Opinion | Portfolio Yoga

Questions, Questions, Questions – the February 2021 Newsletter

The best fund manager in the world in terms of performance and longevity writes once a year. But he has made his mark and doesn’t need anything more to showcase. Most fund managers write monthly given the constraints of managing a capital that can go out as easily as they came in. As an advisor, I feel its important to keep in touch with clients regularly for while money can be made or lost depending on the trend of the market, its important that the client understands the thoughts and views of the advisor which hopefully allow for a longer relationship.

A friend was boasting about how his LIC policies will in the next few years give him a cash flow of a Crore. A Crore today is a big number and was an even bigger number when he signed up nearly 22 years back.

What is the return you got I asked out of both curiosity and belief that the returns won’t seem as rosy in percentage terms as it looked in absolute terms. He had no clue, so thanks to Microsoft Excel, I put in the data.

The XIRR Return came to 10.66%. My friend was disappointed to say the least. After all, he being a businessman has multiple times taken on debt at much higher interest rates than what his investment will pay off (and one he wishes to utilize to pay off one of the loans). But the fact remains that most investors don’t bother even trying to calculate the returns they are getting once the investment has been made. It’s as if what happens will happen, so why bother kind.

When it comes to investing, we spend a lot of time and effort before investing and then become lax in monitoring it till another shiny toy comes along. Most of us I am pretty sure cannot really be sure about our investment returns (XIRR / CAGR) given not just the multitudes of investments that make tracking tough but also the lethargy of having it all accounted for.

A few years back, I was having a conversation with the CEO of a large fund house and queried him on how much of the amounts that were coming in would stay if the markets were to reverse course. He said that based on their own data, they expected more than 50% to stick regardless of markets and performance.

It’s this laziness on our part that kind of drives the industry in ways more than one. Reams have been written about Behavioral Gap (the difference in returns between what the fund achieves and what the investor achieved) but very little about how to solve the issue. Education is one way but there are even larger scams going on in the name of education than the world of finance.

Another friend of mine recently bought a very expensive apartment. I asked him how he came to know the price he paid was the right price. He had no answer other than that its what the price of other apartments in his complex had traded at and hence this price maybe was the right price or maybe not. But hey, if you were to think about it, this is how real estate has always worked. Price is based not on utility or earnings it can provide (not in India definitely) but a perception that for this location, this price is right.

So, we exhaust all our savings and then top it up with loans we will be hard pressed to pay off if things don’t go our way for the next decade at least to buy something we cannot even price it properly.

From the markets to life in general, we accept for most part what the majority seems to believe in. So, investing using a strategy such as Momentum is seen as speculation while investing using a strategy such as Value or Growth is seen as well, Investing for the Long Term.

No portfolio can be static. If an index doesn’t rejig its constituents on a continuous basis, it will end up having mostly dead or barely there companies along with one or two shining stars. The only difference with a strategy such a Momentum vs others is that we do it on a more regular basis. Do we miss the long term compounders – of course this is given since no stock can go up without some degree of volatility and for strategies such as Momentum, Volatility in price is generally a recipe for exit. On the other hand, we are able to ride a lot of stocks that may not be a long term compounder but compound at a sharper pace for a shorter duration.

Ultimately our objective is not about making money in a single stock but ensuring that our portfolio performs better than what a passive index can. If we can achieve that, should we really bother that we aren’t holding a stock that is a great compounder – known only after it has compounded for a while?

When it comes to investing, I sense that we are too feeble to question things. Unlike say Medicine, Finance for most is self learnt and yet we fear if our questions may sound stupid or our views wrong. This is what allows much of mis-selling.

Investors or Advisers, everyone gets wrong once in a while. Warren Buffett in his recent letter too talks about the most recent mistake of his. I keep wondering whether having a negative list of stocks I won’t touch is a mistake given that one shouldn’t fiddle with a systematic approach – but my own excuse is that any gains that come at the cost of good sleep is not worth it.

One of the better books I have read is Anthony Bolton’s “Investing against the Tide”. Its a wonderful read and this list of observations about investor behavior is fantastic advice (if you take it as one)

We need to keep an open mind. Once we buy shares we become less open to the idea that our decision to buy was wrong. We close our mind to evidence that doesn’t confirm our initial thesis.

We need to think independently of others. You are neither right nor wrong because the crowd disagrees with you.

Many supposed experts are not. Many experts never change their view. They remain with a permanently positive or negative view of the world or companies knowing they will be right part of the time. A number of stock market newsletters, surprisingly, get a high number of readers despite taking this approach. We all think we are better at investment than we are.

