Interested to invest in an all-time high market? Follow a system to get long-term returns

Pravin Palande

Economictimes

The Indian equity markets have been trading at an alltime high with the Nifty 50 at 12,938 and the Sense at 44,180 as on November 18. Over the last six months, the Nifty is up 42%. Developed markets are printing money to protect against the Covid-19 meltdown. And Pzer and Moderna vaccine trail results have boosted stock markets across the world. The net eect: the market is slush with liquidity. In the last two months the market has gone up 11%, as FIIs have bought equities worth USD8 billion. All this is leading to crazy valuations with the Nifty at a PE of 35x.

FOMO (fear of missing out), invest in the equity market and eventually lose out. Fund managers, too, have ridiculed retail investors as they enter at the peak, don’t make returns, and then blame the mutual funds. They have a point. Investors often stop investing when markets are down and enter the market at an all-time high. However, investors do not lose money because they come in at the peak. It’s because they do not follow a system of investing in a well-diversied portfolio and instead invest for the short term. But those who do, get returns. Is it really that bad to invest at the peak? What if you are a long-term investor and buy the Nifty 50 index at the peak every year only once a year? We ran some data on the Nifty 50 and analysed the scenarios. If you were investing INR1 lakh at the highest level of the Nifty every year for the last 10 years, what is the kind of return you would be making between 2010 and 2020? Here, your IRR (internal rate of return) works out to be 8.61%. The annual returns for the same period would be 9.32% had you been that rich guy going for a lump sum investment, INR10 lakh-plus, at one go. What if you were investing at the lows of every year and got out of the market at the peak in November 2020? You would make an IRR of 12%. The above-mentioned examples are hypothetical. In real life, we can’t time the market’s highs or lows and may not make the extreme returns. But regularly investing in the market or SIP for the last 10 years on the rst of every month has given a return of 8.08%. If take the total returns, then the number goes up to around 9.5%, which is not great but works well for the long-term investor. Investing for the future The factis that you can buy the market – especially which is trending high -- and can make some good returns in the future. Here we are talking about an inde fund or a quality portfolio that has a Lindy eect – the theory implying what has worked in the pastis epected to work in the future. The idea is to create a system forlong-term investing.It could be through SIP orlump sum investing as long as you buy and sell in terms ofrules that work for you. Meb Faber, a fund manager, has explored buying stocks at all-time highs in great detail. He looked at US data through the 1920s using an equal-weighted portfolio between bonds and equities. “And it turns out, it’s a pretty damn good strategy. Better returns than just stocks, lower volatility, and WAY lower drawdowns… again, all you do is check at the end of each month… if stocks are at all-time high, then you invest in stocks for the next month, and if not, then bonds. That’s it!” he writes in his blog. Faber is ‘trend following’, where he switches between bonds and equities and goes for the latter when he sees higher returns there. In India, we don’t really have an eicient bond market and for most investors the biggest bet is – Am I making more than my xeddeposit (FD) returns? In most cases, equity returns are higher than FD returns. Currently, one-year returns of FD rates is at Upping the risk game But this 42% return in the last six months has become a big cause for concern for those who did not make money in the last 10 years. Many actually stopped their SIPs after the market crashed in March 2020. The rise in the market led to envy, greed, and a desperate need to take risks that most rational retail investors would ideally avoid. Last week, at ET Prime, we got a very interesting query on Twitter. A mutual-fund investor who was investing in SIP for 11 years had an abysmal return of 11%. He claimed to have invested in the best of funds, which actually became the worst of funds. His friend, on the other hand, did not invest for 11 years, but in March 2020, when the market fell, he put in INR40 lakh and made some serious returns. According to our reader, his friend made 20% minimum return by the end of October 2020. We understand that the investor is typically gripped by FOMO or even envy that people in the short term have made more money, while he, in the long term, has lost out. He now wants to become a high-risk investor and even wants to move out of the Indian market and get into dollar-denominated returns. He has most probably got into direct investing. And that is interesting. More people are closing their SIPs and getting into direct investing. While people have lost their jobs and they are forced to move out of SIPs, there are also others who are taking the direct route by closing their SIPs. Consider the SIP numbers. Between April and October, the total SIP amount collected was INR31,336 crore – down by 83% for the same period last year. On the other hand, there has been a relative improvement in CDSL, the share depositories. NSDL has 20.5 million accounts, while CDSL has 26 million accounts in September 2020 – a growth of 4% and 26%, respectively, over February 2020. Underlying these numbers is the underperformance of mutual funds and also a godsend opportunity to people who were working from home and had the time to buy some quality stocks in April and May 2020. The new accounts that were opened in the recent past have made some serious money. The rise ofthe new retail investors The work-from-home professionals ventured in and got to know how the markets worked. Many made money by buying the HDFCs and Infosys of the world at low prices and selling at 20% highs. “I did gure out one thing in stocks -- if you are making money, sell your shares. And if you are not making money on the stock, sell for sure,” says a software engineer-turned-trader/investor. As an SIP investor, he was frustrated but now feels he can manage his small portfolio. He does a lot of online training courses and reads investment books. We are not getting into how much money these investors would make in the future, but this particular software engineer is still continuing his SIP with an index fund. Financial advisors feel this bout of moneymaking should be considered more as luck because these opportunities don’t come for decades. Most of these new investors will make mistakes and lose out, they feel. What matters is if these investors follow a systembased approach. “Whatever the system is, just stick to it irrespective of the time period,” says Anish Teli, founder, QED Capital. So why is it that investors who get into mutual funds at the peak do not make money, while those who invest in index funds or quality portfolio do? The answer is fund managers are goal chasers. They can do this either by index hugging or by taking extreme risks. When money comes to fund managers eventually don’t give returns in the long run. On the other hand, some retail investors who have moved out of SIP will make money if they stick to a system of investing in quality stocks for the long term. Shane Parrish, a podcaster who runs Farnham Street, would call this the dierence between amateurs and professionals. Professionals follow systems and amateurs seek goals. In the peak of the market, everyone, and especially the professional fund manager, is goal-seeking while some retail investors are learning to follow systems. Those are the ones who are giving their SIPs a slip. We will see a reversal to mutual fund SIPs if they fail in direct trading. For now, it’s wait and watch.

Source: https://economictimes.indiatimes.com/prime/money-and-markets/interested-to-invest-in-an-all-time-high-market-follow-a-system-to-get-long-term-returns-/primearticleshow/79349661.cms?utm_source=newsletter&utm_medium=email&utm_campaign=prime_dailynewsletter_paid&utm_content=heading_8&ncode=ae88c8a4f8742a8682bf7d9294253f7f