Nitish Kumar on Sunday took oath as the chief minister of Bihar for the ninth time. He abandoned the opposition’s INDIA alliance to join hands with the BJP-led National Democratic Alliance (NDA), again.
Kumar’s flip-flops drew sobriquets galore – from opportunist, paltu chacha to Aaya Ram Gaya Ram. His boat-jumping tactics characterise the fickle nature of financial markets which are extremely unpredictable.
Nitish Kumar is, definitely, not alone. There are a number of leaders who have switched sides on numerous occasions to meet their political ambition. Well, we may not foresee the actions of politicians but we try our best to predict the future course of markets, which directly impact our income and future returns.
Five key money lessons investors can learn from politics
1. Nothing is permanent: Just as in politics, nothing is permanent in the financial markets. Today’s gainers could be tomorrow’s losers and the vice versa. Likewise, today’s small caps could be tomorrow’s mid-caps and today’s large caps could be tomorrow’s mid caps. So, one should invest with this key reality check in mind.
2. Today’s loss is tomorrow’s gain: Just like the ruling alliance NDA managed to bring Bihar CM into its fold despite having lost him two years ago, the losses in financial markets are also not permanent until you redeem your investment.
And if you stay invested in a stock or a fund, the losses may turn into profits in the time to come.
3. Importance of hedging: In order to account for the losses and unpredictability of markets, it is vital to carry out necessary hedging. For instance, the opposition alliance was caught unaware of the sordid turn of events, but if they had done some hedging (or back up plan), the loss may have been less intense.
Similarly for the markets, it is vital to hedge your risky investments against losses.
4. Volatility varies from stock to stock: Although what happened in Bihar was not unprecedented and would certainly not be the last time to happen. But not all politicians are of such nature.
The financial market counterpart of these politicians are small cap stocks which are highly volatile and can’t be relied upon for immediate gains. But it vital to remember that not all stocks are as volatile as small caps.
So, some stocks, particularly, the large caps are more stable and usually give consistent returns.
5. Short term vs long term investing: Short term political manoeuvring may bring some good political dividends in the short term, but in order to win over masses and win over elections, much more needs to be done before polls.
Similarly, short-term investing does not help investors to build wealth, and it calls for the long-term planning and investment.
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Published: 31 Jan 2024, 08:56 AM IST