Commentary | Portfolio Yoga

The ethics conundrum

Many moons ago, I was offered to be taken as a partner in a company which was started and continued to be run by someone I admired. Given the timing (personally for me), it was indeed a very tempting offer. Then again, I also knew how he treated clients (and their monies) and as much as it would have been profitable, I thanked him for the offer but declined to be part of it.

Years ago, an Industrialist bought an Airplane for his personal usage using funds from a listed company. Unfortunately for him, shareholders objected and the company was a US listed one. The kind Industrialist simply transferred the asset to his listed company in India.

This post was inspired by an Investment Adviser who tweeted and I quote

The biggest co in India grew by corrupt ways. Also, created Huge shareholdr wealth & many millionaires.

There is nothing wrong with the above statement for investors who invested with the company in its early years got some pretty good returns. But then again, so goes for investors in companies like “Infosys” among others which prospered without the need to cheat the government the way the big company is rumored to have.

But what is overlooked is that this is a case of Selection and Survivor Bias. A steel company some time back tried to bribe its Banker to have its way. But not all things go as planned and the stock plunged more than 90% from the peak.

Over the years, hundreds of thousands of companies have vanished with investors monies. Some would have had genuine business difficulties, some just bad luck and quite a few I am sure were there to take advantage of the cluelessness of investors and claw as much money as possible.

It’s here that the philosophy of investing you follow becomes so important. If you are an investor who looks at numbers and willing to bet sizeable sums on companies you like, would you really want to partner yourself with a cheat. Today, he is cheating others, tomorrow could be your turn.

Momentum traders like me on the other hand rarely bother to check the background of the promoters. If the stock is going up, it’s a Buy. If it’s falling, better get out for there are always better options available elsewhere. In that sense, we are blind and may be willing to be shareholders (for however short a period of time) of companies that seem to have crooked managements.

But I am digressing. Great Companies with honest management can have mediocre returns while Lousy companies with dishonest managements can give great returns. While on the long term, there is a very strong correlation between ethics and returns, on the short term, no one gives a damm about it, especially when the markets are running like crazy.

Raymond is in the news for its corporate (mis) governance. But this is a stock that recently broke above its high of 2005. Breakouts are good and one that comes after 12 years could easily work wonders. But if it doesn’t, there is always an exit plan that hopefully ensures that we get out and not become a lifelong investor in the stock. But if your allocation is no more than 4%, should you give a damm about whether the promoter is a chor or not for finally you are measured not in the kind of companies you invested but the return you generated on your investment.

Food for thought, eh?

Mutual Funds or ETF

The topic is something I have written about earlier but given the nature of the market, it keeps propping up as one or the other side unearths what seems to be new evidence which show why one is better than the other. In the United States, its more or less settled that Active funds cannot beat simple ETF’s and this is not just limited to Mutual funds as the bet by Warren Buffett is showcasing.

Ravi Dasika, Co-Founder, Tavaga.com wrote a post on Medium trying to show why the viewpoint of Sharad Singh, Founder and CEO of Invezta.com wherein it was claimed that 95% of all funds beat ETF’s was simply and absolutely wrong. Before we go any further, a word on these two sites. Tavaga.com is a site founded to provide investors a way to build portfolio’s using simple ETF’s while Invezta.com is a site that provides investors with the ability to invest in Mutual Funds Direct (other sites such as FundsIndia for example are sites that provide avenue to invest via Regular schemes which are more expensive ,0.5% to 1.25% approx depending on fund.)

In other words, they offer their customers a choice that is pretty much opposite (Passive vs Active) and even while the total pie of investments that is coming into the equity markets is pretty high, like in the United States, at some point we shall see some sort of cannibalization.

Given the background, lets explore what Sharad Singh wrote at Business Today in his post More than 90% active mutual funds beat the indices. There is still time for ETFs. I would suggest you read the article though the conclusion (as would be evident from the headline itself) was that ETF’s were inferior to active Mutual Funds.

To make a case for Active, Sharad combined ETF’s and Index funds on one side and all Mutual funds on the other. While Index funds are supposedly passive and theoretically should move like the Index, it rarely does so thanks to Tracking Errors that dominate. Either way, Sharad takes a total of 17 ETF’s. I on the other hand could find a total of 24 funds (18 Index, 6 ETF’s) with a minimum track record of 5 years.

