## Saturday, August 22, 2009

### Scott Adams illustration for a column of mine, with a lag of 11.3 years

Ganesh Varadarajan pointed out that on 22 August 2009, Scott Adams made a perfect cartoon for my Business Standard column titled Two great investment strategies of 22 April 1998. For a gloomy perspective on the difficulties of the fund industry in countries like India, see Section 10.11 of this book.

1. Your second strategy sounds exceedingly optimistic. You are assuming something like 20% nominal average returns over a 35 year period?

That's how it turned out for the last decade (since 1998). If you had to rewrite the article today would you use similar return assumptions for the decades ahead?

I suppose another way to ask the question would be whether any country previously has returned that much over that long a duration during its high growth developing phase?

Yet another question would be what component of the 15-20% is due to inflation (maybe proxied via the average return on a broad commodity index in rupees? mcx only goes back to 2005).

2. As an Indian Investor, How does one go about buying into say, the Nifty-50.

3. Rishi,

Buy a Nifty index fund. There are many. The information here an help that choice, though it's somewhat dated.

4. Anonymous,

How does the world look today? A bit different but still extremely optimistic for equity investment! :-)

In this book there is a more detailed look at the risk and return of equity investment in India; this includes an examination of the equity premium and the uncertainty about the Sharpe's ratio. My view today is that looking forward, Indian equity index investments will generate perhaps 13% to 15% nominal returns over the next 25 years. Yes, this is a much lower number than that seen in the 1998 article. (One big thing that changed was that India got more serious about inflation). But it still remains that the equity index fund is a great investment strategy in India.

5. I'll prefer an environment of cautious optimism to extreme optimism any day!

Its amazing to me that your projections were as high as 20% and moreover it turned out to be accurate (albeit after a 5 year period of no returns!).

Not to be a party pooper but the best 35 year period for the US since 1929 had a return of 20x (which is annual 9% nominal return). The Nikkei over the past 25 years has returned nothing (it includes a 5 year period of 4x returns) and it wasn't so long ago when Japan's economy was going to take over the US. History seems to suggest that the 2003-2008 period is almost a generational boom period?

Lastly, about inflation: the CRB tripled from '03 to the peak in '08 while Indian equities returned 6-7x at their peak. If you factor in real estate increases that could amount for the remaining 2x return in Indian equities. This is ofcourse a simplified, uneducated view of inflation. Meanwhile, most economists would say that the annual cpi/wpi was at best in the 8% range. How would you explain this conflict to a layman? How come no one utters the word hyperinflation when talking about the 2003-2008 period (if someone does on TV I haven't heard it)? After all, Gold quadrupled during this period?

I fail to see the point of a high inflation boom - there is much ado about nothing in that scenario. I hope to see a low inflation boom period in India - lower nominal returns but potentially higher real returns than the last decade/last 5 years.

I would buy the book if there is a chapter on inflation in India (in the last decade) in it? :)

6. Dear Anonymous,

You should get the book, for it has a fair bit of useful material on inflation. The best source on inflation is inflation tag on this blog.

The best argument that can be made about the robustness of Indian equity returns in the last decade is that there was really no P/E expansion. In Jul 1999, the CMIE Cospi index was at 335.41 and in July 2009 it was at 2232.66 : an expansion of 20.9% per annum. (Yes, that makes my old BS article rather good). But the P/E in Jul 1999 was 20.67 while the P/E in Jul 2009 was 20.6. In other words, the entire magnificent 20.9% growth was in earnings.

7. Its a very good introduction to one of the prime biases, "survivorship bias" for people genuinely interested in doing due diligence for fund managers.

A vast majority[a very polite term]read magazines like your equivalent of "Fund X is the best in its category". Its easy to get duped and in India where media is in a tacit understanding with fund houses, its very hard to imagine life of ordinary investors.

I would say, yes index fund are a good choice, but 20% is too optimistic. Even if you bring it a notch down, its still is good! And run it with a bit of market timing, a bit not much, just a bit, you can easily get 20%.

Soham

P.S: Do you really think timing the markets is not possible? Just curious!

8. Soham,

Do look at the rest of these comments for an interesting discussion about whether 20% was or is too high.

I think market timing is incredibly hard. My advice to almost everyone (including myself) is : "don't try it". Maybe Larry Summers or John Taylor can do it, but the rest of us can't.

9. Yes,I did happen to read Anonymous-II's comment,and I happened to nod entirely on what he said. Thats one reason, why I think traditional buy and hold is and should be dead.

ETFs or Index Funds are different things in my opinion, though, I will always try to time them,so that it takes a multi-year bull run and not a bear run.

Soham

10. Anon1 = Anon2 = this Anon.

Larry Summers has market timing cred?! The only trading/investing related info I have on him is that he was blamed for causing $1B+ losses on interest rate swaps for the Harvard endowment. Given that most stock markets have been upward trending beasts, its not surprising that market timing has been quite fruitless for the most part over the long term. But, I'm of the opinion that there are occasional regimes when market timing is easier to do and it needn't be exclusive of an investing, buy and hold type of strategy. I'm going through the inflation tagged posts and there really is a treasure trove out there. Thanks! Hopefully, I'll get educated on the disconnect between measured inflation and asset price indices which is bothering me. I suspect that it will lead me to an unclear RBI policy (notwithstanding shocks of 2008) vis-a-vis asset prices and exchange rates. 11. Anon1=Anon2=This Anon, (quite a mouthful anonymous name,I must say) Its a different thing that Western Nations had been undergoing a terrific bull run for the past 200 years driven by the engines of science and technology. So its buy and hold and go to coffin worked. But, as you said earlier, there are many good examples of regime shifts, Japan is an example, US in 70's was one. So, I am not advising people to turn day traders, but scaling away when the street is euphoric can save a lot of heartburn and stomach lining. Soham 12. So where is the cartoon? Or am I missing the whole point :) 13. Chandra, I modified the HTML of my old 1998 web page to include the new Dilbert cartoon :-) 14. Thanks for the info. 15. This comment has been removed by the author. 16. Passive index investing is a great way to invest for most people (i don't include myself in that group though). Anyone interested in taking that route should read a book called value averaging by michael edleson. it is insightful and provides smart improvisations, backed by detailed research and study of long time series of data. 17. This comment has been removed by a blog administrator. Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question. LaTeX mathematics works. This means that if you want to say$10 you have to say \\$10.