It's Not How Smart or Hard Working You Are... - The 5 Minute WrapUp by Equitymaster
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It's Not How Smart or Hard Working You Are...

Jul 23, 2016

In this issue:
» Sowing season gathers pace
» A round up of the global markets
» ...and more!
Rahul Shah, Co-Head of Research

How many fund managers have been able to compound money at nearly 30% for well over a decade? Not many, and that's why Peter Lynch is an investing legend. This is phenomenal stuff whichever way you look at it.

However, as per Lynch's own admission, the average investor in his fund hasn't seen the full 30% his audited records show. In fact, the actual returns are so poor that we had to read them twice to make sure we weren't missing anything. The average investor in Lynch's Magellan Fund has earned only 7% per annum.

This is downright shocking. Here's arguably one of the best long-term track records, and still the average investor in the fund can't even beat the benchmark index.

How can we explain this? Easy - the average investor made a mess of timing his entry and exit into the fund. Whenever Lynch's strategy underperforms, money flows out of the fund. But once he gets back to his winning ways, money comes back in, missing the recovery.

Before you brush this off as a one-off, listen to Joel Greenblatt, another investing legend.

Greenblatt quotes a study on the best-performing mutual fund between 2000 and 2009. His results were even more shocking: The best-performing mutual fund of the decade earned more than 18% annually between 2000 and 2009. Yet, the average investor managed to lose 11% per year over those ten years.

You read that right. Forget low returns, here the average investor actually lost money year after year.

The same self-destructive behaviour was at play. Whenever the fund did poorly, investors ran for the exits. And when performance improved, investors piled in. They bought and sold the best performing fund alright. But at the worst possible times.

If you're thinking investors do the same thing when investing in individual stocks, you're absolutely right. The average stock investor's track record is horrible for exactly the same reason his mutual fund investor counterpart can't beat the benchmark index.

So our goal today is very simple. I have not shared any great investing insight with you. I have not shown you how to assess management quality or value a company. I merely covered how investors make a mess of one of the easiest ways to make money in the markets. All the mutual fund investor had to do was be patient and not give in to greed or fear.

An investor with patience and a long-term mind set has an edge over other investors. Even if other investors are smarter or work harder, if you can keep emotions out of the equation, you win.

Of course, I am not saying that one doesn't need to work hard. Or that there's no point in seeking market wisdom. After all, you still need to research and decide on a fund or stock to invest in.

But I am saying that making money in the stock market doesn't have to be physically or mentally exhaustive. Even an average work ethic and intelligence can work wonders provided one has the right emotional framework.

Do you agree? Do you think unless you have the right emotional framework, you cannot do well in the markets? Let us know or post your comments on Equitymaster Club.

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Now, here's a chart that should warm the cockles of the hearts of everyone, right from the Government to companies to investors. According to the ministry of agriculture, kharif sowing so far this season is higher than the sowing in the previous season by more than 3%. And if this isn't good news enough, the water levels at the 91 major reservoirs across the country have seen a rise in their combined capacity. As per a leading daily, combined capacity has risen to 34% versus 18% a fortnight ago. If you look at the chart carefully, the food item showing the most increase is pulses, a commodity whose prices have witnessed a sharp spike over the last few months.

In a country where majority of the population is still dependent on agriculture for subsistence, importance of good rains cannot be emphasised enough. Especially against the backdrop of two continuous below par rains in the last couple of seasons. With this important cog of our economy showing signs of turning well, it could boost sentiments and incomes across, thus giving a much needed boost to our economy.

Good News: The Sowing Season has Picked up


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Most major Asian markets ended the week on a positive note. Stock markets in Brazil and Hong Kong ended the week higher by 2.6% and 1.4% respectively.

Gains in stocks from sectors like basic materials, utilities and industrials led higher the markets higher in Brazil. With the Olympics on the anvil, perhaps the event in Rio is being expected to provide a fillip to the local economies in the country.

Stock markets in Europe too ended the week on a positive note. Stock markets in UK and Germany ended the week higher by 0.9% and 0.8% respectively. Stock markets in US ended the week higher by 0.3%.

China was the only loser this week, ending 1.4% lower. Continued economic uncertainty in important sectors such as housing along with fears on the currency front were probably the drag that affected the sentiment.

Indian indices were almost flat, ending down by just 0.1% The ongoing earnings season will be a key trigger for the markets going forward.

Most market participants across the globe remain anxious about what central banks from the US to Japan will do next. The policymakers on their part are still trying to assimilate Brexit, and the effects Britain's exit will have on the status quo. Though liberal on rhetoric, they for the large part avoided any big policy moves since UK's referendum in June.

Many anticipate the US Fed's next move as a rate hike. Even so, elections in the US are now close and will likely subdue major policy action.

Performance During the Week Ended 23th July, 2016

04:56Weekend investment mantra

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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4 Responses to "It's Not How Smart or Hard Working You Are..."


Jul 25, 2016

Brilliant Rahul. Simple and so effective but requires a lot of deep understanding and should be holding the right scrips.

Thank you


Koonal Pandya

Jul 24, 2016

Aside from patience and long-term mindset, one needs a periodic and holistic review of the fundamentals. The sector might be facing headwinds, individual company could be suffering through market dynamics and lastly, global impact.


Chandravinod Pathak

Jul 24, 2016

Comment on "It's not how smart or hard working you are...."

You are right in your comment about timing. It is easy to rationalize. It is very difficult to decide whether to remain invested or get out. Eventually one has to follow the proverb in Hindi, "Laga to teer nahi to Tukka".

However you are brilliant in your comments about behavior of investors. I have done similar mistakes.
I wonder how you have developed such wisdom. I have one suggestion, ir your entire team is given charge of our country, the countries economic and political problems could be solved.
Whaat do you say?



Jul 23, 2016

This is the reason that education is not very strong predictor of success in investments and business. If the person is highly educated that means he has high IQ and worked hard to get degree. But, you see lot of illitrate and high school dropouts who are very successful in the world of business.

It seems EQ is very strong predictor. Sooner you realize it, better it will be for you. In this way you can work on your weaker muscles.

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