Prelude to Investing: Fear, Expectations & Geniuses

What does your unit trust agent or fund manager have in common with Sir Isaac Newton?
Both have lost money thinking they are too smart for their own good despite one being a true genius.

Majawit & Co

There are thousands of investment schemes out there, whether you are looking to earn a sensible 6% – 8% a year or magically turn your $10,000 into a million in just a few years – We got you covered

First question you should ask yourself should not be “What return returns do I want” but rather, “how OK am I mentally, emotionally and financially to lose 100% of my investment”. This is a possible moot point, but let’s not kid ourselves here. When it comes to these things, only the super-rich can do as they please and make even more money for themselves. 

For the rest of us, we have varying degrees of choice illusion. I believe that you can come close to your “true options” only after you first determine how much are you willing (and ready) to lose. 

Having said all that…for mainstream investing, what is “sensible” returns that one can expect for a period of 3 years and beyond? 

I am going to go on a limb here and say the it should be 6% – 8% annually for 3 years and more.

Before, you get all hyped up on that statement, please consider the fact that not many investors gets close to a double digit return in 3 years or more from stock and unit trust.

Let’s have a closer look…

I visited this page [funds supermart] on December 1st, 2020, and scour through the annualized performance of all 410 funds they had on that link.

Here are the number of funds making more than 10% a year
  • 20 out of 410 for 3 years  
  • 27 out of 410 for 5 years   
in fact, You actually have slightly better odds of losing money compared to making a double-digit return in the same period!
  • 57 out of 410 for 3 years. That means, for every chance of making 10% or more [20 / 410], you are actually 2.85 times [57 / 20] more likely to make negative returns.
  • 27 out of 410 for 5 years

Does this mean that funds-supermart is bad? Not at all. I picked them because they are famous. While they might have funds of their own on this platform, most of the funds are external funds, which means that all similar platforms in Malaysia will have about the same probabilities. 

Does this mean that unit trust is bad? Also…Not at all! But most tend to over-promise

Most of the financial “gurus”, fund managers, analysts, and to lesser extent, your unit trust agents thinks they are smarter than you and me, why? It’s got a lot to do with short term bias. Let’s look at shorter-term performances from the same source

For annualised performance of 10% and more
  • Year-To-Date: 177 out of 410 compared to 20 out of 410 in 3 years or more
  • One-Year: 192 out of 410 compared to 27 out of 410 in 5 years or more

This creates a ton of short term bias and opportunistic sales. The seller brings the glossy sales materials for all the top performers from the last 6 to 18 months leading you (and most) to believe that it will continue for a very long time. 

Let's check out the stock market in general

If you had $100 tracking the KLCI since Dec 2000, you would have more or less $220 in Dec 2020, which is an annualized return of about 4% (see chart below). Our country’s annual GDP growth is also around 4% annually. Is it structural or pure coincidence? You won’t be wrong with either answers.    

Before the “experts” start jumping on my back for my lazy scholarship and lack of empirical evidence to correlate a country’s stock market index with its GDP growth, let me concede early by admitting that is not always correlated. The chart below is the same chart layered with the performance of the S&P500 in red. 

The US has a GDP growth of about half compared to Malaysia and yet, your same $100 would now be worth around $500 instead of $220. So YES, it’s not necessarily correlated but the same question still begs – what makes you feel so certain about getting a double-digit growth over a sustained period of time n Malaysia without significant risk attached to them?

Let us take a few seconds to ponder this…The whole thing is a zero-sum game (kind of but thats for another post). That means, for You to win, someone else needs to lose and no one is both smart enough or lucky enough to continuously win, let alone win big.

Sir Isaac Newton made a 100% profit on a share called South Seas pocketing a handsome £7,000 in the process. Feeling emboldened, and maybe convinced by his own genius (who can blame him:-)) he jumped right back into the market just months later purchasing the same shares because irrational exuberance from the public is causing demands and share price of South Seas to skyrocket. 

That move eventually cost him £20,000 in 1720’s money which is equivalent to £5,000,000 today when the company’s share prices crashed. That episode lead to the quote below from one of history’s greatest minds. 

"I could calculate the motions heavenly bodies, but not the madness of the human mind"

Sir Isaac Newton

If you think you can (calculate the madness of the human mind) then, for the love of everything holy, I urge you to reconsider.

Conclusion...

Now to be fair, Newton wasn’t a trained stock picker even if the mechanics and requirements for their analysis was formed on the basis of mathematics. He was a Physicist who dabbles in stocks and many other things that he was less successful with including alchemy. 

The point is, he didn’t dedicate his time and talent solely on financial services and all its avenues outside of the popular choices.It is still highly probable that you can achieve 8% or more in the long run from your unit trust and stock market investments provided that you hire an experienced, humble, and diligent fund manager to manage a portfolio that suits your risk appetite, return and timeline expectations.

however…

What if I told you that you can comfortably achieve a double-digit yearly growth without those expensive fund managers? In Malaysia Investing in a Debt Crowdfunding platform is open to both individuals and corporate entities. It’s worth a look from any CFOs or finance managers out there as one way to earn higher return than your money market funds or FD without sacrificing much safety and liquidity.

Would that make me smarter than Newton? Sadly, the answer is still “No” but do find out more about how to earn a high return in a relatively low risk settings over long periods of time this link.

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