During a recent trip to the US, I happened
to meet many young executives from the Silicon Valley, doing relatively well
and perhaps in the 95 percentile of income group but all fed up with lack of
options to generate
alpha on their idle cash lying in their savings / checking accounts. And that
too in one of the most advanced and efficient consumption driven economies on
the planet.
to meet many young executives from the Silicon Valley, doing relatively well
and perhaps in the 95 percentile of income group but all fed up with lack of
options to generate
alpha on their idle cash lying in their savings / checking accounts. And that
too in one of the most advanced and efficient consumption driven economies on
the planet.
One relatively accomplished executive(we’ll call him John) in one of the top social networking company had an even stranger
story. In 2009 (at the peak of the depression), John invested a million dollars
with a top hedge
fund with a non-guaranteed promise of indicative returns upwards of 15% CAGR on a premise that
the bounce back from those levels was likely to be phenomenal in all asset classes and
returns could even be higher than indicated.
Impressive isn’t it! I would have
sold my wife’s jewellery to invest – for where else would one get that kinda return.
sold my wife’s jewellery to invest – for where else would one get that kinda return.
My curiosity got the better of me and
I couldn’t help but probe. To my surprise John recently withdrew and got back USD
1,126,493 after 8 years, a CAGR of 1.5% with a detailed explanation from the
fund manager as to how well his money worked for him in the hands of the fund
and why the investors should feel happy in the times that were tough (2009-2016)
I couldn’t help but probe. To my surprise John recently withdrew and got back USD
1,126,493 after 8 years, a CAGR of 1.5% with a detailed explanation from the
fund manager as to how well his money worked for him in the hands of the fund
and why the investors should feel happy in the times that were tough (2009-2016)
And by the way John was smug – for his sense of
achievement was emanating from the fact that his checking account would have
yielded just a fraction of this return. So John really did well by his own
accord. And top of that the fund sent them a special shopping voucher
(unexpectedly) worth USD 2000 for shopping on Amazon.
achievement was emanating from the fact that his checking account would have
yielded just a fraction of this return. So John really did well by his own
accord. And top of that the fund sent them a special shopping voucher
(unexpectedly) worth USD 2000 for shopping on Amazon.
I did some research on US asset
classes and was rather surprised at my findings.
classes and was rather surprised at my findings.
Dow Jones moved from 7000 to 20000 in
March
2009 thru Dec 2016
March
2009 thru Dec 2016
So if John had simply (read dumbly)
invested in an index fund then his 1 million USD would have been 2.85 million
USD
invested in an index fund then his 1 million USD would have been 2.85 million
USD
If John had bought gold his
investment would have peaked to about 2.5 mil USD in 2011-12 but would have
still been about 1.8
mill USD today
investment would have peaked to about 2.5 mil USD in 2011-12 but would have
still been about 1.8
mill USD today
And of John had bought Apple stock
for that amount, his money would
be worth approx. 9 mill USD today besides earning about 17 dividend payouts
in the same period
for that amount, his money would
be worth approx. 9 mill USD today besides earning about 17 dividend payouts
in the same period
And lastly if rise of oil prices had
impressed John, his money would have remained
almost the same in 9 years
impressed John, his money would have remained
almost the same in 9 years
John and thousands like him would
have definitely paid for his fund’s billions in bonuses.
have definitely paid for his fund’s billions in bonuses.
Oh – I so hope that my best friend
John doesn’t read this piece because the comfort of smugness on an issue is a
virtue that once acquired must not be lost or destructed.
John doesn’t read this piece because the comfort of smugness on an issue is a
virtue that once acquired must not be lost or destructed.
The point is simple :
Lack of financial knowledge is hurting
the potential growth rate of capital that is being used by fund managers.
the potential growth rate of capital that is being used by fund managers.
The greed for a superior return
without a guarantee of capital protection just puts gullible investors at huge
risks and there is no redemption from these ill-informed investment decisions.
without a guarantee of capital protection just puts gullible investors at huge
risks and there is no redemption from these ill-informed investment decisions.
And John isn’t alone – except for less
than half percent of top wealthy people on the planet, very few are able to
generate an alpha on their savings that beats inflation and grows capital.
than half percent of top wealthy people on the planet, very few are able to
generate an alpha on their savings that beats inflation and grows capital.
If the annual rate of inflation is
about 2% historically, the savings must generate a min yield of 2% for the value
of the money to remain same or real return on
investment to remain 0.
about 2% historically, the savings must generate a min yield of 2% for the value
of the money to remain same or real return on
investment to remain 0.
An average or above average executive
is just too busy in the daily rigmarole of life, wife, kids, performance
appraisals, corporate slavery to make any real sense of what to do with spare
cash.
is just too busy in the daily rigmarole of life, wife, kids, performance
appraisals, corporate slavery to make any real sense of what to do with spare
cash.
But the success of stocks like apple
or gold are outlier events that occur thrice or 4 times in a 100 year spectrum.
Only the people who have deep understanding of economics or trends can generate
alpha or even protect capital.
or gold are outlier events that occur thrice or 4 times in a 100 year spectrum.
Only the people who have deep understanding of economics or trends can generate
alpha or even protect capital.
Thomas Pikkety, in his award
winning research and book has beautifully summarised that capital over a long
period of time gets accumulated in the hands of few and the common man
continues to suffer (relative income inequality)
winning research and book has beautifully summarised that capital over a long
period of time gets accumulated in the hands of few and the common man
continues to suffer (relative income inequality)
If capital is deployed in non-sexy instruments
and stocks of companies with sound management and fundamentals, and portfolios
are diversified to include a variety of asset classes and the inherent greed
can be curtailed to be satisfied with ordinary real returns on capital, all
investors will definitely and most likely grow their capital at a far better
rate than anticipated.
and stocks of companies with sound management and fundamentals, and portfolios
are diversified to include a variety of asset classes and the inherent greed
can be curtailed to be satisfied with ordinary real returns on capital, all
investors will definitely and most likely grow their capital at a far better
rate than anticipated.
Mutual funds from trusted fund
houses, that have low expense ratios and the ones that are tried and tested
with historical success of more than 7 years should be bought rather than being
carried away by the glamor of irrational returns.
houses, that have low expense ratios and the ones that are tried and tested
with historical success of more than 7 years should be bought rather than being
carried away by the glamor of irrational returns.
Investing is simple as Buffet says Be
greedy when all are fearful and be fearful when all are greedy. And if Buffet’s
to be proven right, a Global Financial Armageddon is round the corner but then –
that would be the time to be greedy – Isn’t it?
greedy when all are fearful and be fearful when all are greedy. And if Buffet’s
to be proven right, a Global Financial Armageddon is round the corner but then –
that would be the time to be greedy – Isn’t it?
The next blog
Why it’s a stupidity to ever invest in a
house
house
Manu also writes on Huffington Post