Index Fund. Is it the right choice Baby? NA – NA.

 4^th April 2022

Index Fund. Is it the right choice Baby? NA – NA.

Dear Fellow Travellers,

Namaste! Fund Management is a tricky business in which if you earn money for the client – it was your duty. If you lose – you are dumb. So, the fund managers always go for CONSENSUS estimates and Consensus investing ideas. So, if something goes wrong – they all can share equal blame. The fun is when everybody has done the same thing – nobody is wrong. Do you remember the court ruling – Nobody killed Jessica?

If you pack some nonsense idea with glamour and sell it – you will find buyers for the same. Index Fund is such an idea.

What is indexing?

It’s a simple practice of buying all the stocks in NIFTY – 50 or BSE Sensex or any such index in the same proportion of the weightage of the individual stocks. Fund managers don’t need to do any research – no expenses at all. The fund manager just has to order the broker to buy stocks in the index proportions.

The advantage is – that his performance will always match the market. Though index funds can’t outperform the market, that is okay as long as the goal is to match the market or a little less than the market.

Another advantage is, that it has low transaction costs and low management fees. For cost-conscious investors – this becomes the hot selling cake.

The underlying belief about indexing is that it is believed that the market is efficient. Since the market is efficient – everything is discounted and you can’t make more money than what the market is offering you.

As per Louis Lowenstein – “If you believe Efficient Market theory – one stock is as good as the other stock. So, why buy one stock. Buy all the stocks”.

Buffett had said – "if the market is efficient – I would be on the street with a bowl in a hand." The market is not efficient at all.

Let us see the HAZARDS of Indexing: -

1. When more and more people start doing the indexing – the market becomes self-defeating. The so-called efficient market will become inefficient. As there will not be any buying and selling except the change in the index. There will not be any market. Just think. No research / No Value investing. Nothing.

   When I talk about the DESTINY and ROLE of LUCK – my MBA friend laughs. But believing in the efficient market is nothing but the belief in collective Luck only.

   Any person of Common-sense will not believe in LUCK 100%. He will use his intelligence and efforts to find his way toward his dreams. But when you do the indexing – you are 100% living on MARKET LUCK.  

2. When stocks are replaced in the index from time to time – the stock which is being removed will be sold like anything and the stock which is supposed to be added will be added like anything. When stocks are sold on one side – they are sold below their fair value and when the next stocks are added that stock prices will ZOOM up shortly and come down after a day or two. This adds to the cost on both sides.

When the SMALL CAP INDEX is changed the price changes in the SMALL CAP stocks are usually heavy as there is very low liquidity in small-cap stocks.

3. Indifferent Fund Manager: - The fund manager will become indifferent to the particular company management and the resultant effects on the returns. He will focus only on the index. He has no incentive to do something creative or something better. All he is interested in is his fees.

What about RAKESH and BUFFET recommending investing in Index Funds?

Many financial advisors show a BUFFETT Writing or Rakesh clip to there would-be clients in which they both and many others like them are asking normal investors to deal with the market through index funds. With this writing or clip, they are trying to prove that when RAKESH or BUFFETT is recommending Mutual Funds or Index Funds  – you MUST follow them.

If you also believe in the above suggestions and follow their advice – I must tell you – you are really an innocent person.

All they are doing is – they are silently telling you that – you are not intelligent like them to invest in stocks directly so better go and do indexing. The other selfish reason is – that they want to avoid the completion in the Value investing area.

What NEXT?

I have paid handsome fees to Anthony Robbins in 2007 just to learn one sentence. He taught me – “Your decisions are the pathways to your Destiny”.

If you claim to be intelligent/educated / smart and if you are doing INDEXING – there is no difference between you and the uneducated Villager who leaves everything to the LUCK. All your money on getting a FANCY DEGREE is wasted.

Go Beyond OBVIOUS, my friend.

Follow me on Twitter @hiteshmparikh / WhatsApp - +91-9869425399.

Learn a Lesson. Live with Passion & Invest with Reason.

Hitesh Parikh.