nimble-builder domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/portfol1/public_html/wp/wp-includes/functions.php on line 6131restrict-user-access domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/portfol1/public_html/wp/wp-includes/functions.php on line 6131I first heard of Guy Spier when I read his fantastic book, The Education of a Value Investor. Its a very good book for those who wish to make a career in finance. Standing on the Shoulders of the Giants doesn’t get any better than this.
I stumbled across this Interview with him on Twitter and found his thoughts especially on Cloning very interesting and useful. Hope you find the Interview Interesting as well
Part II of the Interview
The title of this post was taken from the following tweet by Rohit Chauhan
When I first read the tweet, I was stumped. If just 5% of the stocks were able to generate better returns than the Index, there is really no point being in the business of selecting stocks. For a while its been said that beating the markets is difficult, but if it’s just 5%, it’s close to impossible.
I decided to test the same for myself. To also ensure that starting point bias doesn’t screw up the numbers, I decided to test for 3, 4, 5, 6 and 7 year returns. The idea was to verify the percentage of stocks that generated a return greater than the Index.
For this exercise, I used data from NSE. As on date, NSE has 1900 companies that are available for trading. But this is not a static number. If you go back 10 years (2009), this number was around the 1400 mark.
600 are the Net additions post removal of stocks due to delisting and hence the number of stocks that you can find 10 year returns will not be 1900 or even 1300 but much lower. To give you an example, if you were to check for 10 year returns of all stocks, the number of stocks come to 2300. Of these, 600+ stocks have ceased to be available for trading. Then you have another 250+ stocks that don’t have 10 year returns since they were listed in the interim period.
This leaves us with (2300 – (636+252)) = 1412 stocks that have 10 year rolling returns. We need to account for the fact that nearly 27% of stocks that were available for investing 10 years ago aren’t available today.
I account this to ensure that the data doesn’t fall prey to Survivor Bias. Do note that tocks that went through demergers and hence had new symbols and prices get removed since they may not have the required amount of data.
Here are the results;
The good news, the number of stocks that have given returns greater than Nifty is not 5% or even in single digits. 3 Year look-back has the lowest number of stocks that have generated returns greater than Nifty and one which isn’t surprising given that over the last two years, it’s been a rally led by a few large caps with small and mid caps nowhere in the picture.
The best returns came for the 6 year period, again not surprising since 6 years back, it was 2013, Modi had been annointed the Prime Minister candidate of the BJP and markets had just started the rally that finally ended in Jan of 2018.
It’s generally in the last phases of a mega bull run that picking stocks become easy. Rest of the time, it requires hard work to be able to spot long term winners. Yet, the fact that hundreds of stocks have been able to beat the Index returns should provide investors the faith that is required to be an active investor. The day, this ratio falls to 5% is the day one should quit active and move to passive.
Factor investing hasn’t got of to a start in India even though most people talk about factors. Value based on how you derive it is a factor that could be used as a way to rank stocks and buy the cheapest.
The following chart is from US where the Value factor primarily defined by buying stocks that are cheap as measured by Forward Price by Earnings has been under-performing the market for close a decade now. Yet, its the one that is the most popular. Maybe fund managers are hoping that at some point it shall mean revert and start to be great again.
The fact that interests me most about factor investing in India is the virgin nature of the concept. Most fund managers are happy to chase stories even though reading books on behavioral finance teaches us as to how easy its to get misled through stories weaved by crafty promoters.
Factors on the other hand being totally quantitative, its easier to overcome our challenges for the data stares right back at us. The best book to read on building such quantitative based strategies would be What Works on Wall Street by James O’Shaughnessy
Which of the above factors do you think makes logical sense and which don’t?
Searching for some information regarding “General Motors Bellwether Theory”, stumbled across this in the Texas Monthly, Issue dated June 1976.
43 Years later, has anything changed?
Twitter is filled with all kinds of folks, but once who get the highest attention are those who make wild projections on either side. No one will bat an eyelid if you claim that you can generate 15% returns in the long term but push that bar up to 24 – 30% and you shall definitely hog the limelight.
Markets / Sectors / Industries all move in cycles – some are long, some are short, but at the end of the day much of the market is cyclic in nature. The same applies to strategies that are followed – some bask in Value, others prefer Quality and few prefer Momentum. No strategy works all the time.
