Commentary | Portfolio Yoga

Is Consumerism really bad?

When Eicher shot up out of nowhere, a quote that was often seen was that if only the guy who bought an Enfield X years ago had bought the Stock. Today, he would be driving a Harley Davidson instead.

Indian’s are savers, Period. While the old generation feels that the new generation (the Gen Alpha) is spend thrifty and consumerist, the fact remains that even those who seem to spend a lot do end up saving a lot more than what others assume they do.

I have written about this in the past and am sure will write more in the future for there is always a balance between savings and spending. While savings are important, one earns not for the next generation to splurge but to enjoy the moments of today and live life to the fullest.

When people talk about splurging, it’s assumed to be things that aren’t worthwhile based on one’s own philosophies. For instance, Is a Expensive Vacation worth it or not? Or what about buying a Car / Bike / Gadget that one loves. Or eating out regularly not because one doesn’t want to prepare food but wants to taste different things?

One of the dreams of my Grandfather I assume was to travel to Kashi & Rameshwaram. But with many mouths to feed, his own Salary was a pittance (he was a School Teacher) and lack of travel options of today, he was forced to keep postponing until he was financially ready. But by that time, he knew it was not going to happen given his hearing & eyesight constraints.

His biggest splurge at that time was buying (via Loans) his own home. But even there fate intervened and while he did live for a few years, once his children moved to other cities in search of Jobs, he had little option but to follow them.

Most think that we have the future figured out despite the randomness and uncertainty that bog our daily life. Planning is important and there is no doubt about that, yet because we don’t know all the paths that life may take, there is only so much of a plan we can realistically accomplish.

Retirement for example is a fairly new concept and even this is applicable today to the better off. The body and mind suddenly doesn’t degrade when you reach 60 but as recent research shows is as active

A couple of days ago, Business Insider published this interesting post. While studies that are referenced can be biased due to Data Mining / Bad Data / Sample size factors among many others, it does makes one sit and think about what is all the hullabaloo about Retiring at 60 and spending the rest of life doing nothing (Link to the Article).

If you think that you can accomplish things and earn a living post 60, doesn’t that also mean that you can take Risks at a younger age and one that was deemed not worth because you start using your savings from age of 60?

It’s easy to laugh when others fall prey to herd behavior that one avoided. Yet, in many ways, how different are we compared to the herd.

Dreams have a finite life – to me, the key is to accomplish whatever possible and not let them die. For what is the meaning of living if only to just die without living the same to our own satisfaction.

Fear of Meltdowns and Power of Meltup’s

Yesterday, 19th October 2017 marks the 30th Anniversary of the greatest crash seen in US Markets when the Dow tumbled 22.6% (close to close). Unlike 2008 though, this barely had a impact on the real economy which continued to remained buoyant.

There is once again fear that maybe we are on the edge of something similar – a meltdown of market though unlike in 1987, its unlikely to be a one day affair. While 2008 still evokes strong memory, a risk of 2008 is even lower given that the financial markets aren’t stretched and all the fears of a looming Credit Card Bust / Housing Loan Bust / Municipal Bond Bust dragging down the markets once again seem to have disappeared from the investors and markets mind.

These days, even threats of wiping out America by Kim Jong-un is seen little more than empty threats and are compared to the Boy who cried Wolf once too many times. The smoothness of the rise wherein markets haven’t seen a substantial fall for quite some time is un-nerving for many but then again, a key factor that is also driving markets is the Fear of Missing Out.

While the markets recovered from the 1987 crash by just a year, the psychological impact takes much more time. As markets continue to climb the wall of disbelief, fear turns to envy and finally greed overcomes fear. The final leg of such a rise can be called a “Melt Up“.

Prior to the the final top of March 2000, Nasdaq had doubled from the starting point of 2600 seen in October 1999. Our own Nifty 50 saw a screaming rise of 50% (4000 to 6000) between mid August of 2007 to mid January of 2008. But Melt-up’s needn’t be the end of a bull market as one experienced in early 1986 in the Nikkei 225 (a case of False Positive). On the other hand, Dow in early 2008 barely showed any signals of a Melt-down.

Currently markets are expensive though not as expensive as we had seen in 2008 or 2000. Combined with the fact that FII’s are continuous sellers while the retail is lapping it up (Direct or Indirect barely makes a difference since Retail is always seen as Weak Hands) makes one wonder how long this rally can last.

The period between 1980 to 2000 was one of the greatest for a investor in the United States stock markets. Dow rose more than 10 times in the intervening period while many a stock delivered much much more. But that one event of 1987 raised fear so much that investors were caught flat footed and missed a substantial part of the rally. They did enter in force towards the end just to see entire portfolio’s, most of which were tech heavy, being wiped out in just a year and more.

Participation increased tremendously with share of households who had a stake in the markets climbing from 19% in 1983 to 49% in 1999. While it differs from state to state, it seems that the number hasn’t moved much from there since 1999

There are certain similarities between Indian markets of today and the US of the early 80’s chief among which is the huge rise in investing by retail folks. Mutual funds lapped up the monies as a falling interest rate and rising markets provided confirmation that the only place to invest was in the stock markets.

