Investment Return Vs Investor Return – Why Investors Earn Below Average Returns?

The average retail investor isn’t able to create wealth in the market despite markets doing so well. Why there is so much gap between investment return and investor return?

Why aren’t so many Indian retail investors able to beat the returns from the indices like Nifty or the Sensex despite the fact so many stocks have become multi-baggers in the past?

What’s the reason retail investors don’t make the same amount of money as the investments in some of those stocks would have?

There are many reasons that contribute to this and I will share them with you one by one.

The aim of this article is not to read why investors don’t make the kind of return but to analyze why you have not been able to make the same kind of returns and see how those factors have influenced your financial health. More importantly, it is the time when you make sure these factors don’t have any impact on your investment decisions.

So let us begin:

1. No Long-term Investment Plans

One of the main reason for such skewness between the investment return and the investor’s returns is, investors, don’t have an investment plan for a decade even when they say they have it.

I interact with investors and often they ask me about stock ideas for the next 10 or 20 years.

When I hear about such long-term plans, I share a viewpoint about stocks that are out of favor in the current market trend and their immediate reply is, isn’t the environment bad for these stock?

So do you think they actually meant 10 or 20 years?

I don’t think so.

But as the conversation is still on…

I ask them aren’t we investing for the next decade and so do you think the environment will remain so bad as it is now for the next decade?

So now there is a pin drop silence or at the most hmmm (quite a long one).

And that hmmm is often followed by looking at me as some kind of fool who is considering investing in these stocks.

This is one of those stories that one can read and think the other guy is a fool but open up your portfolio and ask for yourself.

What percentage of your portfolio is invested for the next decade? Is future that hard to predict?

• Don’t you see all-electric vehicles by 2028?
• Don’t you see electronics wearables by 2028?
• Don’t you see more innovations in pharma and healthcare with an evergrowing population of the world?
• Don’t you see more consumption of food as the need of an evergrowing population of the world?
• Don’t you see more people will need more clothes to wear?
• Don’t you see more people will need more houses to live in?

And the list can go on and on …

Now the big question is: What percentage of your portfolio is invested in the businesses that can be market leaders by 2028?

2. Lack of Patience and Knowledge

Everyone can’t be an investor in every kind of businesses because one can’t understand every type of businesses. So every investment opportunity in the market may not be for every investor.

Similarly, for a trader, you can’t trade every price action chart pattern. One has to trade with patterns that work best for his style of trading. For me, the ones that work best are W or double bottom pattern, higher top higher bottom pattern and a breakout chart pattern.

So as an investor or as a trader, one needs to have the patience to be able to find the right opportunity to trade or invest.

An investor needs to be even more patience. One may not only need to sit tight on investments but also when one has the cash.

Then a blogger will share this famous quote from Peter Lynch.

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves. – Peter Lynch

There will always be a quote on every scenario for sure but you have to deal each based on what makes you comfortable in the market.

• If you remain fully invested in the market and if the market corrects 20 to 30% if you don’t find it nerve recking it is good to follow Peter Lynch.
• If you can wait with the cash and have the courage to buy in the falling market when there is a carnage in the market, you can invest using quotes from Warren Buffet. It is easier said than done and close to impossible to execute. The temptation to buy even lower than current price will always resist you from buying and one misses the complete correction.

What if neither of the above works for you?

The one that works best for me is – Wait for the correction but let the correction also settle and then buy in the leg up.

You may have to even wait with the cash and then also wait out the correction. When things start to settle, don’t wait any further. Don’t consider what you could have done investing at a lower price but focus on what you can do now. Once you have done what you need to be doing, don’t wait again for even cheaper prices. Chances are you will miss again.

See what works for your kind of investment style and invest accordingly.

Self Education is the most important aspect of investing wisely. What is taught about trading or investing in any course (online or offline) is more theoretical than practical and in the market one not only needs practical knowledge but also what works with his style and mindset about investing?

3. Too Many Stock Updates

What can happen overnight to impact your investment for the next decade?

