things burry cannot explain too well

Recently, Michael Burry made a comment which the investors seem have taken too seriously. The story is short, but has made the news big.

Burry rose to fame after he made loads of money predicting the crash of the housing bubble in 2008. He was made more famous by Michael Lewis through his book, the big short. So yeah, he is a great guy. 

But that does not mean whatever he says has to be sacrosanct. He makes mistakes too. In the story, he saying that index investing is proving to be bad. In fact, so bad that he is likening it to the subprime CDOs. 

I am not sure whether I have to feel sorry for him, or for those who believe him. There is one thing I have found short in the investors' mind: that they don't have their own conviction. That's a behavioral debt which often becomes too expensive. 

Well, Burry is saying that index investing is bad, because it does not support market price discovery. Because when too much cash chases the index, prices of all stocks - good, bad, and ugly - will shoot up. Because investors buy without any regard for the price and value of stocks. Because the index comprises of far too many small, bad businesses whose stocks do not have liquidity, and yet are priced high. And he says the crash will be ugly. 

Then he goes on to compare index investing with the synthetic asset-backed CDOs. Here I am not sure whether he is actually comparing the bubble to the bubble, or the index investing itself to the CDOs. If he did the latter, his blunder is more prominent, for the CDOs are based on disproportionate leverage, and the index stocks are not that much. So that aspect is never comparable. But let's give the benefit of doubt to Burry, and believe that he just said about the bubble, like any other bubble. 

Now coming back to his concerns regarding the bubble in the index investing, we all know that the economy and markets are like a cycle. They go up and down all the time. There are times when the prices shoot up so much that they have to eventually fall, and yet other times, the other way is true. When taken to extreme, the bubbles have to eventually lead to price fall, and the busts, price rise. And they always do. 

Also, the free market mechanism comes into play all the time. Let's suppose that the bubble crashes badly. When the prices of the index stocks go up disproportionately compared to their fundamentals, the crash is bound to happen. Remember the dot-com bust. After the crash, the good stocks represented by high quality businesses become cheap compared to their intrinsic value, and the bad stocks represented by poor quality businesses may remain somewhat expensive. The investors will shun the index and buy good quality stocks, and may even short poor quality stocks. The index will then eventually move towards becoming fairly priced, making the case for index investing. 

Let's assume that the index investors, after the crash, sell their index stocks and buy good stocks which became cheaper. After the continual demand, prices of good stocks will go higher, and value of the index will correct. Now we have the case for index investing again. Because of this free market mechanism, even those index investors, who do not sell after the index bubble and crash, will also benefit by staying put on the index investing.

In fact, that is the essence of index investing: to keep going during both good times and bad times, pushing the average price of index units lower, and getting a reasonable market return. I can even say that a good index investor can achieve a return slightly higher than the market by increasing buys during bad times. But that's another story.

The hedgers, speculators, and short-sellers are always alert in a free market, and they take advantage of all arbitrage opportunities ensuring that the price and value of stocks and, therefore, the index are never too far off, for too long.

I am surprised Burry missed this point big time. We should be asking him where else to put money if not the index. The treasuries and high quality corporate bonds yield much lower. Junk bonds are not an option for the real investors. We have two choices then: Pick the stocks, or go to the index. 

Picking stocks is not for everybody. It requires time, interest, skill, and behavior. Index investing is for everyone who cannot be a stock picker, for the investor is assured of the market returns. 

For someone who has at least a decade of investing ahead, index makes the perfect choice. Once the horizon becomes shorter, asset allocation will have to come into play. A right mix of the treasuries, high quality bonds, and the index should take care of the investor's cash requirements for the rest of life.

The fun part is that we are not even close to all-passive investing. There is huge money actively and continually chasing stocks all the time, and I believe that as much as we know of the human behavior, we have a very long way to go against it. The fear, greed, and envy will ensure that active investing will stay for a long time, and index investing will continue to give market returns for those who find it satisfactory.

It is far better to use common sense and wisdom than borrowed conviction. Life and investing then will be rewarding.

index investing 2

Whenever I am asked for advice on investing, I recommend the broader index. I never suggest individual stocks to anyone. For the most, picking stocks is more of arrogance than of skill. Everyone is up to beating the index. Although many mutual fund managers in India have been able to beat the Nifty-50 index, they may not be able to sustain that performance over many years. Even otherwise, for individual investors a simple Nifty-50 index should be sufficient. 

