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3 Es - Election, Emotion and Equity

14-06-14

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The Election month is a busy month – there is a palpable excitement especially period before the results are out – accompanied by an urge to do something and be proven right.

With the election result behind us, some “regret” for not participating in the rally while many others for not “participating enough” despite having the “right hunch”.

However if you just step back a little, you would realize that getting the election result right is a 50:50 game and best of exit polls have got it wrong in past (remember India Shining campaign of 2004 Elections). And to put hard-earned money on a 50:50 risk-reward ratio is what only a true gambler could do.

The table below illustrates the returns one would have gained in 2004 and 2009 respectively. In 2004, one would have lost 25% while in 2009 one would have made 22% (1st May to 31st May –month of election results) .

 

Equity as an asset class is fairly predictable in the long term and quite unpredictable in the short term. However most of us choose to focus on the short term and expose ourselves to emotional roller-coaster ride it offers in this period.

History has also shown that equity has far higher correlation with macro-economic cycle than who is governing the nation. Yes the Govt policies do play a role, but Party A or Party B plays far lesser role than the due is given.

A case in point is Elections of 2004 – the results were a major set-back, however broader economy was recovering out of post dot-com slump and stage was set for the next phase of growth. If one got the call wrong in 2004 but had stayed invested, one would have made 104% in next 2 yrs and 185% in next 3 yrs.

In the same token, if one had got the call right in 2009 and had stayed invested, one would have given back everything in next one year and made paltry 23% and 9% returns in 2 and 3 yrs respectively. A party with proven track record formed the Govt and yet it could not keep Indian economy insulated from the global meltdown.

With the benefit of hindsight, what does it mean for future -

All the macro-economic indicators indicate that Indian economy has bottomed out, recovery phase is going to follow. Equity market has also reflected that by hardly giving any returns to the investors in last 5yrs and started to show new signs of life again.

If you sincerely believe “acche din aane waale hai”, you have not missed the opportunity. It is waiting for you to embrace.

 

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