Prashanth Krish | Portfolio Yoga

Paying Advisor to Buy Blue Chip Shares

Twitter is a place where you meet Strangers. Some become friends for life, some acquaintances but most just some one whose tweet you once read and either agreed or disagreed. While Twitter is known for its Trolls and abusive behaviors thanks to the cover of Anonymity, there are people who are kind beyond what you feel you yourself deserve. For me, one such guy has been Muthukrishnan. I haven’t met him or even talked to him on the phone, barely retweet his tweets and have once in a while disagreed to. Yet, for some reason he showers more kindness than I receive from people I know better.

I don’t disagree on his overall philosophy though once in a way I do disagree. His view on buying stocks for dividend for instance. I have my reasons, he has his. A key question he is asking these days is – Should you pay a fund manager a % fee or worse a profit sharing fee to buy and hold Blue Chip Shares. He believes that fees eat into returns and hence one should not.

I agree with his view that fees eat into returns. But that is not the entire story and here is my view on why it may not be wrong to pay a good advisor to buy and hold great shares.

Vanguard US has a very nice graphic that shows that if you pay 2.0% per year over 25 years it would wipe out almost 40% of your final account value. If you have invested in a regular mutual fund, 2% is what you are charged. So, the number is not a huge assumption vs the reality.

The delicate question though is – Should you pay a manager to Buy and Hold Blue Chip shares. Now, this is not a strategy I know that is followed by most funds and here I mean PMS since Mutual Funds like it or not are measured against bluechip returns and hence forced to buy the very same bluechip stocks.

The flexibility SEBI allows PMS on the other hand is very huge when you compare versus a Mutual Fund Manage. From Large Cap to Micro Cap, he can invest anywhere. He can go to Cash for 100% of the portfolio value if he deems it necessary. Only thing he cannot do is take leverage – but an AIF fund manager can do even that.

Before we tackle PMS, let’s get the pesky Mutual Funds out of the way. Large Cap funds haven’t been able to beat the benchmark Indices for a long time now. With Reliance now being the biggest jockey, it can become even more pronounced as Mutual Funds are limited to holding not more than 10% of their Equity in one company while the weight of Reliance in the Index they track has moved well past that number.

Large Cap Mutual Funds are now called Closet Index Fund. From the web, a Closet Index Fund is defined as

A closet index fund is an actively managed mutual fund whose portfolio includes many of the securities in its benchmark index but whose expense ratio is higher than that of a true index fund or exchange traded fund (ETF) tracking the same index.

A simple ETF is available at 0.10% fee or lower. So, why the hell are people paying 2% (or even more in some cases). Are these guys really stupid? And we are not talking about a few folks either – Almost 81% of investors, that is 4 out of 5 investors come through the Regular route and hence are paying upwards of 2% as fees for having their funds managed by the Mutual Fund Companies.

With Indian Economy and Industry going nowhere, returns are pathetic and yet, the surge in assets we saw in 2014 is not going to topple over easily. So, why are investors staying despite pathetic returns that could have been achieved by safer methods and more importantly paying a 2% fee for the pleasure.

To understand that, we need to take a look at the bigger picture. While the Mutual Fund Industry has grown tremendously, it’s still small when you look at the “ Composition of Household Financial Assets”. As of June 2020, RBI estimates it at around 7%. This is the percentage of financial assets which ignores assets such as Real Estate and Gold.

That is 7% financial savings of Individuals are getting routed to the markets. This is fairly low but not surprising owing to not only lack of knowledge but also lack of safety net in India which means Individuals prefer safety of capital over its growth.

As someone who has been in the Industry for a long time, it’s not surprising that Industry veterans find it surprising that there are folks who are paying for non-performance so as to say. But what they are missing is the fact that most of the clients don’t have the financial knowledge required to handle their own monies.

The Internet has democratized learning but you don’t self-medicate (other than maybe Crocin or body pain tablets) just because you have read on the Net and understood what is ailing you. While not exactly comparable, for many they feel better off with someone – even if that someone is not really an expert himself but paints as one rather than take the risk himself.

