top 10
investing pitfalls
disclaimer: this document is for information purposes only and should not be construed as investment, tax or insurance advice .
past performance is not indicative of future returns. any unattributed data is sourced from publicly available sources
gaurav rastogifounder & CEO kuvera.in
prop trader Morgan Stanley, NYC & HK
advisor, chicago global wealth, Singapore
Chicago Booth MBA, IIT-D computer science
cycling, painting and Bollywood
tell someone which investment products are
bad, and a smart salesman will build and sell
them a product not on that list.
teach someone on how to think about
investing and they can identify bad products
themselves.
if you invest only 20% of your wealth and keep 80% in cash, then your return on
investment will need to be 30% p.a. to get a return on wealth of 6% p.a. (inflation)
avoid cash drag
20%
90%
80%cash
stock, MF, FD etc
time spent hunting for returns
1
target: Rs 1 Cr at age 60 using a Rs 5,000 pm SIP
don’t wait to invest
6.2%7.5%
9.7%
13.0%
18.3%
28.3%
20 25 30 35 40 45starting age
required rate of return
1
adding 5% more every year to your SIPs will lead to a 60% larger portfolio in 30 years
assuming 10% p.a. returns
add periodically
10 20 30
1
asset allocation driven rebalancing will help you buy and sell at the right time and keep
your risk allocation in line with expectations. follow it with discipline.
don’t change your asset allocation 2
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asset allocation driven rebalancing advice
to sell some debt and buy some equity
asset allocation driven rebalancing advice
to sell some equity and buy some debt
don’t dip into emergency funds in bull markets2
bull market questions an emergency fund but a bear market will thank you. remember,
jobs are cut in bear markets. never dip into your emergency fund in good times.
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nifty 50 I don’t need emergency funds!
to the moon 🚀🚀🚀
thank god I have an emergency fund
should I spend 10 hours a week to ....3
learn new skills learn stock trading
companies will pay
disproportionately higher for a 10x
performer.
for the same job, salary bands can
go as high as 3 – 5x of median
higher earnings -> higher savings -> higher investment -> more wealth 3
less than 1% of active traders earn more
money than a bank fixed deposit over a
3-year period
: Nitin Kamath (founder zerodha)
your wealth returns are highest for being the best at your job
be prepared to be down 20% - 30% from peak every 3 – 5 years
returns are not linear, so don’t stop investing when you are down4
-60%
-40%
-20%
0%
Oct-07 Oct-10 Oct-13 Oct-16 Oct-19
nifty fall from peak
2,000
7,000
12,000
17,000
Oct-07 Oct-10 Oct-13 Oct-16 Oct-19
nifty 50
research shows investors lose 1.5 – 2% p.a. in returns because of bad investment timing
decisions
this is also known as the behavior gap – buy after good returns, sell after bad
don’t chase returns either as timing is hard4
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nifty 50are you buying because
hey.. up, up and away
did you sell because you were going to buy it back lower
behavior gap is highest for thematic and sector portfolios. unless you can hold them for
10 years or more don’t even bother.
timing sector and themes is harder still4
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nifty IT nifty bank nifty pharma
as a retail investor you are likely to be last in line to receive “data”, “news” or “hot tip”
when you are buying who is selling?
information that is known to all won’t make you a better stock selector5your likely information funnel
news: media, hot tips, reddit
google finance etc
data: tickr.com, screener.in,
broker api etc
fund manager information funnel
news: company sources,
vendors & users etc
data: proprietary sources, real
time sales, growth etc
sportsperson
programmer
lawyer
fund manager
do you think training 10 hour a week will make you better than a professional …
5
when you are overconfident, you misjudge your value, opinion, beliefs or abilities and
you have more confidence than you should given the objective parameters of the
situation. like in a study 83% of US drivers thought they are better than average.
your only option is to “analyze” the data better ☺
in investing what is not paid as cost, is earned as return. but there are limits, if your
expense ratio is below category average you are doing well.
there is no secret sauce except costs in predicting fund performance6predicts future mf performance
expense ratio
does not predict future mf performance
returns – 1Y, 3Y, 5Y, 10Y, rolling
risk – std dev, sharpe, var, beta
fund house, manager
everything else!
