Prashanth Krish | Portfolio Yoga

Of Godmen, Miracle Cures and Trading Coaches

India has no shortage of miracle men or also known as godmen and as the recent episode in Harayana showcased, they seem to have the ability to mesmerize folks to the extent of committing violence and taking the risk of getting killed for defending someone they don’t even really know that well.

Of course, India isn’t unique – we have seen similar folks elsewhere too – Religiously motivated Suicides are huge (Wiki Link)

Baba’s are famous for offering cures for every type of ailment known to man – from Cancer, the dreaded disease that has no cure to common cold. What is interesting is the profile of people who believe and follow such characters – they aren’t just the illiterate folks who can be conned. Many are well educated and can make out a difference between what is true and what is not and yet, like a herd they would rather be part of it than take a objective view.

Stock trading is a tough business and is unlike any other business. While other businesses prosper by providing a product or service, the only way you can earn money by much of trading (Futures / Options / Intra-day) is if there is a sucker on the other end of the trade.

Depend on who you ask, trading has a win loss ratio anywhere from 50:50 (it can never be where more people win versus the losers) to 95 : 5 (Loss:Win). Then again, it will also come down to the question of who is really a trader.

Would you consider a guy with a capital of 1 Lakh and exposure of 5 Lakhs (over leveraged) a trader. What about a guy who trades on a capital of 1 Lakh though his own Liquid Net-worth is 1 Crore a Trader? Is a guy who buys today to sell tomorrow (on margin) a trader? What about some one who holds for a bit longer – week / month / quarter but with intention to sell a trader?

In a way, everyone can be considered a trader regardless of whether you are buying with a extreme short term view or buying with a extreme long term view. The only reason you are buying is because you believe that you can sell it at a higher price than for what you have bought.

Trading / Investing / Speculating is tough. After all, in which other business can you just buy a product / service and just wait it out to sell at a price which would generate returns way better than any other form of investment.

The reason to invest in Equity is simple – it has over time proven to generate better returns than other asset classes such as Bonds. But the path isn’t straight forward.

Like the Godmen who promise miracle cures, so do coaches who claim that just taking their class will help you change from a trader who is consistently or inconsistently losing to one who is winning most of the time.

In the field of medicine there is something known as Psychosomatic Disorder. These are disorders that are caused more by mental factors than by physical. Treatment for these therefore lies less in Drugs and more in counselling.

In the world of trading, counselling can be helpful if one is able to analyze his trades and the reasoning for why he isn’t ending where he intended to be.

If you are over-trading – higher leverage than what you should ideally be trading with. If you are not diversified enough – too much of risk in a single trade. If you are expectations are far off from reality for the capital you have deployed. If you lack a strategy and this is one of the single biggest reason for failure of many.

Every issue about has a solution, something we know in our own hearts. Yet, there is always a reason we don’t want to take the medicine prescribed.

The rise of the Machines

The biggest attraction towards short term (Intra-day) trading lies in the knowledge that one can take a exposure multiple times one’s own capital. Many a broker for example is happy to allow you to trade Nifty futures while collecting only Exposure margin at the time of Initiation of the trade. This means that you get to take up a exposure of 7.5 Lakhs for a upfront margin payment of just 22K or 3% of the total value.

If you can then capture just 0.50% of a move during the day, this translates into a return of 17% on the trading capital. And all this without having to move one’s butt from one’s chair.

Since 2000 when Nifty futures were first introduced for trading, the median difference between the high and low of the day is 1.40%.

Introduction of computerized trading has also meant that a skilled trader could try to program strategies that can trade more efficiently than a human ever can and over time this has started a Industry we now know as High Frequency Trading.

High Frequency Trading is a term used to denote trading at extreme short term time frame and can be based upon a plethora of trading strategies – from plain villa trend following on micro second scale to market making to arbitrage between Cash / Futures or one exchange versus other.

These days machines can pick off the slightest of market inefficiencies even before they can be spotted by a human eye. The biggest advantage of the arrival of such strategies has been the reduction in terms of spread between the bid and the ask.

