Commentary | Portfolio Yoga

ELSS as a Nudge for Long Term Investing

I buy my requirement of ELSS every year in March. One Lump-sum into a fund I have chosen. While I spend time selecting that fund despite knowing that I may not be buying what would have been the best 3 years from now, the analysis and the results thereafter provide me with a deeper understanding of how to avoid mistakes.

Here are the top ELSS funds from that day onwards. Not bad, Right :). Then again, the second and third rank funds are nowhere in the top performing funds. Maybe add a large element of Luck as well.

Top Performing ELSS funds since January 2017

While most of us use ELSS for tax savings only, a very good friend of mine invests in ELSS not for tax saving but more as an allocation to Equities. Why lock up one’s money unnecessarily you may think and you would be right. ELSS funds are locked with no exit for 3 years while with normal funds, you can get out any day you want. Some funds have an exit load, but exit is possible.

In one of his most influential book, Nudge, Author Richard Thaler says, one needs to resist temptation. Then again, while we think we can resist the temptations when the times are good and the mind is cool, when we are actually faced with decision making, we fall prey to the easy way.

Take for instance the concept of “Mental Stop Loss”. Many traders believe that if they place a stop loss on the terminal, it will be sought out by Algo’s or Operators and executed. Why not keep the same stop loss but one in the mind and execute when price breaches the pre-decided level.

Its sound in theory other than the fact of operators deciding that your stop is worth moving the Index a few points. But what happens when the price actually breaches the predetermined level to exit. The trader rather than cutting the position tries to check the chart one more time to see if he can somehow salvage the trade.

Price is now lower than where he wished to exit, so the next thought for the trader is to place a sell order at the buy price. Bounce toh banta hai, Right?

Most of the time though, the stock continues to move against the position he holds and by the time one realizes, it’s close to the end of the day. If the trader is Short and doesn’t hold the stock, he is forced to cut the losses which would generally be much higher than what he had evigased when he first took the trade. If he is long and has funds, the intra-day position becomes a positional trade with the hope that some day the stock will come back to profit when it could be sold.

The optimal way to deal with such situations is to have a broker who will allow you to place a intra-day trade only if accompanied by a stop. A small nudge of that nature can save much misery to a trader.

The most famous nudge of course comes from the Story of Ulysses and the Sirens of the Sea.

So, what does this have to do with my friend and his equity allocation going to ELSS funds instead of normal funds.

Theoretically other than the lock-in and the tax advantage, ELSS funds are similar to any other fund. In fact, some funds like Quantum Tax Saving Fund has the exact portfolio of its bigger cousin – Quantum Long Term Value Fund.

Yesterday I conducted a poll to check how long did investors hold Mutual Funds before exiting the same.

How long do you hold a Equity Mutual Fund before Switching / Redeeming.
— Prashanth (@Prashanth_Krish) November 18, 2019

What is interesting is the small percentage of people who voted to hold funds for less than 3 years. Here is what AMFI data as of September end has to say in that regard

Data Source: Amfi, Age Wise and Folio Data.

Among both Retail and HNI category, nearly 50% of funds are aged 2 years or lower. One reason could be that a lot of new investors have entered the market and hence haven’t yet completed 2 years of holding.

To get a better understanding if that would be the case, lets take a look at the same data for September 2013. The choice of this month is because Markets and Mutual Fund inflow took off like no other time 2014 onwards.

Notice something peculiar?

Retail Investors had a much higher percentage of fund aged 2 years and above. It would be interesting if we could get data on how many investors holding for 2 years are new to the world of Investing in Mutual Funds and how many had just switched schemes or funds. But that data is not feasible to get, at least at the retail level.

While Nifty is close to it’s all time high, the same cannot be said for funds which focussed on Mid Cap or Small Cap stocks. Even this shall pass, but the temptation is very high for investors and their advisors to shift from funds which have lost value to funds which are focussed on the current favorites – Large Cap Quality for instance. It’s not surprising that from US to India, there has been huge evidence that shows how Investors underperform the very funds they choose to invest into.

