Mutual Fund | Portfolio Yoga

Mutual funds aren’t hands off investments

The number of free resources which provide interesting and thought provoking view points is too many to count. Personally, I find myself spending a lot of time browsing sites (mostly written by bloggers in US) and trying to compare and contrast them with the data I have from India.

Just before writing this blog, I finally decided to check out the long pending list of podcasts I subscribe to but haven’t bothered in a while. First off the block was to check out the interview Barry Ritholtz had with Jack Bogle, the inventor of the Index Mutual Fund and Founder of Vanguard.

The interview lived up to the hype I had heard about it with some very interesting tit bits being revealed during the nearly two hour conversation. I do strongly suggest checking it out.

In India, neither ETF’s nor Index funds have taken off in a big way. While most Index funds suffer from pretty big tracking error, ETF is a product that nobody wants to sell – not your broker, not the mutual fund distributor and the way the biggest and well known fund has been changing hands, even the AUM doesn’t really want it.

The key reason many prefer Mutual Funds to ETF’s is that many funds have provided strong alpha (gains > Index) over the years and this has meant that many believe its far better to invest with a good fund than invest with something that will never out-perform the markets.

But as a recent Morning Star / Bloomberg post showed, his out-performance has come down a lot over the last decade though even now, funds exists that out perform the Index on a consistent basis. But the bigger question is, will we see similar out-performance in the future as well. Unfortunately, other than having a Almanac from the future, one is really clueless as to whether we shall continue to see this trend or shall we revert to what is seen in US where 90% of funds don’t beat the Indices.

Back in the 80’s, Hero Honda came out with a advertisement for its CD-100 with the tag line. Fill it-Shut it-Forget it. These days, Mutual Funds are said to be long term investments with a similar attitude necessary to build long term wealth. At the same time, I hear experts saying that one needs to monitor and if needed change the funds that one is invested in and for that you need to have a adviser who shall do the same for you (in return for a fee – either direct or in-direct).

For example, Manoj Nagpal recently tweeted this picture of funds that needs to be reviewed if they were part of your portfolio

When advisers showcase how great fund performance of top funds have been over the last 10 / 15 years, the point they miss was whether they knew / willing to recommend the funds to their clients those many years ago. A few may have done, but that is always a probability when dealing with large numbers.

In stock markets, you see this behavior when people talk about how investing just 10K in the IPO of Infosys would have made them a Crorepati. What they miss is that very few people actually subscribed and while I don’t have data, very few would have remained invested through and through.

While there is a lot of discussion on the merits of investing in Mutual Funds, I am yet to hear of anyone say, invest in this fund for X years and there is greater than 95% probability that it will beat the Index over that period of time. The reason no one says that is that no one really has a clue as to what fund will be the performers over the next 10 years. Hindsight can only provide you with what worked earlier, no one really knows what will work in the future.

On one hand, we are told not to chase performance (a Vanguard Study if you are interested) yet, when advisers recommend you exit out of under-performing funds, that is exactly what they are doing. If you believe Active will out perform Passive in the long run, the best thing to do would be to stay invested while trying to see where you can cut costs.

Over the long term, what you pay can actually make a large difference in returns and a study by Vanguard claims that cheaper funds outperform expensive ones (Link to article). In the Indian context, we are yet to see any fund go below the 1% barrier when it comes to Actively managed funds with many happy to charge the maximum that is allowed which comes to around 2.5% if you go through a distributor. ‘

On the other hand, ETF’s like Goldman Sach’s Nifty Bees charge 0.50% and this difference can add up to a pretty penny over time, especially if one is looking at investing for the next 20 / 30 years. As Indian markets mature, we shall ape the behavior of markets such as US and that would mean longer periods of low returns. At those times, every Rupee saved is a Rupee earned.

In extreme long term, the choices we make with regard to the funds we invest have a large element of luck. Investors who invested in funds launched by companies such as Morgan Stanley / CRB / Taurus among others haven’t had that much of a great time while those who bet with Kothari (later Franklin) or ITC Threadneedle (later HDFC) saw better gains as fund managers were able to deliver more than what most other funds delivered. But who knew that back then?

