ValuePickr Forum

Why not leave it to the experts?

Hello everyone,

I wasn’t sure which category to put this in, so I’m leaving it in Uncategorized. Please feel free to move it to a more suitable category, if one exists.

This is a kind of existential question for this site. It’s hard to imagine this question does not exist already, but my searches did not bring up anything. If it does exist, I can close or delete this question - whatever the protocol is here.

On more than one occasion, I’ve been told that, with regarding to investing for myself, I can’t possibly hope to beat the professionals, the experts, the people who do it all the time, and have all the background, training, and resources. The implication (though nobody ever said this in so many words) is that I should give up, not worry my pretty little head about it, and let someone else make the decisions for me.

I expect that if you are on this site, then you are interested in investing for yourself. So the question is, why don’t you find a suitable expert to handle your expenses? I guess they call these financial managers or financial consultants. Or just put your money in a mutual fund or similar, and let the fund manager handle it?

I don’t really have a good answer to my question, personally. But in practice I’ve never met anyone who I would trust with handling my money. Over the course of a lifetime, I’ve had many bad experiences with professionals. Doctors, dentists, lawyers, accountants, academics, many of whom had no idea what they were doing. Some were criminally incompetent. Others were simply criminal. And the few investment professionals I’ve met in India have not inspired me with a spirit of trust.

Don’t get me wrong - I’d love to have someone take care of decisions for me. But for me, this has never worked out well.

But this question is about you. Why do you choose to go it yourself? I suspect this is one question for which many people on this site would have answers. Probably many different ones.

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Good question! I’ve often wondered this myself and found there are some good answers in Intelligent Investor book. Posting an excerpt from there - as an individual investor we have certain advantages over a fund manager / proferssional.

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Hi @anandrkris,

Thank you for the excerpt. That’s interesting reading. But I was looking for your own perspective. Assuming you are someone who invests for himself/herself.

Yes, I do invest in direct stocks apart from investments in mutual funds. My own perspective is developed based on reading. So, it is matter of applying what I’ve learnt (and learning) and chasing that elusive beta hoping that one can outsmart professionals. Maybe it is hubris, maybe not - time will tell!

Brilliant, this has got me thinking…

In a poetic way, it’s living your life as per what others say, watching only the movies that you are being told to, doing only the things that you are allowed to!

I am sort of figure my own way guy, if you like to follow someone else’s path maybe thats how you should go!

Now talking in term of money & market

  1. Because his incentive is to get more money from you while yours is to multiply it.
  2. It’s that everyone was a beginner & that by investing in knowledge you eventually become the expert.

the experts, the people who do it all the time, and have all the background, training, and resources.

Though I feel the lack of resources at my end, this doesn’t make them correct!

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Ya I also had same thinking in my mind. But, I realised that catching the next multibagger/ earning 25% return is most difficult part in the market. Almost, all stock pickers dream to get that returns. Once you set the bar low like more than 2-5% returns compared to index. Its simple to do it by doing initia(Joel greenblatt magic formula or few industry specific stock which you understand/ work in it)
(Experts in mutual fund industry cant get you 25+ % returns , utmost they can get more than 2-5% returns compared to index. Prospectively, catching that MF scheme is very very difficult than finding next multibaggers. Maybe PMS can find you but their pricing/ initial investment is vey high)

Hi @sham72942,

Thank you. That’s a nice answer.

Indeed yes. I guess the question is whether one can attain the level of expert. Or at least, expert enough. I don’t have a clear idea of how good at this you need to be to be successful, not actually having ever done it. Perhaps just better than most of the other people trying to do it? :slight_smile:

But I agree it’s the difference between living life passively and letting others make your decision for you, versus making your own decisions.

Do you think that the background, training and resources constitutes an important advantage in this business? Bear in mind that I only have a sketchy idea of the background training and resources that are necessary. I’ve never even taken a finance course.

However, speaking on someone who is effectively self-taught on many subjects, formal training isn’t all it’s cracked up to be. And one can do a lot if self-motivated.

Thank you for your thoughts.

Hi @Sivachander_Shivaji,

Thank you for your interesting reply.

Is it necessary to am for a “multibagger”? This means a stock that will give you a multiple of your initial investment, correct? I’m not sure what you mean by “Almost, all stock pickers aim.” Do you mean, aim for “multibaggers”?

After poking around a bit, I’ve come to the tentative conclusion that the way to make serious money in this business to pick successful businesses early in their lifecycle, and then stay them with for long periods as they grow and develop. I expect it is difficult both to pick such a business and also psychologically to stick with it over long periods through ups and downs. I suppose if you do this, then this stock would indeed become a “multibagger”. However, it doesn’t seem this is the standard industrial approach to investing, perhaps because it’s considered very risky.