This has been one of the key reasons for the strong push upwards in both the prices of stocks as well as the valuations they command. Yet, we aren’t at a stage where there is a possibility of a Melt-down, a Melt-up on the other hand cannot be easily ruled out.

Melt-up’s and Melt-down’s some time have a trigger – for instance our own case of Melt-up in 2007 was triggered by the US Fed action of cutting Fed Rates by 0.50%. Or take the case of Nifty closing the day barely seconds post opening in May 2009 in the back-drop of Congress winning more seats than what the markets anticipated.

On the other side we have Melt-downs such as the fall we saw when NDA lost the 2004 election or the fall we saw in late January 2008 when in the space of just a few days, markets went from 6300 to 5200 (at the low’s).

Both Melt-up and Melt-downs generally do not happen without some iota of signalling. While we focus on 19th October 1987 as the day when the bottom gave way in the US Markets, markets were already hobbling in the day’s prior. Same was the case when the final result of the 2004 Elections came in, the markets had already started to discount NDA coming back and all it needed was a last push – something a statement from Sitaram Yechury achieved.

What next for the markets has been a million dollar question for market participants with stories of how investors are breaking fixed deposits in Banks to invest in markets. But the reality (based on data) is something else. Yes, there has been a huge interest in Mutual Funds in recent past but all the money hasn’t gone into equity alone.

Between January and September of this year, Equity Mutual Funds have seen a inflow of 86K Crores while Balanced funds have seen a inflow of 60K Crores. With most Balanced funds having a portfolio with Net Equity Exposure closer to 50%, this can provide a cushion if and when market tanks. On the other hand, this also showcases that even distributors who sell majority of the funds aren’t really comfortable at the current stage of the market and would rather push their clients to lower risk / lower reward funds than what they did in normal times.

On twitter, Experts have been foretelling doom for quite some time and yet markets continue to defy gravity. High valuations can be a factor that leads to a fall but is generally not the trigger. Markets are at all time highs and yet there is perceptible bearishness in the commentary.

While I have participated in both the 2000 rally and bust as well as the rally leading to the 2008 bust, I fail to recall the widespread skepticism I am seeing right now when the markets were peaking out then. One reason for the Skepticism could be the fact that direct investors haven’t reaped rewards as easily as they did in 2000 or 2008. In 2000, Information Techonlogy stocks was what attracted most and man, did they generate returns. Only those invested in old economy stocks were feeling left off.

The rally leading to the peak of 2008 was much more broader than the one in 2000. 8 out of 10 stocks were in strong up-trends. While Infrastructure and Real Estate were key drivers, almost every other sector was a participant in the rally that seemed to herald the start of a new era.

Friends of mine who I know as perma-bears turned to bulls unable to overcome the overall sentiment that overtook the markets. When the fall came, perma bears friends such as those suffered more burns than even perma bulls for unlike the bulls, they entered too late in the game and waited too long before cutting out their positions when the market turned for real.

One reason for the current skepticism is that this has not been a market where majority of the stocks in the market is on a uptrend. Just a week ago, more than 50% of the stocks were not even trading above their 200 day EMA, let alone be making new 52 week / all time highs.

A Whatsapp message doing the rounds credits much of the recent rise to just 2 stocks – Reliance and HDFC Bank. The story spun is that, if only these two stocks hadn’t moved so much, markets would have been negative rather than closing once again at a all time high. Sentiments are negative even though on the surface people claim to be optimistic.

Investors of today are said to be of a different breed than those of the yesteryear’s. While in US, they are moving lock, stock and barrel to cheap ETF’s and Index funds over expensive Mutual Funds, in India, the flow is said to be from Real Estate and Gold to Equity.

As much as I would love to believe that narrative, I wonder if human behavior can really change in such a short period of time. Have we suddenly grown immune to the basic desires that drive us – Greed and Fear?

Bull markets, be they in Stocks or markets in general are accompanied by good stories. Stories of how GST will make Logistics companies valuable beyond imagination drove stock prices of any company associated with the logistics business and yet by the time GST actually was implemented, most stocks are in strong bear trends [Blue Dart is down 48% from its peak, All Cargo is down 26% from its peak, GATI is down 48% from its peak, Snowman is down 63% from its peak among other notable stocks].

Look at the newspapers and you see barely any good news on the horizon let alone India Shining stories. Complications in implementation of GST is seen as dragging down growth, the demonetization coming undone has driven a spike through growth, Modi is seen as becoming defensive. And yet, we have a market at a all time high and a strong Rupee (despite the substantial withdrawal of FII money from markets). Not the things you would tend to hear during the final phase of bull market that has been for more than 3 years now.

To me, these indicate that there maybe a possibility of a melt-up rather than a melt-down which is being anticipated by most. I just don’t see the factors that would be reason enough for a melt-down in the coming days. That said, as I have written in the past, finally it all boils down to your asset allocation mix and how comfortable are you to hold the same even if market cracks say 20% from here.

