Thread by @indrajayanthan

#StockMarket #MutualFundsSahiHai #mutualfunds

Year after year majority of mutual fund managers are fooling innocent retailers.

S&P Dow Jones Indices compiles a report on active fund performance versus benchmarks over various periods, from 1 to 10 years.

The report for December 2019 , the latest available, showed that only 35% of large-cap funds managed to beat their benchmark indices over the last 10 years.

souce- livemint

Their logic is simple

If you made money, we are the reason

If you lose money feel free to chose from our laundry list of excuses for why it was a difficult and why next year will surely be different.

Nobel Laureates George Akerlof and Robert Shiller call it Phishing For Phools

The “phish” is a way to get someone to make a decision that’s to the benefit of the phisher, but not to the benefit of the phool.

They explain that if you can divert a story someone is telling himself in your favor but not in his, you have ripened him up to be phished for a phool.

Here are the top excuses.

Short term excuses

Don’t focus on short term fluctuations, the market always make money in long term

How long is long term for equity? 3 year ? 5 or 10 ? The truth is entering at expensive valuations hits you hard even if you stay invested for a decade. Also there is

survivor bias. Only good stocks survive long term. The expertise lies in finding them in beginning not at the end.

Long term excuses

1.The market being very “narrow,” driven mainly by few stocks

Then why you didn’t invest in them !

2.Just unlucky

If luck is the only determining factor we should have bought lottery tickets.

Luck have major role in profits while money management plays major role in limiting draw downs ! Whether most of our profits were eaten huge draw downs ?

3.The market at starting point had much higher PE

Why you invested then without waiting for PE or any other criteria to indicate good entry ? You lack proper mindset t
or
you didn't care to inform us
or
you didn't know ?

4.See our other funds managed, they always beat the market in long term !

Is there any survival bias here ? You only let the funds with good returns run ? Bad funds are often merged with other schemes by mutual fund houses. Cutting your loses is a good sign but conspicuously

hiding it in those small letters or disclaimers means it was showing you were selecting based on throwing darts rather than all the selection criteria jargon you were telling us ?

5. You invested in wrong date / month/ year.

Then why you ain't told us to wait ? If i invested in-spite of your warning then i am responsible. Also one way to get around the date problem is to look at rolling returns. Rolling returns means that you look at the returns

between different sets of dates and take an average. Lets compare rolling returns of fund versus rolling returns of benchmark on both good and bad times.

6. You should have invested as SIP or lumpsum . Keep changing depends on how you invested.

Investing in an SIP is better not necessarily better in terms of returns, but it is a lot safer.

Incase of SIP compare minimum returns with benchmark as aim of SIP is to be safer .

7. Large part of the market continue to remain at high multiples even now and earnings growth remains slow for the moment .

There is always some segment in market with high multiples and some segments in low multiples. The expertise lies in focusing on star performers of

those segments in low multiples.

9. Do not look at PE ratio which may be driven higher by a narrow set of stocks but look at Market cap to GDP ratio (also called the Buffett Indicator) is at the 2009 global financial crisis levels etc

Whether the same criteria was applied

throughout or only selectively applied to explain poor performance ?

Few other jargons include ( used when don't know what to say )

system wide corporate governance failure,
lot of over-investments,
earnings growth has been moderate due to multiple reasons

( trick used to find out what we think and reciprocate the same),
maturing of the economy,
mean reverting,
base effect (as the absolute size of economies grow, growth moderates, which reflects in equity returns),

One important way is to check Skin in the game ( funds invest their own money also . But recent events show that's not fool proof. News reports show top executives often sold out early before crisis.

The bottom line

We can get poor returns either because of bad timing or a bad scheme.

Investing for the long term will iron out bad timing.

Bad schemes seems to be resolved by long term but that's contaminated by survivor bias.

Educating yourself and keep on learning is the best way to identify whether its bad scheme or bad timing.