My friend seeks to avoid this since markets move in cycles and what is the current favorite rarely remains the favorite for the future as well. By locking in ELSS funds he is also able to give a 3 year time frame for his investments before taking a call on whether he should consider staying with the fund or switch to alternative investments.

In addition, the biggest advantage of ELSS funds are that they aren’t locked to a certain market capitalization. They are more like Multi Cap funds with ability to take advantage of opportunities wherever they lie. That is one less thing to worry about, Right?

We all have our weakness that inhibits our chances of success in the complex world. One way to avoid what is called in Tennis as unforced errors. Warren Buffett in fact has said that such unforced errors of his have cost his investors billions of dollars in lost earnings.

A book that I think compliments Nudge is Atomic Habits by James Clear. Check that out too.

Making market returns is easy. Beating the market is very hard

The title of this post was taken from the following tweet by Rohit Chauhan

5 year returns for the market is around 8% CAGR. No. of companies which had a CAGR > 8% was around 400 or 5% of the market. The ex-ante probability of an investor to beat the market is < 5%.
Making market returns is easy(Index funds). Beating the market is very hard
— Rohit Chauhan (@rohitchauhan) November 13, 2019

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.

Stop the Naysayers

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

If your capital is 1 Million don't bother about how some one with 1 Billion capital is investing. His Constraints are your Opportunities.
— Prashanth (@Prashanth_Krish) October 30, 2019

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.

The Era of Disruption

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.

How we landed up here.

It was 2013, the Year of the Snake according to Chinese Zodiac. In India though, Investors were running away from the markets like they had seen a snake. Between mid 2009 when UPA came to power for the second time to October of 2013, Investors in total withdrew more than 37 thousand crores from Equity Mutual Funds.

Then again, why wouldn’t they. The government seem embroiled in scams that seem to be growing bigger than one’s own imagination of how large numbers can be. In Europe, countries were going through a meltdown with talk of countries may be forced to exit the Euro.

Stocks were cheap, but you don’t buy when they are cheap for who knows, they can become even cheaper. Add to it, when your neighbour is buying properties like no tomorrow with prices on a never ending incline, why take the risk of buying a business that maybe there today, gone tomorrow.

Sentiments couldn’t have been more worse when the news started to trickle in that a messiah who had made his state proud was thinking of running the nation. In the United States, 17 of the 45 Presidents had served as Governors of state.

In India, Morarji Desai was the first Prime Minister to take office post being Chief Minister of a state (State of Bombay), P.V Narasimha Rao and Deve Gowda being the other politicians who ascended the high office after being Chief Ministers of states.

When one is drowning, even a tender grass offers hope and for the markets which were lacking any real hope, caught it like the savior it seemed to be. After a brief confrontation with the old war horses who refused to give space to the new, the preparations for the coronation began even before the voter had decided on whom they shall vote into power.

Markets were enthused that this finally was the real deal they had been waiting for so long. Small Cap Index doubled in the space of 9 months. India was seemingly shining once again.

Much of the run-up was justified for the base was low and more importantly macro winds were flowing in India’s favor. While bull runs of the past was interrupted by violent reactions and this run was no different with markets going through much of 2015 in a steady state of decline.

Factors this time were not related only to India, Chinese markets were taking a beating too with talks of a global slowdown. Interesting side note, China as been the case with many other countries has never seen its index climb above the highs of 2008.

In the meantime, Real Estate had begun to show signs of weakness and money destined there came to the stock markets. Equity Mutual Funds saw a reversal of flows with inflow of Rs.47,509 Crores in 2014 and Rs.84,697 in 2015.

For Equity Mutual Funds, 2016 was a bit of a dampener. They could collect only Forty Five thousand crores. So, in 2017, they came up with a brilliant campaign – Mutual Funds Sahi Hai.

