Navigating the cacophony

The greatest edge a retail investor has is the ability to ignore the noise the professionals and the business media make. If an amateur can develop his investing sieve which gives him the ability to let only correct facts flow into his mind and keep opinions out that itself is a source of alpha.

Equanimity is a trait which the professionals lack. If a business has a dip in performance epitaphs get written overnight and a mental pressure gets created for retail investors to sell at the opening bell. This is not how investing is done.

Beating the Street

This is the title of a book by Peter Lynch. And in the first 50 odd pages of the book Mr Lynch makes a case for investing in Equities. Long story short his point basis facts is that it is always better to be invested in equities on the long term scale.

Going in and out of equities is detrimental, something I have personally made a mistake at times. Compounding the portfolio at a steady rate for multiple decades can lead to tremendous wealth if held through the crests and troughs of Mr Market's moods.

During any market cycle you will have the professionals and the business media yell in your ears from morning to night to sell this and buy that and to go in cash or to back up the truck and sell your house. 

If you hold steady and act only when facts tell you to do so then you will reap sweet benefits.

We need to not take any words of professionals at face value. We ought to think for ourselves.

Professional Performance and Realistic Expectations from Investing

If a professional's income depends on selling you something he will never criticise it. A business news anchor is supposed to get more eyeballs, he needs to create interest and action. It is their job. And our jobs as retail investors is to use our investing sieve. Let the facts flow in and keep the opinions out.

As on the date of writing this post:

  • Not a single Mutual Fund in India has had a performance of 18% annualised returns or more in 10 years (Source: Morningstar)
  • Only one fund has had a performance of 20% on an annualised basis in last 5 years (20.62%). This is pre expense ratio. So even here not a single fund has earned 20% in last 5 years for investors (Source: Morningstar)
  • The best Large Cap fund in 5 years has given a return of less than 12% pre expense (Source: Valueresearch)
  • The best Multi Cap fund in 5 years has given a return of less than 15% pre expense (Source: Valueresearch)
  • The best Mid Cap fund in 5 years has given a return of less than 13% pre expense (Source: Valueresearch)
  • The best Small Cap fund in 5 years has given a return of less than 14% pre expense (Source: Valueresearch)
  • SEBI has data of all PMSes going back to 2013 month wise. I track some of the PMSes and none have generated 20% CAGR in any of the periods (I track approximately 10 PMSes which are the more 'famous' ones). In fact 70% of all PMSes do not even beat the Nifty 50 Index pre fees. Post Fee the number will be even worse.

At the end of 2019 the SPIVA report shows that more than 80% of the Equity Mutual Funds were defeated by their respective index on a 5 year scale and close to 65% funds were defeated on a 10 year scale.

So do you still want to keep listening to the professionals over and over again?

The professional industry's favourite pass time in India is Buffett Bashing. It is akin to 'Einstein was wrong' in the science world. Every Tom, Dick and Harry on the idiot box claims to have 25% CAGR since inception. None of them ever commit a mistake. Some even claim to buy at the bottom and then short the same stock at the top. In this industry the key focus is on 'topi phenana' (making a fool out of another person). The fool invariably is the naive office going money saving retail investor who thinks 'Mutual Fund Sahi Hai'.

Some of the ways professionals create this image of being situated high up in the ivory towers:

  • Show performance of a sub portion of a PMS offering and claim to be beating the market. When carefully looking at the whole PMS returns on SEBI their actual returns is like a savings account. Some have done literal front running also. Model portfolio is another 'scam'. Result: Doesn't make money for investors.
  • Have 0.01% allocation in 100+ stocks and when 1 of the stock hits an upper circuit post a tweet patting one's own back. While at the same time slyly keeping quiet on 99 duds. Result: Doesn't make money for investors.
  • The 'Forensic Analysts' find faults in all the companies which are going up in stock price and not a part of their portfolio. That's the forensic part of it. Result: Doesn't make money for investors.
  • Some professionals job is only to cry 'Fraud' based on some previous achievements. And now 1 out of 100 might be a fraud in them. Result: Doesn't make money for investors.
  • Post screen shots of P&L statements. Most are edited and then call folks for paid webinars and training classes. Result: Doesn't make money for investors.
  • If you make a good pick or a get a good return on a stock a professional or a wannabe professional will jump and say 'you are an idiot because of x, y, z reasons'. Some will say Buffett never invested in banks, some will say it has poor working capital since one quarter was poor, some will say this is the most overvalued retail company in the world etc etc. Analysts will breathe down your necks with insane reports, blogs will pop up on poor capital allocation by a company. All baseless and/or biased. Result: Doesn't make money for investors.
We can go on and on but one needs to have his BS detector always working at full throttle. Always remember the goal of the professional is to earn fee and not returns for his investors. Fee is primarily earned by increasing assets under management. There are very very few exceptions in the professional field who have focussed on creating true wealth for their investors. These rare species have usually had superior performance and most importantly a consistent investing philosophy. For a professional CAGR of AUM is more important than CAGR of returns.

To Beat the Market consistently a fund manager needs to be special in his investing endeavour. And beating the market for 20+ years is very very rare. It is not as easy as you hear on twitter or on blue ribbon channels.

So what should be a realistic expectation?

The long term returns of the Nifty 50 Index is around 12% not on a total returns basis. So I am assuming approximately 13% would be the real returns on a very long term time frame as of today. The key is the ability to hold onto an investment which generates this 13% returns for a very long time. The moment we retail investors try to be smart to jump in and out, sorry when we are told we are stupid by professionals and we must do what they say, then we usually end up buying something at top and selling at bottom.

Here is a small snapshot of returns one can expect.

A 12% returns for 25 years is a 20 bagger portfolio.

As you can see on a 10 year scale not a single active equity Mutual Fund in India has created 10 times wealth. Only a single active equity Mutual Fund in India has created a double bagger in a 5 year time frame.

So please be aware of the facts when you listen to the person selling his PMS on business channels or when you hear how some momentum portfolio is performing on twitter. Most importantly be skeptical when you listen to all the experts who never made a mistake on twitter and whatsapp.

Think for yourself.



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