The caption of this article has been titled for the average investor who in his quest for financial freedom allocates maximum amount to equities so that he makes enough for Monday mornings to feel as good as Friday evenings. It is true that equities outperform all asset classes over a period of time but not all the time. To outperform all asset classes an investor has to be invested in a bunch of stocks that are in demand during that time. This seems cruel to the bottoms up, diversified value investor who will provide you with several reasons for his stock picks and a few ones to justify his patience. However the ultimate index of an investor�s intellect is the returns that he generates and not the arguments that he provides. In this context an investor who has been able to align himself with the flavor of the season while looking at turning points with a curiously open mind has a definite probability of outperforming all asset classes compared to another investor who is betting on a diversified group of stocks (Sensex) in a bottoms up approach. Strange as it may sound the average investor who has followed a broad-based strategy of investing without any investment thesis has lost more than he thought even while the Sensex has returned 16.7% since inception.
Instead of solely blaming the investor one should look at the overall character of the Indian market (in terms of investor choices). Seventy five percent of the stocks listed in India are not fit for long term investing either in terms of management or business character or in many cases both. Most manufacturers including Textiles, Cement, Power, Shipping, Metals, Infrastructure, Capital goods, Oil and Gas, State owned units (PSUs) do well for a couple of years and than fizzle out thus doing what equities are not supposed to do - reward the short term punter and penalize the long term investor.
Long term is infinite in case of stocks that do not outperform other stocks and asset classes and a few years in case of stocks that do. There is no standardized definition of a long term. A standard thought that most market participants use is that �in the long term equities outperform all asset classes� and to prove their point they talk of a 200 year cycle but the audience who is already in their 30's have just 10% (20 years) of time left to become rich. That 200 year chart is of little use for market participants except that it helps to show the historical intellect of the speaker. A study on how many times equities have NOT outperformed all asset classes within a Ten and Twenty year period throws surprising results.
Over the past ten years Indian equities have under-performed Gold! A decade back Gold was at US$ 310/ounce whereas the Sensex was at 3355. Today Gold is up more than five times in Dollar terms and more in rupee terms (due to rupee depreciation) and has outperformed the Sensex over a 10 year period (2002-12).
Let's rewind back into the earlier decade (1992 - 2002) where the Sensex did nothing. Iin this time span Bank FDs beat the Sensex hands down. For 20 years (1992 - 2012) the Sensex has returned a CAGR of only 7% which is lower than FDs. If this is not long term what is?
From 15th May 1982 Sensex has returned a CAGR of 15.25% which has beaten all asset classes but the coupon on Bonds for the first 20 years of this time span was close to 15% so the risk premium hasn't been high. "Thirty years" is the elusive long term that a person wishing to buy a diversified set of businesses (Sensex) has to wait if he wants to beat all asset classes. Say this to an investor the next time he wants to put some money in a stock!
However in these 30 years there have been extraordinary bouts of money making with multiple stocks turning out 100 baggers. From Colgate, HUL, ITC,Nestle, Hero Motors, Sun Pharma, ACC, Tata Steel, Infosys, Zee TV, Wipro, HDFC twins, Bharti, Pantaloon, Unitech, Titan, Page Industries, Jubilant Foodworks, TTK, Hawkins etc focused investors trying to bet on a few sectors and stocks have made money like bandits through short bursts of a 3-5 years of holding. This data emphasizes that it has always been a stock picker's market instead of being a broad-based investment game for anyone wishing to make money.
Surprisingly most of these stocks (good businesses) appeared very expensive for the entire length of their bull run. One of the classic traits of a leading bull market stock is that it has to appear expensive to the "naked" eye.
Most investors that I come across keep buying some stock from all the sectors in a bid to outperform the market. Many greedy investors focus exclusively on the absolute small caps which they hope would become the large caps of tomorrow. More than 75% of the small caps remain small caps and never graduate to the next big league but strangely an investor who was happy with a 9% interest in his Bank FD undergoes an expectation upswing and wants nothing short of a multibagger the moment he enters the market. No wonder most people give back to the market more than they take away from it. Without necessary expertise and skill it makes zero sense to be in stocks. If you do not understand the game very well a Bank FD is a lot better!
Think about this the next time you call your Broker.
Basantji,
Extremely well written article Basantji. A person very close to me lost about 11 L a few months back in IVRCL futures. For some reason some of my dividend checks used to go to his address. He used to tell my wife that Sincy's dividends are from small companies - Hawkins, Karur Vysya Bank, etc.
After losing the 11L he said he should have been in Hawkins, because he had deposited a number of my dividend checks in the bank.
Equities and for that matter any investment vehicle are for the informed - or those who have an informed guide like Basant Maheshwari!
Nice article. This is what Warren Buffett said: Risk comes from not knowing what you're doing.
Great Article .Keep posting Lot of them.Cheers
Thanks Basantji, for the timely reminder. Should we take the signal that stocks would be very lacklustre for times to come? We are already seeing stagflation which would be bad for equities. Folks having stock market experience during the period '95-00 should share it. I have learnt it hard way by giving tuition fees in all different ways.
[QUOTE=subu76]
Awesome article Basant Sir...very sobering too.[/QUOTE]
It indeed is when I look at several people who come into markets to make enough so that they do not have to go back to work and in that process lose all that they have saved.
[QUOTE=Monkey]
For a broad portfolio, long term returns are linked with valuation at the begining of period under consideration. 20 years period from 1992 to 2012 does not look good, only because broad valuations at the�begining of this period were quite high due to Harshad Mehta led mania. However, returns for the 10 year period from 2002 to 2012 and 30 year period from 1982 to 2012 look good because of not so demending starting valuation.[/QUOTE]
To a large extent yes, but 20 years is a lot of time for things to adjust basically its the character of the market that is an issue, even from 1990 (2 years before HM) we have done 13.5% CAGR which is not too much when compared to the interest rates of those days.
[QUOTE=S.Varghese]
Equities and for that matter any investment vehicle are for the informed - or those who have an informed guide like Basant Maheshwari! [/QUOTE]
Thank you Sir. Words like these overwhelm me.
[QUOTE=FutureBull] Should we take the signal that stocks would be very lacklustre for times to come? [/QUOTE]
As you know we are all incompetent in making those predictions but personally I will not venture out to preempt a recovery unless the recovery actually happens.
hi basant,
nice article. Dow Jones was in 1000 range from 1966 to 1981(15 yrs) yet warren buffet made money.asset allocation across various sectors (fd,real estate,rental income,gold, annuity and equity) is must for avg investors.
Great article!
Great article Basantji .
Posted on:5/14/2012 10:59:30 AMsubu76
Awesome article Basant Sir...very sobering too.