2018 marked the peak of the bull run for the majority of investors. While Nifty has continued to gallop higher, thanks to the steady inflow of funds (Mutual Funds collected an unprecedented 1.36 Lakh Crores in 2017, came close to beating it in 2018 when total equity mutual fund collections accumulated to 1.12 Lakh Crores. Year to date, Equity Mutual Funds have seen a inflow of 43 thousand crores.

Capital Markets are the bedrock of Capitalism for they allow money to be moved from small savers to companies on the lookout for funds. Yet, that model has been dead for a while. Mutual Funds having amassed thousands of crores have kept pumping the same into a few number of stocks.

This moved up valuations into territory which makes no sense if you were to think of buying a stock to be similar to buying a business. High valuations make sense when companies are growing rapidly and the valuations in a way showcase how investors perceive the future growth of the company.

Yet, Mutual Funds are hampered by the fact that Indian markets aren’t really deep. Almost all funds are concentrated in the top 400 stocks and continued flows has led to a frenzy in an attempt to deploy it without bothering about valuations.

Is this the new Normal?

In 2000, in the midst of the Dot Com bubble, select stocks achieved levels of valuations that seemed incomprehensible before and 20 years later, seems incomprehensible today. But at that point of time, you were either a player or not.

Depending on whom you ask, Nifty Price to Earnings Ratio is either an indicator of future returns or its not. But what most will agree is that this has been the first time in ages that we have remained at substantially elevated levels even as sector after sector seems to crumble beneath.

The markets is no longer in the aura of the messiah delivering the goods. It’s now more a question of whether he even wants the same thing as the markets want.

The Indian story wasn’t built on manufacturing for the world as China did or greasing the world’s engines as the Middle East did. Much of the story was about how the large population would enable us to sell more of the stuff to us than others.

India doesn’t have the kind of data that the US has, but based on larger trends it seems that people have either run out of money to spend or aren’t willing to spend and rather save for a rainy day.

Other than in a few countries, economic downturns haven’t been short-lived. The longer the economy spirals downwards, the more self-perpetuating it becomes. We prayed for low inflation and we got it, now we are praying for low interest rates and chances are we shall get that too.

But low inflation and low interest rates don’t come in a silo, they impact on the economy in ways we may not have imagined. Low Inflation, much of which is due to flat trends in agricultural prices have impacted rural demand. While low interest rates helps companies that are heavy on debt, it impacts the other side of the balance sheet – savers who are now forced to save more to get the same income.

What history tells us though is that even this will pass. Yet, history conveniently ignores the collateral damage caused and moves on. No one today remembers those who lost their savings and homes in the 2008 financial crisis, for why would they. Markets have moved on, people unfortunately may not.

Uncertainty – The life of an Entrepreneur

I never met V G Siddhartha even though I stay close to his home, was a member of Bangalore Stock Exchange where he started off initially and one I had been part of for more than 2 decades and more importantly, started my journey into markets as a Primary Broker under Sivan & Co, his company that is now known as Way2Wealth.

Twitter is filled with comments & opinions on what pushed him to kill himself – after all, he wasn’t a nobody. While it’s easy to point fingers at his debt as being the reason for the untimely demise, few companies other than Infotech companies are able to grow without resorting to debt at some point or the other.

Entrepreneur’s are attracted to risk as a moth to flame. They know that its risky, but is there a way out is the question that is frequently tossed about. For every dozen failures, there is always one rags to riches story that spurs one to leave the comfort of a job that pays a monthly salary towards a journey where he could end up lower than where he started off at.

For the better part of my life, I personally have been an Entrepreneur and yet, lack of good advise aided in no better part by my own stupidity and inability to think big soured all my journeys.

What hurts an entrepreneur most is the lack of empathy when one is facing setbacks in business. Everyone and their chacha are happy to throw a few more stones saying, I told you so.

