Forecasting the change is a mug’s game.

Not too long ago, investors were told to focus on process and returns, when returns started getting subdued they were asked to focus on the process. Today, we have shifted it completely to “Don’t worry about Returns, Focus on your Goals”.

Achieving your financial goals that you set based on inputs from your advisor seems to be the only thing that matters with the rest thrown to the dustbin. Not that goals are not important, they are important in the sense of knowing where you wish to reach, but the focus on goals at the expense of everything else is to me defeating the very purpose of life.

The picture below is showcased to signify that even when it comes to investment, success isn’t straightforward

As investors, we are too easily swayed by the soft talking skills of fund managers – they became fund managers not just because of expertise in markets but also ability to convince others. On Twitter, they try to make themselves likeable to the extent that it’s easy to believe that they are as commoners as are even though what they earn in a year or two is most probably your goal to achieve by the time you retire.

We all know that we will die one day but what motivates us and where we find comfort is the fact that we don’t know the date. Assume for instance you knew that you shall die on a certain day – while the facts don’t change otherwise, your ability to look forward would decrease substantially owing to the fear that one is coming closer and closer to the deadline.

Ever since the Franklin debacle and the markets meltdown just before that, one common trait I find is among those who missed out on either of the two. Advisors  who for whatever reason did not get caught with Franklin funds in their kitty today flaunt that as the reason why you need an advisor and one who understands risk better than the fund manager himself.

On the other hand, we have advisors who were able to stay out of the markets just before the little boy dropped today are happy to showcase how they were able to stay out of the markets and why their method is superior compared to other styles of investing. Dare you have a draw-down is their tag line today.

I am one of the poor folks who not only was invested in Santhosh Kamath’s fund but also continued to have exposure even as markets dropped. If not for the fact that I have a bit of experience when it comes to markets and advisors, I would have thought that I am the worst investor around.

There is always something that has worked wonders at  some point of time. Hedge Week for instance reported  “Hedge funds were down 6%, global equities, -14%.CTAs were up 1.90% in Q1, outperforming other major strategies.” 

CTA’s are nomenclature for Commodity Trading Advisors who manage funds using trend following methodology. With negative correlation to S&P, they are seen as the absolute best funds to hold during market weakness or even better when all asset classes are weak. But the last time they showed exemplary performance? Well, that was way back in 2008. 

India doesn’t have any CTA’s – but if there were such funds, I am sure that this would not be flaunted as the best investment strategy to be invested into as is the case currently with Hybrid funds that due to the nature of their stye are uninvested in equities and hence have borne the least amount of damage. 

Coffee Can Portfolio is today seen as the punching bag for every advisor. This ain’t based on returns, mind you – even today, the stocks that qualify and the portfolio that could be built around it is one of the best portfolios measured on risk to return. The anger stems from the fact that how can something so expensive generate returns while the cheap stocks that I hold continue to lose money.

Unlike Saurabh Mukherjea, I am not sold about buying high quality stocks at any value – but I recognize that the strategy has value. It had value a few years back when I invested a small sum and will have value some time in the future as well. Nothing is permanent in this world.

As an investor, your Goal is simple – get the highest possible return with the lowest possible volatility. In other words, a strategy that can deliver a high sharpe ratio. Doing that consistently is all that is required to live a life that you can afford while at the same time ensuring that the future requirements could be adequately met.

But that also means that you shall have to stray away from the herd at some point of time while being with the herd at other points. 2017 was the years to be massively invested in Mid and Small cap stocks, 2018 to 2020, not so much. Large Caps would have been a better fit. 

Asset Allocation is today looked at mosty from the split between Equity and Debt. But what also matters is the kind of stocks you invest in equity and the kind of debt you risk upon in Debt. A conservative investor can be conservative when it comes to debt and aggressive when it comes to equity and yet ensure good sleep by having an overall allocation that is conversvatie in nature.

From Real Estate to Gold to Bitcoin to Bonds to Equity, risks exist everywhere and you cannot really overcome it all. But understanding the nature of that risk and accepting when that risk becomes real is what can help you stay the course.  

“A ship in harbor is safe — but that is not what ships are built for. In finance, if you can sail through life with no reason to risk – don’t risk. It’s not worth the additional few pennies for the stress you may have to put up with. But if you need to take risks, remember that no strategy is ever going to give you rewards without you having taken commensurate risks – knowingly or unknowingly.

Risk is exposure to change. Nothing lasts forever. The situation will change eventually. Forecasting the change is a mug’s game. The future is not sure yet. history helps us build models that can provide us perspectives on the risk – that is all we can need to accomplish.