Get busy living, or get busy dying

Once I read Kiran’s wonderful post, I knew there was a post that I could write on things I felt he overlooked. Tougher was getting the title though 🙂

First of all, I would suggest you go ahead and read Kiran’s post if you have not done. There is a lot of things I actually agree with him (Link).

I am a strong believer and I believe even wrote in a previous post of mine that since we do not know the end date, there is no point in saving to the point of not having a great life. Yes, the children, grand children maybe happy, but were you happy while you saved every penny and invested in the best possible way to achieve the best possible return is my question.

The biggest issue of not knowing our end date is that we end up saving more than we require or worse, using up all our savings even before we meet our maker. While in the first case, the kids (or to whomsoever our assets go) will be more than happy, in the case of the latter, we find ourselves living out our last days in a way that we never hoped we would.

Kiran is right in pointing out that we need to make up our capital and be able to start spending when our health is still in the prime. After all, when we reach a stage when its difficult to climb up a staircase, would be want to endeavor walking through Paris at night?

Kiran’s scorn seems to be reserved for those who are happy with achieving 18% returns (CAGR) and says that if one needs to achieve, he needs to at the very least double that.

The problem is not the 18% either since evidences in US has shown that normal investors have generally performed even poorer than what the market has returned. So, when Kiran talks about 18% (which is what Mutual fund managers claim India’s market has returned over the long term), its something that a lot of folks in the market have trouble reaching in the very first place.

He, of course points out that achieving 35%-40% CAGR is not easy. Let me quote his own words

There is a lot of hard work, there is a lot of luck and there is a lot of position sizing science involved before you make that million dollars.

The thing about hard work is that, markets do not work on hard work alone. You could have done all your homework and finally decided to risk your money in a stock that then went ahead and got embroiled in a scam that no one had a clue about in the first place

A wonderful book with regard to Luck is Michael Mauboussin’s “The Success Equation”. In that book, he has the following picture

As shown in the above picture, stock markets come in a place where luck plays a great deal of role compared to say games like Chess and Athletics.  In other words, without Luck, you maybe at the right stock at the wrong time.

But coming to his verdict that one needs to generate 35% – 40% CAGR over 15 years to be able to do whatever one wants to do before one gets too old to be able to do that, I decided to check what Investor model (among the great investors) should I follow for achieving a return of similar nature.

Here is a list of top US fund manager and their returns

Since the long term returns (dividend reinvested) for S&P 500 comes to 9%, anyone who has delivered above 26% and over 15 – 20 years would fit our profile. The only guy who seems to fit is the Hedge fund manager Joel Greenblatt whose book “The Little Book that Beats the Market ” has attained cult status. Other than Greenblatt, Soros and Buffett have in their initial years achieved similar high returns though with passage of more time and more assets under their belt, their net returns do not come above the 26% barrier.

Its not that 35% is not possible. Its possible and I am sure guys like Kiran and many others have achieved even higher returns. The question though is, are they the outlier’s in terms of the ability to not only understand companies way better than what most of us do, but also devote the kind of time and attention that is required to achieve those results.

Investing in mutual funds systematically can maybe achieve a number closer to that, but even that requires

1. A deep bear market so that you can invest a lot more when the markets are cheap AND

2. Your ability to keep investing even as the market tanks and the world seems to be coming closer to a Apocalypse.

While a bear market can make asset prices cheaper, it also means that there is plenty of risk to our bread and butter (unless one is a Government employee or knows his company needs him more than vice versa). What use are cheap assets, if one’s own future is unsecure.

As a trader, I target 100% return? But its one thing to target / aim and quite another to achieve. My own testing has indicated that the draw-down one sees in one’s investment is 2X the long term return. So, if I am aiming for a 40% return, I should also be prepared in the worst case scenario to see my equity portfolio go down 80%. More importantly, I should even during the worst time not move away from my process.

Its all easy to be said while tweeting and blogging, but when our real money is going down the drain, the first thing to go out of the window is our discipline and method.

In my opinion, there are no easy way out to most of the things that trouble our little minds. But as Kiran concludes, enjoy the process of investing without worrying too much about whether the outcome will be enough to satisfy our and the future generation or not.

After all, if you are were to study history, for thousands of years, life was so uncertain that nothing other than what could be ported out at a moments notice was not valuable. So, Real Estate was never valuable in the way it is now though Gold had its predominant role due to the ability to run away with it.

As much as the Greece episode has given many investors a ability to buy some stocks cheap, do give a though to those who have their life savings stuck with no idea what will be the final outcome. Same goes to the citizens of countries like Venezuela, Zimbabwe & Argentina. We on the other hand are way better off and hopefully will remain so for a long period to come.

P.S: The title of this post is from a wonderful film called Shawshank Redemption.

Perhaps the best way to sum up the key to life is wisdom from the movie Shawshank Redemption when Andy Dufresne said to his fellow inmate Red: “Life comes down to a simple choice: You’re either busy living or busy dying.” It isn’t just a quote from a movie, its advice for all of us.