This post was first published on capitalmind.in

I remember the precise moment I had my first doubts about books on management success. 

In one of my earliest jobs, as a fresh management consulting associate, we used to get assigned books at random by the partners we reported to. Predictably, these were from management lessons and Business Strategy genres. Saturday mornings were set aside for us to present what we’d understood from those books to the rest of the office. A way to make sure we read them. 

My BS detector first went off while reading this book called ‘Big Winners and Big Losers‘ by Alfred Marcus. As far as I know, this book didn’t end up on any bestseller lists, so here’s a quick summary:

The book analyses nine “big winner” companies and nine “big loser” companies over ten years from 1992-2002 to understand the key differences that lead to long-term success or failure.

The author identifies four essential qualities that differentiate the big winners from the big losers:

1. Niche strategy – Winners occupy a “sweet spot” in the market with a well-executed niche strategy. Losers fail to find or defend a niche.
2. Agility – Winners are agile and adapt to market changes. Losers tend to be rigid and cling to exhausted strategies.
3. Discipline – Winners maintain discipline to reduce costs and improve quality. Losers display ineptitude and lack financial discipline.
4. Focus – Winners remain focused on their capabilities and strengths. Losers lose focus and stray into too many areas.

According to the author, balancing these four qualities provides the framework for sustainable competitive advantage.

As I was skimming the book to finish my review and get back to billable work, I paused on an example of how “Focus” helped one successful company while lack of focus cost another. Something seemed off, so I flipped back to the “Agility” chapter.

One winning company had succeeded by remaining “focused” on its core business. Yet another winner was praised for being “agile” by changing its core offering. Similarly, one struggling company was criticized as “rigid” for not adapting its core, while another loser had “strayed” from its mainstay business. The business cases seemed selectively chosen to fit narratives around “Focus” versus “Agility.” Wait a minute.

Could it be that the rules of business success (and failure) are an elaborate exercise in hindsight bias? Of joining the dots after the fact?

After the 2011 World Cup final, we all, armchair experts, called MS Dhoni’s decision to promote himself ahead of Yuvraj Singh brave and tactically brilliant. We would have called it the daftest decision in sports history if the outcome had gone the other way. Hindsight Bias. Like choosing to go with that pitch in Ahmedabad. (No, too soon.)

Once you see it, you can’t unsee it.

You can dismiss ‘Big Winners and Big Losers’ given hardly anyone has heard of it. However, three management books that exhibit the same fundamental flaw have sold more than 10 million copies combined.

The original blockbuster that kickstarted the management success genre is ‘In Search of Excellence‘ by Mckinsey consultants Tom Peters and Robert Waterman.

‘In Search of Excellence’, published in 1982, is based on research into 43 “excellent” American companies across several industries like technology, consumer goods, and services. Through extensive interviews and study, the authors identified eight common attributes that drove the success of these organisations:

1. A bias for action
2. Close to the customer
3. Autonomy and entrepreneurship
4. Productivity through people
5. Hands-on, value-driven management
6. Sticking to the core business (niche focus)
7. Simple form, lean staff
8. Simultaneous loose-tight properties

All great qualities to have for any business. But hardly clearly defined.

Despite its massive commercial success, the biggest criticism of ‘In Search of Excellence’ was that by starting with successful companies to begin with, it had survivorship bias.

Like concluding that wearing Nike gear and practising a lot makes you a great tennis player because the world’s greatest tennis players wear Nike and practice a lot.

As it turned out, even great tennis players don’t stay great.

Here’s what happened to just some of the excellent companies soon after the book came out:

• Wang Labs – Declared bankruptcy in 1992.
• NCR – Significant declines and mass layoffs in the 1990s. Sold to AT&T in 1991.
• Xerox – Fell from grace due to overseas competition. Massive losses in the early 2000s.
• Data General – Collapsed and sold its assets to EMC in 1999.
• Delta Airlines – Filed for bankruptcy in 2005 after years of losses.

Source: mckinsey.com

Among the companies that did not disappear, including the likes of IBM, HP, 3M, McDonald’s, Dana, and Emerson Electric, most struggled to beat the S&P500 over the two decades. Walmart, Intel, Merck, and J&J were notable exceptions that thrived.

Subsequent flagbearers of the business success genre addressed the survivorship bias problem by doing what Alfred Marcus did. They included a set of mediocre or “unsuccessful” companies for comparison with the great companies before drawing out the rules of corporate success. Contrasting ordinary companies against great companies should tell us what additional ingredients the latter have.

Built to Last: Successful Habits of Visionary Companies by Jim Collins, a McKinsey consultant and Jerry Porras, a Stanford Professor, did precisely that.

The book examines 18 “visionary” companies that have demonstrated enduring success and compares them to “similar” but less successful companies in the same industries. The research aims to identify the key factors that differentiate visionary firms. 

They concluded visionary companies are guided by a core ideology that gives them a purpose beyond just making money. They also exhibit key dynamic traits like experimentation, embracing change, and stimulating progress, allowing them to evolve over time.

Several of those visionary companies faced trouble soon after the book was published.

• Marriott – Faced significant losses in the early 2000s after overexpansion.
• Walt Disney – Struggled after the death of Frank Wells in 1994, with multiple poor-performing films and leadership issues until the 2000s revival.
• Citicorp struggled after the dotcom crash and various accounting scandals in the early 2000s
• Motorola lost market share in the mobile phone business
• Sony underwent massive restructuring, selling Columbia Pictures and Sony Music Entertainment to cover losses in its consumer durables business

Source: mckinsey.com

In 2011, Jim Collins returned with ‘Good to Great‘; this time, his co-author was Morten Hansen, a UC Berkeley professor.

The book, written after five years of research, set out to identify the factors that allow companies to make the transition from being good to truly great. They even defined “greatness” as having delivered 3x the market average over 15 years. It’s hard to argue against that definition, especially if you’re an investor.

The book found what the companies that make the transition from good to great have:

• Level 5 Leadership: Are led by humble, determined leaders focused on the company, not themselves.
• First Who, Then What: Get the right people on the bus first before figuring out where to drive.
• Confront Brutal Facts: Confront the brutal truth of their situation to make good decisions.
• Hedgehog Concept: Understand what they can be the best at and focus on that.
• Culture of Discipline: Maintain a disciplined culture, people and approach.
• Technology Accelerators: Avoid fads and only adopt technology that fits their hedgehog concept.

Again, these are solid logical concepts you’d want for your company, except maybe the hedgehog concept of only doing one thing to exclude everything else.

Sure enough, like for the other two books, only four of the 11 companies outperformed the market two decades after the book was published. One went bankrupt, while two others have been close at different times.

Source: mckinsey.com

So what does the exhaustive study of successful companies of the past tell us?

Past performance is no guarantee of future results

All these books resulted from years of data-gathering, painstaking classification of each bit of information (press releases, business publications, financial reports), and interviews with managers before the findings were finalised. You could not imagine doing more in the areas the authors explored and tackled.

Overall, across the 48 companies (with overlap) profiled as great and successful companies in those books, 21 (44%) outperformed the market in the two decades after. The remaining 56% did not beat the market. Investing in great companies to outperform the market was slightly worse than a coin toss.

Fifteen companies (almost 1 in 3) trailed the market by over 5% annually. Of those, several went bankrupt or were acquired at fire sale prices by other companies. The remaining companies delivered market returns or underperformed.

Past and current greatness is not even a guarantee of survival, let alone future dominance.

