Investment Lessons from ‘The Godfather’

For film buffs and critics alike, ‘The Godfather’ embodies what celluloid magic is all about. Over four decades after its release, the movie continues to capture the imagination of audiences like no other, reaffirming its status as a classic.

But there's a lesser-known aspect of 'The Godfather'. Apart from being a source of inspiration to aspiring actors and filmmakers, the film has a lot to offer to investors as well. Following are investment lessons from ‘The Godfather’:

Barzini is dead. So is Phillip Tattaglia, Moe Greene, Stracci, Cuneo. Today I settled all family business

A laser-like focus on objectives and ruthless discipline in their pursuit, are defining traits of Michael Corleone’s personality. Be it protecting his family or safeguarding his business interests, Michael is decidedly aware of his goals and will do whatever it takes—sacrifice his career in the armed forces, join the ‘family business’ and even eliminate his rivals—to achieve his goals.

Similarly, investors would do well to set goals before they start investing. Goals can range from near-term ones such as creating a holiday budget, to long-term goals like a retirement kitty. Apart from making investing focussed, setting goals also helps in tracking progress. Thereby deviations (if any) can be easily rectified. Furthermore, being disciplined (read: curtailing wasteful expenditure, and investing regularly in line with a plan) will help investors stay on course to achieve their goals.

Some people will pay a lot of money for that information; but then your daughter would lose a father, instead of gaining a husband

Michael, a fugitive on the run in Sicily, is enamoured by a local girl. When confronted by her indignant father, Michael calmly reveals his true identity. Also, he lays out the options available, and the trade-off therein.

Likewise, while investing in market-linked instruments, investors must be unambiguously aware of the risk-return trade-off. For instance, a small-cap stock can deliver substantially higher return versus a large-cap stock; however, the potential upside comes at a price—higher risk, if the investment doesn’t play out as expected. Similarly, sector-focused mutual funds can outperform diversified funds, but they expose investors to higher risk. Hence investors must accurately understand the risk-return trade-off before making an investment decision.

Where does it say that you can't kill a cop?

When the Corleone family is under attack, Michael comes up with a seemingly outlandish plan that includes killing a corrupt police officer. His sound rationale wins over his sceptical associates. Essentially, Michaels’s willingness to think out-of-the-box wins the day.

At times, investors can be guilty of being orthodox in their choice of investment avenues. For example, some invest only in bank fixed deposits and small savings schemes because of habit rather than choice. By refusing to consider other apt options, investors run the risk of not meeting their investment goals.

For instance, an investor in his twenties who is saving for retirement 30 years hence, shouldn’t hold a portfolio comprised of only fixed deposits and bonds. Equities and mutual funds must find place therein. Remember, risk in itself isn't bad; rather, investing without being aware of it, and/or failing to correctly assess it, gives rise to thorny situations.

It's not personal. It's strictly business

Every character quoting this legendary line tries to convey that a given action should be seen as a business decision i.e. in a dispassionate manner. In other words, it has nothing to do with personal feelings. The 'not personal' part holds good for investments as well.

At times, investors get 'attached' to their investments. This is especially true of stocks and mutual funds that have had a successful run. The trouble starts when the investment avenue is no longer equipped to perform as it has in the past. Then there are misguided investments which fail to deliver, but investors hold onto them, hoping to ‘get even’.

This approach to investing is unwarranted. An investment is simply a means to an end i.e. the investment objective. If a thorough evaluation suggests that the investment is no longer equipped to play the part that it was supposed to, investors must salvage the situation by exiting the investment at an opportune price and time.

Tom Hagen is no longer consiglieri 

While expanding his operations, Michael sacks his adoptive brother/long-time associate, Tom Hagen from the post of consiglieri (adviser). Stating that Tom isn’t a wartime consiglieri, Michael replaces him with someone adept at strong-arm tactics, since the situation demands it.

Barring a small section of investors who can manage their own investments, others need assistance in the form of investment advice. Investors have a variety of options—distributors, advisers, robo-advisory firms—to choose from. Quality of investment advice can and does have a bearing on investment results. Hence, investors must perform rigorous due-diligence before engaging an adviser. Also, there is a case for reviewing the adviser’s performance at regular time intervals.

I'll make him an offer he can't refuse

In Godfather parlance, this iconic line represents a veiled threat. Refusal to comply with the offer can lead to dire consequences.

In the world of investments, there are periods when markets are frothy and irrational exuberance is the order of the day. In such periods, it is not uncommon for investors to encounter investment propositions that claim to offer a win-win proposition. For instance, an investment that offers high return with virtually no downside. That’s when investors must remember that if the 'offer' sounds too good to be true, then it probably is.

