I was at a party recently where the host played Hindi film songs from the 60s and 70s. Expectedly, songs sung by the legendary Mohd. Rafi and Kishore Kumar dominated proceedings.
Before you knew it, the guests were divided into Team Rafi and Team Kishore, with each side eulogizing their idol and making a case for his supremacy over the other. Soon cacophony ruled and any chance of enjoying the music went right out of the window.
That got me thinking about another debate which has been doing the rounds lately: long-term versus short-term investing.
2011 has admittedly been a rough year for equity investors; the BSE Sensex has shed about 24% over the year.
Detractors of long-term investing are quick to point out that over the five years between December 2006 and December 2011, the Sensex posted an annualised gain of a little under 4% (the mid-cap index rose by about 6% annualized). Hence their hypothesis--long-term investing is dead, and that short-term is the only way to go.
But that is a case of oversimplification. Sure, the indices may not have gained much, but it would be wrong to conclude that long-term investors have lost out.
For instance, over the same period, the best performing funds from the Morningstar India Large-Cap category have delivered annualised returns ranging from 10% to 14%. In the Morningstar India Small/Mid-Cap category, the best performers have yielded 10% to 19% annually. Clearly, long-term investors who picked their funds well have been handsomely rewarded for their patience. That's one point for Team 'long-term'.
But there is another side to this story. An average fund from either of the aforementioned categories has delivered a modest 5% annualised growth. This in turn means that for several investors, the 5-year investment horizon did not quite pay off. And here's one for Team 'short-term'.
But the fundamental problem with this debate is that it propagates a 'one-size-fits-all' approach by labeling an investment style as ideal. Investing, much like music, is a matter of personal choice.
There is no right or wrong way of investing. Neither is there a surefire winning formula. It all boils down to what the investor is comfortable with. Both investing for the long haul and short-term trading have their risks and rewards. Even market conditions can influence which investment style fares better.
For instance, short-term trading is likely to deliver at its best in momentum-driven markets, while a long-term approach should do well over a market cycle. It is for investors to make informed choices and then ply the strategy that best works for them.
In the Indian mutual fund industry, some managers adopt a research-oriented long-term approach, while others with a short-term horizon rely on factors like sentiment and momentum.
Interestingly, we have seen these diverse strategies being plied equally successfully. Hence, instead of debating over which style is better, investors would do well to acquire an in-depth understanding of the niceties of each style, the risks involved and then adopt the approach that they are most convinced of.
Like with music, the mantra with investing is: Play your own tune.
This article first appeared in the Mumbai edition of The Economic Times dated January 13, 2011, with the title: Why the Long-Term Vs Short Term Debate is Futile. The original article in its entirety has been published here.