Indeed Portfolio Management Services are very pricey. Just this afternoon I was visited by three people from Standard Chartered. I didn’t invite them - they sort of invited themselves. They were proposing a PMS called “ASK Investors Managers Inc.” They quoted a management charge of 2.5% on the portfolio, which is apparently “standard”, All I can say is, wow. Nice work if you can get it. They would really have to generate superior returns, because that 2.5% would exert a serious drag on compounding. It’s not far from the difference between equity and debt returns. And they seem to be investing in the same stocks as everyone else, based on what I read. And presumably you get to pay this whether things are going well or poorly.

Overall, a great deal for them. Not such a great one for the investor.

I meant every investor wishes at least one of his stock turns out to be multibagger (Yes your explanation was correct, 5x to 100x the initial investment). As you rightly pointed out, you have to pick when its small and ride throughout its business lifecycle.
In the pursuit of catching one multibagger is where we get this question [Why not leave it to the experts? this looks like himalayan task]

But once you lower your bar like 15% returns (using stock market for “purchasing power preservation” rather than “money making”), you need not do so much work to invest.
You will look for ROCE, constant growth, proven corporate governance and reasonable valuations and you will invest (even though your filter brings large cap.

Ya, service is costly in case of PMS which per se erodes their returns (in the event your PMS is getting 25+ returns)
In the case of mutual fund it is less costly but their fund size is very big so it will drag their fund to market returns
so in both case as a investor we get only average returns.

So, its better to manage our money so that we will get index + 2-5% returns with little work.

I can illustrate this with an example ITC, TCS, HDFC bank etc these stocks dont need brainer.
They are 100% not going to be multibagger in next 10 years. But, it will give index+ and MF+ returns. I need not worry about corporate governance, balance sheet, quaterly results etc. Only thing I need to worry is valuations Thats all.

In small cap/mid stocks, first worry is corporate governance and sector growth, balance sheet, debt, market cycle, third party transactions, future growth prospects, valuations etc etc.

Few times you can swing yout bat like page industries (no brainer needed) or in your circle of competence.

I am 100% sure no MF is going to beat me (expense ratio wont allow to do it in active funds and in passive funds dying business like coal, oil companies and expensive like HUL, Nestle will be there) and in PMS expense ratio/churning ratio is too high.

My suggestion is like cocktail of greenblatt magic formula + coffee can method.

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Hi @Sivachander_Shivaji,

Thank you for the interesting comments.

I’m obviously very sketchy about what PMS does, but it is really possible for them to get 25+% returns consistently, particularly on the big well-known companies, and even when the market is down? I would have thought something like 12-15% maximum. In any case, that 2.5% would be a constant drag. And it would particularly hurt when the market is down, which is when you really want to preserve your capital. I guess my main objection is just that it seems like a really bad business deal for the investor. Very poor value for money. The impression I got from the people I spoke to is that they will be using the same portfolio for all clients, except that each pool of money will handled separately, instead of in one big pool, like a mutual fund. Even if this is not true, and the managers handle asset allocation individually for each client, it’s still a lot of money for choosing a bunch of stocks. And they also implied that they don’t. change the stock allocation very much. They said something about 4% churn. I think a fixed fee per portfolio, as long as it wasn’t excessive would be reasonable, and might be worth it if the manager knew what he was doing. Does anyone do this?

I’m not sure I understand what you mean. How does the size of a mutual fund affect the return? I thought one issue was that mutual funds were very conservatively handled, and mostly stuck to a broad diversification over really big and well-known companies, which of course are not going to typically give great results. And I suppose a lot of smaller companies might not have shares available in sufficient quantity for a mutual fund to buy?

Yes, except these big companies usually have really high valuations. Maybe not right now, because the market is way down.

I understand. There is a lot to keep track of. You also have to decide if and when to exit. Though I suppose that’s the case with any investment. Does corporate governance mean worrying whether the management is going to do something insane like commit some huge fraud and melt down the company? (At least one broker said they don’t bother to look at small Indian companies because of the risk of fraud - financials being fabricated and so on. How much of a concern is this in practice?) Or is the concern just whether the management is doing everything they can to keep the company in good shape?

I’m not really familiar with these, but I just took a look at the coffee can method. If I understand correctly, this means you have to ignore valuations. I really can’t imagine doing this. Paying too much for a stock just feels wrong.

I think that, in general, one reason for letting a professional taking care of things (though I don’t think it’s a compelling reason), is that a part-time investor may get bored or distracted or busy with other things, and fail to pay attention to his/her portfolio at crucial times. It’s possible an investor has to always paying attention to his/her portfolio, but I don’t have enough experience to say.

