Delta Global Partners Research:

Region: India

Title: Its Good to be Dumb or Average in markets-Jan 2012 Date: 09th January 2012 No of Pages: 2
www.dgp.co.in

The Cutting Edge

In one of the recently concluded forum, I was asked to talk on benefits of Long Term investing in stock markets. From the interactions with retail investors I did gather that most of them have two pre conceived notions on Indian stock markets and returns from the same: One is that only smart and well informed or well researched or knowledgeable investors, with ample time, money and resources can make better returns in stock markets. The Second one is that big money can be made only by timing the markets (buying low and selling high). When I did not agree with both the above notions, I was asked to back the disagreement with data. My team went back to 1991, to analyze the data. We presumed the existence three types of investors. One known as Smart who is well informed and has all the expensive tools and resources (research, access to databases, real time prices etc) at his disposal. With all this he manages to invest INR 1,000 every year at the bottom of the Indian benchmark stock indexSENSEX level, in that year. And we presume that he consistently does this for last 21 years (since 1991). The other investor known as Dumb has no understanding of stock markets nor does he have any expensive resources or tools to perfectly time the market every year. He is a complete failure and he invests INR 1,000 every year at the peak of the SENSEX level in that year. And we presume that he consistently fails too & does this for last 21 years. Any investor cant be dumber than our Mr Dumb. The third one is a passive guy, named Average who invests the same INR 1,000 at the closing SENSEX levels in every calendar year irrespective of its prevailing levels. Since both Smart, Average & Dumb have started investing 21 years ago at the bottom and peak respectively of the SENSEX every year, lets see how they have fared now (as on 30th Dec 2011).

ChartI:DoyouwanttobeSmartorDumborAverageinstockmarkets?
Market Value in INR

Source: BSE, Delta Global Partners Research. Assumption: Investment of INR 1,000 in SENSEX stocks from 1991 at years high (Dumb) , years low (Smart) & years closing ( Average) . Data up to 30th Dec 2011). Dividends & tax excluded from returns.

The returns (CAGR) made by Smart based on market value of his investments as on 30th December 2011 was 13.43%. We have excluded- the income from dividends & its reinvestment, transaction costs & the income tax incidence from these returns. These returns were achieved by him with all the hard work and spending on time as well as resources and tools to be able to
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Delta Global Partners Research:

Region: India

Title: Its Good to be Dumb or Average in markets-Jan 2012 Date: 09th January 2012 No of Pages: 2
www.dgp.co.in

The Cutting Edge

invest at the bottom of the SENSEX levels for last 21 years on a sustained basis. Although too good to be true, we do presume that he did invest at the bottom every year and year after year for 21 years. Lets now see how Dumb has fared. Dumb was not as lucky as Smart nor he had the time or thee the money to pay for the expensive resources & tools nor did he understand the factors driving markets or the economy. So he always invested at peak of the SENSEX levels every year for last 21 years on sustained basis. I tossed this question to many investors How much returns Dumb would have made? The responses varied from -8% to +7.5%. The best response was Dumb must have made half of what Smart has made- thats 7.5%. When I gave the figure, everyone was shocked it was 9.06% CAGR. After the initial murmur transformed into pin drop silence, the first question that came was How come by doing practically nothing and by going horribly wrong every year for last 21 years, Dumb generated a formidable return of 9.06% ?. Everyone was expecting that the returns made by Dumb will be half of what Smart made or even negative. Lets go to Average to see how he has done. He has returned 10.75% CAGR, better than Dumb but lesser than Smart. He too has not put any efforts, time or money behind his investments. He just invested INR 1,000 in SENSEX every year on the last trading day of the year. And with all the hard work, time and money spent by Smart the returns that are made are not in multiples say twice or thrice of what Dumb or Average made. In fact Dumbs or Averages returns by doing nothing at all are not very far from what Smart has made by doing everything right (buying at market lows for 21 years). Moreover Dumb has nothing to lose on his performance, since he is already buying at yearly highs. In fact if he buys lower than the highest in few of the years, he will only add to his performance. On the other side Smarts performance gap with Dumb or Average might narrow if Smart misses buying at yearly lows for a few years. Smart thus carries a performance risk. And for 12 years up to 2002, the returns of Smart, Dumb & Average were very similar to each other. After that Smart took off as stocks rallied sharply.

Since not everyone can be Smart, but at least being Dumb or Average and making reasonable returns from stock markets, seems to be a childs play. And for being Dumb or Average you need not be a great timer of markets or understand the markets deeply, if you are willing to give up those little extra returns that Smart makes. Devendra Nevgi deven@dgp.co.in Tel: + 91 9867 277 977
IMPORTANT DISCLAIMER
The note and the suggestions are for information purposes only and not to solicit any business or give any recommendation. Delta Global Partners do not take any responsibility of the losses that may arise out of actions taken based on the note. The figures and charts are not authenticated by any authority. Please make an independent review before taking any decision. Delta Global Partners does not intend to act as a portfolio manager or investment advisor registered with SEBI or under any other law. The author of the note may or may not have exposure to the strategies suggested, if any.

Delta Global Partners Founder & Principal Partner

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Some investors would be better off being Dumb or Average kind of returns rather than take more risk, spend more time and money and make marginally more returns like Smart. Dumb & Average are smart enough to invest in stock markets in a disciplined manner regularly for longer period of time, even though they dont understand the factors that drive the markets.