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Opinion | Portfolio Yoga - Part 3

Category: Opinion

Wrong for the nth time

I am bad at Predictions. In 2004, I did not have any major position in the markets but was bullish on the reelection of the NDA government. In 2009, I had what I assumed was a position that won’t get hurt regardless of the election results (a short option strangle on the Nifty). Nope, markets decided that I was actually wrong by moving way outside what my position was accommodative of. 

The next big test of my prediction skills came in when we saw Britain vote for whether to remain in the EU or not. My view as you may have guessed was that Britain would not be stupid to exit the EU. But stupid I turned out to be. The next wrong opinion came when Corona came calling. I felt that the impact would not be too big. Man, was I wrong once again. Finally, I did not anticipate Russia to invade Ukraine, so yet another negative mark for me. 

Even a monkey would have got 50% right I would think. 

Drawdowns are tough – both in terms of the money, notional or not, that we see being lost as well as the pain of dealing with an investment that is below water for a long time. Yet, markets spend the majority of their time in a drawdown.

Eddy Elfenbein in his CWS Market View posted this,

The Limits to Growth Turns 50

Fifty years ago today, a fascinating book was published called The Limits to Growth. The book claimed that the world would run out of valuable resources by the 1980s and 1990s. Its forecast was based on computer models by Jay Forrester of MIT. The book claimed that the world population and industrial production would soon massively decline.

Yikes! Predicting the end of the world is big business. Apparently, the public loves being told that the end is nigh. The disaster stuff was especially popular in the 1970s. Remember Soylent Green? That film takes place in…2022.

The Limits to Growth was a smash hit. It was published in 30 languages, and it sold 30 million copies. Despite its popularity, all of the book’s predictions completely flopped. The book was being updated as recently as 2012.

Why did they get it so wrong? Julian Simon pinpointed their error. Let me turn it over to Wikipedia:

[Simon argued that] the very idea of what constitutes a “resource” varies over time. For instance, wood was the primary shipbuilding resource until the 1800s, and there were concerns about prospective wood shortages from the 1500s on. But then boats began to be made of iron, later steel, and the shortage issue disappeared. Simon argued in his book The Ultimate Resource that human ingenuity creates new resources as required from the raw materials of the universe. For instance, copper will never “run out”. History demonstrates that as it becomes scarcer its price will rise and more will be found, more will be recycled, new techniques will use less of it, and at some point a better substitute will be found for it altogether.

This is a subtle point that’s simple but explains a lot. People are smart. They constantly innovate and update. I bring this up because that’s why the stock market has been such a great long-term investment. It’s the only investment that taps peoples’ ability to create and innovate. It’s also why we’re focused on the long term.

The winning strategy has been to ignore the fear mongers and stick with the companies that have a loyal following. 

What has saved my skin has been one thing and one thing only – the ability to adhere to the system even during the worst possible times. While the system most of the times did not save the pain (it was long before the UPA-2 election win though), the losses were quickly recovered.

Currently, it’s painful to be fully invested even as the markets seem to be rocking lower. The fear though is not because of the size of the fall but the narrative that has led to this fall. I have no clue how things will pan out from here. But systems regardless of the lag will provide an exit. The question is, can we adhere to it?

Some thoughts on “Do it yourself Investing”

Mahesh had an interesting question he posed 

https://twitter.com/invest_mutual/status/1481845647213207560

The replies are interesting and many on the dot. But first let’s look at the performance (10 years I assume is a good start)

I am using the Nifty 100 Index not the TRI since even an index fund cannot match the TRI and there is no way to replicate that performance.

Standalone, the performance of the fund isn’t too bad. Yes, there are other funds that have done better, but could one have forecasted that in 2012? If not, the only alternative to consider is the Index since that constitutes the real opportunity cost.

But what if you looked at rolling returns, how does Quantum fare against the Index. Since anything less than 5 years could be random, I am using a 5 year rolling return chart.