Index funds have not been that popular in India mainly because at the moment many mutual funds have been able to beat the index. They aren't available at cost as low as they do in the US. Despite that I can argue, individual investors should do well if they stick to the index over the next decade or two, or more.

There are 3 things that one should check before one invests in the index. It should be liquid enough to be able to buy and sell at any time. For that to happen, the assets under management should be as high as possible. Their expense ratio should be as low as possible, and why not when there isn't much to do for the manager other than tracking the index? Finally, the tracking error of the fund should be low. The returns from the fund should be able to tell us how closely it is able to track the index. 

In India index investing comes in 2 forms: Index funds and Exchange traded funds (ETF). Index funds let you invest with the fund house, either directly or through brokers (regular plan). ETFs are like stocks traded on the index. You can buy or sell as low as one unit as you would buy or sell stocks. However, index funds usually have minimum amounts to be invested. 

I have listed down 4 ETFs and 4 index funds mainly based upon their assets size. 

These funds are compared with the Nifty-50 total return over the periods selected. Among ETFs, Niftybees offers better liquidity although SBI ETF Nifty 50 has much higher assets under management. Other than that all ETFs have given more than 15% over the 3-year period; more than 12% over the 5-year period; and Niftybees has given more than 16% over 10 years. More importantly, these ETFs aren't too bad in tracking the total return of the Nifty-50 index. The same is true with the index funds. 

Consider this: how many individual investors can boast of returns over 15% over the last 10 years? This boring strategy of picking the index and sticking to it has been quite good in the past decade. We cannot predict how much it will return in the next decade, but suffice to believe that the return should be quite satisfactory. 

What is imperative is to choose the index fund or ETF, and then stick to it for a very long time. Throw the money each month irrespective of the market levels. And this is the best part of the index investing: pe ratios or pb ratios don't matter; implied equity premiums don't matter; whether the market is overpriced or underpriced is irrelevant for the investor. As the investing horizon gets longer, the risk in expected returns gets lower.

Invest in the index, and move on with life. Do what you enjoy instead of fretting over expected returns. The index will take care of your financial needs. Isn't that cool?

that fi cash

I have written about index investing many times, and I have written about how it is possible to make a reasonable amount of cash in order to claim financial independence. I have noted that making Rs.10 m in India should be relatively easy for anyone. Not many are privileged to be in that camp though. 

The purpose of this post is to assess how much cash is sufficient to sustain long term financial independence. There is the 4%-rule which says that: find out the current annual costs; multiply by 25; and that would be the cash required. This is how it is implemented: in the first year, withdraw 4% of the cash; for the second year, withdraw the first year number increased by the annual inflation rate; and so forth for the subsequent years.

Suppose that a family was able to accumulate Rs.5 m in financial assets at the beginning of 2000 and that the cash was invested in the Nifty-50 index. Assume that the family's annual costs at the time were Rs.125,000 and these will increase by annual inflation rate of 6% each year. That means for the year 2018, the annual costs will be about Rs.360,000. This is a very reasonable assumption for an ordinary family in India. Let us also assume that there will be no further investments.

As of 3 January 2000, the index was at 1592.20; and with Rs.5 m, about 3140 units could be bought; let's ignore transaction costs. On 1 January 2001, the index closed at 1254.30. The family will have to sell about 105 units for its annual costs of Rs.132,500 for the year. The remaining units on that day will be 3034, and the market value will be Rs.3.806 m. On 1 January 2018, the index was at 10435.55; annual costs are Rs.360,000; and units to be sold are about 35.

After the sale on 1 January 2018, the family will have 2016 units with a market value of Rs.21 m, a sizable number. All that the family did was: strived to make Rs.5 m as quick as possible, invested that in a diversified index, and had fun in life, doing what they liked to do. There is no pressure of working for someone else and meeting deadlines. No commuting time. Focus on things that mattered most and enjoyed that work. Leisurely meals. Lots of fun. If the person was age 40 at the time of financial independence, he or she would be worth Rs.21 m at age 58 which should be sufficient to lead a fun-filled life. I have not considered dividends that the index stocks payout. That should be yields of say, 1-2% as additional annual cash. 

