Most stock investors fail. Fail in building the right portfolio and then fail in acknowledging the failure. It is quite likely that you too invest in direct stocks. In fact you might have been doing it for years. Question – have you just been having fun or has you contributed to your portfolio growth? Let’s pass your stock portfolio through an acid test.
“Do you advice on stocks?” This was Deepesh on the line.
“No Deepesh, not my forte. For me, it is simple. There are some really good fund managers out there who can do a better job. I rather let them manage my money.”
“Oh OK. You see, I am already doing a good job with my portfolio. I just need a second view on my current holdings.” Deepesh didn’t sound impressed with what I had told him.
“That’s great Deepesh. You are from very few people who have claimed that they have made money by investing in stocks. Let’s do a little thing, if you will.”
“Have you ever calculated how much money you have actually made on your stock investments – return on the investment?”
“Not really. But as I said I have made a decent money. I guess it should be close to 15% year on year.”
“Wow! That’s a great number. But let’s confirm it. Can you share your stock portfolio transaction details with me? I will do the maths for you.” I told Deepesh.
“Sure. I will email them to you,” was his confident reply.
Deepesh works in an MNC IT company based out of Bangalore. He works at a senior position and has a comfortable income, saves quite a bit and has a decent investment portfolio size.
He has colleagues and friends who invest in stocks. As he saw them discussing stocks and how much money they were making, he also got interested and started investing in stocks.
He was very confident that his stock portfolio was doing very well. I wanted him to see the truth.
That’s where I asked him to share the details. Deepesh’s email arrived with his stock portfolio transactions.
There were close to a 100 transactions done over the past 9 years or so. In total, there were 11 stocks that were currently in the portfolio.
I took the current value of his holdings along with the transactions and calculated the XIRR.
For those who have come in late, XIRR is one of the methods to calculate returns.
OK, so the formula brought out the result. The XIRR of the stock portfolio was 0.0000003%. As good as ZERO, basically.
Deepesh came to meet me. He was almost in shock.
“What are you upto Deepesh? What’s the point of putting in all this effort? You make the bank savings account, paying 4% interest, look like the best investment ever.”
“Is your formula working correctly? Are you sure there is no error?” Deepesh still couldn’t believe it. He looked at me for a few seconds and realised what was happening.
“That’s a revelation. Frankly, I didn’t realise it was this bad. How could I keep myself in the dark for so long? Now that I see it, I am thinking.” he confessed.
“I started with the advice of friends and of course took some tips from online sites and magazines that I read. Never went too deep with my investments. So far, I believed that I was making decent return on my investments. Guess, it hasn’t worked for me.”
Deepesh leaned back and put both his hands behind his head.
“You see every investor thinks that he is better than the average. And there lies the paradox.”
“Yeah, I know what you mean. It is clear to me now. Either I need to spend more time with my stock portfolio, correct my investment strategy and get it working, or I should just put my money in mutual funds and spend time doing other things which I love to. My intuitive response is to go with the second option.” Deepesh had almost made his decision.
“Good to see that you realise the issue and are willing to make a correction. As they say, its’ never too late!” I was happy for him.
My Challenge to You – Put your stock portfolio to an acid test
So, this was Deepesh. What about you? How has your stock portfolio done?
Let me throw a challenge to you, the investor in stocks, who thinks “s/he is better than the average investor“.
My argument is that you have not been able to beat the broad market index, that is the BSE 500 or NSE 500 in the last 3 and 5 years.
Worse, you have failed to deliver returns more than even the savings bank account interest over a period of 3 and 5 years.
It is time you became aware about it.
This is how you will do it. Download all your stock transactions in an excel sheet and calculate the XIRR. The formula is self explanatory. You can know more about XIRR here.
Do share your revelations and learnings with me. Everything can be lost but not the learning.
I look forward to your comments.
Someone who doesn’t even bother keeping track of portfolio gains shouldn’t be investing in stocks.
If you must invest directly in stocks, invest in your domain of expertise! You might realize what’s going to happen before professional fund managers do (ex: PC enthusiasts knew about AMD Ryzen months in advance, and many took advantage of it).
Most of us are probably better off spending time on family/friends/career/travel/learning new things/starting own company than on studying the stock market.