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Long-Term Equity and Macroeconomics: Any Connection?

Submitted by admin on February 24th, 2024

Inflation and interest rates hardly play any role in long-term equity investment.

It may sound like a surprising disconnect, but we can establish it logically. You should have some patience to go through this blog post.

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Most investors overemphasize on the roles of these two elements and use the concepts for direct equity investment.  Keep in mind that equity market is a completely different horizon  that does not allow for “vinividi, vici”. In the long run, macroeconomics becomes a powerless tool in determining future of your equity investment. However, it’s not true about short-run scenarios.

Suggestion: Leave your knowledge of macroeconomics to the pages of your economics books. Equity market investment is a different game and your knowledge in macroeconomics will give you no extra benefits.

How to Define an Investor?

In simple terms, anyone committing capital in hope of profitable return is an investor.

Remember that committing capital is not same as committing labour.  A business requires three types of commitments. These are:

• Land
• Labour (Human Resources)
• Capital (Money)

Good and Bad Investors

Therefore when capital is invested, it becomes a priority for the investor to assess if the business can make an optimum use of land, capital and labour.

A company with wise men at the helm never makes bad investments in its good times and never incurrs unnecessary debts after falling on hard times.

Ups and downs are a part of an economic cycle. However, a well-informed investor always tries to create some balance between these 3 aspects all the way through.

For example, the banking industry slumped into deep crisis in 2008 and 2013.  After that, when then RBI Governor Raghuram Rajan asked the banks to identify their NPAs and keep a close watch on their health, a fountain of bad loans left them shocked.

A wise investor always commits his money to good banks. So he can survive and thrive even in bad times. Those doing the opposite experience a heavy loss.

Lesson to Learn

Good banks stay afloat even during hard times whereas, bad banks sink in similar situations. When the interest rates skyrocket or inflation surges, good banks gain a fair share of market lost by bad banks.

A smart investor will learn from his market experience and understand that timing is not the biggest player in the entire scheme of things. In fact, it could be a destructive force for your investment portfolio in the long run.

Timing in the stock market has no relevance to building a long-term investment portfolio.

Important Advice

Most investors never consider any particular metric of return, like compounded return, annual return or any number. One considers it only when the person is confident of his investment decision and portfolio. It is possible only when you correctly do your homework. In that case, you definitely have a good grip on the meaning of “high risk, high return”.

One thing more! Short-term returns are an obsession for many investors. Don’t fall in that trap. Massive wealth generation is possible only through the right investment strategies.