The Wealth Creation Formula

Assumed Relief-vs-Long-Term Patience

The Indian Poll verdict has been as predicted by the exit-polls. For the stock market, it is not important which political party rules the Country; it is the stability of the Government the market has cheered-on. However, as the Stock-market popular quote goes Buy the rumour and sell the news, the traders have sold-off and booked profits earned during the pre-poll and exit-poll rallies. Historically, we have observed such behaviors of the investors were proved to be wrong. The trader's mentality is focused on very-short term and hence we ignore the advice to traders. But, investors repent their action at later stage, when they observe their fear and hurry to book out the profits were quite wrong.

The Power of Compounding: Albert Einstein once quipped,

The psychology to wait longer while in "loss" and book-very-quickly when in profit, prevails in the minds of the novice investors. We at PMS Bazaar Research team felt it is our responsibility to re-assure the investors to stay invested in order to benefit more, by citing few historical samples.

The sensex chart posted along is for the period from 1980-to-2001. It is quite usual for the investors to get attracted to stock market when the market is in a Bull-run. Our observation was that, during the year 1994 more investors were attracted and invested. The correction after 1994 till 1998 was quite de-moralizing for many investors, and when the markets surged again in the year of 1999, wide-spread profit bookings were observed. The investors after witnessing the fall during the following years 2000 and 2001, would have been quite elated that they were smart enough to have booked their profits in 1999. On calculating the returns for this period of 5 years from the peak value of 1994 to the peak value of 1999, we get a Compounded Annual Growth Rate of (CAGR) only 4.98%, which is very paltry. We have also observed many other unfortunate investors with lesser knowledge, had been impatient and sold out during the years of 1997/1998 booking losses. During those days, PMS industry was not launched. Though the Mutual-fund industry was prevailing the over-all investor education was at a budding stage, and there weren't many mutual-fund investors.

After the year 2004, when the stock markets started their fresh Bull-run, more investors started investing in the Equity market. The PMS industry was also in the budding stage during those years. We have posted along the Sensex chart from 1980-to-2007. Just a look at the chart, on the period of 1994-1999, in this Larger-timeframe, itself reveals, the assumed BIG falls (of 1997/1998/2000/2001), appear too tiny - (circled in red). Had the investor stayed invested till the year 2007, his investment could have made a huge return of 19.12 % CAGR. For easiness to understand, Rs. 10 Lakh invested in Sensex in the year 1994, would have yielded Rs. 12,75,070/- in the year 1999 (which is just 4.98% CAGR), had he stayed invested till the year 2007, the yield could have been Rs. 51,69,059/- (which is 19.12% CAGR). We have projected only the Sensex figures as the PMS industry was in budding stage and no sufficient data for those years. However, the next period example comparing the 2007 peak and afterwards are projected with PMS strategy returns.

The sensex chart from the year 2004 to 2018 is posted along. Almost the identical pattern is observed, and as it happened historically, those who invested in the peak of 2007 (December-2007), were demoralized during the 2008 fall, and were relieved to book profits quickly when the market recovered. However, those who stayed invested till the year 2018 were rewarded with good returns.

Very interestingly, when we have compared the return of a PMS portfolio (launched in the year 2007 - December - when the market was at its "then" peak), with the Sensex returns, the PMS portfolio has returned huge ALPHA (gave excess return while compared to Sensex). The important inference is that, Mr. Albert Einstein is vindicated, by this longer time-frame return from the PMS strategy. (IF you give more importance to "t" the growth of the investment is very huge). The comparative chart is posted along.

The current scenario & the Learning from the History

It is observed that the Equity markets were in the corrective phase during the year 2018, and those who had invested in the recent peak of the market - may have waited with the pain of 18-to-20% erosion in their portfolio. The psychology of those investors may push them to book-quick profits when the markets are recovering. This article is focused mainly to re-assure those investors to wait patiently for the next few years to get decent returns from their investments.