The markets are not linear; and we have considered the exact moves of the market from 2000 to 2018. In fact, the index closed lower for (January) 2001, 2002, and 2003. Due to this, the market value reduced from Rs.5 m to Rs.3.043 m in January 2003. The family was not bothered by the PE; neither bear market, nor bull market. Heck, there weren't any more investments either. 

The only linear assumption was the inflation rate of 6%. We could tweak that here and there, but Rs.360,000 a year of annual costs are pretty reasonable in today's times for a typical family in a low-cost smaller town; it may be lower, but not higher. Why should this ordinary family be living in high-cost cities after financial independence when there are options for lower costs, better weather, and more leisure?

With that income, the taxes will be zero. Yes, we have ignored transactions costs; but I have made a bigger point: that it is not very difficult to be financially independent in India for anyone. For qualified professionals, it should be much easier, but even ordinary people can achieve it. The key is the behavior, not excuses. 

We have also ignored the asset allocation, investing fully in equities. But again, I wanted to make a bigger point, remember. A case could be made for the family to take up part-time work (that qualifies its criteria of fun) to meet just annual costs, and the annual realizations from equity (unit sales) are invested in bonds each year. Over the years, the family would be able to have reasonable amount in debt too. 

Even applying that 4%-rule - Rs.200,000 initial annual costs with Rs.5 m - the closing market value of investments will be Rs.14 m in January 2018. Good enough for that ordinary family. But I don't think, that typical family will have Rs.570,000 annual costs in today's times. Yet the point is made, isn't it?

If the family was able to accumulate Rs.10 m, instead of Rs.5 m, and had double the costs - Rs.250,000 in 2000 and Rs.720,000 in 2018 - the market value of investments would be Rs.42 m in January 2018. This is in fact possible for qualified professionals. Even initial year costs of Rs.420,000 which will be Rs.1.2 m in 2018, the market value would be Rs.26 m in January 2018.

index investing

Whenever I am asked for advice on investing, I recommend the broader index. I never suggest individual stocks to anyone. For the most, picking stocks is more of arrogance than of skill. Everyone is up to beating the index. But the truth is that majority of investment managers, forget individuals, fail to trump it. A simple, low cost S&P-500 is all one needs to move towards financial independence. Alas, stocks never cease to excite people. That's a behavioral problem, isn't it?

While S&P-500 is what I suggest, there are total market index funds too. Let's check out the index offerings from Vanguard. All information is taken from the Vanguard website.

The S&P-500 investment comes in 3 variants: ETF, Admiral shares, and Investor shares. All invest in the S&P-500 stocks representing 500 of the largest US companies. Consequently, they track the index returns. 10 largest holdings make up approximately 23% of the fund's total net assets. The net assets value of the fund is $459.3 b. The expense ratio is 0.04% for ETF and Admiral, and 0.14% for the Investor. Here's a quick summary of these funds.

The total market investment also comes in 3 variants: ETF, Admiral shares, and Investor shares. All invest in the CRSP US total market stocks representing the large, medium, small, and even micro-cap US companies. Consequently, they track the CRSP US total market index returns. 10 largest holdings make up approximately 19% of the fund's total net assets. The net assets value of the fund is $756.6 b. The expense ratio is 0.04% for ETF and Admiral, and 0.14% for the Investor. Here's a quick summary of these funds.

While it really does not matter which index is chosen, my preference is S&P-500. Many prefer the total market because smaller companies have the tendency to become big and give superior returns. It is true, but, my advice is to stick to the large businesses than bet on small and micro. The S&P-500 makes up a large portion of the total market anyway.

What is imperative is to choose an index, and then stick to it for a very long time. Throw the money each month irrespective of the market levels. And this is the best part of the index investing: pe ratios or pb ratios don't matter; implied equity premiums don't matter; whether the market is overpriced or underpriced is irrelevant for the investor. As the investing horizon gets longer, the risk in expected returns gets lower. With this you will be able to beat a majority of the investment managers in the country. 