Investing is always an individual pursuit. We are all different in our life experiences and choices we make. We are wired differently and respond to situations differently. So, what is good for you may not be equally good for me and vice versa. In my view there are three key factors seen across successful investors 1. Circle of competence 2. Temperament 3. Patience

Like Warren always says, IQ has nothing to do with success in investing. Knowing your circle of competence and sticking to it is more important. Example - John Arrillaga, He became a billionaire by sticking to real estate just around Stanford campus (just a few Sq miles). Not many experts really understand or are willing to agree on where their expertise ends.

It’s easy to feel greatly intelligent when the markets are booming and feel like a worthless investor during times like now. Being greedy when others are fearful and being fearful when others are greedy is easier said than done. That said, acting decisively when businesses in your circle of competence are available at a discount is a key requirement.

Palm trees take years to grow. Typically 15-20 years to start giving any benefit. That said we had our ancestors for example in Tamil Nadu with such vision to plant it everywhere. Investing is the same. If you have the vision to see beyond even 3-4 years, you are far ahead of the crowd.

To summarize, if you have very good temperament, know the limits of what you know and stay patient and willing to play the long game, you are likely to beat the experts in the long term by a wide margin.

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I meant “in the event they achieve” also, their expenses will erode extra returns. I really dont have much idea about how they maintain portfolio. I just saw their expense ratio and ran away. Because prospectively, odds of PMS getting higher return than index funds is less.
You can get similar analogy from Hedge funds in america (Warren buffett bet against it and won also [https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp] )

Ya thats what I meant. You can argue what if I invest in smaller fund size. There you have increased expense ratio.
Another thing as per SEBI guidelines they have to trim their positions once particular company stock occupies more than 10%. For eg: asian paints i bought in 2000 which was 5% of portfolio and in 2010 it occupies 15% then i have to trim it to 10%.

Corporate governance can be classified into competence and integrity. Integrity is the FACTOR to rule in/ rule out a company irrespective of their lucrative business/sector/profits/growth. Competence we cant predict with certainity but you can follow capital allocation to assess it.

Actually I meant buying the companies using " magic formula" and holding on as said in “coffee can”(never timing the market, travelling along trough and peaks of the stock).
You need not have full time attention (on the contrary, its hazardous to your portfolio) (https://theconservativeincomeinvestor.com/fidelitys-best-investors-are-dead/)

I was a passive investor for 7 yrs with Sundaram finance - I got 19% cagr. But when entered it , I had zero clue what a mutual fund does or how things work. Yet without knowing anything , I kept giving my SIP for 5 years. I didn’t even look at returns . Then one day I started looking at the yearly statement & I was stunned & surprised at returns. Yet when I spoke with a different friend who was investing in SIPs even before me didn’t get my returns . So I had to find out because I knew I got returns because of sheer luck. Once started exploring I understood that my MF started right around time of GFS in 2008 while my friend invested from 2006.

My interest was piqued. Ever since I have been trying to learn. Once I went down that path there was no way I am leaving my decision making to others - because even if they are best money managers when macros are against them they don’t have flexibility on cash and wait . I can as individual investor.

I am not yet successful but I am risk averse & don’t leave it to blind luck and trying to learn every day

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Why one would wish to invest by oneself? there might be several reasons:

  • wanting to move up the learning curve, derived by passion for that field and wanting to excel in that career (one has to assess the extent to which one is willing to bear the pain in terms of new learning, Unlearn concepts, time involved (years…), opportunity cost).
  • Need not necessarily to beat any professional fund manager. Most clients within the same Thematic fund will have completely different rate of return profile, depending on market cycle the investor gets into, price at which stocks are bought.
  • Getting into a SIP with MF is very easy and investor can do a few hundred rupees of SIP each month. Compare that with a Professional PMS setup, where in one has to invest a minimum of Rs 25 Lakhs as per SEBI. But the reality in many well managed PMS set up is, those PMS adds clients only if they bring in Rs 50 Lakh as investment, and some others min Rs 1cr. These high amounts are kept as entry barriers by the PMS, so that only those investors, who truly understand the investment rationale and philosophy of the PMS fund manager, gets to be included, as it is a long term journey. (When PMS concept was initially launched in India, where entry amount was Rs 5Lakhs, investors having a trading mindset used to invest in PMS and expected answers from the Fund Managers when their portfolio moved by a few basis points).
  • About PMS : Most PMS, even though their cost structure appears high, they work on “High Watermark” basis. There are also other PMS, which works only on Profit Basis (without management fee). The latter is a true partner for the investor.
  • the investor is already well diversified into Equity (MF + PMS), Debt, Other Asset Class and still has some money to dabble with

regards.