For most of the time, the 5 year rolling returns were actually higher than the Index. It’s only if one had invested 5 years back would he see a pretty large divergence. 

But despite the performance, the AUM did not pick up steam. 6 years back (the earliest data I could get), the AUM for the fund was 416 Crores. It has grown but not that much. Today new funds are able to raise multiples of that without even a track record.

But this underperformance may not be the new normal. Then again, who really knows how the future shall pan out. 

Dev of Stable Investor had a poll running where he asked a simple question – Do you have a financial advisor

80% don’t have one with while 7% believe they require but are for now happy with doing things on their own.

The amount of information that is available to a new investor today is exponentially more than what was ever available and a lot of this is actually free. I for instance subscribe to 100+ substacks many of which have amazing depth of reasoning and yet are delivered free.

I also these days am buying a lot of books, maybe more than what I should but when I look at the total spend, it’s actually less than what many a well known advisor would charge for a year’ subscription. In a way, I feel justified in the expense.

Then there is twitter. The amount of information shared freely is just unimaginable. There are biases of course, but that is par for the course regardless of whether the advice was freely delivered or paid. Look at this tread on Pitti Laminations 

https://twitter.com/sanjaylangval/status/1481974486941540359

I don’t think there is at any point in the past an equivalent to this. During the dot com bubble time, Bangalore Stock Exchange was a hive of activity. One trend that caught the imagination of a lot of traders were pivot levels (Link if you are new to that). 

These despite being so easy to calculate were sold for humongous prices. The buyers once they purchased this would keep this in the pocket taking a peek once in a while like an exam student trying to cheat by looking at his chits he has carried from home.

The current craze for the Do-it-yourself investors are small cases which makes it easy to replicate a portfolio. With markets on a one way run, investors are lapping up new products introduced by well known advisors. But do the returns really justify the time and efforts involved.

Momentum portfolios have such a run that Mutual Funds are now getting into the game. Recently UTI came up with a NFO followed by Kotak and now Motilal Oswal. Then again, Momentum is in the hot seat as of now. Nifty Alpha 50 has risen nearly 200% since January 2020. The question whether replication is easy or not I best leave it to the experts.

One of the perks of being in the business of stock broking for a long time is the ability to interact with an enormous number of Do it yourself investors and traders – this even before DIY became as famous as it is now. 

But it also provides a perspective. Most do it yourself investors and traders don’t make money, worse many lose multiple times what they came out to achieve. Yet, the spirit of adventure and the fact that the few who succeed make it seem like it’s within reach push even those who aren’t ready to invest themselves to try their hand. 

When things don’t work out one can see the frustration in trying to pass the blame – from the stock broker to the exchange to SEBI, whoever one feels could have helped him realize his dream that is now long gone.

Doing it yourself is similar to the last voyage Henry Worsley took.  

Even with his deep experience and knowledge, his final mission ended in a disaster. I have in my career come close to dropping into a crevice never to recover and have seen unpteen disasters of others (friends, acquaintances). The success stories get hyped up while the failures are brushed under the carpet.

It’s okay to do all by one-self but if you feel you need help, its okay to connect with a advisor – preferably a fee only advisor so that when you need his help, you can reach out to him and get a different view of the issue at hand and one you already have a view upon.

Henry Worsley called upon the world’s most expensive taxi maybe a bit too late, but that was still better than being stuck with no options to exit even at a price.

Let me leave you with a dialogue from one of my favorite movies 

An extraordinary year has come to a close

An extraordinary year has come to a close. The gains for the year is nothing close to the best years and yet, this has been a landmark year for investors. While one remembers years like 2017 or even 2014, this year was way way special.

Look at the following chart for example. It plots the average number of securities that were trading above their 200 day EMA by the year. 2021 beats every year save for 2005. 

Only 2005 comes close to matching it. This is not calculated just at the end of year but basically the average for every day through the year. This isn’t surprising since the number stayed above 90 for quite a while and never went below 80 most of the time. We have ended the year at 67%, so in a way, we have closed at the lowest point for the year.