Ideally nothing.

Still, investors tune up the TV in the morning for market updates.

As an example, lead prices will trade overnight and it may be either up or down. The company that uses lead as a raw material may be impacted but should it matter to you as an investor for the next decade? The increase in lead price should be a worry for the management of the company. You know for sure the management has the ability to deal with it and so you have invested in it.

Or the much talked about news these days is the trade war between the US and China.

I thought this is a golden opportunity for Indian export-related companies and I am yet to see anyone mention it on TV. If the US bans Chinese products, it is awesome for Indian companies because the US people won’t stop using those products but the gap created by no-Chinese products in the US will be filled by other countries including India.

I may be wrong but this is what my view is.

Even if there is a third world war and if you manage to survive, the investments will still be fine.

At the most one should look at is the quarterly results of the companies and what impact it has on the news flows. Rest is better avoided.

I know again this is easier said than done.

I am also a culprit to watch CNBCTV18 every morning around 9 AM. On the lighter side, one can say I watch it for the news anchor more than the actual news.

Thirty years ago, there weren’t so many news channels in India. As of today, we have more business and stock market news channel. So many news channels broadcasting news 24×7 need a lot of content. The volume of news hasn’t gone up to the extent the number of news channels has. So often these news channels increase the volume by adding news that isn’t relevant.

The point I want to make is, everything being reported as breaking news isn’t really that relevant news.

I use a rule of thumb for news channel – Trust no one on any news channels because they are being paid to tell what they are telling and they aren’t trading as they could not make more money trading than being on TV or else they would have traded.

Investors will be seldom on TV and so they make more money investing than being on TV. Once in a while, they will be there.

Even if you check out other people’s view of the stock on TV, your view about being an investor in the company should match that of the analyst. If it doesn’t it is all froth and can be discarded.

I have taken decisions based on the news I found on TV and this is when I had no plans to make any changes to my portfolio. It is very tough to keep holding a stock where you have a news headline flashing on the screen and you are making a profit.

Read: Why Holding Profits is Tougher In Stock Market Than Keep Holding The Losses?

The conclusion is, most of the market news is not only useless but also harmful. Take the news as a source of information but don’t use it to decide your investments. Use quarterly results for investment decisions.

4. Trying to Predict the Market

No one has ever been able to predict the market correctly. WhatsApp messages for predicting the exact day of a crash in Indian market always keep coming. So read the point no 30 from an article on fool.com:

30. The phrase “double-dip recession” was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of “financial collapse” in 2006 and 2007. It did come. A similar story can be told virtually every year.

Investors who missed the 2008 crash were hoping for a second dip to participate in the market in 2011 and 2012 and the market never gave them the opportunity again.

Similarly, no one could predict the financial collapse in 2006 – 2007.

The data is much more important because it is reported by Google which means they crawl every major news channel where every type of analyst share their views and yet no one did mention a financial collapse.

Markets don’t give a dip when everyone is waiting for it. The market always will surprise both on the upside and on the downside.

If you expect to be able to predict those, you can’t.

Make sure you have your risks are covered which is the only thing that matter when investing in the market.

Professional traders have better information and faster computers than you can’t even afford. Don’t try to beat them doing arbitrage trading or anything like that for that matter. You don’t have the needed information nor the expertise to predict them.

5. Looking for the Next …

Every decade has a market leader in every market one can think off.

In the US, General Motors was on top for the past decade. Now Apple is at the top of the world.

In the Indian market, PSU’s were at the top of the world in a pre-2008 crash. Or Reliance Industries was lingering around the same price for almost a decade prior to 2017.

One has to identify where will be the next market leader and invest in those companies. The difficult part is to hold them in the midst of so much news floating around it.

This is true but the wealth is always made investing in boring companies that don’t hit the news floor often. So you don’t have butterflies in your stomach when holding those companies in your portfolio.