Here is the list with returns

As the data evidently shows, ETF’s handsomely beat Index Funds some of which can be attributed to fees (IDBI Nifty Index fund for example charges 1.74% as its Expense) while others maybe due to the churn needed to continually adjust for the inflows / outflows. While even ETF’s face that issue, due to the size of the Creation Unit being large, I believe that impact is much lower in their case.

Now, lets look at Mutual Funds (and since Direct funds are still a very small portion of Retail Investors, I shall use Regular)

On an average, Mutual funds have indeed outperformed both Index Funds and ETF’s by a margin. But what data misses is the fact that this data is skewed in two ways.

One, the starting point of the 5 year analysis starts right after the bear market of 2011. A fund which had a higher beta than the Index would surely outperform given the overall bullishness in the period.

Second, the 10 year returns are of funds that continue to exist. Any fund that was closed / merged would be missed propping up the returns higher (since its generally weak under-performing funds that find themselves under the axe).

Even more important point to note is that if you had invested in any of the funds on the left hand side, you would have either kept in line with the ETF or under performed. On the other hand, investing in funds on the right hand side should have given you a return much higher than what you could have got through ETF’s / Index funds. But either way, its not a 95:5 split but more of a 50:50 (Coin Toss). (Errata: Only 22% of funds have under-performed not 50%. Apologies).

Do note that while we compare all the funds against Nifty 50, its actually a wrong way to compare since many of the above funds have pretty large investments in stocks outside the Nifty 50. On the other hand, if you were to invest equally into both Nifty 50 and Nifty Next 50, you would more or less get the entire population. But since we have just 2 ETF’s with minuscule AUM’s, it would not be a fair comparison.

Over the last 5 years, Nifty Next 50 has given a return of 20.24% showcasing where and how the extra returns by the funds above maybe been garnered. One can only hope that we see more launches to track indexes such as these making it easy for potential investors to invest in a ratio that has a very high probability of beating the best of the funds (which are recognized only in hindsight).

If you were looking at investing for the long term, a good mix of Nifty 50 and Nifty Next 50 on the equity side should beat the shit out the majority of funds 10 / 20 years from now, that is unless you know which fund to buy and forget for the next decade.

Finally, the goal of investing is to ensure that our Goals are met. The road you prefer is left to you and while most of us will still arrive at our destinations, the time taken maybe different due to the different roads we took to reach.

Retirement Woes

One of the key reasons for savings is to ensure that once one retires from their job, they have enough resources to help them lead a comfortable life for the next XX years they may survive. The last thing most people want is to become destitute’s in their old age and dependent on either their children or worse relations.

If you were to read the key problems facing Americans, most of them aren’t ready financially for retirement and even those who thought they were were rudely awakened when the global financial crisis hit the town in 2008. In India, savings for Retirement is generally made via Provident Fund if you are employed. State / Central government employees contribute part of their income to ensure that after they retire, they can get a pension (which is adjusted for inflation) till the end of their lives.

While under savings is a horror story many hear and for sure don’t want to be on the same boat, over savings (which like anything else in life comes at a cost) is meaningless especially if comes at the cost of sacrificing things you may have loved to do during your younger years but got too daunted since that would have eroded a substantial part of the savings.

In last few years, I have lost two family members and the story of their lives is so much similar and yet so different. While both faced hurdles at a younger age, one was able to enjoy life much better than the other. I was reminded of them when I was having a conversation with a good friend of mine who wanted to do certain things given that as one ages he knows that he will not be able to do the same as he gets older, yet the lack of understanding of what he really requires to lead a comfortable life post his working career means that he would rather save as much as he can (and given what I know, he already has exceeded what would be required at the current stage of his career).

Financial Planning these days is all about Excel and Calculators to show that if you spend X now, 10, 15 years later you will need (m * n), but does one really have a clue as to how the world will shape out 10 / 20 / 30 years into the future?

10 years ago, I did not dream of spending as much as I do on Telecommunication as I do now while on the other hand, what I thought would be really expensive hasn’t really lived up to the fear. 10 years from now, do we really know what our major spends will be given the pace at which technology is changing our lives?

