Transcript of Podcast:
Hi I am Arjun Parthasarathy speaking and this podcast is on “Investing & Weather – Predictably Unpredictable”
I witnessed the Chennai Cyclone in December 2016 and the devastation it caused is unforgettable. Chennai has seen many cyclones come and go but this one was the mother of all cyclones. The cyclone was predicted a couple of days in advance but the devastation it caused was unpredictable.
Weather is definitely unpredictable despite the use of advanced technology to predict the weather. Floods, drought, cyclones, hurricanes, typhoons, earthquakes, volcano eruptions, tsunami, snowstorms, extreme cold, extreme heat are weather conditions that occur without warning. One can expect these conditions but can also never be prepared when they hit. Technology can predict weather at the time of arrival but never well in advance.
Weather is predictably unpredictable and will continue to stay this way for the rest of the earth’s existence.
The more I think of the predictable unpredictably of the weather the more it seems to reflect on my profession, which is helping hard working professionals invest their savings in the right assets at the right time to secure their financial future. Investing is also predictably unpredictable, like the weather. The predictability is the risk, which is always present in many forms, the unpredictability is when the risks will materialise. Like the Chennai cyclone, when risks materialises, it can devastate and one prime example is the 2008 financial crisis, which saw investor’s savings accumulated over many years disappear in just a few months.
In 2016, there were many predictably unpredictable events such as Brexit and Trump win. Both were not predicted but the unpredictability of these events actually gave them a sense of predictability. Investors were completely unprepared for the events and the way the markets behaved thereafter. The common notion was both Brexit and Trump victory were bad for markets but the rally in equities to touch record highs put paid to this notion.
How does one position for unpredictability while investing? As the common joke goes, when the Met says good sunshine, you can expect rain and when you as an advisor say buy a stock it can actually turn into a sell!! Positioning for unpredictability in investments is tricky, after all you don’t know what exactly you are positioning for. However if you do not position for unpredictability, which is the only predictable factor in investments, you can lose your future financial security in a jiffy.
Again, drawing a parallel to the weather, the predictability of the weather is the Seasons, Spring, Summer, Autumn and Winter. The seasons don’t change but weather within the seasons can be unpredictable. Similarly the basic tenets of investing does not change, which is growing your savings to beat inflation and this comes largely from growth assets, which is predominantly equities. Equity investments should be timed well and in the right stocks and when unpredictability of returns in equity increases, shifting into more predictable assets like bonds is the best way of protecting past returns from equities.
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