Prashanth Krish | Portfolio Yoga

Home Country Bias

At heart, we are all very Nationalistic. We love our country regardless of whether its the United States of America or Zimbabwe. One reason for the unreasonable love maybe due to the fact that we are all invested in the progress of the country we live in (which for a large part of the population also happens to be the country one is born in).

We earn our living in the currency of of our country and invest our savings in assets in the same currency. We are in a way tied to our country’s progress. If our country sees strong growth, it makes our investments do better than if our country goes through a turmoil.

For instance think about a rich Zimbabwean who after years of toil had saved a good amount which he believes should see him through. And then, Robert Mugabe happens and by the time he realizes what is happening, his savings is really worthless (regardless of how much he had saved).

While the Zimbabwean Dollar has long been replaced in the country, two days back, it was given the Official burial with the final exchange rate set at $5 USD for 175 quadrillion Zimbabwe dollars. Any idea how many Zero’s it takes to make it a quadrillion?? Its 15 Zeros – FIFTEEN.

Recently, in Venezuela, the stock market exploded going up 92% in May. Of course, this gain is really notional given the fact that Inflation last week broke through the 500% mark. It will take even more of gains just to be at the same place where they were say in the last year.

While we are lucky that India may not face such a exigency, the fact that we are completely loaded on our home country is a risk we carry at all times. Our Jobs, our Investments, our Savings, literally everything is Rupee Denominated.

Of course, this is not surprising given the fact that home country bias (in Investing) exists in every country where the vast majority either have no way to diversify or prefer not to diversify. But given the enormous risks we take, would it not be a bit better if we could save a small portion of our savings outside India.

A report I found on a investment website gave the percentage of assets we Indians have in India at 99.7%.

A key reason for the low percentage maybe due to the fact that most Indians could not have until recently invested outside even if they wished to, unless of course they took the ill-legal route.

Savings outside of one’s country diversifies oneself in two ways,

1. The savings being in other country is not exposed to the risks that the Indian Economy is exposed to AND

2. The savings being invested in a currency other than our own means that in the unlikely case that the Rupee goes for a tumble, our savings continue to hold value.

Lets for example take the case of Gold. Gold moves daily based on two factors – Demand Supply and Currency moves. Demand Supply is a key criteria but even if Gold was stagnant for a day, the price in India may change due to the change in Indian Rupee vs the US Dollar.

When one buys’s gold, one is hence also hedging against the Rupee. If for example, Rupee appreciated strongly against the US Dollar, we could see (assuming on change in price of Gold in USD terms), a fall of a similar ratio and vice versa.

One of the best books in this area would be Meb Faber’s Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies.

In this book, not only he reasons out why one should invest outside one’s country but also provides strategies as to how to go about it. I strongly suggest you read the book to have a better understanding of the rationale behind investing outside one’s own country.

But investing outside one’s country is not easy for us since unlike the United States, our exchanges do not have any ETF’s of other counties (save for the highly illiquid Hang Seng Benchmark ETS). But in the Mutual fund arena, we do have a bigger choice with multiple Fund of Funds available for investment. In addition, we have funds like PPFAS which invest a substantial portion of their portfolio in stocks outside India.

If you are a serious investor with the ability to invest directly into country ETF’s, you can always do that by investing via a broker who allows you to buy securities traded on the US stock exchanges.

But with India growing at 7.5%, you may wonder if this really is a worthwhile route. To answer that, lets check out the chart of HangSeng Bees plotted against Nifty Bees.

Despite the fact that we have had a Modi Rally, Hang Seng has literally beaten us black & blue 🙂

While Meb Faber in the book I referred to earlier goes to say that one should invest as much as 40% of one’s portfolio, I believe that at the very minimum, one should consider investing at least 10% of one’s investment outside India.

Investing outside India is not Anti-Nationalistic, its just a way to safeguard our savings against extreme events over which we may or may not have any control.

SPIVA® India Scorecard – A note

Today the Economic Times published a study a that claimed

study by the S&P Dow Jones Indices says a majority of the large-cap actively managed funds in India underperformed the S&P BSE 100 index in the five years ending 31 December 2014

The whole study can be downloaded from here (Link). LT @NagpalManoj

There have been a few questions raised on the said study

1. Uses BSE100 & not scheme benchmark
2. Uses Total Returns (Div reinvested)

My take is that BSE 100 too does not reflect entirely the stocks that are bought in supposedly large cap funds. BSE 200 may actually be better in that regard.

