Happy Valentine’s Day

Happy Valentine’s Day

Hello friends. This update starts with an interesting anecdote that attempts to explain my reading of a situation we are currently in.

On 8th February, I created an original tweet. It went like this:

Dear February,
just because it’s Valentine’s month,
we don’t need to see Red every day.

Yours,

Stock Market

#valentine #bse #nse

In matter of less than few days, this very tweet went viral.

So much so I got it back from others all across india and it was even read out on Bloomberg, albeit as a forward.

Some of the sources who forward it back to me claimed it was from them and later a few admitted to have received it as a forward. The source was never discussed.

Hang on.

This memo is not a grudge memo, although in a market fall, it is usual to have grudges.

Our lack of education in schools and colleges on risk or loss management adds to a situation where we lose control of what is logical and start piling on mass beliefs. While this should ideally sound logical, we forget that mr stock market is a believer against majority.
The point of reference to my tweet was-

1. We live in a world of mass connect;
2. We hear a lot of views and even forward them causing a greater belief on these views;
3. We hardly investigate sources more so in falls as every thing seems justified in a reasoning even though we defy the same logic when markets rise and show a far higher sense of confidence in our actions.

Relate my tweet to the current market scenario.

December end, we all were told by all channels, magazines, experts, consultants, funds that as we end 2015, we will dawn on an exciting 2016. New allocations to fii funds will keep their interest alive while retail would buy so much that “inevitably” it would overtake fii buying. Hence with both fii and dii on the buy side, the markets would continue to do well. At best, the debate could vary on “how much” but not many seemed doubting the sense of direction as UP.

Look up the sensex and nifty targets of majority of Broking houses and the stock recommendation reports. It was a buy one way or the other.

All this news of buys went through blogs, whatsapp groups, social media, print media, electronic media. There were investor camps, dhamaka earnings, multi bagged views, what all.

We were cruising till an ice berg hit. And Twitter was all about Titanic.

Immediately we saw and are seeing flash cards of one “negative” after the other:

1. China
2. Oil
3. Redemption by sovereign funds
4. Global markets
5. Concerns on Lack of liquidity with investors
6. Leverage
7. Rumors of long term capital gains
8. Fears of usfda on every pharma co
9. Fears of slowdown of consumer cos due to rural slowdown
10. Banking problems in psu- as if these were not known for months ahead- unless we chose not to even believe our own capable governor when he kept warning of this.
11. Slowdown in infra
12. Whatever as it all works in a contagion.

If my small world, a tweet found its way to several lacs of ears, now imagine the impact of all the giant tv channels, the huge network of Broking houses, the network of whatsapp and social media groups, the print media, the word of mouth spread of all this negative every passing minute.

Investor camps eager to catch the next big idea till December 2015 look like gas chambers. Get me out. How much fall is in place- have replaced the optimism. All in just a few days.

The cascading effect has created more chaos.

Each thing is being correlated to bad.

Don’t buy strong brand companies as they are expensive- (though all have become cheaper relative to December and have a history of wealth creation)

Don’t buy pharma as USFDA will strike soon and valuations are not in sync. (Till December it was a story of a secular bull run)

Don’t buy private sector banks like Hdfc bank or Indusind. Why? Oh the effect of Sbi and likes would son hit them too. And now some are more expensive than others. (By the way at any point of time in any sector, the best is always more expensive than others. The question is is the best doing well)
Sell stocks no matter what. Even if history supports gains for decades. Even though equity is the best class of investing. Even though buying in biggest disasters proves superior returns.

Interestingly it wasn’t one factor that lead (or is leading) the fall. We had a reason every day. Almost if we didn’t, we could have typed “bad news” on Google and found one and somehow co related it.

The effect has been a fall in scrips across sectors.

While it can be argued that some scrips deserved to correct (read 27/12 blog update: jaago investor jaago- froth in several second line stocks and the tweets on a blind froth in mid rung pharma and IT) the moot point is markets don’t spare even good companies in a liquidity exodus.

Hence even if one Broking house that I otherwise respect, got the sensex target right at 24000 odd, one forget even the stocks liked by the same Broking house were equally battered.

Picture this:

A consumer company well loved and believed to be all weather stock fell from 17000 to sub 10;
A branded food company that wasn’t plagued with a maggi sort of problem fell from 1700 to sub 1000;
An Internet co fell from 1600 rs odd to 400 rs odd;
A pharma co much recommended fell from 1800 to 900 while its smaller mid cap from also highly recommended just till a few days back from 108 to 38;
An automobile co that has been posting good results last few quarters fell from 3300 to 2200 odd; to name a few.

