Author - Prashant Vaishampayan

Luck Vs. Skill in Investing

Jeremy Chia reminds us that investing is a game of probabilities. In any game where probability is a factor, luck undoubtedly plays a role. This leads to the age-old question of how much of our investment performance is impacted by luck?

Is an investor who has outperformed the market a good investor? Similarly, is an investor who has underperformed the market a lousy investor? The answer is surprisingly complex.

Long term stock prices tend to gravitate toward the present value of the company’s expected future cash flow. However, that future cash flow is influenced by so many factors that result in a range of different possible cash flow possibilities. Not to mention that on rare occasions, the market may grossly misprice certain securities. As such, luck invariably plays a role.

Skill is one aspect of investing that is hard to quantify. However, there are a few things Chia looks at. First, we need to analyse a sufficiently long track record. If an investor can outperform his peers for decades rather than just a few years, then the odds of skill playing a factor become significantly higher. Although Warren Buffett may have been lucky in certain investments, no one can deny that his long-term track record is due to being a skilful investor.

Next, focus on the process. Analysing an investment manager’s process is a better way to judge the strategy. One way to see if the manager’s investing insights were correct is to compare his original investment thesis with the eventual outcome of the company. If they matched up, then, the manager may be highly skilled in predicting possibilities and outcomes.

Third, find a larger data set. If your investment strategy is based largely on investing in just a few names, it is difficult to distinguish luck and skill simply because you have only invested in such a few stocks. The sample is too small. But if you build a diversified portfolio and were right on a wide range of different investments, then skill was more likely involved.

Mauboussin wrote: “One of the main reasons we are poor at untangling skill and luck is that we have a natural tendency to assume that success and failure are caused by skill on the one hand and a lack of skill on the other. But in activities where luck plays a role, such thinking is deeply misguided and leads to faulty conclusions.”

Chia concludes that it is important that we understand some of these psychological biases and gravitate toward concrete processes that help us differentiate between luck and skill. That’s the key to understanding our own skills and limitations and forming the right conclusions about our investing ability.

Investing rules of Bernard Baruch

Bernard Mannes Baruch was an American financier and statesman. According to historian Thomas A. Krueger: For half a century Bernard Baruch was one of the country’s richest and most powerful men. Bernard Baruch has made millions in the US bull market in stocks since 1924. However, he started anticipating a Wall Street crash as early as 1927 and sold stocks short periodically in 1927 and 1928.

Baruch would reiterate his life lessons in a list of rules on how to invest. The list is pulled from the lessons he learned over a lifetime in the markets. Here are his ten investment rules:

  1. Don’t speculate unless you can make it a full-time job.
  2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.”
  3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities of growth.
  4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.
  5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.
  6. Don’t buy too many different securities. Better have only a few investments that can be watched.
  7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.
  8. Study your tax position to know when you can sell to the greatest advantage.
  9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.
  10. Don’t try to be a jack of all investments. Stick to the field you know best.

These “rules” mainly reflect two lessons that experience has taught him — that getting the facts of a situation before acting is of crucial importance, and that getting these facts is a continuous job that requires eternal vigilance.


2021 : Returns in the first half

Jon writes on his blog that for the most part, markets in 2021 have shown continued improvement on last year. In fact, the worst place to have money so far this year is cash. The U.S. and the broader international and emerging market indexes are positive year to date.

Investing in a world where everything seems to be working out — except “safe” bonds and cash — it can be tempting to tweak your portfolio. Why not move that money earning nothing into something much better? After the last six months, and the six months prior to that, Jon bets a lot of people are thinking exactly that. When thoughts like that pop into your head it’s always worth asking yourself a few questions.

First, am I taking enough risk to meet my goals? Building a portfolio is not an exact science. Uncertainty around the future makes that impossible. But it’s certainly plausible that some investors are taking less risk than they can handle. If you have less money in stocks than you’re comfortable with, can handle more risk and volatility, then maybe a change is warranted.

However, the alternative should also be considered. If you have more money in stocks than you’re comfortable with, reducing your exposure might be warranted. Successful investing has never been about getting the highest return this year. It’s about getting the best long-term return at risk you’re comfortable taking.

Second, am I making changes because I feel like I’m missing out? FOMO (Fear Of Missing Out) sucks. It gets a lot of investors into trouble. Frankly, the returns other people and/or asset classes are earning in the market are irrelevant to what you’re trying to accomplish. If your portfolio is sound and doing what it’s set out to do, whatever is going on outside of that is a distraction. Ignore it. Far too many investors shoot themselves in the foot trying to chase returns.

