As contemplated let us talk about creating an equity portfolio.
There are many instruments with which equity portfolio can be created.
Amongst which 3, 4, 5, 6 & 7 can be combination of Asset classes and Strictly may not be Pure Equity.
For Example; PMS can be Pure Real Estate or Equity or working on CPPI ( Constant Proportion Portfolio Insurance) model or can be of Debt along with Equity.
As per guidelines of SEBI minimum size of PMS has to be Rs. 25 lacs while of AIF is Rs. 1 crores.
Many Investors mostly from Gujarat indulge in Direct Equity. More so for Doctors!
It is not advisable to buy stocks or equity unless you have time for Research and Analysis and you have the ability to study. Buying stocks is more or less like self medicating. If done wrong it can be Wealth destructing too. Only a few investors realise this because they never measure their performance. The tough Yardstick they keep for Mutual Fund Investment never applies to their own Portfolio. If you analyse any equity portfolio of investors and compute its annualised returns, rarely, one can come across the Annualise returns of more than 12%. The main flaw in Direct Investing is lack of process. Stock picking by M.F. or any F.I. is process driven. There are lot of Filters and they visit the company. They interact with the employee, dealers, suppliers, bankers and get the first hand information from top management. In addition to that they study the Industry or Sector of the company, their
Corporate Governance Standards, Industries Scenario, Competitive atmosphere, threat analysis, Global outlook and trend in that portfolio sector extensively. So both Macro and Micro Analysis is done exhaustively and simultaneously.
When Individual Investors buy equity shares it is based purely on hunches, tipping or market grapevine. One tends to fall in love with his/her own scripts. So the emotional attachment creeps in which results into marginalisation of portfolio. He/She talks and brags about one or two pick which may have done well but conveniently ignore the fallies and mistakes. Surprisingly many Investors have very ficklish style and end up buying high and selling low. So he/she never measures his/her own performance. On the contrary, the detachment with which fund manager manages his portfolio and particularly the trait of exiting the stocks is rarely replicated by Individual.
Alarmingly we often ignore the time value of money. If someone has bought Reliance, Larsen or Tata Steel the value of the first two is same in 10 years whereas in Tata Steel it depreciates by 30%. We take solace in the fact that we have blue chip shares and although they have not performed well, they have protected their turf. Here lies the fallacy in thinking process. Because factoring time the value of Rs. 1 lac Invested in Reliance or Larsen today is Rs. 35,000. And only Rs. 20,000 in Tata Steel . While in 10 years any average Diversified Mutual Fund would have given you 15 to 18% annualised returns. Comparing apples with apples, Sensex returns grossed 40% for the last 10 years. On converting it amounts to flat 4% return per year or an annualised 3% return approximately. On an average a large cap fund has given 15% annualized return over the same period. And believe me majority of the Investors have underperformed even sensex in the last 10 years because of choice of shares like Reliance, L&T, Tata Steel, SBI, SUZLON, GMR, GVK and King Fishers. This is because many of them Invest on the basis of Market Grapevine, tips and broker’s advice.
Let me give you a clear example as to why you should not buy stocks on the basis of these type of information. A few days back, I was watching the FIFA World cup round of 16 match France vs Argentina. Although the game was interesting towards the end, at the very beginning it was quite mundane and so i switched to a channel with Hindi commentary just for fun. One of the commentators made a remark that France had never won a match against Argentina since 1930 in the FIFA world cup. Now, you’d be backing on the wrong horse if you bet on Argentina on the basis of this sole information without taking into consideration the the current form, players and other various information into account. That would have been a foolish mistake which would have cost a chunk of money. Buying stocks on the basis of these types of information is an asinine move as well. Don’t expect to make money over the long term and if you do, one can only attribute it to luck.
Interestingly Warren Buffet has said “Never Ask the Barber if you need a haircut.” Similarly, there’s very little money to be made by a broker recommending the ‘buy and hold’ strategy. If that was the case your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice you’ll rarely see in a monastery, let alone a brokerage house. As Charlie Munger has rightly put “Quick trading of stocks is like the slaughter of the innocents. It makes the people who run Las Vegas seem like good intelligent people.” Many of my clients ask why is the ‘buy and hold’ strategy recommended or what is the premise behind it. The underlying logic is fairly straightforward. Equities are generally riskier investments, but over long holding periods, an investor is more likely to realize consistently higher returns compared to other investments. To put simply, if given sufficient time to mature, the market goes up more often than it goes down, and compounding the returns during good times yields a higher overall return.
For e.g., let's take the period between 1926 and 2010 for the US Equity Markets. This period includes the recession of 1926-1927, the Great Depression, subsequent recessions in 1949, 1953, 1958, 1960, 1973-75, 1981 and 1990, the dot-com crisis, and the Great Recession which started from 2007. Despite this, the markets returned a compounded annual growth rate of 9.9% for large caps and 12.1% for small caps. Talking about Indian Equity markets, Sensex has returned a compounded annual growth rate of 16%.
Let me tell you about an interesting case which I find quite amusing. Spencer Jakab had mentioned this in his book called “Heads I Win, Tails I Win: Why Smart Investors Fail and How to Tilt the Odds in Your Favor”. Jakab does a great job providing some much needed context around some of the greatest investing track records. The numbers he provided on former Fidelity Magellan portfolio manager Peter Lynch, considered by many to be the greatest mutual fund manager of all-time, were eye-opening: During his tenure Lynch trounced the market overall and beat it in most years, racking up a 29 percent annualized return. But Lynch himself pointed out a fly in the ointment. He calculated that the average investor in his fund made only around 7 percent during the same period. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery.
That’s some behavior gap. Mutual fund investors have a history of buying high and selling low. This in fact is more applicable and more intensive in direct investing. Talking about the ‘buy and hold’ strategy, one may argue that what is the definition of long term. If you ask a trader he will say one day is long term. Many of the investors think that a period to 2-6 months is long term. Different Individuals have different answers to this. Generally minimum 5-10 year period is considered ideal for Equity Investing. But Keynes had said that in the long term we are all dead. So your investment always should be guided and governed by your financial objectives. For example, if you want your investments to fund your 3 years daughter’s education, long term period should be around 15-18 years. In case, she wants to pursue medical, it may be more. I have had the privilege to attend Warren Buffett's Annual General Meeting for the past few years it is interesting to note that even at the age of 88, he talks about his investments with a long term view of 15 years.
I have come across many doctors who are very busy and in turn delaying their decision making process and working very hard themselves and allowing their funds to be lazy. As usual, it would be appropriate to quote Warren Buffett here: “If you don’t find a way to make money while you sleep, you will work until you die”. To conclude, Investing is more about behaviour and discipline than it is about numbers and analytics. Investing is boring and if it is not you are doing it wrong.
In case of any queries, you can contact me at tutiramit@yahoo.co.in