Building Wealth through Equity

In reaction to my tweets as well as my blogs where I am not exactly fanatic about Systematic Investment Plan, a reader queried me on “How to build Wealth”.

Wealth is described as “an abundance of valuable possessions or money”. While I don’t know who you are, the very fact that you are reading this means that you are comparatively well off. You may not be “filthy rich”, but you are rich enough to understand the nature of things and are interested in improving yourself.

Most advertisements of SIP suggest that by putting your savings into equity (specifically mutual funds), you will end up wealthy. While definitions of wealthy would differ (most of us consider ourselves not wealthy), a UBS survey in 2013 put the definition at $5 million with $1 million in hard cash. In India, that would come to (based on PPP) somewhere near to 10 Crores (8 Crores of Assets, 2 Crores of Cash).

Given that most of the Richie rich figure in the Fortune 500, let’s glance at it to see how they came to acquire such wealth. While Forbes doesn’t list out how much of the wealth was self-generated vs inherited, the top is dominated by persons who started out companies that went onto become mega corporations. Among the guys from Finance, many of them are fund managers who made their riches managing other people’s money.

Of course, the list is a list of Survivor’s for only those who survived and continue to thrive find a place. For every one of them, you can easily count 10 – 20 who may have come close if not for an error in business / strategy that dragged them down and another 1000 – 10000 who started businesses with similar ideas but went nowhere.

The biggest wealth generation happens if you start an industry and find yourselves incredibly successful. If you start of something and it fails to get traction, you could end up losing what you have. Entrepreneurship is not for everyone and hence while the riches at the end of the line maybe great, let’s accept that is not an option for the vast majority.

Investing in Fixed Deposits / Bonds though have a place in one’s portfolio is unlikely to provide you with strong inflation adjusted returns, forget about building wealth. Insurance is not an investment regardless of how your agent put it. Real Estate was in the last decade a real wealth generator but I believe prices have reached way above their equilibrium making them an asset class that could actually destroy wealth, forget generating it.

Gold has in recent past given good gains though given that there is no value other than maybe the fear that drives its price (other than our own incessant demand), I doubt it could generate wealth though it could protect if a catastrophe were to hit the country. Then again, if a catastrophe of that nature were to hit, the price of Gold would be the least of your worries.

That leaves us with only one asset class – Equities. As long as the country is growing, firms will grow in line with it providing us growth of the nature that cannot be attained elsewhere. Here is a chart to showcase how great the difference in returns can be

As the chart (from US) clearly shows, equities beat other asset classes by a wide margin and this through 2 World Wars, Vietnam War, the Great Depression among other catastrophes that struck the country through that time.

But investing in equities is not an easy task given that at any point of time, there are more than 2000 stocks that trade on the Indian stock markets. While Direct Equity investing can be an enriching experience, it’s not suitable for everyone given the efforts required to be put in and the understanding required to be able to differentiate between good stocks and bad.

One can avoid this problem by investing with a fund / fund manager of repute. Here again, our options are

Mutual Fund
Portfolio Management Schemes (PMS)
Alternative Investment / Hedge Funds

For most investors, the first carries the biggest appeal since the entry requirements are low. Add to that, tax treatment of profits is the best only for those investing via Mutual Funds.

But once again, we face a problem due to the huge number of funds available for investing. For example, there are (including Index / ETF’s) 80 Large Cap oriented funds. Add Mid / Small / Multi Cap, Debt / Fund of Funds and the list grows to a phenomenal 582 (as of Feb-16) funds.

If selecting stocks to invest was tough, selecting the right fund managers isn’t easy, especially given the fact that even fund managers change firms rather regularly. Most financial advisors take the easy way out and recommend the best performing schemes of the last X years. But when asked the probability of them remaining best performing in the coming X years, they draw a blank.

Once upon a time, fund managers beat the index handily given the clumsy approach by which indices were built and maintained. Those days are over though as data shows a drastically reducing out-performance by fund managers which comes to our next point.

If fund managers (who are professionals with huge amount of experience and knowledge) cannot beat the market consistently, what other options remain for an ordinary investor who cannot spend the time to learn and invest in the right stocks?