The fear for most is losing money. It’s that fear that drives most to trust someone who they think will handle the money better than they can handle themselves. This fear is not about being paranoid either – whenever markets crash, even non business papers write in big bold fonts the thousands of Crores that has been lost by investors in a single day. This is a meaningless number, but who is to inform them of this.

The alternative path that most of these investors will choose without the ability to invest through an advisor is to invest in a Fixed Deposit. In fact, I am pretty sure that a lot of Investors who go to the Bank – a private sector bank to be more specific would have had the idea of investing in a Fixed deposit but were shown a different way to save and invested (hopefully since Banks are notorious for selling ULIP) in a Mutual Fund.

Markets have had a crappy time for a long time and regardless of what the Experts say, it’s unlikely to change in the coming quarters either. Yes, the darkest before dawn but the light at the end of the tunnel could also be the headlights of the incoming railway engine and not the end of the tunnel itself.

Either way, while investors seem to be getting a raw deal, the other options available to them aren’t any better either – invest in FD at a taxable rate of 5.5%?

Okay, I understand why small investors may be okay with high fees and pathetic performance, but what about HNI’s you may ask – Why are HNI’s willing to pay a fund (PMS generally) a fee for just buying and holding a set of high quality stocks.

While most PMS don’t buy and hold, I do know of a PMS that has a AUM of greater than 2000 Crores and buys and holds a portfolio of quality stocks. In the few years of data I could get access to, the client saw barely any change other than one stock being added after its Initial Public Offer.

The said fund charges no fixed fee but a performance fee over a hurdle that can be crossed even in these days by a liquid fund. Yet, the AUM keeps growing. What explains such incongruence. After all, here we are talking about sophisticated investors who can easily replicate what the fund is doing and save themselves a bundle. Why are they not doing it when it seems so easy?

In mid-2016, Saurabh Mukherjea came out with his book – “The Unusual Billionaires” where he showed how buying and holding a set of quality stocks over 10 years would have beaten most other funds not to mention the Indices. There was even a Interview where he listed out the stocks that currently matched the requirements (Link).

I used that list to create a portfolio (my own weighting method) and posted it on Twitter too.

https://twitter.com/Prashanth_Krish/status/799997097923645440

I bought and have been holding the same. A few months from now, it will be 4 years since I did that exercise. The portfolio itself is up 60% vs 42% by Nifty 100 which I took as the benchmark. No trades, No Fees, None whatsoever over the last 4 years – not tough, ain’t it?

The reason I have been able to hold is not only because I understand better but also because today it comprises just 10% of the equity portfolio. What if this was 50%, would I have been able to stay on?

Identifying Blue Chip stocks of today is easy – the problem is what will you do once they are no longer a blue-chip. An Index automatically chews over a stock that has lost its game and adds a new entrant, same goes for a fund manager who will chuck out a stock and buy what he believes is better instead. Stocks once considered blue chips and even many which were part of the Index today lie in ruin. Buying and Holding them would have meant not just an opportunity cost but also a real cost in terms of loss of capital.

By paying an advisor to buy and hold, many clients are basically outsourcing the pain component that involves selling the bad apples and buying new apples that appear suspicious today but in the end may actually deliver the goods.

Can this fee be lower? Of course, it could be – but like the Brokerage industry of the past, until a challenger emerges, why cut your own income. So runs the gravy train.

Personally I believe that funds that buy and hold good quality stocks and churn very little are doing a great service for while they may not get interviewed on Television every other day, the clients are assured of safety of capital.

Measuring returns based on what they could have achieved by buy and hold of the same is factitious since we can never be sure if they would have bought and held the same stocks or rather just used the money to buy a vacation apartment as an investment.

The Biryani Eater

Mutual Funds offer more options than those offered by Darshini Hotels. While the main course could be Large Cap, Large Cap and Mid Cap, Mid Cap and Small Cap, the number of side dishes that are available under various names would put to shame a Andhra Thali

From Sector Funds to Focus Funds to Thematic Funds to what not, the choices are overwhelming resulting for most investors losing their appetite just trying to get the best they can get.