The Calendar year return on the Sensex is posted along. Since 1980 till 2018 in the 38 calendar years, negative returns were during 9 calendar years and 29 years yielded positive returns. If you extrapolate the returns for 5 years, on investments made, just on the 01st of January of the next-calendar-year after the "negative-return-year", they have been substantial. For example, the year 2008 had been negative and the erosion was 52.45%, and the year 2011 had been negative with 24.64% erosion. The returns for the investments made just after these negative years are tabulated and charted.

For this calculation we have considered all the PMS strategies in the PMS bazaar universe, which were operational prior to the year 2009, (total 12 Strategies) for the first 5 years calculations, and all the PMS strategies in the PMS Bazaar universe, which were operational prior to the year 2012 (total 29 strategies) and all the Equity diversified Mutual-funds (excluding the sector funds). It is quite evident from the calculations that, even the Minimum return yield from the PMS universe is much higher than Sensex.

For this calculation we have considered all the PMS strategies in the PMS bazaar universe, which were operational prior to the year 2009, (total 12 Strategies) for the first 5 years calculations, and all the PMS strategies in the PMS Bazaar universe, which were operational prior to the year 2012 (total 29 strategies) and all the Equity diversified Mutual-funds (excluding the sector funds). It is quite evident from the calculations that, even the Minimum return yield from the PMS universe is much higher than Sensex.

What is Different currently compared to the earlier historical cycles

An observant investor would have noticed, in the longer periods, well-managed portfolios have yielded supreme returns compared to indices. This is possible only when the portfolios are concentrated with specific themes like that of the many leading PMS strategies. Indian Equity market has undergone crucial policy directed structural changes, which initiated emergence of newer thematic and better growth-oriented PMS strategies. It is statistically proven in the past, such adherence to investment principles, usually increases the ALPHA creation.

Themes like "un-organized to organized sector", increased supply demand to the Indian Defense, new initiatives on mega-infrastructural projects, are few examples. Policy based re-structuring of the existing sectors, like forensic audit initiatives, mergers for win-win situation creation for NBFCs with core-banking, re-capitalizing and NCLT procedures to revamp the banking sector etc., will boost the Indian equity performance further. More importantly emergence of apt investment knowledge imbibing entities like the PMS Bazaar, will improve quantity and quality of the long-term investors in the Indian Equity. The current formation of Majority Government is likely to provide stable investment environment and thus attract more foreign fund flows into the Indian Equity market.

Hence, after considering various historical statistics and current structural changes, PMS Bazaar Research team is advising the investors to stay invested and reap increased exponential returns through their investments in the PMS strategies. We assure investors better risk adjusted returns from the PMS industry in the ensuing 5 years period.

Conclusion

  1. Equity markets have yielded better returns in the 5 years period after any yearly correction.
  2. PMS strategies have outperformed other forms of investment
  3. It is prudent to give importance to "t" rather than to "r" in the compound interest formula
  4. Current Political mandate for a stable Government will improve economic performance thus boost the equity investment yields.
  5. Newer policy initiatives created newer thematic approaches to investment, which are sure to yield better "ALPHA" if managed through Portfolio Management Services.
  6. Long term patience will always win over the short-term psychological relief selling actions.

Caution & Disclaimer

  1. Past performance is not a Guarantee for the future performance.
  2. Global macro-economic conditions like tariff-war/crude price hike etc., may prolong the periods of patience.
  3. Selection of PMS Strategy should match with the Risk profiling and investment objectives of the individual investor, and non-professional approach to selecting the right and befitting PMS strategy may create inconveniences and discomforts.

Disclaimers

Past performance may or may not be sustained in future. The content in this report is a broad based opinion by the research team of PMS Bazaar. Your suggestions to include / exclude specific topics, critical comments on the views expressed are welcome. This is not a recommendation to buy any product. PMS Bazaar is not responsible for any investment action initiated. Please consult your financial advisor before investing.

For more details, please feel free to contact us at info@pmsbazaar.com.

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