While India aims to be a 5 Trillion Dollar Economy, we still don’t have Personal Bankruptcy laws that ensure that if you fail, you can clean up and start afresh. Rather, most business failures I have seen have ended up with the businessman being cleaned off everything.

Starting a business requires funds and funds are hard to come by. Bank Loans require right connections or pledge of property but smaller loans are actually even tougher. At the City Market in Bangalore, money is lent to vegetable vendors in the morning at what is called “meter baddi”. Basically, they are given 90 Rupees in the morning and need to pay back 100 Rupees in the evening.

Go up a small level higher – say you want to start a grocery store and suddenly you find that there are no real avenues for raising debt at rates that make business sense. Commercial rents are generally high in most parts of the town and just the advance needed to stock up on the essential items can set one back by a few lakhs.

From Personal Loans to Pawn Lenders, most small entrepreneurs have running debits and one that while providing them with a chance robs them of the future for the high interest rate rarely enables them to meet ends meet.

If you wish to start something that requires a corporate setup, you have your first taste of government regulations as they start adding up to your bill even before you have given a name for your firm. Then onwards, its a steady stream of filing things and paying the Auditor, the Company Secretary, the Government among thousand others.

Starting a business is a pain – from the start when you have trouble convincing your parents that you are better off on your own versus joining the herd for a safe salaried income. Once you cross that hurdle, from the Banks to the Government, everyone wants to trip you up even before your competitor has a chance.

If you somehow are able to sail through those, you are like the fish that finally comes out of the river to face the ocean. By the end of the first year, most fishes are spent force and look back at how their life would have turned out if they had just gone along with what their college mates and took up a 7 to 9 job.

When I started going to the Bangalore Stock Exchange, we occupied 3 floors with over 250 active members. This even though NSE had started off a few years back. In the 15 years I spent out there, I saw member after member basically either running themselves out because they took one risk too many or decided to fold before they were forced by circumstances and took up jobs in the booming brokerage industry elsewhere.

Today, I don’t think there are more than 25 brokers with enough business to afford paying their office rents. The surprising thing for me has been the fact that very few of the next generation of these brokers, many of whom have been associated with markets for decades have shown interest with most of them preferring to join the herd in search of a suitable job than take the risk of running a business where compliance costs have been slowly and steadily creeping up even as the brokerage dried up like many of the Bangalore lakes.

In India, failure is not seen as part and parcel of one’s journey but rather the end of ones’ journey. Failure is a stigma that refuses to go away unless you succeed beyond their beliefs and more importantly show that you have succeeded – this generally by way of a Grand Wedding or buying a top of the range car.

One of the key issues facing the nation today is said to be unemployment. Yet, with the stigma of having been seen as a failure if they try and fail, few want to risk anything at all. Its time we started embracing the culture of taking risks by allowing those who fall to rise back up again without having to be ashamed at having failed. They failed because they tried.

As the son in law of a former chief minister, Siddhartha could have easily taken up the line of politics like other relatives of major politicians. Instead, he took upon a risk that worked for a while but ultimately burdened by facts that we barely know took his own life. Let’s remember for what he achieved rather than wondering what he could have done different.

As my favorite poem by Robert Frost ends,

Two roads diverged in a wood, and I took the one less traveled by, And that has made all the difference.

Stop Playing the Blame Game

If Investing is a Journey, 90% of such journey’s are left mid-way. Every co-passenger you meet on the journey seems to know what his final destination is – unlimited riches. Financial freedom alone doesn’t cut it for what is freedom without recognition as being a great investor / trader.

Markets move in cycles and we all know what goes up most of the time comes down – may not back to square one but definitely deep into recess before the next up cycle begins. Yet, the euphoria of a bull makes one forget that all these can and shall end one day.

While fundamentals provide the true value for a stock, its sentiments that drive much of the demand and supply. In 2014, news of the incoming government’s intention to launch GST provided a strong fillip to logistic companies.