The chart below plots the number of instances where the Sensex hit a new all time high. 

While at 88, this is lower than in 2014, this is the 5th year we have been in high positive territory. 

When one looks at the maximum drawdown we saw in the year, its reflective of the trend of little volatility we saw during the year.

Since the financial crisis and the Federal Reserve intervention, yearly drawdowns greater than 20% have been rare with only 2011 and 2020 seeing one. 

It’s also showcased in the chart below which plots how many days Nifty 50 spent with a drawdown greater than 5%

Only in 2014 and 2017 have we seen the Index stay close to it’s high of the year. 

Breadth is an important barometer when judging the quality of a bull market. Greater the participation, the better is its ability to hold the line. One way to look at breadth is to measure the % of stocks that have a one year return greater than Nifty 50

In August of this year, this was at the highs – 75% of stocks having delivered One year returns > Nifty 50. Something we last saw in 2005 and later in 2010.

Mutual Fund Inflows have been good but not record breaking. If one removes the contribution of SIP, the actual amount actually goes to negative. 

Do note that 2021 data is only till November 2021

FIIs have been consistent sellers though this data doesn’t include their investments in new issues and hence overstated. 

Purely by absolutes, this is the most selling we have seen since 2008. What is also interesting is that their share in NSE listed universe of stocks is lose to where it was in 2006 / 07/

The biggest change one has seen since Covid both here in India as well as elsewhere is the large participation by Retail Investors. While this data doesn’t go back as much as one would love to look at, it shows quite a spurt compared to the last year markets were exceedingly bullish – 2017

This is also supported by the number of new Demat Accounts that have been opened. The stock price of CDSL shot up 180% reflecting the growth in the year.

Be it Stocks, Real Estate, Commodities, Crypto, NFT or any other asset class, money is being made like in no other time. Much of it of course has to do with the continuous pumping of money by the Federal Reserve and one that is chasing down every rabbit hole.

Look at the data of expansion of Monetary Supply in the US. While one can argue that 2020’s expansion was much required, the fact is that 2021 has seen an expansion that we had not seen since 1972 (2020 being the exception). 

This has also meant strong growth rates.

Which inturn is fuelling inflation world over. 

The bears have for long been fascinated with hyperinflation due to the continuous print of money. While we may not see hyperinflation, the probability of seeing consistently high inflation cannot be easily ruled out.

A high inflation in itself doesn’t cause equities to crash. Between 1972 to 1980, Inflation in the US moved from 3% to 13%. Dow on the other hand continued to trade in the range bound fashion it had been since 1965. 

Relative to history, most markets are seriously expensive but again, markets don’t crash because it’s expensive.  

For whatever reason, I am reminded of this scene from the movie Titanic. 

Everyone is happy. Captain is smiling all around as he orders for the ship to accelerate at full speed. The workers (think of them as the Fed) are relied on to work harder and push more coal to maximize. Even the Dolphins appear to be delightful and happy.

A look back at my Prediction for 2021

In December 2020, I posted a chart which tried to plot how Nifty may move through the year. While not a believer in prediction, I have been working on whether there is some logic to the thought that markets move in cycles and if cycles are repeating, can we know how the future pans out.

My own asset allocation mix is based on my top down analysis of the market and hence this fits my own biases perfectly. 

“People can foresee the future only when it coincides with their own wishes.”

— George Orwell, British writer

The year end predictions for Nifty were 16,155, 16,342 and 22,257. Nifty closed the year at 17,354 – a bit off my mark but till August was actually snaking around one of the prediction lines. Beginners Luck I would say.

For the coming year, I am introducing a 4th Model. I am also plotting a consolidated model. Overall, the insight (which should be taken with a bag of Salt) seems to suggest that markets could continue to rise in the coming year as well, though the odds of a spectacular year are on the lower side.

As long as Nifty doesn’t do the inverse of these charts, I think most of us should be happy. The risk of a deep fall appears low at the moment but given how much our markets mirror the US markets, one needs to observe that market vs ours.