3 equity funds you shouldn’t give up on...

From Jan 2014 through June 2014, the S&P BSE Sensex has risen by 20%, while the CNX Midcap index has appreciated by 37%. As with every market upturn, this time around too, the performance of equity funds has come under the scanner. There are several articles doing the rounds, detailing which equity funds and fund categories have fared the best. Keeping with the norm, the investing community has yet again displayed little tolerance for funds that have failed to make the most of rising markets. As a result, funds that have underperformed (relative to peers and/or benchmark indices) are being vociferously scorned.

I thought it will be interesting to focus on 3 equity funds that haven’t had an impressive run thus far, but continue to be strong offerings, nonetheless. To be clear—I’m not suggesting that six months is an adequate time period for evaluating equity funds; neither is that a recommended investment horizon.

However, the fact remains that there is a lot of short-term oriented advice and views doing the rounds. Investors can and do get influenced by such erroneous advice. If anything, this commentary is intended at refuting such short-term views. Here’s a checklist of 3 equity funds that investors shouldn’t give up on.

1. Franklin India Bluechip Fund

It has been a tough ride for the fund, thus far in 2014. On a year-to-date (YTD) basis ending June 2014, the fund (up 21%) has marginally outscored its benchmark index (S&P BSE Sensex) by one percentage point. In a peer-relative sense (i.e. versus large-cap funds), the performance has been found wanting. Here’s why: to begin with, manager Anand Radhakrishnan adheres to the fund’s large-cap nature far more stringently than the category norm; in the present market upturn, small/mid-caps have outscored their large-cap peers. Also, the manager’s top-picks Infosys and Bharti Airtel have detracted from the fund’s performance.

Why you should keep the faith:      

The fund has all the makings of a top-notch offering. Supported by an accomplished investment team, Anand ranks among the best portfolio managers in the country. The investment process is robust—research-driven with an unwavering focus on quality and reasonably valued stocks. The benchmark-agnostic approach coupled with willingness to trade-off short-term pain for long-term gains, only further accentuates the likelihood of a divergent showing versus the norm, in the near-term. However, over the long-haul, the fund remains ably equipped to reward investors. Finally, it helps that the fund is backed by one of best fund companies in the country.

2. DSP BlackRock Small and Mid Cap Fund

Manager Apoorva Shah hasn’t had the best of times in the recent past. In 2013, funds helmed by him had an eminently forgettable year; among other reasons, Shah’s bet on a macroeconomic turnaround didn’t quite come off. As for this fund in particular, despite having bested its benchmark (CNX Midcap) both in 2013 and thus far in 2014, it has failed to match the showing clocked by a typical small/mid-cap peer. In the Jan 2014-June 2014 period, Shah’s investments in a motley mix of stocks such as IPCA Labs, Persistent Systems and Britannia Industries have held back the fund.       

Why you should keep the faith:     

Not many managers can match Shah when it comes to skilfully combining fundamental factors (such as an in-depth understanding of stocks) with elements such as market sentiment and news flow. The investment process though not robust in the conventional sense, is certainly workable. It helps that the manager is at home with the process, and executes it with skill. Over the years, Shah has displayed the ability to rapidly realign the portfolio and recover lost ground. Another factor in the fund’s favour is the fund house which ranks among the better ones in the industry. All in all, the fund continues to be a strong long-term bet.

3. SBI Magnum Global Fund

A cursory glance at this fund’s recent performance might lead one to believe that manager R. Srinivasan has lost his touch. YTD ending June 2014, the fund has appreciated by 31%, and underperformed the S&P BSE Midcap index by nine percentage points; on the peer-relative parameter, the fund fares even worse. Interestingly, while the manager’s top-picks have by and large fared well, select holdings from the financial services, media and health care sectors have taken away from the fund’s showing.

Why you should keep the faith:     

In the small/mid-cap segment, few managers can hold a candle to Srinivasan. The manager relies on intensive research to ferret out growth stocks. The emphasis on business competencies further underpins the process. Over the years, he has displayed an uncanny ability to pick winners ahead of the curve. Another positive is Srinivasan’s willingness to back his conviction bets, and adhere to the fund’s small/mid-cap nature. At an asset size of INR 10.7 billion (as of June 2014), capacity—a typical area of concern in small/mid-cap funds—isn’t a worrying aspect as yet. The fund’s long-term credentials remain untarnished.

On a concluding note, just as near-term underperformance doesn’t dent an inherently strong fund’s long-term prospects, a strong showing clocked by a mediocre fund on the back of rising markets, doesn’t enhance its long-term prospects either. Be wary of such short-term wonders.

Data Source: Websites of fund companies, www.bseindia.com, www.nseindia.com