Wealth Creating Perspectives – Check if YOU Own Them

I often wonder why the speedometer in my car comes with a maximum limit of 220 km/hr. Over the centuries, car speeds have evolved from Benz Velo, creating a record way back in 1894 with a top speed of 20 km/h, to Koenigsegg Agora RS defining new limits by hitting 447.19 km/h in 2017. However, these outlier incidents are beyond realistic limits for an average driver like me to hit the accelerator any day. As a matter of fact, in most countries, the legally permitted speed limit is much below what the speedometer is max out for.

On doing some fact-finding, I was amazed at the probable reasons. Though the most acceptable reason evolved to be that customizing speedometers for different cars may not be economically viable, there is also a marketing aspect. A high limit on the speedometer helps build a better perception of the engine, even though cars, generally, are not designed to go that fast.

To conclude, the maximum limit on any speedometer is not to be tested if I am not on the racing track, as those limits exist for an entirely different reason. This analogy goes well when we think about the price of a unit of the mutual fund, also referred to as NAV, that gets published daily. In fact, this may be one of the biggest reasons that impact investors' behaviour to a large extent.

However, NAVs that get published daily help discover asset prices in the most transparent way possible. The market forces that discover the best price on all business days makes mutual fund one of the most liquid vehicles to take a position in any asset class. Imagine a situation where mutual fund companies publish prices periodically; anyone willing to buy or sell units would have struggled to get the best current price.

But most investors tend to miss this logic of prices getting published daily and instead take this as a yardstick to dampen their conviction on their previously decided goal. Imagine for a moment, if real estate prices were published daily would our obsession for them would have been any different?

So, my first learning from this read is that as speedometers are not built to max out; similarly, NAVs don't get published to make us evaluate our portfolios daily.

So next time I see an unexpected loss in my portfolio, I will consider this a notional value. It's notional because I only make a loss if I actually execute the trade and book that.

The complete package

In a recent session, participants were asked about their buying preference between an average car and a Mercedes GLC SUV. Hypothetically considering both the vehicles were available at the same price. Without a doubt, everyone went with the Mercedes GLC SUV. However, on further probing what drives their choice, most participants acknowledged the high-end security features.

The presenter next showed the group an extract from a news report about the sad demise of a business tycoon in a car accident. Unfortunately, the car involved in the accident was the same model the participants had chosen earlier.

The group was in a fix when asked why other vehicles that would have passed through the same spot moments earlier went unhurt; this car, with best-in-class security features, met with the accident. Post-investigation reports suggested that the passengers in the back seat were not wearing their seat belts resulting in airbags not opening up.

So, the point to drive home is that all products come with some user guidelines, which, when followed meticulously, provide the desired experience. As a user, I don't have the privilege to pick and choose features; only that is acceptable. Therefore, I will have to adopt the product as it is with all inherent characteristics, and only then can I expect the desired outcome.

This anecdote resembles the equity market, where volatility is an inherent feature and generates a sizable return only in the long term. So as an investor, I can't have the privilege of expecting returns from equity by avoiding the inherent volatility.

The insight I got from this incident is that, like for airbags to respond, we have to put our seat belts on; similarly, to get the best out of equities, we have to sail through both the rough and smooth patches of the journey. We can't simply pick the best days and avoid the rest because the picture of the best and worst days can only be seen from a rear view.

The Best Fund

The G.O.A.T of Argentinian Football holds sixty Guinness Book records, a feat even generations will find difficult to beat. However, the record of missing two penalty strikes in the world cup also goes to the same genius. Seven times Ballon d'Or winner missing the shot twice in the most coveted tournament, where the striker is in absolute control of the situation and needs to beat the keeper from only a distance of 12 yards, sounds unbelievable. But the fact is that even the stars will have periods of underperformance. Hence inconsistency is the only constant.

Metaphorically it dawns upon me that even the most sought-after mutual fund schemes will have patches of underperformance. But like a team that doesn't drop its star player for languishing temporarily, similarly, as investors, we need not get out of the scheme for interim under achievements.