Causality, but the other way

If you worked at a company when it made record profits, chances are the atmosphere in the office was supportive. There were budgets to conduct manager training, offer flexible policies around days off, and offer more employee-friendly perks. You’d strongly agree if you were asked whether the company was good at people management.

Conversely, if the company was going through a few quarters of declining earnings or declining sales, budgets were likely cut, hiring and increments frozen and additional policies added for expense approvals. Someone asked about their time would shudder, saying it was their worst workplace.

Everyone looks good when things work. Good leadership, smart strategy, excellent execution. Then it stops working. And all of it looks dumb, but in retrospect.

Phil Rosenzweig calls it ‘The Halo Effect’. Given a currently successful company, all things about the company will seem to have been instrumental to that success. The opposite will look true for unsuccessful companies.

The interview responses, a vital component of reaching conclusions, were predetermined once the authors picked companies in their heyday to analyse.

Being in the right place at the right time is underrated

The one glaring thing missing from the extensive studies was understanding the companies’ external environments.

Walmart happened to be in the discount retailing space just when the concept of big box stores and shoppers driving to the suburbs to do their shopping took hold. Of course, it deserves credit for modernising its supply chain to cater to that model, while Kmart struggled to shift.

National Semiconductor, Wang Labs, and DEC were dominant in the era of centralised computing and mainframe computers. Intel stole their thunder when the field shifted to personal computers.

Philip Morris prospered in an era of big tobacco, ironically when anti-smoking policies forbade advertising, saving them costs while effectively ending the risk of new competition.

On the other hand, the maker of the finest horse carriages in the early 1900s couldn’t have done anything other than exit the business when Ford’s Model T started gaining mass acceptance.

The common theme for every company that did well was it was in the right place at the right time.

Few companies manage to swim against the tide when their core line of business comes under existential threat because of changing technology or broader demographic shifts.

I’m therefore naturally sceptical of analysis that goes like this:

Here are a bunch of great companies based on how they’ve done in the past    Here are the things we found that make them great (visionary promoter, distribution network, etc.)   Other companies do not have these excellent characteristics (because look at their results so far)    Therefore, buying these companies and holding them for the next two decades is the best (and only) investment strategy.

Believing that great companies of the past automatically qualify as buy-and-forget stocks for the future is one of the most enduring fallacies in investing because the evidence shows the opposite. From the ‘The original Nifty Fifty‘ of the 1970s to businesses like Kodak, Xerox, Nokia, Blackberry, Sears, and GE that looked unbeatable at one stage only to decline into irrelevance, some quickly, others gradually.

Take recipes for greatness and claims of infallible investments with a grain of salt. Context and luck play an outsized role, often more than the easily visible and controllable things.

Even the greatest companies in history couldn’t fight the trend. We would do well to respect this fact.

Anoop is on Twitter at @CalmInvestor

The post The Enduring Myth of Great Companies appeared first on The Calm Investor.

This post was first published on capitalmind.in

“It is not surprising when wealthy people who know nothing about wine end up with cellars that aren’t much better stocked than their neighbours, and it should not be surprising when wealthy people who know nothing about happiness end up with lives that aren’t that much happier than anyone else’s.”

Why are we so bad at predicting how much pleasure we will experience from future events, whether buying a luxury car, taking a round-the-world cruise, or throwing a fancy wedding bash?

This article paraphrases the insights from a paper titled “If money doesn’t make you happy, then you probably aren’t spending it right” by Elizabeth W. Dunn (Univ of British Columbia), Daniel T. Gilbert (Harvard University), and Timothy D. Wilson (University of Virginia). Specifically, it lists eight principles, backed by empirical research, for spending money to increase happiness.

The authors point to two causes:

Imperfect mental simulations: We are insensitive to the fact that our mental simulations lack important details, and we don’t anticipate the ease with which we will adapt to those positive and negative events.

Different contexts: The context in which we make forecasts and the context in which we have the experience are not the same.

Think of the joy of anticipation of driving the spanking new BMW 5-series out of the dealership versus the actual experience of worrying about scratches from the dozens of two-wheelers squeezing in at every traffic light and later about the servicing costs for any minor problem.

This means we mispredict three things:

• what will make us happy
• how happy it will make us, and
• how long that happiness will last

The authors propose eight principles to maximise happiness from spending money.

Principle 1: Buy Experiences instead of Things

We experience a better lift in our mood when contemplating past purchases that were experiential over things. Therefore, spending on experiences is likely to give us more lasting benefits.

A wandering mind is an unhappy mind, and experiences keep us focused on the here and now.

After devoting days to selecting the perfect hardwood floor to install in a new home, the buyers find their once-beloved Brazilian Cherry floors quickly become nothing more than the ground beneath their feet. In contrast, their memory of seeing a baby Cheetah at dawn on an African safari continues to provide delight.

Things bring us happiness when we use them, but experiences bring joy when we do them and when we contemplate them.

Experiences are also more likely to be shared with others, bringing more happiness.

But then there’s a fuzzy boundary between what is a “thing” versus an “experience”. We experience the road trips enabled by the thing, a fancy car.

One “hack” to enjoy our possessions more is to think of how the thing expands what we can do rather than as something we have.

Principle 2: Help others instead of yourself

Termites, eusocial insects, and naked mole rats are three species with complex social networks. Humans are the only species on the planet that create complex social networks that include unrelated individuals.

The quality of our social relationships is a strong determinant of our happiness. Everything we do to improve our connection with others, including spending money, improves our happiness.

Individuals reported greater happiness from spending that they did on others compared to what they spent on themselves.

Rather than thinking of this as a call to give everything to charity, I think of it as making the lives of your loved ones easier. Upgrading my parents’ flight to make their 15-hour journey more comfortable was orders of magnitude more pleasurable than if I had done that for myself.

Principle 3: Buy many small pleasures instead of a few big ones

Which of these is more pleasurable? Eating a single-scoop of your favourite ice cream flavour twice a week apart or eating a double-scoop on one day.

Adaptation is when we get used to something to the point that it doesn’t elicit any feeling.

If we inevitably adapt to the greatest pleasures money can buy, then it may be better to indulge in a variety of frequent small pleasures—double lattes, uptown pedicures, and high-thread-count socks—rather than pouring money into large purchases, sports cars, dream vacations, and front-row concert tickets. This is all relative, of course. Front-row concert tickets might be a small purchase for some.

Frequent small pleasures tend to differ each time, so forestall adaptation.

Also, happiness is more strongly associated with frequency than the intensity of positive experiences. Put another way, a bi-weekly ride on a merry-go-round might be more enjoyable than an annual ride on a roller coaster.

Principle 4: Buy less Insurance

If the bad news is that we adapt to good things, the good news is that we also adapt to bad things.

We underestimate our psychological immune systems and our ability to cope with negative events, and we overestimate the negative effects of bad things happening.

So, we buy extended warranties that cost half of the actual product. The endowment effect makes it the price of protecting something that is mine, and it feels worth it to avoid the unlikely event that the product will stop working.

Generous return policies actually reduce our enjoyment of what we own by reducing our sense of commitment. Things with no return policies, another form of insurance, make us commit to the thing and convince ourselves we like it more.

Principle 5: Pay now and Consume later

Buy now, Pay later causes people to buy things impulsively and spend more than they should. It also has another negative impact: it removes anticipation, which is a “free” source of happiness.