I believe that I have enough dry powder to take advantage of any such fall while at the same time not risking as much that I shall be one of the sellers as the markets cracks big time rather than being the buyer.

Illusion of Safety

At the Mall I frequent to, a guard uses a hand held device to screen me – front and back. Neither he knows nor I as to what he expects. Beeping is considered normal since Belts / Pens and variety of things cause the same sound. But a illusion is created that once you are inside, you are safe.

Seat Belts and Helmets are compulsory in most cities across India and the world. But do they really make a difference or are they providing a incentive for people to risk more?

In his book, Risk, John Adams tries to showcase as how humans are comfortable with a certain level of risk and if there are new safety mechanisms introduced to reduce that risk, we take higher risk that shall match our earlier risk profile we were comfortable with.

The Risk Thermostat

A model originally devised by Gerald Wilde in 1976, and modified by Adams (1985, 1988). The model postulates that

everyone has a propensity to take risks
this propensity varies from one individual to another
this propensity is influenced by the potential rewards of risk-taking
perceptions of risk are influenced by experience of accident losses—one’s own and others’
individual risk-taking decisions represent a balancing act in which perceptions of risk are weighed against propensity to take risk
accident losses are, by definition, a consequence of taking risks; the more risks an individual takes, the greater, on average, will be both the rewards and losses he or she incurs.

The above chart showcases how we take risks and balance the same based on Rewards & Risk. Unfortunately what it doesn’t show is that Accidents which help one understand “Perceived Danger” isn’t just a stroll in the Park. When they happen, depending on the intensity can set back financial plans of years.

A part of our earnings are saved and where we save is based on multiple factors including future returns. While real estate has always been a place for investing big (dumping all savings plus taking a load of loans), it was only in the years from 2004/05 to 2012/03 that things went crazy.

Doubling of prices became a norm and investments that became 10x in under 10 years a reality. Yet, here we are with prices going nowhere (not yet South other than a few panic driven sales) and lot of projects stuck without being completed.

Mean Reversion is a concept that many don’t understand but holds itself true almost everywhere you go. Gold had a fabulous few years and while we continue to buy, the price is going anywhere but up. Its been 5 years and we are still 15% away from the price we saw in 2012.

Gold tripled in price between 2007 – 2012 but for anyone investing in 2012 expecting similar returns, he surely would be sorely disappointed.

With Gold and Real Estate not delivering returns, the only other logical choice of investments have been the stock market. Where gold left off, Equities have picked up from there.

Last five years have been very good for market and I am not speaking about India alone. Almost every other country is on a unprecedented bull run. Mutual funds have seen good times, but this time around, the rush is crazy for even fund managers to wonder if it makes sense to keep investing or better to close funds for fresh investments.

Since Modi came to power, Retail investors have plunged in big time investing their savings in Equity and Debt Mutual Funds (70% in Equity Funds, 24% in Debt, 4% in Balanced funds, 1.5% in ETF’s and 0.5% in Fund of Funds).

This in-turn has driven up valuations big time though thanks to timely changes by the Index Management committee’s, we still aren’t at 2008 highs not to mention 2000 peaks.

There is optimism in the air and why not – equities have been delivering returns even though underlying companies aren’t really able to deliver on Analyst expectations. And the best part is that despite all the hype, we aren’t even close to bubble territory kind of move.

Mergers and Acquisitions start hitting peaks as Optimism grows irrationally and yet we are still at a stage where one hears about more companies cutting down dead wood than buying new forests. Bubbles need easy money for Promoters to do stupid things.

These days, with Public Sector Banks reeling under Non Performing Assets, they are lucky if they aren’t being squeezed out. Those caught with loans more than what they can afford are trying to unload assets as quickly as they can.

Reliance Energy wanting to sell its Crown Jewel, JP Associates selling off its Cement Plants or they wishing to sell their prime jewel, the Yamunna Expressway, Tata’s literally giving away part of their Telecom business for Free – these aren’t the things you hear if there is a lot of unbridled optimism in the Air.

When a asset class becomes too expensive, the immediate thought is that the only way it could go is for a Crash to happen and in a way, the stock market has been a excellent candidate. Every-time we got over-valued, we have crashed and the next time won’t be any different.

Yet, not all mean reversion happens by way of price crash. Time correction is another way for markets to decompress valuations till they reach the mean (or rather mean meets the price).

When Gold reached its peak in 2012, a investor who got in at the lower end in 2003 was looking at a impressive CAGR return of 24.5%. Today, the same investor if he held to the asset has a CAGR of 9.80% – a okay kind of returns.

Assume gold stays around same place or makes a all time high 5 years from now. A investor who bought and held for the 15 years (remember, buying was at bottom) would be seeing a CAGR of 7.60%. These days, Banks give out as much and that return without a iota of Risk.

Markets have had a wonderful run in the past few years – the future though is uncertain (as it is all the time). Valuations are expensive yet we aren’t close to bubble territory. Foreign Institutional selling is being easily absorbed. We saw that in late 2007 as well, but Mutual fund investments were never so strong at that point of time.