To me (and as investors are finding out in a big way in US), rather than keep jumping through he loops on which fund / fund manager shall work in the coming year, the best way to generate wealth in equities is to invest in the Index itself. While buying and maintaining 50 stocks (Nifty 50) is not easy for anyone, we do have an easy way in terms of Exchange Traded Funds.

Exchange traded funds have the same advantage of Mutual Funds when it comes to tax treatment. Since it’s a single instrument, you will not need to invest into 3 – 5 mutual funds in the hope that the diversification will ensure that one bad fund will not ruin your returns.

Research has shown that a 60::40 allocation to Equity::Debt with say a yearly rebalancing is a combination that is tough to beat by most funds / fund managers. Now that isn’t so tough, is it?

The biggest advantage is that when either Bonds become over-valued or Equities go into a bubble, your rebalancing will ensure that when the drop comes you aren’t as much affected compared to someone who blindly keeps investing without regard to valuation.

It’s an automatic way to address concerns of buying when markets are expensive and selling when markets are cheap since the rebalancing will ensure you do just the opposite. As stocks fall (and your value of investment in Equities decline), you will shift (at the time of the rebalancing) from bonds to equities thus adding when markets have fallen. And when markets perk up, you do the reverse ensuing that you lock up some of the profits rather than see it wither away when markets turn for the worse.

Of course, despite all this, you will not still build real wealth. Real wealth is built by taking risks and concentrating on absolute returns and not relative returns. But that is a story for another day.

Is your Advisor Lazy?

When a weak student joins a tuition class, the teacher promises the parent that his ward will improve and while may not end up as a rank student will at the same time not fail the exams. On the other hand, when a student who is already doing well joins, the aim is to try and see if he can come in the top 10 ranks.

A lot of water has flown about whether systematic investing is good or not without there being much of a context attached to it. Any investment plan that inoculates savings is good as long as there it’s saved in asset classes that provide one with positive inflation adjusted returns over time and is not a scam (read Teak Investments / Emu, etc).

Personally, I was a believer in systematic investment planning though I haven’t invested into mutual funds. I too believed like vast majority that this is a good way to invest and grow for the long term. The biggest advantage of SIP is that it’s easy – once you sign-up, amounts will get withdrawn periodically and as the law of large numbers dictates, over time, you investment will be closer to the mean than either ends.

SIP is supposed to be done blindly, yet the same advisers who advise SIP rightly advise that picking the right plan is paramount as well. This though creates a dilemma given the large number of funds that we have – which funds are good and which aren’t?

To solve that dilemma, let’s assume we hire an advisor who knows better than me (after all, if he is as clueless as me, what’s the whole point in paying him) and who can guide me better.

Most advisers seem to stick with funds that come from large houses (HDFC / ICICI / Franklin) given that they have showcased good return over time. But does historical return itself is enough to judge whether a fund is worth investing into?

As on date, there are around 130+ large cap funds. An adviser who manages 100+ Crore of investor funds some time back tweeted that the length of any SIP has to be at the minimum the length of a business cycle – 8 years.

Let’s assume that the advisor has a list of 3 funds which he believes you should invest into. It’s all Good, Right?

The biggest disadvantage of SIP is that it forces you to invest into expensive markets as well as cheap markets. Now, while markets do not remain cheap or expensive for too long, they do enough times over time.

For an investor who has been goaded to invest with the hope of good returns over time, deep draw-downs are killing. After all, you are supposedly saving a goal – Retirement / Child’s Education and here you have a statement telling you that after saving for X years, current value is lower than what you invested in first place.

No wonder it is that most people stop SIP at the lows of the market as the pain of looking at the loss and adding to it (in their view) becomes too unbearable.

I can understand a Do it yourself investor doing such a fuck-up. But once you go through an adviser, isn’t he supposed to be there to help you. I am not speaking about the supposed hand holding they claim but in terms of real valuable advice?

IDFC Mutual Fund has brought a nice graphical ad of how to lose money in markets – easy, Buy when markets are expensive. But how many advisers advise an investor to save into debt funds and shift (while adding more) once markets go cheap?