While human ingenuity can still beat the machines, the opponent is growing stronger by the day and can be expected to skim off any easy profits that may have worked for years.

One such strategy which to me has been impacted would be “Trend Following” strategies on the short to medium term scale. While these still can work to generate decent returns over the long term, the pain point one needs to endure is becoming larger over time.

Take a look at the Barclay CTA Index returns

While one could see barely any negative years in the years leading to 2008, post 2008 this has become way too common. Unlike small individual traders, these results represent the combined efforts of some of the greatest funds managing Billions of Dollars.

Every one loves to quote “When the facts change, I change my mind. What do you do, sir?“, yet how many approach our Trading Equity Curve as a fact and if facts are indeed changing compared to the past change our strategy. Most of the times, we are happy to cling on to vestiges of the past hoping that some day,the facts themselves could change to our favor.

Coaches are key people in a sportsmen’s life for they can make or break them depending on how lucky they have been in selecting the right person with the right attitude. In Trading / Investing, a Coach / Mentor can help you understand your weakness and point out to areas of your strength.

But Coaching / Mentoring is and cannot be one off event. To me, its a continuous process with the aim to understand one’s own behavior better. The longer you strive, better becomes the probabilities of success.

Knowing why we fail isn’t enough for most of us know the reasons regardless of whether we want to accept it or not. To achieve better results requires more than just a one off class / session for we are stubborn and would rather defend our views than try to seek out contrarian thought. But the first step is to accept – There are no miracle pills.

Ruffling Feathers – the Ajit Dayal Interview

Most mutual fund distributors that I have come across online (I have been used to invested direct even before Direct was a option, so no offline distributor friends) rarely talk about a fund that has in its category been the best across 10 years and for good reason. This was a fund that until recently decided to ignore distributors, the champions of the Mutual Fund Industry and tried to touch base directly with the Investor.

For the trouble the investor took to invest on his own, the fund ensured that they charged the lowest fee (this before the onset of Direct) since no commissions needed to be paid to anyone.

The low fee structure has also meant a lower salary base for fund managers. While top fund managers of other funds earn Salaries of Crores (+ Stock Options which aren’t disclosed), the Salary of Atul Kumar, head of Equities at Quantum for instance is one of the lowest among Mutual Fund Managers with AUM > 500 Crores.

Last week fund investors received a letter bidding adieu from the founder, Ajit Dayal and suffice to say, other than those invested, don’t think anyone barely gave it a thought. But on September 1, ET published a Interview with him, where he called out the fund industry on the question of Integrity.

No one likes their Integrity questioned and least of all fund managers who believe they have done yeoman service to investors who have been able to get better returns even after paying a much heftier fee and in a way, they are right.

What Ajit Dayal set out to do when he started Quantum was similar in thought of what John Bogle tried with Vanguard or what Eon Musk is trying out with Tesla (Selling Direct to consumer to eliminate costs). As Robert Frost wrote in his splendid poem, “The Road not Taken”

I took the one less traveled by,
And that has made all the difference.

Quantum took a path that differed from what the rest of the Industry had taken. But taking a different road in itself doesn’t lead to success. To call those who didn’t take a similar path of dishonesty is asking for trouble. After all, unlike say Vanguard which has proven over time that Index Funds / ETF’s are the best instrument, Quantum hasn’t been able to sell as to why one should invest in its fund versus other funds which have given better returns post higher expense ratio’s.

A key reason given out by Quantum as to why it avoided Distributors is lack of transparency. But that could have easily solved by showcasing the commission that is given to the distributor as its now compulsory rather than eliminate the distributor completely.

Another class of people who are looked at with scorn are Stock Brokers .While there have been many Stock Brokers who have cheated their clients, not everyone is or was a cheat (Disclaimer: I am a Sub-Broker). Every Industry has its share of black sheep, but to call the entire herd black is stretching one’s own credibility.

Mutual funds on a whole manage around 6.3 Lakh Crores in Equity alone. Of this Quantum manages around 1000 Crores or 0.16%. Its way stretched to think that Industry could get here by just mis-selling to retail investors.