Wishing you a very happy and prosperous year. 

Contrarian Investing – Investing in China

In recent times, there has been a lot of talk about Global Investing with all kinds of narratives spun around to make it sound that if you are not investing globally you are missing out. Nothing could be further than the truth, but selling expensive products requires a good narrative and right now with US markets providing market-beating returns, a good excuse is all that is required.

Why to invest globally vs locally. The first time I heard about Global Investing was from experts in the United States. The United States, they said, being a mature country will grow around 3% while emerging giants such as China and India are growing close to double digits. Why confine to the United States alone they argued.

Over the last decade and more, anyone who followed their advice and invested in emerging nations underperformed the S&P 500. Diversification is good but mindless diversification adds no value.

In India, at last count, there are 56 Mutual Fund Schemes offering various themes and a few countries with 5 new offerings. But if one were to look at the Assets under Management, 5 funds and one fund of fund, all focussed on the US markets.

Axis and Kotak have global innovation funds but where majority of the underlying stocks are from US (65% and 80% respectively). A key attraction for investors has been the recent strong trends one has observed in the US markets.

But the same US markets saw a near 12 year period of Zero return between 2000 and 2011. Nasdaq was able to break above the high of 2000 only in 2016. In the same period of time, Indian Markets did phenomenally well.

Post the recent attack on Indian Troops, China evokes a very different sentiment than one we had before that. This is not limited to India alone as we have seen a severe spike in China being seen as unfavorable across much of the developed world.

Much of this is a result of not just trade disputes China has with others or the fact that CoronaVirus started out there but the aggressive Wolf Warrior Diplomacy that has been carried out with Ambassadors all but threatening the leaders of other nations for what China sees as errors of Omission or Commission. 

The biggest risk of investing in Autocratic countries is that they lack the rule of the law which allows for fair competition and pricing. This in a way pushes away prospective investors. This also means that such countries are generally cheap. They are of course cheap for the reason that your companies can get booted out of business without any compensation.

Take a look at the Cyclically Adjusted PE Ratio of major indices (end June 2021)

Anyone who has read Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice by Bill Browder knows how risky it can be to invest in such a country. While I loved reading the book, I did wonder, is there another side to the story? The problem for autocratic countries is that their Judiciary is seen as one sided, even if there is another side to the story, we may tend to not believe the same.

Countries such as China & Japan have a conviction rate of 99%. A very high conviction rate either means that the police is extremely efficient or the judiciary is compromised not to challenge the state. Either way, it’s an extremely risky proposition to invest in such countries directly.

China tech crackdown is India’s gain was a recent article pointing out how in this year, Venture capital funds have shifted funds to India due to the duress they are observing in China post the Alibaba incident. 

Excess returns are not possible by investing into companies or countries where everything is working out great. Decent returns, Yes but not Excess returns. Excess returns is the fee that the market pays the risk taker for buying something when no one wants. Value Investing 101 is all about investing in what everyone seems to think as risky. Markets are right a lot of times with risky companies going down the tube. But they are also wrong and that is where the opportunity lies.

Currently I am starting to see China as one such country which is out of favor, seems to carry risks that are opaque in nature but can blow up spectacularly and a country that is said to have peaked early.

Investing in China for outsiders is tough. This is a reason why Hong Kong for long has been the gateway for investing in China. In 2010, when there was little talk of International Investing, the Benchmark Asset Management Company brought out a HangSeng ETF. Motilal Oswal followed up with the N100 the very next year.

When compared with one another, the returns can be said to be Chalk & Cheese. The Nasdaq 100 ETF since its listing has delivered an absolute return of 884% vs 162% for the HangSeng Bees. Not surprisingly the Hang Seng Bees has a very small asset under management – just 100 Crores.

While Nasdaq has been an outperformer for a long time, the Assets themselves are fairly recent. As of end October 2019, the N100 ETF had an AUM of 242 Crores and its Fund of Fund an AUM of 98 Crores. Today (end October 2021), the AUM of the ETF is 5,703 Crores and the AUM for the FOF stands at 3,998 Crores.