While logistic is a simple business with very little of a moat to speak about, stocks got re-rated crazily. Companies like GATI which were trading at 10 times their trailing earnings suddenly were traded well north of 50 times. Its as if GST would revolutionize the Industry and boost their earnings significantly.

Well, there is a reason for old proverbs such as “If wishes were horses, beggars would ride”. Markets had just overestimated the impact and when results didn’t showcase any such boom, stock started to climb back from the peaks to the base-camp from where it had all started. The stock is today down 80% from its peak and yet its actually more than double from where it started off.

Sector after Sector has followed a similar pattern with stocks being sold at valuations that defy gravity and logic. Yet, with markets showing no weakness, like Chuck Prince many an advisor and fund manager felt that this was the new normal. Afterall, why is it abnormal to pay Non Banking Finance Companies which depend upon Banks for their own funding a price to book and price to earnings that is multiples of banks that have cheaper cost of deposits.

This is not the first time nor the last. The only difference is the sector / stocks in play and the players themselves. Old wine in new bottle as they say.

The question is what next. There will be another bull run but that doesn’t mean that your stocks will participate. In 2000, anything that had a name that included Infotech shot up. When the dust settled, the only survivors were barely a dozen at best.

Similar was the play in 2008 when Infra companies toppled. 11 years hence there has been very few if any companies that are trading above their 2008 high.

In 2008, one of the top performing mutual fund was DSP BlackRock Micro Cap Fund, a fund focussed on small cap stocks. When the trend turned, the fund dropped like a rock falling 75% from the peak. But come 2017 and the fund was once again in focus with inflows to the extent that the fund actually stopped taking in fresh monies.

From the 2008 high, the NAV at the beginning of 2017 was up by 200% – the high of 2008, not the low of 2009. This even as the Nifty Smallcap 100 had barely recovered to its high of 2008.

This did not come through by sitting on their old portfolio but by removing weak companies which were replaced by better companies. This ongoing process cuts out the weeds and ensures that the future performance is better than the immediate past.

From advisors to fund managers, 2014 to 2017 was a time when most of them got carried away by the relentless bull rally. Momentum investing, especially price based momentum investing isn’t bad as regular readers of this blog know by now.

My own Momentum Portfolio was 80% of small cap stocks in January 2018. Today though, the portfolio is more in the Large to Mid Cap universe. While that in itself hasn’t helped me in limiting the draw-down (currently around 20% mark), the thought process is that when the markets bottom and the next bull rally takes off, the portfolio will be in the forefront of gainers.

If I had held the same portfolio that I had in January 2008, the portfolio would have been down by more than 60%. Cutting the losers and holding onto the winners has helped restrain the overall draw-down though given the deep cuts we have seen.

If in this market, you have been caught with stocks that are down, you have two choices – one – hold onto the existing portfolio with the hope being that when the trend turns, the stocks too will recover.

Or better, shift out from the weak to the strong for when the market climbs back up again, the strong stocks of today have a greater possibility of generating better returns than the weakest of today.

In a way, the current situation for many is similar to the Monty Hall problem. Rather than me explaining the same, this video should do the trick.

Every rise and fall in markets is accompanied by narratives as to why the markets have moved as such. Currently the narrative is to blame the fall on the government policies. While government policies do influence stock price movements to a great extent, the fact remains that overpaying for future earnings does take a toll in future growth prospects of the firms as well.

Infosys was growing faster in 2000 than anytime in the future, but overpaying for that future earnings meant that the high of 2000 was seen once again only in 2006. Then again, investors in Infosys were lucky, same couldn’t be said for the hundreds and thousands of investors in companies such as DSQ Software, Silverline, Pentafour Software among others. All they hold today is worthless paper.

You can blame anyone for the mess but the impact is felt only by you. Everyone of us makes mistakes, but the way out is to first accept the mistake and learn the lessons it offers. Blaming can only take one so far and you are far better not investing with people who blame things on everything but themselves.

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Is this the new Normal?

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