In the same breath psu banks, psu stocks including a recent offer for sale, metals, cement, auto ancillaries, mid caps, small caps, God knows what caps etc fell. Yet it seemed that the fall in this category was more than the fall in some of the examples I shared. Why?

…..because some of the mid caps and small caps had given good returns before falling vs some stocks that have seen a secular fall for the last few years. Mind you, even some of those in secular fall feature in long term wealth creation.

What does that mean? Why do we see the falls as doom and ignore the recent past of gains as a given?

Doesn’t it suggest that stocks off and on gain and correct and as long as the gains insure us from the pain of falls, we are fine.

Doesn’t it suggest that as highs, there is overdose of information “interpreted” as positives, while on corrections, we accept everything as an endorsement bias of negatives. Most of it just “emotions”

In the community of investors, reside many:

Some day traders
Some technical
Some short term investors (many)
Few long term investors

The last category get featured in books. Which are meant to be read. And learnt from. Why is it that these few have portfolio sizes that can leave many with their mouths open. Do you think these guys never went through falls? Forgot 24/8 just in 2015? The market was down some 6 percent in one day. But it was forgotten. Why? Cause things “eventually” looked up. multiple examples of a similar kind exist.

Suddenly there is no talk of bull market. Headlines read “we have entered a bear market”. But why? We don’t know. Just because we saw 2008 and just because market levels have come to some month lows- we so believe. Just as we believed that at the end of December we were in a bull market. In fact we thought we were well equipped to even know what phase of the bull market.

I don’t doubt there is some global nervousness. But in my view, not all is coming from true bad news. Some of it is coming post a good bull run (corrections are natural), but most just from a flash of 2008. Ppl fear the cliff of 2008 and thus are resisting buying when they are getting some fab cos at great prices. And more than emotions, it is the cascading effect of a lot of negatives floating around.

We talk all year on Buffett and Munger. Are they selling? Did they buy the last few companies in 2015 worrying of their destruction in 2016? Why are we not quoting them now but will when stocks rise to highs and we feel we were tutored by them. Do they analyze china by the hour? Can they? Do they check every day what fii and dii are doing? Or what others are doing?

Imagine you own a barrel that’s empty. It has the capacity to take in lots of water. Occasionally it will leak either due to an sudden speed surge of water being deposited or Occasionally some water will be lost to evaporation. Or someday you don’t feel energized enough to come to work to fill it. Some days you are so happy to see the water filling up that you have fun. Splash some water on yourself or friends and lose some water. Some days you drink the water as you are tired and thirsty but don’t fill it. As you know you can fill more over time.

You fill the water with a mug. The mug draws water from a tap. The tap runs and you fill water commensurate to the size of the mug as you cannot lift the barrel or drag it under the water. You have a limited capacity to fill it. Further many queue up with you for the same tap. As they all too have to fill their barrels. So some days you wait longer to get water. Some days your turn doesn’t even come and you queue up again.

Suddenly someone comes and says water will be obsolete. Without applying any logic the news spreads across. Few turn up at the tap. Many think it’s a lost cause. The queue has few takers. You lose track that your objective in the first place was to keep filling water. You know water has an unlimited use. But because of sentiments you chose to join the comfort of negative news.

Water here is your equity. The mug is your income that enables you to fill it. It comes in every month and is used by you to buy equity. The barrel is your portfolio. Your wealth. The queue is a bull market.

Ignore the negatives. Hundreds of years of equity investing teaches you- keep investing. There is nothing as a known known in markets. Prices are never static. Wealth creation is never a on and off game. It is a game of discipline. Some say we won’t buy a stock we liked at 200 at 100 now but will buy it when it bounces up. First it won’t knock on your doors to tell you: hey I’m about to rise. Many stocks hit limit up of 20 percent for several days when markets regain their vigor. You are ignoring at Cmp you can buy more for the same amount you would have spent at 200. More makes your net investment price lower. Even small incremental differences make huge differences due to compounding.

If you want to believe Buffett or Munger or Marks or even some of the smartest investors and fund managers , why do they talk of returns over a period of time? Why do some ignore noise when it’s loudest.