Today, much of Twitter is agog with how Quality Stocks are a bubble on the verge of Collapse. I have no clue on whether they shall continue to rise or get pricked and crash, I am no soothsayer with abilities to know how the future will unfold.
In 2017, owing to changes in the environmental policy in China which is now the leading producer of literally everything, Electrode prices started shooting up. What was sold at 5000 shot up to 50,000. All because China arbitrarily decided to shut companies that manufactured Steel.
HEG is a leading producer of Electrodes and the stock shot up from sub 200 levels to a peak of 5000 in nearly 1.5 years. Anyone who had studied the sector even a bit would know that this wasn’t going to last but the frenzy in the markets and the assumptions (mostly wild) on how long it would take to get supply back in the market made investors chase it higher and higher.
If you were a fund manager managing hundreds or thousands of crores in capital, I can understand why you would like to ignore such short term trends. Getting in and out for large funds is messy and you wouldn’t want to partake in stocks that are in the limelight for a short duration with pretty low volumes.
But if you are reading this post, I assume you are managing at best what is a few crores of capital. A 3% position in such stocks is less than 1% of the value traded in the stock on any of those days. Why should you ignore such opportunities?
Its risky and I don’t want to take short term bets may be the answer you have for me, but the fact is that every bet you make is short term, just that companies which continue to deliver and are held while removing companies that fail to deliver. In other words, most bets are a series of short term bets held over the long term.
In the current market scenario, Quality stocks which are trading at relatively high valuations are seen as the next bubble in the offing. There is no denying that companies are trading at extremely rich valuations, but rich valuations alone isn’t good enough for a crash to happen. Stocks can remain richly valued for long well before it starts delivering the goods.
But even if the fact is true that Quality is over-valued, should that stop you from participating in the rally. Bajaj Finance was said to be overvalued when it was 2000. Today at 4000 its still considered as over-valued.
For a very long time, Amazon was considered an expensive stock. 10 years ago, the stock was trading at sub 100 levels and a PE ratio closer to that of today. Today, at $1800 and similar valuations, it’s seen as a value buy. The change came not because the stock crashed as is evident from the price change. The change came because the company has continued to deliver stellar earnings making it look like a bargain today on the assumption that this trend continues in the future as well.
Anyone who bought years back as an Expensive Quality stock is today holding a not so cheap Value stock. Talk about Narratives.
The problem as I see is that there is overly focus on being right when entering a stock versus focusing on being right when exiting. True Risk Management is all about getting the exit right, it’s never about getting the entry right.
From its peak, HEG declined by 83% at its most recent low. But this did not happen over-night or even in the course of a week or a month. The decline has taken an entire year and even today we aren’t where we started off from.
As a fund manager, it’s tough to accumulate or distribute vast quantities of stock in a short span of time. The bigger the AUM, the tougher it becomes to invest in most stocks outside of the larger indices. Its hence understandable if they wish not to invest in companies like HEG.
But this ain’t true for you as an Individual Investor. You capital allows you to be more nimble that most fund managers are, so why follow thesis that seem like threats to them but can actually be opportunities to you.
On that note, I tweeted this a few days ago
As a Momentum Investor, I love bubbles for they offer the greatest opportunity to profit from. Yes, exits can be tough when it implodes, but time and again, what I have observed is that the fall is slow at first and fast much later. Unless there is evidence of fraud, stocks don’t crash in a day or two.
The only way we as market participants can make money is because the markets are unreasonable all the time. There is no such thing as too high or too low (until its zero). Whether you are a value investor or a momentum trader, it’s important that you have a set of hard rules that shall take you out of a position. If you get that right, how you enter will not make much of a difference in the long run.
20 years back, we bought and sold stocks through a broker whom we called physically, bought books by going to a bookstore, purchasing essential items and groceries meant once a month visit to the local kirana wala and went out for Lunch to the nearest hotel even if we despise the taste and lack of variety.
Today, most small brokers have perished, bookstores are closing down owing to lack of footfalls even as more Indians are buying books like never before, small kirana stores are closing in the face of competition by large chains and online grocers and the number of options you can have for lunch has multiplied to the extent that in some parts of town, you can order from a different hotel every day of the month.