But when one compares one fund with another, the concept is that both are easily tradeable. But this is not the case with most Indices since we do not have ETF’s bench marked to it. So, whether its BSE 100, BSE 200 or BSE 500, unless you are able to buy a ETF, comparing with the Index makes no sense since for most investors, there is no way to participate in those indices.

Total Returns is the Right way to compare since when we compare Growth funds, we are assuming that the Dividends are re-invested into the fund.

The study itself has issues since it uses average returns. Since funds that have out-performed are way bigger in size compared to those that have under-performed, this may not be the right way to analyze.

Secondly, 5 years is too short a period for any such analysis given that we have not seen a severe bear market since 2008. A 10 year study starting at 2005 would have made more sense.

A few days back, I calculated returns of funds (Large Cap) over the last 15 years and compared it to the returns of CNX Nifty Total Returns Index

As can be seen, almost all big funds save for SBI Magnum Equity Fund & HDFC Large Cap fund have strongly out-performed Nifty. But is this the complete list of funds that were available for investment in the year 2000? The answer is a big No, there is quite a big of survivor bias out there and the following table from the report linked above is proof of it

The most astounding number was in the Indian Equity Mid-Small Cap space with look back of 5 years. Over the last 5 years, 30% of funds have disappeared. For a Industry that is still taking off, this is a big number and unless we quantify what happened to investments in those funds (which after presumably under-performing for long with small AUM would have been merged with a bigger fund), its really tough to say how good the performance is seeing only those who have survived till date.

Until the time that we have ETF’s for all our Indices, it makes better case to go along with funds which have a successful track record since there is no way of replicating them for a common investor using ETF’s alone.

Walking the talk

One of the toughest things to do in life is disagree with something and then walk the extra mile to showcase that you really mean what you say.

For example, today Mr. Motilal Oswal who owns and runs Motial Oswal Financial Services posted the following tweet

Trading is injurious to your wealth as well as health. Investing for long term is wealthy as well as healthy practice pic.twitter.com/Y9dH8zTwsy

— Motilal Oswal (@MrMotilalOswal) May 23, 2015

Trading is a tough business, no doubt about it. Depending on what evidence you go by, as many as 95 – 99% of traders end up on the losing side. But the question is, what is the success ratio of those Investing (especially direct investing).

Unlike traders, measuring investor success / failure is tough for one, there is no constant. For example, if a person invests X sum of money and after say 10 years, his investment remains at X, is he a successful or a unsuccessful investor?

But does his own company walk the talk in terms of offering products that he truly believes in. Yes, making such choices can be expensive for the firm in the short term, but if he really strongly believes that his clients health is affected by the choices offered by his company, should he persist in providing those choices?

If one were to visit the website, the page has this advertisement running

Its interesting that not only is the seminar FREE, but you end up getting a FREE gift as well. How enticing 🙂

If trading is really injurious to one’s health, how does attending a free seminar change that. After all, its not saying that it will help you become a better investor but proclaims you can become a Professional Trader (whatever that means)

Taking the high moral road on Twitter is easy, the test comes as to one really goes the extra mile to ensure that the road one takes has that high standards as well. After all, that’s what separates the Men from the Boys.

Trusting financial Intermediaries

In response to a tweet of mine, Anupam Gupta (b50) tweeted this

@Moneylifers @Prashanth_Krish such huge distrust in the entire financial distribution chain, including MFs? any reason?

— Anupam Gupta (@b50) May 22, 2015

They key question is, should we trust those who claim to work on our behalf while having a business model that goes against that very logic.

Lets start of with the much hated Stock Broker. A stock broker was one who in earlier days allowed persons to buy & sell securities for a small commission. The commissions which were huge in those days steadily has crept downwards with advent of technology and more competitors.

Its general knowledge that its very tough (will not say impossible since there will always be guys who claim to make a living out of it) to make money trading the markets, especially on the intra-day time frame. Yet, almost all big brokers send daily flush of SMS calls asking their clients to Buy ABC, Short ZYX and so on and so forth.

How many brokers have you come across who shall say, well, the way to wealth generation is not by trading but by buying and holding shares of good companies over a long period of time (I kind of disagree with my own statement out here, but I hope you get the point). How many brokers advise you to just do a SIP on Nifty Bees since the probability is high that the returns you generate by doing that is way bigger than what you can achieve on your own.

On the other hand, I come across statements such as, Invest only that money in the markets that you can afford to lose. Its no wonder that people invest a Lakh in stocks and goes out and invests a Crore in Real Estate. Worst case, he knows that the land is his no matter what happens.

For the not so sophisticated investors, there is another way to get into markets – Mutual Funds. But just like most financial products, even this needs to be Sold. So, the mutual fund distributor also becomes a kind of Financial Advisor.