I do realize this article has come a bit boring, a bit too long. But it’s come from the heart as always. Wish you all great returns.

 

Caveat: not Sebi registered. Be safe, seek advise. Keep good company of people and believe in life.

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Introspection over a cup of coffee

Source: Introspection over a cup of coffee

Introspection over a cup of coffee

Hi friends,

instead of a blog update this month, I was invited to do a guest write up for Dalal Street Investment Journal (www.dsij.in)

accordingly my thoughts on the market appear in the issue dated 8th February 2016, at pages 30/31. I think they have come out simple and well.

i hope my thoughts resonate with some of you in your quest towards long term investing. I look forward to your cherished comments.

standard disclosure: I am not a registered investment advisor. The views expressed are personal and out of passion. You are advised to consult with a professional or exercise due diligence.

happy investing. Enjoy the coffee and the thoughts.

jago investor jago

hey friends,

I have in the last few days come across so many investors who have met with success in the last few years in owning mid caps or small caps.

Well done.

It’s great to see that so many investment decisions have been duly rewarded and many investors are happy.

however being a keen observer, I have noticed another trait. one which seems ridden with lots of pits and which could undo a lot of gains.

most investors who have been successful have now started taking themselves to be akin to fund managers despite very little experience.  the feeling around is they now have the mantra,  the secret ingredient that will lead their portfolios to more multi bagger returns through 2016 and beyond. some believe they will do 100 percent for many years running. Even at the cost of sounding childish and over confident.

the following traits were observed:

a) most of these investors have a history of being in the market for not more than 2-3 years. they have never seen a market crash and have thus participated in mid and small caps at a time when the overall small and mid caps have been on a dream run. Sometimes people overlook a trend and take too much credit for it forgetting humility and embracing arrogance and over confidence;

b) most of these investors had nothing to do with investing before this 2-3 year stint. most were in jobs or still are and now feel ripe to be captioned not only as full time investors but “advisors”. Many are thinking of giving up their jobs believing they have a smooth road ahead as super investors quite oblivious of long term trends and impact of market crashes, cracks or reversion to mean. My advise: please don’t sacrifice “certainty” of income in a stupid belief that you are the next hot fund manager or advisor. Remember there are still a handful of the guys at the top and even they are more in tune with the fact that they don’t always beat markets or get more than moderate returns.

c) most of the investors turned advisors  never found one idea. They were fortunate to read ideas on many mid caps and small caps through some form of media and assumed that ideas as of their own origin. They forget that “overall” it was a great time for mid caps and small caps and even by historical standards, a dream run in such stocks. The overall lack of ownership in mid caps and large caps and a general high inflow of news from hitherto unknown or undiscovered web sites, blogs or the like has brought in a “flow” of like minded investors or believers into a common pool of ideas. More like group sourcing. When the tap runs dry, many are left thirsty. Learn to dig for water.

d) they believe a lot of the stock upmoves in what they own is their talent or doing-ignoring that in most cases they do not even own 1 percent of the co and do not influence 99% of the owners. They also forget that many of the stocks owned or purchased may have been illiquid and thus even with one or two credible names entering them a mass revolution of buying and believing started. They think discussing stocks on a whatsapp group is enough for its rally and ignore historical data where even the biggest of names have not moved stocks in a one way move. They forget markets are not a voting machine but a weighing machine.

e) there are multiple cases of assumed personality of Columbus now around. It seems what has not gone up is “undiscovered” and many Columbus voyages to discover the next multi bagger are underway. Just because quality companies have run up and become expensive, a flow is extending to usually laggards in a catch up with sector valuations. Sadly a lot is being taken as easy money.

My friends, my role in this article is only to look at history and suggest we all learn from it. Every bull market has some dubious stocks hitting new highs. Most die sooner than one realizes or remembers. Every bull market makes many an investor gullible and over confident and  history leaves trails of larger losses than gains- a fact demonstrated in the statistic that less make consistent gains in markets than those who lose money. Try and be in a controlled thoughtful and cautious frame of mind. Be protective rather than careless. The fault lies not in the discipline of investing and sticking to quality or certainty but what is undone in a state of haste, exuberance, hubris and what Nassim Talib calls “fooled by randomness”.

Simple economic theory proves that in a sector there are a few leaders and many laggards. In any profession, some succeed many lag. It’s a known fact that many companies self destruct and very few companies sustain. Something that even prompted a fantastic book BUILD TO LAST by Jim Collins (and its follow on book).