Balaji Telefilms shot to fame with its Kyunki Saas Bhi Kabhi Bahu Thi. Limited number of movie channels meant that the same story could be told across languages. Limited prime time meant that connections and network were the key to get the preferred slots. Oncoming of Amazon Prime and Netflix is in a way extinguishing that barrier.
Fifteen years ago when I became a broker, my client list was limited to my ability to network. Today if I were to start anything, the world is my oyster as the saying goes.
For a very long time, banks in India followed a unique model when it came to paying interest on money deposited in savings accounts. While even today public sector banks under-pay, the small investor has much broader options.
Once upon a time when Mutual Funds were still in their infancy, fund investors had to bear all kinds of expenses ranging from amortising new fund offer expenses to entry loads were paid by investors.
Today, not only has the overall fee gone lower, but active investors have the ability to choose funds that charge much lower for same funds or even lower for basically buying the Index. It took more than 30 years for the revolution of low fees to become mainstream in the United States, we should get there within 10 if not less.
Portfolio Management companies charge both a fixed fee on the assets they manage and a performance fee (some with very low hurdles). But things are changing even there. At Capitalmind (Disclaimer: I work here) for example, we have a portfolio where the total cost of a portfolio that invests in the top 100 largest companies of India and top 100 companies in the United States with total expense ratio (ours + the underlying funds) comes to just 50 basis points.
Disruption is even here around the corner. Smallcase for example is a way for a smart advisor to create a portfolio & one that is publicly tracked. With the fee being fixed, the larger the capital invested, lower the fee as a percentage of the portfolio not to speak about there being no performance fees during those good years.
Your margin is my opportunity said Jeff Bezos years ago and it’s coming true across the spectrum. Stocks with crazy valuations are seen as leaders that are unlikely to be disrupted. But every Golaith at one time or the other meets their David and when that happens, its very likely that David will win the battle unless he is bought out first.
As Investors, we need to be nimble footed to recognize the change for recency bias and our own heuristics generally provide false signals on where one should invest and what one should avoid.
Recognizing emergence of a new trend is as important as recognizing the end of an earlier trend. That is easier said than done but is the only way to stay ahead of the herd.
The other day I was reading a blog post where the author claimed that even 1 Crore in savings is not enough to sustain a good life (assumption being monthly expenses of 50K per month). But how many (I am sure that if you are reading this, you have already reached the 1 Cr mark in savings or sure you will) folks in India can really save that kind of money.
In ways more than one, we live in our own bubbles. Unlike the West, we have very little to speak off when it comes to Social Safety Net. Costs are ballooning even as opportunities for income become weaker by the day.
In the last couple of years, explosion of ecommerce has meant there has resulted in a huge number of low pay jobs. While it was easy to make fun of Pakoda making as being an Industry, being part of the gig economy is worse for you learn no real skills no matter how long you work nor build any brand identity.
When we talk about Retirement, most instantly think about their job ending when they come to 60 years of age. But why 60 and what is the history behind Retirement.
Retirement is a very recent phenomenon thanks to 1. Growing population that meant you had more people available for work 2. Longer life expectancy and 3. Changes in technology which meant the older generation had to constantly keep learning new tricks
Frederick Hoffman argued in 1906 that a country’s productive potential could be maximized if people ceased working at age 65. While we are mentally as active at 70 as maybe at 60, the physical abilities deteriorate over time and unless one is in the knowledge based industry, its rare to see active senior workmen on the floor of any factory.
India’s life expectancy has been trending higher and given both the advances in healthcare and quality of lifestyle means that should expect the average to move higher.
Unemployment has always been India’s bane though for few periods of time, we have had the kind of growth that made it seem that maybe finally we were able to come to grips.
Social Security is a major source of retirement income for a large swath of Americans, but in India, one is left to their own. This means that if you stumble during your earning years, it tough if not impossible to build a retirement nest that can last your lifespan.
By 2050, the United Nations estimates that one out of every six people—or 1.6 billion—will be over the age of 65. In Japan, a country which is rapidly ageing, 59% of men ages 65 to 69 are still working.
A year ago, I had an acquaintance ask for my help in figuring out if he was on the right track. This Gentleman had 3 Crore plus in savings but had a pretty hefty monthly requirement. He had gone with a very large wealth management firm a year before that and was seemingly not sure he they were guiding him right.
