Irrational behavior and all justifications

Hey everyone,

Hope you are all shines.

The markets continue to play games. As they always do. And investors continue to be confused. As they always do.

The purpose of this update is not to disparage anyone or his thoughts. The views expressed are personal and you all have a right to agree or disagree.

However my general observations are that markets remain rational. They always reflect a price, high or low, is set by irrational investors. I have personally reduced interacting on twitter with ideas not withstanding the fact that my model portfolio continues to beat the markets well. The reason for such a behavior is to protect my mind from irrational thoughts and to focus on what a rationale investor aims to do. That is to invest. I don’t know if I will prove right or wrong. Eventually I have to be right unless the world ends, in which case, it won’t even matter.

Why do I consider investors as being irrational is highlighted in this article. It is not my claim that I am above all this but I am trying to learn along the path.

Example 1: focus is on micro not macro

The world is getting better at many economic things. India is a part of the world. It enjoys one of the highest gdp growth rates even with all mark downs. The world is betting on counties with no growth or with liquidity infusions that are spiraling demand and propelling revival. India continues to have real growth as with one of the highest inflation and lesser disposable income as a result thereof, we are still seeing one of the best gdp rates. So much fuss is being made of some revisions when the same people who made revisions were till last year or so before talking of India overtaking china. Brics was in and india was shining. What an investor needs to realize is markets mature over time and have swings. The same people will come back to upgrade india and India will shine. If time is a problem to decipher, it is fair enough to subscribe to that as a market risk. But if it is taken that over time things will be better, it is silly to try and be bearish at cmp.

Example 2: you don’t get credit for wins, you get flak for mistakes:

The market shows irrationality. If one co has a problem, it initially forgets to distinguish between a systemic issue vs a cyclical issue. Strides acrolab fell from 690 to 580 on medi reports of fipb not clearing the Mylan deal of agila. On the same news which appeared last week in ET of deferment of its approval, the stock rallied from 580 to 820. I recommended buying at 580 as to my mind both news can’t trigger an unequal effect. In reality what seems to have occurred was an fii approval to buy by enhancement of limits which theoretically means the co had ready buyers but who could not buy when our retail was happily selling.

Same is the recent case with MCX. Over analysis by people who know nothing more than to ascribe the problem as common between Mcx and FT. Even when it is a matter of fact that should sebi allow foreign ownership, Mcx will be sold in minutes. While we enjoy Maggi. The assumption that all of a sudden the promoter of Mcx is unethical was seem by me today in one post. What the person posting overlooks is that this is the most regulated business headed by a man who took on the might of bse, nse, sebi to set up what is India’s premier metal exchange fund.

Another example of this behavior is my own model portfolio. I was swarmed with queries on what to buy when the nifty was rising and each stock would rise in minutes of a tweet. Now questions are asked only by a handful when actually more should be looking at buying. It is also ironical that I had 30 stocks beating the markets,none at original purchase price. One down in Wockhardt. One more arshiya was exited several months back as updated here. Yet no one focuses on the 30 winners. The comments are more on Wockhardt and whether it will tank or re emerge. Truly it has been disappointing to see such behavior.

Example 3: assume your salary declines. Would you stop consuming or would you reduce it? Would you try to improve your skills or would you simply give up and condemn everything? It’s the same with markets. When you find your portfolio falling, re balance your subsequent investing by biting what you can overall afford. Buy do consume the market. Improve your skills by understanding what you went right with and what you were wrong with. Learn from history and be prepared for the future. Remember the cardinal rule of investing: in markets you don’t make money by timings but by the time you spend in the market.

Example 4: ranbaxy tanked to 250. If some rational investor who otherwise liked the stock would have bought it he would not only smile at 330 now but also would have the honor of beating many of us who don’t own ranbaxy and aim to make sense of what we own. The point is markets revert to mean and what is good but in pain gets healed. Take another example. Many mnc stocks made new highs as masses predicted delisting of cos before 30th June 2013 to meet sebi norms of 75 pct holding. Thus markets were irrational at their highs in buying. I hardly came across anyone suggesting selling the cos then. When ofs were offered again there was a beeline for them as everyone looked at past highs and decent falls. Most of such ofs stocks are lower.

I picked a few to recommend to buy. Oracle was one. The reason for its rise was more to do with a focus on India rather than an ofs. If you google, you will also find a question to its parent on delisting where the md if I recall had suggested he would be happy to do so at 2200. The stock was quoting close to 2350 then.

Example 5: unilever announced a hike in royalty. Mkts doomed the stock. I turned a buyer. Logic? Royalties are a function of either sales or profits? Royalties only go up in monetary terms when sale or profit go up. The stock thereafter had its best run in years. I recommended an exit at 710 when there was too much euphoria.

Example 6: we talk of a doomsday in mkts. Being defined as? And have no definitions. People who are crying doom need to also suggest whether they have shorts on. Isn’t it then logical that they have a vested interest. Take another situation. I am bullish and I vested. So in that case even I have a vested interest. But looks at maths which has no emotions. It is beyond doubt that many cos are down even 90 pct. a stock at 100 falls to 10 and is down 90 pct. when it rises to 100 from 10 it moves up 10 times or 1000 pct. and again things revert to mean. So isn’t it worth small bites at least? Consider this also. A stock can fall only 100 pct. which it never does. It can however rise infinite. Still bearish to keep everything away?