The highest risk in investing is not going with the crowd but going with them when they are wrong which usually happens at peaks and bottoms. The best tech companies are no doubt in the United States, but when it comes to valuations, how many are priced to perfection and what happens if those predictions fail to come true.

When an asset management company starts a new fund, the general reasoning is that they are getting into the asset gathering mode. But what if a fund launches a fund that may not really get its asset base to swell. The launch of the Mirae Asset Hang Seng TECH ETF to be suggests that rather than it being another attempt to boost their assets (which crossed the magical figure of 10 Lakh Crore a few months ago), this is a attempt to provide a opportunity to invest in a market that is cheap, seems to have a decent future with a affordable product.

Another interesting NFO that is coming out is the Nippon India Taiwan Equity Fund. While much of Taiwan’s market is China, it’s tough to know how they can play out if China decides to start squeezing Taiwan economically. 

One of the reasons to avoid International country specific funds is we really know so little about them. Seven years ago if you had invested in the Franklin India Feeder – Templeton European Opportunities Fund, the value of investment would have grown by an awesomely obscene CAGR of 2.20%. This even as Europe has recovered from the crisis that was seen as the end of the European dream. Anyone remember the PIIGS and the doomsday that was pointed out then?

Investing as a whole is always risky. All we can do is attempt to address the risks as efficiently as we can while also hoping that our thesis is not extraordinarily wrong. 

Random thoughts on the IPO Market and Market Tops

In 2008, Reliance Power came out with a massive public issue. At that point no one could have called it a peak but in hindsight that became the peak due to the fall in the US markets which set the ball rolling downwards across the world.

From that point onwards big issues are seen as a probable peak point though no one seems to know which IPO. These days every IPO seems way too overpriced making even the Reliance Power issue relatively a value pick. But markets seem to ramble on with even more ridiculous IPO being able to list at valuations that in other times would make no logic.

Does anyone remember which IPO was the peak in the Dot Com bubble? The peak came without any large IPO hitting the market. One day we were hitting upper circuits and suddenly another day we were hitting lower circuits.

These days analyzing IPOs is a total waste of time. Investors loading in for the IPO aren’t there because of their belief in the company. It has more to do with listing returns. Even analysts whose job is to track and analyze have run out of reasons to recommend buys on such offers unless they assume linear growth for decades to come.

At some point of time, every bull market loses its legs. While we could causate the reasons behind why it fell on such and such a day, it most probably is because the marginal buyer stopped buying. 

Every high there seems to be dramatic predictions (some veiled, some not so) about a forthcoming crash. The other day a friend mentioned how his friend’s kid and other kids he knew were now opening trading accounts and whether this could be a signal of a top.

Like the dinosaurs which went extinct in the Cretaceous age, so too shall the IPO’s. But unlike the dinosaurs, they shall come again back in force for we had seen similar trends in IPO’s in 1995, 2000, 2007 and who knows 2021?

We are a Year Old

The other-knowing are wise

The self-knowing are discerning

Those who triumph over others have muscle

Those who triumph over themselves are commanding

Those who what enough is are affluent

Those who practice strenuously have resolve

Those who don’t lose their place are enduring

Those who die and don’t disappear are long-lived

– Laozi / Tao Te Ching

For many businesses, the first year can be a make or break. Fifty percent of businesses die in their very first year of operation. Most businesses get started because the founder generally sees either a lacunae in the current setup which he hopes to fill or believes he can offer a better product compared to those that are currently available.

It doesn’t matter how good a product is or how big a gap the founder thinks he is filling if the market doesn’t validate him and the way of validation is achieved by being able to sell the idea to the public for a price. 

Financial Advisory is dime a dozen and yet there is a real dearth of quality financial advice. The biggest sellers of Mutual Funds for example are not Financial Advisors but Banks. Selling Insurance and Mutual Funds is part and parcel for most Private Bank employees to the extent that many would rather push investors who come to place a fixed deposit to either a Unit Linked Insurance Plan or a Mutual Fund. 

