Education | Portfolio Yoga

Saving Early or Saving Late

One of the often repeated mantras in the world of finance is that if you don’t start saving early, you lose out on benefits in the long run. Theoretically it’s true – the earlier you start saving, the more you end up with. Just look at Warren Buffett, he purchased his first stock when he was 11 years old and look at where he is now.

I passed out of school and later college when the Infotech revolution was just starting to bloom. Most of my classmates chose to do an Engineering Degree and later joined Infotech firms. On the other hand there were a few guys like me who chose a different path. One of the poems I studied at school and love it to this day is “The Road Not Taken” by Robert Frost and it’s amazing how deep the poem goes about life in general.

Thanks to technology, keeping in touch today is much easier than in earlier days and in many ways it’s amazing the divergence in paths that most of us have encountered. But paths aren’t set in stone and as much as early saving habits are good, it doesn’t really add up when you look back over time.

One friend who did not choose to go for Science and then Engineering started with an ordinary job. His life would have been ordinary if not for a decision he made a few years down the lane. He emptied his savings, took on Debt and flew to a foreign land to get himself an MBA.

While I have no clue about the savings of my friends, I can hazard a guess that this friend of mine who chose differently both in terms of career path and later is how to utilize his meager savings is in the top quadrant vs friends who started to save early.

When I passed out, a basic Engineering Degree was good enough for being taken up by any of the Infotech companies at salaries that were at a premium to general wages. Today, even Computer Science graduates have a tough time getting jobs and even those who get the salaries aren’t as juicy as they used to be earlier. A study that came out a couple of years back said that entry level salaries at a reputed global infotech firm had remained the same for the last 10 years.

One reason is the supply and demand dynamics. Karnataka for instance had 60 Engineering Colleges in 2001. Today, it stands at 300. In addition, the number of seats that are available have increased exponentially. So much is the excess capacity that AICTE has shut down 128 engineering colleges across the country between 2016 to 2019.

Everyone has similar goals – Retirement, Kids Education, Buying one’s own house being the primary goals. Yet how much you can save in absolute terms means a huge difference in the lifestyle as well as goals one hopes to achieve.

The path most of us take in life is the result of various factors with luck playing a large role. But luck can do only so much without the right skill set. In 1996, getting an Analyst job was all about being in the right place at the right time. Today in addition to being at the right place and time, it’s also about whether you have the right skills and that generally means either a CFA Degree or an MBA. Just being passionate about investing and research in general doesn’t tend to work out great for a prospective employee.

It’s easy to preach from the high temple about the need to save more, tougher is to show how to earn more for absolute savings finally is about your earning capacity (for majority). There will always be one off cases where just saving with a low base alone was enough, but that is always the minority.

Investing in Markets – Ways and Means

We have hundreds if not more number of studies that has shown that over the long term, the best growth is delivered only by equities. While in India, Real Estate has also proven to be a bonafide wealth generator, I strongly believe that growth over the next decade or two will more likely come in Equity with Real Estate more or less providing sub-optimal returns.

So, how does one go about in investing into the markets. For a lay man, there lies there options of investing his savings into the markets

1. Investing via a Mutual Fund

Theoretically speaking, this is the easiest way to gain exposure to the markets. But then again, not all Mutual Funds are the same and hence some amount of research is necessary to ensure that we invest in the funds that have showcased long term growth vs chasing funds that have made a mark in the very near past.

While most mutual funds in United States haven’t been able to beat the benchmark consistently, in India, we have hordes of fund managers who have beaten the benchmark returns year after year. Whether this is due to they being Genuis or whether its because of the fact that the benchmarks are not really that good a criteria to compare against is a story for another time.

But having said that, its a fact that top funds keep changing over time. Prashant Jain is a much acclaimed fund manager, but lets face the facts – his top fund, HDFC Top 200 has generated a CAGR return of 13.36% DSP BlackRock Micro Cap Fund which over the same period has seen a CAGR return of 24.5%.

What I have done above is known as Selection bias. I have selected the DSP fund not by foresight but by using current returns. In 2008 and 2009, the best large cap fund (5 year returns) was Reliance Growth Fund. Over the last 5 years, this fund has provided a CAGR return of 12.8%.

Over a similar period Nifty Total Return Index has shown a CAGR growth of 11.68%. While one can still argue about there being a alpha out there in funds such as HDFC Top 200 and Reliance Growth, we need to also consider the fact that they hold stocks outside of Nifty constituents and in essence, comparing the performance to Nifty is erroneous.

Personally my family is invested into multiple funds across the spectrum and overall, returns have been decent enough. As Warren Buffet once said, diversification is the only free lunch and this applies to Mutual funds as well.

A step above Mutual Funds comes a more personalized investment vehicle.

