrise sectors of the time. Consequently, against my principle of investing post NFO in a MF in general, I invested in all the three funds in the NFO. This was because the launch was from a high pedigree company, by a reputed fund manager, from sunrise sectors, and so on. Initially, I thought the banking fund would perform best, followed by the digital, but subsequently, realising the rising trend in digitisation, especially during post monetisation and the Covid pandemic era, my judgment went in favour of digitisation as a priority sector, which proved right. This is because, as of August 2, 2021, the NAV of digital, banking and consumer funds is
32.68, 24.83& 24.56, respectively, despite all being launched at the same time. Nonetheless, my judgment says that now onward, the banking fund might outpace. This is simply because in the post-Covid era, the economy will open up fast, favourable policy framework ushered by the efforts of the RBI, improvement in asset quality of banks, opening up of the realty/ housing sector with higher demand for loans (with likely upward increase in interest rates), flood of high value IPOs, as also likely increase in demand for personal and business loans by masses. In this regard, Public Sector Banks (PSUs) are likely to perform far better – a hint to invest in banking stocks.
The proof of my judgment that investment in a MF post NFO, after a reasonable wait and watch period on the performance of your chosen fund, generally proves more rewarding may be seen as an example in the latest scheme by HDFC launched in July 2021, namely the Banking and Financial Services Fund at Rs 10 per unit. Its NAV touched a low of around 9.82 on July 20, and remained below the issue price till July 29. The fund touched a positive NAV of 10.096 on August 3. I expect excellent returns from this fund, and may touch a NAV of 12.5 or so in about 6 months’ time. One may often find more or less a similar trend, in general, for most NFOs.
To support my view point and judgment for investing in stocks, I picked up Mahindra Holidays in early June 2021, realising that with unlocking post Covid, tours and travelling by people who are tired of remaining indoors for so long will increase rapidly. And one of the beneficiaries could be reputed players like Mahindra Holidays. Simply because this is from a high pedigree, respectable, consumer-friendly stable, having posh resorts at very lucrative locations, with grand services and facilities. Likewise, for more or less similar reasons, I invested in Easy Trips post IPO, with handsome gains. Similarly, I invested in Happiest Minds post IPO, judging that the promotor is enjoying a proven track record, after having promoted such a grand company as Mind Tree. And its price has sky rocketed in just a few months, thus proving my judgment right. Consequently, I am sure that investing in equities is the art of judgement, and not science.
More and more people are becoming interested in equities, especially now, during the Covid pandemic period. So, enjoy investing in equities, ushered by information and knowledge, keeping cool, and not being hasty or with blind speculation. Pick up a stock with proper judgment. Also, as per my judgment and experience, investment in MF post NFOs, chosen stocks in IPO or in early-stage post IPO is likely to prove more rewarding, in general. In fact, I believe that the success of stock market play is more on one’s judgment and market environment than on the fundamentals and technicalities of a stock alone. Happy investing!
The author is a Blogger and former employer with the Government of India
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.