Mid cap stocks have had a great run in recent months, but do you know that its valuation a couple of months back was at a never before seen high. Yet, money has flown like never before as investors latch on to the hot hand fallacy.

If you are investing into mid-cap funds using SIP or lump sum, do you know the probability wherein 5 years down the lane, you could still be underwater?

Some time back, I had worked on future returns based on current price earnings ratio of the index. Reproducing the same one again, its clear as to how great returns can be achieved by buying cheap.

To me, an advisor who advises SIP (in Equity) for everyone and more importantly all the time is a lazy advisor and will get you returns that are average or below. If you are a weak student, yes, you shall pass. But if you were a student who was already scoring A’s, do you really want to be given a prize for getting a C?

Ecclesiastes 3:1–8 is a well-known passage that deals with the balanced, cyclical nature of life and says that there is a proper time for everything:

“There is a time for everything,

and a season for every activity under the heavens:

a time to be born and a time to die,

a time to plant and a time to uproot,

a time to kill and a time to heal,

a time to tear down and a time to build,

a time to weep and a time to laugh,

a time to mourn and a time to dance,

a time to scatter stones and a time to gather them,

a time to embrace and a time to refrain from embracing,

a time to search and a time to give up,

a time to keep and a time to throw away,

a time to tear and a time to mend,

a time to be silent and a time to speak,

a time to love and a time to hate,

a time for war and a time for peace.”

For a longer list of what should you NOT expect from an advisor, do read this post by Yamini Sood (Link). In addition, I would suggest reading of the transcript of a speech delivered by Jason Zweig (Link).

As Lou Holtz once said, “Virtually nothing is impossible in this world if you just put your mind to it and maintain a positive attitude.”

Let me conclude this post by quoting a passage from the book, Investing with the Trend by Gregory L. Morris (Book Link)

My decades of experience have taught me that there are times when one should not participate in the markets and are much better off preserving capital because bear markets can set you back for a long time, and they are especially bad when they happen in your later years. Keep in mind that the closer you get to actually needing your serious money for retirement, the worse the effect of a severe bear market can have on your assets. It is critical to understand the concept of avoiding the bad markets and participating in the good ones. It is never too late to invest intelligently for your future.

Missing the Obvious

The hot topic in last few days have been about SEBI and how they are killing the distributor by making it known to the investor, the fee he pays (indirectly). Much comparison was made as to how Insurance agents had a free run before Manoj Nagpal put out a tweet clarifying things a bit. He said and I quote

Life Insurance Cos already disclose commission. Benefit illustration – which has to be signed by client – has it (buried in lot of paper)

The human eye, its said doesn’t register / record everything. It instead takes snap shot and stitches to get a complete picture. Since the amount of data that is collected is huge, a lot of things are just zapped out unless we force ourselves to look at the same.

When we are driving, we see and observe traffic to make sure we don’t break laws (Signals) nor cause accidents. Yet, you cannot remember the colors or models of the last cars you overtook. Yet, the fact that we overtook them means that we did observe them for a while at the very least.

When we are making investments, what are we looking at? We are looking for major things like writing down the right information and selecting the right scheme. If we have already decided what to invest in, the least thing that the mind will focus on is commission that will get paid pursuant to our acceptance.

Just today, I fell for the same when I made a investment via online portal that allows one to invest directly. My focus was so much on registering and investing that I missed the fact that they charge a platform fee of Rs.948.00 per year. My whole idea of using the platform was to invest direct (and this fund by the way is not something they recommend either) yet I missed the obvious fact that I was paying them for just providing me with the ability to invest & monitor (something that I could have done a whole lot cheaper elsewhere).

I instantly wrote back to them and received a call wherein I was assured that since the transaction has been completed, they will make a special case and not levy (again, this levy is not auto-debit and I would have had to pay if I wanted to continue my usage of the portal) the fee.

A thousand bucks is not really expensive, but given the fact that most mutual funds provide you with the ability to invest online for free and monitoring is easy given once again the plethora of sites and apps (most being free), one needs to question what exactly he is paying for.

Of course, since the fee is fixed, once investments cross a certain barrier, the charges get diluted (as % of AUM). But if you are doing a one off lump-sum or a SIP, you still do not get the full advantage of the difference between the Direct and the Regular scheme even though you yourself would have done all the hard work.