I got questions about Force Motors recently in the DIY members’ community. I have seen quarterly results and monthly sales numbers and there is no reason for the stock to correct to the level it has been but neither it needed to be where it was when it hit an all-time high. The only concern I have with the stock is very low operating profit margin but otherwise, the stock passes my investment checklist, fundamental analysis and business checklist. The stock won’t hit the news floor often.

The main reason for the investors not able to make better returns is because they are always looking for a better opportunity than the one they already know or has invested in.

Aren’t you looking for the next MRF or next Eicher Motors or next Page Industries or next HDFC Bank?

But the reality is, in the process, you have not even managed to beat the returns by investing in those companies.

Each of the stock I mentioned above are well known to everybody and has been the multi-baggers for quite some time now.

So now spend some time on your portfolio do this exercise for yourself.

Pick any one of the stock out of those known multi-baggers. Let’s take Page Industries for my calculations but feel free to pick anyone.

I get the question can Ashapura Intimates or Lovable Lingerie be the next Page Industries? Now consider you invested in Page Industries a couple of years back.

Will you have made more returns investing in it or in the stock you invested because it could be the next Page Industries?

The value investor may argue at high PE multiple the stock may be overvalued. It may not be the right approach for value investing but what I am suggesting is the practical approach that is bound to work for retail investors.

You don’t have the time or the resources to be able to find the next Page Industries like Mr. Raamdeo Agrawal or like Porinju Veliyath. Even if someone finds such good stocks, he or she doesn’t have the knowledge to keep holding the stock despite the bad news flow.

The end result is, you are neither investing in the past good stocks nor holding the one you invested in because the hunt for the next Page Industries is still on.

It is good to invest in the next multi-bagger but what if the past multi-bagger has still a long way to grow over time?

The TV expert will talk about valuations aren’t comforting for such stocks. They can say that because they can beat the performance of such multi-bagger stock but the question is, will you be able to do the same?

So why not just stop finding the next multi-baggers and invest in the current multi-bagger?

Let us say you still want to pursue the next …

Allocate 10 or 20% of your overall portfolio to the potential multi-bagger.

If you invest 80 to 90% of your portfolio in past multi-baggers and then try to find new multi-baggers with 10 to 20% of your portfolio, it reduces the risk in your portfolio by a considerable margin. If your next multi-bagger performs as expected, it will add to your returns but if it doesn’t you are still better off than most of the investors who are still looking of the next…

6. Want to be Overnight Billionaires

Do you want to invest in a stock that can grow at 26% CAGR for the next decade to become 10 baggers?

Most of the investor answer will be yes.

The important aspect is to remain invested in the same stock even after the first year and you have made 25% returns from it. Often investors move to something much better opportunity and in the process lose out.

The main reason for an investor looking to beat the market and make the most of it is because they don’t want to give the time and are always looking for better than the current opportunity.

It is one of the biggest mistakes the investor makes.

Be in the market for wealth building and not trying to find the next best opportunity than what you already have.

There are tens of thousands of professional money managers and only a few have been successful and what could be the reasons for it. So don’t invest in the market to be an overnight billionaire.

Put others to work. Let others find the multibaggers for you. Once they have confirmed a multibagger take it from them and let your profit ride being in the market for the long.

I don’t prefer value investing but I like growth investing.

The company that may have been already identified by others but if it has the growth potential for an elongated period of time, I am fine buying it at a premium because I don’t want the stock to become 10x in short period of time. I am fine if it becomes 10x over a long period of time.

7. The Low Cost of Trading

The decline in the cost of trading is one of the worst things to happen to investors. It made trading possible.

Consider the scenario of an investment in a real estate, the hidden costs are as high as 10% to 15% of the total property value out of which 7% is just the property registration cost in your name.

Such high cost makes sure you aren’t trading in the real estate market.

Now consider the cost of trading in the market and it is not even lower than 0.1% with low-cost brokers like ZeroDha.

Over to you

As an Indian retail investor, I have made all the above mistakes and there is no harm in making those mistakes. The important thing is to realize them and stop repeating them.

Do you agree with my view of why Indian retail investors aren’t able to get the returns? Express your thoughts in comments below.