We get substantial enjoyment looking forward to an upcoming long weekend trip, often more than the actual holiday itself. You could argue that if reminiscing about a pleasant experience brings us joy, then consuming now should be as enjoyable as consuming later. However, research has shown thinking about future events triggers stronger emotions than thinking about past events. This also applies to negative events. We suffer more in anticipation than during or after the fact.

The best vacations I’ve had are ones where I didn’t have to settle a hefty bill at the end because it was already prepaid. So the only thing to do was to relax and enjoy it.

Delaying consumption also makes us make better choices. We’ll likely choose a healthier snack when shopping for a few days later than to consume immediately. Probably another reason why you should not go grocery shopping on an empty stomach.

Principle 6: Think about what you’re not thinking about

On any given day, our experience is shaped by the local features of our current situation rather than by more stable life circumstances. This means time pressure at work in a given week will have more impact on your level of happiness than the fact that you have a stable, high-paying job.

This principle needs to inform how we spend money. For example, a bigger, more lavish apartment with a longer commute from the office might seem better than a smaller apartment that costs the same but with half the commute. But we must consider how the extra time spent in traffic daily will feel.

We tend to overestimate the impact of the “big” things (the size of the house) and underestimate the impact of the little things (the extra commute).

One way to consider big purchases is to imagine a typical day in our lives after the purchase. In what way will <new thing> impact my daily life? Will it make it better or worse?

Principle 7: Beware of Comparison Shopping

Comparison shopping distracts us from the attributes of a product that are important for our happiness, instead focusing on the attributes that distinguish the available options. Read that again because it happens to each of us every day.

When viewing two or more products side-by-side, a comparison, by definition, highlights the easily comparable aspects of the products, like a 48MP camera with 5x optical zoom versus a 12MP camera with 1x zoom. Whether or not there is a discernible difference in the selfies and landscapes you’re likely to be taking gets lost. Yet, things of this nature often drive the purchase decision.

It also works the other way by making us pick the optically cheaper option even though it compromises important features we need. Like the peace of mind from buying at 10% higher from a well-reviewed supplier versus the cheaper fly-by-night operator who you don’t know will actually ship you the goods.

Don’t let the peripheral upstage the essential.

Principle 8: Follow the herd instead of your head

The 17th-century writer François de La Rochefoucauld wrote: “Before we set our hearts too much upon anything, let us first examine how happy those are who already possess it”.

Other people can be a vital source of information about what they like and what they think you might like.

My understanding of this principle is this means talking to a few folks who own what you’re considering to get a sense of what it’s truly like. The idea of owning a vacation farmhouse where you sip your coffee while listening to birds chirping can be tempting. But talking to a few farmhouse owners might highlight the weekends spent getting the plumbing fixed, and complaints about evening mosquitoes might make you think otherwise.

Wrapping up

When asked to take stock of their lives, wealthy people report being more satisfied than others. However, when asked how happy they are at the moment, their responses tend to be same as everyone else. This means money provides us with satisfaction when we think about it, but not in the daily use of it. The paper’s assertion is that if your money is not buying you the things that make you happy, the fault is yours in how you’re spending it and can be fixed.

Further Reading

If money doesn’t make you happy, then you probably aren’t spending it right – link

Ten Money Messages I’d share with my younger self – Capitalmind

The post Money does buy happiness but only if you spend it right appeared first on The Calm Investor.

This article was first published on capitalmind.in

On February 22 this year, the Nikkei, Japan’s benchmark equity index, crossed 38,915 and closed at a lifetime high of 39,098.

With most major global markets making lifetime highs over the last year, this should not be distinctive.

But the Japanese market is “different”.

The last time the Japanese index touched 38,915 was in December 1989, over 34 years ago.

In the chart below, we visualised the wait for new highs in cumulative months, along with the percentage drawdown between subsequent highs.

After touching nearly 39,000 in December 1989, the Nikkei lost over 80% of its value over the next 18 years before finally starting its recovery. It took the next 16 years to recover to its 1989 level. All this while other major markets behaved like we’ve been taught equities are meant to.

Why did the Japanese Equity Index peak in December 1989, followed by one of the world’s worst prolonged bear markets seen by any equity market?

Kamikaze Capitalism

Michael Lewis, of The Big Short fame, coined the term “Kamikaze Capitalism” in an article he wrote in June 1990, months into Japan’s stock market crash. Edward Chancellor borrowed the term in his book “Devil Take the Hindmost” for the chapter on the Japanese crash of 1989. This article summarizes most of that chapter to understand the wide-ranging factors leading to Japan’s asset price bubble and its subsequent collapse.

Japan’s economic context going into the 1980s

Following numerous bank collapses and stock market crashes in the 1920s and early 30s, Japanese authorities declared they would not tolerate such failures. So, risk was socialised in Japan far more than in the West. Then World War II happened, and Japan’s economy was devastated. In 1945, Japan’s per capita GDP was only 11% of the United States and 47% of its own 1940 level. However, the country quickly began rebuilding under the Allied occupation, implementing land and labour reforms.

From 1955 to 1973, Japan saw extraordinary economic expansion mainly due to government-led industrial policies, a focus on export-oriented industries, high rates of savings and investment, and the adoption of advanced technologies.

The 1973 oil shock significantly challenged Japan’s oil-dependent economy. The country adapted by shifting to energy-efficient technologies, developing knowledge-intensive industries, and expanding the service sector. By the 1980s, Japan was the 2nd largest economy in the world.

Against this backdrop, speculation finally came to Japan in the 1980s. It burrowed so deep inside the Japanese system that it was in ruins when it left after a mere five years.

Japan – Economic superpower

By the 1980s, Japan’s share of world trade was over 10 percent. Its exports were comparable to those of Britain in the nineteenth century. Japanese per capita income was due to exceed that of America. Japan’s industrial companies dominated new technologies in consumer electronics, and its banks were the largest in the world in terms of assets and market value. A book titled “Japan as Number One” became a best-seller on both sides of the Pacific.

Japan invested its trade surplus in purchasing US assets, American real estate being a particular favourite.

In 1986, Mitsui Corporation acquired the Exxon Building in Manhattan for a record price of $610 Million. Mitsui’s president reportedly paid $260 million above Exxon’s asking price to have his name in the Guinness Book of World Records.

zaitech – financial engineering

In 1984, Japan’s Ministry of Finance permitted companies to operate special accounts for their shareholdings, known as tokkin accounts. These accounts allowed companies to trade securities without paying capital gains tax on their profits.

At the same time, Japanese companies were allowed to access the Eurobond market in London. Companies issued warrant bonds, a combination of traditional corporate bonds with an option (the “warrant”) to purchase shares in the company at a specified price before expiry. Since Japanese shares were rising, the warrants became more valuable, allowing companies to issue bonds with low-interest payments.

The companies, in turn, placed the money they raised into their tokkin accounts that invested in the stock market. Note the circularity: companies raised money by selling warrants that relied on increasing stock prices, which was used to buy more shares, thus increasing their gains from investing in the stock market.

In the mid-80s, Japanese company corporate profits from trading in the stock market, zaitech, were greater than from company operations.

The Property Boom as a Prelude

Between 1956 and 1986, land prices in Japan increased by 5,000 percent, while consumer prices merely doubled.

Japanese banks provided loans against land as collateral, and the rising land value became the engine for credit creation. Japanese banks also owned a large number of shares in other companies. A proportion of profits from these shareholdings counted against the banks’ capital.

As Japanese share prices went up, so did the value of the banks’ cross-holdings inflating their cpaital and enabling them to lend more.

