Consistency of decisions is key success parameter in markets

The one prominent feature of equity markets is the volatility associated with it. The markets react to every news either positively or negatively and accordingly display the continuous movement in the stock prices. There would be periods of euphoria or gloom which is depicted in the markets leading to boom-and-bust cycles respectively. But in the long run, stock prices are always slave to earnings and profitability of the respective companies.

It's hence said that equity markets are a voting machine in the short run while a weighing machine in the long run. This is because in the short term, the opinion of the various market participants and their sentiments drive the price like the votes in a voting machine. However, in the long run, a more precise and accurate measures like the weighing machine dictate the stock prices. These are parameters like earnings, profitability, margin expansion, etc.

What matters the most is not how the markets behave but how would one react to the reaction of the markets to the news defines their investment outcomes. So, towin and sustain in the markets, the investor's behaviour or psychology turns critical. The discipline and consistency in decision making trumps even sophisticated analysis and research. This has been illustrated and proven by many investors at multiple times.

Edgerton "Ketchie" Welch, from a small town of Chillicothe, Missouri, US, later went on to become the CEO of the local Citizens Bank & Trust Co, has resported an investment performance that beat the nations's biggest banks and insurance companies at various points. When quizzed about his exceptional success, he admitted that he wasn't smart enough to play the stock market and never even heard of modern portfolio theory. Instead, he revealed that he subscribed Value Line (a stock report) and bought all the the stocks that had its highest rankings and were also seconded by analysts of two other brokerage firms he used to trade.

He held onto each of the stocks until the analysts at all the three brokerage companies dropped their ratings and then sold his positions immediately. He simply followed this exercise to identify, buy and sell the stocks in his portfolio. Forbes, the interviewing magazine thus concluded that the secret to his success in investing wasn't any system but simply his own consistency. A consistency to stick to his method.

What's remarkable is not about just displaying the consistency but to remain stoic and persist with the formula in different situations of the market. This is why Warren Buffet says that one needn't be a genius to operate in equity markets but must be rock solid in their behavioural skills to not give away in phases of extreme herd mentality. Remaining consistent with the strategy and removing emotion out of the equation while making decisions would help neutralise much of the risks.

Yes, it's exceedingly difficult to remain steady and unemotional when extreme events of war and pandemic happen and not to change their time-tested approach to investing. In this world of information overload, one gets to have access to loads of information, at times creating distraction than providing any utility in the decision making. It's important for the investors to cut the noise and retain the long-term perspective.

In just last couple of years, the walls of worry included the pain of pandemic, the supply chain disruptions, the Ukrainian war, the supply squeeze that ensued the persistent inflation, the interest rate hikes as a reaction, the prospects of economic slowdown due to these changes. So, at each point of time, we have a new problem at hand while we managed to survive for the last two years and are looking forward into the future now. Acting rational, showing consistency in approach and willing to have a long-term perspective helps to succeed in equity market investing.

(The author is a co-founder of "Wealocity", and could be reached at knk@wealocity.com)