costs are even more important in stock trading 6perception
discount broking is “free”
minimal transaction cost
(Rs 20 etc)
reality
bid-offer of 0.25% - 1%
impact cost of 0.25% - 1%
STCG & LTCG for rebalancing
others costs such as stt, stamp duty,
DP charge, SEBI turnover, exchange
transaction, and penalties
echo-chamber can build through social media choices w/o one realizing it.
echo-chamber driven “…misinformation leads 50-70% of users to underperform the
market average.” –Microsoft research
are you stuck in your echo chamber? 7
🚀
🚀
🚀
find experts who disagree with you and find out why!
where are the naysayers? 7
confirmation bias is the tendency to search for, interpret,
favor, and recall information that confirms or supports
one's prior beliefs or values.
“anecdotes” are not data
probability that your returns will be
like Buffet
1 in 1,000,000,000… add a few
more zeroes. miniscule!
probability that some one will have
Buffet like high returns
almost 100%. every look back
period will have a winner in
terms of high returns
8
Buffet exists to re-enforce that probabilities work in the way they should, not to suggest that anyone can generate Buffet like returns.
ps: in the past 20 years even Buffet hasn’t beaten the index!
are you looking for the “missing” piece of information? 9
high
hedge fund: 2% + 20%
AIF / PMS / MF: % of asset as
fees
why is someone giving you their money-making secret sauce for Rs 10k / year?
there are many hedge fund managers in Forbes 400, not a single thematic basket seller
where do investment managers make more money?
low
thematic baskets
options seminar
managed accounts
selling strategy signals
youtube videos etc
are you looking for the “missing” piece of information? 9
p&l
gamification
daily check
addictive hit to brain
spin stories around winners
but are you beating FD returns?
now you know why trading apps don’t show portfolio level returns!
“.. in the typical six-month period, more than eight out of ten day traders lose money.” –Taiwan Stock Market
what matters more p&l or your portfolio level returns?
portfolio returns
better decision making
long term planning (goals etc)
no need to check daily
don’t mix investing and insurance10this one is done to death, and you know it already
so don’t do it even if a friend or a family member asks you to!
dude, this fund is rated ⭐⭐⭐⭐⭐ by three agencies, it is a no brainer
should you invest?
q
look for the “missing” piece of information
setup a fund and generate
revenues as performance and
expense fees!
why do Mutual Fund star rating companies give their ratings for free?
do fund rating predict future fund performance?
if I had a rating system that predicted future mutual fund returns, I would…
give it away for free
a
you got a Rs 5 lac bonus, should you STP or invest lumpsum in one go?
STP: invest in liquid or debt funds and move to equity over 6 or 12 equal installments
q
3 out of 5 odds that investing lumpsum will lead to higher future wealth.
these are good odds, use them every time.
don’t wait to invest & timing the market is harda
this momentum “thematic” basket blows the index out of the water.. 20% p.a returnsq
backtest actual
costs, “missing” information and human capital…. phew!a“actual returns” don’t include costs
let’s factor the big costs
20 %
-3 x 0.5% (3x turnover, 0.5% bid offer)
-3 x 0.5% (impact cost)
- 15% x 20% (all gains are short term)
= 14%
assuming the strategy delivers on the
promise. most do not. 🤦
missing info 1: why sell such a golden
goose of a strategy for a pittance?
missing info 2: do you know your
realized basket return?
are you one of the first to find out about
this awesome theme?
finally, is tracking and rebalancing still a
good use of your time?
when would you consolidate your portfolio into fewer funds?
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q
down markets are ideal to consolidate into fewer stocks or funds with lower capital
gains incidence. however, investors wait for holdings to be in the money to consolidate.
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nifty 50Lot of investors looking to
consolidate. will incur high capital gain taxes on
sell orders.
few investors looking to consolidate. low / no capital gain taxes onsell orders.
a
on average active funds underperform index funds
stock trading is way harder than everyone makes it to be, and not worth the time
on average “thematic” baskets underperform active funds post costs and taxes
many try to time the markets, none succeed in the long run
the larger the return promised, the bigger the disappointment
get rich by being the best at your job, stay rich by indexing
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