Monthly Archives: August 2015

Some thoughts part 2

2. The never ending debate between concentration and diversification:

in my investing years so far, I have read several books, heard several speakers, read various articles, blogs, subscribed to newsletters etc only to learn each individual has his own style. It’s the comfort of what works for you that sets in to usually guide you on what you should do. However why I am personally in favor of diversification is-

a) a concentrated investor usually owns a handful of stocks bought at a certain price. Since traditional teaching tells us you need to buy right and sit tight, and stock prices the,selves never sit, it usually follows that post a stock,price rise, a concentrated investor never buys more and thus keeps adding cash waiting either for a fall or opportunity. I assume this can’t go on forever in terms of opportunity to add another company as if it were then by sheer addition itself there would be diversification. A cinventrated investor thus is not fully invested and chooses to hold lots of cash. Imagine if you were concentrated and owned 60 pct equity that does well and 40’percent cash.

the market does well and your 60 percent invested say goes up 50’percent. The rest 40 percent in a saving account or fixed deposit goes up say 6 pct post tax. Your total,portfolio returns then are 56 pct, which is phenomenal. However if instead of earning 6 percent you owned more stocks having bought other good ideas or seemingly good ideas and because of a rising market made say a lesser than your top bets return of say 25 percent (half) would your overall portfolio returns not rise??

In other words, what counts is absolute money made. To ignore the 40’pct computation in assessing how well the rest did is itself a falacy.

Buffett himself talks on this. He says you are playing baseball and someone keeps throwing pitches at you. By pitches he draws an analogy to stock prices. Some days the pitches are high and you do nothing. Other days they are low and you swing and hope to get a home run. In a diversified portfolio you are an allocator of capital based on the availability of cash, the concept of limited resources (cash) being capable of put to alternate resources (opportunity cost) and a stock market which more than ever before gives you so many opportunities. Why i say more thnk before is:

Globalization has been a game changer. We have a market with heavy fii influence and an extra ordinary media coverage on companies literally by the minute. In such an environement even an issue with a fund in one part of the world triggers a reaction within india. A problem with a co that just beats street expectations and put up its best result puts a pressure of more build up vs sustainance of delivery buying vs it’s now in the price reaction triggering the price to fall. A black swan in the company or elsewhere causes nervous prices. And how!! China, Greece, interest rate fears in usa, quantatative easing, npa in a bank that has lend to a company that is troubled and its impact collectively on interest rates, crude, commodity crackdown or rise, forex issues etc….the list never ceases to end.

Thus stocks are far more volatile than before. Which also means they throw more opportunities than before. Usually not limited to where you concentrate but everywhere. You are not beating your best bets when you buy new you are beating your cash returns.

I will also clarify- when I buy where I see opportunity I won’t necessarily sell just because it has gone up. I will sell only if my cash has better use. And if I can get a 30/40 pct vs a 6 pct I’m good.

Markets also fall. They always do. and when they do it cascades into almost everything falling. Why? Cause when someone makes a loss on something his psychology tells him to make good the loss by booking profits elsewhere before they disappear. This update is not intended to capture if that is right or wrong but that’s the usual behavior norm.

When stocks fall I have always got a sense of where I want to build up vs where I would like to encash. The reluctance to deploy cash is usually met with a switch over strength and what I liked more than others is now within a better “buying power”. As long as one day before my returns on non core are beating cash in bank, I’m good.

my own journey also benefits from another buffett thought: keep cash flows coming. The word is flows not stagnation. They May come by stock appreciation of non core and your beating the banks or by other sources of income ( I work and hopefully hard enough) or other sources like rental incomes or dividends etc.

Hope to update the next line of thoughts in a few days.

Happy investing and happy learnings. Feedbacks welcome as always.

There are no stock disclosures in is write up. But for the sake of good processes, I am passionate on what I do including investing. And not a registered sebi analyst. One thought of action may not be conducive to a completely different set of circumstances and like I said earlier, success has infinite molds.

Some thoughts

hey guys,

i will share with you some thoughts that I shared with some of you at a talk on my investing journey.

Don’t feel bad if you were not a part of it for we did not discuss ideas that usually draw more attention but only our journey, our mistakes, learnings (if we learnt) which to me are far more valuable than even the joy of looking at a stock return turning favorable.

some of these thoughts may be borrowed wisdom or tweaks from learnings but still I hope they make good sense.

