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How the accumulative advantage of 1% rule can help you generate alpha in your investing journey

Economic activity is steadily improving with the opening of most sectors. The pace of hiring, especially in the IT

space, is quite robust. Real estate is witnessing a revival of sorts. Agri commodity prices have moved up with the

possibility of bringing more income to the hinterlands. Overall, there is a steady flow of positive news from all

quarters. Amid positive sentiments, we must continue practicing safety protocols to eliminate any possibility of a

third wave.

As organisations and individuals move their focus from mere survival to prosperity, they will be dealing with a

changing environment. However, what is likely to remain the same in the pre-pandemic and post-pandemic operating environment is the competition and its intensity. Athletes compete for that one medal, companies compete for the same client or politicians for votes. In the era of disruptive innovation, the general impression created is that to be hugely successful one must do something path-breaking. While this is true for some fields, it may not hold for all operating areas. A small positive change maintained over a long period can lead to outsized results.

Take the case of Mexico. Dealing with poverty levels, the governor of the Mexican state Coahuila noticed that children staying in houses with dirt floors were more prone to diarrhoea and had higher fatalities. In 2000, he launched a program called Piso Firme (“Solid Floor”), to replace dirt floors with cement ones. It provided 34,000 homes with a cement flooring upgrade by 2005. The success in Coahuila, led to Mexico making a national commitment to eliminate dirt floors. By 2012, the total number of cement floors installed had reached 2.7 million. An independent survey showed that the program led to a drop of 13 per cent in diarrhoea and 20 percent in anaemia for children under six for the households that participated in Piso Firme. A small positive step repeated over 12 years led to large results.

Another example of small positive steps repeatedly taken leading to outsized results is of Jaydev Payang, India’s

forest man. Through regular planting of seeds and saplings on the island of Majauli he has created a forest cover of

550 hectares in 42 years. Compare this with the outcome of big bang plantation drives.

This is what can be referred to as the 1 per cent rule. The accumulative advantage that drives the Pareto principle or the 80/20 rule that we are familiar with. 1 per cent improvement sustained over a long period can be the real cutting edge for organizations and individuals as well. What applies to day-to-day life applies to fund management as well.

For a fund to beat the benchmark or its peer set, it does not have to post dramatically big returns. A small outperformance over a period leads to a big outperformance. There are many examples in the industry where funds, using the same philosophy, have multiplied money 6.5x when the index delivered 4x over the same period. We strive to achieve that incremental performance consistently over a long period to deliver a happy investing experience for our investors.

Individuals can also apply the same rule in their lives. If a person walking 1,000 steps a day decides to walk 1 per cent

more every week than the previous week, in 5 years she will be walking 13,000 steps a day. Saving 1 per cent more

than the previous month will lead to ~2x more savings in 5 years. This requires us to work on our habits. A small

shift in inculcating the right habits can go a long way to achieve results in health or in our wealth creation journey.

To sum up, whatever you wish to undertake, make a small beginning, do a little more every time, and stay the course.

A quote I find powerful in this regard is that of F.M. Alexander who said, “People do not decide their futures, they

decide their habits and their habits decide their futures.”

(The author, Ajit Menon is CEO, PGIM India Mutual Fund. Views are his own)

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