Time based corrections remove the panic but depress the returns. If you are planning your life based on the past returns, maybe its time for you to take a quick rain check. Its never too late to keep some powder dry for no matter how good you think you are, you don’t want to be in a place like Tata Tele found itself.

The illusion of safety in Mutual Funds can make one take risks higher than what he ideally should. Keep track of your Allocation and stay away from exposure that you cannot digest in the next fall – whenever it comes.

Retirement Worries

How much do you need to Retire in Peace? The quintessential question has really no clear answers with answers varying based on their own biases and beliefs.

On the web, a simple search for “How much to Retire filetype:xls” give you hajaar excel files where you need to put in a few numbers and voila, you have a ready-made number that you need to save to get there.

While Excel files are a good place to start, they at the max are dependent on who has framed the question and what he believes in. Some excel files for example ask very few questions and then provide you data on how much you will spend in Retirement while others request detailed queries which you need to answer before a number is flashed.

Someone I know from Twitter and who has built the later style of Excel Sheet had this to answer for my question on why so many queries

“The sheet is complex. Deliberately so. Most investors want piece meal answers and product names without considering asset allocation and its variation. So I would like to focus on that. It is not for everyone”

Some time back I downloaded from the web around two dozen such calculators and tried it out to see the results on what I shall need for my own retirement. Most numbers are close and not surprisingly so.

The other day I had tweeted about a live webinar on Retirement Savings. I myself attended the same though didn’t follow up on calculating what I need. Someone who I have met once mailed me a couple of days back and I quote (with permission of the sender)

“Thank you for sharing the details of the webinar. But after watching it I’m a bit afraid. The gentleman in the webinar says 4 crores of capital is required if I want 50K monthly after retiring. I want your frank opinion – is this really legitimate? or is it some sort or market gimmick from him?”

I wasn’t surprised he was worried. Very few of us are able to earn / save 4 Crores by the time of Retirement. The reason for the big figure lies in the way most Retirement Calculators are build.

The three Key questions that most Excel sheets require your answer are

Your Current Expenditure (Yearly)
Inflation (Estimate until you Retire)
Years to Retire
Life Estimate (End Date)
Inflation (Estimate post Retirement)
Return on Investment (both Pre and Post)

Once you gather all the info, Excel – the greatest invention ever, comes to your aid.

Type in FV(Current Spend, Current Inflation Estimate, 0, Years to Retire) and you shall quickly find out how much you will be spending at the time of Retirement.

Do a similar Query using the output (Expenditure at Retirement, Inflation post Retirement, 0, End date in Yrs) and voila, you suddenly now know how much you will be spending at the death bed.

It’s my humble view that if you can project inflation for the next 50 years, I am sure that you should be considered for the post of RBI Governor for he himself has no clue of what Inflation would be over the next 1 year let alone next 30 / 40 years.

But since we know and if we feed that information to Excel, we immediately know how much we will spend at what year and reverse engineering that, we can easily find out how much to save by the time we retire.

For example, if you today are spending 25K per month and have 20 years to Retire, at the time of Retirement you will be spending 80K per month and by the time you die (95 Years), you will be spending 6.16 Lakhs per month.

Man, Life is so easy once you have figured out all these info for all you now need to do (for majority of folks) is Save, Save and Save with the hope that you shall reach the magical number that Excel has given out.

Most calculators go the Linear Equation way since it’s pretty simple to come up with a number that seems to sound round about right. We are after-all a growing economy and will continue to grow for decades (something very few countries have actually been able to achieve) and hence these numbers should be right, Right?

The fault in these numbers lies in the fact that they are for proving ready-made solution. The reality though is that each one of us will have a different path and one that will lead to a different requirement.

Expenses grow over time and that is true. What is false is that you will continue to spend as much money (Inflation adjusted) even after touching your 70’s and 80’s as you did in the 40’s. The biggest expenditure at those times is Medical for no matter how much you like eating out now, your body will say No to eating out and having the simple pleasures of Life at your own home.

Current Expenditures in that sense have very little to do with Future Expenditures.

Real Estate investment (even for self) is currently a nice mocking subject. SIP better than EMI goes a famous saying. But at 60’s and 70’s, do you really want to move houses because the landlord wants you out every few years.

Yes, Renting is cheaper option these days given the atrocious cost of property. Unlike markets though, corrections in India have been far and few (last most remember is the 1995 price crash). Property prices I am told are crashing left, right and center and yet I find very little evidence to the same. Yes, there have been instances where owing to difficulties; people have disposed off properties at prices lower than what one believed in. But that is nothing more than a panic and one unlike stock markets rarely result in capitulations.

The famous crash in United States of housing in 2007 was due to a variety of factors most of which aren’t even applicable to countries such as India.

The biggest advantage of owning your own house shows up in the Security you shall have in the post-retirement years. Regardless of anything else, the least of your worries shall be getting kicked out of the house due to inability to make the required rent.

A financial calculator doesn’t differentiate between costs that cannot be avoided and costs that can be avoided. Every cost you have now is assumed to remain and keep growing in the years to come.