  1. The impact of social media:

of late  there has been too much euphoria in tracking several forms of social media from Twitter to blogs to forums to even whatsapp groups. Thee are some blogs, sites etc that are doing a fabulous task in identifying and following up on companies just as there are sites and social exchanges that are meant to further the cause of investing with all positives. However there is also a huge impact of technology at play which means the information that can be disseminated through a post can now reach many more people than it could through earlier traditional means. The lack of control through paid subscriptions or purchased copies such as apply to magazines or the time lag in distribution of media or the ability to connect with only your own connects through the mobile or meetings stand defeated with modern communication over the net. Not only are many sites, posts, tweets, blogs free to all, they reach a huge populace at almost the same time. In some cases even through Google alerts. That imperially means too much of a recommendation to buy or sell can be read by many and many may act on the same almost at the same time. In economics we were taught that demand and supply usually determine prices in a non controlled environment. With the markets in a bull mode, most of these posts have been on the buy side and thus have caused a sudden huge buy demand by many. Even if for one person the demand is a grew hundred or thousand shares, when multiplied in almost the same time zone by several “aspirants” the chase could be up the mountain.

Precisely why though I find no fault in the proponents and well wishers who wrote the posts, I find fault in a never ending chase by investors who merely forget price is not equal to value. The debate on what is value to one vs to another can extend but usually euphoria is beyond fair value. That explains why the same lot of shares that have done exceedingly well in the past for their own merit found a huge chase by the crowds much to the point of the greater fool theory.

in one of his tweets, the renowned fund manager, mr. Samir Arora makes a mention of this. At the risk of my own interpretation and amendment  I state:

An investor finds a good idea and writes on it, the stock is at price x. The idea gets attention and the stock price moves to y after some investors buy it. More stories are written on success than failure and more of our movies too have happy endings than deaths. Hence more people join in to rave on a stock going up, sometimes even claiming their own intelligence in selecting that very stock beyond a plain reading or a cumulative of endorsements. Success attracts success and so more join in and chip in on the same stock till the stock prices are beyond fair value.

Now the co this has a PE or PEG or whatever matrix you deem fit higher than its average which means the market iis factoring in a huge premium to growth. Imagine a co was functioning in its usual way with all its arsenal of finance, marketing, production, research and development etc doing their planned job oblivious of the huge premium tagged on to them that demands an even higher success.

Comes the d day. The co either delivers as it planned or provisioned or better. The market is let down as it expected more.

worst the co falters due to “black swan” events like global currencies, non receipt of payments due to orders, change sin raw material prices etc.

the first set of investors now feel the co is above fair value sometimes way above. As the decision to buy sell or hold is usually triggered by cash flows vs valuations they need to break the bad news..the stock is no longer cheap. They can still be invested depending on their time horizon but the stock is no longer getting that positive excitement it once had,min the trailing line is a set of less disciplined followers, who were excited till they believed their own version of the story but now the question that dodges them is “who drank the kool-aid” and caused the first sell order and down tick.

the net effect is value has caught up vs price and one of them is now naked with the tide running out. The result is the reverse mad scrabble to sell (even dump). There may be nothing wrong with the scrip still except it has no sponsors and no followers till it arrives again at fair value.

those hurt in the war are the buyers who chased while those still sacrosanct are the ones who again see value and deploy their funds or if not stay put.

the result has seen some good companies going beyond fair value in the free home run madness and the resultant sharp correction with one or more inevitables.

on could have avoided the impact of all this either by buying right (known usually in hindsight) or at least avoiding the chase. Even mathematically more damage is caused by a scrip falling than rising apart from the psychological effect of loss averseness being more than the joy of gains.

I personally felt many companies had run ahead way to fast and were bound to correct somewhat fast and furious due to the social impact of too many chasing too fast.

one of the other drawbacks of this social effect is say I like a stock and write on it based on a thesis. Now my thesis goes wrong somewhere along as can obviously happen in stock investing. Will I first sell the stock and then break the news or will I break the news and then sell. The chicken and egg situation will deepend on whether I am ethically bound to do something. I may well be in the case of an advisory service that is paid but not if its my own will. The result in any case will again be cascading. Like an engine derailing with the rest of the boggies directionless.

once again, I am not undermining the fab role of some sites or blogs or tweets etc, I do know some of the people who run them work painstakingly hard on their thoughts and are ethical in every respect. Yet society is known to be a judge of its own convenience. Heroes are forgotten and new heroes are born. Stock markets are even more merciless with people getting less credit when they create ideas even when they work (the credit is usually upsurged for social acceptance, recognition and an admission in the knowledge club) and getting more flak with even some mistakes.

We learn, we observe and we move on.

the article shall continue with more thoughts updated over the next few days.

happy investing and my apologies for any spelling mistakes or the like. As always an instant ploughing through an iPad.

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