The budget is over, result season done. The journey continues

Hey guys,

Here comes another spur of the moment and hence spontaneous heart to heart talk.

Conscious about the regulation of SEBI on recommendations, the update shall steer clear of stock names or recommendations and only reflect on my learnings and General thoughts.

If any of you lack the time or resources to keep up with too many books, blogs, journals, magazines or any form of dissemination of matter, it is my humble recommendation that in the very least do read Berkshire Hathaway’s latest letter authored by both Mr Warren Buffett in the first part and the additional though equally provocative comments by Mr. Charlie Munger.

The markets have rewarded well. I have absolutely no grudges or expectations that were not met by mr market in the last several months. If one looks back in hindsight, I stand on one hand to look at all the stocks that were held during the past few months (or 2/3 years) on one side and the general reward of just being one directional in approach.

While owning some great companies through this period had certainly enthused a lot of smiles and a great return and nothing beats the feeling of owning several multibaggers, I would add greater weightage to the second component of being one directional. More so, at a time when almost anyone I know or met or heard had some degree of sceptism on the market. In some cases, guided by some dark clouds on the economic and political front and in some cases led by an almost satisfied and unbelieving progress in stock prices that seemed to suggest it was “too good to be true”. A large part of this was in my opinion caused by:

A) an initial belief of “believing” “endorsing” and “approving” that each bull was smarter than each bear or disbeliever and then paradoxically
B) the sense of comfort in the thinking of masses weighed by an initial reward that made many think it’s best to profit and end up looking right than to eventually lose the gains and give up the first smart moves.

I also found that in the initial days of rise, the no of believers starting rising almost proportionate to their portfolio gains, almost as a insured measure but later more so towards 6000-7000 nofty levels, many thought that they had turned economist, fund managers and started writing off the market. Rarely has market believed in consensus and this time too the market knew its bit.

I think a lot of the confusion of belief bs disbelief, to buy, hold or sell is guided by too much exposure to media. One forgets that plenty of those who appear on financial channels to give or rather express their views are more momentary in nature than strategic. In the first place for a person to give a market view at the very moment assumes not only the ability to process high data (macro, global, govt, liquidity, management intent etc) but also to perfect the knowledge of human behavior and their expected reaction to unknown or relatively unknown events. It is little wonder then that the most profound investors always suggest playing greater weightage go long term than the short term. On the other hand most of these TV “witnesses” or “pundits” like to gamble to see an immediate reaction to their views which cannot be talent and has to be at best luck.

It is thus not surprising that our country still has a handful of people at the top looked upon as decisive investors or fund managers worth a name and credible portfolio size.

I loved this sentence from mr buffett’ letter: be careful about such sporadic experts as they will fill your ears but not your wallets. It is also true that we live in a world that loves to be sensational. We witness shows like kaun banega maha karorpatti or where people will touch snap snake, lizard, insects or walk on the edge of a suspended structure at a height only to get enough eye balls and make a show. Where newspapers score more on sensation rather than the wisdom of the editor or like itself. It is thus not surprising that the ability to predict what is likely to happen in the market in a day or week or even month draws more attention than the tested conversion all wisdom of building a portfolio together in a slow process with less regard to emotions and more to value and with the blessings of compounded returns.

Another paradox that plagues many and that sometimes includes me too is the attempt to benchmark. In a race there is one winner, in a lifetime, there are many races and sometimes winning is just like a marathon with you being able to last. I am trying to curb my own euphoric mind not to benchmark and to pay more regard to the substance of things than statistics which in any case are usually misleading.

I had a very interesting chat with a fund manager I highly regard. He said many people say we own x y z stock that may have gone up x y or a times and further say we are concentrated investors but rarely do you have such concentrated investors fully invested in equity. This if you find some one who says my stock went up 5 or 10 times and he had 50 percent in equity and the rest in cash or liquid funds or gold or real estate, he himself is not only diversified but is hiding the fact that for the 50 or whatever percent that he does not own equity, you could be beating him with even a 10-15-20 odd percent return.

The bull market usually also creates many fools. Who will be one and who is not, no one knows. One often reads tales on both sides. One side is when some one sells a co early believing he has made enough and is the smart Alec who knew exactly where the earning growth or market assigned PE will assert its brakes. Warren Buffett makes a clear admission in several newsletters of his own folly in granting shares of Berkshire to other companies as a swap and on a lighter note says he finds some solace when Berkshire shares correct to his past dues.

The other side is characterized by a larger chunk of investors who start believing that their run is perpectual and that there is indeed a midas touch. I will admit to you when the market was sub 6000 many of such investors who I also came across used to suggest their logic or rationale to buy or sell some company guided by some home work and thought process. Sitting on the laurels of luck that eminates from the belief that in a day even a faulty watch is right at least twice, they begin to take the luck factor into a self assumed skill. It is pertinent to note that we live in a society of many forecasters, fortune tellers and the like and from time to time it is empirical that some of them will be right for some section of people. What is sensationalized and henCE under limelight is success and not failure. Take any advertisement for weight loss that makes an ugly appearance every day in our newspapers. It always shows a relatively less glamorous overweight person having received some wonders while in reality concealing the majority tht fail. Almost attributing the limited success to their own while brushing the majority failures to structural problems of the concerned.

In similar parlance, once success bitten becomes more daring than shy in markets and adventures out to a path of predicting outcomes with leases emphasis on home work or labour and more on “don’t ask me why, I was recently successful and can benchmark it” syndrome.

It is usual for many such suspects to even ignore the role of luck in their lives sometimes caused by the participation of others (don’t forget usually stocks move up when people unknown to us start thinking alike and participate in similar conduct) or sometimes by the presence or influence of the hard work of others which is assumed to be self directed just in the spur of the moment. As warren says, the true test happens when the tide runs out and one discovers who is swimming naked.

That is why more than finding the right companies one should attempt to find the right temperament to invest and try and develop the right mindset to guide yourself in times of volatility and unpredictable human behavior. Books written on legends guide us more to their successes while they should guide us also to the causes of mistakes.

I find it a bit confusing too when people were talking of the market being overvalued at 6000 or even 7000. Most of them assigned the reason to PE or to no change on the ground. Isn’t it the other way around? No change usually means a bad situation and hence an earning regime that suffers from some cause or the other. Usually in such gloomy situations corporate profits and earnings revert to mean which in such circumstances means pick up. It is also some what logical to believe that earning pick ups mean PE which is just a statistical tool will change. Very few actually talk of cash flows increasing or going into capex and what rh impact would be.

I think investing that ends up being too complex usually ends up being a fluke. The age old moral of slow and steady (read boring) wins the race is often forgotten. Let’s assume in one year the market is expected to go up 20 percent but does so in one month. More will be delighted without realizing that the opportunity of investing and winning in 11 months stands lost.

There is such a huge disbelief in equity in india that it baffles me. I have encountered so many people advocating on gold or fixed income or being liquid and treating equity as a gamble. Of course it is a gamble if you are betting with your eyes closed on the reco of some lunatic on a day over which you have zero control. At the same time the effort of learning and taking declines in stock prices in your stride over a period and to evaluate if you bought the right scrip and what has triggered it’s fall will be far more rewarding. As again brilliantly put “it does not matter if you are right or wrong. What matters is how much you make when you are right vs how much you lose when you are wrong”.

I wish you all a pleasant journey in this fascinating world of investing.

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