10 years back, I barely spent any money on Telecom and Internet. Today, it’s a big number. Tomorrow, who knows – it may actually decline rather than increase for disruption is always in the air.

Retirement Calculators also try to include expenses you may need for Children’s Education / Marriage among others. Once again, the thought process is simple. If it costs 60 Lakhs today to do a MS in USA, how much will you need to save so that your child can do when he comes of age.

Once again, we overlook what technology can aid up in. MOOC wasn’t even an acronym few years back, today more and more colleges are looking at it as a way to limit the costs of students who are overburdened by student loans while at the same time being able to deliver quality education.

The biggest complaint of MOOC today is that the students miss out on the Networking / Learning from co-students as also ability to make friends. While the complaint is real enough, by the time your children come of age, we may have found a better solution. Most importantly, this assumes that the child really wants to do a MS in USA instead of something else.

The bigger your requirement is, the more you need to save. While savings are always good than spending, too much of savings always comes at the cost of quality of living. Do you really want to compromise on every small pleasure, read expenditure, today just because a excel sheet says so?

A friend of mine spends an excessively obscene sum of money on vacations (he loves travelling). Yes, he can save more by cutting down on that expense. But at retirement, no matter how big the savings are, his body itself would disallow the free nature of vacations, something he can now do now.

On the other hand, at other places he is as miser as you can be with very little spent on un-necessary items such as Gadgets / Mobiles and Vehicles. In a way, his way of life is Quid Pro Quo.

Today more than ever, we have people and tech that can help up plan our retirement. Whether you plan it yourself or take the help of someone else, question every number and every assumption.

There is nothing like one single number that can solve all your worries, so the key is to make sure you are in the wide band with the best case scenario being of lowest probable expenses and worst case scenario of maximum expenses. The reality would lie somewhere in the middle as always.

Value, Momentum and The Risks of Coat-Tailing

Fame is a double edge sword. While everyone wants to become famous, being famous brings its own set of scrutiny and limitations. Take the recent controversy regarding twitter handles followed by Prime Minister Modi. As an Individual, he is entirely at his own liberty to choose whom he wishes to follow and who he doesn’t.

But being the Constitutional head of a Government means that every action he makes is scrutinized, every statement read carefully and every action thoroughly analysed. So, when he follows twitter handles, that is as close to endorsement as you can get on social media (and this is evident as many who he follows have that as a Bio input).

Virat Kohli, the Indian Cricket Captain recently opined that he shall stop endorsing soft drink giant and fairness products because of their association with junk food and racism. That action will cost him a lot of money, but when one is looked up my millions of youngsters, it’s important that one’s action is in line with the broader social agenda.

Of course, Kohli isn’t the first sportsmen nor will be the last to take a stand that in-line with the image he wishes to project to his followers. The rise of Social Media brings its own challenges – people who otherwise would have remained Anonymous have now huge followings with their tweets being critical input for their followers.

And this brings us to the controversy that we saw thanks to a Whatsapp message I received about a tweet by Porinju Veliyath who runs Equity Intelligence India Ltd, SEBI Regd Portfolio Manager. By his own words, he is a Value Investor who tries to dig into companies that are ignored by the analysts due to its size.

Lack of data stop me from making a longer term analysis, but based on whatever data is available at SEBI, he has done pretty well for his clients. Better returns means that he is followed by investors hoping to get some ideas of what stocks to Buy. Not surprisingly, his follower numbers on Twitter have shot up and are now close to 400K mark.

On April 21, 2016 he tweeted about Eastern Threads with the disclosure that he was invested.

Eastern Treads @ 95 | A case study – Many Indian Micro-Caps r getting tranformed, going professional, I’m invested:https://t.co/cmV46MFY23

— Porinju Veliyath (@porinju) April 21, 2016

If one were to look at the Annual Report of Eastern Threads, he was invested for more than a Year though based on twitter’s limited search ability this was the first time he tweeted out the stock.

The difference between Momentum Investors (myself included) and Value Investors comes down to time frame of holding. Value Investors are willing to hold onto companies they believe in for years and even decades. Momentum Investors on other hand are much more fickle, we are willing to stay with a company as long as the stock price is rising, once the rise stops, we are happy to part-company.

Markets move in cycles and this means that it’s rare for any momentum investor to hold for years let alone decades. So, it was indeed surprising to see that Porinju divested his personal stake completely within 30 days of the tweet. (Annual Report provides the dates of Sale)

Here is another interesting data point. This one relates to Nirvikara Paper Mills where Porinju bought a stake enough to trigger interest in the stock by those who follow (RJ Blog wrote on the same here and here). While he continues to hold a stake as on 30^th June 2017, the second post coincided with his sale at a price the stock hasn’t yet seen till date.

Coat Tailing is a concept that originated in the United States with one of the biggest follower of the strategy being Mohnish Pabrai. In 2008, Gerald S. Martin & John Puthenpurackal wrote a paper titled “Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway” wherein they showcased that copying Berkshire Hathway from his filings earns significant Alpha. Those who buy into stocks that are recommended (Direct or Indirect) by well-known investors are following the same strategy even though many may not actually know much about the Risks and Rewards of it.