A Multi Cap Fund was on the other hand a simple Thali where the Chef decided what should be added and what should not. This made things simple enough for the customer that they flocked to him at the cost of most others. Biryani from being the main course was now shuffled to a side course.

The Hotel Regulator though was not pleased. After all, how could Biryani, a course in itself become just a side dish. While a Biryani eater could have chosen a Biryani in the first place instead of a Thali, the Regulator has decided that if you come to the hotel and aren’t able to make an appropriate choice, you should be served Biryani to the extent of 25% of your meal regardless of whether Biryani is where the Chef has expertise or not.

Those who had Biryani all these years and stuck by the lack of demand by others though are very happy for there will be a new crowd of people who will now get Biryani and this should lift the spirits of Biryani which has seen its shine go down since 2018.

My own current meal I checked has 50% of its constituents being Biryani even though the Index I track has just 10%. This makes my meal superior given that now there will be a rush of Chefs trying to learn new tricks and what better than buying the Biryani I already own.

Chef’s are paid big money to ensure that they are able to please the customer. While Biryani was a favorite of earlier years, it is not now given the poor state of Rice that is available and even that in limited quantity. The question though is, should the chef worry about his clietle or worry about his Salary.

A month or so ago, a famous Chef decided that he will close his door to all new clients since there was only so much good rice that was available. Citing “capacity constraints”, he decided that only those who had already come in would continue to get the famous Biryani he prepared. Others need to wait till the next time he opened the doors

With his bulging stock of Biryani, I am sure he shall be happy that a rising tide lifts all existing Biryani already in the market and will make his clients even more happy. Even Biryani owners who have been stuck in quicksand and had been drowning slowly but surely over the last two years are happy and why not – finally they can say to their clients. Look, didn’t I tell you – Apna Time Ayega.

The question for those who don’t have as much Biryani as the regulator has ordered is simple. Should the hotel owner care for the taste and health of his clients or should care just about his income in which case, I am sure he will force-feed instant biryani to all those already present and unwilling to exit this hotel. Buying massive quantities of Biryani today will make some people happy, but in time, you should see a massive case of Indigestion as those who wish to get out find that there are no more buyers for their Biryani’s

All characters and events in this publication are fictitious and any resemblance to real persons, living or dead, is purely coincidental.

On Dividend Paying Stocks

On Twitter, there is a raging debate on whether you should buy stocks for their dividends. On one side are those who argue that buying dividend paying stocks is the best way to ensure a cash flow without having to liquidate investments to generate a regular income and on the other side we have those who argue that is simply makes no sense to buy dividend paying stocks especially considering the low yields most of them provide one with. It’s akin to buying real estate for the rental income vs buying real estate for the growth opportunity if offered. So, what is true and what is not?

To better understand the truth, let’s start at the beginning of why dividends were paid to shareholders in the first place. Going back in history, you will notice that the first companies were not of the kind that exists today but were joint stock companies formed for pooling of risk capital for a certain venture. Because the ventures of those days meant a binary result – the venture either succeeded beyond imagination or failed miserably, the pooling of resources reduced risk for all players and when the rewards came – everyone wanted a cut and this cut is what today we shall call as Dividends.

Paying out large dividends in the past meant the stock was seen as a great investment – In the early years of Dutch East India Company’s existence, the company paid out as much as 75% of its income as dividends. By doing this, the company was able to make a case for higher stock prices and which in turn enabled it to draw upon higher risk capital.

Today, companies pay out dividends for a host of reasons but more than the share price, its paid to shareholders to retain their loyalty towards the stock. In the United States for example, historically the small shareholder bought companies that provided them with a regular income in form of the dividend and this meant that companies that paid out a steady stream of dividends.

In fact such stocks even have a moniker – Widow-and-orphan stocks. These stocks are seen as stocks that often pay a high dividend and are generally considered low risk. The dividend paying attribute is not limited to stocks either – even today we have Equity funds that pay out dividends.

Dividends are not free money the company is distributing to its shareholders. Rather, it distributes a part of the income it has earned in the previous year after keeping aside what it believes is required for either future investments or just hoard it for a rainy day.