Former prime minister Indira Gandhi coined the term “roti, kapda aur makaan” as an election slogan and truth be told that its the basic requirements I think most of the readers here would already possess. Census 2011 said that 86.6% of the population owned their houses and yet the Real Estate boom has meant that rather than enjoying what we possess, we try to gather more in the hope of even more gains.

Food Inflation has been pretty high in recent times but given that is a commodity at best, the same cannot go on forever since consolidation of land, better quality seeds, use of technology will make food cheaper at best or roundabouts here.

While Textiles has turned out cheap, the one factor most didn’t account for and is a major dent for families is Education which has become way expensive over time. Then again, not sure if anyone thought people would ponk up the kind of money they do now.

But with Massive open online course (MOOC) catching up, do you really think that 20 years from now, Children will have to spend a Crore or more to get into a college in America?

Savings is important but so is leading a life as carefree as possible. Right now I am in the middle of reading Shoe Dog by Phil Knight and while its a case of Survivor / Selection bias (he wrote the book because he survived the adventure and we read because Nike is after all one of the biggest brands out there), I still wonder how many families allow their wards to take risks he took early in his career.

Not all risks pay off, but the experience stays and helps one feel of a life led according to ones wishes and dreams. So, how many dreams are you killing for a goal about which you don’t have a clue let alone know the path? Food for Thought?

Here is what happened in 2016

Year end posts are obligatory in nature. So, this is a list of stocks that went up, this is another list that went down and hey, this what I think will happen in the coming year.

Yet, if you really dig the data you can find some interesting facets that may have been easy to miss otherwise. 2016 was literally another dud year, the 2nd in the row. Yes, we did have some great moves and huge volatility, but we are still where we were at the beginning of September 2014 and surprisingly despite the passage of time, we aren’t any cheaper than we were at that point of time. Says something, ain’t it?

Lets start of with the percentage move plotted in a distribution style chart.

While the year may have been flat, we have had a lot of stocks that doubled or more. If you were invested in such stocks, 2016 would have been a awesome year for sure. For others (and that would include me), better luck next time, eh 🙂

The biggest gainers, gains > 100% were mostly mid and small caps with very few of them starting out at 100 Rupee or more. Sugar sector had a awesome year with the equal weighted index rising as much as 74% and hence its no surprise to see many a stock related to Sugar at the top of that list.

On the negative side, ignoring the random names of small cap stocks that are on the route to oblivion, the biggest disappointments would Tree House, RCom and Just Dial. And then there are stocks whose charts suggest a clear cut pattern of pump and dump, Global Offshore for instance

But overall, with 48% of stocks ending in positive territory, it isn’t so bad either. And before we move on, here is the list of the Best and Worst 25 stocks

Stock picking is tough in the best of times and even though the current year hasn’t been bad, anyone (and there are literally thousands of investors) who are holding stocks that literally bled to death this year are unlikely to believe that Equities are the best way to invest for a secure future.

Yes, the hope is to catch as many of the Green ones as possible, but how many do you really have the expertise to catch and a bigger question, will you know how long you need to hold it?

Global Offshore for example went up from 50’s to 800’s and yet some one who bought with intention of sitting tight would have seen all his gains withered off.

On the other stocks like Mandhana after having literally no returns over the last few years finally gave way as it fell 80% from its peak.

ETF’s are still a nascent product in India though with the arrival of Robo Advisory and investment by EPFO into ETF’s, hopefully going forward we should see more momentum .

Almost all ETF’s ended in the Green with the only exception being the Infra ETF.

While not all sector index are available, with new launches we are seeing quite a few options other than Gold and Nifty which still constitute the maximum number.

With mainline indices being flat for the year, the Top winners and losers among Mutual funds were dominated by Sector funds.

DSP had a good year with 3 of its funds being among the top winners though it also holds the ignomity of having a IT fund that lost a great deal more than both the Nifty IT Index (its benchmark) as we as its peers.

For the Second year running, FII’s continued to be Net Sellers and like last year, the only solace and what maybe saved the markets from having a much rough year was the steady stream of investments coming in from local funds (read Mutual Funds) which thanks to the weakness in Real Estate, Falling Interest rates and good advertising has been able to rake in much higher amounts than it used to.