We often judge a fund based on the last year's performance and tend to switch to a new scheme if the existing fund's performance is lower than our expectations. But what we miss to evaluate is that the last year's performance is for someone who had invested a year ago and hence irrelevant to me. Everything in life goes in a cycle; therefore, the best-performing fund may not be ranked the same a year later, which will coincide with my investment period.

JP Morgan has done an interesting analysis in the US about the returns generated by various asset classes during the last two decades and the return generated by an average American investor. Surprisingly when the market has generated a return of 7.5% (S&P 500), an average investor in the US has only made 2.9% during the same period (Ausenbaugh E, 2022, Feb 18, J.P. Morgan Wealth Management). The drag in the performance may be attributed to the unwarranted activeness of an investor, and frequent changes may be one of them. Otherwise, the investor should have at least generated the market returns. So, it’s not the market that decides our returns but our behaviour.

My grasp from this episode is that, as there is always the possibility of the G.O.A.T coming back stronger in the next match, so are funds which may be lagging temporarily but can mitigate the underperformance once the cycle turns, provided we remain invested with them when the tides turn in our favour.

Getting into the Character

Whenever we think of brilliant stage performances, we often refer to the actors as getting into the character's soul. That's what differentiates a successful actor from a mediocre performance. While portraying the character, the actor gets so involved in the role that they get detached from their actual being.

Investing in equities is actually owning a part of the company under consideration. But in most cases, the investor behaves as lending money to someone. They are always concerned with the capital invested and expects growth to be consistent, like an interest payment.

Now imagine a situation where I am running a business. I won't count my profits daily. I will accept that there will be years when I will make fewer returns. Worst, there will be years I will make losses. But in most cases, neither of these incidents will incite me to shut down my business and shift to an entirely new trade. Instead, I will wait with patience for the tides to turn in my favour and to make up with higher sales.

This is where I will be tested on my behaviour, whether I demonstrate the character of a business owner or a money lender.

The day we enter the character's soul like a seasoned actor, there won't be fear or doubt about the periodic underperformance. Instead, we will start concentrating on future victories. We may even see down markets as opportunities to expand our businesses or add more units.

Childhood Dream

Most of us in our childhood would have at least once thought of becoming a soldier. Though, unfortunately, I could not fulfil that dream, I often ponder on what could have led my little soul to fall in love with that role model. Though I don't want to entirely negate the reasons, nonetheless, for an average kid, patriotism and serving the nation are complex emotions to drive the little heart at that tender age and longing for a similar career.

What I later realised and even got verified with participants in a session is that as a kid, we love playing the role of soldiers because we can play with toy guns and press the fake triggers. Additionally, further few participants told me that even today, when we play video games, it is because we enjoy firing our enemies.

Now if that is the fact, the immediate picture shown to the group is of a newspaper reporting about Galwan Valley, where Indian soldiers got into a physical confrontation with the enemy troops.

Now this heroic behaviour of the soldiers brings about a thought-provoking revelation. We all fantasised about being a soldier so that we may fire. However, when the actual situation evolved, the soldiers restrained from pressing the triggers.

Think for a moment what must have gone through the mind of that brave soldier at that very instant. His family is waiting back home, and the enemy is in front of him; he is holding one of the most sophisticated weapons in his hand; if he doesn't shoot, there is always a possibility of getting killed. Still, what he displayed were absolute military discipline and behavioural excellence.

I often wonder how a soldier can be remarkably calm in the most adverse situation. Someone from the group I was interacting with rightly pointed out that they did not get the order from their commander to shoot. Precisely that would have been the case, but to demonstrate such an extraordinary level of discipline is beyond the imagination of most of us.

For someone like us to create wealth, we must train our minds towards that same level of discipline. Like the memory of the family waiting at home to the enemy ready to overtake you, are all noises which could tend to deviate the soldier. Similarly, market news, so-called words of wisdom from our financially untrained friends and relatives, and fear of volatility are all noises.

The day we learn to control our emotions and bring absolute discipline to our thought process like that soldier and listen to the guidance of our financial advisor, who is like the superior giving instruction to the soldiers, there will be no looking back in our journey of wealth creation.