Friday, September 18, 2020

This week's interesting finds

Charts of the week

Leverage equity buying (net calls) at an all-time high

Household savings by year

In 60 years, the Momentum trade has never gotten this carried away (including the top of the market in 2000)

A nice dissection of the components of inflation

Cash generation is strong

The Big Growers’ share of market cap: we’re above 2000 top and are now in line with the Nifty Fifty

Bits and pieces:

• The Shiller cyclically adjusted PE ratio is the highest on record with the two worrying exceptions of 1999 and 1929. (Source: Morningstar)

• Small traders are dominating the options market and 75% of the volume is in contracts that expire in two weeks. (Source: Bianco Research)

• The urge to trade seems to be universal:  A legion of day traders is taking over Korea’s stock market accounting for 88% of the total value of Korean equity trading in the first 8 days of September (Source: Bloomberg)

• Millions of Indians have piled into the country’s stock market helping sustain a strong rebound from the depths of march. Average age of new customers in Zerodha – India’s discount brokerage house: 28. With the impetuosity of youth, the novices are choosing to bypass underperforming mutual funds and do their own stock picking, penny issues preferably. (Source: Financial Times)

With the sway of stay-at-home traders growing and starting to eclipse other influences on equities, figuring out who is doing what among amateur stock dabblers has become a critical mission for big investors. They’re canvassing Reddit threads and picks at retail brokerages, plugging data into programs and trying to gain an edge.

Over the last twenty years, the average equity mutual fund posted a yearly return of 8%. Over the last twenty years, the average investor in an equity mutual fund posted a yearly return of 4%.

The reason is that majority of investors play the short-term game – trading in and out, in and out of equities – an asset class that has been known to build wealth over long periods of time.

The tendency – of short-termism – has become more common over the years. Investors, who are have become so used to chasing short term performance, are acting a lot more with the vastly available information on how funds perform not just year on year, but even on a quarterly and monthly basis.

This doesn’t mean that you must stick with your losing funds forever, as people do with their losing stocks to get their money back. But instead of switching in and out of funds, you must give time to the ones that have been managed well in the past but may just be going through a temporary period of underperformance vis-à-vis the new leaders. This also applies to your losing stocks. Stick with businesses that have been managed well in the past, and even now, even when their stocks are going through a temporary phase of a downturn owing to the overall market weakness.

“Investing is simple, but not easy,” says Charlie Munger. Knowing that following the herd or chasing market leaders is a way to hell is the ‘simple’ part. Avoiding it is the ‘not easy’ part.

Trying to time the market or finding winning stocks or fund managers and then siding with them till you find the next batch of winning stocks or fund managers is a waste of time that often backfires.

To do well over the long run, your best bet is to keep things simple. Stick with stocks, funds, and managers who are intrinsically good, even when they are going through temporary bad phases, do not deviate from your investment process, minimize your costs, and keep a long-term perspective.