Mr. Market Makes Money, Investors don't: From RK Yadav
Equities have generated close to 17% compounded annual
returns over last 20 years. As an asset class, returns from equities are far
higher compared to returns generated in fixed income, gold, silver, commodities
etc over long period. Known big investors like Ramesh Damani, Rakesh
Jhunjhunwala and many other successful investors have not made their fortune
overnight. They have been investing for over last two decades. Investors do not
understand or appreciate long term investment approach and the process which
goes towards building wealth of such successful investors. Equity mutual fund
schemes like HDFC Equity Fund (16 years: 21% CAGR Return), HDFC Top 200 (15
years: 15% CAGR Return), Reliance Growth (16 years: 21% CAGR Return) and many
more such equity schemes have generated phenomenal CAGR return since inception.
However, investors have not earned similar returns from their investments in
equities over this period. An analysis shows that equity mutual fund retail
investors have managed to earn only about 6% CAGR returns, which is quite
shocking. Why such disparity between investors' return and market return?
Following are some of the reasons, which have resulted into poor investors'
return from equity.
Timing market:
When sensex fell to 8000 level in 2008, investors who had liquidity thought market will go down further. They waited to catch bottom. However, market recovered and sensex scaled 20000 in short span. Those who waited for the bottom, failed to invest and take advantage of lower valuation. It is just not possible to sell at the peak and buy at the bottom. It does not really matter whether you are investing when the sensex is at 10000 or 8000. Fear of further loss or Greed of buying at 10% - 15% lower valuation, resulted in opportunity loss of 100% or even more. Over last 3 years, the CAGR return difference between investing at 8000 or 10000 sensex level is not much or not worth the efforts of timing market perfectly.
Greed and Fear:
Investment history shows that most of the investments are made when the market is at peak or close to peak. If you chase momentum or fancy stock idea, you will end up paying fancy price for stocks and ultimately fancy losses. At the same time, due to fear of market sliding further, many investors exit when the market is at bottom. Investors invest in fixed income instrument when the market is at bottom to safeguard capital and invest in equities at peak of the market to participate in rally.
Stopping SIP during falling market:
Many mutual fund investors stop their SIP investments during bear phase. Only if SIPs are continued during such time, mutual fund investors can lower their average cost and buy more units when NAV is down.
Instant Gratification: Investors expect quick returns, whereas, equity investment is a long term process. Those who expect quick returns gets frustrated in short time and exit good long term stock. In short term, market is driven by liquidity and sentiment. Even the best of investment ideas may not deliver positive return. If you follow right investment process and invest in sound companies with proven management track record, returns are bound to come in long term.
Tracking Macro and Global events:
Nobody (including so called financial experts) has clear answer as to how events will unfold in US and Europe in near to midterm. In tracking global events too much, investors end up ignoring good investment opportunity. Markets have always generated very high return post big negative events like 9/11, Asian crisis, and market crash in the years 1993, 1996, 2001 etc. If you focus on good investment idea rather than too tracking too much of macro, international events and media, you are bound to make money.
As seen above, many factors are related to behavior aspect of investment. If you have right mental framework and common sense, investment is not so complex affair. You can not only match Mr. Market's return but also outperform it.
Timing market:
When sensex fell to 8000 level in 2008, investors who had liquidity thought market will go down further. They waited to catch bottom. However, market recovered and sensex scaled 20000 in short span. Those who waited for the bottom, failed to invest and take advantage of lower valuation. It is just not possible to sell at the peak and buy at the bottom. It does not really matter whether you are investing when the sensex is at 10000 or 8000. Fear of further loss or Greed of buying at 10% - 15% lower valuation, resulted in opportunity loss of 100% or even more. Over last 3 years, the CAGR return difference between investing at 8000 or 10000 sensex level is not much or not worth the efforts of timing market perfectly.
Greed and Fear:
Investment history shows that most of the investments are made when the market is at peak or close to peak. If you chase momentum or fancy stock idea, you will end up paying fancy price for stocks and ultimately fancy losses. At the same time, due to fear of market sliding further, many investors exit when the market is at bottom. Investors invest in fixed income instrument when the market is at bottom to safeguard capital and invest in equities at peak of the market to participate in rally.
Stopping SIP during falling market:
Many mutual fund investors stop their SIP investments during bear phase. Only if SIPs are continued during such time, mutual fund investors can lower their average cost and buy more units when NAV is down.
Instant Gratification: Investors expect quick returns, whereas, equity investment is a long term process. Those who expect quick returns gets frustrated in short time and exit good long term stock. In short term, market is driven by liquidity and sentiment. Even the best of investment ideas may not deliver positive return. If you follow right investment process and invest in sound companies with proven management track record, returns are bound to come in long term.
Tracking Macro and Global events:
Nobody (including so called financial experts) has clear answer as to how events will unfold in US and Europe in near to midterm. In tracking global events too much, investors end up ignoring good investment opportunity. Markets have always generated very high return post big negative events like 9/11, Asian crisis, and market crash in the years 1993, 1996, 2001 etc. If you focus on good investment idea rather than too tracking too much of macro, international events and media, you are bound to make money.
As seen above, many factors are related to behavior aspect of investment. If you have right mental framework and common sense, investment is not so complex affair. You can not only match Mr. Market's return but also outperform it.