Finally, it’s always good to ask what if I’m wrong? The correct answer is you lose money. Are you comfortable with that potential outcome? A sound portfolio is built with this question in mind. It also happens to be the last question anyone asks when markets are rising and everyone’s optimistic and appears to be making money. Much like today!

The heightened speculation that emerged in 2020, spilt into this year, and is ongoing. There are a lot of “brilliant” investors around more than willing to show off their quarterly gains. It’ll be interesting to see how long that lasts.

Jon concludes that when everyone’s optimistic and few think they can lose money, getting rich quick becomes the strategy du jour. Many will eventually figure out it has one tremendous downside. You lose everything. Until then hopes and dreams are driving pockets of the market for now.


For Indian Investors, it is perhaps time to look beyond the local market

Asset Class % Total returns Q1 Q2 1H 2021
India 5.18 7.01 12.55
S&P 500 US 6.17 8.55 15.25
US IT sector 1.97 11.56 13.76
US Financials 15.99 8.36 25.69
US Healthcare 3.18 8.4 11.85


Based on MSCI Index Dollar returns


How to Think About Investing Cash on the Side lines…

With markets reaching new highs, investors are wondering how to invest their cash. When it comes to deploying cash on the sidelines, there are no easy answers. Charlie Bilello wrote these pointers based on his study of US markets. These may be true for other markets as well.

Investing is just a game of odds and the historical probabilities up until now suggest the following: If you sit in cash over a 1-year period, you have a 30% chance of outperforming the market. If you sit in cash for 10 years those odds fall to 16%. Over 25-year periods, cash has yet to beat the US stock market.

Sitting in cash has an opportunity cost on average, and that opportunity cost increases with time (8% over 1-year periods, 1,297% over 25-year periods). If you are waiting for lower prices to get in, chances are you will get them (74% of the time), but you also have to be prepared to wait forever (26% of the time there’s no lower low). If you are waiting for a bear market (-20%) or more to get in at lower prices, you may never get that chance (only happens 21% of the time).

Slowly wading into the market via dollar-cost averaging has beaten a lump-sum only 32% of the time over 1-year periods and 27% of the time over 3-year periods. The longer the time period you spread that initial investment over, the lower your odds are of outperforming a lump sum today.

Timing the market based on valuation is not an easy task, and you have to be prepared to sit in cash for many years or even decades depending on your methodology. Had such a strategy been applied historically, it would have lagged buy-and-hold because equities with high valuations can still have positive (and cash-beating) returns over time.

Timing the market based on interest rates is not a strategy supported by the data which shows almost no correlation between the two variables. The notion that rising rates are “bad” for equities is a myth.

Does that mean everyone should just close their eyes and invest all their cash on the sidelines today in a lump sum? Bilello concludes most certainly not. Successful investing is about psychology more than anything else and if putting everything in today via a lump sum causes you to lose sleep at night, you will not be able to stick with that portfolio for a week, never mind next 20+ years. The portfolio with the highest expected return is completely irrelevant if you can’t handle its higher level of risk. Far better to be in a portfolio with lower returns that you can compound over 20+ years than one with a higher return that you are likely to abandon at the first sign of trouble. The goal for all investors should be to remain invested long enough to reap the enormous benefits of long-term compounding. That starts with finding a portfolio and a plan that is best suited to you.

Will benefit from larger home cooking trend – Borosil

Update on the Indian Equity Market:

The market ended flat for the second straight day on Wednesday. The last hour buying helped reduce the losses made through the day. At close, the Nifty was up 1.30 points, or 0.01%, at 15,576.
Among the sectoral indices, PSU BANK (+3.0%), METAL (+2.2%), and AUTO (+1.8%) were top gainers while IT (-0.8%), FMCG (-0.5%), and FINANCIAL SERVICEs (-0.2%) were losers. Among the stocks, UPL (+2.8%), TATASTEEL (+2.6%), and HINDALCO (+1.9%) were the top gainers. ITC (-2.9%), TECHM (-1.2%), and AXISBANK (-1.0%) were the top losers.

