Yet Another Piece of Advice for 2016, Even If Environmentally Friendly

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Happy New year

 

Happy New Year folks!

As 2016 comes in, the investing world pops up a massive set of investment ideas, thoughts on what you should do, and why you need to keep investing, or why you will lose money if the US fed increases rates while inflationary expectations seem anchored below their lower bounds, whatever that means.

I will not give you such advice today. (Tomorrow’s a different story). I have no business giving you such advice, since I have no idea what each reader’s individual situation is, and anyone who doesn’t care to ask you enough questions before giving you advise is either giving you a polite brush off, or is being damaging.

Many people will tell you stuff for free this year, and stuff that’s incredibly detailed like: Buy X stock with stop loss of Y, or that stock ABC will be a multibagger. Or that you should buy an index, because some smart fellow in the US wrote that indexes are awesome because costs matter and ETFs have lower fees. Or that Warren Buffett says don’t lose money, so when your investment loses money, you should hold it until it doesn’t. Or that you should use an advisor instead of investing directly, or the other way around.

What I would say is: Don’t miss the forest for the trees.

Stuff that’s tested with the US markets is not always applicable to India. In India, active investments have beaten passive investments over long periods of time. Even this year, more funds have beaten the index (among the diversified funds with 100 cr + AUM ) than those that underperformed. The logic that works in the US doesn’t work in India, and hasn’t worked in the last many years. While there is no guarantee that the future will mimic the past, you must admit that the past is all we know.  Taking a US specific statement at face value is a folly and in reality, misses the forest for the trees.

Multibagger recommendations are plentiful nowadays. There’s whatsapp groups touting the next tinycap, there’s people on TV telling you that a stock will go 5x or 10x. There’s stuff thrown at you about how some stock went up 10x last year, and how there’s another stock that’s going to be that in 2016. This might be good, but when you advise 70 stocks in a portfolio, and a few of them go up 2x but the rest do badly, you have, as a whole, lost money. Individual stocks are nice, but what matters is portfolio level returns. Touting individual stocks or investments is of no use at all – in fact, the fact that a plot you purchased for 50 lakh is now worth 60 lakh might be more valuable to your portfolio than the stock you bought for Rs. 3 lakh which has doubled. Allocation, sizing and position management account for more of your returns than individuals stocks will; and a multibagger focus usually misses the point.

People who run businesses of recommendations or fund management have different goals from you. Many of them work for fund houses, and their target is to not underperform . They have to run large amounts of money, so for them investing in small companies, even if those companies are good, is not worth their time. They typically focus on one asset class – stocks or real estate – and to them, all money should be allocated to their asset class. You, as an investor, have to see things differently; you care about absolute returns that beat inflation – regardless of whether the index has fallen or not. You don’t have size limitations, you typically have equity, debt, gold and real estate in your portfolio and your overall goals don’t change based on whether the RBI has cut rates or the government has passed GST. While news is great for sharpening intelligence, investing is a discipline that needs a focus on goals rather than on some current investing logic.

(For example, the runaway success of the Indigo, Alkem and Lal Path Lab IPOs might make you decide to invest in IPOs in 2016 – but guess what: other than Indigo, the good IPOs gave you little allocation, of less than Rs. 10,000 worth – even a 40% gain will not be enough to do anything significant for most of you. )

In the end, stay true to yourself. Your goal may not be to make a lot of money, and you might derive immense pleasure from doing something else; if that’s what excites you, then chasing the most fancy investment and then dealing with the hope, the exuberance or the despair of a 10% up or down move is truly missing the forest for the trees. You need to live, not win. Live better in 2016!

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8 COMMENTS

  1. Hello Deepak, Happy new year

    One thing I didnt understood…Touting individual stocks or investments is of no use at all – in fact, the fact that a plot you purchased for 50 lakh is now worth 60 lakh might be more valuable to your portfolio than the stock you bought for Rs. 3 lakh which has doubled.

    I feel “stock you bought for Rs. 3 lakh which has doubled” is more good than the real estate example. What are you trying to say.

    • That’s what I mean bout forests and trees :) You make Rs. 10 lakh on the real estate. You made Rs. 3 lakh on the doubling of the stock. Which one is more useful for you?

      The point is – what matters to you are absolute numbers. What is the likelihood you would invest 50 lakh in a stock that would give you a higher equivalent return to the plot? Answer: very very low, no? But plot wise, you don’t mind putting 50 lakh. That’s the difference.

  2. Deepak: Very powerful message… I personally tout the concept you have mentioned about stocks n real estate as “propensity to invest” in funds vs stocks… Lots of onvestors just don’t get it… But its the single bigest lesson for me… That bridges gap between expected returns vs experienced returns…

  3. Guess, if we don’t have an investment philosophy then everything becomes worthless!
    Happy New Year Deepak, many thanks.

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