As a momentum follower, I would love trading Porinju picks and the mood in the current market is all about, Buy First – Ask Questions Later. We buy a stock not a business and this means that focus in only on the price of the stock rather than how the underlying business itself is performing.

Porinju has not violated any legal rules. But when one is famous enough that just mentioning a stock will push it to upper circuit, moral and ethical behaviour comes under scrutiny too.

Based on returns he has generated in his PMS, he has generated tremendous cash and goodwill of his clients. But becoming a client of him isn’t possible for everyone given that the minimum capital comes to 50 Lakhs. This means many a follower wishes that he can generate better returns by following what he invests into.

Most replies to his tweet where he sarcastically thanked me and another friend who tweeted more info about it was that no one was compelling anyone to follow / buy stocks he talks about. This is very much true – Caveat Emptor is something that goes without saying. But blaming the victim is always easy.

People who have attained fame and are widely followed which to me means that their actions have to be inline not just with the legal rules but with ethical and moral values that he stands for. When I entered the market, I didn’t come with a MBA or an ability to analyse stocks. The only way to learn – follow the big guys. Same holds true for most newbie’s who enter the market today. Very few start by first preparing themselves – acquiring requisite degrees / experience for investing isn’t a full time activity for many but a way to scale up one’s own savings.

Fame as I said earlier brings it’s own set of requirements that go beyond what one may need to follow. As Spiderman learnt, With Great Power comes Great Responsibility. Large Investors have a greater responsibility to the public than what the law requires.

Caesar’s wife must be above suspicion.

Of Godmen, Miracle Cures and Trading Coaches

India has no shortage of miracle men or also known as godmen and as the recent episode in Harayana showcased, they seem to have the ability to mesmerize folks to the extent of committing violence and taking the risk of getting killed for defending someone they don’t even really know that well.

Of course, India isn’t unique – we have seen similar folks elsewhere too – Religiously motivated Suicides are huge (Wiki Link)

Baba’s are famous for offering cures for every type of ailment known to man – from Cancer, the dreaded disease that has no cure to common cold. What is interesting is the profile of people who believe and follow such characters – they aren’t just the illiterate folks who can be conned. Many are well educated and can make out a difference between what is true and what is not and yet, like a herd they would rather be part of it than take a objective view.

Stock trading is a tough business and is unlike any other business. While other businesses prosper by providing a product or service, the only way you can earn money by much of trading (Futures / Options / Intra-day) is if there is a sucker on the other end of the trade.

Depend on who you ask, trading has a win loss ratio anywhere from 50:50 (it can never be where more people win versus the losers) to 95 : 5 (Loss:Win). Then again, it will also come down to the question of who is really a trader.

Would you consider a guy with a capital of 1 Lakh and exposure of 5 Lakhs (over leveraged) a trader. What about a guy who trades on a capital of 1 Lakh though his own Liquid Net-worth is 1 Crore a Trader? Is a guy who buys today to sell tomorrow (on margin) a trader? What about some one who holds for a bit longer – week / month / quarter but with intention to sell a trader?

In a way, everyone can be considered a trader regardless of whether you are buying with a extreme short term view or buying with a extreme long term view. The only reason you are buying is because you believe that you can sell it at a higher price than for what you have bought.

Trading / Investing / Speculating is tough. After all, in which other business can you just buy a product / service and just wait it out to sell at a price which would generate returns way better than any other form of investment.

The reason to invest in Equity is simple – it has over time proven to generate better returns than other asset classes such as Bonds. But the path isn’t straight forward.

Like the Godmen who promise miracle cures, so do coaches who claim that just taking their class will help you change from a trader who is consistently or inconsistently losing to one who is winning most of the time.

In the field of medicine there is something known as Psychosomatic Disorder. These are disorders that are caused more by mental factors than by physical. Treatment for these therefore lies less in Drugs and more in counselling.

In the world of trading, counselling can be helpful if one is able to analyze his trades and the reasoning for why he isn’t ending where he intended to be.

If you are over-trading – higher leverage than what you should ideally be trading with. If you are not diversified enough – too much of risk in a single trade. If you are expectations are far off from reality for the capital you have deployed. If you lack a strategy and this is one of the single biggest reason for failure of many.

Every issue about has a solution, something we know in our own hearts. Yet, there is always a reason we don’t want to take the medicine prescribed.

The rise of the Machines

The biggest attraction towards short term (Intra-day) trading lies in the knowledge that one can take a exposure multiple times one’s own capital. Many a broker for example is happy to allow you to trade Nifty futures while collecting only Exposure margin at the time of Initiation of the trade. This means that you get to take up a exposure of 7.5 Lakhs for a upfront margin payment of just 22K or 3% of the total value.

If you can then capture just 0.50% of a move during the day, this translates into a return of 17% on the trading capital. And all this without having to move one’s butt from one’s chair.

Since 2000 when Nifty futures were first introduced for trading, the median difference between the high and low of the day is 1.40%.

Introduction of computerized trading has also meant that a skilled trader could try to program strategies that can trade more efficiently than a human ever can and over time this has started a Industry we now know as High Frequency Trading.