When a company pays out a hefty part of its income as dividend, what it suggests is that it has no avenues to invest and feels better off paying back a large part of the said income back to its shareholders. One high dividend distribution company (and not making waves on Twitter) is Castrol. It has paid on an average 80% of its net income in the last 12 years. The stock CAGR over the last 10 years (12 years currently would fall right at the bottom of the 2008 crash) is a piddly 0.50%. I am not saying that this could have been better if the company had used the money instead to grow, but am saying that a high dividend payout ratio has a cost.

Coal India, another great company with a high dividend payout (to please its principal shareholder – Government of India) has seen its shareholders lose a cumulative 11.25% per year for the last 9 years.

Not all companies are believers in paying dividends even when they have substantial cash profits / reserves either. The biggest name in the Industry – Warren Buffett loves getting paid dividends by the companies he owns but hates paying out dividends for the shareholders of Berkshire Hathaway. In his 2012 letter he laid out his rationale for not paying dividends and instead says that shareholders who want such income are better off by having a sell-off policy. I would urge you to go through it (Link)

This year, has seen a spate of companies announcing mega-dividends. The rationale for the same is the fact that the government has changed its policy when it comes to how dividends are taxed. Until 1997, dividends were taxed at the hands of the shareholder. But those were the days of physical shares and very few tax payers I would assume would maintain let alone pay a tax on the dividends received. To eliminate this, the government of that time shifted the burden of paying taxes on the dividend paid out to the company. Thus came out about the Dividend Distribution Tax. In 2020, this has been reversed with dividends once again being taxed at the hands of the Individual taxpayer.

This change has meant that a shareholder who falls into the higher tax bracket is better off selling a part of the share equivalent to the dividend he would receive for he pays a lower tax vs getting paid the same by the company. But the change is also a bonanza for multinational companies who can now payout a higher dividend for the parent may own shares in a lower tax rate country and hence end up paying a much lower tax on its income than what would have been deducted via the dividend distribution tax.

Given the immense opportunities in the market, I feel that investors would be short changing themselves if they went after dividends rather than growth. If you want a regular income, you are any day better of with products like Post Office Monthly Scheme than buy stocks based on their past dividend activity for the risk is that you may end up with a gain on dividends (that are then taxed) while losing not just opportunity but taking a cut in the capital itself.

Want to read more. Do check out –

The Evolution of Dividend Policy in the Corporation and in Academic Theory.

The Mob called Twitter

There are a few movies I am happy to watch over and over again – Gladiator being one of the elite list. It’s not just about the story that makes me watch it over again but about some of the dialogues and the depth you can take the dialogues to in a different world. One such dialogue is this

Twitter is many things for most of us. For me, it has provided me a world of connectivity and knowledge by being able to read the opinions of others. Now, it’s not like I have been a saint myself and while I don’t regret saying many things that led me to being blocked, I do regret the way I did it. I wonder if I could have been better than that in expressing whatever I expressed regardless of whether I was right or wrong.

In the world of finance, building assets under management – either as an Advisor (or Mutual Fund Distributor) or a PMS doesn’t come easy. It’s in many ways the same for building a twitter follower base. In both the cases, it’s the ability to convince others that you provide a service of value that matters.

Most people with huge followership are those who are well known through other media or have made a name for themselves in their respective fields that even if they don’t tweet much, they still command an audience that mirrors on obscenity.

Then there are guys like D.Muthukrishnan (@dmuthuk). I don’t watch Television much and maybe wrong, but I don’t think he is a guy who comes on TV and says – Buy ITC for 202, target of 212, stop loss of 192. Rather, he uses his personal twitter account to tweet about a stock he holds (and a substantial quantity at that) and the merits of the company.

As an Investment, ITC could be a great one or a lousy one – only time shall tell the difference but what ITC is not is it being a microcap company that has questionable financials. He is not alone in talking about his book – any and every decent fund manager does that. Now, if you are any decent fellow who doesn’t take nicely to being said that ITC is a great stock when you believe it’s not – you have two options – Short the damm stock, call it a fraud or maybe like Bill Ackman did with Herbalife – present a 250+ deck to showcase why its a fraud and why you should not hold it, let alone buy the stock.

But that is tough – ITC for all the wrongs it may have done in the past is still a giant cash generating machine. More importantly it distributes a very large percentage of its cash earrings back to its public shareholders. So, rather than attack ITC, it’s amazing how people I genuinely admire have taken on him for his other aspects of his life – his being a Mutual Fund Distributor being the latest.

India has around 1 Lakh Mutual Fund Distributors who account for nearly 80% of the equity assets under management that is held across funds by Investors. A large part of these distributors barely make enough money to make it a worthwhile enterprise. While I don’t have any stats to back me up, I do think that like many other things, even here Pareto Principle works. Basically, 20% of distributors make 80% of the money.

The majority of investors invest through a distributor because he has convinced them that this is a better deal than having their money in an Fixed Deposit or other asset classes. There is a second set of clients – the HNI kind who go through a distributor not because they don’t know they can save themselves the commission by buying a direct fund but because they believe that at the end of the day, the distributor provides him value for the commission he gets.

Some time back, I was associated with a distributor who has a fairly large AUM. His clients are not of the retail category but one who can write a cheque for a 8 digit investment without batting an eyelid. Having met a couple of his clients, I know they know even better than the distributor himself, so why even bother?

In India, we don’t bucket people by their profession. While we discuss only the core requirements at the beginning stage, as we gain comfort, we want to share our thoughts and views on other things that matter to us and love to have an outside opinion. In that way, HNI’s financial advisor provides a perspective that he might either be missing in a range of areas they feel comfortable sharing and asking for views.

For someone who has come from much humbler beginnings, the one thing I would love from Muthu is about how he went about building the business he did – the up’s and the down’s and the path thereof. I don’t see a reason to crib about his Income is still gross income and not net income and is in line with what you expect someone managing a couple of hundred crores to earn.

I wonder if the long period of socialism in India has pervaded to the extent that we feel uncomfortable with those who earn more than us that we need to find a stick to hit him with. On Twitter, it’s easy to call out people – but let’s call our people for their wrongs rather than for being different.

PS: I don’t know or have met Muthu other than from whatever we have interacted on Twitter. I felt like writing since it’s starting to become real ugly.

Investing, Path Dependency and Mental Barriers

I spent the last few days at my Sister’s place and returned home today. On the way, I picked up a packet of milk. Between where I picked up my milk and my home, I seem to have inadvertently dropped my purse containing a couple of thousand bucks in addition to other Cards and miscellaneous items that keep my purse fatter.

Today is also the day when a stock I hold dropped 10% (Selling Circuit). The loss in that stock alone is greater than what I lost in money terms today but I basically forgot that I had a loss today in the markets while the loss of my purse still boggles my mind. Did I drop it or did it fall off – what if I had left later in which case I may not have had to stop for milk or better still taken my father’s advice and taken another route which would have meant I would have missed the milk booth altogether and maybe would still have my purse in hand or what if.. You know the drill.

In Investing and Trading, we look at the past and wonder, what if I had done this and not that. The difference in outcomes is so enormous that we keep wondering what if everytime we hit a speed bump.

Active fund investors are ridiculed for buying closet index funds that at max provide the same returns as Index before cost. Post cost, most of them under-perform to the extent of the cost (Fee). But given the fact that selling Mutual Funds is a push business vs say Fixed Deposit at Banks which is pull, one wonders whether one should even compare the investor with a Index fund or should one consider the alternative he would have invested into – Fixed Deposit at a Bank.

One of the biggest risks in back-testing is that you end up building a trading system that worked great in the past but the future has no bearing with the past other than the fact that sometimes it rhymes. Having done thousands of tests on data, I found this tweet to be on the dot

“Most quants are not trying to find any real edges but only to fit their formulas on market data. They will get crushed at the end by randomness. Edge has two components: initial luck to build a track record and then large AUM.” https://t.co/1DaZCZN5Nh
— Jerry Parker (@rjpjr12) August 25, 2020

Buying Quantitatively Cheap stocks worked for a while and then it stopped working. Fund managers though keep hoping that the trend is about to reverse. Apna time Ayega is basically what fund managers seem to be writing to their clients as the fund keeps disappointing compared to other strategies the money could have been invested into. Very few seem to question why it worked historically versus trying to prove why it shall work in future (which basically is claiming mean reversion)

One reason for Do it yourself investors to start favoring Index funds is because they are unable to reason out which of the 400+ funds will take the route that provides them with returns greater than what they could achieve by investing in the Index. There are funds that will definitely beat the Index, but finding them before has become tougher given the odds of failure which keeps raising.