Invest in the index, and move on with life. Do what you enjoy instead of fretting over expected returns. The index will take care of your financial needs. Isn't that cool?

Yet, there aren't many who pick this strategy or after picking it have the discipline to stick to it. That's altogether a different story.

s&p-500 real returns, not 7%

Most early retirees bank on the safe withdrawal rate of 4% for their financial assets to last their entire (well, almost) life. This rate was backed by the Trinity study carried out in 1998. So the aspiring early retirees vouch by the study, and declare their financial independence once their financial assets reach 25 times their sustainable annual expenses. For instance, if the current annual costs are $40,000, the required cash to be financially independent is $1 m. 

This is how it goes: While the annual costs increase by the inflation rate each year for the retiree to sustain, investment returns exceed inflation rate by some margin. The assumption behind this is that the assets are invested to yield a real return of 7%, and therefore, a 4% withdrawal rate would almost never deplete their portfolio. The 3% difference is the cushion that protects the portfolio and even helps it grow. 

The purpose of this post is to check whether the market's real returns are 7% in the long run. Let's assume that the retiree invests entire cash in the total market index of S&P-500. Here's the story:

The first thing to note is that returns without dividends reinvested are lower, mostly by about 2%.  More importantly, the real returns are mostly lower than the expected return of 7% when dividends are not reinvested.  That should affect the 4% rule significantly. 

for today's early retiree

I have collected the 40-year period data to check the actual returns of the S&P-500. An early retiree usually will have 30 to 40 years of financially independent life. If one were to retire now, the past data suggests that if dividends were not reinvested, the real returns were lower than 7% during all of the past periods except from January 2013 to date. Even after dividends reinvested, there were 2 periods when the real returns were lower than 7%. In fact they were much lower 3.58% (from January 2000) and 5.12% (from January 1998). This is due to the dotcom buildup during 1998 to 2000. However, the past 5-year returns have been excellent; real returns exceeding 12%. This is mainly due to the financial crisis of 2008 which supplied much lower base to recover from. Which one of this we would like to expect on a more sustainable basis in the next say, 30 or 40 years?

for 2013 early retiree

For those who were looking to retire in 2013, the data is more interesting. None of the years showed more than 5.50% real returns before dividends. Even after dividends invested, the information is scary. Only on 3 occasions did the real returns exceed 7%. I am sure the aspiring retiree would have thought a bit before concluding that the markets would yield expected real returns of 7% in the subsequent 25, 30, 35, or 40 years. Past information did not much support this claim. 

for 2008 early retiree

The story is not very different for the 2008 retiree. Even after dividends reinvestment, the real returns are far behind the expected 7%.

for 2003 early retiree

I wouldn't bet on the 7% for 2003 aspirant as well. The past actual real returns were not very comforting to conclude that the expected real returns were going to be 7%. 

what to do then

I am not going to argue against 25 times number because the word early retiree is actually a misnomer. Nobody sits on the couch sucking thumbs during the financial independence years. That person is more likely going to be doing something of interest and passion which usually translates into money. So it is more likely that bills are going to be paid by the money earned through matters of fun rather than withdrawing from portfolio. Some take up part time work just so that bills can be paid. Most find ways to earn cash and not touch the portfolio. That makes sense. 

Yet, my take on the required cash is a bit different. I like to assume a zero real rate of return on the portfolio. After that, the math is easier and is a function of annual costs and number of years. For annual costs of $40,000 and 40 (expected) years of financial independence, the required cash is $1.6 m. This is 60% higher than that is expected by the 4% rule, but more conservative and more certain to last. 

I reckon the financial independence aspirants will be better served if they tone down their expected returns from the equity market index. In fact, when the allocation is between both equity and bonds, the expected returns fall much lower. Then the 7% real returns becomes a farce. 

stocks for long

The Indian markets have had downward movements in the last few days mainly due to the fall of rupee relative to dollar; but there are always other factors too. The media, as usual, has been going crazy, and naive investors are wondering whether to buy, sell, or keep quiet. Someone said it long back: it is human nature not to be able to sit quietly in a place. There is nothing new here, or elsewhere. The US markets have not been any different. 