High Frequency Trading is a term used to denote trading at extreme short term time frame and can be based upon a plethora of trading strategies – from plain villa trend following on micro second scale to market making to arbitrage between Cash / Futures or one exchange versus other.

These days machines can pick off the slightest of market inefficiencies even before they can be spotted by a human eye. The biggest advantage of the arrival of such strategies has been the reduction in terms of spread between the bid and the ask.

While human ingenuity can still beat the machines, the opponent is growing stronger by the day and can be expected to skim off any easy profits that may have worked for years.

One such strategy which to me has been impacted would be “Trend Following” strategies on the short to medium term scale. While these still can work to generate decent returns over the long term, the pain point one needs to endure is becoming larger over time.

Take a look at the Barclay CTA Index returns

While one could see barely any negative years in the years leading to 2008, post 2008 this has become way too common. Unlike small individual traders, these results represent the combined efforts of some of the greatest funds managing Billions of Dollars.

Every one loves to quote “When the facts change, I change my mind. What do you do, sir?“, yet how many approach our Trading Equity Curve as a fact and if facts are indeed changing compared to the past change our strategy. Most of the times, we are happy to cling on to vestiges of the past hoping that some day,the facts themselves could change to our favor.

Coaches are key people in a sportsmen’s life for they can make or break them depending on how lucky they have been in selecting the right person with the right attitude. In Trading / Investing, a Coach / Mentor can help you understand your weakness and point out to areas of your strength.

But Coaching / Mentoring is and cannot be one off event. To me, its a continuous process with the aim to understand one’s own behavior better. The longer you strive, better becomes the probabilities of success.

Knowing why we fail isn’t enough for most of us know the reasons regardless of whether we want to accept it or not. To achieve better results requires more than just a one off class / session for we are stubborn and would rather defend our views than try to seek out contrarian thought. But the first step is to accept – There are no miracle pills.

Are we at a Tipping Point

The big read of the week has to be the “Howard Marks” Memo which these days seems to be the second most read fund manager report after the Oracle of Omaha. In this Memo, Howard warns about the Risks that the market seems to be ignoring as the fear of missing out (FOMO) seems to drive money towards ideas that in general times wouldn’t have been given a second thought.

Last weeek, I ran a Twitter poll asking if it was possible to see 20,000 on Nifty 50 by year 2020.

What probability would you give for Nifty to cross 20,000 by 2020?

— Prashanth (@Prashanth_Krish) July 21, 2017

Quite a few replied saying that they felt the chance was ZERO while the majority of voters felt that the chance was less than 25%.

The results weren’t surprising to me given that in recent times, there has been quite a concern that markets may have over-extended and it was time for a pull back. Yet, given the fact that we don’t know the future, should we write off even the remotest of possibilities?

No one really likes Bear Markets. While Value Investors claim to love Bear Markets as they provide them the opportunity to pick Dollars for Nickels, when the push comes to shove, I do wonder how many will be left standing let alone participate by buying stocks as they become cheap.

Bear markets come in different shapes and forms.

The 2000 Boom and Bust

Who doesn’t know about the Dot Com Bubble these days. December of 1998 was the start of the rally that took Nifty 50, a Index that wasn’t having any heavy weight Infotech Stocks at that time from 817 to a final high of 1818 in the space of just 15 months.

The rally in the Infotech Sector Index took quite a different route with the rally starting two years earlier in December 1996 with the Index floating around the 78 mark. When the peak was finally achieved, the Index was quoting at 9,550.

Similar to the Nasdaq 100 which took more than a decade to break its all time high of 2000, Nifty IT too broke its 2000 high only in 2013.

One thought process of where one should start a new bull rally emphasizes that a new bull rally starts only on breaking the previous all time high. Using that definition, we are still in the Infant stage of the bull rally in Infotech (validity to remain as long as it trades above the 2000 high) and yet IT stocks are a pretty hated lot.

Nifty 50 on the other hand took around 34 months before it broke above the 2000 high and 48 months it was before we were well and truly above that high water mark. Dow Jones Index on the other hand had to wait for 72 months before the 2000 high was broken only for the financial crisis to crater the Index well below even its 2002 low (Nifty 50 on the other hand didn’t really come anywhere close to the lows we saw in 2002).

Its another matter that the stocks of the next rally bore little resemblance to the stocks that mattered in the earlier rally.

The 2004 and 2006 Mini Bear Markets

Markets fell greater than 30% from their peaks in 2004 and 2006, but given the speed of recovery, this mini bear market is less talked about. While the trigger to the 2004 fall was the surprising end to the NDA government in which markets had great hope, the 2006 fall was triggered by global factors.

While both 2000 and 2008 are talked about as the great bear markets, 2004 and 2006 aren’t since the amount of time spent underwater was fairly short. Markets rebounded strongly from the lows and in no time were we back at the earlier peaks.

The Great Crash of 2008

Who needs to be told about the crash of 2008? These days, every time market starts to feel a bit too hot, the fall of 2008 is what comes to top of the mind. Investors who look at valuation seem to worry that every time we close in to the valuation we saw in 2008 prior to the fall, its just a matte of time before we see a repeat of the same.

