In the final section of this note, I will share a recipe for wealth creation. It’s simple, and it’s effective. But the odds are you won’t execute it. You might not even believe me.
But a detour first.
Daniel F. Chambliss, a sociology professor, followed competitive US swimmers in the 1980s, collecting longitudinal and cross-sectional data to determine qualities that lead to success at different levels of the sport. His conclusion reported as a brilliant paper1 was: Excellence is mundane. It is a confluence of many small things done consistently and correctly over time. In fact, “maintaining mundanity is the key psychological challenge” in the pursuit of excellence. Reinforcing his conclusions, Mary T. Meagher (3 golds at 1984 Los Angeles Olympics, and world records in 100/200-metre butterfly that held for 18-19 years), when asked what the public least understood about her sport, replied, “People don’t know how ordinary success is”. As a 13-year old, when Mary decided to break the world record in the 200 m butterfly, she made two changes immediately.
1. She started coming to all practices on time, and
2. She began doing all the turns while practising correctly and in accordance with competition rules.
The little things count.
Back to our recipe.
Some concepts are so indisputable that we take them for granted, and as a result, they don’t receive enough attention. Savings is one of them. Most people with an investible surplus don’t track their savings rate on a regular basis. Although most of us understand the importance of saving, we systematically underestimate its impact. Consider the following example (Courtesy: Joel Greenblatt, American academic, investor and writer):
A starts saving 50K each year from the age of 19 and stops saving when she is 26.
B starts saving at the age of 26 and saves 50K each year for the next 40 years.
At 10% return on saving, who has the higher corpus when they are 65? Saving early in your career can have a huge positive impact on your wealth. It also has a big positive impact on your career (and, in turn, your income) as it gives you the ability to say no to suboptimal opportunities.
Savings is in your control; investing returns are not.
A healthy savings rate also helps in another ingredient of wealth creation: avoiding stupidity. If you see your corpus steadily inch up, it’s easier to resist the temptation of quick riches. A person generating 10% on savings consistently will beat someone generating 20% every year but taking a 30% hit every 5th year. “If you pursue 'returns' too vigorously, you’ll never get them”2 . Patience is crucial. Almost any sensible investment vehicle or philosophy will be effective if you give it enough time. What matters is your ability to stay on the path. Pick a vehicle, a bus, that suits your need and disposition and then stay on it. Make a start. It could be with Index Funds or Active Funds or any other sensible investment vehicle. And then, just stay on the path. It’s that simple.
Now, if after reading the first paragraph you scrolled down to the final section, you need to be extra careful while making investment decisions. If you calmly read on (thank you!), you will probably find what comes next easy to implement. The formula for wealth creation:
Are you disappointed? This isn’t exciting enough? Well, that’s the point. Wealth creation is mundane.
The concept of mundanity is relevant to investment management as well. There are certain stocks in DSP Mid Cap Fund and DSP Small Cap Fund that are up 10X-20X in the past 10 years. I was curious if these were a result of unique and exceptional insight or of something more mundane. Vinit Sambre (FM and Head of Equities) gave the example of a company that he was tracking since the mid-2000s. The company conducts only one public meeting a year. All the data that was needed for the investment was there in the annual reports. The promoters seemed sincere and were determined to take the ROCE to more than 20%. The balance sheet was clean, and the CAPEX supported the promoter’s view that the space had huge growth potential. An investor could patiently wait for the numbers to confirm the trajectory and execution prowess, and still make a phenomenal return on his investment.
Another example was of a company that came with an IPO a few years ago where the top line was up 30% in 2 years, but the employee and other expenses were down. Not surprisingly, these expenses grew significantly faster than the revenues post listing, and as a result, the stock has not given any returns (the issue was subscribed 3X).
These are simple observations and checks. The best investment managers you can think of will occasionally have a brilliant insight, but often their good performance is a result of small things done consistently over time and sticking to a sensible process.
Consistency is important while picking a fund manager. Atul Bhole (FM, DSP Flexicap Fund) is absolutely clear that “he is willing to take valuation risk but not willing to take the risk of mediocre businesses or mediocre managements”. His portfolio’s composition and its performance reflect this approach. Rohit Singhania (FM, DSP Equity Opportunities Fund, Co-Head Equities) gives higher weight to valuations, and he is not averse to participating in cyclical and turnaround stocks. Investors might agree or disagree with these investment philosophies, but they should be sure of what they are getting. The fund, the vehicle, the bus they pick should stay its path as well.
Good investing, too, is mundane.
1 The Mundanity of Excellence
2 Helsinki Bus Station Theory
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