Mutual fund industry under pressure from SEBI started with Direct funds around 5 years back. Yet, the amount that comes through Direct is minuscule. The simplest explanation for this would be that the guys who are selling regular – Distributors / Financial Planners are providing some value which makes the end investor appreciate and willing to pay (in-directly of course) for the services rendered.

As I have written many a time, lower the fees, better the returns on the longer term. But if you have no clue about finance and aren’t willing to learn, it could turn out to be far cheaper to pay a advisor than try to do in oneself.

Quantum was a nice experiment and if they continue to adhere to their beliefs I do think they can make it big. Their Long Term Equity fund became the Best performing fund among Large Caps in October 2016, a position that they continue to hold.

Finally, its all about returns over the long term that matters. As long as the are able to achieve that, my money will prefer them over others. Ajit Dayal deserves praise for starting something different, yet he is as human and fallible as the rest of us. So, thank you Sir for the venture and Best of Luck for future endeavors.

Those who really deserve praise are the people who, while human enough to enjoy power, nevertheless pay more attention to justice than they are compelled to do by their situation. – Thucyclides

Read the full interview here: We have done all that we said we would do: Ajit Dayal

When founders Quit, does Philosophy change?

I have been a follower as well as investor in Quantum Mutual Fund and also a big admirer of their philosophy. While their fund, Quantum Long Term Equity was launched in 2006, unlike many, I came across them fairly recently (2012).

The key reason for me to like their fund was their philosophy of lower fees and willingness to go to cash when markets felt over-heated. While they remained one of the cheapest equity funds to invest for a long time, the same isn’t true now with mutual fund fees falling dramatically in recent times.

Yesterday, the man who started it all “Ajit Dayal” sent a letter bidding adieu to investors in the fund. This was very surprising given that founders do not generally exit the company without a period of transition and even then, generally tend to stay around for long to ensure continuity.

While returns are key, one of the reasons funds like Quantum have been able to garner assets is because of investors belief in the philosophy they claim to uphold. While Quantum sits on top of the ranking list (on ValueResarch) categorized as it is under Large Cap, that doesn’t really provide the true picture since just a few years back, it was categorized (based on their portfolio) as a Multi Cap Fund.

When a Star fund manager / founder exits the fund / firm, the key question that needs to be asked is, should one continue to stay with the fund. Most fund houses ensure that the logic / philosophy that is the core of the fund is ingrained that ensures continuity regardless of presence or not of the guys who build those philosophies in the first place.

As investors, when we invest in a fund, we are outsourcing the whole fund selection and investment process to some one we trust. The bigger the investment, greater the trust factor. But when key people quit without sufficient reason or warning, it puts us in a quandary about whether we should stay with those who remain at the firm or move.

Moves such as these reinforce my view that rather than be dependent on fund managers, one should develop the expertise necessary to invest directly in the markets. If that is not possible, the best alternative is to invest in Index Funds / Exchange Traded Funds.

The risk of investing in Index is that while we are basing our investment in a mutual fund on the capability of the fund manager in question, here we are trusting that the Index Selection process has a sound logic that can survive and thrive over time.

The key to returns is concentration and this is more so important in mutual funds where investing in too many funds will only mean fodder for everyone else while you get returns lower than what even the Index could have easily delivered. But when changes such as this happens, its time to step back and think deep and hard as to why you were invested in the fund in the first place and whether the logic continues to remain true – change of management not withstanding.

Personally, the family investments we have in Quantum will stay for now though I am not too enthused to invest afresh at this point of time.

Total Returns – The Better Benchmark

Once in a way, one comes across a Mutual Fund that decides to take the bull by the horns when it comes to transparency. Mutual fund are products that are sold on the basis of past performance – the better the fund performs against its peers and the benchmark it targets, the easier to sell.

While active management (to which we are a votary of) is seen as a failure in countries such as United States, in India, its a thriving industry thanks to funds that are able to beat the Indices they follow by a margin that is large to even visualize.

Fore example, lets take the best fund in the Multi Cap space out there – ICICI Prudential Value Discovery Fund. This fund is the top performing fund among Multi Cap funds with 10 year CAGR returns of 17.80% versus its benchmark, the BSE 500 which has generated 9.32%.

BSE 500 index represents nearly 93% of the total market capitalization on BSE. NIFTY 500 Index represents about 95.2% of the free float market capitalization of the stocks listed on NSE.

But growth funds when bench-marked against the Index do not really give the accurate comparison for growth funds have the luxury of Dividends. When companies pay out Dividends, the stock price gets adjusted (theoretically) to provide for the pay-out.

But unless it a extra-ordinary dividend (wherein Dividend is greater than 10% of the stock price), the price of the stock is adjusted as it would have been in case of Bonus or Split. Most companies though give out Ordinary Dividends and this is simply deducted from the stock price without any adjustment.

Let me give a example of how this works.

Assume a Index of 50 stocks and having a value of 1000. For sake of simplicity, lets assume that on a single day (ex-date), all 50 stocks go ex-dividend with each company having given out exactly 2% of their stock price as Dividend.

All things being equal on this date, all stocks will open 2% lower and in turn the Index will see a 2% decline. But this decline is not real as the investor receives the amount equivalent and hence not necessarily a loss. A growth mutual fund on the other hand just adds this to income.

So, while the Index would have fallen by 2%, the fund would have remained steady. This would mean that the fund is now out-performing the Index by a measure of 2%. The fund manager with this new money can re-invest (remember, he gets the Dividend payout) into the same stocks and hence compounding the returns over time.

Enter Total Returns Index

The above anomaly can give rise to funds that aren’t really market beaters being able to claim to be better than the Index when it may not truly be the case. Total Returns Index is a virtual Index wherein the Index manager is assumed to have re-invested the dividends back into the same shares. In the above example, this would mean the fund would take the 2% dividend paid out and re-invest bring the fund value back to 1000.

How much difference can this make? Well, take a look at the chart below which plots Nifty 500 with Nifty 500 Total Returns Index

The difference over time as the chart depicts above can be phenomenal. Not surprisingly then most funds prefer to benchmark against the Index rather than Total Returns.

Of course, an added impenitent to measuring their performance against Total Returns was the fact that NSE till very recently gave out only data for Nifty 50 Total Returns. The only fund to have bench-marked itself against Total Returns was Quantum Long Term Equity Fund.

But as friend in the Industry said, “their name doesn’t (really) ring a bell in the AMC space”.

Other than Quantum, other funds have for long given it a pass. This even as many have generated returns better than Total Returns Index (which any-way cannot be invested into given lack of Instruments).

This seems to be changing. On 23rd August 2017, DSP Blackrock has taken the first step to benchmark its funds against Total Returns Index. This is a step in the right direction and DSP needs to be applauded for taking the Initiative.

While Quantum has always been the leader, its nice to see a fund house that is several times larger than Quantum take similar initiatives. We can only hope that other larger funds now follow suit and start measuring themselves against Total Return Indices of their respective benchmarks.

The last few decades have belonged to active management but nothing remains static and with growing fund size and better participation in equities, its only the best in business who shall thrive.

Book Review: Bull: A History of the Boom and Bust, 1982-2004

1982 to 2000 saw one of the biggest bull rallies in the history of the United States stock market and the book Bull: A History of the Boom and Bust, 1982-2004 follows the up’s and down’s of that journey.

While the Bombay Stock Exchange is the oldest continuously traded exchange in Asia, the markets have never really appealed to a large majority of common folk who would rather invest their hard earned savings in Bank Deposits, Gold or Real Estate.

Before 1982, the situation in the United States was somewhat similar with a lower percentage of folks investing in markets.

With falling interest rates and a rising stock market which was coupled with a boom in Electronic Media, investors overcame fears of the past as they rushed in to take advantage of the ability to make money with click of a few buttons.

India seems to be placed very similar to where US stood at that point of time when it comes to the catalysts required to goad investors from safer assets like Bonds and Banks into Riskier investments such as Equity.

