Forget 2020, this Precious Jewel Will Keep Shining in Your Portfolio Even in 2030 and Beyond

Dec 26, 2019

Rahul Shah, Editor, Profit Hunter

If ever there was a list of top 10 finance articles of all time, Charles Ellis' 'The Loser's Game' is sure to find a mention.

I've lost count of the number of times I must have gone through it and how I have increasingly begun to believe in its central message.

The article, written back in the 70s, makes a very strong case that investing in stocks has undergone a seismic shift.

It has turned from being a winner's game to loser's game.

Apparently, Ellis picked up this analogy from the game of tennis.

The game of tennis, Ellis argues, can be broken up into two major types, a winner's game and a loser's game.

The former, Ellis argues, is what is played between skilled tennis professionals. These are the handful of guys who are the top performers. Here, what counts is the quality of shot making. One can only win this game by hitting more winning shots than the opponent and outsmarting him.

A loser's game of tennis on the other hand is what the rest of the public plays. The so-called amateurs.

Here, what matters is how long one is able to keep the ball in play and make fewer mistakes than the opponent. The key here is to hit fewer losing shots than the opponent as the ability to hit a winning shot is very limited. The guy with the fewest errors wins.

Interesting, isn't it? It turns out this distinction holds true across a lot of different sports and activities and can come in extremely handy in taming even the strongest of opponents.

Once you realise whether the underlying activity is a winner's game or a loser's game, you can devise your strategy accordingly.

Ellis then went on to argue that investing in stocks had undergone a seismic shift where it has transformed from being a winner's game to a loser's game.

Beating the stock market was no longer about finding stock market winners. Competition had gone up so much that finding these winners consistently was turning out to be next to impossible. This, combined with the high fees the fund manager charged and the frequent churning of the portfolio, was resulting into a substantial underperformance. More and more money managers were lagging the benchmark index.

Ellis argued and rightly so, that it was time the strategy changed from trying to win the game to not losing it.

In other words, make fewer stock picking mistakes, pay lower fees and reduce churning as much as possible.

Ellis even went to the extent of saying that since beating the market had become so much more difficult, it may not be a bad idea to join the market itself. Put differently, invest in a low cost passive index fund.

Well, little did Ellis know that this subtle suggestion back then would reverberate so strongly in the corridors of the stock market a few decades later.

If reports are to be believed, passive funds became the undisputed champions of the stock money in the US for the first time early this year. At a little over US$ 4 trillion, it had more money under management than active funds.

Things are looking up for passive funds in India as well. Not in terms of asset under management but returns wise. As per a leading daily, passive mutual funds are all set to beat their active counterparts for the second consecutive year this year.

I can't help but believe that even the assets under management for passive funds will show a faster growth than the active counterpart.

You would be happy to know that I have already taken a big step in this direction.

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Investing in a low-cost index ETF forms one of the cornerstones of my Double Income strategy. My allocation to this ETF is a significant chunk of the total value of the corpus at any point of time. It is one of the safest and the most attractive ways to participate in the long-term India growth story.

In fact, the move is already paying rich dividends. This ETF is the best performing asset class in my Double Income service, up 10% in the last three months alone.

I am confident that it will continue to make a stellar contribution in the future as well.

It is like those precious jewels in the portfolio that will keep shining even in 2030 and well beyond.

As we enter the new year, now may be the perfect time to fine tune your strategy and make passive investing a small part of your overall corpus. How small? Well, 15-20% may not be a bad idea.

If you want to go a step further and know how to keep moving between this asset class and strong cash generating stocks and at what level to buy and sell them, my Double Income strategy has all the answers.

Warm regards,

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

PS: 3 small-cap stocks are on the verge of a big rebound. Read more about these 3 stocks here.

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1 Responses to "Forget 2020, this Precious Jewel Will Keep Shining in Your Portfolio Even in 2030 and Beyond"

Hem Bansal

Dec 26, 2019

Bull Market is always winner's game while beer market is always looser's game. You have to work on both strategies as per your market perception.

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