Will benefit from larger home cooking trend – Borosil
Edited excerpts of an interview with Mr. Shreevar Kheruka, Managing Director & Chief Executive Officer, Borosil with CNBC TV18 dated 31st May, 2021:
• Borosil saw a 30% YoY revenue growth in 4QFY21. There was a good bounce back in 4QFY21 after dull 1HFY21 and ended the year much stronger than anticipated.
• First 10-15 days of April-21 were following the same trajectory as 4QFY21 did, but due to second wave coming in, business got impacted as shops and outlets were shut.
• As the cases wane in the second (COVID-19) wave, a stronger bounce back is expected again. In short term some pain is expected on the consumer side of the business but demand seems to be strong in the long run.
• On the scientific side, Borosil makes vials and ampoules and that has seen strong demand because of COVID as well as non-COVID related injectable demand. This business has headed up even in 1QFY22 and strong demand is expected to continue for the rest of the year.
• It’s a wait and watch situation on the consumer side, but the company is bullish on the opportunity in the next year as well as for the future.
• Consumer business contributed ~60-65% of total revenue in FY21 and rest is scientific segment.
• The consumer business has been stagnant and things are rapidly growing on the scientific side. Mid-teens growth is anticipated for scientific segment in FY22E, vials are expected to grow ~25-30% for FY22E.
• E-Commerce has been the fastest and strongly growing channel for Borosil.
• Capex is planned for vials and ampoules as well as for new products in the segment. Not large Capex allocated for scientific laboratory equipment.
• Borosil is looking for inorganic expansions going forward in scientific segment and has a net cash of ~250 crores in company’s books.

Asset Multiplier Comments
• Looking at the performance and growth in 2HFY21 we believe that Borosil has good potential going forward. Diversified product portfolio, gain in appliances and E-Commerce channel and sale of COVID-related products such as Remdesivir and vaccine vials gives us confidence on growth of the company.

Consensus Estimate (Source: investing. com and market screener websites)
• The closing price of Borosil was ₹ 220/- as of 02-Jun-21. It traded at 70x/60x the consensus EPS estimate of ₹ 3.1/3.7 for FY22E/ FY23E respectively.
• The consensus target price for Borosil is not available.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

10 Things You Shouldn’t Care About as an Investor

Ben Carlson writes that it is more important than ever to filter out the stuff you shouldn’t care about as an investor. Here are 10 things that fit the bill:

  1. How rich other people are getting. John Pierpont Morgan is attributed with the quote, “Nothing so undermines your financial judgement as of the sight of your neighbour getting rich.” There will always be people with more success, prestige, money and accolades than you. Easier said than done but not worrying about how much money other people are making can save you a lot of unnecessary stress and angst.
  2. What you paid for an investment. Picking stocks is harder than you think. Buy and hold is a terrific strategy for some stocks. For others, it’s the equivalent of an investor death sentence. I’ll just wait until I break even is a tough place to be as an investor because some stocks don’t come back…ever. There’s a fine line between being disciplined and being stubborn when it comes to investing.
  3. The amount of time and effort you put into your investments. In many areas of life, trying harder leads to better results. That’s not the case when it comes to investing. In fact, trying harder and paying more attention to your investments will often lead to worse results. There are no extra points for the degree of difficulty when it comes to the markets. Most investors would be better served doing less, not more.
  4. One year performance numbers. One year (or any shorter time frame for that matter) returns don’t tell you anything about yourself as an investor. Every investor will have good years and bad years. Diversification often looks silly over the short term. Risk management can seem useless. Luck can trump skill. You’re probably not as good or as bad as your short-term performance numbers suggest. Long-term returns are the only ones that matter.
  5. Your IQ. EQ matters more than IQ when investing. Yes, some level of intelligence is required but once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing. There are plenty of intelligent people involved with the markets but not nearly as many who have control over their reactions. Intelligence alone does not guarantee success in the markets.
  6. Financial advice from billionaires. Ultra-successful people typically offer some of the worst financial advice. They’re simply too out of touch with normal people to provide useful advice. It’s also important to remember these people say stuff all the time that they don’t actually act on. You have to watch what they do, not what they say. And billionaires have the ability to make huge mistakes with their wealth and they’ll still be fine. If you make a huge mistake it’s going to hurt a lot more.
  7. How much you could have made if you would have only put $10k into… I hate these comparisons. These fantasies serve no purpose unless you know how to spot them ahead of time.
  8. Success in other areas of your life. Your biggest risk as an investor depends a lot on your personality, emotional make-up and station in life. The worst investors are often those who assume success in their career automatically translates to success investing in the markets. It doesn’t work like that.
  9. Timing the market perfectly. Investors waste far too much time trying to find the perfect entry point for their investments. That perfect entry point is only known with the benefit of hindsight. You’re far better off putting your money to work when you have some money to put to work and letting compound interest make up for any ill-timed purchases. It’s fun to look at returns from the tops and bottoms for certain markets or stocks but no one actually invests consistently at the peaks or troughs.
  10. Producing alpha in your portfolio. No one on their death bed has ever regretted the fact that they didn’t have a better Sharpe ratio (risk-adjusted returns). The whole point of investing in the first place is achieving your financial goals, not beating the market.