While I note that it is possible to find stocks to buy in every market, bull, bear, or volatile, there are times one could do well if one was able to sit quietly for sometime. In investing, there aren't exact rules to follow other than this one: buy low, sell high; or sell high, buy low. There are many ways to achieve this. The game is therefore more of an art than science. 

People think that they can make money by always being active in the market. Yeah, they can, but the chances of consistently being successful in the long run is much limited. That's the reason why there have been very few successful traders and speculators. If we check investing patterns of the rich, we can find that most of them did well by staying in the game for a long, long time. Many of them have had almost all of their wealth tied to one or two businesses, and yet the outcome turned out to be quite good. The reason is simple: they focussed on their businesses rather than anything else. 

It is stupid to argue about things that are not in our control. For instance, oil prices and currency fluctuations. We have witnessed these things, and more weird ones, in the past. Yet, businesses have prospered. It is therefore much better and easier to concentrate on the businesses we like, pick the stocks, and be part owners and enjoy the ride as long as we continue to like those businesses. Let the managers worry about how to deal with: the operating, financing, and dividend decisions. When businesses are good and managers are honest and able, there is little we can and should do to alter. Buy right, and sit tight: There is much money to be made when we don't interfere with the compounding math. 

Alas, not many can understand this simple, yet powerful game. Get rich quick is what lures them; nothing can be worse than one's neighbor getting rich. Even Gekko would have probably agreed that envy is worse than greed. 

When markets are overpriced, it is better to pick a book or go out. When they are underpriced, it is better to buy our favorite businesses at prices that we like. When markets are volatile, either sit quiet, or simply set up a program to buy the index itself periodically. In fact, index buying is great for people who do not understand the game. Such buying will ensure that prices are averaged out and returns are satisfactory. The only condition is that the index buying period should be continuous and for a very long period. 

Of course, there are times when I like to indulge in trading. After all, I find markets fun all the time. The capital allocated to trading is tiny, but it lets me have fun. And that's the key. We should not allocate a significant amount of capital to speculation; that will be silly. 

It is easy to summarize: Select the businesses that we like to buy. Wait for the right price; let the wait be for long, no problems; there aren't penalties. Keep a good portion of capital for this. In the meantime, set up a program to buy the index each month irrespective of market prices. That way, we are in the markets all the time. When the price is right, buy the stocks, and hold for as long as the businesses are sustainable. The idea is to hold both stocks and index for a very long time, preferably more than a decade. Sell stocks when the underlying businesses no longer possess long term competitive advantages. When the selection is proper, such situations should be rare. Do not look for hot tips; do not follow anyone's stock portfolio. These are stupid ideas. Someone else's conviction will not do any good to us. Being in business is a long term game; so is being in stocks. 

Want to have fun? Go out and enjoy. Pick a book and read. Indulge in hobbies that make you happy. Want to trade in markets? Allocate an insignificant portion of capital, and speculate to glory. 

To make decent money from markets is not very difficult with right behavior. There isn't complicated math here. Think long; think long term, and it should be fine. And if we stop comparing ourselves with others, we should be fine too. 

low risk investing

Consider this: Nifty was at 1480.45 on 30 December 1999. It was trading at a PE multiple of 24.09 and PB multiple of 4.30. The market was yielding dividends of 1.02%. Of course, it was trading at a very high price compared to value. In fact, it was looking at a bubble which was about to break; the market was at such a peak price that the implied equity risk premium was the lowest. Any sensible investor would not buy into these levels. 

And bubble break it was. By July 2001, Nifty was trading at 1053.40 with a PE multiple of 14.92 and PB multiple of 2.33. Frankly, for an investor there was value everywhere until 2003. The opportunity to make money was clearly visible. 

In October 2003, Nifty was trading back at December 1999 levels. That means, for someone who bought at the beginning of 2000 and held through until 2003, there was zilch. Just why would anyone buy the market at such high prices? It does not make any sense, does it? 

Well, it turns out that considering the opportunity costs it did make sense to buy the market at that time provided the investor held it through today. On 12 June 2015, Nifty closed at 7982.90. The annual return for the investor would have been close to 12%. This return is actually post-tax since long term capital gains are not taxed in India. I don't think any other alternative investment would have returned better than this. 