At its peak, the much derided and yet the quickest way to figure out where the market lies, Nifty 50 PE was testing the highs it saw in 2000. Sensex PE Ratio (both of them being at that time of 4 Quarter Trailing Earnings on Standalone Balance Sheets) was a bit away from its peak of 2000.

Despite the difference in stocks (Nifty 50 has 51 stocks while Sensex has 30) and the weights, both most of the time top out simultaneously most of the times. 2008 was one such instance.

The fall of 2008 has for many who experienced the same has created a phobia of every fall being similar to the one seen in 2008. Seeing your retirement kitty (if invested in the market) fall by 50% or more is nothing some one can forget in a hurry.

For long, Foreign Institutional Investor have been the critical driver behind the rise and fall of markets. Other than for the one instance of 2016 where markets closed positive even as FII’s sold (Calendar year basis), every time, FII’s have sold, markets have dropped and vice versa.

Much has been said about how Mutual Funds are becoming the key driver in markets. But a cursory look at the Quarterly net flow of Equity Mutual Funds doesn’t really show it likewise. We have had similar inflow’s in 2007 for instance as we are having now.

The only difference is in terms of Gross Inflow / Outflows. While the first 6 months of 2007 saw a Gross inflow of 42,903 Crores , in 2017 its 1,24,517 Crores. This would suggest that while there has been a strong move towards Mutual Funds, the churn is pretty high as well.

Breadth Indicators

One way to determine where we are relative to earlier times is to look at a few breadth indicators.

Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

John Templeton

A euphoric market is one when literally everything is flying. At this point of time, you don’t need to do any Analysis but just invest in anything that seems to be moving higher.

While Mid and Small Caps seems to have been in a Euphoric in recent times, the evidence doesn’t easily lend to that buzz. For instance, here is a chart which plots the percentage of stocks that are trading above their 200 day Moving Average.

The above chart contains 2 data points. The top pane plots Nifty along with the 10 day Moving Average of Number of Stocks trading above the 200 day Indicator. The idea of using a 10 day Average is to smooth out the volatility.

The lower pane provides the raw data – % of stocks trading in NSE that are above their 200 day averages.

At 60%, we aren’t really into territory that seems to be risky at the moment. In fact, post 2014 Election Rally, we haven’t seen the Indicator cross 70.

This in my opinion is indicative of the fact that markets aren’t totally over-bought. While one cannot rule out any reactions from current levels, any major bear market of the kind seen in 2000 or 2008 seems to be not on the cards unless there is a Global Meldown in Equity in which case, all bets will be off.

Valuation

The big elephant in the room would be Valuation. Markets are expensive based on PE Ratio regardless of what Index you apply the same upon. The only cheap Indices would be the Infotech and Pharma, but hey, who wants to invest there in the first place.

Above is the Nifty Price Earnings Chart over time with Average and Standard Deviations. A casual observation would be that while markets are expensive, they haven’t reached a point where the odds really aren’t in favor of exposure to equities.

Current market valuation is more expensive than in 2004 prior to the crash, but is the Index the same as what was in 2004? Currently Financial Services account for 35% of the total Index weight. This wasn’t the case in 2004 for instance when the composition of the Index was vastly different.

Only 25 stocks continue to be part of the Index when one compares the Index of 2004 to that of today. In other words, as much as its essential to look at historical data points to get a sense of valuation, ignoring the huge churn and differential weights can change the basic structure of the analysis.

HDFC Bank for example is trading at 30 times its earnings and is closing onto representing nearly 10% of the Index weight. A High PE + High Weight in turn would pull up the overall weight of the Index. Is HDFC Bank cheap or expensive is another story altogether.

The path forward

Wouldn’t it be lovely to have a Almanac which can give us precise turning points of the future (Experts of GANN, a style of Technical Analysis would love to claim they know such dates) so that we can be fully invested when markets are trending higher and be totally in cash when the trend turns to bearish.

While we cannot project the future, one thing that is bound to showcase the future as it happens is the chart. Right now, the market is strongly bullish regardless of what method you apply. At some point markets would start to roll over breaking major supports and trend-lines on the way. That would be a better time to become bearish than try to predict the top based on tools that fit our narratives.

Above chart is as on date. Compare this with similar chart of the previous bull run. See something similar?

Is the chart of 2017 similar to one of 2008 or are we placed similar to 2006 or 2004? Once in a while markets can go up sharply at a 45 Degree Angle. While they mostly end up correcting, not all corrections end up like 2008.

I for one continue to believe that the best way to play would be to follow a Asset Allocation mix that is suitable under current circumstances and one while allows us to reach our goals even if the best laid out plans falls flat.

Share this:

Share this:

The Risk Thermostat

Share this:

Share this:

Share this:

The rise of the Machines

Share this:

The 2000 Boom and Bust

The 2004 and 2006 Mini Bear Markets

The Great Crash of 2008

Breadth Indicators

Valuation

The path forward

Share this: