It is funny how many people want to get returns far (the operating word is far) greater than the index!

Over a 54 year period my father has got a return greater than 14% p.a. in Hindalco. This is not good, it is great. The two important things are ‘r’ the rate of return and ‘n’ the number of years that you have got it for. So a 54% looks good for 1 year – most of us know such rates are not sustainable for a long period of time.

So if the Sensex has given a return of 20%p.a. + a dividend return of about 3% p.a. – you would have done brilliantly over the past 32 years…however searching for alpha is a given…and everybody does it. Some lucky guys like me get it – I think accidentally 🙂 not sure.

Now to beat the index you need to look at the index (look at the MSCI India index) or the Sensex…then decide which shares to buy more (overweight) and which shares to buy less (being underweight) and which shares not to buy (style drift) and create a portfolio. There is a decent chance that you will drop many psu companies, oil companies, etc. and overweight yourself on say financials, IT, auto, etc.

With some luck you –

may out perform over 2-3 years, but get killed in one year when all your scrips fall much worse than the sensex – and wipe out all your ‘alpha’ . It is not easy.

The easier way is to buy about 70% of the index in the index proportion and fill up the remaining 30% pick up shares WHICH CAN NEVER MAKE IT TO THE INDEX – P&Gamble, Colgate, Gillette, …some IT companies (small but good), etc. and check out over a 10 month period….and start with a prayer – it helps!!