The moral of this story is that time in the market is more important than timing the market. Equity investment is actually a low risk, high return game, as opposed to the more conventional high risk, high return.  

Even buying in a high-priced market would have yielded superior returns if the buyer had the qualities to admit first and then correct the mistake by letting the time take its course.

If the investor does not understand or has no interest in the game, it is much better to keep buying the index over a long period of time, rather than believing that he can beat the market. If he had done just that, i.e. bought the index every month from January 2000, the annual return by now would have been close to 15%, rather than 12%. This return should be more than adequate for the time and effort put in. 

If the investor wanted better returns there was another way: A more sensible investor could have, and should have, bought the market in 2003 and earned close to 19% after-tax returns. That's the way this game should actually be played.

Just imagine, how easy it is to make money provided one behaves in a manner that is required; emotions have no place in this game. The markets supply enough opportunities for us to act, but these are not available on a routine basis. We should have the patience to wait for the right time before we strike. Alas, not many are equipped to do this simple, yet powerful act.

Eventually, market prices follow fundamentals of the business:

Of course, nothing like picking stocks: Individual stocks give much better returns if the investor is ready to put in efforts in analyzing the business, its price and value. Equities are actually low risk, high return investments. Unfortunately, not many understand this, and more evidently, not many have the right behavior that is required to play this game.

If investing was high risk, I would avoid it. Thank heavens, it is not, but speculating is.

less thinking; the index way

The folly

The pursuit of money takes people anywhere and makes them do anything. That's why they ignore what is more important in their life and go for what seems to be more important. They are part of that rat race, trying to outdo others, i.e. make more than others. Invitation to stress!

In particular, let's take the investment business (investment banking, portfolio management and security analysis). The analysts are engrossed in the game of investment analysis with the sole aim of beating the market and others in the market. Do they succeed? If we go by what history tells us, in the majority of cases, it's a no. But that has not reduced any stress for them.

Even those who are not in that business (the rest of the crowd) want to participate in the game. They hear stories on television where the so-called experts yell out direction of the market, target prices, stop losses and recommendations. They also hear stories from friends and relatives at the week-end parties. The temptation is too much; emotional control is too little. Unfortunately, the end result is not worth anybody's time and money.

The proof

Why get into all of this when you can make decent returns over a period of time without stress? All that is required is: discipline and patience; neither analysis nor too much thinking.

Here' is the proof: 

Just look at the way Sensex has moved upwards over that long period. Over 20-plus-year period the market has given a return of close to 15% p.a. Is that bad? Try plugging that rate on your worksheet and see what compounding does; then try a higher rate and see the result. Consistent super-normal returns are only on paper; it is very difficult to maintain those rates over the long period.

If we take 10-year periods, for 31Dec1989-99, the market returned about 20% p.a.; for 1999-2009, it was 13% p.a; and for 2003-2013 it has been 13% p.a. again. These are the periods selected with hindsight.

Let's look at the bad days: For 1999-2003, the market return was 4% p.a. Remember that dot.com boom and then that bust; the folly was to buy at 31Dec1999 prices. Nevertheless, there was enough time to rectify that mistake; by just staying in the game. See what patience can do for you. But if you tried to go in and out, you were actually bowled out.

Next, for 2007-13 the market was very weak (negative return of 1.4% p.a.). Sub-prime crisis, global meltdown, and local scams, infrastructure and energy issues, too many promises made and then broken by the government. Even here there were indicators screaming market was expensive if you were a little attentive: 27.6 P/E and  6.7 book which was the highest multiple for the book ever.  Yet if you bought at 20000-plus at 31Dec2007, you will have to wait. Conversely, if you had bought at 31Dec2008, to date return would be about 17% p.a.

The growth
Indian GDP was less than $500 billion for too long; it has come to about $2 trillion now. Compare this to, say, China's $7 trillion. We have a long way to go; growth has to come considering our human capital. So if someone says due to the base effect our markets may not deliver in future, don't respond; just smile in your mind.

The moral

You would have faced none of these problems if you bought only the index (not individual stocks) and your purchase was based on a systematic-investment-program. Here you would have averaged out in the long run.

