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Smart Money or Dumb? What's the Difference?

We all want to make terms of money in the market to be smart investors but really what distinguishes smart money from the masses of dumb money that's losses around the markets.

In recent times Rakesh jhunjhunwala proof to be a very successful investor. Everyone wants to emulate RJ...or at least his investment results.

So, what was his magic?

Hint: It isn't arcane financial calculations

One line that stood out for me from the recent book, 'The Big Bull of Dalal Street: How Rakesh Jhunjhunwala made his Fortune' by Neil Borate, Aprajita Sharma and Aditya Kondawar was this:

"Not every year I make money. I make money in spurts, like 1989-92, 2003-07, 2009-11.

In 1994-99 I would not have made any trading income"

 - Rakesh Jhunjhunwala

If you want to internalise one RJ Superpower, this is it:

To understand & act on the fact that stock market returns are lumpy, not even.

Equity markets are not Bank deposits that give you a predictable even return every year.

This is obviously not something that is unknown!

This is something we all understand in theory, but find it hard to implement... And this was something RJ mastered!

If you remain disciplined through downturns, or frustrating sideways moves which can go on a long time when you're living through them, you'll be way ahead of the rest of the pack.

Instead, the way most investors behave is to get struck by FOMO (Fear of Missing Out) & jump unto a theme just when it is peaking.

Case in point: All the Nasdaq ETFs in 2021 that were heavily subscribed (although I kept warning against those at the time) because the Nasdaq had been on a tear for 2-3 years.

Even in the Indian market, all thematic funds or PMS schemes that are launched, whether for sectors like IT,  Pharma etc or some other theme like Greater China, all come near the peak of the cycle for that particular theme.

The fund houses well understand that this is the easiest way to gather assets...even if it brutally drags down the investors' portfolio Returns.

And this FOMO issue is equally predictably compounded by panic selling on the other side...

Hence suddenly, the same NASDAQ that look so attractive in 2021 appeared very risky once it was already down 40% in 2022!

Thus many compounded their problem of buying at the wrong price by also selling at the wrong price.

Nasdaq, which was at the bottom of the global league tables in 2022, is close to the top again this year.

Some more similar thoughts from investors:

Last year, many came saying to us, 'When your India PMS is doing so well, why should we have anything in your Global funds?'

Then the logic of global diversification over the long term starts to dim.

Cut to today, it is: 'Why invest in equity when I made more in fixed income last year?'

So asset allocation decisions for the long term are made based on how some asset performed in the last 3 months or 6 months...a complete recipe for disaster!

Remember that sentiment is always a contra Indicator.

When you are feeling buoyant & confident is exactly when you should be wary, as next period returns are likely to be below average.

On the other hand, if the general feeling is of anxiety & frustration, the next period returns are likely to be above normal.

These are confirmed by a host of academic research studies across the world.

In theory we all know that equity might give higher returns over the long term, but it is with a lot more volatility than a host of other asset classes.

But in real time we get rattled when the returns are volatile/ not there/ even negative for a period of time.

Unfortunately, if you get out of the market at scary times, you'll never be able to catch up when the upmove comes.

If you missed out on just the 10 best days of the market in a full 40 years you would have lost out on two thirds of the return. Miss out on 30 best days and 90% of your returns disappear.

As it happens, these sharp upmoves normally come in a bear phase as markets rarely go up that rapidly in a bull phase.

For example, if you did not get back into markets by end March 2020 after the horrifying COVID crash at the beginning of that month, you'd have missed the 30% move in next 5 weeks in both India and global markets - a gap that would have been impossible to catch up on, no matter how smart an investor you are.

In an ideal world, you would get out before a big crash and get back in time - something we did manage to do both in our India PMS and global funds during the Covid crash - we called it out the turning points in public in real time.

At other times we used hedges to cushion a possible crash when things looked uncertain. For example the day Russia invaded Ukraine, the Indian market fell 5% while our equity PMS scheme fell only 1.6%.

But overall, in the scheme of things, it is a bigger damage to your portfolio returns if you are out of the market (ie not invested) at the wrong time than if you remain invested in the market at the wrong time.

What's the takeaway?

Please think carefully about your India Vs Global allocation.

Within India, your Fixed income, Gold, Equity allocation.

THEN don't keep tampering with it on an everyday basis...especially, don't chase the asset class or sector or stock that has recently done well.

These are the returns on Indian equities (and the First Global equity PMS, India Super 50) over the last 3 years. Yet 1.5 months of gold prices going up or Fixed Deposit rates increases & investors start dissing equities.

But let the market go up 25-30% and the same people will then come running back, compounding their problems.

 

Returns

Return/Volatility

(Equivalent of Sharpe Ratio)

FG-IS50

Nifty 500

FG-IS50

Nifty 500

FY21*

57.9%

34.9%

2.8

1.1

FY22

31.1%

21.8%

2.2

1.9

FY23

-3.0%

-2.3%

-0.2

-0.2

Total Returns#

100.7%

60.7%

5.8

2.7

* For a 13-month period, i.e. from our 1st full month of operations since inception i.e. from March 1’2020 till March 31’2021.

# From our 1st full month of operations since inception i.e. from March 1, 2020 to March 31, 2023.

# These returns are after fees and expenses as reported to SEBI

FG-IS50 (First Global India Super 50)

Equanimity, discipline and ability to stick to your long term plans, basically control over your mind are key for successful investing.

Happy investing!

From the desk of 

Devina Mehra

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