Commentary | 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?

Trading and Living

In recent weeks / months, quite of my friends have left trading to either start a new business or go back to college or taken up a job or changed their business. Its not that they were ill equipped to handle the markets, on the other hand, their education and experience would match the best of the best which set me thinking on why trading is such a tough business.

Trading is a challenge like no other with everyday proving for most to be a battle between them, their weaknesses and the computer and most days, the majority fails to achieve the goals they set out to achieve when they woke up in the morning.

Being in the brokerage industry for nearly two decades now and witnessing either directly or in-directly hundreds of traders, the one staggering fact of the business is the rate of failure is something that you will not see even in the Silicon Industry where companies churn over faster than you can imagine.

Most business have a known upside and a well known down-side on which things could be planned. For example if you were to open up a shop, you know that the down-side is equivalent to making no sales and yet needing to pay the rent, pay your workers among other fixed costs.

Trading is bit similar to trading in perishable items where on good days you end up selling everything you have and on bad days end up losing the whole capital deployed. But if you have ever been to the vegetable market, you don’t see a churn in the vendors like the way traders get churned over time.

There are a million things that are reasons behind failures in trading, but to me, the following are the major criteria

Regular Income: Most people are used to regular income – Salary for example and anticipate something similar in nature from trading. When trading on the other hand, there is no guarantees. You may actually taking losses for months together before you find the edge and start gaining back your losses. Some one I know had a draw-down of 3 years before he was able to synthesize his strategy and was able to gain his losses back. Sustaining such a long period of time without a secondary source of Income is impossible for most which mean that they end up leaving the field rather than stay and fight it out.
Under Capitalization: Most businesses provide you with a fair idea on what is the minimum capital you need to start off with. You know that you cannot possibly take on rent a showroom with just 10K in the pocket. But when it comes to trading, some think that even 5K would do it (Nifty options anyone?). While no amount of capital can help someone on the wrong track, if you start off with too little, its equivalent to buying lottery and hoping you will win.
Short Cuts: I see a lot of traders believe in using short cuts in the hope of succeeding. While few spend thousands (and these days many charge in Lakhs) on so called education, others spend a few thousand per month to get access to trading / investment ideas from guys who they hope are knowledgeable and will enable you to achieve your goals with the least effort. Great traders don’t have the time to spoon feed you their trading ideas for a small fee. They will rather clean you up in the markets than bother with passing the SEBI exams that are now required to be passed before you can sell advisory services.
Lack of efforts: Most traders are prompt when it comes to screen time, but can the same be said when it comes to reading books / testing strategies. Trading requires (not compulsory but preferably) expertise in markets, statistics and programming. While not everyone can be a expert in all three, you need to be able to tick mark two out of three to be able to risk money that YOU CANNOT AFFORD TO LOSE. Unless you are here for time pass, risking money you can afford to lose shall get you nowhere in the long run since as percentage of your net-worth, the addition will be too small (kind of rounding off error).
LUCK: Luck plays a large role – and I am not even talking about Individual trades. Regardless of your beliefs about Luck, it could be a major factor that determines whether you are a successful trader or a ordinary one and the worst thing is that there is little we can really do about it.

Its all nice to dream about trading for a living but if you are the sole breadwinner for your family, I seriously believe that the odds of your success is pretty poor to start with and will erode faster than the option premium over time. Most successful traders I have encountered had a secondary income that supported them as they learnt more about markets and trading more often than not by burning their fingers / hands or even entire bodies.

Jesse Livermore who is looked up by many who have read Reminiscences of a Stock Operator by Edwin Lefèvre will know that he went totally bankrupt twice in his career. Not every one can come back from one bankruptcy, let alone twice.

We are One Year Old! Yippee!

Time flies they say and it couldn’t be truer about how fast a year has passed since Portfolio Yoga got started. I have been writing on public forums since 2004 with focus mainly on trading and technical analysis and the initial game plan was to provide reader’s with data backed analysis that is both interesting and yet actionable. Despite the fact that Bombay Stock Exchange is Asia’s oldest stock exchange, when it comes to data, we are a long way behind many of our peers. The fact that we decided to create an Index a century after the idea was born in the United States is a story to tell in itself.