“Knowledge of history is an investor’s best defence against Error” and as India finally is seeing a marked change in sentiment with investors choosing equity, the lessons there could turn out to be important as our markets mature over time.

Markets moving ever repeating cycles of bull and bear. Currently it seems that we are on a never ending bull market. But history says that this can and is never true for the longer a bull market, greater the possibility of a gut wrenching bear market.

Most Investors experience in Bear market these days are limited to 2008 when the only casualty was the financial market. A real bear market is when there is wide spread job losses and loss of confidence.

There were way too many quotable quotes in this book. You can check out this tweet thread for some of those which really hit hard.

When will large majority of people start investing in markets? This is how it happened in US pic.twitter.com/MQr6rI1CFy

— Prashanth (@Prashanth_Krish) July 15, 2017

Preparation is half the Battle – the question being, are you prepared enough?

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Chasing Performance & Behavior Gap

When Gold, especially in form of Jewelry is bought, its not bought by calculating the CAGR returns it shall provide over the next 3 / 5 years. When one buys a home for his own use, he is not calculating how many times it can become in the next few decades. But not calculating really mean that we are ignorant of returns?

Every month hundreds of vehicles are sold despite irrefutable evidence of how by just a few years it will be worth closer to scrap than any vehicle. Aren’t the buyers conscious of this fact?

Value Investors claim to buy good business choosing only businesses that keeps generating consistent returns for their shareholders. But do all good businesses make for good investments?

From the religion we profess to the acts we commit, everything is based on a some philosophy we agree with and one we would like to follow. Investing should be no different, or is it?

Last weekend, I raised a question on Twitter as to what drives Investors when it comes to Mutual Funds. The results were a tad of a surprise to me.

What is your Primary Criteria when investing in a Mutual Fund / PMS?

— Prashanth (@Prashanth_Krish) August 5, 2017

Returns are important and the very reason we finally invest, but Returns are post-ante – something we really have no control with. What we have control over a larger degree is the Philosophy that is followed by the fund house and how well we believe in them.

The reason for a investor to bet on a Philosophy than a Star Fund Manager or even Returns is that without there being stead fast belief, one can never be comfortable as to whether the fund continues to remain one that is worth staying invested or one from which it makes sense to move on.

In the 2000 bull market, one person who stayed away from Participation was Warren Buffett. For a time, he was heavily wrong as market broke every rule that seemed to bind it in the past as a new set of investors made bets that paid off immensely.

Such was the divergence that when the Nasdaq Composite was touching new all time highs, the Dow was a very close to its own All time High, the stock price of Berkshire Hathway was down 50% from its peak.

Rare would be the man who held Berkshire Hathway shares in those days while ignoring the hot stocks that had turned ordinary Joe’s into multi millionaires. “GREEN LIGHTS” Business Week proclaimed. “The stock market’s rise is a accurate reflection of the growing strength of the new economy. Productivity growth, although understated by official statistics, is raising as companies learn to use technology to cut costs, a necessity for competing in global markets”. (Quote sourced from the book, Bull: A History of the Boom & Bust, 1982 – 2004).

Its one thing to believe in a philosophy and quite another to be able to take the hits that come along with it. As Momentum Traders, we Invest / Trade without bothering about the companies in which we put our monies to work. The philosophy that guides us is historical evidence of cycles and belief that as long as we are trading with the larger trend, we shall come out better than where we started from.

From the outside, all Mutual Funds are the same – all of them try to gather as much of assets as possible and try to maximize gains for their investors, or are they different animals?

The last one year has been phenomenal in the markets with Nifty 50 up by 17.72% and Nifty Next 50 up 27.00%. Based on above data points, would you invest in a fund that has under-performed both the Indices with its 1 Year Return being just 15.39%. What about another fund that benchmarks itself to Nifty 500 which over the last one year has been up 17.30% verus 21% return by the Benchmark it follows?

The fund that is up 17.72% is Quantum Long Term Equity Plan while the fund that generated 17.30% return is Parag Parikh Long Term Value Fund.

