Over the last 20 year period the Standard& Poor Index returned an annualized gain of 9.1% – which means SIP returns should be superior. The Individual Investor got a return of 3.8%.

The Bond Investor got a 1% yearly return vs. an annualized return of 6.9% of the Barclay’s Aggregate Bond Index.

Why do retail investors under-perform by such a HUGE MARGIN? Well many readers of this blog may have different views, but the retail investor, in general is a poor investor.

What are the normal mistakes? – Behavioral Investment experts have their reasons, the Media has its own reasons, and I have a combination of all of this!

1. Overconfidence: So many investors think it is easy to beat the index-it is not funny.

2. Amazingly stupid half investment lessons: – ‘If you invest in a good company, it will always make money in the long run’. Orkay, Nirlon, Mafatlal, Silverline,…are all companies which were once upon a time in the index. Now they are not. This is called survivor bias.

‘My father made money in Infosys, so will I’ – replace it with ‘Nirlon’, ‘Orkay, ‘Patheja Forgings’ – and you will understand what I mean. History repeats itself, sure – we do not know how often, that is the problem.

3. I cannot see ahead, so I will look in the rear view mirror and drive: God bless the driver/investor – considering that we are driving around in a mountain.

4. Recency effect: ‘Market is going down’ – actually what they mean is ‘Market has gone down’ – now will it go up in the recent future? The true answer is I DO NOT KNOW. However retail investors will tell you ‘Market is going down…I think it will go to 15,000 on the Sensex…..what do you think Subra?’ If I keep quiet it gets reported as ‘Subra also kept silent…he must be in agreement’. Vow, actually I am not in agreement, I am wondering how people can make such statements, dude.

5. Herd Mentality: My brother in law just sold all his shares, and mutual funds and bought a flat….and the price has already gone up by 10%!! He tells me nothing will happen in equities for the next 3 years, SO I AM BUYING A FLAT. Oh! I forgot to add – he is a real estate broker.

6. Looking at the market everyday and getting confused. Listening to the experts and wondering who is an expert.

7. Running a 42km marathon like 420 races of 100 meters!

8. Fear – ‘My father lost Rs. 3 lakhs in Harshad Mehta scam’, ‘My brother lost Rs. 5 lakhs in Ketan Parekh scam’, ‘My uncle’s broker cheated him off Rs. 5 lakhs’…- all ‘fear indicators’ . Actually look hard enough.

The guy to be blamed is the same guy whose face you saw in the mirror this morning while shaving. Not Harshad Mehta, not SEBI, not the Prime Minister, not your wife, not your advisor…..just the bloody guy whose face…..LOL!!!

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1. I will invest in education much before I invest in the markets: Nothing to beat the classics like Random Walk down Wall street, Warren Buffet (pre 2000 he spoke more sense, but still he is a fountainhead, make no mistake), John Templeton, Ken Fisher, – see the ‘must read books’ – appearing somewhere on this blog.

2. Market patterns are difficult, almost impossible to predict: this is a pattern finding part of our brain (fully exploited by the media) which makes us think we can find patterns. The earlier you learn that you cannot, the better it is for you.

3. Trading, is NOT Investing. Trading is not Investing. Please repeat this a zillion times every day. This is Surya Namaskar No. 13.: Hold your ears and put your face between your knees, while keeping your back straight. If you still do a trade which you do not know is a trading transaction or investment transaction, repeat this asana 20 times. Next mistake 400 times. Power of compounding! Once you do this asana 400 times, you will not repeat this mistake. Hopefully.

4. Start today and do a SIP in an index fund: for starting to invest you do not wait for your education to be over, start TODAY….do a SIP..when you finish your education, you can invest in other places! Remember there are many people in the market. Beating all of them is a stupid target. If you can allocate assets intelligently, you may have won the game already!

5. Invest in rock solid business ideas which have worked. A new idea is for Rakesh Jhunjhunwala, Vallabh Bhansali and Uday Kotak to invest in. You are well off investing in Grasim, Hdfc, Sbi, Colgate, TCS, ITC – what has ALREADY worked. If you understand a business, see how it works, understand it and then decide. Like Warren Buffet says ‘create your competency circle’ . Everybody cannot know everything.

6. Focus on your investing – unless it is the index. If it is the index you can chill.

7. Long term is ONE BUSINESS CYCLE – which means FIVE YEARS PLUS. Not one year like the media keeps saying! Media may not know the Capital Market definition of long term and the Income Tax definition of Long Term.

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Let us look at it from the ‘investor’ or ‘client’ ‘s point of view.

