Questions, Questions, Questions – the February 2021 Newsletter

The best fund manager in the world in terms of performance and longevity writes once a year. But he has made his mark and doesn’t need anything more to showcase. Most fund managers write monthly given the constraints of managing a capital that can go out as easily as they came in. As an advisor, I feel its important to keep in touch with clients regularly for while money can be made or lost depending on the trend of the market, its important that the client understands the thoughts and views of the advisor which hopefully allow for a longer relationship.

A friend was boasting about how his LIC policies will in the next few years give him a cash flow of a Crore. A Crore today is a big number and was an even bigger number when he signed up nearly 22 years back. 

What is the return you got I asked out of both curiosity and belief that the returns won’t seem as rosy in percentage terms as it looked in absolute terms. He had no clue, so thanks to Microsoft Excel, I put in the data. 

The XIRR Return came to 10.66%. My friend was disappointed to say the least. After all, he being a businessman has multiple times taken on debt at much higher interest rates than what his investment will pay off (and one he wishes to utilize to pay off one of the loans). But the fact remains that most investors don’t bother even trying to calculate the returns they are getting once the investment has been made. It’s as if what happens will happen, so why bother kind.

When it comes to investing, we spend a lot of time and effort before investing and then become lax in monitoring it till another shiny toy comes along. Most of us I am pretty sure cannot really be sure about our investment returns (XIRR / CAGR) given not just the multitudes of investments that make tracking tough but also the lethargy of having it all accounted for.

A few years back, I was having a conversation with the CEO of a large fund house and queried him on how much of the amounts that were coming in would stay if the markets were to reverse course. He said that based on their own data, they expected more than 50% to stick regardless of markets and performance.

It’s this laziness on our part that kind of drives the industry in ways more than one. Reams have been written about Behavioral Gap (the difference in returns between what the fund achieves and what the investor achieved) but very little about how to solve the issue. Education is one way but there are even larger scams going on in the name of education than the world of finance. 

Another friend of mine recently bought a very expensive apartment. I asked him how he came to know the price he paid was the right price. He had no answer other than that its what the price of other apartments in his complex had traded at and hence this price maybe was the right price or maybe not. But hey, if you were to think about it, this is how real estate has always worked. Price is based not on utility or earnings it can provide (not in India definitely) but a perception that for this location, this price is right.

So, we exhaust all our savings and then top it up with loans we will be hard pressed to pay off if things don’t go our way for the next decade at least to buy something we cannot even price it properly.

From the markets to life in general, we accept for most part what the majority seems to believe in. So, investing using a strategy such as Momentum is seen as speculation while investing using a strategy such as Value or Growth is seen as well, Investing for the Long Term. 

No portfolio can be static. If an index doesn’t rejig its constituents on a continuous basis, it will end up having mostly dead or barely there companies along with one or two shining stars. The only difference with a strategy such a Momentum vs others is that we do it on a more regular basis. Do we miss the long term compounders – of course this is given since no stock can go up without some degree of volatility and for strategies such as Momentum, Volatility in price is generally a recipe for exit. On the other hand, we are able to ride a lot of stocks that may not be a long term compounder but compound at a sharper pace for a shorter duration. 

Ultimately our objective is not about making money in a single stock but ensuring that our portfolio performs better than what a passive index can. If we can achieve that, should we really bother that we aren’t holding a stock that is a great compounder – known only after it has compounded for a while?

When it comes to investing, I sense that we are too feeble to question things. Unlike say Medicine, Finance for most is self learnt and yet we fear if our questions may sound stupid or our views wrong. This is what allows much of mis-selling. 

Investors or Advisers, everyone gets wrong once in a while. Warren Buffett in his recent letter too talks about the most recent mistake of his. I keep wondering whether having a negative list of stocks I won’t touch is a mistake given that one shouldn’t fiddle with a systematic approach – but my own excuse is that any gains that come at the cost of good sleep is not worth it. 

One of the better books I have read is Anthony Bolton’s “Investing against the Tide”. Its a wonderful read and this list of observations about investor behavior is fantastic advice (if you take it as one)

We need to keep an open mind. Once we buy shares we become less open to the idea that our decision to buy was wrong. We close our mind to evidence that doesn’t confirm our initial thesis. 

We need to think independently of others. You are neither right nor wrong because the crowd disagrees with you. 

Many supposed experts are not. Many experts never change their view. They remain with a permanently positive or negative view of the world or companies knowing they will be right part of the time. A number of stock market newsletters, surprisingly, get a high number of readers despite taking this approach. We all think we are better at investment than we are. 

We are all overconfident and, in particular, you mustn’t let a good run go to your head.

We are often most influenced by the recent past and by recent prices. Often the first plausible answer is the one that influences us. 

We are too conservative when we take gains and too relaxed in running losses. 

We should ask ourselves if we own it, would we buy it again at this price? 

Investors underestimate the likelihood of rare events happening when they haven’t happened recently, while they overestimate them when they have. A classic example of this is the effect hurricanes have on the insurance business. After a bad season investors often think the next season will be bad again. This point about investors being particularly influenced by their recent experiences is a very important one. 

Successful investment is a blend of standing your own ground and listening to the market. You won’t be successful if you are too much in one camp and ignoring the other.

My idea of writing this is not to advise you but to provide some pointers on things that we know and yet have never questioned. Hope it provides some food for thought.

Question everything. Learn something. Answer nothing.

Euripides