Can passive investors make decent money?

Q&A: Questions & Answers
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My simple question, is it possible for passive investors without too much of a concentrated portfolio make returns to the tune of 20% CAGR?

I’ve read all the usual books referred to here, can read financial statements, although can’t think of the implications of each number and possibilities of the numbers being cooked up. I am an engineer although I have a business degree and read business publications. ( I know what Munger says about business degrees and generally think, he is right in some aspects)

Of course, I should be able to invest in a few mutual funds and forget about it. But I’d like some intellectual challenge to pursue.

When I was pursuing business degree, my professor/coursework emphasized on diversification and technical analysis. Although now after reading about it for about a year, I have learned from the wisdom of VPers that concentrated portfolios and fundamental analysis of undiscovered companies is what creates wealth.

Here is my current strategy:
I have started a few investments in individual stocks starting March 2015, my current portfolio is like a fund.
(Not that I started in the bull market, it was too painful to open a demat account earlier.) I buy a few stocks of every company I’m interested in/hear of, for tracking and further research. I dread paying taxes, so I plan to hold a stock at least for a year and have not sold anything yet, in spite of some of them going down more than 25%. So I know I can control my emotions and can be patient.

After a year, I need to figure out how to sell a few and make my portfolio more concentrated. I have only 2-3 stocks which are at least 5% of the portfolio.

With that background, my question is, what is the process I should follow to make 20% annual returns for 15-20 years? I’ve calculated what that amount would be and that would be more than sufficient for my future needs with the amount I’m planning to invest. Do I need a lot of undiscovered companies in my portfolio to get there? Or, subscribing a mutual fund should be enough? Although I’ve started SIPing to MFs, I’d like to pursue some intellectual challenge.

Again, my question is to those of you who’ve been invested for 10+ years/have gone through multiple cycles/have known people who’ve done that. I know the last 20 years have been great for Indian economy. Do you think, will this trend continue and will equity investing create as much wealth as it had in the past?

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I am on same boat brother.Trying to figure out but did put some fund in MF for defense/weakness as I am only engineer without any business degree…so thanks to put forward the query.

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I can tell you what my biggest learning has been - I think first and foremost, one should love analysing businesses and this is the most important question that you need to ask yourself and honestly answer. Only if you are passionate would you be able to sustain the ups and downs in this journey.

My second biggest learning has been to not worry about targets. I think there’s no point in thinking about a 20% CAGR for the next 15-20 years as a target. Even over a long period of time, your returns from individual stock investing can range from permanent loss of capital to infinite returns. Again, this ties back to the first point. If you just keep going and keep learning from your mistakes and most importantly, if you maintain discipline, there’s no limit to the returns.

Thirdly, if I had to talk about a process, I would say that its important that we keep it simple. This is something I learnt from Buffet. As he once said, the trick lies in defining your circle of competency. Once you have defined it, its then critical that you dont step outside that circle regardless of how small that circle might be. As you keep learning though, your circle might become bigger and bigger but at no point of time, your investments should cross those boundaries. My biggest challenge has been to stick to this third point. I am still learning.

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A 20% CAGR for 15-20 years is phenomenal and i doubt if anyone can achieve that save a few who you can count on fingers.
My advice (take it as an advice from someone who’s been in the markets for 11yrs approx):

  1. Figure out why you are in the markets and be realistic. If you truly want 20% CAGR I can assure you that such massive wealth creation will require tremendous effort patience and dedication on your time.
  2. Focus on the process and not the outcome. Continuously learn, keep getting better and avoid making mistakes. You can think as advice from Munger or from Krishna in Gita doesn’t matter. But just do the right thing and the results will follow. (Or bonus: 3 idiots says the same: apne aap ko itna kabil banao ki success khud peeche daude).
  3. After a certain point numbers like bank balance, age, returns etc are all relative. The thing that matters - happiness and peace of mind can’t be measured in numbers. While we all work hard to make more money, do keep this at the back of your mind. If lumpy returns shake you and lead to an unhappy family is it worth? OTOH if you can stomach it, you should definitely not fear volatility.
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a decent mutual fund like one from the Franklin Templeton stable can
deliver a 20 per cent CAGR return over very long periods with little
efforts on the part of the investor. Most of us on this forum are eying far
bigger returns.

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Not sure what you’re trying to say. Franklin Templeton is not a ‘passive investor’ which is what this question is about. Among the 1000s of MFs out there, how do you know which one will give 20% CAGR over the next 15-20yrs. We can look back but there’s substantial survivorship bias. Even ‘decent’ MFs like Hdfc top 200 have suffered, there’s no guarantee of future performance. Also I didn’t say no one makes 20% CAGR over 15yrs, all I’m saying is that it’s highly uncommon and anyone who achieved that with intelligence (and not pure luck) has put in far more efforts than any ‘passive’ investor, which is what the question is about.