In my own case, I learnt a valuable lesson that I thought I knew very well – nothing comes for Free

🙂

Transparency in Mutual Funds

On Friday, SEBI came out with a Circular detailing among other things

The amount of actual commission paid by AMCs/Mutual Funds (MFs) to distributors (in absolute terms) during the half-year period against the concerned investor’s total investments in each MF scheme. The term ‘commission’ here refers to all direct monetary payments and other payments made in the form of gifts / rewards, trips, event sponsorships etc. by AMCs/MFs to distributors.
The scheme’s average Total Expense Ratio (in percentage terms) for the half-year period, of both direct plan and regular plan, for each scheme where the concerned investor has invested in.

This has really set things abuzz among the IFA folks who believe that this spells death for many of them given the fact that now the customer is empowered with the knowledge of what he is paying for the advice he is receiving, he may not really be quite keen on continuation of the service as it stands.

Some time back, SEBI decided to differentiate between an Adviser and a Distributor. An Adviser while could charge a fee could not take advantage of the commission paid by the AMC. The basic idea here was to ensure that by de-linking the adviser’s income to products he sold, a adviser wouldn’t sell products not suitable for the investor. But given the fact that Distributors were given a free run where they could (and a leading site that enables investment in mutual funds) still claims and I quote “The smartest way to invest in Mutual Funds and more – For FREE!, it was a tough issue for any adviser to ask an investor to pay when he could supposedly get the same for free.

To overcome this, many a RIA just placed their distributor code under a different entity making it seem that they provided the advice for Free when it clearly was not happening since many of them did not even enable investors to invest in “Direct” rather than “Regular”.

The biggest concern among IFA’s is that this method (of not making the client know what the IFA is getting paid) was the best since we “Indians” supposedly do not wish to pay for advice. Yes, we would love to get things for free (who doesn’t), but if there is a way to evaluate and showcase why paying for advise maybe worth the investment, a lot of those who weren’t ready will have a change of heart. That doesn’t mean everyone will do, but who said changing opinions is easy.

Syms, an off-price clothing store in New York, says, “An educated consumer is our best customer.” I have friends who are happy to go with a distributor since he provides them with evidence backed data on what funds are good investments and what aren’t. If a distributor is providing value and has nothing to hide (after all, no one expects anyone to do anything for Free), I find no reason as to why should this new disclosure bother him. The only guys who would be stumped are those who were claiming to do a free service while riding piggy back on the commissions.

As to those who claim that without the distributor, Mutual Funds will not be able to penetrate in a big way, I would like to read this short story “The Old Lady of Somanahalli”

True Lies

The other day Jim Rogers claimed that he foresaw a 100% probability of a U.S. Recession – a probability that gives him no room to escape, but then again, this is not the first nor the last time he has predicted the unpredictable. In his book, Clash of The Financial Pundits, Josh Brown writes about one such guy – Joe Granville and its a fascinating story to say the least.

Mutual funds are good generators of wealth in the long run if the markets where they are invested see a good growth. Every country has seen at least one big bull run which provides unprecedented gains to the investors.

As much as Technical Analysis is about basing the future on the way its past has been, its no advocate of blindly trusting that historical patterns will occur in the future as well. As Mark Twain eloquently wrote, History does not repeat itself, but it rhymes.

Some years back, in a moment of euphoria a Goldman Sach’s Analyst decided that the next big growth will come not from advanced countries like America or Europe but from 4 countries – Brazil Russia India and China and so came the acronym, BRIC which later on became BRICS thanks to the addition of South Africa to the list.

Over time, the bricks have been falling off to the extent that the lone man standing now is India. Brazil which showed so much promise has been done by the collapse of commodity prices, Russia in addition to getting hit by commodity prices also got hit due to its incursions in Ukraine, China – country whose stock market literally shook the world markets is someone whose numbers are always under question.

For a while, it was good with the worldwide growth washing away everyone’s sin’s of omission and commission but while investors may have a short term memory, markets remember.

