The history we know tells us that the first atomic bombs were dropped on Hiroshima and Nagasaki in August of 1945, killing around 200,000 people. What we may not know is that Kyoto, home to wartime factories and an intellectual hub with an educated population, was meant to be the first target for the bomb. The other three cities in the target list were Hiroshima, Yokohama, and Kokura as backup. Nagasaki wasn’t even part of the deliberations.
The atom bomb became a reality in July and all plans were ready to drop the bomb on Kyoto on the rail yards of the city. The target site was half a mile away from Hotel Miyako.
An unrelated story had occurred 20 years ago. Henry Stimson had gone to Kyoto with his wife for a holiday in 1926 and stayed at Hotel Miyako in Room no 56. They enjoyed the beautiful city in its autumn weather, explored the gardens, the hills, its historic temples, the rich heritage, and collected great memories during their 6-day stay. This turned out to be an extraordinary visit, leading to one man playing God 20 years later, saving 100,000 lives while transferring death to a similar number of people in another city. It turned out to be the most consequential sightseeing trip in human history.
Nineteen years later, Stimson was America’s secretary of war and the top civilian overseeing wartime operations. “I don’t want Kyoto bombed,” he said, as soon as the target committee picked Kyoto as the first city to be destroyed and informed him. While Kyoto ticked all the boxes for the city to be bombed, in all his meetings, Stimson pushed back that Kyoto should not be bombed. While the generals kept wondering why not Kyoto, Stimson finally went to the President and got Kyoto out of the list. Ultimately, the first bomb fell on Hiroshima.
The second bomb was to be dropped on Kokura as per plans. Unexpected clouds made it difficult for the bomber pilots to see the ground below. The pilots circled hoping clouds would clear. They didn’t. The crew decided to attack a secondary target and approached Nagasaki. It had the same cloud cover. As fuel was running low, they made one last pass—the skies cleared as the clouds parted at the last minute. Nagasaki was bombed.
It became a city doubly unlucky—first, it was a last-minute addition. And second, a brief window of clouds in the sky over Kokura made the pilot fly to Nagasaki. Kokura civilians were lucky. It’s called Kokura’s luck to this day for someone escaping from disaster. Clouds spared Kokura & Stimson’s fond memories of his vacation saved Kyoto.
This real story tells us that the world doesn’t have single and simple cause and effect relationships. We believe, delusionally, that we can understand, predict, control and forecast the future. The events that happen today would be the result of multiple factors, not the one we attribute as the primary reason.
GDP growth means better stock market returns. But many variables in China ensured that this equation failed in 2024. Rate cuts mean bond yields fall. The Fed cut rates twice this year, yet yields spiked in the US. There were no rate cuts in India, yet bond yields drifted lower.
Stocks always make money in the long term, yet there are 24 out of 25 emerging market countries where their stocks earned less than gold (in their local currency). Most countries have earned barely 2-3% inflation, many just 0. India and the US have earned 5-6% higher than inflation in the past three decades. Democracy and capitalism work. Or, both are also more expensively valued markets today, hence the inference could change in the future.
Cheap stocks earn better returns, yet the best performing stocks in the past two years have been expensive stocks becoming more expensive—for example, capital goods and industrials. Financialization of savings have seen private banks taking market share—yet some of the finest private Indian banks (even the world) earned less than FD returns for their shareholders.
Large caps don’t have alpha & in India, small & midcaps enable stock picking, hence more alpha. We read this many times in 2022 and in the last two years, the reverse happened. Quality stocks make the best returns, yet highest ROE companies (return on equity) aren’t the best rewarding stocks, not just today but even over decades.
Thus, while keeping investing simple, don’t oversimplify investing views to such one-line popular statements. They lead to oversimplification, lazy investing, and ignoring the unpredictable nature of the world and, hence, markets.
As humans, we believe we live in a predictable and controllable world based on very limited experiences. Hence, we turn to authoritative sounding people who are also happy to supply to our demand for certainty and rosy forecasts.
These are some of my learnings over time and in 2024 from my mistakes and poor judgement. Here are some actionable steps from these learnings in my investing:
1. Have a higher savings rate (vs aiming for high rates of returns from markets)
2. Have a multi asset approach (diversify across good stocks in India & the world along with gold & bonds to act as defence when stocks don’t do well. This enables me to stay put and stay invested for decades).
3. Stay invested for decades, so I allow compounding to happen. Rs1 crore at 12% over 30 years is ₹30 crore. The hero is not 12%. It’s having Rs1 cr of savings left aside for three decades. The hero is time.
4. Aim for reasonable returns by investing for an unreasonable tenor of time. Moderate fluctuations help. High volatility doesn’t.
The takeaway is what I always say, the world is generally unpredictable, we have illusions that we can forecast and markets fluctuate. Hence, diversify and asset allocate while investing to safeguard your portfolio from unpredictable fluctuations.
Kalpen Parekh, managing director and chief executive officer of DSP Mutual Fund