When you are young (say age 24 to 34) you spend a lot of time LEARNING and build a base for future EARNING. At this stage you are much better off concentrating on your career. Of course you will earn – do the simple things like doing a SIP, take a term insurance, be careful while you borrow. In short keep it simple. Learning your craft, doing the extra courses, working late hours, having a good time with friends, and once in a while checking your mutual fund statements! That is how life should be. Ignoring investments is risky, and you want the power of compounding…so do your investing, but keep it simple.

When you are 34-45 – both you and your money should be working hard. Differentiate the wheat from the chaff. Jump up your SIPs. Take some big bets on equity, if you know how. Learn the rudiments of wealth creation.  Your investments are now bigger, so you have to be more careful. If you do not wish to invest in learning, just jump up your indexing. Start your PPF. Check out your pension requirements. Decide where you want to stay once you retire.

When you are 45-55: Your money has to work real hard now! you will be withdrawing for your needs like children’s education, children’s marriage, buying a second house, leisure travel etc. You will also be earning very well…It is the time when you consider quitting your job. Ascertain to see how prepared are you to quit your job. How rich you are is a function of how many months/ years can you live WITHOUT a pay packet. Get realistic about getting a new job if you lose your current job. YOU HAVE TO know everything about your money now – and make it work real hard.

I wrote this piece because I am finding a lot of people who concentrate on mutual funds, ulips, etc. but earning much below their potential! Please remember that when the corpus is small (when you are young) and extra 1-2% MAY NOT MATTER as much as it would matter when your age is more. That extra effort in finding a better job in a different location – city or country.

I hope people do not take this to mean ‘ignore your money’. NO. Just index and concentrate on your career.

Do not think that because your dad opened a PPF ACCOUNT for you when you were 4 years old (you were lucky, sure!) you will end up RICH. YOU WILL NOT. The final figure that you have in any account is a function of:

HOW MUCH MONEY YOU PUT (make no mistake, this is VITAL),

HOW SOON YOU PUT IT (earlier the better)

HOW LONG YOU LEFT IT UNTOUCHED (the best, do not keep removing to see how it is!)

Do not buy ULIPs….all those instruction stay as it is. CONCENTRATE MORE ON YOUR CAREER that is what it means.

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Wealth creation is a time consuming, easy to understand and very difficult to implement process. There are no cut fast rules on how to create wealth.

Deepak Parekh, Uday Kotak, Rashesh Shah, Nirmal Jain, Raheja, Hiranandani, are all people who have created wealth by the greatest method. Run a good business, leverage with people and brand building. Leverage with geography and borrowed funds….then take the company public. By doing this every rupee of earning gets valued at 30 for Mr. Deepak Parekh (Hdfc has a p/e of 30) and similar numbers for the others. These people made their money from equities, debt, commodities and of course listing their companies!  I am not talking that league, yet.

Let us see what all you should know – we will start with 10 steps:

1. Understand the Power of Compounding: it looks odd to realise that the power of compounding is NOT taught well at school! They give you some simple examples – rarely are you taught the POWER! Even people working in financial services do not appreciate the power of compounding. Ignore this only at YOUR OWN PERIL.

2. Understand the Power of NOW: LEARN the power of starting to compound as soon as possible in life. If you have not understood, NO TIME LIKE TODAY..pick up the pen, call the advisor, click on the net – whateva…just start, NOW, TODAY.

3. Understand the Power of Regularity – start a SIP AND make sure you do it regularly – not missing a single month. If by chance you do miss a month of investing, immediately pick up a cheque and send it in! At the end of a YEAR you should have invested 12* Amount being invested every month. If suddenly you have money, top up the SAME account.

4. Understand the power of Not Touching the Money for ‘n’ years: Capital and Wealth creation needs long periods of growth. If you do not touch the money for any sundry purpose, leave it untouched. This helps in compounding. REmember this for life!

5. Understand the power of LEARNING: If you are willing to wish to invest in equities – directly or through mutual funds,    learn as much  as possible about equities. Invest in learning, before you invest your money.

6. If you do not (or will not) learn about equities, never mind, learn the power of indexing in equities!

7. Learn simple things like keeping your accounts in an excel sheet and keep track of the paise….the rupee will take care of itself. Track your income, collect all monies due, track your expenses, track your investing and returns.

8. For events which you know invest. For sad events which MAY happen, insure. You never know….

9.Remember delayed gratification may not be easy, learn it. Food which gives 30 seconds of pleasure on the tongue stays in your waist for 30 years. I understand this….but when I see a sweet I still fall for it. Knowing and implementing are completely different animals. Alas!

10. Invest in education, training, health, travel and fun. Very important to remember do not forget the present for doing something great in the future. The future is important, but the present is vital.