The Behavior Gap

In 2012, Carl Richards a Certified Financial Planner came out with a book titled – The Behavior Gap – Simple ways to Stop Doing Dumb things with Money wherein he coined the term, “behavior gap” to explain the reason as to why Investors in Mutual Funds under-perform the funds they are invested into.

Behavioral Gap is not academic. As the following chart from Axis Mutual Fund shows, this is as real as it comes.

As can be seen, the difference can be substantial but without understanding the source of where this gap comes from, its easy to fall prey.

Momentum Chasing is Bad

Being a Momentum Trader, this is a tough to say but true when it comes to Mutual Funds. Chasing Momentum can easily land you in trouble for unlike stocks where Momentum Investing has great value, in funds, this can easily backfire.

Currently the best performing fund among Large Caps is the JM Core 11 fund (Best performing fund based on 3 year look back) and yet its AUM is just 32 Crores. The reason is not hard to fathom if one were to look at the performance of its funds with a longer track record. JM Equity Fund for example is the worst performing fund over the last 10 years (Large Cap) with return on Investment being a pitiable 4.03%. These days, you can get better return on Investment than that on your Saving Account.

Every fund worth its name claims to have a philosophy that is said to ensure better returns for its investors. Its quite another matter as to how many funds really follow what they preach.

Motilal Oswal Mutual Fund has a Philosophy of “Buy Right, Sit Tight”. Motilal Oswal MOSt Focused 25 Fund is the 3rd best fund among all Large Caps. Their 3 year return has been 19.75% but is the Return based on following of the Principal they profess?

The fund has a Turnover of 86% which seems to suggest that the Portfolio is going through a lot of churn. With markets flying, this is providing returns better than average, but what when the Tide goes down?

A competing fund (Large Cap focused with similar AUM) one of whose core philosophy has been to keeping costs as low as possible has generated a return of 13.75% over the same period. Turnover of the fund – 20%.

Does the above example mean that Higher Turnover is better or should one care less about Turnover as long as Results are above expectations?

While there is data lacking to reveal whether a higher turnover is better or worse, the following is evidence from United States where one has more data points to get a better perspective

Source: The Perils of Portfolio Turnover by David Blanchett.

One of the under-performing funds these days is Parag Parikh Long Term Value Fund. This fund philosophy is simply to Buy and Hold for the long term stocks that they believe are Value (Buying securities at a discount to intrinsic value). The fund has a Turnover Ratio of just 10% but a 3 year return of just 14.73% versus the best fund among Multicap funds – Franklin India High Growth Companies Fund which has given a return of 20.63% (Turnover Ratio being 44%).

Once again, the fund house in question has a philosophy of investing across Value and Growth and for now seems to have delivered way better than pure Value fund. But is this is a good model for eternity?

The Prime Objective for investing in Mutual Funds is the ability to hire a fund manager who believes in values we understand are willing to bet upon. Comparing one fund to another purely based on short term returns hence makes little sense and yet going by the Inflow / Outflow Mutual Funds data shows, this is what is happening with Investors chasing the best funds of the day.

Momentum Investing in Stocks on the other hand actually offers better Risk to Return as the upside is unlimited versus limited upside for even the best of funds. Strategies that work in one market needn’t really work in another and trying to force it can only result in broken goals and un-necessary disappointment .

“All I want to know is where I’m going to die so I’ll never go there.” – Anonymous

Climbing Trees & The Benefit to Cost Ratio

One of the most abundant trees once upon a time in Bangalore as in many other cities across the south used to be the Coconut tree. Thanks to the fact that literally every part of it is useful, the tree is also called a Kalpavrisksha. Growth of city has meant a rise in number of trees being cut down to save on space though even today it’s not un-usual to find such trees in almost any old area across the town. In fact, at my place we have one that has been yielding fruits for decades.

While most trees can be easily climbed, this is not the case with the Coconut Tree. With a single straight stem and no real grips along the way other than for the groves formed by leaves that have long since gone, climbing requires a certain kind of skill-set.

A coconut tree climber today charges 300 – 400 per tree for a single climb. When I was young, I used to climb trees and yet, never have I tried to climb a coconut tree to pluck the fruits. The risk of falling is just too great for the savings it affords.