It is completely impossible for all companies to be doing better than a sector average and almost improbable for all companies to sustain growth and valuation above a sector average. Even in economics, we were taught on the law of diminishing returns in a sector as efficiencies set in, economies are utilized and competitive edges of the past give away to a new order of destruction and disruption.

 

Greed hits not only investors but also promoters and their pursuit of ways to make quick money.

while the market is a fascinating place and there is lots of wealth to be made, don’t lose track of some basics:

  1. Read Read Read
  2. Don’t take the market or stocks or returns for granted
  3. It is almost impossible if anyone tells you he made 100-200% returns to match these returns. Ignore him. He is a passing phase with little or no experience and very little history of success and no experience of sailing in a storm. I would bet many would burn out now in this over confident pursuit of unknown unknowns. Even a good fund manager’s returns are measured over longevity and usually in ability to safeguard the returns in adversity rather than in blind moves. History has examples of IT boom and crash, Realty stocks boom and crash, Infra boom and crash- in each cycle you will see traits of latching on to a rather poor set of companies in this blind belief that another pearl was discovered by a group of quick return investors. Most of whom are now out of the market for good.

 

Happy Investing.

Caveat: I am not a SEBI registered consultant. However I have been in the market to have seen and to be aware of several ups and downs and the fact that its imp to sustain.

 

Don’t be a cry baby, be a buy baby

Dear friends,

here’s the link of the article I wrote at alphaideas.in and which was posted on this Monday morning.

http://alphaideas.in/2015/12/14/dont-be-a-cry-baby-be-a-buy-baby/

Thank you for your overwhelming response to the same. Am humbled.

 

regards.

 

Take a deep breath and smile

Hey friends. What a day I chose to update the blog. The news of an election loss for the ruling party just came out. Although is may have a short term impact on markets, it’s important to understand that a market does not have to only fall or rise.

A market can choose to do nothing.

Frankly I expect that until the year end (which fortunately is not too far away) the markets may just do. Nothing. There would be debates on whether parliament will function or there would be more walk outs, protests, noise.

We are almost done with many results, the finding is a mixed bag. Large caps in banking (public sector), two wheelers, infra and capital goods like Larsen Toubro, large pharma like sun, lupin etc are struggling with nos. Some like Dr Reddy now have Usfda overhang. Some like thermax and Larsen have reported slow down in order books. And some like Abb, Siemens, Bosch etc remain good companies at a very expensive valuation.

Mid caps look fairly valued commensurate to both their results and recent run up. Recently I had tweeted that mid caps look fairly discovered, owned and valued.

Frankly it seems to me, at the risk of being wrong, that the market looks tired. There is that feeling that about two quarters onward earnings will improve, credit cycle will be more liquid and interest rates lower. Govt spending may improve, tax rates on corporate taxes may see a bit of softening. But as of today many cos are either fairly valued or even expensive.

An investor may feel happy at market rallies and bad when they fall. But given that equities are a long haul vehicle, boring markets are actually not bad. I intend to use the coming few days to:

A) evaluate some of my past holdings to see if the growth story continues. We sometimes get too carried away in our winners and complacent about sir strength (read valuations). Sometimes we are blinded by the fact that the world and systems are changing too rapidly and a competitive edge that seems sustainable is far more apt to destruction today than it ever was.

In a recent issue of Fortune, I read how global CEOs believe a good co must disrupt 4 times in 10 years. The cost of disruption is evident at the pace at which wealth is being created and displaced.

Today the morning papers spoke on how Facebook has undone GE in its rankings. This trend is likely to continue.

B) some of the stocks we like will become less likable. Nothing wrong with them. Just that some other cos will throw relative attractiveness either due to valuation or new changes. Have a look at some of the recent corporate results. Some of the most written about companies are witnessing disappointing results while some less glamorous cos are reporting better nos or projecting better times. It appears that the usual rules of economics in demand and supply and scarcity causing a higher than fair value are playing out.

It may be difficult for many to know this now or to be right or wrong but there is one good rule that applies well in investing. Companies with good managements usually bounce back and get on track. Which means when good managed cos have a stock market thrashing or a quarter or two off and hence loss of “demand” and abundant “supply” you can take out your fishing rods and sit patiently in the sun hoping to hook on a good catch.

