Podcast 31st July 2015
Hi I am Arjun Parthasarathy speaking and this podcast is on “Tennis is showing you the Way to Invest in this World”
Tennis is one sport that embodies the current environment in financial markets globally. Risk free is becoming a liability and the only way to protect and grow capital is to take on risk. If you look at the match statistics of all top players who consistently win, the number of winners is the predominant factor in the wins. The player with the least number of unforced errors usually does not come out on top, unless his or her number of winners is high up in the match.
The current generation of tennis players go all out in a match and the one who can consistently hit winners throughout the match is the winner.
In financial markets, investors are segmented by their ability to take risks. The most risk averse investors usually gave a lot of weight to bonds and stocks of fundamentally sound companies that made profits and gave out dividends. The least risk averse investors went after returns, wherever they came from. This gave rise to the concept of “Risk & Return” where the one who took higher risks made higher returns and vice versa.
The concept of “Risk & Return” has completely changed now. Risk aversion does not lead to lower returns with high degree of capital protection. Portfolios that are risk averse and invested in supposedly high quality assets such as sovereign bonds can suffer huge losses if markets turn for the worse. The actions of global central banks in pumping liquidity into the system and keeping interest rates at close to zero percent levels have led to yields being artificially depressed. Bond yields of many developed economies are trading at close to zero percent levels or even negative.
Investing in bonds giving zero percent returns or extremely low returns is not a classical risk return trade off. Here there is only risk if central banks turn around policies and bond yields shoot up. Sovereign bonds too are not risk free as seen in Greece. Printing money to pay back bondholders by governments whose debt is predominantly issued in local currency increases the risk of inflation eating away capital.
The “Risk & Return” tradeoff is hurting long term investors like pension funds the most. Risk is high even in the supposedly safest of asset classes and returns are non existent. Investing in stocks of fundamentally sound companies have yielded nothing as these companies have been swept away by the new generation of players. Pension funds are struggling to service the liabilities that are rising every day.
Tennis is showing the way to invest now. Take that extra risk for reaching the winning post. However winning in tennis requires hours of long practice, dedication, sacrifice and mental strength. Similarly winning in investments requires strong foundation of knowledge and staying on top of the ever changing world of financial markets.
Attend our Knowledge Workshop on Retirement Investments in a Fast Changing Dynamic World on the 4th of September 2015 at Sofitel BKC Mumbai. Please call Neelima at +919819770641 or log in to investorsareidiots.com to register. Thank you for listening in.