Manoj Nagpal tweeted the following story yesterday which seems to imply that investors who try to save pennies by going direct take much bigger risks.

My First Twitter Short Story
Folk Tale of Kerala: Swamy and Coconut Tree
Are u Swamy trying to buy Direct Mutual Funds? pic.twitter.com/lb6fgd5gVn

— Nagpal Manoj (@NagpalManoj) August 2, 2017

While I disagree with the premise of the story (the guy who climbs the tree himself is not a Direct Mutual Fund Investor, rather he is an Entrepreneur who takes the risk of plucking what he assumes are low lying fruits), it’s true that if you aren’t knowledgeable about finance, it’s better to have an advisor to guide.

In the United States, almost all states now include personal finance in their K–12 standards. Of course, on the other hand household debt is hitting new peaks showcasing that education while helpful isn’t enough to stop us from taking stupid decisions.

In India, I don’t think any school offers classes on how to manage finances. How many students passing out of colleges I wonder can really differentiate between Fixed Deposit and Recurring Deposit let alone the difference between CAGR and XIRR.

A booming stock market along with aggressive marketing by AMFI has meant strong inflows into Mutual Funds. Much of the inflow into Equity funds come in through Distributors who are paid for both brining the client by way of Upfront commission but also are paid through the length of the time the client remains on-board by way of trailing commission.

It is no one’s argument that we don’t need advisors. Most clients require advice on how to organize their investments better. But does that require one to pay a fee in perpetuity regardless of whether advice given has been continuous in nature or was a one off?

For a long period of time, Stock Brokers also doubled up as Advisors given the lack of any other decent alternative. This also meant that pricing was high with investors being charged as a percentage of their investments.

But passage of time has meant that there now exist professional stock advisors who will for a fixed fee guide you on the opportunities that are available. Once a stock broker is reduced to just being an executor, the fee started to fall to the extent that a few discount broker’s today offer to execute your orders without taking a paisa in commission.

Flat Fee based advisory hasn’t really taken off anywhere across the world. The blame though lies on our cognitive biases than regulatory hurdles.

The Power of “Free”

Almost every distributor claims that his services are for free versus the fee based advisor who asks you to upfront a certain sum of money before he would even initiate the process of helping you invest in the right asset classes.

While most of us presume that nothing comes free and there is always a catch, we justify the ignorance by assuming that nothing is anyway being paid out of my pocket. The distributor is anyways compensated by the fund house, so why should I bother.

In a bull market, fees hardly matter given the returns the fund could deliver. But when you are saving for causes such as your Retirement or your children’s education that is a couple of decades away, this small difference can really add up over time.

But the biggest reason for one to either choose a Fee based Advisor or Do it yourself is not just to save money.

“The great thing about reading is that it broadens your life” ― George R.R. Martin

While we spend our whole lives trying to earn more, isn’t it also important to learn how to deploy the same better. Mistakes happen regardless of whether it’s a decision taken by you or a decision taken by someone you paid. But while you can always learn from your mistakes, the same cannot be really said when the mistake was committed by someone else but impacted you. You then become Collateral Damage.

While we fear that we may stumble, as Alfred Pennyworth says to Bruce Wayne (Batman) – Why do we fall sir? So that we can learn to pick ourselves up. Your Distributor would love for you to be uninformed for the more uninformed you are, lesser the chances of asking tough questions.

Start with simple concepts and soon you shall find that it’s not all that tough and those complex sounding jargon aren’t really as complex as it seemed from the outside. Even if you were to take the help of an advisor, wouldn’t it be important for you to understand whether he is helping you or helping himself?

To conclude, it all boils down to whether you will take want to take responsibility for the choices you make or hope someone makes the choices for you. And No, Investing in Mutual Funds isn’t a full time job that you would rather outsource.

“The only real mistake is the one from which we learn nothing.”

~John Powell~

The rise of the Machines

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Enter Total Returns Index

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The Behavior Gap

Momentum Chasing is Bad

Source: The Perils of Portfolio Turnover by David Blanchett.

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The Power of “Free”

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