Example 6: the mkt sells Infy on growth concerns and then buys it back with mr Narayan murthy back. With no financial change. No one knew he would be back. Just as we don’t know what will propel any co back. What remains a certainty is good cos will find a way to do what is in their interest.

Example 7: the munjal achieved a super milestone of 5 cr and 50 countries are targeted for exports. They chose to bifurcate with honda when the doyen, BML munjal and his family could have sold and retired in perpectual wealth. Mr bajaj is bullish on exports. Maruti is setting up a huge plant. Bosch did a huge capex. HUL one of the highest buy backs. So did smithkline consumer. Bata announced its plans to open ,ore stores. Why are we not believing the very people who head these cos and constitute the best leaders our country has had?

More will follow. I wrote enough and need time off on this beautiful weekend. Cheers and happy investing as always.

Advertisements

19 thoughts on “Irrational behavior and all justifications

  1. Manher desai says:

    Stock like HUL deserves place of permanent in family core portfolio. No need to tender in buy back offer. You can sell this kind of stock for children s higher education or for daughters marriage or buying your first house.
    Safirbhai need your opinion on ITC Mico Bosch Bayer Crops BASF TCS .
    Need to know what stocks you would like to consider in Family Portfolio.

    • safirpicks says:

      Hi sir,

      I like and own itc, Bosch (mico), Bayer. I have recently booked tcs to concentrate on tech m and Hcl. Trade in wipro for 100 rs moves. Bosch, itc, tcs qualify for family portfolio.

      • Manher says:

        Bosch likely to introduce new braking system for two wheeler and three wheeler vehicles. Innovation by tradition is BOSCH .

  2. CompassSeeker says:

    Very well written Safir Sir. No wonder why retail & most of fund managers loose money all the time.

    I admire your model portfolio. may not agree to all of them but you have done tremendous hard work in building it. Congratulations !!

    P.S. – I am net buyer since July 🙂

  3. mvalue says:

    hi safir,

    I really admire your clear headedness;One has to have supreme conviction to bet against the tide and win consistently.

    One question i would like to pose to you is how do you distribute your allocation among your stocks. I have observed there are lot of wonderful surprises like MRF,kaveri ,strides in your picks along with many others. Rarely there may be a nasty surprise like arshiya which no one can predict. Would love to learn from your thinking and method you follow on portfolio allocation to manage risk /return favourably.

    Do you believe in averaging a stock if price falls.

    Looking forward to your posts.

    • safirpicks says:

      Hi,

      I no longer follow a concentrated portfolio. Much as we claim that diversified portfolios don’t do as well as a high conviction 10 stocks portfolio, we forget that warren Buffett himself is now well diversified with abt 90 stocks. I am happy with around 30. The weights are defined at inception and in my portfolio, there are few stocks with higher weights. This is both a result of initial picking and market rewards. However as the stocks Coe from diverse sectors, there are times when banks do well, times when consumer and pharma do well. Some ideas being mid caps can give better returns. I am however interested in limiting risks too most of which arise due to complexities of globalization. I usually do not average except ifs stock falls on short term concerns if I believe the concerns are irrational. I usually do add to winners if I get new funds and stocks are within the reasonable price range commensurate to growth or potential growth.

      • mvalue says:

        thanks safir. One more question; Is PSUs a strict avoid ; would you think pricing of PSU’s is irrationally low considering there is every possibility for a change of guard.

        for the record; I have never made any money in PSU’s in my small portfolio except for the dividends 😉

      • safirpicks says:

        As per my tweets, have been negative on all psu’s and short in few as most are over controlled, over regulated businesses subject to misuse.

  4. Janak says:

    Safirbhai my thoughts on mcx are same as yours. Your post was a nice read, your blog is on my bookmark now. JN

  5. Rajiv Kothari says:

    Very well written rational thinking post & a nice read. Do admire your conviction & style of investment. Also you should not get unduly upset with people’s comments if some stock recommended by you tank for a certain reason. Those following you should very well understand that like any other investments, investing in the stock markets too has its own risk & there is no guarantee of assured returns. Unless you invest wisely & with conviction there are more chances of you loosing money than making profits.
    Please keep on sharing your thoughts.

  6. Jagan says:

    “focus on what a rationale investor aims to do. That is to invest. I don’t know if I will prove right or wrong. Eventually I have to be right unless the world ends, in which case, it won’t even matter”
    The above few lines sums up to a grand book on investing…way to go 🙂

  7. umesh mishra says:

    sir
    thanks a lot for the post. a delightful read. i like the way you swim against the tide and win.

  8. umesh mishra says:

    in the last post i had asked your view on psu banks and i was saved by your reply. thanks once again.

    • safirpicks says:

      Actually I did answer as if you are following my tweets, have cautioned against psu banks since several months. Advised shorts on sbi, bob, union, pnb, and in fact even non banking psu etc for a long and continuous time and maintain that

  9. Kamal says:

    Hi safirbhai,
    Assuming one has to build ones portfolio at current market levels, what is the best way to build it and what are the best stocks to buy now? Most of your stocks bought buy you are actually bought at levels which offer lot of margin of safety. Buying some of them at these levels may or may not offer desired upside?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: