I had written a similar post couple of months back.
In the post we discussed as to how from the lows of August-October 2013 a random portfolio would have given a return of 130% in a year and how every advisor will start showing their performance.
Now we get into the next stage of markets where a lot of Investors/Traders have hit a big Home Run with superlative returns.
At the same time some people would have had success in their profession, business, hobby also!
Let us look at a few scenarios as to how we react to success.
- If you are an IT programmer do you go out and boast you made a killing code to everyone on facebook or your friends and how you spent hours learning how to code and how everyone should do it?
- If you are a Surgeon do you go to parties and meetups to tell how you saved so many lives and why everyone should become surgeons?
- If you are running a Business which has grown superbly do you go around shouting to the world how you know everything about the industry?
- If you hit a Lottery ticket or win a Price do you announce to the world so that they can ask for some help ?
- If you are an Artist and make up a superb Painting or Artifact do you call people home to come see it ?
- If you are a Cricketer do you go around boasting about the Century you hit ? ( kids do )
The majority of the people ( not all ) would answer in a “No” to above question. Because its work as usual.
But when we come to markets it is the other way around
Almost everyone loves to say
- Maine Bola Tha
- I made XYZ % returns
- My XYZ stock is up 10 times.
- I made a 5x in that counter.
- Equity is a superb asset class why are you not investing.
( For an advisor i,e me there are genuine business reasons to boast about performance 😉 )
But there are very few who say this
- How i got screwed in 2008.
- I lost a lot of money in markets. ( Mind you this set of people are looking for sympathy and not guidance on Investing or Hard Facts)
- I lost a lot of money in XYZ stock.
- I believe these are the few stocks to buy and you should buy !
- I dont know where the markets are going / this sector is going.
- ( Ask 10 people Market kya lagta hai – generally 9 have an answer. Even your office staff like peons and paanwalas will have an opinion)
There is no real answer for this Human Behaviour in Investing.
But all i can say is get ready for anyone you meet to talk about how he made a killing in equities and how he got multi-baggers and a lot of Gyan about investing right from Value Investing, Managements, Business, Growth, Trends, Technicals, FIIs and everything under the sun about equities
Let us look at statistics of Returns in last 1 year.
The Random Portfolio
- Many Investors who are into equities for a KICK. ( isnt it thrilling to make a 5x return in a year or a 20% return in a week).
- Many are Investing Virgins and took crazy risks ( Ones who have not been screwed in 2008 ).
- Many become CAGR gods who have started looking at retirement plans.
- Many are superb Cloners. Buy and hold whatever Mr Value Dude buys.
- Many having negligible Invesment in Equities but a major part of their day spent in looking at prices / company fundamentals/ reading market reports with lesser focus on Core Business or Profession.
But at same time there will be some people who would be real legends making money consistently for years/decades and being modest about it as well as continue to stick to their discipline and hard work.
Just one year does not decide success unless you are calling it quits 🙂
Some of the famous investors had a drawdown of 35-70% in 2008. But they could come back out of it only because of the conviction and hard work. Also could make a lot of money in past few years because of research and patience. Many have quit markets after 2008 never to come back.
Look at this video in January 2009 ( mkt collpased in 2008) as to how somebody got really pissed on some good investors too.
In bad markets there is a bad mood and nobody talks equities. Quite a lot of people giving you Gyaan today would have been deadly silent a couple of years back.
With returns comes a lot of satisfaction but only returns made in market are not enough and most of us do crave for appreciation,adulation and love to pat our backs 🙂
Maybe that could be one reason a lot of successful Investors will be giving Gyaan in coming days to get all the adulation.
But still there is no way to differentiate. Try looking for investors who talk about process and not returns.
But at the same time on a different time frame it is not the same. How 2014 is good but ask someone about 2007/2010 and you know the story of how it takes efforts and conviction in investing.
Some interesting stats.
1) Its not all rosy for everyone.
a) Since 2007 – 60% of all 3000+ BSE listed stocks are still negative and 40% positive.
b) 30-40% of stocks since December 2007 are down 50%
c) Only 30% of BSE listed stocks are up 50% from Dec 2007
2) Nifty is up 30-35% from tops in december 2007 and november 2010.
( Source - https://www.facebook.com/Indiacharts )
( This is why a lot of investors who got sucked in 2007 in bad stocks and never got out are still skeptical about markets. Some of them would have considered themselves legends in 2005-2007)
I will end this boring and uselss post ( Gyaan) with an equation which according to me defines Investing the best.
Capital X Returns = Wealth
Capital = This is your Raw Material.
Returns = Capability, Markets, Timing, Management, Industry etc and a bit of Luck.
Wealth = Final Product which takes years.
Like in any business your Raw Material i.e Capital is at the core of the process and the end result i.e Wealth makes sense in proportion to your NetWorth.
( A 500% return on 0.5% of net worth is nowhere as good to a 50% return on 10-50% of your net worth)
Capital comes either from already created/inherited Net Worth or is incremental savings from your business or professional Income.
So if you plan to continue to Invest incrementally – You got to remember its not just your equity returns but how you compound your business or professional income to invest more and Increase Capital Deployed in Equity matters equally.
The Returns of last 1 year can make your over-confident or increase expectations or even lead to plain stupidity and bad decisions.
We should plan to not get over-awed, influenced or envious of Investors who have hit it big but to focus on reading, learning more so that we can last for a longer period of time in Investing and how to increase capital as part of networth and capability to manage the same 🙂
A good analogy.
“A century in a professional cricket game will only get you selected for next couple of games but you need to keep scoring them to make a Career.”
P.S – I continue to remain Bullish on Indian Equities for the long term as has been my stance for many months 🙂 and maintain the view to increase exposure to equities as part of our net worth.
I have been working on this interesting topic of Random Portfolio Selection with a friend Prashant Krish (twitter account – @Prashanth_Krish ) for past many months and the process has helped me a lot in strategizing investment decisions.
He has again made a sheet for the last quarter/half yearly/annual.
Random Portfolio Selection Filter
•The only filter was stock should be above 50 rs and listed on NSE. ( to remove unusual big movers )
•25 stocks selected randomly ( rand function) with an equal weightage of 4%.
•Time Period – Last Quarter / Half Year and 1 year.
•No shuffling of stocks. Just buy and hold.
•No brokerage applied. 5 portfolios created.
In last 1 year
Nifty = 31%
CNX Small Cap = 55%
CNX Midcap = 56 %
Random Portfolio Returns
Lowest Return – 51%
Highest Return – 100% ( 3 out of 5 random iterations have 100% )
Average Returns – 85%
You can download the full sheet for your own analysis.
So if you would have bought any 25 equal weighted stocks on 1st January 2014 you could very well be up 100% or more in last 1 year.
In last 15 months almost 70% of NSE stocks are up 60-100%. Almost half the stocks are up 100%. ( Source – Business Standard Article )
Quite a lot of investors would have got X-10X returns in many stocks. Some would have made 100-300% or even more in last 1 year on a portfolio level and different time frames. Many would have even used leverage, some would have had concentrated portfolios and hit big winners.
But how many of us knew for sure there was a sitting doubler in last 1 yr ? ( If you did why did you not sell your house as well as your neighbours to buy stocks )
This is the beauty of markets.
Topline is Vanity, Bottomline is Sanity, Cash is Reality and in Hindsight there is always Clarity !!
So how do you differentiate a very knowledgeable Investor from a Lucky Amateur ?
There is absolutely no clear way to differentiate the two investors. As there is no different Color to Money made by knowledgeable decisions. Only returns cannot be the criteria.
Almost everyone has made returns.