The Savers Dilemma

During a recent trip to the US, I happened to meet many young executives from the Silicon Valley, doing relatively well and perhaps in the 95 percentile of income group but all fed up with lack of options to generate alpha on their idle cash lying in their savings / checking accounts. And that too in one of the most advanced and efficient consumption driven economies on the planet.

One relatively accomplished executive (we’ll call him John) in one of the top social networking company had an even stranger story. In 2009 (at the peak of the depression), John invested a million dollars with a top hedge fund with a non-guaranteed promise of indicative returns upwards of 15% CAGR on a premise that the bounce back from those levels was likely to be phenomenal in all asset classes and returns could even be higher than indicated.

Impressive isn’t it! I would have sold my wife’s jewellery to invest – for where else would one get that kinda return.

My curiosity got the better of me and I couldn’t help but probe. To my surprise John recently withdrew and got back USD 1,126,493 after 8 years, a CAGR of 1.5% with a detailed explanation from the fund manager as to how well his money worked for him in the hands of the fund and why the investors should feel happy in the times that were tough (2009-2016)

And by the way John was smug - for his sense of achievement was emanating from the fact that his checking account would have yielded just a fraction of this return. So John really did well by his own accord. And top of that the fund sent them a special shopping voucher (unexpectedly) worth USD 2000 for shopping on Amazon.

I did some research on US asset classes and was rather surprised at my findings.

Dow Jones moved from 7000 to 20000 in March 2009 thru Dec 2016

So if John had simply (read dumbly) invested in an index fund then his 1 million USD would have been 2.85 million USD

If John had bought gold his investment would have peaked to about 2.5 mil USD in 2011-12 but would have still been about 1.8 mill USD today

And of John had bought Apple stock for that amount, his money would be worth approx. 9 mill USD today besides earning about 17 dividend payouts in the same period

And lastly if rise of oil prices had impressed John, his money would have remained almost the same in 9 years

John and thousands like him would have definitely paid for his fund’s billions in bonuses.

Oh - I so hope that my best friend John doesn’t read this piece because the comfort of smugness on an issue is a virtue that once acquired must not be lost or destructed.

The point is simple :

Lack of financial knowledge is hurting the potential growth rate of capital that is being used by fund managers.

The greed for a superior return without a guarantee of capital protection just puts gullible investors at huge risks and there is no redemption from these ill-informed investment decisions.

And John isn’t alone – except for less than half percent of top wealthy people on the planet, very few are able to generate an alpha on their savings that beats inflation and grows capital.

If the annual rate of inflation is about 2% historically, the savings must generate a min yield of 2% for the value of the money to remain same or real return on investment to remain 0.

An average or above average executive is just too busy in the daily rigmarole of life, wife, kids, performance appraisals, corporate slavery to make any real sense of what to do with spare cash.

But the success of stocks like apple or gold are outlier events that occur thrice or 4 times in a 100 year spectrum. Only the people who have deep understanding of economics or trends can generate alpha or even protect capital.

Thomas Pikkety, in his award winning research and book has beautifully summarised that capital over a long period of time gets accumulated in the hands of few and the common man continues to suffer (relative income inequality)

If capital is deployed in non-sexy instruments and stocks of companies with sound management and fundamentals, and portfolios are diversified to include a variety of asset classes and the inherent greed can be curtailed to be satisfied with ordinary real returns on capital, all investors will definitely and most likely grow their capital at a far better rate than anticipated.

Mutual funds from trusted fund houses, that have low expense ratios and the ones that are tried and tested with historical success of more than 7 years should be bought rather than being carried away by the glamor of irrational returns.

Investing is simple as Buffet says Be greedy when all are fearful and be fearful when all are greedy. And if Buffet’s to be proven right, a Global Financial Armageddon is round the corner but then – that would be the time to be greedy – Isn’t it?

The next blog

Why it’s a stupidity to ever invest in a house

Manu also writes on Huffington Post