Equity Investment is tough
Equities will outperform debt in the long run. For an equity salesman ‘long run’ means 5 years. For Nirmala Sitaraman long term means 1 year. For the fund manager long run means 7-10 years. For Warren Buffett long run means a couple of decades.
A Sip in good shares will get at least 15-20% return in the long run says an IFA.
Sip in an equity fund in the long run will give you 15% says another IFA.
All the 3 statements about equity are false.
Equity investment is tough, and can be done only by people who are emotionally stable, and equity should be used only for generational wealth creation. Imagine you had invested in an sip in an equity fund (through sip of course) in 2014 for a goal in 2019. Your adviser told you “5 years ….” bullshit. It is wrong because if you have a goal to be achieved in 2019, you may have to withdraw from 2016. So it is a stupid decision to be in equities for a 5 year investment horizon that too in SIP mode. However if you had entered equity investments in 2003 and exited in 2007 December – you would have made a fantastic profit. That is the problem in equity. You can’t learn too much from past performance in equity. There are times when debt has beaten the index over a 20 year period. It is clear that the starting prices are very very important.
So equity is about good starting points (in terms of pricing), long run, patience, being satisfied with the gain, removing profits once in a while and salting it away during successful periods. We talk about the 2003-8 as boom periods do we not? If you had bought Infy it would have taken you more than 1.5 decades to just come to its original price.
Why do people think that Investments are safe in shares over a long period of time? It is simply because they have been told a lot of ‘sales’ talk in the past. So smart salesmen take past data and tell you the following:
- over 20 years Sensex has not given negative return
- equity has always performed better than debt over the past 20 years
- sip has NEVER lost money over 12 years
all these 3 statements are true. However all these 3 statements for a minute forget that “past performance is not an indicator of future performance”. Salesmen have stories…they try to let you believe that what you WISH will happen over the long term. Nonsense.
The risk in equity is that a serious part of your portfolio can be wiped out and stay wiped out for a long time frame. Imagine if you had Satyam, Yes bank, Edelweiss, Dhfl, etc what would have happened to your portfolio? Well if I had sold all these shares ….I would have made a fortune.
Imagine if you had a goal which needed funding in Dec 2007, and you withdrew your equity portfolio, you got damn damn lucky. Would you have benefitted by taking your holding period to 2009? No way. Another myth ” equity long term” goes.
What if there is a market crash 6 moths before you need to withdraw?
What if you had a concentrated portfolio in NBFC and many went to zero?
A large portion of your portfolio going wrong is possible…
What if you got the sizing wrong? say you had 100,000 shares of Dhfl and 1000 shares of Indigo?
Time is a good friend for a good portfolio and a terrible enemy for a bad portfolio..
Clearly if you put all your money (imagine you retired in 2008 Jan……) …what would hav happened to your portfolio…
Go on…give your responses….
SS
Sir, your article has the answers as well.. But the problem is – what is ‘good portfolio’ ? What is ‘good starting point’?
If a seasoned investor stumbles, how can a sales man know? Quoting WB: “Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.”
It is only in hindsight that we realize they were good portfolios and good starting points.
By good portfolio (as of today): are we talking about having blue chips that never had their PE drop below 35 ? Or are we talking about 90% of mid-caps with good fundamentals waiting for the value to ‘unlock’ over long periods of time ?
By good starting point (as of today): are we talking about individual expert opinion who always calls out market bottom? What if it is not the bottom now?
If answers to these is “I don’t know”, then we can never be discussing “If we had done this or that in 2008…. ” etc.. The fact is, we did not know (as of Mar 2009). But, for QE & interest rate cuts that time, perhaps the US recession could have been more severe and gone beyond Mar 2009. IMHO, I agree that, We need to have – insight to see it, cash to buy it and courage to hold it. With most of us one or the other is always missing.
Sid
Subra ji has requested responses and am sure there would be a lot. Not sure if he would respond to them 🙂
In a nutshell, the post more or less describes the ‘sequence of returns’ risk. To keep this short and to the point, I have just one question.
What would be Subra ji’s advise to an inexperienced/experienced investor (who is obviously not having a crystal ball, no one does) to counter/nullify/negotiate this risk?
a) He can say ‘I do not know’ (if he feels that that is the case at the bottom of his heart of hearts:)
b) He can say ‘I am not here to answer questions, go find for yourselves’.
c) He can say ‘An attempt to answer this comes with a fee’, fair enough.
d) He can simply choose to stay silent 🙂
subra
in the market there is only one question: “Did you make money” that is all. Market does not consider any theory.
Nitin
Very old saying “Karm Kiye ja Fal ki icha mat kar re insaan… Jesa karam karega wesa fal dega bhagwaan… ” Very Very true in case of personal finance.
Karam —> High Expense, High Debt , No Plan , No Saving
Fal –> Stressed Mind, Tension , Poor heath Uncertain future Life
Karam —> Managed Expenses, Manageable Debt/No Debt , Systematic Plan for Goals,
Fal –> Relaxed Mind, Happy Family, Good Health , “Safal Jeevan”
As you said in another post that risk can not be avoided however it can be mitigated/managed. No one can identified “Right time”. Only time in future can tell if the decision turned out good or not. One can have multi crore portfolio right now – One political change in country can wipe out that whole thing, One legal battle (fault or no fault) can put a BIG dent
Just like a businessman creates empires thinking that it will last generation but it take one stupid decision to wipe it out and we have seen many cases (GE, GM, Lehman , Satyam, Anil’s Reliance, CCD, Jet Airways, Yes Bank,) they all went down because of one stupid decision.
Looking back in history we can always connect the dots and say it worked out good or not, but no one have seen future so only thing we can do it Plan Execute Review and Repeat .