Trading is a tough business with success rate being lower than starting any other business. In my twenty years in market, I have seen both riches and the horrors that accompany success and failures. While data shows that majority of businesses do not survive for 10 years, when it comes to trading, that time frame gets drastically cut down with a large majority of traders quitting it way early (unless they are having a full time job or a Inheritance on which they can draw their financial strength from). Any wonder then that more people want to offer services to help you decide what to buy / sell than do that on their own.

But if you have been a reader of this blog, you would have noticed that these days rather than talk / write about trading, my focus has shifted to the Mutual Funds arena specifically that of Equity funds since my expertise in markets helps me understand them better. In much of the world (democratic, liberal countries), equity has been the strongest driver of growth in terms of risk adjusted returns (Inflation adjusted returns) compared to every other asset class. In India though, Real Estate has provided way better returns (unless you were lucky enough to invest a large enough sum in few stocks that have given a zillion percent in returns) than other asset classes. In fact, despite my own inclination to not invest in Gold, Gold too has provided decent returns (thanks to both its rise in the International markets plus the continuous depreciation of the Rupee) which are very much comparable to one that is received by investing in equities.

Managing other people’s money is a multi-Billion Dollar enterprise world over. Everyone loves to try and beat the market though on the long term, very few actually possess the talent to do so without taking risks that could ruin their capital. Mutual funds are a good way to take part in the growth of equity for those who aren’t willing to put in the hard work of identifying opportunities by buying stocks of companies they believe in directly.

With real estate getting bogged down both in terms of prices being way off from what most people can afford as well as in terms of fresh regulations, equity investing is finally coming of age. Assets under Management by Mutual Funds / PMS / Hedge Funds have seen a steady growth reflecting this trend.

But the big question that I am unable to get an answer for is whether investors are getting the maximum buck for their investments. In my previous blog posts, I have showcased how even random investing can provide better returns than fund managers and given the churn that most mutual funds see in their portfolios, one does wonder whether a fund manager really possesses better knowledge about companies and industry than a layman on the street.

I believe every investor wants to maximize the returns he gets for the money he invests but that is not possible without having an in-depth understanding of where and how the returns are being generated. I hope that Portfolio Yoga will fill that gap by providing investors reference and understanding of risk, rewards and opportunities. Being neither a distributor of mutual funds, an agent of Insurance or a fund manager (PMS/ Hedge Funds), I hope that this site can provide you with a neutral perspective of things.

Investing is all about probability and over the coming years, I hope that Portfolio Yoga will provide you with the right tools that not only help you in selecting the right investments but also enable you to understand where you stand and the probability of you reaching your financial goals. While it’s true that there is no gain without pains, it’s also true that enduring pains do not assure of gains.

And before I conclude, let me thank from the bottom of the heard to you, dear reader since without your support, it would have been one hell of a lonely journey (hope it ain’t too cheesy :D). Thanks for being part of this journey. So, here’s me signing off and hoping for a awesome 2016 and beyond.

Disclaimer: The information contained within this blog is provided for informational & educational purposes only and is not intended to substitute for obtaining professional financial advice.

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.

Fundamental investing vs Technical investing

The question as to whether Fundamental or Technical is the right approach to investing is as old as the hills with there being no clear answer on which is better ideology to follow. I have blogged multiple times on how random portfolio’s have worked wonders as well and given the laziness of the approach, it makes one wonder whether we are fooling ourselves trying to find the holy grail of strategies when in the long run, just disciplined investing should be good enough. Or maybe, its just that we cannot accept that simple strategies can work and hence the constant need to search for a complex / sophisticated one.

Dr.Vijay Malik is a well known investor / commentator in the fundamental analysis circle who today re-plugged a article comparing his journey which started with technical analysis but how he found it inferior after finding fundamental analysis.

Dr. Malik concludes the article (Why I Left Technical Analysis And Never Returned To It!) by way of 4 bullet pointed answers to why Fundamental Analysis is superior to Technical Analysis.

Before I argue my take on those 4 points, I do think that technical analysis has acquired a name as a vodoo science thanks in no less part to some of its well known practitioners. Switch on the business channels on any trading day and you will guaranteed to be given hundreds of tips of what to buy / sell – everything accompanied by a story and a chart. Most of the advises are for the extreme short term (hours literally) making it feel that maybe a chart has no use for the investor who is prepared to wait for the long haul.