Technology is seen as a one stop solution for all things including finance. Robo Advisory is the next big thing in finance with personalized solutions being provided to clients at a fraction of the cost that traditional advisory shall cost. Think of it as a Low Cost Airline vs a Full Service Airline.

While low fees is definitely a great appeal, the issue when it comes to finance is our inability to hold our emotions in check when the chips are down. Asking a computer to solve it isn’t going to help. 

In March 2020, I saw fear and panic envelop as markets cracked like no other time before with the Index down 40% from a peak it had hit at the start of the year. My own portfolio was down more than 25%.

When markets fall big time, even experienced professionals tend to panic. Today, it’s all nice to wonder what if one had bought during the fall but at that time, the question was whether to take the hit and move on or wait and see how things may unfold. 

To try and get a better understanding I tweeted 

https://twitter.com/Prashanth_Krish/status/1241242995300564993

What I could see was real pain and pressure felt by many. This was also the time that Analysts on TV were warning about even more pain that could be coming. A famous technical analyst using an esoteric model of analysis even painted a picture of Nifty going down to 2000. 

Looking back at the DM’s I don’t think I advised many to buy more but I did advise to hold on for now, the pain has been seen and I personally felt that markets may not tumble down the rabbit hole as many seemed to predict.

If there was any doubt on what space Portfolio Yoga wanted to occupy, this episode gave the clarity it required. While the initial thought was to take the Registered Investment Advisor License, the new rules that were being circulated meant that it was not worth going down that road. 

One could not have asked for a better first year in terms of how the market has behaved. Even a lousy strategy would have worked wonders and it’s not surprising that the Portfolio Yoga portfolio’s had a dream run.

We started with just one portfolio – Portfolio Yoga Multicap Momentum Portfolio and have over the months expanded the offering to include Portfolio Yoga Large Cap Momentum Portfolio, High Price Portfolio and the Coffee Can styled Quality Portfolio.

All this at a simple and single price that we felt was something that would be affordable by those who may not have a large capital to start with but required a bit of hand-holding and a good portfolio to start their investment journey.

One of the differences we feel that we offer compared to others is the ability to call us if you wish to get a better understanding of the services or even the market. This meant getting in touch with more than 50 of our clients and even meeting a few of them personally. 

Also, did I mention that we even today are the only guys that offer partial refunds if one is not satisfied with the services anytime after subscription? Love to say that just 8 of the total of 294 who have subscribed to us wanted a refund. 

One of the easiest ways to sell is to talk about performance. In bad years, everyone wants to talk about the process while in good years, it’s all about performance and how great their stock picking ability has been. While we write a monthly newsletter to clients, we have never talked about our performance. 

Our performance is not shitty but is not the best either. But the reason not to talk about performance is because it in a way sets expectations that may or may not be matched in the future. In 2017, I distinctly remember small cap fund managers tomtomming their returns with many comparing against Nifty 50. Over the next couple of years, it was just one way down for many with drawdowns to the tune of 50% or more. Clients panic at the exact wrong time because they got sold an idea without selling them on the risks.

Momentum is a good strategy and has an outstanding year and half. But at some point the returns shall wane even as the returns of some other factor will shine. Momentum is not some free lunch in the market. 

After a strong start, client growth has kind of tapered off but that is what happens even when a spaceship is launched, so all izz well 🙂

What Next?

In the world of factors, the only gap that remains from Portfolio Yoga stable is the “Value Portfolio”. Unfortunately the quantitative approach is not the most ideal given the nuances when it comes to Indian stocks & their promoters. We are actively working with someone who has deep insights into Value Investing to bring a Discretionary Value Portfolio out. 

With Corona on the wane and a new office now setup, the hope is also to attract a few youngsters to work with us to bring out deeper insights into stocks and market. In the meanwhile, we now have a presence on the Smallcase platform with our Large Cap Momentum Portfolio.