Portfolio Management Scheme (PMS for short):

Those who follow me on Twitter know that I am a very strong skeptic of PMS as a investment vehicle. My main objection comes from the fact that for most brokerage led PMS, this is not something where the objective is to generate above market returns for the client but is a nice way to churn the portfolio as much as possible in an attempt to garner as much brokerage as can be culled from the account.

In fact, it is a surprise that Assets under Management of PMS has growth substantially over the years despite most of them not even providing decent returns (let alone market beating) and worse of all, hiding the facts from the potential investors.

I do not have the break-down as which firm manages what amount, but just as a simple exercise, lets review the performances of top names in this business

Coming up first would be Sharekhan (Link)

AUM: Around 32 Crores

What surprises me is not the under-performance but the fact that NSE Nifty returns are shown as having given different returns when compared with different products.

India Infoline (Link)

AUM: 4600 Crores

India Infoline runs a multitude of funds

IIFL-1

Motilal Oswal (Link)

AUM: 1400 Crores

One of the few which has beaten their benchmarks. But then again, these are 1. Weighted Returns (and not everyone would get the same) and 2. Am not sure if these are after fees or before fees (Fees are substantial in nature, refer to page 14 of the document).

There are at least another 25 – 30 firms offering PMS, but I do hope you get the idea. PMS is not a ideal vehicle to ride the markets. In fact, one PMS firm actually managed to lose money when the markets were going up and lost money when the markets were coming down. The fund manager is now a star investment advisor 🙂

Last but not the least

Direct Investments into Equity:

Directly investing into equities is one of the most risky ways to put savings to work if you are neither willing to work hard nor have a clue about how markets work. Too many folks have burnt their hands in equity investing to swear off anything related to equity (Direct or not). But having said that, the only way to beat the returns generated elsewhere can be found here.

But if you are willing to put in the hours required to learn and understand the various way to analyze the markets, its a effort that can provide for worthwhile returns with total control in your hand.

But a caveat first – International evidence has shown that the average equity investor under-performs the markets very badly. In fact, many would have been better off just putting the cash under their pillow than investing into markets

While the above data comes from Mutual Fund investments and redemption by individual investors, with human psyche being the same, direct returns by investors would not be too different.

Investing (no matter how large or small your investments is) is a full time endeavor. Unless you are willing to devote a substantial amount of time, this is definitely not a area to dabble in since not only would the returns be below par, but the time spent could have been better utilized elsewhere.

To fill this gap, we have many a person offering to advise (Newsletter based generally) for a small fee. But with the vast majority of them being pure snake oil sellers, I would generally avoid all such stuff unless they have proof of their pudding (Audited returns of their own funds which in turn should be substantial portion of their net worth)

To conclude, while its true that some funds have shown ability to beat the markets, I recommend novice investors to distribute between a few select funds and a few ETF’s that track the index (Index funds). Invest regularly and you would turn out fine regardless of the gyrations we see in markets.

Education in Markets

Getting educated in markets is pretty expensive affair since our mental clocks aren’t drilled in the way its required to for success in markets. Since unlike any other field of expertise, one really doesn’t need to have a formal professional education (not that having it ensures success, it only means you open your innings with higher odds), it attracts all kinds of people with the only common factor among most of them being that they have money to risk.

Unlike other professions, learning about markets isn’t easy in the formal education set-up. You may learn a bit about it by doing a MBA, but the theory one learns and the reality once faces when exposed to the real world is spaces apart. You can on the other hand complete a certification course such as CFA (for Fundamentals) or CMT (for Technicals) to get a better understanding of how to go about doing business (read Investing / trading) in the markets.

Other than the above International Certifications, here in India, we can find many companies / Individuals offering courses for the short to medium term. The course fee for such ranges from Rs.2500.00 (One Day) to a multi month mentorship programme costing Rs.8 Lakhs +

While I can understand the acceptability and popularity of cheaper courses, I really fail to understand who in the right mind would want to pay Lakhs of Rupees as fees for learning from some one who in all probability doesn’t earn much from the markets in any case (why take un-necessary risks when its easier to earn money by preaching to newbies).

If you are willing to invest a few lakhs, my own advise would be to spend the money on accredited courses from leading institutions (in India “National Institute of Financial Management” comes on top of my mind. You find plenty of them in US Universities as well) since the recognition that entails and faculty who you can meet can rally add value to deeper concepts and thoughts.

While I have reached my current stage without attending any such courses (when I entered the markets, there were not many structured courses anyways), I do believe that one can get some benefit out of them. But there is no short cuts to markets and the only way to survive out here is to learn and un-learn (as and when we come across new data that seems to conflict our initial outputs).

While learning from the markets without any experience or guidance is a expensive affair, it doens’t have to mean that you need to pay an arm and leg to get that.

Choose Wisely!

Disclaimer: I have taught students when I was working in an organisation before as part of my responsibilities.

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