99.9% Investors Failed to Capitalise on the Success of this Fund

Jul 27, 2020

Rahul Shah, Editor, Profit Hunter

People in charge of the Mirae Emerging Bluechip fund must be a happy lot these days.

The fund turned ten recently and it couldn't have asked for a better birthday gift.

The fund has raked in an impressive first decadal performance, logging in gains of 18% CAGR, almost two times as good as the benchmark index.

In an era where 'Alpha' (outperformance) is shrinking faster than ever before, it is indeed a splendid performance.

However, there aren't a lot of investors the fund can share this joy with.

Of the total number of investors on its roster today, only 0.1% of them have stayed put in the firm in its entire 10-year journey.

Put differently, a whopping 99.9% haven't earned anywhere close to the Warren Buffettesque returns that the fund has piled on.

You see, an overwhelming majority of the investors must have invested in the fund much after its inception.

And then there are those that may have exited the fund mid-way and have not stayed put.

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Either ways, the number of investors that has earned the full 18% CAGR is extremely tiny and highlights one of the biggest scourges afflicting the industry.

In his introduction to The Intelligent Investor, Ben Graham makes a very important observation.

  • We have seen much more money made and kept by "ordinary people" who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had an extensive knowledge of finance, accounting, and stock market lore.

I think Benjamin Graham hit the nail on the head here.

Did the 0.1% investors who stayed put with the fund for 10 years have better stock market knowledge?

Did they have access to some hidden information about the skills of the fund manager that others did not?

I don't think so.

My theory is that they were temperamentally better equipped and were willing to take the short term market fluctuations in their stride.

They knew that in the long term, the stock market news will be good and were willing to just hang in there.

They did precisely that and ended up making a killing.

In fact, this whole incident reminds me of the famous Fidelity study. The fund did an internal review to figure out which type of investors received the best returns between 2003 and 2013.

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The audit revealed that the best investors were either dead or inactive.

Yes, you read that right. The guys who did the best either forgot they had invested in the fund or had their assets frozen after their death.

For me, the key takeaway is simple.

Not doing anything and pretending to be dead is perhaps the biggest edge you can have in investing.

This is because majority of the investors are terrible timers.

Instead of buying low and selling high, they end up doing exactly the opposite. Thus, they mess up their long-term returns. Which is why, they are almost always better off staying put and let compounding work its magic on their investments.

Another approach that I have found useful is to have some fixed allocation between stocks and bonds, say 50:50, and keep rebalancing after a fixed interval of time.

So say you start with 50:50 and if the stock market goes up and the ratio becomes 60:40, you move money out of stocks and put it into bonds.

And if the stock market goes down and ratio becomes 60:40 in favour of bonds, you can take money out of bonds and put it into stocks and make the ratio 50:50 again.

This approach has the major advantage of forcing you to buy low and sell high instead of the other way that most investors end up doing.

When the stock portion becomes 60%, you are selling high and when it becomes 40% and you take money out of bonds, you are buying low. This approach doesn't let emotions play havoc with your investments and ensures that you do the right thing from a long-term perspective.

In fact, this approach comes highly recommended by Benjamin Graham who even recommended a 75:25% split between stocks and bonds. If the markets are low, you go 75% into stocks and once they turn expensive, you go 75% into bonds.

I have seen that the comfort level with an approach differs from person to person.

Some people like to stay put and remain completely inactive. While there are others that love to buy and sell stocks on a frequent basis.

I am of the view that as long as your approach allows you to buy low and sell high, you should do well with whatever approach to adopt.

Good Investing,

Rahul Shah
Rahul Shah
Editor, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

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2 Responses to "99.9% Investors Failed to Capitalise on the Success of this Fund"

PREMKUMAR R

Jul 27, 2020

I am a subscriber to both Microcap Millionaires and Exponetial Profits and have made a small investment in most of the stocks that you recommended here. Moving frequently from stocks to bonds and vice versa is not easy for a person like me. I haven't made any investment in the bonds except for sovereign gold bonds. I have some portion of my investments in FD and some in liquid funds and very little in debt funds. Most of my mutual funds SIPs were/are in equity funds.

I satarted my SIP in Mirae Bluechip fund in Jan 2017 and it is ongoing. Your comments on dead and inactive investors is interesting.

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paresh Shah

Jul 27, 2020

Interesting. But wasn't that the logic of the PE funds. Unfortunately they did not do as well. In a situation when the markets remained around the 37 K level for a considerable period of time [years] neither the SIP nor this approach will lead to good returns !

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