C) I would be personally happy not to over stress to find multi baggers. I feel from my interaction with some and a lot of reading investors are taking multi baggers as anything that’s cheap relative to market. I see more investor talk on cos from a valuation perspective than a qualitative perspective. The whole investing community of india thinks they are Buffetts and Mungers and that all know all moats. This is an art that comes partly by a sound knowledge, partly by a market participation fee and partly by psychology. Some have it but also have temperament and capital. Some have it but have borrowed capital and hence a pit waiting for a day for them to trip. Some have no temperament nor knowledge but believe they have access to some blog, web site, Twitter connect, broker report that would be their Aladin’s lamp.

Guys be patient. In a run up from just 5500 to 7500 odd several stocks have gone up multi food even though market move in far more muted. Take it partly as good timing and partly as a pat for buying some good stocks and not too many bad ones. Now spend time pausing.

Use falls to buy your convictions. Borrow less and save more. Find some good friends and be under their sensible approach to capital building rather than a 20/20 match. It is not usuall for stocks to keep multiplying very rapidly. One bag egg in the basket can rotten the entire basket.

Don’t be swayed by unknown names. Some times cos have magical qtrs but never sustain them. And then when such inherently poor cos fall many turn around and say markets are a gamble and that everything is rigged.

When you run too fast sometimes it’s good to slow down. Observe the nature around. You are bound to find another good spot to run, a bunch of flowers that not many have noticed in their running past them. Read good books. They are like a good breakfast that enhances your temperament your discipline and your approach to a valued process.

As we turn the year to a new Samvat or Diwali, I shall share some experiences I went through last few months.

My greatest experience was winning the love, respect, affection and in some cases, friendship of some of you. I was humbled to meet some of you and see how much you look up to me with the blog that I am a well wisher. Truly a multi bagger for me.

I also saw some of you are truly devoted to learning. In your interactions you are keen to learn the process and not jump to stock discussions. I feel that will hold you as winners in times to come.

I also saw an automatic cut off system. Partly from me partly by a natural process. Negative ppl or thoughts should always be away. Neither are such people worth it nor is the process somethings you have to live with. It’s one life and you shall have enough of your good people around to bother about others.

Finally coming to some sectors or stocks, I am quite impressed with the way some private banks have been taking psu market share. I see this continuing. While someone sways you to say the entire sector is plagued do read some history. There are stocks there with the likes of Hdfc bank, Kotak mahindra bank, Indus Ind bank etc that not only have given phenomenal returns, they have done things to maintain their edge. Even today Uday Kotak says every night when he sleeps he wonders if he will wake up and have his bank intact. See the positives in that. For years the bank has been a huge wealth creator. Aditya Puri sounds confident about what he is doing. See Twitter account of hdfc bank and you will get an idea about how much innovation is at work. Little surprise that the bank has a ranking now in the top banks in the world.

Nbfc look good. Partly by their business model hat allows them to customize at a far swift pace and partly by the fact that with a smaller lending per customer they have greater pricing and lesser npa.

Pharma is under going a great global story. True many are now expensive. So wait. It will cost you nothing. Markets have heir bouts of insanity on select days. Be the punching tiger on that day.

Speciality chemical cos look interesting with their Patent pipelines. One of the best wealth creators last few months was a co called Navin fluorine. There are many more such potential winners.

Keep a watch out on some mnc cos. When great parents focus on children the results are usually tempting. I recently read on a few of them getting serious about India. Some of them are not even unduly expensive.

The prospects of housing finance, one of the best performers since last few years continues to be robust. Ignore the negative talk on land not being sold. Some of it is to do with a complete mess up of builders some to do with speculation. No sane person would not desire to have a better house. And am end customer chooses his dreams. His housing finance enables him to do so. While this is not a recommendation, I think Dewan housing runs a fab advertisement featuring the super Shah Rukh Khan explaining the importance of house loans. No slowdown lasts when it comes to roti-kapda and makaan.

Select pockets of consumption look reasonable. In branded clothes, tiles, tyres (5 are sold for every 1 car) and similar pockets. Some good companies have announced very aggressive capex plans that make their mkt cap look promising if one goes by their history of success.

Be friends, be believers, be patient, be progressive.

We have a long path to our dreams. Never stop dreaming.

Happy Diwali and my best wishes
Disclaimer: the article refers to some stock names for illustration. I may have vested interest in some. I am not a sebi registered advisor and may well be wrong in my views. I will not be wrong in being an optimist in life 😀

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.

a good journey is not bad just because of a speed breaker

hello bloggers.