Sometime back, there was a running joke that if Anil Ambani had invested into Nifty 50 instead of investing into all those companies, he would have been far more richer today than facing the law of the land with regard to bankruptcy procedures. The same joke is not said with regard to Mukesh Ambani for he has been much more successful. In 2005, when the family decided to split, I doubt anyone could have seen this forthcoming, but thanks to how we think, today it seems natural that Anil – the once flamboyant superstar would fail. As Annie Duke – You can’t use outcome quality as a perfect signal of decision quality, not with a small sample size anyway.

When it comes to biases, it’s amazing how many of them hold us back from achieving our true potential. Every decision we make in life can be reduced to a binary – Yes and No. Each decision in itself is like a split from the main stem and can take a life of its own. Some decisions go right, some go wrong and while in truth we always have a 50-50 chance, it’s amazing how much time is spent on trying to understand the wrongs than the rights.

A right decision in my case was pursuing a job in 2017 vs launching my own business. This turned out to be right. But in 2005, I decided the other way – pursuing a career in my own business vs taking up a Job I was offered. That in hindsight I tend to feel turned out to be a wrong decision – not because of anything else but because my business failed. Knowledge of biases and fallacies alone is not enough.

Should I pursue a Business or take up a Job, should I invest directly in stocks or buy a Mutual Fund, should I buy an Index Fund or an Active fund. Should I hold a concentrated position of stocks or a diversified portfolio, should I pursue a strategy of Value or one of Momentum. The questions that investors face is mind boggling in nature and its no surprise many are concerned about whether they are doing the right things.

Each of the decisions we make is based on both our own biases which can get exaggerated by the company we keep and our own beliefs formed by actions of the past. The biggest regret of many investors is not having been invested in the right stock when they first started investing.

A good friend passed me this tweet for instance

I just turned 40. If I could visit my 25 year-old self and give him professional investment advice, this would be it: Focus *exclusively* on where companies might be in 10 or 20 years. Nothing else matters. Befriend those who think on that timeline.
— Implied Expectations (@LongHillRoadCap) August 25, 2020

I have had a similar thought before. Wouldn’t it be amazing to have the incredible foresight that one has achieved today years back when one was just starting. It’s a question that has bothered me too but I came to the conclusion that even if I were able to go back in time and tell my younger self the greatness of Momentum Investing, I may have still failed. Not because the strategy is faulty but because my beliefs in the style of investing I focus today has been borne through the combined experience of years.

In Investing, we can read through hundreds of books / blogs. But ultimately the path you take is your own and one that will not be smooth either. The only way to stay sane and continue despite the hurdles is to get a better understanding of both our losses and our winners while understanding the limitations.

There’s a difference between knowing the path and walking the path..

Writing this post has been one way to overcome the disappointment of losing my purse. I do hope that it provided some food for thought. If it did not, hopefully I can do a better job next time around 🙂

It’s a Mad, Mad, Mad, Mad World

Not a day goes by these days without someone commenting that the market is ripe for a correction. After all, the economy as we see it through our eyes is worse than at any point we have come across in the past and yet the stock market is rocking. It’s a conundrum that is confusing the best of investors.

The Nifty 50 PE ratio which is seen as more representative than the BSE Sensex PE ratio is now at an all time high. The Sensex PE Ratio while not at an all time is currently around the same level where we saw it in January 2008. But the consensus that one comes across seems to suggest that looking at PE ratio is faulty since the drop in earnings which has subsequently boosted the Price to Earning Ratio is a one off due to the compulsory closure of much of the country in Quarter 1 of 2020. The impact of this quarter’s damage will get wiped out in years time, but the question is where will the Indices be by that juncture.

This dichotomy between stock markets and the economy is not being seen only in India. In fact, S&P 500 – the barometer stock index in the United States made a new high this week. This while even the US is suffering immensely from the damage caused by Covid. This from a New York time post

“The Federal Reserve Bank of New York’s weekly economic index suggests that the economy, although off its low point a few months ago, is still more deeply depressed than it was at any point during the recession that followed the 2008 financial crisis.”

While Robinhooders, the moniker attached to small retail investors who trade through the RobinHood Application has been blamed for exacerbating the relentless rise, the fact remains that we, the small retail investors are generally the weak hands. Yes, once in a while we get it right while the highly paid Institutions get it wrong, but for most of the time it’s the opposite.

Since November 2013, we have seen just 3 months where Net Equity Inflow was negative for Mutual Funds. The first was in March 2014, next came in March 2016. June 2016 was another negative month but could be ignored given that outflow was just 45 Crores. The last outflow has come in the last month – July 2020.

The question that needs to be asked is if smart retail is turning out to be ahead of the crowd. The reason for using the smart prefix is because even in July, we saw Inflows of 14 thousand Crores. It’s just that more money was withdrawn resulting in Net negative for the month.

Between the months of January 2008 to March 2008, Mutual funds saw an inflow of around 24000 Crores. Rest of the year basically was flat even though markets kept getting cheaper. In fact, the biggest outflow for 2008 was in October when markets hit its lowest level. On the other hand, when markets recovered, retail started to sell back with total net outflows between September 2009 to October 2010 being to the tune of 24000 Crores. Nifty though did not waver much as it continued its upward journey.

Nifty has been on a major uptrend since 2009 and yet for anyone who has been invested for the last 7 years, returns have been suboptimal leading one to wonder that with all the problems that surround us, are we better off with a lower exposure today than before.

The question hence is where we do go from here. I wish I knew the answer. On one hand there have been serious reports suggesting that we may be on the cusp of a new bull run. While it may not be to the tune of the 6x Nifty saw between 2003 to 2008, even a doubler in next few years may be much more than what many seem to be anticipating at the current juncture.

On the other hand, there is the economy and all the dire calls about how the ballooning of the Federal Balance Sheet means that we don’t have as many bullets as we had earlier. But this has been heard of before. A perma bear in the US projected in 2011 a best case upside of 3.4% for S&P 500 and worst case being negative returns. The reality turned out to be a CAGR of nearly 14%.

Having said that, even a broken clock can be right twice a day and it’s possible that markets may have found a new peak from where the only path is downwards. To get a better estimate other than valuations, I have been working on what I call “Weight of Evidence” Indicator. Basically it’s a Indicator build using a combo of Trend, Breadth and Sentiment Indicators. The Indicator as of now moves between the range of -7 to +7 and currently stands at 5.

What is interesting is the future returns when the Indicator is at a certain level. We moved to +5 this week. In March of this year, it was -5. The table below outlines the average one year return and the number of times the indicator has reached those levels (Weekly data points, Time frame being 2005 to 2020).

Not surprisingly we can see that when the Indicator is extremely negative (-5 to -7), the future returns are strongly positive. But markets have been there for only 7% of the time. On the other hand, the next best set of returns are when the Indicator is between 4 and 5. Basically while on the negative side, Markets are mean reverting, on the positive side it seems that momentum begets momentum.

Of course, as the data also shows, this indicator has its fair share of failures. When it has reached 5, only 75% of the time has the market been positive at the end of year 1 from that date while 25% of the time it has ended in losses.

One of the things I have learnt in my years in the market is that the upside generally is a surprise even to the most bullish analyst. Buying when blood is on the streets is a great philosophy, but as even Buffett actions recently showcased, it’s not easy to buy especially when the cost of failure can be very high. Buying when the coast is more clear could be a better strategy for those who missed out on the earlier opportunities.

A freewheeling discussion with Shravan Venkataraman

As people who have met me personally can vouch, I can talk and like my writing sometimes go out of tangent from the discussion one started upon. While talks generally are around a specific subject, I think podcasts should explore more than just one agenda.

What follows is a kind of free-wheeling non scripted discussion on markets and strategies. Hope its worth your time

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