top 10

investing pitfalls

disclaimer: this document is for information purposes only and should not be construed as investment, tax or insurance advice .

past performance is not indicative of future returns. any unattributed data is sourced from publicly available sources

gaurav rastogifounder & CEO kuvera.in

prop trader Morgan Stanley, NYC & HK

advisor, chicago global wealth, Singapore

Chicago Booth MBA, IIT-D computer science

cycling, painting and Bollywood

tell someone which investment products are

bad, and a smart salesman will build and sell

them a product not on that list.

teach someone on how to think about

investing and they can identify bad products

themselves.

if you invest only 20% of your wealth and keep 80% in cash, then your return on

investment will need to be 30% p.a. to get a return on wealth of 6% p.a. (inflation)

avoid cash drag

20%

90%

80%cash

stock, MF, FD etc

time spent hunting for returns

1

target: Rs 1 Cr at age 60 using a Rs 5,000 pm SIP

don’t wait to invest

6.2%7.5%

9.7%

13.0%

18.3%

28.3%

20 25 30 35 40 45starting age

required rate of return

1

adding 5% more every year to your SIPs will lead to a 60% larger portfolio in 30 years

assuming 10% p.a. returns

add periodically

10 20 30

1

asset allocation driven rebalancing will help you buy and sell at the right time and keep

your risk allocation in line with expectations. follow it with discipline.

don’t change your asset allocation 2

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asset allocation driven rebalancing advice

to sell some debt and buy some equity

asset allocation driven rebalancing advice

to sell some equity and buy some debt

don’t dip into emergency funds in bull markets2

bull market questions an emergency fund but a bear market will thank you. remember,

jobs are cut in bear markets. never dip into your emergency fund in good times.

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nifty 50 I don’t need emergency funds!

to the moon 🚀🚀🚀

thank god I have an emergency fund

should I spend 10 hours a week to ....3

learn new skills learn stock trading

companies will pay

disproportionately higher for a 10x

performer.

for the same job, salary bands can

go as high as 3 – 5x of median

higher earnings -> higher savings -> higher investment -> more wealth 3

less than 1% of active traders earn more

money than a bank fixed deposit over a

3-year period

: Nitin Kamath (founder zerodha)

your wealth returns are highest for being the best at your job

be prepared to be down 20% - 30% from peak every 3 – 5 years

returns are not linear, so don’t stop investing when you are down4

-60%

-40%

-20%

0%

Oct-07 Oct-10 Oct-13 Oct-16 Oct-19

nifty fall from peak

2,000

7,000

12,000

17,000

Oct-07 Oct-10 Oct-13 Oct-16 Oct-19

nifty 50

research shows investors lose 1.5 – 2% p.a. in returns because of bad investment timing

decisions

this is also known as the behavior gap – buy after good returns, sell after bad

don’t chase returns either as timing is hard4

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nifty 50are you buying because

hey.. up, up and away

did you sell because you were going to buy it back lower

behavior gap is highest for thematic and sector portfolios. unless you can hold them for

10 years or more don’t even bother.

timing sector and themes is harder still4

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nifty IT nifty bank nifty pharma

as a retail investor you are likely to be last in line to receive “data”, “news” or “hot tip”

when you are buying who is selling?

information that is known to all won’t make you a better stock selector5your likely information funnel

news: media, hot tips, reddit

google finance etc

data: tickr.com, screener.in,

broker api etc

fund manager information funnel

news: company sources,

vendors & users etc

data: proprietary sources, real

time sales, growth etc

sportsperson

programmer

lawyer

fund manager

do you think training 10 hour a week will make you better than a professional …

5

when you are overconfident, you misjudge your value, opinion, beliefs or abilities and

you have more confidence than you should given the objective parameters of the

situation. like in a study 83% of US drivers thought they are better than average.

your only option is to “analyze” the data better ☺

in investing what is not paid as cost, is earned as return. but there are limits, if your

expense ratio is below category average you are doing well.

there is no secret sauce except costs in predicting fund performance6predicts future mf performance

expense ratio

does not predict future mf performance

returns – 1Y, 3Y, 5Y, 10Y, rolling

risk – std dev, sharpe, var, beta

fund house, manager

everything else!

costs are even more important in stock trading 6perception

discount broking is “free”

minimal transaction cost

(Rs 20 etc)

reality

bid-offer of 0.25% - 1%

impact cost of 0.25% - 1%

STCG & LTCG for rebalancing

others costs such as stt, stamp duty,

DP charge, SEBI turnover, exchange

transaction, and penalties

echo-chamber can build through social media choices w/o one realizing it.

echo-chamber driven “…misinformation leads 50-70% of users to underperform the

market average.” –Microsoft research

are you stuck in your echo chamber? 7

🚀

🚀

🚀

find experts who disagree with you and find out why!

where are the naysayers? 7

confirmation bias is the tendency to search for, interpret,

favor, and recall information that confirms or supports

one's prior beliefs or values.

“anecdotes” are not data

probability that your returns will be

like Buffet

1 in 1,000,000,000… add a few

more zeroes. miniscule!

probability that some one will have

Buffet like high returns

almost 100%. every look back

period will have a winner in

terms of high returns

8

Buffet exists to re-enforce that probabilities work in the way they should, not to suggest that anyone can generate Buffet like returns.

ps: in the past 20 years even Buffet hasn’t beaten the index!

are you looking for the “missing” piece of information? 9

high

hedge fund: 2% + 20%

AIF / PMS / MF: % of asset as

fees

why is someone giving you their money-making secret sauce for Rs 10k / year?

there are many hedge fund managers in Forbes 400, not a single thematic basket seller

where do investment managers make more money?

low

thematic baskets

options seminar

managed accounts

selling strategy signals

youtube videos etc

are you looking for the “missing” piece of information? 9

p&l

gamification

daily check

addictive hit to brain

spin stories around winners

but are you beating FD returns?

now you know why trading apps don’t show portfolio level returns!

“.. in the typical six-month period, more than eight out of ten day traders lose money.” –Taiwan Stock Market

what matters more p&l or your portfolio level returns?

portfolio returns

better decision making

long term planning (goals etc)

no need to check daily

don’t mix investing and insurance10this one is done to death, and you know it already

so don’t do it even if a friend or a family member asks you to!

now, let’s apply these

dude, this fund is rated ⭐⭐⭐⭐⭐ by three agencies, it is a no brainer

should you invest?

q

look for the “missing” piece of information

setup a fund and generate

revenues as performance and

expense fees!

why do Mutual Fund star rating companies give their ratings for free?

do fund rating predict future fund performance?

if I had a rating system that predicted future mutual fund returns, I would…

give it away for free

a

you got a Rs 5 lac bonus, should you STP or invest lumpsum in one go?

STP: invest in liquid or debt funds and move to equity over 6 or 12 equal installments

q

3 out of 5 odds that investing lumpsum will lead to higher future wealth.

these are good odds, use them every time.

don’t wait to invest & timing the market is harda

this momentum “thematic” basket blows the index out of the water.. 20% p.a returnsq

backtest actual

costs, “missing” information and human capital…. phew!a“actual returns” don’t include costs

let’s factor the big costs

20 %

-3 x 0.5% (3x turnover, 0.5% bid offer)

-3 x 0.5% (impact cost)

- 15% x 20% (all gains are short term)

= 14%

assuming the strategy delivers on the

promise. most do not. 🤦

missing info 1: why sell such a golden

goose of a strategy for a pittance?

missing info 2: do you know your

realized basket return?

are you one of the first to find out about

this awesome theme?

finally, is tracking and rebalancing still a

good use of your time?

when would you consolidate your portfolio into fewer funds?

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q

down markets are ideal to consolidate into fewer stocks or funds with lower capital

gains incidence. however, investors wait for holdings to be in the money to consolidate.

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nifty 50Lot of investors looking to

consolidate. will incur high capital gain taxes on

sell orders.

few investors looking to consolidate. low / no capital gain taxes onsell orders.

a

in conclusion

on average active funds underperform index funds

stock trading is way harder than everyone makes it to be, and not worth the time

on average “thematic” baskets underperform active funds post costs and taxes

many try to time the markets, none succeed in the long run

the larger the return promised, the bigger the disappointment

get rich by being the best at your job, stay rich by indexing

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