The 1985 Plaza Accord and the Yen

In September 1985, US Treasury Secretary James Baker gathered the finance ministers of the world’s leading economic powers at the Plaza Hotel in Manhattan. The ministers agreed to lower the dollar’s value in relation to other currencies, particularly the yen.

The dollar sank to under 150 yen within a few months from 259. The purchasing power in dollars for anyone with yen in their pockets rose by 40%. At the same time, Japanese goods became nearly twice as expensive in international markets, threatening the economy.

The Bank of Japan cut interest rates to stimulate the economy, boosting the price of assets, land, and shares.

By August 1986, the Nikkei reached 18,000, up 40% in a year. A manga on the Japanese economy, published by Japan’s leading financial newspaper went to the top of the best-seller lists.

Due to the above factors, Japanese share prices increased three times faster than corporate earnings.

The textile sector sold for 103x earnings, service companies for 112x earnings, marine transportation businesses for 176x and fishery and forestry firms for 319x.

Tax-exempt postal savings accounts were abolished in April 1988, releasing over ¥300 Trillion for new investment.

Property prices climbed on an ever-increasing supply of credit. By 1990, the total Japanese property market was valued at over ¥2,000 trillion, or four times the real estate value of the entire United States.

Property sector inflation had a direct impact on stock prices. Analysts looked for the “hidden value” of company land holdings that were valued at cost on the balance sheet. In aggregate, these holdings were computed to be worth ¥434 trillion yen above book value.

Companies were valued more for their property than their businesses.

Crash Protection

In a Financial Times article on October 14, 1987, George Soros predicted a Japanese stock market crash. Markets worldwide did correct, but ironically, the Japanese market best weathered the global market crash, falling only 19% versus 30% for the Dow.

The day after the October crash, the Ministry of Finance summoned the four largest brokerages and ordered them to make a market for NTT shares and keep the Nikkei above 21,000.

The largest brokerage, Nomura, had five million domestic customers, mainly Japanese housewives, who put their daily savings into special Nomura piggy banks, played stocks market computer games on Nomura software, faithfully followed Nomura’s stock tips (no “sell” recommendations were ever issued).

Through their large shareholdings in the press, the Big Four brokerages could manipulate information available to their clients. During their weekly meetings, the same brokers were said to collude in choosing which shares to promote.

After the October crash, the president of a securities house said Japan had survived the period of volatility because it was a consensus society—a nation that likes to move in one direction.

The Far Eastern Economic Review called the Tokyo Stock Exchange “the most cynical, speculative, and manipulable stock market in the world.”

Consumerism and the Art Bubble

The bubble economy promoted a massive increase in consumer spending. The Wealth Effect of rising asset prices, combined with the stronger yen, stimulated a craze for foreign luxury imports.

Credit card circulation increased 3x, and consumer debt per head rose to American levels

The combination of ambitious Western auctioneers and Japanese speculators, whose wallets were swollen with bubble profits, created the most extravagant art market on record.

In 1986, the dollar value of Japanese imports of foreign art quadrupled. The week after the 1987 crash, the world’s most expensive diamond and the world’s most expensive printed book were sold at auction. In both cases, the buyers were Japanese.

Finance companies provided margin loans for up to half the value of the artworks.

The end of the Bubble

Japan made up 15% of world stock market capitalization in 1980. By 1989 it represented 42% of the global equity markets

As 1989 ended, the stock market’s price-earnings ratio was 80x earnings, with a dividend yield of 0.38 and a price-book ratio of 6 times.

Nomura securities forecasted the Nikkei would reach 80,000 by 1995, a level it has not reached nearly three decades later.

But at the end of 1989, a new governor took charge at the Bank of Japan. He raised the interest rate on Christmas Day, 1989. Four days later, the Nikkei reached its all-time high.

However, by the end of January 1990, the Nikkei had fallen 2,000 points. The central bank raised rates five times until it reached 6% in August 1990.

Even as the brokerages tried to manage the fall, the Nikkei fell to 30,000 for the first time in two years and then to 20,000 in September 1990. After a brief bounce in October, the Nikkei slid to 14,309 in August 1992, a 60% decline from its peak.

In the summer of 1990, the corruption that had simmered away during the bubble years burst forth in a series of financial scandals. Nomura, Nikko Securities, Daiwa, Cosmo Securities, Fuji Bank and many more were implicated in wrongdoing of some sort.

Large American companies voluntarily delisted from the Tokyo Stock Exchange, and turnover on the exchange ebbed to 1/10th of its bubble peak.

The excess production capacity created in the bubble led the Japanese economy into recession. Consumer spending plummeted. Property prices continued falling throughout the middle of the decade.

Long term Impact

Nine years after the collapse of the bubble economy, Japan teetered on the brink of systemic collapse, its banking system weighed down by bad debts of an uncertain magnitude, companies reporting record losses, and its consumers too frightened to spend.

Over 60% of Japanese personal assets were committed to cash-bearing interest of less than 0.5% per annum by this time.

The Japanese bubble economy illustrates the danger that arises when investors believe that market risk is shouldered by the government rather than by themselves, the moral hazard problem.

The essential components of the Japanese economic system – centralised industrial planning, administrative guidance, authorised cartels, cross-shareholdings, lifetime employment, promotion by seniority, the long-termist view of market share above short-term profitability, were increasingly questioned and dismantled.

By 2004, prime properties in Tokyo’s financial districts had slumped to less than 1% of their peak values, and residential homes fell to less than 1/10th of their peak.

Firms that had borrowed heavily during the bubble years had massive excess debt and capacity. They underwent a prolonged period of deleveraging and reduced competitiveness against global competition.

The Government’s attempts to stimulate the economy led to increasing public debt. By the 2010s, Japan faced significant fiscal sustainability challenges, exacerbated by an ageing population.

The Bank of Japan faced the “zero interest rate constraint, ” where even a 0% nominal interest rate was effectively positive in real terms due to deflation.

Japan’s experience has become a cautionary tale for other developed economies, with policymakers and economists worldwide studying the “Lost Decades” to avoid similar outcomes in their countries

Recommended Reading:

[Book] Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor

[Article] Kamikaze Capitalism by Michael Lewis

The post Inside Japan’s 1980s Asset Price Bubble: The Lost Decades appeared first on The Calm Investor.

For investors in the Indian stock market, understanding the dynamics of returns across different time horizons is the key to maximizing gains while minimizing regret. A deep dive into the Nifty index’s annualized forward returns offers invaluable insights into the intricate dance between entry timing, market cycles, and investment horizons.

The chart shows annualised returns from investing in the Nifty Total Returns Index (which includes dividends) early each year from its inception. Each column shows the annualised return 1, 2, 3 and so on years from investing in the year represented by the corresponding row. Each column allows for comparing the annualised return at the same timeframe from investing in different years. For example, the “10” column shows the 10-year annualised return from investing every year from 1999 to 2015. Investments after 2015 have completed not 10 years yet and are therefore blank.

The Perils and Potential of Entry Timing

The data starkly illustrates the substantial impact entry timing can have on returns, especially in the short term. Investors who unfortunately entered at market peaks, like the cusp of the 2008 financial crisis, faced a sea of red in the following years as portfolios bled value. Conversely, those who strategically or luckily invested during market corrections or in the aftermath of downturns often enjoyed a rocket-ship ride as the market rebounded.

One Market: Multiple Realities

Investors starting their journeys at different historical points would have had vastly different perceptions of risk and return just a few years into their investments. Consider the early years of five investors through time.

The 2000 ‘The stock market is rigged’ Investor

The dawn of the new millennium was a tumultuous time for the 2000 investor. The dot-com bubble burst, followed by the 2001 crash, would have quickly tempered any initial enthusiasm. After three years, the investment was still deep in the red before beginning a recovery in 2004, which flipped the return to a respectable, although far-from-spectacular, 7%. This investor carries scars from the early beatings, making him forever wary.

 The 2003 ‘2x every 2-3 years, at least’ Investor

Entering after a downturn, the 2003 investor enjoyed several years of spectacular returns as the market rallied. After 3-4 years in the market, the 2003 investor sees stocks as an exciting, fast wealth-building exercise, probably leaving them unprepared for the 2008 crash and its aftermath.

The 2008’ Even break-even is bliss’ Investor

Investing just before the financial crisis, the 2008 investor has a baptism by fire. Watching their portfolio plummet early in value would have been a test of resolve. The market grinds down, losing nearly 60% in the first year of their investment, but then rebounds in 2009, then flatlines for the next two years leaving them disoriented about what to expect from markets. 

The 2018 ‘Lucky if you beat inflation’ Investor

Entering after a few years of solid returns, the 2018 investor comes with a strong sense of security. She looks forward to high double-digit returns, maybe even better, if she can find the right mid- and small-cap portfolio (The equivalent charts for the Nifty Midcap150 and the Smallcap250 are at the end of this post). But it turned out 2018 is terrible for small-caps as the Nifty alone bucks the trend to about stay above water. After muddling about for nearly two years, the 2020 pandemic crash further makes this investor yearn for the safety of fixed deposits.

The 2020 ‘BTFD or Bust’ Investor

Entering a sleepy market, the 2020 investor sees a pandemic hit and creates a savage correction that reduces prices by 40% in a few short weeks. There is uncertainty of the kind even market veterans haven’t seen before. Then the money printing begins, and stocks, among other assets, see a rocket-fueled rally. A surreal remote-working locked-down world offers few entertainment outlets. Everyone works with an eye on the open brokerage account tab while attending Zoom calls. Then the world limps to normal, and stocks lose some fizz, but only a little. Making money looks easy.

When you start doesn’t just affect your returns, it also rewires your risk perception.

The Beacon for Long-Term Investors: This too shall pass

If you pan over the graphic, one thing that stands out is how annualised returns converge into a narrower range after the 10-year+ mark, irrespective of the wild variation in the early years.

Since the numbers represent annualised returns, this implies that the typical big year, up or down, is followed by moves in the opposite direction. Over time, supernormal returns of the 20-30% kind inevitably moderate downwards. The lesson is simple: if you’ve had mega years early on, moderating subsequent expectations, at least for the next 2-3 years, will help avoid unrealistic net worth projections and subsequent disappointment.

The reverse also applies. The frustration of barely-there returns in the initial years tends to be followed by productive years that normalise a lot of the disparity between lucky and unlucky investors.

This graphic should instil confidence in investors constructing long-term portfolios. 

Whether recent investment returns have been too good to believe, or too hard to endure, just remember – this too shall pass.

The Strategic Investor’s no-frills Playbook

Distilling these insights into actionable strategies, a playbook emerges for the strategic investor:

1. Embrace a long-term horizon: Extend your time frame to 10+ years to smooth out volatility and capture the market’s innate tendency to rise.
2. Diversify across time: Use SIPs or periodic investments to navigate volatility and mitigate the risk of poor entry timing.
3. Stay invested through downturns: View market pullbacks as opportunities rather than threats. Being able to actively manage risk as a core part of your investment framework is certainly nice to have
4. Avoid euphoric entry points: While perfect timing is impossible, sidestep investing at frothy market peaks. Seek out relative undervaluation.
5. When in doubt, index: The Nifty’s consistent long-term returns make index funds an appealing core holding for long-term portfolios.

As investors’ experiences across the decades show, the path to successful investing is often paved with short-term volatility and uncertainty. Yet, those who embrace a long-term perspective, stay disciplined in their approach, and ride out the inevitable downturns are often handsomely rewarded.

While the market’s short-term twists can be unnerving, history tells us that patience, discipline, and strategic investing are often the surest paths to long-term financial success. As the Nifty’s annualised return data so eloquently shows, it’s not just about timing the market, but about the time you spend in the market that truly counts.

Appendix – Midcaps

Appendix – Smallcaps

Speak with a Capitalmind Client Advisor about a customised investment strategy consultation to see if Capitalmind PMS / AIF fits your long-term investment needs.

The post Decoding Long-Term Nifty Returns: The Power of Time Horizons appeared first on The Calm Investor.

This article is reproduced from our article in The Economic Times

We are constantly bombarded with expert forecasts about the stock market and individual companies that are often off the mark. Open any financial newspaper or turn on any financial news channel, and you’ll find no shortage of analysts making confident predictions about where stocks are headed.

Yet, basing your investment decisions on these forecasts is often a recipe for subpar returns. Despite their knowledge and experience, expert recommendations fail to consistently beat the market.

Our team at Capitalmind recently analyzed over 2,000 buy/sell recommendationsmade by institutional analysts on Nifty stocks between 2010 and 2020. Here’s what we discovered:

Analysts made four times as many “buy” calls (upgrades) as “sell” calls (downgrades).

Sixty days after the call, 63% of upgrades led to a higher price and 55% of downgrades to a lower price.

When compared to the Nifty index, only 50% of upgrades outperformed the index, and 46% of downgrades underperformed.

While analysts got the absolute direction right, more often than not, their calls had little predictive power in beating the overall market.

So why do experts struggle to make market-beating recommendations despite their knowledge and experience?

Keynesian Beauty Contests

John Maynard Keynes, the legendary British economist whose groundbreaking ideas transformed modern macroeconomics, was also a highly successful investor. He built an impressive fortune speculating in stocks, currencies, and commodities.

Keynes explained investing with an analogy to a fictional newspaper beauty contest. In this contest, readers had to pick the six prettiest faces from 100 photos. The prize went to the reader whose picks most closely matched the consensus of all readers.

Consider a simplified example: Imagine asking 1,000 investors to pick a number between 0 and 100, with the winner being the person whose number is closest to 2/3 of the average pick. If everyone picked randomly, the average would be 50, and the winning number would be 33 (2/3 of 50). But if everyone figured that out, they’d pick 33, making 22 the new winning number (2/3 of 33). This line of reasoning continues until the “rational” pick becomes 0.

But the actual winning number depends on how many people carry out this chain of reasoning and to what degree. When this experiment was conducted with over 1,000 professional investors, the average was 26, and the winning pick was 17, the number only 2% of the players had picked.

The number-guessing exercise shows that your probability of winning depends not just on your reasoning but on your ability to anticipate everyone else’s reasoning. The same applies to investing.

A company’s fundamentals and growth prospects are critical. However, the market’s perception of that company is equally important. If a company is already widely favoured, high growth expectations may already be priced in, limiting upside potential and amplifying downside risk.

Roulette versus Horse-Racing

Roulette is a popular casino game often seen in James Bond movies. It involves a wheel with 36 numbered pockets, alternately red and black. The winning number is the pocket where the ball falls after the spinning wheel comes to rest. The payout odds are fixed—35 to 1 for a single number, 11 to 1 for a row of three numbers, etc. Your and other players’ bets don’t affect the odds and the payouts.

But in horse racing, the odds constantly shift based on how many people bet on each horse. Correctly picking the favored horse yields a small payout. The biggest payout comes from correctly picking the horse few others bet on.

Investment returns work similarly. The highest return potential is found in underappreciated companies where the market’s expectations are low. Future upside becomes more limited as expectations rise.

This is why it’s so challenging for experts to consistently predict market direction or the prospects of individual stocks. They must anticipate not only a company’s results but also how the market will interpret those results compared to expectations.

Navigating the market’s beauty contest

In the stock market, as in Keynes’ beauty contest, the goal is not to pick the most attractive investment but to pick the investment you believe others will soon find attractive. Expert opinions often reflect the consensus view, which is often already priced in. True opportunity lies in finding the hidden gems the crowd has yet to appreciate.

Think of investing like betting on a horse race rather than playing roulette. In roulette, the odds are fixed, but in horse racing, the odds constantly shift based on how the crowd is betting. The biggest payoffs come not from following the favorites but from astutely predicting which long shots will surge in popularity.

Ultimately, navigating the market successfully means seeing through the distorted reflections of the crowd’s ever-shifting expectations to the underlying reality. It means having the insight to pick the winner of the beauty contest before the judges make it obvious to everyone else.

So while expert opinions can provide valuable insights, they are merely one perspective in the never-ending game of anticipating the market’s next move. Savvy investors use them as a starting point for their own analysis, not as a substitute for independent thinking. In the beauty contest of the market, the real prize goes to those who can see the potential in the overlooked and underappreciated before the crowd catches on.

Recommended Reading:

The Enduring Myth of Great Companies

The Halo Effect: How Success Blinds Us in Business and Investing

The Futility of Analyst Recommendations

The post The Keynesian Beauty Contest: Why expert forecasts often miss the mark appeared first on The Calm Investor.

The Hyundai IPO, open for subscription from October 15th to 17th 2024, is the largest-ever IPO in Indian Public Markets. At an issue size of ₹27k Crores, it is 35% larger than the previous largest IPO, Life Insurance Corporation of India, which took place in May 2022.

We examined IPOs over the last two decades and specifically at large IPOs to understand the overall trend in the number of primary and secondary share sales, their offer sizes, and, finally, how the largest IPOs have performed for investors.

The chart shows the number of share sale offerings from 2004 to the present. The blue columns are IPOs, i.e., companies raising public money for the first time, and the orange columns are additional fund-raises by already public companies.

The sheer number of public offerings have risen sharply over the last two years. Nearly 600 share sales have come to market since the beginning of 2023. 335 have come so far in 2024 (as of 14th October, the day before the Hyundai IPO opened). Beyond the number, we should also look at the offer size i.e. how much money have these share sales been raising.

Chart below shows just that. The y-axis in this case is the total amount of money being raised in Crores.

A significant increase in the amount of money being raised. Since the beginning of 2023, over 5 Lakh Crores (5,00,000 Crores) has been raised via share sales.

But note how the orange columns form a bigger part of this chart compared to the previous chart. This implies existing companies have been raising a lot of the money being raised through share sales. In fact, just over 22% of total funds raised since 2023 have been by companies coming to market for the first time i.e. IPOs.

What industry sectors have most IPOs come from? Chart below shows the offer size of IPOs split by the sectors the companies have been from.

Over the years, Financials have dominated the companies raising money from the public markets. This trend continued in 2024, with 27% of funds raised by financial services companies. Interestingly, Consumer companies, both cyclical (like Auto, Hotels) and non-cyclical (like Pharma, Healthcare, FMCG, and Alcoholic Beverages) together account for 34% of all funds raised this year. They are followed by Industrial companies, accounting for 14% of IPO funds raised in 2024.

Given the interest in the Hyundai IPO, how have mega-IPOs done historically for investors who bought at the offer price and held?

It turns out not that great. The table below shows the top 40 IPOs in India by size, their listing date, price, and total return to date.

What is Total Return, and why is it different from Price Return?

Because of dividends. Total Return assumes the dividends are reinvested into buying more shares of the company at the prevailing price. Therefore, Coal India, which came to market at ₹245 in April 2010 and trades at around ₹490 as of October 2024, just about doubled in price, for a price return of 101%. However, it also paid out dividends over those 14 years, often at a yield of > 5% of the share price. If we had taken those dividends and bought more shares of Coal India at the price at the time, the Total Return from holding Coal India since its IPO would be 443%. The CNX500 has done similarly over that time frame.

Of course, since not all companies pay out large dividends, the difference between Price and Total return is not as wide for the others.

Hence, we compare the Total return with that of the CNX500 (the index of the top 500 companies by market cap) over the same period to see how investing in the IPO did versus just buying and holding the index. The chart is interactive and allows scrolling and sorting through the top 30.

https://datawrapper.dwcdn.net/5EFxw/2

• 24 of the top 40 IPOs by size have failed to generate excess returns (versus the CNX 500). This includes the impact of dividends and assuming they were reinvested in the stock.
• 12 of the 40 have delivered negative returns, with Reliance Power being the most high-profile and the largest at the time.
• Two of the top 10 have generated returns greater than the CNX500. Coal India just about doubled in price over 14 years but does much better with its dividends. Even then, it just about matches the index.
• Zomato is the only top 10 IPO that has delivered meaningful excess returns. The other big winners out of the top 40 are TCS, Hindustan Aeronautics, Indian Railway Finance Corp, Indigo, Bharti Hexacom and Bajaj Housing.
• Five of the biggest IPOs in India are from the last two years. Most of them have done well, including Bajaj Housing Finance, Bharti Hexacom, and Brainbees (First Cry), thanks in no small measure to a favourable market.

Overall, mega-IPOs don’t seem to offer lucrative returns.

There are several potential reasons. Large IPOs tend to arrive after a bull market has been underway for a while, so they tend to be priced optimistically in keeping with the prevalent appetite for risk. While the specific reasons for large IPO underperformance vary, combining the massive supply of shares these IPOs bring with the higher earnings growth expectations given the aggressive pricing tends to punish any disappointment in growth quickly.

But what about the Hyundai IPO?

Here’s Deepak’s take:

There are opinions about the Hyundai IPO, and I’m not going to recommend or otherwise, but two nuances you must note

Oh, it’s only an Offer for Sale: versus giving the company money, you’re letting the shareholder (Hyundai Korea) exit.

You actually want companies that don’t…

— Deepak Shenoy (@deepakshenoy) October 16, 2024

The post Investing in mega IPOs: What the Data Shows appeared first on The Calm Investor.

This article was first published on capitalmind.in

We examine over two decades of gold and silver returns alongside the Nifty to determine whether these precious metals have a place in a long-term investment portfolio. By evaluating the historical performance, volatility, and key influencing factors of gold, silver, and the Nifty index, we explore the potential benefits of diversification and optimal asset allocation strategies i.e. the optimal amount of Gold and Silver in a long-term portfolio.

What we found: A portfolio primarily allocated to equities, supplemented by moderate Gold exposure, can offer not only more stable risk-adjusted returns but also potentially higher absolute returns with reduced drawdowns compared to a Nifty/Equities-only allocation strategy. Given its historical performance, Silver only merits a small allocation in constructing a low-volatility portfolio.

Introduction

Did you know that so far in 2024, Silver has returned over 30%, followed by Gold with 23% compared to 15% for the Nifty?

₹100 invested in the Nifty three years ago would be worth about ₹141 now – a healthy 40% cumulative return. But you would have done better with Silver or Gold.

An investment in Silver in October 2021 would now be worth ₹153, 8% more than the Nifty, and Gold would be worth ₹159, a very respectable 13% more than the Nifty investment. And that is without considering the additional yield if held in the form of Sovereign Gold Bonds.

Clearly, this is a specific window of time, and since one swallow does not make a summer, what if we compared the longer-term rolling return trend of the three assets?

Historical Performance: A Tale of Three Assets

The chart shows rolling three-year returns of the Nifty, Gold, and Silver from 2003. The coloured bar at the top shows which asset led at each point in time.

Based on the last three year’s return, silver and Gold are currently ahead of the Nifty. Historically, that has not been the case. Over two decades, the Nifty has been ahead 56% of the time, with Silver and Gold ahead 23% and 21%, respectively.

Comparing Annual Returns: Nifty, Silver, and Gold

The table shows calendar-year returns of the three assets over 24 years, from 2000 to YTD 2024, with the top-performing asset in each year.

Year-to-date, Silver leads by a distance, with Gold not far behind. In fact, Silver has beaten the Nifty in three of the last five years.

In 24 full years from 2000 to 2023, Silver ended the year ahead in five of them. Gold in seven, and the Nifty closed the year with the highest return in the remaining 12.

The Two+ Decade Performance Report Card

The table below shows the performance summary of the three assets, Silver, Gold and the Nifty, from 2000 to October 2024.

Over two decades, the Nifty has shown the highest return, but not by as much of a margin as one might expect. But the Nifty leads Silver and Gold in terms of share of time leading on rolling return periods, and the increase in that share over longer holding periods means the Nifty has been more likely to give you higher returns relative to the shiny metals, the longer you held. 

On the downside, the Nifty has seen the worst drawdown and higher annualised volatility than Gold.

Gold has a lower return than the Nifty but with significantly lower drawdown and volatility. Silver is the worst long-term performer of the three, with a drawdown comparable to the Nifty and significantly higher volatility.

So, do Gold and Silver make sense in a long-term investment portfolio?

The Theoretical Case For and Against Gold and Silver

There are strong proponents on both sides of the debate of whether assets with no intrinsic value i.e. the ability to generate future cash flows, can be considered investments. 

Some of the most-repeated arguments in favour and against holding Gold and Silver:

For

• Store of Value: Gold and silver preserve value and purchasing power, especially during economic uncertainty.
• Portfolio Diversification: They diversify portfolios and reduce volatility due to low correlations with stocks and bonds.
• Supply Constraints: Limited supply and growing demand can drive prices up.
• Safe Haven Appeal: Investors seek them as safe havens during crises, boosting prices.
• Potential for Price Appreciation

Against

• No Cash Flow: Unlike stocks and bonds, gold and silver do not generate any cash flows, which goes against the classical definition of an investment
• Holding Costs: Owning physical metals, whether directly or through investment vehicles, incurs storage and insurance costs.
• Opportunity Cost: Their long-term returns have historically lagged behind stocks, so why bother?
• Emotional Decision-Making: Speculative interest and emotions can lead to ill-timed buying/selling decisions.
• Potential Price Volatility: Prices can be highly volatile, driven by shifting investor sentiment.

Whether or not these metals make the cut for every investment need, their longevity and universal acceptability allow us to study their role as investments.

Why not 100% Nifty: The power of holding uncorrelated assets

If Nifty has the highest annualised return over two decades, why bother with considering either Gold or Silver? Why not be 100% allocated to the Nifty and count on its long-term edge to play out? After all, a ~1% incremental return compounded over two decades is a portfolio that’s nearly 20% bigger.

This is where the power of asset allocation can get counterintuitive.

The answer to whether an asset makes sense as an addition to a long-term portfolio depends on the extent to which it moves together with what you already own.

Consider Gold. During the global financial crisis of 2008, when the Nifty fell by over 50%, gold proved to be a safe haven, rising by nearly 30% in the same year.

The table below shows the pair-wise correlation of monthly returns between Silver, Gold, and the Nifty.

The most notable in the table are the low correlations of the Nifty with both Gold and Silver.

Harry Markowitz first proposed combining non-correlated assets to improve risk-adjusted returns. However, it is not as apparent that a portfolio combining different assets can also outperform the best-performing standalone asset on an absolute basis, provided it is rebalanced periodically.

An example: The 50:50 Nifty-Gold Portfolio

Consider a simple approach of allocating 50% each of ₹100 to Nifty and Gold at the start. 

• After Year 1: Let’s say the Nifty is up 10%, and Gold is down 5%. The portfolio is now ₹102.5 (₹55 in the Nifty and ₹47.5 in Gold).
• Start Year 2: ₹3.75 of the Nifty is sold to buy an equivalent value of Gold, resetting the portfolio to ₹51.25 in the Nifty and ₹51.25 in Gold.

This continues each year when the asset that gains more is pared down to buy more of the asset that lost value. How would such an approach have done when followed for two decades?

The chart shows the cumulative equity curve of the 50:50 Gold-Nifty Portfolio.

The 50:50 strategy cumulative does better than 100% allocation to either asset class over the long term. It also does that with moderate drawdowns compared to the Nifty.

The table shows summary metrics for nine combinations of Silver-Gold-Nifty, in addition to 100% Silver, Gold and Nifty portfolios. Notice six of them show higher annualised returns, and all of them show better (lower) volatility and drawdowns than the Nifty.

Combining Gold and Silver with the Nifty offers better risk-return when maintained over the long term. 

But how does one arrive at that ideal combination?

Exploring Optimal Allocations: The Efficient Frontier

In the above table, we examined a select set of asset allocation combinations to see how multi-asset portfolios would have performed relative to the Nifty. 

The graphic below shows the outcome of every possible allocation combination to the three assets from 0 to 100% in increments of 1%, giving us over 5,000 possible allocations.

The chart shows the risk (volatility) and reward (CAGR) of each of those 5,000+ combinations. It also highlights the 100% asset portfolios and the highest-return and lowest-volatility portfolios along with the 100% Gold, Silver and Nifty portfolios. 

Reading this chart: Consider the 100% Nifty dot roughly in the centre of the chart. The y-axis shows the annualised return of 13.2% from 2000 to Oct 2024 and the x-axis represents the annualised volatility of 22% it endured over that time. Any portfolio to the left of the Nifty has been less volatile and any portfolio higher than the Nifty has delivered higher returns. Portfolios both, to the left and higher than the Nifty have delivered higher returns with lower volatility. The optimal portfolios have been highlighted. The dots have been shaded as per the worst drawdown they experienced, lighter colours mean better drawdowns.

According to our analysis, the highest return while minimising volatility from 2000 to 2024 would have come from holding a combination of 32% Gold and 68% Nifty. The lowest volatility combination while maximising return would have been a Gold-heavy portfolio with 62% Gold, 35% Nifty and a small 3% Silver allocation.

In spite of its standout performance in 2024, Silver does not justify a significant allocation in the long-term investment portfolio.

Chart below shows the cumulative performance of the individual assets along with the optimal return and volatility portfolios

Implementing a Nifty plus Gold and Silver Allocation: Practical Considerations

Optimal Allocations Depend on Historical Data

The very specific allocations discussed in the previous section are unlikely to be the perfect combination going forward. Optimal Portfolio Analysis relies on historical price movements and depends on the chosen date range. For instance, beginning our analysis ten years later, from 2010 to the present, yields the highest return combination as an even more Nifty-heavy portfolio with a lower allocation to Gold.

Transaction Costs and Taxes Impact Returns

The analysis does not consider transaction costs and capital gains taxes from yearly rebalances, which would reduce but not eliminate the excess return of the annually rebalanced strategies. In the real world, these factors eat into returns.

Future Performance is Uncertain

The core assumption is that physical assets, like Gold and Silver, will continue their historical behaviour in the future. However, their prices will be determined by supply and demand, which like most things, is unpredictable.

Implementability Has Improved

While our analysis goes back to the year 2000, Gold ETFs in India have only been available since 2007, and Silver ETFs even more recently since 2022. Until then, implementing such an allocation strategy would have required owning the metals physically, making yearly rebalancing significantly harder. Fortunately, ETFs have made it much easier for investors to gain exposure to precious metals in a portfolio.

Not for the Perennial Comparison Shopper

This approach is not for those who constantly compare their portfolio’s performance to the market. The optimal portfolios from our efficient frontier analysis both trail the Nifty on three- and five-year rolling returns nearly 60% of the time. Any multi-asset portfolio combining lower-return assets will lag equities over long periods, especially during bull markets. This can make the decision to allocate to staid assets like Gold appear foolish.

The Behavioral Advantage of Diversification

Holding uncorrelated assets like Gold and Silver can provide a psychological boost during equity market downturns. When stocks are plummeting, watching the value of your precious metals holdings rise can help you stay the course and avoid panic selling. As the saying goes, “Put 10% in Gold and hope it doesn’t work.”

Key Takeway: The case for Gold (and only a little Silver)

A portfolio primarily allocated to equities, supplemented by moderate Gold exposure, can offer not only more stable risk-adjusted returns but also potentially higher absolute returns with reduced drawdowns compared to a Nifty/Equities-only allocation strategy. Given its historical performance, Silver only merits a small allocation in constructing a low-volatility portfolio.

Ironically, the urge to switch all allocation to equities is strongest precisely when exposure to other assets is most needed. As the legendary investor Benjamin Graham advised, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.”

As an investor, it’s worth asking yourself: Is my portfolio adequately prepared for future uncertainties? A judicious allocation to gold alongside equities may provide resilience and peace of mind to stay invested in the long run.

Anoop is on Twitter @CalmInvestor

The post Silver’s Surge, Gold’s Hedge: Strengthening Your Equity Portfolio with Precious Metals appeared first on The Calm Investor.

50% of IPOs have beaten benchmark returns but Larger IPOs have disappointed w.r.t. long term returns’ says Anoop Vijaykumar, Investments & Head of Research, Capitalmind Financial Services. Tells Sonal Bhutra & Reema Tendulkar that large IPOs come out when index is doing good for 1-2 years so growth moderation, post listing, for these large IPOs, see’s huge price correction.

The post On CNBC-TV18 discussing how large IPOs have historically performed in India appeared first on The Calm Investor.

This article was first published in Mint.

Market corrections are an inevitable part of the investing journey, but they don’t have to derail long-term financial goals. While it’s natural to feel anxious when stock prices are falling, savvy investors know that these times present opportunities for growth, learning, and strategic decision-making.

Here are seven ways to turn a market downturn into a chance to strengthen your portfolio and your investing mindset.

Resist the urge to rewrite history

When markets tumble, it’s easy to look back and convince yourself that the signs were obvious.

“I knew I should have sold when valuations started looking stretched!”

But the reality is, valuations can be stretched for a while and predicting the exact timing of a correction is nearly impossible, even for professional investors. Attempting to time the market often leads to missed opportunities or locked-in losses. Focus on making forward-looking decisions based on your long-term investment plan and risk tolerance, rather than second-guessing past choices.

Use the correction to learn about your true risk tolerance

Market downturns offer an opportunity to better understand your emotional connection with risk. Pay attention to the investments that cause you the most anxiety and use this awareness to refine your investment approach.

If specific holdings are keeping you awake at night, they may not align with your risk tolerance. Tailoring your portfolio to match your true risk profile will help you navigate future market volatility with greater confidence.

Rebalance with intent

When markets are volatile, it’s tempting to make impulsive decisions driven by fear. However, a more strategic approach is to use the correction as an opportunity for intentional rebalancing.

For example, let’s say your target asset allocation is 60% stocks and 40% bonds. A significant stock market decline may have shifted that balance to 50/50. By selectively buying more stocks at lower prices, you can restore your desired allocation while positioning yourself for potential gains when the market recovers. Think of it as a disciplined “buy low” strategy rather than an attempt to time the bottom.

Do a Media Detox

During a market correction, the 24×7 news cycle can be your worst enemy. The more you consume short-term-focused financial media, the more likely you are to make emotionally driven decisions that can harm your long-term returns. Go on a financial media diet and study market cycles.

Use this time to shift your perspective and dive into the rich history of financial markets. By studying past market cycles, you can gain valuable insights into the long-term trends and patterns that have shaped the investment landscape over decades. I’d recommend Burton Malkiel’s A Random Walk Down Wall Street for an accessible and engaging read.

Opportunity for a Portfolio refresh

Market corrections, while challenging, can offer a chance to enhance your portfolio’s quality.

Evaluate your investments to ensure they align with your goals and risk tolerance. Identify holdings that no longer fit your strategy and consider selling underperforming or overvalued assets.

Likewise, explore opportunities to invest in sectors or companies previously out of reach due to high valuations. Use the correction to reposition your portfolio with stronger, more reasonably priced investments.

Strengthen your “Do Nothing” muscle

It may sound counterintuitive, but one of the most effective strategies during a market correction is to simply do nothing.

Decades of market history have shown that investors who stay the course during downturns are often rewarded as markets eventually recover. In fact, some of the best opportunities to buy stocks at attractive valuations occur during times of peak uncertainty. As tempting as it may be to “take action” when prices are falling, often the wisest move is to stick with your existing investment plan and let time work in your favour.

Keep the Big Picture in mind

Finally, remember that short-term market movements are just one small chapter in your long-term investing story.

While it’s natural to feel anxious during a correction, try to keep things in perspective. Historically, the stock market has delivered positive returns over the long run, despite numerous corrections and bear markets along the way.

In hindsight, every downturn has turned out to be a good time to invest more. By staying focused on your ultimate financial goals and maintaining a disciplined, patient approach, you’ll be well-positioned to weather any short-term turbulence and emerge a stronger, more resilient investor.

Market corrections are a normal and necessary part of the investing cycle. By using these challenging periods as opportunities for learning, reflection, and strategic decision-making, you can turn a potential setback into a chance to strengthen your financial foundation.

Stay the course, tune out the noise, and trust in the power of long-term investing. Your future self will thank you.

Anoop Vijaykumar, Investments & Head of Research at Capitalmind.

The post Mint Article: Mind over market: 7 habits of investors who thrive during corrections appeared first on The Calm Investor.

Had a detailed chat about the current state of markets, valuations and Gold with the folks at NDTV Profit

Despite the 15-20% correction since October, why markets are still expensive, especially the mid and small caps, and to keep return expectations low for the next 12-18 months

At $15B, FII selling in just the first 3 months of 2025 is the 2nd highest in any calendar year since 1999

There’s some mean-reversion happening with sectors like Auto, Realty, and Energy that rose the most since the pandemic lows of 2020 have seen the most correction

Banks are probably the one sector currently with reasonable valuation versus long-term trends currently

Also, Gold breaking $3,000 / ounce recently means that since the 1970s, it has delivered double-digit annualised returns to Indian investors, but not without some intermediate pain.

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