Advisory / Education is a big industry and for most of them, technical analysis fits their needs perfectly. Like the Instant Lottery, they are willing to sell their wares with results being instantaneous and the crowd loves them for it. Given the fact that I neither run a advisory service nor try to educate investors for a fee, I do wonder what is the point in defending technical analysis given that I know it works for me.

But I am digressing. The point of this post was to showcase a alternative perspective on the questions raised as to why TA is inferior, so lets move ahead on that. (Dr. Vijay Malik’s quotes are in Italic / Red)

Technical analysis keeps an investor on a treadmill. You can never relax. Carrying open positions requires guts. No one knows how markets are going to open up or end at any day. Fundamental investors sleep peacefully at night.

There is honestly no difference when you carry positions over-night for risk remains the same. Neither a fundamental nor a technical investor knows how the market will open or close. The only difference is that most of the time, a technical investor has a plan laid out on what he shall do in case of stock moving higher and what he shall do if a stock moves lower. Of course, if he like me is a Systematic trader / investor, even that decision making process is outsourced.

It doesn’t matter what methodology you chose, if you don’t have a plan and have made too big a bet, you will end up losing sleep. I am sure that neither Sequoia Bill Ackman are investors who look at chart to take decisions, but these days, VRX is keeping them awake.

In my own journey, I remember the days when I used to sit and watch Dow till it closes and sleep worrying about how that will impact my position the coming day. But moving to systematic trading has removed those worries and made trading (even when markets are not trading in my favor) much more simpler.

Technical analysts rarely capitalize on big moves. There is so much noise in indicators, everyone giving either buy or sell signal all the time. In fundamental investing, you buy once and sit tight. It lets the large gains come to you. I feel safe to say that an investor nibbles in technical analysis whereas she grabs a big bite in fundamental analysis.

To me, the question is not whether you are capturing a 100 point move or a 1000 point move since the bigger difference will come from how much you are betting. A 1% allocation to a 100% mover is same as a 10% allocation to a 10% move.

When using charts, using long term signals eliminates the issue of not being able to capture the bigger moves while at the same time providing timely exit. Rather than just talk theoretically, lets use a recent example: Page Industries.

If you used a simple 200 day EMA, you would have garnered 10,497 points from 2008 till date while being exposed to markets for only 76% of the time. Of course, you will argue that I am falling prey to Selection Bias and I accept. my point really was to show that if you have selected a stock and are concerned about missing the meat of the move, you may want to be relieved to know that you can participate on the big moves.

In technical investing you need to get most of your decision right (>50%) before you make some money. Significant money is required to cover cost of live data feed, brokerages and losses of wrong trades. In fundamental investing even 10 stocks chosen well over one’s lifetime can make one millionaire. Warren Buffett is a live example. He found Coca Cola, Gillette, Wells Fargo, Washington Post and stayed invested with them.

Once again, the question is not about your success ratio, but about how much you make when you win and how much you lose when you take a hit. The trading system which I use on my own funds for example has a Win:Loss record of 40:60. But since my winners make more that twice on what is lost by losing trades, it makes up and then more.

Yes, trading is expensive but unless you are trading intra-day, costs are much lower and in these days of low brokerage, brokerage is not a major factor anymore. But I agree, if you can select 10 stocks that you think will do big on the long term and then bet big on them, you would not need to go through the gruel of trading. As I have written earlier, I was lucky to buy into at least three 100 baggers (one of which I still hold). But since I did not bet big, despite having those winners, I still am way short of fulfilling any of my financial goals. But if you think, you can identify the next big thing and willing to be big, Good Luck.

Technical analysis is more time consuming. An investor has to continuously keep updating the charts and analyzing new patterns, which keep on appearing, whereas in fundamental analysis, once a quarter reviews seem sufficient.

Once again, the key is that it all depends on what kind of time frame you chose. The longer the time frame, the lower the requirement to look at charts on a regular basis. Also fundamental analysis is not about just relaxing after buying a stock. Both analysis requires constant and continued efforts and if you aren’t prepared to put those efforts, its way better to invest in a Mutual Fund / ETF and hope that the manager does better than you.

I am biased towards Technical Analysis since it has provided my bread and butter for long. So, take my above view with a bag of Salt. What works for me doesn’t necessarily mean it shall work for you.

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

🙂

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