This Week in a nutshell (May 3rd to May 7th)

This Week in a nutshell (May 3rd to May 7th)
Technical talks
NIFTY opened the week on 3rd May at 14,481 and closed on 7th May at 14,823, a weekly gain of 2%. The index is trading above its 50DMA of 14,730 which might act as a support. The short-term moving average (10 DMA) is turning up which suggests a possible rally going ahead. The RSI (55), and MACD turning upwards also indicates a positive momentum.
Weekly highlights
• The week opened on a positive note as investors cheered a strong dose of positive earnings reports as well as economic data that showed the US economy is growing. But the rally was short lived as coronavirus-induced lockdown worries weighed on investor sentiment on Tuesday.
• Reserve Bank of India (RBI) Governor Shaktikanta Das provided additional liquidity to banks for lending to vaccine makers, hospitals and providers of health services, as well as easing rules for small businesses to restructure loans which led to a rally in Pharma sector.
• The Dow Jones Industrial Average closed at a record high on Thursday, bolstered by an upbeat weekly jobless claims report, while vaccine makers dipped after US President Joe Biden backed plans to waive patents on COVID-19 shots.
• Credit Suisse has sharply lowered its real GDP growth forecast for FY22 to around 8.5-9 percent, citing economic disruptions in the country due to the raging second wave that is likely to shave 100-150 bps growth off the economy.
• April PMI data indicated a marked and unprecedented expansion in business activity across the U.S. service sector. Supporting the upturn in output was the fastest increase in new business on record. Pressure on capacity remained evident, as backlogs of work accumulated at a faster pace and employment rose at the second-sharpest rate on record. Some concerns regarding the sustainability of new order inflows weighed slightly on business confidence, although optimism remained relatively strong.
• FII (Foreign Institutional Investors) selling and DII (Domestic Institutional Investors) buying trend continued this week as well. There was a net outflow of Rs 50,920 mn from the FII kitty while DII invested Rs 21,340 mn.
Things to watch out for next week
• The 4QFY21 result season continues in the next week as well. The Commentary from biggies such as Asian Paints and Tata Power will be critical. Managements’ comments over the business impact of second wave of Covid-19 will be important. Please note that NSE will be closed on Thursday 13th May.

Investment lessons from David Booth

David Booth is Executive Chairman of Dimensional Fund Advisors that he founded over 40 years ago. It now manages more than $600 bn for investors across the world.  

Gambling is not investing, and investing is not gambling: Gambling is a short-term bet. If you’re picking stocks or timing the market, you need to be right twice — in an aim to buy low and sell high. Fama showed that it’s unlikely for any individual to be able to pick the right stock at the right time — especially more than once.  Investing, on the other hand, is long term. Investing, to me, is buying a little bit of almost every company and holding them for a long time. The only bet you’re making is on human ingenuity to find productive solutions to the world’s problems.

Embrace uncertainty: Over the past 100 years, the US stock market, as measured by the S&P 500, has returned a little over 10% on average per year but hardly ever close to 10% in any given year. The same is true of dozens of other markets around the world that have delivered strong long-term average returns. Stock market behaviour is uncertain, just like most things in our lives. None of us can make uncertainty disappear, but dealing thoughtfully with uncertainty can make a huge difference in our investment returns, and even more importantly, our quality of life.

Implementation is the art of financial science: The way to deal with uncertainty is to prepare for it. Without uncertainty, there would be no opportunity. We always emphasize that risk and expected returns are related, which means you can’t have more of one without more of the other. Make the best-informed choices you can, then monitor performance and make portfolio adjustments as necessary. Come up with a plan to get back on track in case things don’t go as expected. And remember, you can’t control markets, so try to relax knowing you’ve made the best-informed choices you can. Great implementation requires paying attention to detail, applying judgment, and being flexible.