In a recent article, I read about the last 150 years of innovation has been on lines that has never been seen in any other 150 years. So, when we look back on the markets of the last 15 years and think that that next 15 will be similar or even better, how realistic our assumptions really are?

My idea of critiquing investment methods / strategies is not to say that they aren’t worthwhile but to provide you with a perspective of things from a different view point. Anyone and everyone makes money (some by hard work, some by luck, some others by Inheritance) for money is the key essence to survive (forget thrive). But unlike say our grand father or his father before, we want to do a lot more – more travel, more entertainment, more outings with family. And then who doesn’t want a bigger home, better education for his kids among other wishes.

But life is costly and there aren’t short cuts to success. If you were to look at the Fortune 500, you shall see the list of men who risked big and survived. You shall not see a Vijay Mallya there since while he did risk big, the bets didn’t pay off and instead have taken their pound of flesh in terms of loss of existing wealth.

The reason investors are generally skeptical of equities is because of their inability to understand the risk component. Understanding that is the key to getting a better than average return. Everyone aspires for average returns, but for the average to be average, some will be above the average and some will be below the average. Where do you prefer to be?

Mutual Funds /Equity / Bonds / Cash all have their place in one’s portfolio provided you understand their pro’s and con’s before getting sold on what may or may not be ideal for you. To conclude, let me quote this from Howard Marks, a guy who has delivered returns which are closer to equity but by using bonds.

“If riskier investments could be counted on to produce higher returns, they wouldn’t be riskier. Misplaced reliance on the benefits of risk bearing has led investors to some very unpleasant surprises.”

Finance and the Treachery within

Of all the Industries, the one that is loathed despite its laudable achievements is the world of finance. If not for the inventions in finance, most of us would still be bartering stuff around and hoping that you have what I need and you need what I have.

While inventions in other industries are lauded, in the world of finance, invention in recent years has made one wonder as to whose good these instruments of finance really are.

At its simplest level, finance is all about money changing hands from one who has more than he wants (for now) to one who wants more than he has (for now). Every business is build on its ability to finance its investment from one source or the other.

Directly or Indirectly, most of us are participants of every nature of business there is. While investing in Equities or Bonds is a direct way, when you lend your money to the bank and they lend to a business, its a indirect way wherein your money is channeled to the business with the risk being spread across.

Mutual funds are one way of participating in the business with the main logic being that the fund manager knows better than others. But does he really know any better?

Every month, reports go out on what funds bought and sold and the list is large enough to wonder as to why fund managers need to trade so much even as they hold in disdain any form of short term trading / investing. HDFC Equity Fund for example (picked up at Random) has a turnover ratio of 34% which means that the whole portfolio is literally turned over every 3 years and yet, we have fund managers who shout from the roof tops the advantages of holding for the very long term.

Since 2000 if not earlier, there has been reports of how monkey’s have been able to beat professional money managers (at least the vast majority of them). While there is no monkey out there with ability to pick the best stocks, the reason behind their success lies in the fact that markets being random, everyone has a chance at hitting the jackpot once in a while.

Some time back, the book 100 to 1 in the Stock Market: A Distinguished Security Analyst Tells How to Make More of Your Investment Opportunities by Thomas William Phelps started to make waves in the financial circles. I myself have not been able to read it though thanks to the world of Blogs, was able to get detailed reviews of it.

The thing is that no one, not me, not you, not the hot fund manager right now or the wise wizard next door has a clue about which business will click and provide tremendous gains over the next 10 / 20 / 30 years and which won’t. This means that one really cannot buy a few selective number of stocks and hope for the best.

In fact, right from Warren Buffet to the value investor down the road prefer to reduce risk of the portfolio by diversifying the same. Mutual fund advisers advise one to invest into not just 1 fund but 4 – 5 funds to reap the benefits. But if you were to total up the stocks, you may very well find that you own nearly 70 – 80% of market capitalization ranked stocks.

Much of the financial world is made of monkey’s who offer to provide the service of sharing their cake. As you would know the story by now, its the monkey who stood to gain from the cat’s misfortune. There is literature after literature, all backed by data going back decades and even centuries about investing in a simple index fund being way better than in any mutual fund. But we are told that India is different and Indian fund managers are really able to generate Alpha – something that even Warren Buffet is finding difficult to achieve these days.