To better days ahead. Onwards & Upwards. 

I bought HDFC Bank in 1996

In 1996, I was a greenhorn in the stock markets. My guide and mentor then had a few years experience but in hindsight was even more naive than me. I did not know about Beginner’s luck but I had the luck of not just entering the market at a time when sentiments were not great and arbitrages all around but also at the cusp of the dot com bubble.

I was able to buy stocks of quite a few good companies along with a lot more of the bad ones, some of which remain in my custody even today. One such purchase was HDFC Bank. I bought 100 shares which was the minimum lot size in those days for HDFC Bank at around 40 bucks. 

HDFC Bank that trades today has a face value of 1 versus the face value of 10 which I had purchased then. Adjusted, my buy price would be 4 bucks. At today’s closing price that would mean a CAGR of 27% over the last 25 years. 

The investment of 4000 hence is now worth 16 Lakhs. A very nice sum but one which won’t change the life of any person who has been investing for 25 years. What would have changed is if I had either bought a much higher quantity at that point of time or added through and through the years. Doing neither means that the outcome while extremely satisfactory is nothing really great to talk about.

Tweets of the nature below are common 

Bias for some reason is supposed to be a wrong word to use. People I admire seem to suggest that one should not attach biases to such analysis. But biased is what the tweet really is.

At the same time as HDFC Bank and at a similar price I bought another bank – Global Trust Bank. While I don’t own the HDFC Bank stock I bought, I hold Global Trust Bank in its Certificate form. Talk about ignorance.

From CNBC to Twitter, everyone loves to talk about the Winners and why not. Stories of success are always inspiring. Becoming the next Jhunhjunwala is all about buying the next Titan and holding it for a couple of decades. 

But when Jhunjunwala bought Titan, the future of Titan was very uncertain. The watch business wasn’t really doing great even though HMT by that time was on the decline. Another listed player Timex was facing tough times as well. When Juhunjunwala bought Titan, Titan had just launched its game changer – Tanishq but no one including the management knew that. Indians for long had bought jewellery from their neighbourhood goldsmith and could Titan change that one wondered.

But they did and that changed everything. 

Since unlike Warren Buffett, the transactions and holdings of Rakesh are private, it’s tough to glean how much he invested as % of his net worth. Based on some rough analysis I figure it’s somewhere around the 3% mark. That is what even a simple 30 stock equal weighted portfolio will result in. What worked for Rakesh was that he did not do anything in the stock, letting it go through its twists and turns in his incredible journey. Oh, he also allowed the stock to balloon to what I assume nearly 70% at one point of time. Most financial advisors will sweat with even a 7% exposure let alone 70%.

Compared to the 90’s and the early part of this century, the ability to identify future multibaggers has dwindled considerably thanks to a much larger segment of population now involved in digging up any and every information there is about stocks.

These what if scenarios have given rise to stocks that are identified as the next HDFC Bank, the next Titan, the next Asian Paints but the investors would have been better off with the originals than the supposed disruptors, But the story is sold and retail is generally left holding the bag.

Sixteen years back Hero Honda was the market leader in two wheelers. It is the market leader even today. For the investor though, the stock has generated (not accounting for dividends which do add up a bit) a bit lower than what Sensex has generated. So much so for buying Market Leaders which who generate good free cash flow.

I believe having a good understanding of biases helps understand data better. Selectively looking at the winners and assuming how easy it is to build wealth only leads to disappointment unless you have been very lucky in investing big time into at least a few big winners and then had the balls to keep them through and through.

Good Stories are basically a by product of what Charlie Munger says 

“Show me the incentive and I will show you the outcome.

The world of finance is driven by incentives. Understanding that helps one read between the lines.

“It’s good to be cynical,” he said. “That is, if you know when to stop. Most of the things that we’re all taught to respect and reverence- they don’t deserve anything but cynicism.”

― Aldous Huxley, After Many a Summer Dies the Swan