If there is something that almost everyone likes, then it is the world of motion pictures. It has a way of teaching the truest life lessons by leaving us in awe.
Remember this lady? Yes, Vidya Bagchi from Kahani. Remember how she stunned everyone when she revealed she wasn’t pregnant? Let’s call this situation 1.
In situation 2 we have the scene where the protagonist gets to know that he is the son of Amarendra Bahubali. Almost everyone knew this, but it was a revelation for him.
Situation 3 brings the final season of one of the most popular TV series ever Game Of Thrones where no one knows which character will eventually win the iron throne – the centre spot of power!
We find Jay and Veeru from Sholay in Situation 4 where from the very beginning all the characters involved and the spectators on the other side of the screen – both parties knew they were best friends and would watch each other’s backs if needed.
The beauty of the world on that side of the screen is the fact that we can draw parallels from them.
A model was derived by Joseph Luft and Harrington Ingham famously known as Johari Window which is one of the best models to understand one’s relationship with the other coordinates in the surrounding circle.
Here are the missing dots:
Situation 1 goes to box 3
Situation 2 goes to box 2
Situation 3 goes to box 4.
Situation 4 goes to box 1.
What is ideal from the point of health interaction?
↔️ Stretch box 1 and minimise the other 3.
Can we see the world of Mutual Funds through this glass? Let’s try to.
Let’s take Box 1: Open Area: Jay-Veeru:
Obviously, the bigger it is, the better placed are the two parties (user of the product and the one who is in the guiding seat). Both are in a win-win situation. In an open area, as the chart narrates, the crux has to be known and accepted by both ends. Okay. What is the simplest one liner in MF equity which is quasi-universal?
Equity is the best return generator asset class over a fit period of time.
When we plot Equity against gold, FD and average inflation over the last 38 years, the picture stands clear:
Having explored this, let’s take a step towards the complicated zones.
Box 2: Blind Area: Bahubali:
Something which he/she (the final user, i.e. the client) does not know but others (manufacturer/ advisor) know.
So it’s time to bring the villain out from Pandora’s box: the unpredictable, ugly patches of equity:
Do we see correction every year? Oh yes! Between 1988 to 2018, only one year, 2017, had all 12 months of S&P 500 in positives.
Want worse? Bring this down to Indian equity bad patches. If we take lumpsums in Diversified Equity funds having a track record since 2000:
The longest period when lumpsum generated 0% return is: 6 years 1 month!!
The longest period when lumpsum generated 8% return (~average FD return, the risk free anchor for mass) is: 10 years 5 months!!
Scared?
Necessary evil, I’d say. This sensitization has to happen at T-1. If we want to cut the blind area short, placing both ends of the picture of equity is a must!
Box 3: Hidden Area: Vidya Bagchi:
Something the user knows/ thinks and we don’t seem to know/ understand. Interesting!
I believe this box is created by misunderstanding perspectives.
Is the baby given enough toys for him to smile? Yes from the givers, no from the baby.
A recent study of FIFA tried to throw some lights on the hidden attribute of the end users in MF:
40.89% of Indian Mutual fund retail investors hold their equity portfolio beyond 24 months!!
Reading between the lines gives out an alarming truth: retail investors have defined the ‘long term’ in equity investment on a risky whim.
Box 4: Unknown area: the finale of GOT:
We are in an industry of theories derived from observations and the next observation might not be predicted by the theories already built.
So the ideal investment philosophy lies between two opposite ends of the theoretical poles:
Clearly, we need to shift the focus points from outcome to process.
From headlines to framework.
The question now is how to build a framework which is:
Simple.
Easily understood.
Noise proof.
Can be replicated across investors?
If we go back to the boxes, stretching Open Area needs shared discoveries, feedbacks, observations. By amalgamating these 3, let me propose a bricks-house model.
We are taking the MF discussion from which -wall-to-paint-turquoise-in-the-bed-room to lets-place-right-bricks-for-the-house.
Every portfolio should have its bricks chosen very carefully:
1. CORE: The most important pillar. Takes maximum area in the pie. This is untouchable for a pre decided tenure. If you juggle too much with this brick, the house falls. For different goals, there will be different pieces attached.
2. EMERGENCY: We live in a world driven by changes. In case of any contingency (not necessarily serious ones, your wish to buy something from your amazon wish list with 70% discount might also feature here), this brick will be used. It is the cash flow window for the house.
3. SATELLITE: This brick is for you to colour in experimental shades – can be coloured with a bull run of Pharma/ International call and hence can accommodate specific calls.
Please understand, for a retail investor, the core will be different than that of a corporate where the cash flow need is different. For a mid size corporate, the core might consist of 100% debt funds of liquid beyond maturity and its satellite can be duration calls.
For a retail mass investor, the brick-house model can look like this:
Remember, the most important rule for CORE is not to be interrupted if not absolutely necessary. To make that clear, we have to cut off the wings which work as springboards to react.
The most followed action or the desire to act comes from the want (not need) to pick top performing funds every year.
Is that making a difference?
What if I choose a passive index (for example, Nifty Next 50) and continue?
The study:
Activity makes you gain more?
Not really.
So in a scenario where the alpha is shrinking, a passive or a smart beta strategy can form a part of the CORE portfolio.
Obviously, active portions (like SIPs in mid-small caps for 10 year and beyond) will also be a part of the CORE. An advisor who understands the need and nature of an individual client will be the one to take the best call.
The motto is to shift the investor’s energy from noise/ever-changing headlines around finance and focus on a long lasting sound framework that can cut interruption. And you can also take the freedom to paint the wall of the biggest brick with:
chakstalks 