Of theories and biases

Over last couple of days, my timeline has witnessed immense activity between various persons on whether or not SIP is the best way to save and invest in markets. My last two posts were a consequence of trying to put my thoughts on the same.

To clarify before I move further, I am not against saving and not against SIP as a medium to save. But, please, lets not consider it wealth building giving it value more than what it deserves. Adjusted for Risk, any investment that provides a positive value adds to our kitty, but the definition of Wealth is somewhat different since it brings out dreams of one being able to afford things that he doesn’t seem to think is possible in the current.

While SIP’s in Equities can provide a much better return than Bonds, please do note that if you are not used to seeing months of gains wiped out and threat that even the principal maybe at risk, you may not be the ideal candidate to make such investments. For better or worse, sticking to tried and tested methods will ensure you get a good night sleep even if your returns are below what can be optimally achieved by taking a small dose of risk.

Difference of opinion in markets is normal – I for instance have for long received brickbats for insisting that any and every strategy needs to be validated using non discretionary tools. As a Technical Analyst, we as a group are held at ridicule by investors / advisers who believe that Balance Sheets and Cash Flow provide a better understanding of the company than how the price moved over the last ‘n’ periods.

Efficient Market Hypothesis, a subject that is taught to every Management student claims that stock prices reflect all available information about companies and investors can’t beat the market indexes by stock picking. In fact, when some one says markets cannot be timed, he is knowingly or unknowingly reflecting the same. But ironically the same persons then go out in search of funds that are consistent in beating the markets.

Every fund manager tries to time the market in his own ways. The fund manager of Quantum for example took to timing by reducing exposure to stock in the hope that markets will weaken at which point he can re-enter providing value and a better return to his clients. He had done this before and it worked, but this time, he went to cash a bit early and given the current fall, added exposure a bit more early.

Prashant Jain of HDFC is a case of taking risk on a sector which did not turn out the way he would have thought it will. But go back in history, and risks taken by him gave him a pretty large addition that what other managers could deliver.

You can see this in the International arena as well with Bill Ackman having a ball in 2015 but facing literal rout in 2016 (even though we are just 1.5 months into it). LTCM delivered superlative returns for 4 years before it fell of the sky and went under.

On the other hand, we have John Bogle of Vanguard who makes the following points when it comes to Mutual Fund investing

1. The vast majority of managed funds underperform their respective relevant market indexes
2. There is no reliable way to predict which few managed funds will outperform the market
3. The intelligent investor therefore invests in index funds

He believes that most investors are better off with a cheap (and his company Vanguard has shown time and again, how cheap index investing can be) ETF that tracks the Index.

When it comes to leverage, literally everyone is against it. But does it mean that leverage trading / investing is bad?

I believe the bulk of what we believe is based on two factors

1. What appeals to us the most
2. What seems to provide what we are looking for (Long Term Returns / Regular Income / Stability {Real Estate}

For me, the appeal has been to Technical Analysis since end of the day, I believe that trying to gauge the quality of management of a company or my ability to understand the nitty-gritties of how the business is run is beyond my understanding and abilities

But some one who has the abilities I am missing on the other hand will be fascinated by how one can go about picking great business which can provide returns better than market.

In India, Mutual funds are pushed since historically they (or at least funds that have survived) have proven to be market beaters. But without the evidence that comes from analyzing survivor free database, its similar to claiming that if only you had invested 10K in the Infosys IPO, you could have retired way before time.

As a full time trader and investor, my bias is towards attaining absolute return regardless of the behavior of markets. This cannot be done without some kind of timing tool and while my time frame is short, testing (by self and others) have shown that you can get way better returns by having a simple 60 – 40 (Equity:Bonds) asset allocation than by trying to select the best funds and hoping that the fund manager does the right things all the time.

Each and every one of us develop our own biases based on either the focus of our work or what we have observed over time. This bias affects our judgement to make the right decisions and hence the reason to turn towards experts. But unfortunately experts too are biased and would not change their view even if provided with contradictory data.

Most of us spend 8 hours or longer to earn the Income, a part of which gets saved. If you cannot spend a bit more time in understanding the various facets of market and what is that you are really looking for, nothing really can help you out.

As a Idiom goes “You can lead a horse to water, but you can’t make it drink”. How you deal with your money should be your concern, else some one will take the decision on behalf of you – something that could turn out to be good though generally its outcome is lousier than the worst thing you could have accomplished yourself.