Annual letter to subscribers – 2020

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The model portfolio delivered a return of 15.8% for 2020 versus 14.9% for the nifty and 21.9% for the CNX midcap. We have achieved our stated goal of 3-5% outperformance relative to the Mid cap index for the last 3 years. We are trailing the Nifty over the same period.

I wrote the following post in July – Survival is the ultimate prize

Staying in the Game

In view of the uncertainty, I mentioned that I was taking a middle path. I did not go all in as the market started recovering and continued to add slowly, following a bottoms-up approach. The trade-off was that If the recovery happened faster than expected, we would lose out in terms of  returns. However, if it took longer, then we would be better off than those who were fully invested

The entire idea was to avoid predicting or timing the market

As we held in excess of 30% cash for major part of the year, we barely matched the indices due to this drag. I have no regret in taking this approach as my focus was on survival. It is easy to look at returns on paper and shrug off losses of 30%. The reality is that a lot of investors just throw in the towel at the bottom and never benefit from the eventual recovery.

As long as we are in the game, there will always be new opportunities to take advantage of.

Two decades of investing

I have been investing since 1995. The first five years were spent in learning the basics and investing in mutual funds to get started. After five years of investing, I managed to lose 30% of my capital by 2000, as I got swept by the Dot com mania. The next 10 years were spent in re-learning the basics and avoiding fads and manias

The lessons learnt in 2000, helped me in avoiding the Infra and RE mania of 2007. I was able to make 30%+ CAGR during the decade ending 2010. This included the bull market from 2003 to 2007, a major crash in 2008 and then an equally big recovery in 2009/10

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We started the advisory on Jan 29th, 2011 and will be completing 10 years next month. The model portfolio which mirrors my portfolio, has delivered 22% CAGR during this period. Our objective was to outperform the indices by 3-5% during this period and we have managed to do better than that.

This period mirrors the earlier decade in several aspects. For starters, there have always been some or the other concern at the country or global level. There have been major world events and large market drops during both the decades. There have been enough reasons to wait till the future becomes clear.

In spite of all the uncertainty and risks, a sensible approach with a long-term point of view does work. The end result is quite satisfactory even if the returns are lumpy and unpredictable. If I had waited for all the stars to align, I would have missed the 70X+ return over a 20-year period.

There are a few things we can be sure of for the next 10 years

  • The market is a tough place, and you must love the process to survive the tough times
  • Competition in the markets to earn excess returns will continue to increase and it will not be easy to outperform. It will require constant learning and re-invention to do better than the market
  • There will be all kinds of problems and crises at the country and global level which will cause large drops in our portfolio
  • Our returns will be lumpy and would come in spurts

Asset allocation and Diversification

There is a lot of emphasis on timing the market among investors. On paper it makes a lot of sense. If you can avoid the drops and take advantage of the upside, then the returns are sure to be great. The problem with this myth is that most investors are not able to do it consistently (over decades) to beat the simple buy and hold approach.

Sure, there are some super traders who can pull this off, but we can count such individuals on two hands. Just because a Sachin Tendulkar scored 49 centuries in ODI, does not mean that you and I will be able to do the same, merely by having a bat in our hands

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The vast majority of investors are better served by following a simple strategy which I can outline as follows

  • Define an asset allocation strategy based on your age, risk profile, cash flow needs etc. This involves defining how much you want to allocate to equities, debt, cash, real estate and any other asset class
  • The asset allocation strategy involves deciding the percentage of your net worth which will be allocated to each asset class. For example, you could decide to allocate 50% to equities, 20% to real estate, 10% to cash and so on
  • Once you have the percentage in place, take the long term returns for each asset class and plug that in to come up with the long term returns for your portfolio. Be conservative in your assumptions
  • Decide the appropriate asset for each asset class. For example, the model portfolio would be part of your equity class. Debt funds or FDs would be part of your debt class and so on.
  • Rebalance the portfolio every quarter (in rapidly changing markets) or once a year (in slow markets). If equities do well and the percentage for the same goes to 55%, sell down to bring the allocation to 50% and allocate that cash to other asset classes
  • Turn off the TV, financial news and gurus and focus on more productive aspects of life

The above approach is the basics of financial planning and there is nothing new about it. The problem is that most investors know about it, but very few follow it. Most of them would rather make on the spur emotional decision than have a sensible and consistent plan for the long run. Where is the excitement, drama and storytelling in that?

The truth of the matter is that a simple, long term asset allocation and diversification plan followed with discipline with get you 98% of the way in terms of your financial goals. If you still have an itch to do something – allocate 1-2% of your fund to a gambling bucket and go crazy with it. However, the balance of your capital is not something to play with.

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Investing is not an Engineering problem

I have an engineering background and a very quantitative/rationalistic lens of looking at the world (does not mean I am rational). What I mean is that when I am analyzing a company and valuing it, my assumption is that all investors will ‘objectively’ look at the numbers and value it in the same fashion.

This approach to investing has its merits and works most of time. However, it has limitations and overweighing it leads to problems. I have written more on this topic here.

Investing in the markets is not an engineering problem which can solved by logic alone. In the past I have failed to account for that to our detriment. The best way to manage this kind of trap is to have a time fuse for each idea. If the market does not come around to our view after 2+ years, then one should just exit – No questions asked.

A long-term partnership

I repeat this every time in the portfolio review and will do so again (more for the benefit of the new subscribers)

  • I do not have timing skills and cannot prevent short term quotation losses in the market.
  • My approach is to analyze and hold a company for the long term (2-3 years). As a result, my goal is to earn above average returns in the long run and try to avoid losses during the same period
  • Despite my best efforts, I will make stupid decisions and lose money from time to time. The pain felt will be equal or more as we invest our own money in the same fashion

We will treat all of you in the same manner as we would want to be treated if our roles very reversed. This means that we will be transparent and honest about our actions especially when we make a mistake



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Rohit Chauhan

Rohit Chauhan

Investment Manager at RC Capital Management
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