A financial advisor generally makes his money by charging a X% of fees on the total assets he manages. But since most of us would not want to pay from our pocket, the advisor instead advises on funds where he gets the biggest commission. And since tail commissions are low, lets churn the portfolio every time there is a new fund offering. After all, buying at 10 is cheaper than buying a fund with a NAV of 100, Right?

In India, Insurance is not seen as a hedge but as a way to save (Invest). Its no wonder then that most Insurance Advisors (agents really) advise one against buying Term life policies and instead go for Endowment / ULIP plans where the commission paid is much higher. Even after accounting for the risk coverage, the return is so low that is makes zero sense, but hey, I get back my money here seems to be the logic.

And finally we have the Financial Advisors who claim to help you trade / invest in markets for a small monthly / quaterly fee. What I find amazing about these guys is that all of them want you to pay up in advance regardless of the results. Not a single guy says, Here is the way I do business. I advise you on what to Buy / Sell for X months. If you feel the advise is worth it, pay me XX so that I continue for the next Y months, else, no worry.

Nope, every one of them wants you to trust them with your money while not trusting you for one second. Do you really think they work for your benefit?

And finally, Portfolio Management Schemes. I have tweeted on it quite a number of times and every time i look at those numbers, I wonder who would want to invest in a product that under performs all the time. Most PMS model is build upon generating brokerage. If, and that is a big IF, they do end up making some money, they want a cut of it as well.

Almost all models in the financial sphere is out there to get a cut of your savings. There are of course, many honorable guys out there who do business which is worth for both the client and himself. But they are so far and so tiny, that you rarely hear about them, let alone learn more about them.

As the saying goes, “There ain’t no such thing as a free lunch”

We spend our lives trying to save every rupee we can, but what use is it, if we allow ourselves to stumble upon when the it comes to making the money earn for us.

Privacy of our Financial Information

Privacy in the Internet era is literally down to Zero. Our mails are read, our buying patterns are analyzed, we ourselves via social sharing websites provide out information on what we do, when we do, where we go, who our friends are among thousands of other data points.

To learn about how much of our information is online and available to companies, do watch this very very interesting video – (Link). Even for those folks such as myself who know quite a bit on these issues, this was pretty mind blowing information.

What about our financial information you may ask. Aren’t they pretty secure?

A few weeks back, I received a post from NSDL (mind you, posted using normal post) that combines all my stock holdings at all the Depository Participants and to top it up, provides the value on date.

Now, they don’t stop at just stocks that are scattered across various depositories but also have column’s for the following asset classes

Equities

Preferential Shares

Mutual Funds

Corporate Bonds

Money Market Instruments

Securitised Instruments

Government Securities

Postal Savings Scheme

Mutual Fund Folio’s

In other words, other for investments in Real Estate, this more or less provides a complete overview of one’s financial affairs and this is sent by Normal Post (Postage of 3 being affixed). Interestingly half of my family did not get this post and as I write this, I wonder – did it get lost or was it ….. (Conspiracy theory) 🙂

If this is one level of stupidity, I stumbled upon another a few days back. Few days back, one Mr. Nilakantan Rajaraman of Funds India wrote a interesting blog post on their successful investors. While no personal data was revealed, if you need to analyze data, every person’s data was seen.

Funds India is a financial intermediary who make it simple to invest in Mutual Funds (though now they also enable you to trade, buy Gold, enable investing in fixed deposits of companies, get Loans (Personal) as well as buy Insurance and the best part, its all FREE

Of course, we all know, There Ain’t No Such Thing As A Free Lunch and in almost all the cases where its free, there is a commission that is paid. But that is paid which is not so bad since they do provide you the ability to do investments more easily.

Of course, with Mutual Funds now enabling Direct investing which cuts out on the commission, there is pretty big a loss for you in the long term if you are using such services for only the ease of use rather than having them act as your personal investment advisor.

But I am digressing (as I usually do) and so, lets return to that blog post (Link). The blog post is able to get a lot of details of where they are investing, how they are investing, how much returns are generated among a lot of info. Then again, the fact that they shall collect and use that info is embedded into their Privacy policy (Link)

If its ain’t bad enough that the Investor loses on potential gains due to the trailing commission that gets charged, its worse in my opinion that private information is shared with them and all that for just enabling you to invest a bit more easily than you can do by visiting the websites of the concerned mutual funds.

I am sure that the information they collect is secured. But the question is, are you comfortable and is this worth it??

