Personal Long-Term Investing Isn’t about Establishing a Mutual Fund

If it were the case, why bother?

Just put your money in a mutual fund instead. 

There are many competent fully equity-oriented mutual funds out there. 

Some of the competent ones have very reasonable expense ratios and eye-popping statistics. 

Investing in a mutual fund takes away your work-load completely. 

You put in the money for the longish-term, and then you’re done. Don’t bother for the next 5 years. 

If you’ve chose the dividend payout option, you get an SMS or an email maybe once or twice a year that puts a smile on your face. It’s a payout!

What is a mutual fund?

What’s so mutual about it?

You mutually agree to what the fund manager is doing. 

Thus, make sure that the fund-manager is competent. Study the fund-manager’s track-record. 

A mutual fund typically consists of 50-75 stocks. Some are weighted heavily, some more lightly. 

The return you get is the mathematical average of the 50-75 stocks, adjusted for the weight they carry. 

It would suffice here to say, that the MF delivers some kind of an average return, less all kinds of fees, which typically range around the 2.5% mark per annum. 

Therefore, as far as returns are concerned, after tax deductions, one is probably left with a high single-digit one or a low double-digit one, in the long run, compounded. 

Not too bad.

Remember, this is equity we are talking about. Equity is an asset-class which gives returns that are adjusted for inflation. 

Actually, great. 

Those of you who are satisfied with this need not read any further. Just go ahead and put your surplus funds into MFs.

However, some of us want that extra kick. We are not satisfied with low single digits. We want 15%+, per annum compounded, after tax and adjusted for inflation. 

This is not greed. 

Ambition perhaps. 

Drive. 

Renumeration requirement for the arduous work put in. 

We’ve struggled. 

We’ve gotten hit many, many times. Each time, we’ve stood up, taken the hit, and carried on.

We have learnt. 

All for what?

Now it’s time to cash-in.

We go about setting up our long-term portfolios in the proper fashion. 

Total number of stocks eventually in the portfolio needs to be well clear of the MF mark…otherwise, right, why bother.

MF-type diversification will give an average return. 

We will build a focus portfolio. 

Focused returns are higher in the long run.

What’s the magic number?

Well clear of 50-75 stocks in all is understood. For me, even 40 is too much. I could deal with 30, though. Hmmm, let’s steer clear of the 3 in 30, so 29 is good enough for me as a maximum. The pundits are satisfied with 15-20 stocks, no more. Focus-gurus swear by 10-15 stocks. I’m ok with a maximum of 29, (a limit I’ve not reached yet) because in reality, I just hold 6 sectors, and multiple underlyings within the sectors. Thus, even with a maximum like 29, the 6 sectors alone make it a focused portfolio. 

The bottom-line is focus. 

As long-term investors doing it ourselves, we are going to focus. 

Staggered entry. 

Small entry quantum each time, many, many times. 

How small?

Small enough, such that one can enter about 30 or so times in a year and still have ample savings on the side from one’s earnings. Why 30 or so? That’s a rough 10-year average calculated per annum, estimated by me, during which one gets margin of safety in the 220 days or so that the markets are open in the year.

There we are : focus-investing, margin of safety, staggered entry, many, many entries, small entry quantum each time and generation of ample savings despite equity exposure. 

Is that a formula or is that a formula?

🙂

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What’s it Gonna Take Today, Pal?

Indicators.

Fibonacci.

Moving averages.

Price action.

Isn’t everyone following all this?

Do the markets behave accordingly?

No. Not really. Sometimes, sure. Generally, no. Just my opinion.

So?

Where does that leave you?

How do you plan your trade entry?

There’s not much planning to it really.

Oh yeah?

Pray on what basis is one to enter then?

Study.

Then overall feel.

What?

Yes.

Gumption?

So?

With no study, direction’s a 50:50.

With study leading to overall feel translating into gumption, this ratio could well become 55:45.

You don’t need more.

Blackjack odds for the card-counter are perhaps 53:47 at peak.

Ok, so you’ve got your 55:45, what then?

Trade management.

You make your money managing your trade.

Formula?

Simple one.

You cut the wrong call. Nip it in the bud.

Let the right call continue being even more right.

Learn, perhaps the hard way, to let the winner continue winning.

Trade might reverse.

That’s the risk you have to take, to win more.

There are no free lunches in life.