But with there being a very high correlation between Nifty and FII investments, its essential that they start trusting the markets with their money if we were to have a bullish year like the ones we saw in 2012 or 2014.

Internationally, were were more or less on in the middle with neither we being great performers nor being the dogs of the year.

Since the table uses local currency to measure the gains, any gains accruing due to depreciation alone gets counted when its essentially just adjustment (Example: FTSE 100)

And finally, Nifty Sector / Thematic Index returns over the years. I have broken it into 2 pictures. One with at least 10 years of data and in the other you shall find all Indices with their returns over the last 5 years.

And finally, the best and the worst performing Indices over the years. Here is the interesting thing in this data set. In the winners, you can find Nifty Metals represented three times and yet if you were to measure the returns over the last 10 years, its a pittance to say the least. Once again, blind buy and hold doesn’t work other than in hind sight and with money you really have no requirement for

Nifty Pharma had one of its worst years since 2008 and while its still not yet very cheap, I see it getting (stockwise) to that zone from where you could see it bounce back providing decent returns at the very least.

So, here is me hoping that 2017 bring out the best of opportunities for us.

Blog Porn

Before the advent of the Internet the only resources available for a Investor / Trader were books and Newspapers. For Indians, it was more of Newspaper and “khabar” since investment books were rarely found in one’s library (am speculating here given my experience, could have been different in a city like Mumbai for instance).

Internet and the arrival of blogging has changed all that. While most of us have moved to Twitter, its actually in the blogs that you can really lay out your thesis without being constricted by number of characters.

There are a few well known blogs by Indians though my own view is that most of them lack quality and those that are of high quality are either paid blogs or worse the author decides to blog once in a blue moon.

On the other hand, US which has a much longer history when it comes to both the Internet as well as participation in markets, one sees a very huge number of blogs that touch on every aspect that you could think of.

Few days back, friend Arun @LazyTRaider made a tweet request for blogs that one follows. I responded with a list of blogs I generally follow. This pic attracted quite a bit of interest with it right now having been Favorited by 136 folks. But the pic doesn’t really do justice since it requires a lot of effort to track and read the posts on each of those sites.

Rather than you spend time going through various sites to check for updates and read what interests you, I decided to pull the feeds into a single sheet and make it available on this site. By doing this, I hope that this becomes your one stop shop for reading anything interesting that is happening in the investment world.

So, what are you waiting for, go and check out US Blog Roll

You shall also find the link in the Menu Option above. Happy Reading.

Stock Advisory in India

With there being more than 2500 listed stocks that trade every day, picking the right stock is tough for professionals, let alone Individuals. If you are an Investor wanting to build a stock portfolio, how do you go about it?

The answer is basically two fold,

You do your own research and buy stocks that you believe in.
You outsource the decision making to a third party and take the trades advised by them.

Friends who know me know how anti advisor I am. This has been borne out of personal experience with stock advising. For those who don’t know, I long back had started an advisory, was part of another advisory firm started with a few friends and then worked (though my role was different) in a firm that had stock advisory as one of its offerings.

What was uniform across the three was that performance (as I measured) was below par given the commitments that were required to be put in by the Individual who took such a advice. Advisory, especially of the Stock variety is asymmetric in nature. You not only pay the advisor beforehand, you have no recourse in case they fail to meet the expectations (on which the product has been sold to you).

Worse, many a firm locks you into the plans with no exit in case you want to get out. Prorated refunds are essentially something you barely find among most of the firms. Remember, the cost of advising 10 or 100 more or less remains the same and yet, they want to make sure that you cannot exit.

But then again, this is an Industry that seems to be growing by leaps and bounds going by the number of people who are registering and offering service to Investors. The one common factor is the returns they seem to have generated in the past. Most beat the best mutual fund out there handily. Of course, given that there is no Audit or third party tracking, it’s a guess as to what the real returns to the investor could have been (after accounting for slippage / taxes).

While collating the list, I left out advisors who also provided advice to traders (Intraday / Derivatives). I believe that most advisors who offer intra-day service / positional derivative trading ideas know that most clients will get burnt and yet the attraction of easy fees attracts most of them to offer such a service.