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One strategy could be to buy nifty bees when dividend yield of nifty is above 1.7% ( ~ 2^[.75] %) and sell it off when the dividend yield goes below 1%. Given high volatility coming ahead of us, you should get chances to buy nifty bees at the given conditions. Not exactly a passive approach but at least you don’t have to analyze individual business . On backtesting this strategy, one can get 20% returns. Only thing is that you wont be in the market all the time.
Another approach could be to never sell , but buy whenever the first condition is met. I like the second as it is more passive and allows you to be in the market all the time. However, you cant expect 20% with the second strategy. 13-14% would be more reasonable with the second strategy.

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20% cagr for 20 years will multiply your wealth 40 times !! 10 lacs will turn into 4 crores. Essentially such movement is seen when a small cap becomes a mid cap and mid cap becomes a large cap. Even if you are able to hold on to few of them in your portfolio, however there will be some laggards as well. Also as human the tendency to book profit will be there. IMO, 20% cagr over a very long period is difficult on portfolio basis…may be near to impossible. 12-15% should be fine. Anything above 15% should be considered extra ordinary. My views are forward looking and not what has happened in the past.

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I’ve read a few threads in this forum, I’d assumed that most of them achieve/plan to achieve much more than 20%. So I’d assumed that it is relatively easy to earn that over long periods of time, without so much as a concentrated portfolio. Hence my question. Not discounting the learning curve and hard work required, but I’d assumed that 20% is not aggressive and is a moderate ambition. Thanks for keeping me grounded.

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I am not sure if one can easily make 20% for 20 years but my Retirement Portfolio is giving me 22% returns CAGR from last 4 years even after 20% cut from 9100 nifty levels !! I have a mix of Large/Midcaps which i am buying every month via SIP:

  1. Kajaria Ceramics
  2. Asian Paints
  3. Relaxo Footwear
  4. HDFC Bank
  5. Godrej Consumer
  6. Lupin
  7. TCS
  8. Suven Lifesciences
  9. Blue Dart
  10. Bajaj Finance

I buy what i see from my eyes and business which i understand !!

btw … i am also an engineer and love to anaylze companies/stocks !! :slight_smile: :slight_smile:

Cheers !
Puneet

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Hi,

In last 3-4 year 75% of stocks have given CAGR of more than 20%. If you randomly select companies and check 5 year chart you will know what I’m saying.

Most of the companies you have are great companies with great management. They have created huge wealth for investors in past. If you have bought them long back it was great decision. But currently I think there is lot of optimism and fancy built in their price and may provide stable returns if they perform exceedingly well else might get stuck in range.

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@mkurian [quote=“mkurian, post:1, topic:4503”]
With that background, my question is, what is the process I should follow to make 20% annual returns for 15-20 years?
[/quote]It may help to scale down your expectations. I am reminded of matrimonial ads of men seeking, “smart, intelligent, highly qualified, beautiful, slim, tall, fair, open minded and devoted bride”. Of course I am reasonably certain such search has been on since the beginning of mankind and historical elusiveness is no deterrent to a young man.

Nifty has delivered about 11% returns since 1995 in quite a turbulent manner, counting dividends. Corporate earnings growth have been lower in the past 11 odd years. Buffett’s advice is to get into an SIP in a low cost index fund - in the US though.

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Good to see 10 quality picks. Timing is even better. 3-4 years back identifying is a nice skill. However 2015 and jam feb 2016 is bearish. India vix is rising…there is somewhat fear…I would say. Panic not yet set in. May be as. Nifty approaches 7000 panic will happen…even expert opinions are diverse. Some equity analysts are suggesting stay out of market, do RD, FD and gold kind of stuff. However we value pickrs need to be steady and patient.

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My two cents!!

One important point I noticed in the recent years is that the people lack patience, especially we Indians. I see my office cab driver is not even ready to wait for 5 seconds to allow a vehicle in the front to take right, the moment he sees the vehicle in the front taking right starts sneaking into left lane blocking the traffic on the left side. Eventually creating the mess.

The same analogy applies to the market. In the era of fear mongering media, an issue like Greece Debt become a big threat to Indian market because it’s part of EU blah blah blah… In the way when the news daily “The Hindu” wrote an article “New US rule a blow to Indian pharma exporters” but the fact is that it’s applicable for only gov orders. How was the reaction ? Alembic Pharma tanked 20% so are others.

We should remember market’s have gone through the tough time line “Gulf WAR/ Kargil WAR/ 911 WTC attacks/ 2611 Mumbai Attacks/ Afghanistan Invasion/ Iraq Invasion/ Syria Power Tussle/Sanctions on Iran/North Korea nuclear Test/Russia Creamea Takeover/ US-Russia Cold War/” and given us the best returns.

Only thing that worries me is China slowdown but it will recover in couple of year. Anyway if investment horizon is 5 years or above then no worries at all.

Here comes patience!!!
If we have selected a best investment i.e. the investment that passes the scuttlebutt, value-investing philosophy with good MOAT and ethical promoters then no need to be panic in the short term (meaning 1- 2 years) volatility shouldn’t shake us. Rather they should be an opportunity to add more which we missed during the bull periods. When market market recovers it will create wonders!!

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