The solution to every problem and goal you have in mind is now easily achievable by doing a Systematic Investment Plan we are told. No amount of words or data seems to change the beliefs of the non believers, so let me try and tackle the issue in another way.

What are the Primary reasons for Investors to invest using SIP. Based on my discussions, I could come up with the following

Unlike in the past, we are told that youngsters these days don’t save much even as they draw mouth watering salaries. Unless some part is taken off and invested, they may not have much by the time retirement comes calling. Also since they are butter fingered when it comes to money, they cannot accumulate money to buy when markets are cheap.
Most investors have no clue about investing and aren’t prepared to make efforts to learn the same. Hence investing directly in stocks is too risky for them since they cannot understand the difference between say a Jet Airways and a Kingfisher.
By investing every month regardless of valuation (which they cannot perceive anyway), they can hope to benefit by long term averaging (in fact, the other word for SIP is Dollar Cost Averaging).

So, any alternative to Systematic Investing has to be one where no grey matter is strained and its simple enough for execution.

One of the ways to generate wealth on the stock markets is to buy Good companies and hope that they continue to grow for decades to come. Easier said than done as evidence has shown that even companies that are part of Indices can come to naught.

Buying the blue-chip of today may provide you with a decent return but nothing extraordinary while if you can buy a stock before market start to believe in it, you may have a real wealth generator out there. Its similar to investing say in Kohli before he started notching up his Centuries. His price (even say in case of Sponsorship) would have been way lower than what after market recognized his abilities.

But identifying such companies is not easy – not even for fund managers who prefer to buy the safe stock than risk (and rightly so) on companies that may emerge to be the next big thing. Most mutual fund portfolio’s are hence full of stocks that are similar in nature (and hence more the funds, more the over lapping).

What if instead of putting X amount of money per month into a scheme you invested the same into a random stock. A stock that was chosen by anything but skill, how do you think that would play out?

Well, I tested out the same. Using a survivor free database, I selected stocks every month randomly and assumed to have bought the stock for the money I was investing (10K per month). Every month all I did was throw a dart and buy the stock it picked.

The negative of the strategies would be

You will have a lot of bad apples. After all, not every company will thrive on the long run.
Your demat statement will run into pages after a few years as you keep adding more and more companies over time.

The positives of the strategy are

Since you invest only a small sum every month, the maximum risk would be losing one month of investment. On the other hand, if you can over time get even a single 100 bagger, it would ensure that 99 other bad apples are taken care of
Cost is small for executing this strategy. These days with brokerage firms offering Zero brokerage for Cash Delivery, the net cost would be way smaller than any other comparable investment (even Vanguard is beaten).

So, how did my test turn out?

I selected 120 stocks from Jan – 2005 to Dec 2014 and invested 10,000 into them. I did not add for Dividends which over time can turn out to be a good enough amount and one that will take care of the costs (Demat / Exchange costs) and more.

So, how did it turn out? A 10K investment per month for 120 months meant a principal investment of 12,00,000. At the closing prices of Friday, the current sum would have been 74,13,875.35 and since the investment was monthly, our XIRR return comes to 29.40%.

Of course, this is just one streak of many (given the randomness) and you may actually end up either better or worse than the above number. The intention of this post is to provide you a view on how you can build a large kitty without having to wonder if you have picked up the right fund manager and if the fund manager is making the right bets.

Much of the finance industry is about making grandiose statement without providing the data to back them up. They say that if you SIP for say 10 years, you returns would be great, but is there is no possibility of having a loss after 10 years? Not even 1%, Zilch? Really??

Hundreds of thousands of Crores change hands from investors to those with the ability to market themselves as being the savior of your savings with no one being the wiser. As a adage goes, “The fool and his money are soon parted”.

When the financial crisis hit in 2007 / 08. thousands of investors lost money, many bankrupted. As to those who sold them such products in the first place? Well, most of them are well off and many are in a better position than during those turbulent times.

As I repeatedly emphasize, every one is after you money and its up-to you to safeguard the same. If you fail, you cannot have anyone to blame but yourself.

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: