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Over the past 6, 12 or perhaps 18 months, the Indian capital market performance has had a polarized structure. It is broadly divided into, on the one hand, a small set of wonderful companies that are grossly overvalued, whichever way you look at it, and which keep getting expensive; and on the other hand, a large set of decent or not so good businesses that are just about reasonably or grossly undervalued.
Whatever the reason for it, but the fact is that mutual funds and fund managers who had performed quite well till about 2011 have suddenly lagged market indices, and in some cases, quite drastically. Value investors have found themselves wanting, in pursuit of value.
May be it is a case of style drift, when a particular style of investing goes out of fashion and a new one catches on. May be it is something else. May be in the long-term they will catch up, may be they won’t – I don’t know. The fact is that as an individual layman investor, beating the market using star-ranked active funds or value style stock investing has not been easy.
Moreover, beyond a new set of winners that have emerged, a large part of the mutual fund industry has found it difficult to match, forget beating, the main benchmark indices. So far till about couple of years back, in the Indian markets, it was not the case. But the usual winners are not winning, and that is the case if one looks at 6 month, 1 year, 2 year and in some cases, 3 year performances too.
3 years may not be sufficient time to assess performance, but the fact is there have been a new set of winners – in funds, fund managers and individual stocks.
This triggered me to read ‘The Little Book of Common Sense Investing’ by John Bogle, the singular personality responsible for popularizing the Index Fund in the West through his mutual fund company Vanguard.
Truly a masterpiece, this book makes it simple for the lay individual investor to incorporate the fundamentals of asset allocation and rebalancing into his portfolio based mostly on a set of low cost, Index funds. It is the easiest way a truly long-term investor can be assured of building wealth for himself over decades of investing.
This book starts with a foreword note in which Warren Buffett says: “A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth. In this book, Jack Bogle tells you why.”
Bogle goes on demonstrate how investors turn a winner’s game into a loser’s game by chasing the illusion of market beating returns. He further explains that, while there will always be winners that beat the market over different periods of time, it is not predictable who will do so in the future based on past results, and shows how these winners change from time to time, thus surprising investors.
Finally, he advocates that investors should focus largely on their asset allocation, rebalancing strategy and base most or all of their long-term portfolio on low cost index funds.
Here are a few excerpts from the book:
“Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.”
“Common sense tells us–and history confirms-that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost.”
“The classic index fund that owns this market portfolio is the only investment that guarantees you your fair share of stock market returns.”
“The brokers, the investment bankers, the money managers, the marketers, the lawyers, the accountants, the operations departments of our financial system are the only sure winners in the game of investing.”
“Fund investors are confident that they can easily select superior fund managers. They are wrong.”
“The beauty of a cap-weighted index is that it automatically adjusts to changing stock prices and never has to buy and sell stocks for that reason.”
“Common sense tells us the obvious; while owning the stock market over the long-term is a winner’s game, beating the stock market is a loser’s game.”
“It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”
“By and large, fund managers are smart, well-educated, experienced, knowledgeable, and honest. But they are competing with each other. There is no net gain to fund shareholders as a group.”
“Every single firm in the fund industry acknowledges my conclusion that past fund performance is of no help in projecting the future returns of mutual funds.”
“Studies show that 95 percent of all investor dollars flow to funds rated four or five stars by Morningstar.” {In India, this may be valueresearchonline or similar}
And last but not the least, why it makes sense to base your really long-term portfolio on Index Funds, rather than on active funds or individual stocks.
“Index funds endure, while most advisers and funds do not.”