Resting in peace (of mind)

A few days ago, a friend created a Value Research Premium membership account to help a family with an inheritance dispute. By the way, soon (in a matter of days), Value Research Premium will become Value Research Fund Advisor, but more on that later.

Let's get back to the inheritance dispute. In 2006, an older man in that family passed away without leaving a will. Besides other kinds of assets, the dead man had many equity investments. These were scattered in more than 50 stocks and mainly were the kind that anyone buying with little thought would have acquired in the preceding three to four years. From 2006 till now, no one has been able to transact in these stocks.

Recently, my friend obtained a complete account of the holdings as they existed in 2012 and entered them in Value Research Premium.

It turned out that during this period, the stocks had generated returns of slightly more than 15 per cent per annum, becoming about 4x! This is despite the fact that about one-third of them were now dud stocks (for example, some of the famous infra stocks of the pre-2008 crash) and had basically become worthless. Note that this is not even a 'buy-and-hold' strategy - it's actually a 'buy-and-die' strategy. Even the worst stocks were never sold and are still on the books, and the returns remain pretty good.

This brings to mind a study that Fidelity Investments conducted in the US to determine which investor accounts had the best returns. It turned out that the highest returns were from investors who completely forgot about their investments for years, even decades. Not only that, but they also discovered that a good proportion of these investors had died a long time ago. That's right.

Regarding managing your investment portfolio, the most profitable strategy may be doing exactly what a dead person would do - nothing. Please understand that I am not advocating that you should actively pursue this strategy. However, the lesson that investors should draw from this is quite clear.

Our cover story of 'Mutual Fund Insight' June issue is on the same basic topic, and we approach it from a more practical angle. It uses the well-known fable of the hare and the tortoise to illustrate these contrasting approaches to investment and their outcomes. The hare is all about speed, and his approach is similar to risky, short-term investment behaviours like trading stocks, derivatives and even IPOs (initial public offerings), which inevitably lead to substantial losses.

Despite the hare's (over) active management, so to speak, he ended up with little to show for it due to frequent trading, a temptation for quick gains and high-risk ventures.

In contrast, the tortoise represents a prudent, long-term investment approach, focusing on mutual funds, higher savings rates and investments suited to his risk profile and timeline. By avoiding the allure of quick gains and high-risk options, the tortoise experiences steady and significant growth in his investments.

The tortoise's approach mirrors the benefits of a disciplined, long-term investment strategy. By investing regularly in a diversified portfolio of mutual funds, the tortoise takes advantage of the power of compounding over time.

Moreover, the tortoise's strategy of staying invested through market ups and downs aligns with the findings of the Fidelity study and my friend's story. By resisting the constant temptation to monitor and tinker with his investments, the tortoise avoids the pitfalls of emotional decision-making and the potential for ill-timed trades. This hands-off approach, combined with a well-thought-out investment plan, proves to be a winning strategy in the long run.

Interestingly, once an investor understands this point, the tortoise's approach seems easier. There are very few activities in life where doing less brings better results, and we should be thankful that investments are one such area.