India’s decade started decades ago, and perhaps is going to be decades long…

There is confidence, and an unshakable belief that by the time this decade is over, we will be in a totally different place. Be it business, or something as mundane, as the value of our share holdings. Touch anything and by the end of the decade it will be gold. Kind of.

The optimism is not unfounded. In fact, and perhaps for the first time in decades, India truly stands out. Not as much, in my view, for doing the right things. But for how the right things we have done over the last many years, and decades, have shielded India from all kinds of crisis that have engulfed various parts of the world. Proof that we are on the right path is right there for us to see. And that’s what matters.

Optimism is good. Unbridled optimism perhaps is not. Let’s come to that later.

But first, as is perhaps our beat at Contramoney, let’s dampen the optimism a bit. Just a little bit.

You see, both you and I know that India has had a few false starts when it comes to reforms in the recent decades.

Some would say India’s reform efforts started with the Rajiv Gandhi – V P Singh duo in the mid-1980s. Most would pin it to Narasimha Rao – Manmohan in 1991. Then of course there was famous Chidambaram budget of 1997, when India learnt what the Laffer Curve was all about (lower taxes, could lead to higher tax revenue). This list is long, but perhaps, one other episode that needs to be added here is India’s alignment to the US on civil nuclear cooperation in the mid 2000s. While this deal was about civil nuclear cooperation, it was really about India’s alignment with the US at a much broader level.

I guess where we stand today is a function of all these efforts, and a lot more. But the fact remains that each of these efforts by themselves seemed, and rightfully so, huge events which could change the future of the country. And indeed, they did. But not in the way we thought they would, and at the speed they would.

So, while we remain enthusiastic about the future, we must remember that we have been there before. And it does not take long for this trend to get derailed, even though temporarily.

Now, the purpose of sharing this was not to kill the mood. I think it will be unwise not to still be optimistic (but not blindly optimistic) about India. But having said that, and having seen what’s happened in the past, there are some lessons which could help one ride India’s multi-decade long decade.

You see, without getting into detail, long-term economic growth requires core elements like land, labour, and capital. This is 101 Economics. We all studied that. The policy framework is built given these core resources. If the policy gets it right, we grow fast. If not, we still grow, but not as fast or then in bursts, because the elements of growth are still in our favour (this is where India has been for a long time).

India, today, perhaps for the first time, has all the elements in place. And that too stress tested, as mentioned before. So, going ahead, we could be racing as a country. And if the policy framework falls flat, for whatever reason, we will still grow, but modestly so.

Either way, this is good news that could last decades into the future.

This takes me to the point of how to ride this multi-decade trend. To make my argument, I will flip this and suggest what not to do instead.

First, a big mistake one is prone to make in times like these is to start looking way out into the future and estimating how successful Indian companies will be. This fits in especially well with small and mid-cap companies. It’s easy to visualise a small company’s market cap go from 250 cr to 2,500 cr (10x), as compared to a ₹10 lac crore market cap of a large company goes to ₹100 lac crore (10x). As a result, portfolios naturally gravitate towards this segment of the market.

If history is any guide most such punts are nothing but spectacular failures. Why? Because for a company to realise the opportunity it takes a lot to go right, and that’s not guaranteed.

If you don’t agree that’s only because the failed companies are not staring you in the face every day. They have disappeared!

Second, another big mistake is to lever up to amplify the already amazing return potential India offers. Debt in investing for most people is not a wise idea at all. It’s poison. Not only could it amplify losses, one bad trade could significantly eat into your accumulated wealth.

Recently Charlie Munger conceded that if Berkshire Hathaway had taken on some debt, returns would have been higher. But the fact is that it takes special skills, and an iron clad balance sheet to be able to make leveraged bets. Most readers of Contramoney would perhaps not qualify (if you have a Berkshire like balance sheet, my apologies).

Third big mistake is to assume that all will be good, always. The eternal bull. You see, no matter how good the economy is going to do, there are going to peaks and troughs. In economic growth, stock market indices, real estate prices et cetera. And therefore, if you do not have a financial plan, and the asset allocation to execute that, you could end up with sub optimal returns, or worse, losses because of wrong allocation.

In conclusion, the next few decades will perhaps throw up the easiest way to make money in Indian stocks. All we need to do is not get in the way of doing anything fanciful.

Just stick to proven processes and stick to your financial plan and asset allocation.

If you get this right, the multi-decade economic boom will translate well into your own multi decade wealth creation boom.

Happy investing.

Rahul Goel is the former CEO of Equitymaster. You can tweet him @rahulgoel477.

You should always consult your personal investment advisor/wealth manager before making any decisions.