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the single word is NO. When I was reading an article recently I saw an article with similar headlines…it was an article in Newsweek and it said ‘One word Can Save Your Life: No’. Make no mistake this article was written by a doctor. She was not trying to save on deductibles, she was not trying to save money….AND THEY WERE APPLYING it to THEIR LIVES.

I could not but nod my head in agreement.

Cut. Come to India. With so many financial planners, quasi financial planners, quacks, banks, life and general insurance companies, mutual funds, portfolio advisors, portfolio managers, etc. fairly obviously somebody would have got you!

It is also so difficult NOT TO SEE THE ADVANTAGES when confronted by a good salesman (hopefully trained by me!!). Who can deny the need for focus, asset allocation, pension plan, child plan, neighbour’s wife plan, own mother in hospital plan, funeral plan, broken dentures plan, cancer plan, kidney failure plan, tiger eating you on the highway plan, ….- given the right name, selling it to the retail ‘prospect’ seems like selling toothpaste.

If you have teeth, you have to buy toothpaste, right?

So if you have a child you need a child plan, if you have a body you should have a medical plan, if somebody you knew got cancer, you need a cancer plan. Like they say anybody with a forehead thinks he can plan, so be it! If you will retire you need a retirement plan. ….so on and so forth.

So you agree to a Wealth plan, a Child plan, a pension plan, a medical insurance plan, an endowment plan, a ULIP, and an income replacement plan. Then the next word ‘Asset allocation’…sir you need to be in equities, gold, land, bonds, bank fixed deposits, post office savings, ppf, blah blah blah. Of course you need a few credit cards too.

Then the other word ‘leveraging’. So you need a home loan, a car loan, a personal loan (taken to make the down payment of the house which you anyway cannot afford!), a travel or foreign tour plan, children’s education loan, OMG these guys are innovative are they not?

Then the dreaded word diversification again. Large cap fund, banking fund, pharma fund, gold fund, midcap fund, small cap fund, elss.

Now that you have said yes to all this – he says sir you need to be in different fund houses too – so a Hdfc, Prudential Icici, Reliance, ….and a few more fund houses as per the distribution targets of the ‘advisor’.

So now you have a fairly simple request converted to 4 pages of holdings, some as a SIP, some ULIPs, ….and the client is completely confused.

Frankly what does the customer need?

Well if he has the ability, need and willingness to invest in education he should look at a couple of well managed multi cap funds like Hdfc top 200, Hdfc equity fund, Pru I discovery, Franklin India Bluechip…one term plan, one credit card..or to make it even simpler an index fund.

And sir do not invest in a lumpsum – do a systematic investment plan, a systematic transfer plan, a trigger option, a variable investment plan, a weekly transfer, a monthly transfer plan……..another list of options!

Once he has the basics in place, he should learn the art of say NO. No to channels, magazines, websites, blogs, planners, …just keep it simple dude.

Read the article and you will be able to relate to the financial world what that article says about the Medical world.

PS: My doctor has kept me off medicines for the past 28 years. I love him. Not sure if I can say about all the doctors….I have a few friends, a few clients, a few readers of my blog, …..I just drew a parallel from a Newsweek article to our noble profession of financial advise!

http://www.thedailybeast.com/newsweek/2011/08/14/some-medical-tests-procedures-do-more-harm-than-good.html

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The average return on equity investments (without reinvestment of dividends) is about 18% over the past 31 years. Does it mean that every year you got 19%? The answer is no. Such ‘zero standard deviation return’ is possible only in CERTAIN debt instruments. In equity investments there have been years of +242% as well as -46%.

When you see years in which the stock market returns are say 90% – you know that immediately following that or in a couple of years you HAVE TO GET A NEGATIVE return, because the 90% return HAS TO REVERT TO 19% – REVERSION to the mean.

However there is no pattern of 38%, 0%, 19%….it can even be -242%, 29%, 45%, -32%…and slowly catch up with 19%. The theory says a given return (value) will continue to return to an average (return) value over time. It may happen that over a period of time the average itself will increase or decrease, but the impact will be far more gradual.   This statistical measure can be applied to any measurable value, including interest rates, cricket scores of a team, batting and bowling averages as well as the return on a certain investment.

This theory is extended to a bunch of good fund managers too. Suppose you own A,….E five funds. There is a good chance that suddenly one fund may not be doing well. Do a lot of detailed research and then pump some extra money into it.

Of course you need to remember the old maxim ‘Winners rotate, losers remain at the bottom’ – so be careful!

Very funny how people use average returns when it comes to investing. They have no clue what will be the future returns. Neither does the fund manager, the agent, the RBI governor or the Prime Minister. So they end up seeing the past returns. This is like ‘I cannot see in front, so I will look in the rear view mirror and drive’. This works fine if you are driving in a desert or even a long road. You only hope you are not in choppy markets. Unfortunately, markets are choppy ALWAYS!!