We are all overconfident and, in particular, you mustn’t let a good run go to your head.

We are often most influenced by the recent past and by recent prices. Often the first plausible answer is the one that influences us.

We are too conservative when we take gains and too relaxed in running losses.

We should ask ourselves if we own it, would we buy it again at this price?

Investors underestimate the likelihood of rare events happening when they haven’t happened recently, while they overestimate them when they have. A classic example of this is the effect hurricanes have on the insurance business. After a bad season investors often think the next season will be bad again. This point about investors being particularly influenced by their recent experiences is a very important one.

Successful investment is a blend of standing your own ground and listening to the market. You won’t be successful if you are too much in one camp and ignoring the other.

My idea of writing this is not to advise you but to provide some pointers on things that we know and yet have never questioned. Hope it provides some food for thought.

Question everything. Learn something. Answer nothing.

Euripides

Market Manipulation or Just being Crazy? The WallstreetBets Edition

Unless you have been sleeping under the rock for the last few days, you would have come across multiple posts on GameCorp, a company that may have been way less known in its home country at the beginning of the year but one that is now known and analyzed throughout the world.

Market Manipulation is as old as the woods. While I am sure the markets were manipulated by select coterie even before the 1700’s, this small video makes for a nice intro into market manipulation and price rigging that was seen 300 years earlier.

Warren Buffett made his money the slow way. Compounding after all doesn’t really break the bank in a year or less. For many though, this is way too slow to their liking and would rather be pleased if they can multiply their money at a much faster pace.

One of the easiest ways to move the price higher is to corner the commodity or stock and make it harder to get. The less floating stock available, the faster it shoots up and the faster it shoots up, more the interest by others wanting to jump into the action.

The biggest issue that most speculators face when they attempt to corner a stock is that they aren’t rich enough to buy out all the stock and hence resort to leverage and all that results is a house of cards. One whiff of wind is enough to bring the biggest of them down to the ground.

One of the most audacious attempts to corner was attempted by Jay Gould who attempted to jack up the price of Gold by cornering as much as possible both directly and indirectly via ensuring no flow from the Federal Reserve (Link). While he was successful, a similar attempt by the Hunt brothers to corner Silver failed. Some other notable attempts (link)

Who doesn’t want to jack up prices. Industries try to do this constantly by engaging with their competitors and try to push up the prices even if demand has not shot up. Engaging in such actions is seen as fraud and when caught companies can be penalized. A example that comes to mind – CCI fines cement companies $944 million for price fixing

Cornering stock in India ain’t easy. As soon as your holding crosses the 5% mark, you are supposed to intimate the company and continue to intimate them of any changes. If you cross 26%, you need to make an open offer to other shareholders.

This is when a single person is buying up the shares. But what if a host of unconnected persons buy shares to move up the price as has happened in GME? Actions such as those have no history – manipulations of price have always been by people who are known to each other in some way and have built a trust that enables them to field their money to the venture.

While it’s exciting to watch the action from the sidelines, anyone who has seen the past knows for sure that these things won’t end well. Hedge funds do make mistakes but their size and ability to cut the losses (as we gave seen with GME) is vastly different from the action of retail investors who get anchored to the high prices and generally are less willing to take action when the trend goes against them.

This boom is actually positive for companies who have a viable business but are indebted by debt. Like in case of Hertz (though it failed since it was already in receivership), it’s easy for the company to actually come out and issue new shares at these crazy valuations and no matter how many fearless investors there are, a hoze of new issues will quickly temper the spike and later turn into a orgy as everyone tries to exit at once.

While such actions aren’t possible in India due to very few stocks having any decent short positions in the first place, it has been seen hundreds of times in stocks that have had a very low float and have been ramped up.

While Ruchi Soya comes to mind, check out MMTC in the past. Small float is easy to corner and if you have the management on your side, you can ride your way to glory. Of course, the problem though is that after riding the tiger, everyone wants to get out of one without being eaten and is generally tough unless enough PR has been built via various media channels to make retail get excited.

Take a look at the MMTC chart below {Chart adjusted for Bonus and Split}

The interesting data point of the whole rally from 300 to 56,930 was achieved with volumes of just around 31K thousand shares being delivered.

While the stock fell off sharply from the peak, the real distribution started when the company issued a Bonus and the stock face value was split from 10 to 1 in 2010. Volumes exploded and after more than a decade, investors are yet to see the prices anywhere close to where they were in 2010 / 2011.

It’s easy to get caught in hype around a company with the stock booming higher. Who doesn’t want to participate. But like Vakrangee taught me, getting in is easy, its getting out that is the key and where most of us make the mistake of believing something we knew not to be true to be true.

