Nothing Works all the Time

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Collective2 is a US website where you can sell a strategy that trades / invests on markets or if you are an investor, track and invest along with the strategy. Think of it like the smallcase in India but without the hassles of having to go for SEBI registrations and as such you can build a model, launch it on the site and if it works as you think it will, keep collecting the subscription fee from your users. 

As a free subscriber, I get newsletters sent weekly showcasing the “Trading Strategy of the Week”.

If you notice, there is no single strategy that repeats itself. While this could be to market different strategies, the general reason is that you don’t want to flaunt something that worked earlier but not working now. In fact, since I have a hoard of their letters, I went back to strategies that were recommended to be checked out a couple of years ago. 9 out 10 had vanished showing how low the chances of success is.

In markets, you continuously see some industries that dominate only to wither off over time and some other industries take the leadership. Currently it is Pharma that is dominating the news but a few months back, it would have been Quality and a bit before that it was Large cap and even before that it was Small Cap. 

The other day, a fund completed 10 years of successful investing. While the fund returns have been fantastic, the article pointed out how just 911 investors were invested throughout the journey. Clients were to blame 

It reminded me of an old blog post about Fidelity where it said that the clients that did the best were the ones who were dead.  The second best performing set of clients forgot they had Fidelity accounts.

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It’s not the case with every investor of course. I have had my family invest in Mutual Fund Offer for Sale in the late 90’s and we hold many of them till date. One of the better investments I can claim to be invested since day one of the fund is Franklin India Technology Fund. The return since inception is 18% – wonderful right. Should have really boosted our family’s net-worth.

Unfortunately, nope and the reason is twofold. One is of course how much we invested in 1998 when it was first launched – we invested a measly 5000 bucks (the minimum investment if I remember right). That was a very small part of our family’s net-worth as on that date. So, it was just one another investment – not THE investment.

Second reason is that we did not add to it over time. This meant that what was already a small percentage over time became a rounding off error in a sense. So, while the 18% looks great, its value as part the total net-worth is negligible.

It was based on the thought process, I asked this question to my dear followers on Twitter 

The answers were as usual very interesting, but most were against the principle of investing all of one’s money other than maybe in the Index. This is not surprising especially in light of recent events such as Franklin Templeton’s debt funds – it’s bad to have a small holding, think about if this was the only investment. 

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As I write, a mailer from Motilal has landed in my Inbox. Motial is launching a new Multi Asset Fund with the title, Different asset classes outperform each other at different times. What is different for a Multi Asset Fund from a Multicap Fund? In both, the fund manager has the ability to move assets towards sectors or caps where he believes lies the greatest opportunity. The only difference though is that while a Multicap fund would essentially buy only stocks, a Multi Asset Fund is more of a Fund of Fund and one that invests basically in other funds (mostly from their own house as far as possible).

These days, passive investing is seen as the key for data shows that 90% or more fund managers are unable to outperform the same. Passive investing hasn’t grown as much as the hype we see on Twitter though for the simple reason that the monetary gains to be gained by selling a client and servicing him are nothing compared to active funds. 

But how much of that is the genuine belief that no manager can out-perform the top 50 or 100 stocks of India in the long term vs recency bias due to current better performance by the large cap indices vs say the small and mid cap indices. This applies for even N100 or PPFAS which is suddenly being seen as the cool investment to be invested into

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But back to my question – why is it so tough to make a choice when it comes to a fund. The reason is simple – we are afraid to take a call which in hindsight may look foolish. For all the talk about Fund Manager, Process, etc, our focus is extremely short term and looks back at the returns – nothing wrong in that perse, but that also means we lack the confidence in both our own approach as well as the approach of the fund manager.

As an Investor, you really are at your peak when you start to think like a Fund Manager – which is what one is essentially with the only difference being that rather than other people’s money we are dealing with our own money. Every decision has to be seen in the light of what it brings to the table when relative to the rest of what you hold. Once you get an understanding of it, the choices in front of you become very easy to make.

The objective of this post is not to hold a gun to your head and make you choose a single fund but to provide a perspective that more may not indeed be better. The better we understand what we are invested into, the easier it is to navigate during tough times as it is during the good times. 

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Prashanth Krish

Prashanth Krish

Prashanth is a Chartered Market Technician who believes in the Systematic Momentum Investing strategy. He runs his own portfolio advisory firm - Portfolio Yoga.
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