When a person sits down to write, after a gap, usually two situations surface before him.

Either a person meets with a writer’s block or has so much to say that where to start and how becomes a bigger issue.

I happen to be in later state.

I have been busy spending good time in multiple activities ranging from advising brands to investing to reading more books and blogs on human psychology.

Everything in this is driven more by a passion rather than a trusted regime.

Passion at times is nothing but a belief.

After all even God is a belief.

Sometimes beliefs are weighed by circumvention or intrigue.

For example, in the context of markets, by a questioning: what can go wrong, how much capital will I lose, is xyz right when he writes a gloom report or is abc the one to believe given his just recent record of a smart report and resultant stock rise.

My personal experience borrows from a simple learning slightly twisted from a well known saying. If “to err is human, to believe divine”.

In a recent presentation I attended I was fortunate to chat with mr raamdeo agarwa and mr bharat shah. A day later, Raamdeo gifted me his latest signed book on investing in which, he makes an elaborate and historically backed case of value creation and elaborates how many times the market itself has gone up since the formulation of the first sensex almost 29 years back.

All of this, notwithstanding gloomy situations of sub prime, dot com boom and bust, Greece, euphoria over BRICS and then fall out of Brazil and Russia and many more such dooms. The simple fact has been the market has continued to rise and give exponential returns over time more by belief and discipline and most importantly by concentrating on signals and not noise.

Each of the doom scenarios has proven Very little ability or even absolute inability of several experts and investors to predict or even to insulate their portfolios as most of such black swan events have fallen within the domain of “unknown unknowns”.

The recent Maggi controversy is yet another example of how an excellent company can get it against the wind and be blown away without an inkling or reasonable apprehension despite even having a highly acclaimed management and despite an excellent history of corporate and consumer governance.

The effect of NESTLE now seems to be impacting gsk consumer and ITC.

As against these unknown unknowns which extend to several complex and usually difficult to trace factors ranging from global overnight sentiments, fed moves and expectations or worries on rate hikes, Greece settlement or failure, quantatative easing or hardening, some bank in some part of the world goofing up on some sub prime like situation or ending up paying exorbitant fines, every now and then adjustments on MSCI or what have we, RBI interest cuts or no action, political consensus or its absence on reforms and many more similar jargon, there are far easier known knowns.

I call them far easier in a relative sense although I won’t be surprised someone argues this too against me. So be it.

The most known known that hipster and facts support is that good companies bought at decent prices and held over a prolonged or relatively longer phase usually end up creating huge wealth.

I used the word ‘decent’ price instead of ‘reasonable’ price to better reflect a “range” of buying rather than at a point price, duly understanding, that in a true live sitaution what is precise is far tougher than a decent range.

I hav come across several reactions by friends, colleagues and connects on the market falls as also on market rises. Some even argumentative and some rather disbelieving almost as if it was engraved in stone.

The sitaution of market rises reflects a scenario where more people talk on the lines of my (theirs not mine) xyz stock went up so many times and I (they) knew it all. A situation where people attribute more to talent or luck than skill or the overall rally.

The situation of market falls (rather corrections) reflects an imposed feel bad judgement when everything is suddenly bad, not happening or Bound to go bad. Almost like a cursed day without a look in to the fact that every day is a new day and historically markets rise with time not on time.

I recently came across a pun tweet by mr samir arora on Twitter which aptly sums this up:

“remember when your portfolio goes up, it’s because you chose good stocks/ quality etc. When it goes down, it’s because of RBI, Greece, budget….”

As soon as the market corrected from 8900 to 8100, the same typical and now much expected noise took over…we told you it was overvalued, we told you the market had risen without fundamentals, we told you QE is hitting indian markets, we told you it’s best to book profits than see the fall, we told you the clock strikes one and the mouse comes down, humpty dumpty (investor) sat on a wall (sensex), humpy dumpty had a great fall….God knows what all.

Picture this:

a) unless you are a trader with a small gain bias, you normally would not buy a scrip for 10 percent gains. Inversely why would you be so perturbed if it fell 10 percent at all?

b) if you knew before the fall that the “most” the scrip could rise was 10 percent, was it that you owned a wrong company in the first place: one that was driving a fast car against an inevitable wall waiting for a certain crash. In which case, do you own companies that have very limited shelf lives? For if you do, every market is a worry for you for a man who invests is also known by the company he keeps. Literally.

c) if QE is the cause of a market fall in india, is it that india is playing the perfect host? Is it that india is a Samaritan who says “world markets, you need not worry. Go on keep rising. I am there to fall in case QE slows down as if I was the most to rise when QE happened

d) if you believe markets are falling due to bad earnings, picture the earnings with a few exceptions: Tata steel, cairn, sesa sterlite and such few companies that have truly run into a financial chaos. Factor that there is no case for markets to “surely” fall when earnings are bad or to “surely” rise when earnings are good.

the markets are futuristic and behave well over time but in shorter phases are usually wrong and irrational. Actually more than markets, scrips.

The question to ask should be: is the earning cycle likely to be better or get worse.

On the contrary markets typically fall when earnings are at the highest and at the end of a rising cycle since then there is euphoria, capital dilution with several takers in private placements, rights, iPos, when bad companies rise in Blind rush with good companies and usually draw more attention as the new hot things that cannot even be benchmarked on valuation. Usually on replacement cost theories, eye ball count valuations or other non traditional matrices that defy even an understanding by good companies.

Of course there can be a sitaution when the current earnings get worse before getting better but the best test of this can be had from some simple observations.

When things are really bad, any change is looked upon as holding a miraculous promise. This was duly manifested itself when Mr. Modi announced he would contest. The markets took it as a catalyst simply because things had gotten really bad and anything from there could only improve. The market then rallied and there was huge talk of real estate, metal, infra and capital intensive sectors reversing. People (as distinguished from investors) flogged into these counters just looking at 52 week highs or lows just as they did with psu banks.

What people forgot was a cardinal rule markets reward growth and beyond growth consistent growth. That’s why good companies compound and time spent in owning them adds up to wealth as against short term gains or income.

I am not at any moment saying all companies in these sectors are bad or anything close.but many are in the realm of unknown unknowns with greater exterior influence than their own doing.

If I feel I have my appetite under control by being fed (invested) and yet am hungry to believe in my stocks and have my eyes on a more certain longer term than a shorter unknown ride, there is more reason to be bullish than bearish. Do also remember this: in good times two things work in good companies, their own managements and the exterior environment. In bad times, good companies continue to have their managements work even against the grain.

Poor companies do well in good times as part of an external uplift but in tougher times have the double whammy of poor management and poor external support.

I have used the current fall to enhance most of my holdings. The exception has been some over the top valuations where either I have done nothing more out of indecisiveness or lure of not being able to ride on again or have simply sold to buy good companies at reasonable valuations.

While I do not want to name stock ideas not being a registered analyst with Sebi, companies in the following sectors look good to be. Stick to the best names or to absolute cash bargains with growth for maximum impact.

A) paints
B) indian Pharma that has a credible generic pipeline and is focussed on international markets. Don’t get too hyper with off and on USFDA issues. They sort out with time if companies have good managements and history
C) mnc agro chemical companies that are a play on indian land efficiency improving through patented technology or branded products
D) housing finance cos: ignore the noise of too much worry on land price falls. You are not buying real estate companies but companies that fund an inevitable dream for some and a feat for most to own better homes.
E) non banking financial companies: history supports them well if they are large and run by credible managements some of whom are most respected business groups.
F) private sector banks. Anyone can see the wealth hdfc bank or Kotak bank by examples have created
G) small Caps that have market caps less than sales, pay dividend, don’t have promoter dilutions but stake increases, don’t have equity dilutions by placements and have profits in a range of market cap far more commensurate to their sector leads. if you look well there are companies with growth, good managements and even good dividend yields that I feel the market is mispricing.
H) strong brands including in what the markets call as cyclical sectors such as autos, auto ancillaries and tyres. Just look up historical facts. Most defy cycles.
I) companies that are growing albeit a bit slower but where historical growth is favorable and that too in a scenario where others have been hit by degrowth or falling market shares.

Some people may say oh look who’s talking, a guy who himself keeps an active check on markets. Passion is self indulging though all passion is not poison. Do what you enjoy and enjoy what you think has worked for you.

For life will give you many teachers, some rewards but few sponsors.

Remain pragmatic and believe in your thoughts and ideologies even more if they sound too simple.

Happy investing.

(Do pardon errors. Wrote this sipping some delicious tea overlooking the alps both with passion and with good intent).

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