Compared to the antics of the Wallstreetbets, manipulation in India is much more rampant with stocks gaining 1000% or more in a year with very little activity. Bafna Pharma went up recently from Rs.5 to Rs.170 without a single day of normal trading activity. Tanla merits a mention too though the path was more staggered here.

I participated in the Dot com bubble and what I see in US markets is reminiscent of those times. The story backing it up was different in that time, but the stock moves were very similar if not more exaggerated (then vs now). For Nasdaq to reclaim the peak took 15 years though far fewer companies survived the same.

The narrative that is currently being thrown around is Liquidity though we saw the Dot Com bubble without any similar kind of liquidity. It finally falls to behavior – especially Fear of Missing out that explains the actions of people who were seemingly sane one day and on another went out and bet all their life savings on things they had very little understanding about.

Finally do remember, we the Retail are the weak hands. This doesn’t change even if we are able to score a few goals here and there. In the long run, markets are efficient and strong hands always win. Investing is not a game even though it evidently feels like one.

Image Credit Power Grab: Activists, Shorts & The Masses — Investor Amnesia

The much awaited “Correction”?

Some weeks are good, some aren’t. But for the markets since November, every week was a good week if not a great week. Rare have been the times when we saw such exuberance in markets with everything flying off.

Making money never felt so easy. All you had to do is be long in a stock, in any stock for that matter. Of course, this exuberance wasn’t limited to Indian Markets alone. US markets which we track closely seemed to be doing the same as the countdown to the end of President Trump started.

With Biden taking Oath, on twitter it would seem as if the United States has been freed from a dictator. Happy days are here again it seems or maybe not for there are very few men (or women) who have had no faults.

Markets dislike consensus. If everyone loves a stock too much, the probability is high that the stock will either do nothing for a while or worse retrace a part or the whole of the journey it had in recent times.

Too much good news is bad news. Between Biden taking the floor, the CoronaVirus vaccine being out and the Federal Reserve promise of unlimited bounties in the near future, there doesn’t seem to be much for things to go wrong. Complacency sets in and just when you think that the Sun will finally set in the east will the market surprise one like none other.

Fund Managers are bullish. I am bullish. In fact, other than a few friends many of whom I know are always skeptical, I cannot find many souls who aren’t bullish in this market. Then again, why would you want to be bearish when you can be bullish and reap in the rewards.

From its low of March, Sensex has doubled. But if you were to move your starting point back to the start of 2020, the gain would have been just around 20%. Nothing out of the ordinary.

In the past, one was used to seeing a decent pullback when the market deviated too much from its mean in too short a period of time. The crisis of 2008 changed all that and we are now used to seeing shallower and shallower corrections. The correction of March 2020 was in fact the worst correction we have seen since 2008.

Corrections are good and welcome. A friend of mine asked why I was hoping for a correction when I would not short the market. A correction will be painful for my Bank Account since I have no intention to exit the market at the first signs of a retracement but at the same time, markets that keep moving higher without a correction are like a forest which keeps accumulating dry wood. A single spark is enough to cause worse damage than limited fires over time would have.

When it becomes too easy to make money, investors lose proportion of what is risky and what’s not. In the bond markets for instance today Greece and Spain which have never really recovered from the crisis of 2008 are able to borrow cheaply than even countries like India despite our cleaner record of repayment and a more stable currency and economy.

My belief that I have been forming in the last few months is that we are at the start of a multi-leg bull market. But a bull market doesn’t mean a one way move without any corrections. During the 2003 to 2008 bull market which was one of India’s finest and best bull markets of all time, we faced 2 corrections of greater than 30% and 2 corrections of 15%.

A correction in the Sensex to say around 40,000 may seem extreme today but 40,000 was what we broke above as recently as November. Like in games, markets need a time-out once in a while to enable everyone to catch their breath. As investors, we should welcome such moves.

As I write this, India VIX is around 22.88 which means that traders aren’t really expecting a huge crash. But things can change on the dime.

“Luck Is What Happens When Preparation Meets Opportunity” – Seneca

How long will you Stay Invested

In November of this year, my personal portfolio made an all time high. The previous time I had seen an all time high was way back in early January of 2018. A couple of months, it would have been three years since I last made an all time high for the portfolio (not inclusive of dividends though).

Equity returns are lumpy in nature. Unfortunately most of us don’t have the patience to hold through the worst of times in preparation for the oncoming best of times. Fear has a way of playing its tricks on our mind at the worst possible times.

Markets loathe giving free money to one and all. Before the 2008 financial crisis led crash, Indian Markets used to crash once in two years on an average. When I say crash, I mean a drop of at least 30% from the previous peak.

In 1996, Nifty 50 rose from 800 to 1200 by the middle of the year but by the end, it was down 800. In 1997, it once again rose to 1300 just to fall back to 950 by early January 1998. The bounce 1200 odd before jettisoning all the gains and falling back to 800 by late 1998. From there started the Dot Com bubble rally that took Nifty 50 to 1800 levels before the crash took it over time back to 920 in late 2001.

Then we had the crash of 2004, 2006 and of course, the crash of 2008. Post 2008, Markets drifted lower for a considerable length of time only once – 2011 and even then did not go below the 30% mark. In fact, after 2008, March 2020 was the first time we saw a drawdown greater than 30%.

The financial crisis and the way the Federal Reserve responded has changed the behavior of the market. Just when it seemed the normalcy of balance sheets of the Central Bank will be restored, we were hit with Covid which has resulted in an unprecedented flow of liquidity.

While the recent rise in Indian Equities thanks to the generous inflow of funds from FII’s, do note that India is the only country into which liquidity is pouring. For most other emerging markets, its the other way round. To me, this is indicative that much of the flow may not be speculative in nature and at least a large part could be because of a change in perception with regards to the future growth of the economy.

Markets are expensive, goes the headline. Most measure the valuation of the market by using Nifty 50 Trailing Price to Earning as the proxy. But why Nifty 50 and why not Sensex or the Nifty 500 or the Price Earnings of the market as a whole. Is it because we all have fallen prey to availability bias?

In 2020, Sensex went up by 15.8%, Nifty 50 by 14.90%. Sensex Price to Earnings on the other hand went up by 28.80% while Nifty 50 PE went up by 35.90%. At the end of the year, Nifty PE stood at 38.45 vs Sensex PE of 33.50. Would you say Sensex is cheaper than Nifty?

No one knows the future but one can be pretty confident that the earnings of companies for the financial year 2021-2022 will be way better than 2020-2021. How much better would make it easy to get a fix on how expensive the market really is. Oh, by the way Nifty PE is Standalone earnings while the true picture will be shown by using Consolidated earnings. But since NSE doesn’t provide it, we don’t bother with it.

Then there is Authority Bias. We stop questioning things just because someone with authority says so and if he says so, how could it be wrong. So, when claims are made using a single example of who SIP is better than Lumpsium, we don’t stop to question the stupidity of comparing an Apple with a Pineapple.

Questions are always asked of a bull market – be it at the beginning, the middle or the end. There will always be some indicator or parameter that can be used to defend a bull case or make a bear case. In Statistics, one school of thought says that if you have at least 30 independent samples, it can be used to make some decent predictions. We end up making predictions with a sample size of two or three and then wonder why we went wrong.

Equity is Risk when looked at a short term time frame. There is no getting away from it. If you invest money today, the risk to capital exists at the very least for one year if not more. But as time passes, the risk moves on from the capital invested to the gains and as one moves even further, it’s just part of the gains that will be at risk.

The longer you stay in the markets, lower the risks of ruin (unless of course you are leveraged in which case, the risk of ruin may never go). But to stay longer, you should invest only so much that allows you the comfort of good sleep regardless of market conditions. A secondary requirement of course is to invest in something you deeply understand or trust. The reason I could stay with the strategy during its long drawdown had more to do with my trust rather than any superior skill sets. Building that takes time but once built, it serves you for the lifetime.

Bull Market Gurus

Every Bull market gives rise to a set of Gurus who can do nothing wrong. They are aggressive in terms of stock selection and for a while anything they touch seems to become Gold. While before the advent of Social Media and 24 hour business channels, it was tough to amplify one’s message beyond one’s own circles, today, we have Gurus who are able to dominate both the Social Media and the Television networks enabling them to reach millions.

When I started off in this business, there were no business channels. The first channel that I remember devoted to the stock markets was called “Money TV”. It did not have any programs but instead more or less spent the whole time broadcasting stock prices. Think about having only data and no noise – it was a lovely period.

When we talk about the 1992 bubble and crash, we name it after Harshad Mehta. The Dot com bubble which was not unique to India was driven by Ketan Parekh though his name is not as associated as HM with the rise and fall.

The bull and bear markets post 2000 have no real guru’s with everyone using the generic names for the crash “Financial Crisis / Housing Crisis”, but that did not mean there weren’t any big guns who strongly believed that India was finally shining and it’s time had finally come.