Tune out the noise: If an investment sounds too good to be true, it probably is. Stress is induced when people think that they can time markets or find the next winning stock. There is no compelling evidence that professional stock pickers can consistently beat the markets. Even after one outperforms, it’s difficult to determine whether a manager was skilful or lucky. Consistently finding big winners is difficult, but everybody can have access to the expected returns that a diversified, low-cost portfolio can generate.

Have a philosophy you can stick with: It can be difficult to stay the investment course during periods of extreme market volatility. We will all remember 2020 for the rest of our lives. It serves as an example of how important it is to maintain discipline and stick to your plan. By learning to embrace uncertainty, you can also focus more on controlling what you can control. You can make an impact on how much you earn, how much you spend, how much you save, and how much risk you take. This is where a professional you trust can really help. Discipline applied over a lifetime can have a powerful impact.

What type of retiree will you be?

Mike Drak writes that the producers of retirement commercials would like us to believe that all retirees are the same. They aren’t. To be happy in retirement, we need a good handle on what our needs are—financially and otherwise—and then find ways to satisfy them each and every day. That might sound difficult, but it isn’t. To help get you started, here are the three general types of retiree Drak discovered during his research on retirement:

  1. Comfort-oriented retirees. These folks like to avoid stress, instead favouring a safe, predictable retirement. They no longer have any goals. Retiring was their big goal and, now that it’s behind them, they just want to rest and take it easy. Comfort-oriented retirees don’t need much to be happy. Just the basics will do, food on the table, a roof over their head and some level of financial security.
  2. Growth-oriented retirees. These retirees have a need to keep stretching, exploring, learning and experiencing new things. If they can’t do that, they aren’t happy. They’ve created a bucket list a mile long and plan on knocking things off that list for as long as they can. They have a hardwired desire to feel “significant” and a need for accomplishment and contribution. Their work nourished these needs, and they lost that source of nourishment when they retired. Until they can find a way of replacing it, they’ll always feel like something is missing in their life. Self-actualizers, even retired ones, are never satisfied with how things are. They’re continually setting new personal goals that will challenge and improve them, so they can realize their full retirement potential.
  1. Self-transcenders. Self-transcenders look for a cause, a need, a problem to be solved, something that they’re passionate about. This becomes their mission. They know it isn’t how much you give that counts, but rather how much love you put into the giving. Helping those who are struggling leads to the “helper’s high,” a feeling of intense joy, peace and well-being. Helping others gives self-transcenders a strong sense of purpose. When they have what they consider a purpose-driven retirement, they’re happier. They can sleep peacefully at night knowing that they did something to help others. They wake up in the morning feeling excited and wondering, “Who can I help today?”

Drak suggests that one should now ask self: What type of retiree are you? If one can answer that question, you’ve taken a crucial step toward a happier retirement.

Adopt to survive and thrive

Robert Vinall writes that there are two contrasting approaches to investing – one placing more weight on the future; the other on the past. They are a reminder that the optimal strategy is a function of the era you invest in. If you are in a market characterised by rapid and widespread change, it pays to be forward-looking despite the inherent difficulty of judging the future. If, on the other hand, you are in a market where the pace of change is slower and more localised, then it may simply be better to bet on reversion to the mean as the future is too uncertain and genuine change too infrequent.

The older generations of value investors invested based on the assumption that historical patterns of cashflow generation would reassert themselves – better known as “reversion to the mean” – seemed the better strategy. Many of the great investing track records were built by investing in stable, unchanging businesses when they went through a period of underperformance on the assumption that they would eventually recover. It was an approach to investing that was based on a good understanding of a company’s history and the assumption that the future would not look too different to the past. It worked far better than betting on companies with short histories and big plans for the future, and it seemed obvious that it would continue to.

When the investing era changes, older investors have to adapt, which in practice does not so much mean learning new tricks as unlearning old ones. The former is certainly easier than the latter as learning is fun, but parting ways with cherished ideas are painful. In one important respect though, there is an advantage to experience. When the nature of the market does change, it should, at least in theory, be easier for the investor that has lived through different types of markets to adapt than for the investor who has only experienced one type. The younger investor suddenly finds themselves in the position of the older investor without the benefit of having experienced a change in the market before.

To increase the chances of adapting to different markets, Vinall sees one big thing an investor should do and one big thing they should not. The single biggest thing they should do is commit to adapt. The single biggest thing an investor should not do is tie themselves to a particular investment style or geography or industry or any other categorisation. 




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