We often hear stories about how top investors have made a fortune from the stock market. It is with a fascination with the stars that many people look up to these titans of the stock market. What makes them succeed, and what is the secret sauce of their success?
In this article, I’ll look at the portfolio returns of Rakesh Jhunjhunwala, a Mumbai-based stock trader/investor and a household name in Dalal Street, and that of a layman’s portfolio had they followed the investment principles I would have followed. detailed in a May 7 article in Moneycontrol.
Recently, a media article detailed Jhunjhunwala’s key investments. The table below lists his most valuable investments.
A few things stand out about the holdings, which are also recommended by academics when building an optimal portfolio:
Restricted Stocks in Portfolio: In terms of value, these selected 15-odd stocks make up the majority of investments (~60 percent of investments)
Diversification: The portfolio is well diversified with companies in IT, FMCG, BFSI, Commodities, Pharma, Auto, etc.
Weights by Strategy: High conviction ideas have concentrated bets
Minimize Losses, Maximize Profits: There are some loss-making investments, but the high-performing ones outweigh them
Return calculation and comparison
According to the table above, Jhunjhunwala’s portfolio (excluding investments in Star Health) delivered a weighted average absolute return of ~96 percent between March 29, 2019 and November 24, 2021, compared to Nifty’s ~50 percent return over the same period. This further emphasizes the benefits of following the principles of portfolio construction.
In the May 7 article, I had highlighted how a layperson can optimize portfolio returns by tracking interest rates. Let’s compare the returns of a professional investor (as seen above) with that of a layman if he/she had followed the approach according to the article.
According to the article, between November 2013 and May 2020, a person would have earned more returns from debt and from June 2020 more returns on equity. So with regard to the comparison period, the lay investor should have focused on debt from March onwards. 29, 2019 to May 2020, and as of June 1, 2020, he/she should have gone into equity.
In order to recalibrate the asset allocation decision according to the investment cycle to the specific dates as stated in the table above, I provide the main indices below to match the dates of Jhunjhunwala’s investment.
The gain in the debt index was ~17 percent between March 29, 2019 and May 31, 2020. Assuming 30 percent tax (due to STCG), the net return would be ~12 percent. As of June 2020, through November 24, 2021, Nifty yielded a 77 percent return. This translates into a combined return of 98 percent ((1+12%)*77 percent).
The return profile changes marginally when recalibrated to January 4, 2022. On date, the return of the professional investor would be 104 percent, while that of the individual investor would be 102 percent.
I’ve only taken the index to detail returns for the lay investor. However, according to www.moneycontrol.com, 17 of the 26 large-cap direct investment programs (over Rs 100 crores AUM) yielded returns of more than 77 percent. Similarly, the return profile of 14 of the 16 schemes in the Gilt Fund (direct investment) category was also higher than the debt index between March 29, 2019 and May 31, 2020.
A layman can therefore not only outperform the market, but also equal a professional investor if he follows a process and is patient with his proven investment strategy/decision.
The above calculations do not take into account investments in Star Health to make a like-for-like comparison. We also do not know the return of the remaining 40 percent of the professional investor’s portfolio, nor of the debt/equity related asset allocation.
The comparison/conclusion is in no way intended to belittle the performance of the professional investor. The aim is to encourage the lay person to adopt investment logic to optimize returns on their portfolio/investments, even through traditional investment vehicles such as index funds.
The period considered for comparison is arbitrary and based primarily on the item period related to the investor’s portfolio.
Shankar K has two decades of experience in equity research. Views are personal and do not reflect the status of this publication.
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