Are you Ready

Around Nine months back, Morgan Housel wrote in his blog

“Three types of businesses: Solve a customer’s problem, scratch a customer’s itch, exploit a customer’s vulnerability”

Solving a customer’s problem is what all claim to do – but solving problems are hard and messy and time consuming.

Scratching a customer’s itch is much more easier compared to solving his problem.

In the Movie “Flight”, Whip Whitaker played by Denzel Washington is at a Bar where he (trying to avoid Alcohol) asks for an Orange Juice. The Bartender provides him the Orange Juice and asks, anything else. Whip then asks for an Alcoholic Drink.

In a way, we have way too many Bar Tenders who try to provide services that scratch a customer’s itch and from there it’s a short ride to exploiting his vulnerability.

We all crave for excitement and if excitement can come with ability earn more than what our peers can, what is the problem is the mind-set of many an investor.

Real Estate has been an asset class for long and yet it wasn’t crazy as it became in years between 2005 and 2014 as prices went ballistic with no relationship to any metric. Add leverage to the mix and it was a bloody good cocktail for those who were able to ride.

Our fascination with Gold is Centuries old and while there was a strong inclination to break the bank and invest in gold as it nearly quadrupled in 2005 and 2011, it never approached the kind of frenzy we saw in Real Estate for there was no leverage that was available easily for retail investors and the risk of physical gold is always there.

With neither Gold nor Real Estate delivering superlative returns and Interest rates on a downturn, the only way out of the mess was to get into Equities for haven’t they always outperformed every other asset class?

Direct equity investments are seen as scary but go through a Mutual Fund and magically the risk seemingly vanishes or so we are told.

Over time, Mutual Funds have indeed delivered superlative returns. The Median 10 year return (with starting point being just below the 2008 peak) is around 11.28%. Compare this versus the median return of Debt funds (excluding Liquid / Short Term) and add the fact that we took the market extreme for our starting point and you know why Equities is still the better asset class out there.

But the big picture misses out on several small and yet important things that happened through those years including the fact that the best fund on 10 year basis today was once down 70% from its peak.

Imagine for a moment the Plot of Land you bought at 1 Crore now getting sold at 30 Lakhs. You may stay and hope that the future gets better but the pain till it reaches your entry price is unbearable and then the fear once it crosses your entry price about whether you will get hit once more with such a draw-down.

Money is getting invested in markets at a unprecedented level. This has as Warren Buffett once said has led to all ships rising in the tide.

Stocks which in my limited understanding of finance have little or no future are being gobbled up by retail investors following strategies they barely understand let alone has stood the test of time (in reality not a back-test).

Momentum is a wonderful strategy when properly applied. But like in software, Garbage in = Garbage Out. In the fag end of bull markets, every tom dick and harry stocks will show momentum. Getting into those stocks is easy and for a while you may actually even make money but rest assured, when the swing comes down, the exit door will be too crowded for you to exit without getting burnt.

It’s easy to visualize that we are different and have learnt from history and will not like other times panic and remove investments. If only for we are only Human.

India is supposed to out grow even China in the years to come and I am not talking about population but the road that China followed for its growth is no longer available for we to take advantage of.

Automation / Competitive Tax Policies among others are driving whatever left of jobs in manufacturing out. 10 years from now, it’s a way different world than what we can visualize now for changes are happening at a rapid pace.

With companies in the Infotech space for example reducing the intake of new employees, the only avenues of job these days seems to be in the service sector with low paid salaries and dead end career’s.

When you buy a company that is selling for 40 / 50 times it earnings just because we have potential, do you also consider how such potential can become undone?

A market like Life is cyclic. Some cycles are long some are short but the one thing that remains a constant is that every cycle ends. Are you prepared for that eventuality?