This could stop you from earning 15% per annum... - The 5 Minute WrapUp by Equitymaster
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This could stop you from earning 15% per annum...

Jun 10, 2015

In this issue:
» Consumer discretionary demand is on a decline
»  Is India on a cusp of a turnaround?
» A round up on markets
» ...and more!

Investing is simple but not easy. It is simple in the sense that you just have to follow few rules and stick to them. However, it is not easy because following these rules and adopting a disciplined approach is harder than thought. If that was not the case then most investors should have at least earned market matching returns (long term average of about 15%) by simply mimicking the index. Yet you may find many people who have done poorly as a whole than the broader market. And thereby suffered in the long term where most of the money is to be made.

But why - Have you ever thought?

Lack of patience is perhaps one of the biggest reasons why most investors fail. Fidelity carried out an interesting study recently that clearly depicts how important patience is to investing. They segregated the return performance of their accounts based on time line. And guess what, the best performing accounts were of those clients who were dead. Second in line were those accounts whose clients had forgotten that they even had an account!

Thus, the itch to constantly do something is the biggest drawback for any investor. Mind you the problem is not with the investment style but with sticking to it and being patient. For instance, some may follow value style while some may follow growth. The problem begins when one style underperforms for a brief period. In that case, an impatient investor simply drifts to another style. And the drifting process continues in search of quick returns if his current style is not favoured by the market. This makes his portfolio a potpourri of strategies.

Drifting is problematic as you move out of your circle of competence. There is a reason why certain funds focus on certain sections of the market. Same way each investor should also identify his area of expertise and stick to it.

Another reason why investors suffer is because they over emphasize minutia of information and under emphasize critical matters. As a result, they miss the big picture.

Let me give you an example to clarify this. Generally most investors focus on quarterly results and look out for levers that led to underperformance or outperformance. Such small details help understand the performance drivers and can be exciting in nature. However, what matters the most and is probably not that exciting is the proportion of grey hairs in the board composition. Or for that matter related party transaction history of the company, levels of management compensation, capital allocation skills of the management etc.

Mimicking is last but not the least reason why most investors fail. Mimicking means simply following the footsteps of a renowned investor and do what he does. As per one anecdotal research, if an individual simply did what Buffett did after his trades were made public he would have easily trounced S&P 500!

Not to say that one should blindly follow gurus religiously. We do not advocate that. But even if an individual chooses to do so, it becomes increasingly difficult for him to remain patient. Let's say your guru messes up on one investment which you mimicked.

A guru having known the company would be more comfortable holding on to it while an average investor lacking patience may sell soon since his conviction is borrowed. You are bound to panic when you replicate and don't know much about your investment. Hence, there are very few investors who can religiously mimic.

The bottomline is that success in markets comes with patience, discipline in following a strategy, and having the desired skill set. Absence of any single factor could make investors handicapped. The best approach for them is to seek professional guidance and not experiment with their own hard earned money.

Have you analyzed why your investments failed in the past? If yes, what were the reasons for failure? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
As the Indian economy has yet to pick up significantly, the demand for discretionary products seems to be on the wane. This is more telling if one looks at the revenue growth of some of the top consumer discretionary companies in India. As the chart shows, the rate of revenue growth of these companies has dipped in the last couple of quarters.

Demand has been tepid despite the fact that inflation has eased off and commodity prices have remained low. One of the reasons for this has been the slow growth in wages as a result of the slowdown in the economy. For one, rural demand has been falling due to unseasonal rains and lower crop production. Further, the government, in its bid to get its finances in order, has been trying to reduce subsidies. This has then put further pressure on incomes especially of those in the rural regions.

At the company level, capacity utilization levels continue to be on the lower side. Thus, companies are wary of spending on capex and increasing employee wages. In such a scenario, households are looking to save more by cutting overall spends. And this has then impacted revenues of discretionary companies. According to us, this should start picking up though, once the Indian economy starts recovering more meaningfully.

Will the demand for consumer discretionary products pick up?

Speaking of a recovery in the Indian economy, as per an article in the Economic Times, Morgan Stanley is of the view that India is on the cusp of a turnaround. This does not seem to be the view of many foreign investors given the volatility seen in the Indian stock markets in the past several months. With the Modi government having completed a year in power, things have been slow to move on the ground. Sensing this, foreign investors have been pulling money out of India to invest in some of the other emerging countries. The correction is not surprising since much of the rally last year was based on unrealistic expectations from the government in the first place. Implementation of reforms was not something that was going to happen quickly. Keeping this in mind, writing off India does not make sense.

Infact, India still has a lot going for it. Although slow, it does not mean that the recovery is not taking place at all. According to Morgan Stanley, the recovery has already begun with noticeable ramp up in engineering orders, a decline in stalling of new projects and a rise in new investment proposals. The Indian economy has already witnessed inflation easing off. And at present, it seems to be on the cusp of a transition to faster growth as reforms begin to yield fruit. Thus, as long as inflation remains low and growth picks up, India cannot be entirely written off.

Indeed, if the Modi government sticks to its plan of implementing key reforms, India could very well be the pick of the emerging markets. Especially when the largest economy in the region China is slowing down. China has been under quite a lot of pressure in recent times. Its economy has not been growing at the scorching double digit pace that it did before the global crisis. This has largely been because of its exports driven model and the consequent sluggishness of the developed economies. The demographics are also beginning to work against it. In contrast, while India's growth has slowed down, the potential for recovery in the coming years remains much stronger. India also has better demographics in terms of higher number of a younger workforce.

The other aspect that differentiates India from China is more on the political front. The Modi government has been laying a lot of emphasis on building and maintaining ties with foreign countries, which has not been the case for China. Thus, as long as the relentless focus on reforms remains, the coming decade could very well see a phenomenal growth in the Indian economy.

The Indian stock markets were trading in the green at the time of writing. While the BSE Sensex was up by 300 points, NSE Nifty was up by 80 points. The Asian equity markets were trading in the green at the time of writing. The European stock markets too opened in green today.

 Today's investing mantra
"The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Jinesh Joshi (Research Analyst) and Radhika Pandit (Research Analyst).

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Equitymaster requests your view! Post a comment on "This could stop you from earning 15% per annum...". Click here!

2 Responses to "This could stop you from earning 15% per annum..."

manmohan khetan

Jun 11, 2015

Suggest to publish similar data for spending on Marketing and on Quality Testing by other companies i.e. HUL / ITC to have an objective idea of Nestle spending on same heads.


Rajagopalan Ramesh

Jun 10, 2015

An excellent article indeed ! Investors who are willing to make multi-baggers must read this. I have been doing the same mistake. I held excellent stocks from an Index Level of around 4500 but sold when the Index touched 7000 levels. Had I held onto the stocks until 8900 levels, I would have made a killing. I generally buy on medium to long-term basis. But if the stock gains around 10 to 15% in two months time, I happened to sell. Though I have been making good returns, my investments did not yield multi-baggers. Your article emphasizes patience - which attitude is lacking in most of investors like me. The Investing Mantra also reiterates the same view.

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Equitymaster requests your view! Post a comment on "This could stop you from earning 15% per annum...". Click here!
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