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.

 

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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).

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.

The year that passed and the year that lies ahead

hi and a happy new year to all of you.

It’s been a fascinating year in terms of markets and stock returns building on an equally good 2013.

I thoroughly enjoyed interacting with you all through the blog, or in some cases in meetings and did my bit to share views on stocks or markets or both. Constrained by a SEBI circular, I have shied away from talking scrip wise of late and shall continue this article in the same spirit.

The purpose of this article is to simply share my experiences in simple words that may appeal to any reader, based on some of the experience I had in the year that passed and the base on which I endevour to see the year(s) ahead.

1. It pays to be optimistic in life and in equities. While it is true, markets have their ups and downs and sometimes downs are brutal, the net effect has always been rising markets. Mathematically too in a buy situation you can get unlimited up side vs a sell situation where you can park your gains but have to trouble your mind to put capital to creative use in a situation of both inflation (lessening of buy power on money held) and opportunity cost lost in holding something that could be a several times multibagger. It’s better to lose a few points to get the multiplication effect

2. You own scrips. You don’t own markets. You are not an fii with an index ownership. Why are you so perturbed about market moves anyways? Even in declining or falling markets, scrips go up. In some cases, cos that you found to be below a fair market cap suffered from no sellers for the same reason that those owning found the co cheap and were not in a paradox of irrationality caused by fear or herd moves. Even if some co falls, due to market panic, it opens the doors to enable buying and as long as you are buying with surplus money and for a long haul nothing matters. You would have never lost a dime in owning a Nestle or Asian Paint or Pidilite even if you bought at the peak of any year.

3. Have your own conviction. I have moved away from borrowed conviction to a headphone mode and while it is ok to interact with people for their knowledge skills, you need not follow everyone’s views on the stocks you own. People may not have a correct perspective on a co due to several factors, which include:

A) their lack of ownership and hence interest;

b) the ownership of other stocks and thus a belief that mine is better than yours. In eft a judgement that only time can test;

c) risk averseness. Please read a fantastic book called Risk Savvy by Gerd Gigerenzer which talks about the perception of risk and reward and that it is not necessary that perceive risk is same as a perceived loss. In The education of a value investor, Guy Spier, talks of the difference in uncertainity vs risk. Plus by imperical reasons, one man’s food is another man’s poison.

D) don’t bother too much about the upside, bother about the downside. Highlight factors that are the base of your buy decisions or sell decisions and measure them rather than keep asking questions on xyz having run up too much and thus ought to be sold.

E) there is nothing as a best scrip by historical facts. While it is true that owning a nestle or Colgate or asian paints would have given you an upside in the past several years, most multibaggers of this bull run were found in small or mid caps.

f) find pools of continuing education in like minded people, in books, in blogs and in people who share experiences such as on you rouge, TED talks etc. The mind needs oxygen of thoughts.

In the years that went by many stock ideas detailed by me worked well. I do not want to emphasize on the winners but want to emphasize on any mistakes or leanings I had.

my first learning is stop discussing ideas with everyone. People have no idea about your company and yet express views as it is human to comment in everything, I have the worst knowledge on some subjects like politics or medicines and cannot assume myself giving a correct perspective on that. Learn from Buffett and Charlie munger and the readings on them.

I have seen there is no pre set formula that wins. Some of us have had diversified portfolios and some concentrated. Some of my diversified portfolio friends including my own portfolio have multiplied several times and yet some of the concentrated ones have done equally well. You are an allocator of capital. Period. Allocate well and make the most of your abilities. Learn from mistakes, even jot them down and follow a path of belief.

some people excel in special situations, mergers, de merger value unlocking, some in timing the market, some in growth stocks, some in value stocks. Some in reversion to mean. Everything works in a disciplined frame.

there is nothing wrong in my view in seeing stock prices frequently in rising markets. The talk do not see your portfolio frequently applies in confusing state of mind often triggered by falling markets and mayhem or irrational valuations. The first impacts your ability to bear loss as the feeling of loss is double to the feeling of gain and the second makes u greedy. Actually the second is perhaps not such a bad idea as it could also make you sell on a spectacular rise above your pegged levels. The mind feels good to see rising prices and a winner has a better state of mind always.

one of my Cardinal mistakes of the year was to exit Relaxo early. I have taken notes on my assessment mistakes and hope to learn from it.

Another mistake has been to follow any group chats  it takes away freedom of thought and time that can be used to read up, think blue ocean or spend time chatting with a like minded friend rating than being in an aquarium of multiple ideas. Remember money is a limited resource with unlimited options and can only be put to limited use. I am no longer in any chat.

I remain focussed in 2015 on reading, evaluating the next multibaggers, in making friends, in pursuing knowledge and new shores and in trying to be a better person and an investor.

i remain grateful to all the wonderful people who energize me and in the company of whom I feel it’s worth being.

India should have good times ahead and I continue to see a lot of value creation in the sectors I tweeted earlier on: housing finance, agro chemicals and pharmaceuticals.

Diversification vs concentration debate

hi friends,

often I witness ongoing debates on concentrated vs diversified portfolios. Most knowledge on one approach to the other stems from historical evidence or books. Many argue that one should only have a concentrated portfolio of best bets. This enables one to read up on the companies that are owned, track them, allocate capital in a meaningful way and maximize returns. Another school argues that concentrated positions can underperform, for example when a stock in the holdings underperforms or goes through a black swan event. I have seen that even savvy funds had to face this with the recent likes of SBI and perhaps others being a large allocated amount.

my personal take on this is that books and hIstory both borrow from some ifs and buts. Let me try and discuss some that come to my mind.

1. Most books that one reads were written in a period where cos did not face issues such as institution or fii limits to ownership. There was just one category of ownership ie promoters vs non promoters. While the percentage shuffled between non promoter holdings the percentage owned more or less remained same. In this scenario, when spread across multiple listed companies lies a cardinal presumption, one that centers around mass public (non promoter) holding. Advanced markets such as usa have large public holding and thus shareholding frequently changes amidst such large portion of shareholders. India on the contrary has a very low public participation. Almost every fund presentation where I was invited as a guest saw the fund manager in india trying to attract public money into investing. The issue has not been which cos or sectors as much as it has been that public needs to participate. Our markets thus remain largely owned by promoters or foreign funds. Promoters resort to several fund raising measures. Earlier the easiest was equity dilution in traditional forms such as a sale or rights issue. Now we have new forms including QIP or optional convertible debentures. We also have non voting shares, warrants and the most dangerous pledging. The later has had a toll on many good businesses specially when in the quest of expansion or opportunity, promoters have pledged shares or issues foreign convertible bonds and there is a swing of either exchange rates of interest payments go hay wire. In my assessment the factors that are impacting investment decisions are far more than simple investing books advocate and thus more variables are increasing risk to investing.

a FIi like any normal investor should be buying and selling stocks for profits. Simple. But no. Things like fii limits, liquidity crunches caused when they dry up, country specific taxes, issues such as GARR, corporate governance issues which strangely now include missed revenue or profit targets are at play. A fii may also sell investments in india if it has a portfolio liquidity or a country specific opportunity, unlike many retail investors who only buy or sell in india. They also arbitrage with derivatives and since what matters is overall portfolio returns, the behavior towardsTraditional ownership of scrips becomes complex. Let’s assume an fii owns dlf and there is a sell order of the kind that came in last week.mthe fii can even sell the shares in derivatives holding its physical holdings intact and take advantage of price corrections by the derivative profits. A entail investor may not even hav the sophistication to understand calls or puts or shorting in derivatives or other hedges including against currencies, commodities etc.

2. All theories on concentrated or diversified usually emanate from fund managers or investment legends.thentheries however assume availability of large corpus of funds at one go. Thus they pick the bets cos. A cardinal rule of investing is to buy right. The words but right have two functions ie to buy at an attractive price vs future expectations and to buy the right companies. Usually the best companies have many friends ie owners. Most multi bangers are made by buying companies at an unknown or lesser known time and holding on. Companies that are unknown or lesser known have lesser or no reports or history and that itself means that the risk to Reward is interesting. By definition of risk, it is always a function of rears, to say one should not buy more cos as it increases risk is thus like saying it can also increase rewards. Similarly if I own cos with lower risks my rewards could also be lower. In 100 to 1 in stock investing, an awesome book of basics, a point is made.myou could buy 100 cos. 99 can fail but if you get one right and hold it through the chances are that one can make 100. If you get two right you could have 2 cos with 100 x and so so on.

3. Many people like me have a regular source of incoming funds. Many buy from salary or earnings receipts. At that point of incoming money, it seems silly to be that I should force myself to either buy no equity (overpriced or expensive though good enough to hold) or buy expensive but best companies knowing I will “eventually” make money though in the interim will most certainly lose better investment options. In economics, we were taught money has an opportunity cost. It is limited in your hands and can be put to multiple uses that compete. Also in life we are taught there is no feta unity over eventuality except eventually we will all be dead.

that brings me to what I call and follow. Opportune investing. Many people and friends confuse this and think it means trading. If it did I would not have a core portfolio. Further I find that my core portfolio has almost no churning. It has positions added when prices are attractive but usually never sold. However I do not let new money stagnate waiting for opportunities as if opportunities arise I can always chose how to deploy or redeploy money. My money goes into what I think is the right or good price for a co on that moment. This way to borrow from a presentation that mr ashish kila, a friend, made “you can buy a railway ticket and enter a train. Later you can chose if you want to be in that compartment or find a better seat. Don’t miss the train however just because you didn’t get the first seat you wanted as it was not at your price”. On the contrary my core vs non core focus has given me many rewards. It makes me read more, and reading is directky proportionate to learning. When markets rise it gives me the benefits of better returns. When markets fall and core positions also have price erosions I can decide better to switch simply as the mind is reconciled to money already invested vs in a trap of whether to invest.

the only debate is how many scrips can you own. Going by warren buffets ownership of over 90, Peter lynch ownership of several and a fund like hdfc ownership off several I find there is no trap. The cardinal rule still remains own the right companies and be disciplined to add if you find the going good or retract if you made a judgment error or are subjected to black swans. Recently the highest market cap co and market darling, TCS tanked 9 percent which is a lot if you examine the year to date returns of tcs.

It is also imp you own enough of a co so that when you get it right you make a difference. I recall a brilliant sentence that mr samir arora makes in one of his interviews: it does not matter so much if you are right or wrong. What matters is when you are right how right are you and when wrong how wrong.

i have been bullish on markets for a while now and continue to believe timing and its endless pursuit is a waste of time. On any day when you have money look for a good company and buy regularly. Hold the company that rewards and be skeptical of those that don’t.

last few months my best returns came in from discovering value when it was ignored and not by buying obvious at expensive prices just for concentration. The best returns for me came from hindustan composites, poddar developers, Cupid limited, kiran vyapar while consistent returns came from core companies. Please note I am not advocating buying the cos I detailed here as I have myself reduced or sold some or even completely and now remain focussed on:

a) core holdings

b) emerging companies in auto and auto ancillaries where there is a qualitative shift in production or order size intake

c) a media content company with huge cash vs market cap and a new business head

d) a Pharma co that is less than one time sale and with an enterprise value far in excess of market cap. And a ownership by an unlisted Pharma giant.

e) a railway sector connected co which is and has been a monopoly and where I am inspired by our PM’s emphasis on railways and the statement govt has no business to be in business and hence a hint to privatization. With huge cash in the balance sheet and a network that seems impossible to replicate for years.

f) a play on telecom and 4g and supported by a technology giant.

happy investing and happy diwali to all of you.

Caveat: I am not an investment advisor. I have no intent to suggest a buy sell or hold. I am only reflecting my personal views without any company names or targets or projections.

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