So, without further ado, here is the list (which shall be constantly updated over time) of Stock Advisors. Do note that for it to make sense, you need to commit enough capital to make the cost less than 3% of your portfolio. Else, the returns no matter how good they are will be meaningless from your net worth point of view.

Link to google spreadsheet.

Becoming a Trader

One of the constant queries I receive from readers is how do they go about becoming a Trader. Where and How should they start, what books to read, do I take classes on Technical Analysis are among the top questions asked. Rather than keep copy / pasting similar replies, I felt that it was time to expand on the same and post it as a blog, so here I go.

What attracts men (very few women) to trading is a question I think has a question that hasn’t been fully addressed despite enormous amount of research on the same. Trading attracts literally everyone, from some one who found it tough to pass his degree exams to some one who may have topped in his Masters. Education in a way is no Bar.

Trading is tough, but if you are able to call it right, the financial rewards are huge. If you analyze business / companies, you shall find that not many provide / generate Return on Equity as large as that could be gained without the need to employ thousands of staff.

The chart alongside for example depicts the returns generated by some one I know purely via trading in 2016. While the returns are volatile, the returns are enormous (especially since the capital employed is pretty large). You can find very few businesses that can generate such returns on capital.

While money attracts, the key attraction I have found for many to try their hand at trading is the challenge it seems to provide and one that is missing in their own work places.

Trading for a living is too romanticized. Unfortunately truth is that more traders fall by the wayside than in any other business. While friends have disagreed with my numbers, the fact is that success in markets is by a very small minority.

Where success is tough, you see ancillary industries prop up that promise you success for a small fee. In the trading business, you have Fee based Advisors who promise to alert you with the best trades, the educators who promise to educate you to ensure that you can find your success and the broker who showcases / talks about great traders and how you too can maybe become like one of them.

I tried to search for Top Technical Analysts in India (since Technical Analysis is often linked with trading) and the names that came out weren’t surprising. After all these names are well known to anyone who watches business channels such as CNBC. But do you know what else is constant among them all? Well, you just need to check their websites to see that they all offer (for a fee) tips both of the Intra-day variety as well as Positional.

If you are a top lawyer, your income is still dependent on how many clients you can attract, If you are a top Surgeon, your Income is directly related to how many operations you make and same is the case with literally all other business / service sectors. But in trading, if you are good, market rewards you. Its as simple as that. You really don’t need to put up a website, have a call center to answer client queries, spend time to advertise on Television among others.

If you succeed in trading, there is nothing equivalent to describe and compare it with in the real world. You are the real Master of the Universe and every dream is out there to make it a reality. But then again, as a saying goes “if it was easy everybody would do it”.

Assuming that you still want to go ahead, how and where should you start?

Well, for starters start with a Billion. Am joking, but you really need some serious capital if you really want to make a career out of trading. Then again, as many a bloke has found out, no amount of capital is enough if you have a crappy strategy – its just a matter of time before you blow it all away. (Related Reading: Post by Nooresh Merani on the same)

Trading is not like any other job and that means that you don’t have a regular income as well. So, make sure that your life is not entirely dependent on how much you can make it in that month. If you do, its a sure fire way to failure.

While much of trading is seen as the hectic / intra-day variety especially in the derivatives segment, if you want to survive and thrive, avoid at least at for the first few years anything close to intra-day or trading in futures and options. As enticing it may seem, its a fast path to disaster for most.

Education is important to succeed in any field and trading is no different. While trading is supposed to be about reading charts, its important that you know anything and everything there is to know about. That said, I am skeptical about the quality of advise provided by Individuals who for a fee promise to help you learn the ropes. On the other hand, I would suggest you attempt to pass the CFA / CMT exams. While they are self study based, the exams aren’t easy and require you to have a deep understanding of the intricacies of the market.

Trading in my opinion is not for everyone, the few who succeed aren’t the ones you would have thought would succeed when they first started. Having lost money in every way you can think of, all I can say to conclude is that Trading ain’t Easy and if you are enticed by the easy money, beware for the bottom may give away faster than you imagine.

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