The portfolio he showed me had the following funds with his funds split across them.
In addition, he had just been switched out of 3 funds and into 3 others. Thanks to the switches, in addition to getting ripped off in Dividend Tax, he was paying Income Tax on top of it as well.
So much for having some-one plan your finances. Of course, he wasn’t alone as data for flows into Balanced Funds showcased. Investors were sold the concept of being able to get monthly dividend even as the overall value of their holdings increased over time, a win-win situation. The only winners were those who sold thanks to the nice commissions.
I have this friend who has worked for a while and been an entrepreneur for another length of time and currently if he goes by the hippie slang, he is between jobs. He recently came to me asking for advice on how to go about investing the money he has while ensuing some kind of security for old age.
While I am not a Certified Advisor, given the bad experiences I have come across plus the fact that his corpus was way too small for most advisors to make it work commercially, decided to create a plan that allowed him to get a monthly income.
But was I on the right track, did I miss anything. Thoughts of these made me tweet to get reactions from those who follow me on Twitter.
140 plus responses were received and I am thankful to each of them for taking some time out to think and respond to a real problem that required a good solution.
Due to the nature of request – monthly income combined with fact that the person had too less money to work around, many responses were similar in nature.
Selected Tweets with my views on the same
An Interesting suggestion this was. IDFC First Bank offers 8% interest on 3 year deposits. At 20 Lakhs, this would generate what he wishes while the investment in Large Cap would enable a bit of compounding at a higher rate (hopefully). Even better would be buying ETF’s of Nifty 50 and Nifty Next 50 since tests have shown that they can generate as much return or sometimes even better than the best large cap fund.
What is a Balanced Advantage Fund?
Balanced Advantage funds are funds that invest 65% into equities and 35% into debt. The advantage here is that since it has 65% into equities, its treated as Equity for tax purposes.
The disadvantage, since 65% is in Equity, 90% of its movements are correlated with Equity. Equity returns being chunky in nature, this is not the best instrument for having monthly returns.
This is a very interesting scheme and while my friend is not eligible since he is not yet 60, locking in 15 Lakhs with return of 9.60% (taxable) is something that is worth looking at for those above the age of 60.
Maximum number of suggestions were to invest everything at Bank and enjoy the fruits. The positive is that the monthly income for now would be more than what he requires enabling him to save and add to the principal
The negative is that there is Re-investment Risk. If interest rates are lower at the time of renewal, he would have to start cutting expenses which would have gone higher thanks to Inflation or start eating into the principal – not an enticing prospect.
This is something I actually discussed with my friend. While he too wants to be active and not just sit at home, the tough part is that very few skill sets have ability to generate an income without having to risk capital for he has none.
Have talked to him about a couple of areas where he could start off and while income may not be visible immediately, who knows what tomorrow holds. Fingers crossed for now.
Another common suggestion was Reverse Mortgage. While I did’t explore this idea with him at current juncture, its something that hopefully shall catch on. SBI eligibility for Reverse Mortgage is 60 years and while his house being in the suburbs may not yield a great amount, its still something that can be accessed if circumstances so demand.
Cost of Healthcare is a real issue especially given that as one gets older, the risks get higher while premiums shoot up making it immensely tough to be insured.
Friend has Health Insurance for now, but bigger question is, how much is enough. Not an easy ask balancing the requirements with the cost of taking that hedge.
One of the interesting observations was that he retired early by choice. I wish not to go into the circumstances on why he is Retired before he has accumulated a Crore other than to say “shit happens”. Life doesn’t go according to one’s plans and wishes.
As much as the suggestion is valid, as one gets older, he wishes to stay close to his near and dear ones. After all, emotional security is as important as financial security.
Overall, diverse suggestions and once again, thanks for chipping in. Was especially moved by this tweet
What I felt was missing was the concept of “Safe Withdrawal Rate”
While this is more applicable in countries where the government ensures that your ailments don’t need you to sell your house, even in India post a certain age, it makes sense to think about withdrawing from the Capital itself.
This especially if low interest rates have made it tough to meet ends. Risk though is that you run through your capital before life runs out.
The whole exercise has been interesting enough for me to wipe the dust off the CFP books I had ordered a while back. As for my friend, I think he will get along okay.