Atrocious Targets

Yesterday, a market analyst in a interview to CNBC claimed that Nifty was heading to 6750 based on his analysis of the Index. A few months back, another Analyst claimed that Nifty shall move way higher than what it was trading at that point of time. Going back further, I remember a Analyst mincing no words and being certain as hell that Nifty would reach a number that was last seen in 2009.

Other than these, there have been predictions of Sensex at 100,000 by Mark Galasiewski, editor of Elliott Wave International’s Asian Financial Forecast who gave a time line for the target to be achieved by 2024 (Link).

Dow Jones has also seen outlandish targets, the most bullish being Dow 40000 (Book link) to Dow going back to 1000 & even 400. And this target has been repeated since time immemorial so as to say (Link).

Over a long enough time frame, the only way markets can go is Up (unless the world goes into a never ending cycle of deflation) which means that no matter how high a target is seen, it is just a matter of time before the same is achieved.

But the key question is, are any of these prophecies actionable? And the simple answer is a even simpler No.

So, the question that comes up is, what is the need for these outlandish targets when they themselves know very much that its one thing to throw a random number as a target and quite another to be actually be able to take advantage of the same.

What I find is that most of these targets are bandied about by people who are happy to sell Tips / Newsletters while the real money managers generally prefer wiser counsel. Of course, the negative side of listening to fund managers is that you are always a perma-bull regardless of the state of the market.

While it makes sense to be bullish when valuations are cheap and attractive, once markets have moved way higher, there is need to be cautious and reduce the amount of exposure to the market. In fact, in a recent Interview, Hedge Fund manager Samir Arora said that 2015 was more of a Long / Short year (Link)

For a investor, shorting is not possible and hence the best alternative would be to have exposure that varies based on factors such as future growth and current valuation.

Our own Asset Allocation Model (Link) and our Model Portfolio’s (Link) are in a way designed for just that kind of thought process. We believe that even the lay investor can generate above market returns with simple strategies and without having to pay a leg and foot to fund managers who at end of the day aren’t any much wiser than us.

Perils of following Advisors

For nearly a month now, a website that sells Intra-da / Positional tips has been sending at the end of the day, a SMS showcasing that their 1 trade yielded XX, XXX amounts (Always in 5 figures, never less). After sending nearly 20 SMS, the guy changed track and today morning informed me that I was selected for a free 1 day trial (how generous of him).

So, promptly after markets opened I got the SMS for the trade of the day – A buy on PNB at market price. For added affect, I was also informed since their source had confirmed the news (whatever it was), one could take a big position (Bigger the better 🙂 )

A second SMS promptly followed the first – in case I was not interested in buying PNB in cash or futures, I could also buy the 160 CE. While the price he recommended was 7, by the time I looked it up, it was already available at 6.

Before I go further, lets look at the PNB chart (hourly) as was seen at close of yesterday

Chart-wise, it is nowhere bullish, but at the same time was not extremely bearish either. To go long would need some guts since there is no indication of any major move coming.

PNB declared its results during market time and not surprisingly it came in weak (Results). Again, markets reacted to the same slamming down the stock by 6% at close. The call option which was trading at around 6 when he issued the call, closed at 1.75 (a loss of 70%+ of invested capital)

The entire episode could have turned out the other way if instead of a Buy call, he had given a Sell call. But with markets opening very strong, that would have went against the general logic. If the call was a Sell, it would have succeeded beyond his imagination & if I were to be a novice, I would have been attracted to it.

At the same time, I wonder if he sent a Buy call to half the numbers he had and a Sell call to the other half. If he had followed that strategy, his evening today would be busy showcasing the win and pushing the reader to pay for the next tip.

Market Advisory firms are now dime a dozen since the investment to start one is fairly low. But do the people behind it really have the skill-sets to advise is a question that rarely gets answered. Add to that, unlike in say the US, we just do not have ways to independently measure the performance of a analyst using a fixed capital.

As in any other field, there is no Free money out in the markets that allow one to take it out repeatedly without sweating it out. The biggest attraction for trading is that the capital requirement is very low but just as in Forex markets, the consistent winners tend to be negligible in number.

Its no wonder that most advisors ask you to first pay them their monthly fee before they start the services. Why not ask for the payment after the month is over. If the quality of advise is so good, at the very least serious minded traders / investors would love to pay and continue to get their services. The only reason you cannot see such a offer is because the failure rate (both due to wrong calls by the Analyst as well as missing of trades / bad execution by clients) is so high, that barely a few want to continue further.

A fool and his money are soon parted goes the age-old idiom. What is worse than paying for such services is to actually deploy real hard earned money in an attempt to recover one’s cost. Sunk cost fallacy becomes obvious out here.

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