The moral of the story is: spend your time and energy on something that interests you. At least you will look forward to doing it. Don't listen to any unsolicited advice; they are all noise to distract you. Invest consistently in a broader market index (not sectoral index) over a very long period of time. In the meantime, enjoy your favorite, whatever that is. Life is good!

beat them in the (investing) game

The players and their fate
There are investors. Then there are speculators...traders and punters. And there are mutual funds. All of them trying the same thing. Beat it. Make it.

Investors have noble thoughts though. They want to protect their downside and aim to earn adequate return which is some points over the market return. Some do; some don't.

Speculators, well, want to do what they are good at..speculate. They win some and lose more, much more. Negative-sum game players. Their instincts never let them stop playing. They will play until they are gone. Needless to say, their net returns are poor. They always lag the market. Don't believe them when they say they do.

Institutions (mutual funds and the like) want to beat the market by some solid points. They hire managers with special skills; they talk the jargon; they use presentations; they want to be high profile. But overall, they remain good only at that, crunching numbers. Their result is mediocre. No, the majority is not able to beat the market.

They continue playing the same game
When the large majority cannot even equal the performance of the market itself, it is surprising that none of them think of doing something different. That is, work towards beating the market or at least equaling the market.

A new game: Beat it
Beating the market, though not impossible, requires different skill set. Not the jargon or the gibberish. It requires an acceptable investing framework and rational behavior. It appears simple, but in reality can test anyone.

Key requirements are treating investing as a business by itself (you are the business owner), and devoting sufficient time to learn about it: prepare the framework and develop the right behavior.

This is a lengthy process like any other business. As you go along, you will learn about various securities (businesses) and how to value them under different circumstances.

If you run this business of yours properly, you should be able to aim for market beating returns, that is, some points over market. And over the long run, these additional points should be able to make you rich enough.

Another game: Beat them
Well, if you don't have time and patience to start your own investing business, or you don't enjoy this process since you consider there are better things in life to have fun, it's not a big deal. You can still make money..in the long run. You will not beat the market but you will beat the majority of those players out there.

All that is required is discipline and patience. This game is called index investing which is investing in the market itself. You will get the same result as the market.

If the market goes up by 10% you will see 10% (almost) upside, and if it goes down by 5% you will see 5% downside too. In short, your performance will mirror the market performance.

With this you will beat a vast majority of those so-called investors (individuals and institutions) out there. What more do you need?

It works like this: You invest X amount each month (week, quarter, half-year or year will do) in a broad index fund (exchanged traded or managed) irrespective of the index value. You continue this process for sufficiently long period, say, 10, 20 or even 30 years. The result should be pretty good indeed if you work the math. The magic of compound interest is marvellous.

You should not skip investing; and should not track (worry about) the market in the entire period.

There are detractors to this kind of investing. They argue: Companies in the index change all the time; Index funds invest in only large-cap companies; Index funds have to invest in expensive stocks; As the index value goes up (that is, as market cap of the companies in the index goes up), the large base effect restricts profits.

Consider this: The Nifty value in Jan-1994 was 1083; now it is 5908; The Sensex value in Jan-1991 was 982; now it is 19444. Even at today's weak market conditions (high interest rate and low demand) the market performance has been at a compounded rate of over 10% pa.

There is far lower risk (and stress) in index investing since it goes for a long time. You see much volatility in the mean time, but over the long period the risk is virtually not there.

There is no reason why we cannot see market return of about 10-15% pa compounded over the next 10-20 year period.

This is certain if two things hold good: reasonable interest rates and higher corporate profits. India has virtually no choice in its policies. The reform policies may be delayed but they will have to come lest we will be in debt and danger. The potential for growth is there with so much to be done in infrastructure, energy, agriculture, manufacturing and services.

That points that index investing is, after all, not that bad. Do the math with your choice of monthly investment, number of years and a return of 10-15%, and check.

So for all those beach lovers or what have you, there is a choice to have fun in life, do the favourite day job and make money.

Wonder if those institutions are listening. If they aren't, you will be beating them at their favourite game in their field in the next 20 years.

Low risk, low stress, more fun and more money. Too good to be true, but it is true.