If you don’t know, now you know!

You know very well
Who you are
Don't let 'em hold you down
And if you don't know, now you know

: The Notorious B.I.G, Juicy  


This one is going to be a short note and we will revisit one of the most frequently asked questions of us – should one buy direct equity or buy via equity funds (index or otherwise).


In a study we did in Sep 2020 we note:


A lot of new investors have been led to believe stock investing is easy, finding the right stock is easy and that once you invest the returns will automatically follow.  Furthermore, a narrative has been created that while most Mutual Fund SIPs have not returned much in the last 3 years, if you were invested directly in stocks you could make a lot of money. While the first part of the statement is true, a Nifty index Mutual Fund SIP over the past three years would give you a ~4% XIRR, the second part is patently false.


Comparing point to point returns of stocks with SIP returns of Mutual Funds is meaningless.  To make a fair comparison, we looked at individual stock SIPs of ~275 largest stocks over the past 3 years. The average XIRR for a stock SIP is -0.9%. On average, in a stock SIP over the last three years, you would have lost money.


We came across some more evidence on the same from Blackrock, but this time for the US markets.


These are your odds when selecting stocks.  And this is during a raging bull market. The US stocks broadly gained 15.2% per annum over the last 5 years.


If you think you can do a better job selecting stocks than an index fund or an active fund manager then do give a listen to this podcast and articulate for yourself what your investing edge is.


Ps: the biggest smoking gun that most retail traders/stock pickers perform poorly compared to the index is that not a single brokerage shows you your stock portfolio XIRR or annual returns. Think about that!



Two more things before we close.


New research at Kansas State University shows watching financial media increases stress, regardless of whether the market is up or down. 67% of people watching financial news showed increased levels of stress. Even when the financial news was positive, 75% exhibited signs of increased stress. The hypothesis being positive financial news may trigger “regret” and then lead to FOMO.



Active funds are supposed to outshine during times of volatility. A new study from the University of Chicago Booth School of Business shows that’s not what happened during COVID-19. As the chart above shows, the average active fund underperformed its benchmark by 1.5% during that time period.


It states, “Pastor and Vorsatz analyzed daily returns from 3,626 equity funds between February 20 and April 30—a tumultuous 10 weeks when the S&P 500 index collapsed by a third before gaining nearly all of it back. The researchers find that net of management fees, a large majority of actively managed funds lagged behind their respective benchmark indexes.”


And if you don’t know, ….


Happy investing,
CEO | kuvera.in | @rustapharian

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Interested in how we think about the markets?

Read more: Zen And The Art Of Investing


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