In case of say gold the last 3 years average return is 32%p.a. – and so channels are urging a buy. The average return over a 30 year period is say 7%p.a. in rupee terms.

when you watch television channels urging you to buy gold remember the returns figure and the ‘mean reversion’ story..that is all..

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What bull shit. Complete bull. Nobody, repeat nobody knows whether it is a good time to enter the market or not to enter the market.

So what do we do? We watch TV or ask our broker.

If the TV anchor says wait for 5 months, they lose a viewer for 5 months.

So we ask our broker. He lives on the velocity of our portfolio.

Both love you. They cannot hurt themselves, can they?

So they say..

‘get out of volatile stocks like commodities and get into defensives like fmcg, pharma etc’

or ‘rate sensitives will find it difficult if interest rates go up – and we are at the upper end of the interest rate cycle…so get out of rate sensitives like …’

or

‘the markets are overheated, it would make sense to sell infrastructure stocks and enter day to day consumables like fmcg’

….was it not Warren Buffet who said if you ask a barber ‘do i need a hair cut?’ what will he say

“This way…Sir!”

Why do I have to remind you regularly…you know it na?’

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Market timing is really difficult. I realised this long back. Maybe 25 years ago if not 33! Though it also looks attractive to time the market – and people tell you how ‘being there in the 10 most important days’ is more important,…you realize the futility of the whole timing exercise. The heroes in the Indian investment context – Chetan Parekh, Parag Parikh, Vallabh Bhansali – are clearly in the investor category and not so worried about the ‘market timing’.

Well if you read the press or watch television you will be convinced that the market will go down (after all inflation has moved from 8.02%p.a. to 8.08%, has it not? Well the anchor and 4 guests will all tell you that the market will go down. However the same set of people justify why it went up by 345 points!

How they can shamelessly do this exercise day in and day out beats me. Well I did turn to Warren Buffet, Peter Lynch and a few others.

Alexander Green seems to be talking about something like that today…read on:

http://www.investmentu.com/2011/July/buffett-templeton-lynch.html

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Looking at ratings to invest in a mutual fund is pretty foolish. Also when the number of funds in a category increase, there will by definition be a lot of 5* funds. This is obvious is it not? If  I were running a rating agency and I decide that the top 10% will be called 5* it is good for the business. So if there are say 500 equity funds, you will have 50 funds that will get a 5* rating. Now how will you pick 2 funds (investing in more than 4 funds is a waste of time) given the fact that you have 50 funds from which to choose. However it is good for the rating agency – all the schemes will advertise, put an asterik and say ‘Subramoney has rated us 5*’ – clearly I will be the biggest beneficiary. L O L

Rating is a difficult business, done by overqualified people with impossible assumptions. Why they even rated many junk bonds as AAA, and then in 6 months down graded them to junk!

So does rating make sense? No. Not for mutual funds. For banks, company fixed deposits, etc. it may still make sense…but not for mutual funds. Frankly rating agencies should be above board, and above suspicion. Next big blunder will come from…?? Read on.

http://www.fool.com/investing/general/2010/05/21/put-the-rating-agencies-out-of-their-misery-before.aspx

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Well Tactical Asset Allocation happens when you pull out some money from equity assets and keep that money in other asset classes like cash or debt funds. The asset class to which you shift is more as a ‘principal protection’ rather than to ‘earn’ a return. Which means it is perfectly all right for me to sell Hero Honda @ Rs. 2000 and stay in cash.

What return I get in cash is not a consideration at all – it is a matter of protecting one’s capital from a downside in the market.

Also tactical asset allocation (unlike Market Timing) is not a ‘All or None’ game. You can sell some equities which you think are fully priced, or sell some shares in one industry and keep some other shares in the same industry (like selling Ashok Leyland, but keeping Tata Motors) …and shift the sales proceeds to cash.

Market timing in investing also should not be confused with day trading. Day traders are always in the same asset class – say equities or one or two commodities. They do not shift from equity trading to commodity trading – they are day traders, NOT INVESTORS. The trader is largely indifferent to the stock or the index – he is just playing the momentum. In a bull market he gets an opportunity to buy and then sell. In a falling market he first sells and then buys! There is no asset allocation for a trader – in most cases at the end of the day he is in cash – or in some cases he is on a leveraged position.

Market timing in investing is a clear case of saying…’Now the market is at 21000, it is at a price earning ratio of 22, or some such trigger makes a person shift from say equities to another asset class like cash, gold, oil, etc.’

Here he/she is taking a call that the asset class which he is entering is the best – and will give a relatively higher appreciation vis-avis the other asset class!

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