Compared to India, America which has had a higher participation by retail has been enchanted by various Gurus over time. The only non guru guru to have survived are Warren Buffett and Charlie Munger combination with most others have fallen by the wayside. A list of some of the big names of the past can be read here (Link)

While the ultimate losers are the retail who follow these gurus, the gurus themselves use their moment under the Sun to make a tidy bundle. With public memory being short, it’s amazing to see previously failed forecasters coming back to the limelight once the conditions are good.

The only way to become a guru is to reject the old and embrace a new style that the guru has discovered. For instance in 2017, the rejection was with the traditional thought process of giving weight to management and its reputation and instead we were extolled to buy into companies with bad management. It worked for a while and the guru was able to amass a massive sum under his belt. While today he is no longer highlighted, I am pretty sure his day in the Sun will be back sooner than one assumes to be.

In 2019, a new guru emerged who discarded the fancy theories of not buying stocks at high valuations. Valuations don’t matter, he roared and for now he has been proven correct as a company with single digit growth trade at triple digit valuations. If Tesla can be valued at 1200 times its earnings, why should not the best of Coffee Cans be valued at high multiples.

This year has belonged to the new emerging club of Pharma Experts. While there have been value investors who started nibbling to pharma in the last few years, the last few months have belonged to twitter warriors who seem to have a better understanding of Pharma than the Pharma companies themselves.

Personally, I have nothing to complain about, Pharma has been the biggest driver of my own returns even though Pharma is nowhere close to my circle of competence. The fear though is that while I know I can make a quick exit, not everyone will be able to do so. We have seen this when the Dot com bubble crashed in 2000 as well as the crash of the Infrastructure / Real estate led boom in 2007/08.

While I don’t believe that gurus themselves are frauds, the fact lies that many have no fiduciary duty and many a time get carried away by the market sentiment attracting audiences who have no business to follow the gurus footsteps.

As much as we would wish, there is no easy path to success in markets. If you don’t have the time and ability to learn the skills required, you are better off investing in just a Index fund and hoping the country in the long run does a good job.

Advise is Cheap, Advisory is Not

Twitter for the financial community has been a fine place for exchange of ideas and thoughts. While the #fintwit community is not very large, it’s decent enough to generate interesting conversations around the world of finance.

For all the talk of we not being part of a herd, if you were to just scroll around with an open mind, you would see that talk is cheap and action is missing. The bigger the number of followers, the rarer he or she will openly challenge a fellow fintwit. let sleeping dogs lie as the Iodim goes.

While we laugh at others who we feel are stupid enough not to recognize the reality, Once in a while I feel if we are in a echo chamber ourselves. We have our strong beliefs and no matter the evidence we will continue to stick with our beliefs while either ignoring facts that challenge our assumptions or worse show us to be wrong.

One of the fantastic writers I have come across in the Indian fintwit community is @PassiveFool. I love reading his long newsletter filled with thoughts most of which I agree with or make sense. But once in a way, he takes the logic way too far and one that makes no sense at least from where I come from. His latest tweet thread was one example and I retweeted disagreeing with him.

Sorry but disagree. The comparison for returns should not be Index Funds but alternative investments – FD / ULIP / Real Estate. https://t.co/q6zp9Ld7te
— Prashanth (@Prashanth_Krish) November 30, 2020

One of the negatives of twitter is the limitation of words, so let me break down why I think he is wrong in the long form here

The first tweet has two numbers – one the amount of money HDFC makes from Prashant Jain funds and second the under-performance in the same period vs the Large Cap Index. Both these numbers are correct I believe but yet provide the wrong context.

The 700 Crores HDFC makes is not because of various reasons including the fact that they have been able to build a very strong distributorship who are willing to side with the fund manager despite the bad days he is seeing currently.

But here is the thing – what if you looked at the same data in 2015 (5 years comparison vs Nifty Total Returns). To compare, I shall use HDFC Top 200 fund – the fund that is no more in existence today but the prima donna for HDFC for a really long time and one Prashant has been managing

While Nifty delivered (including reinvestment of Dividends) a absolute return of 70%, HDFC Top 200 outperformed it by delivering 92%. In other words, if the same question was asked at the beginning of 2015, there would not be a tweet saying that HDFC was earning despite underperformance. Lets move to the next tweet that gathered my attention

https://twitter.com/passivefool/status/1333300261717110786

Again, the data is correct. 80% or so of the Assets that are coming into the asset management firms are coming from distributors but are they getting scammed? Scam to me is a word that is better used when investments are suggested where there is low probability of getting the principal back, let alone interest.

I don’t know if mutual funds calculate the total returns they have generated across clients – kind of Lifetime Customer Value – but if they do, I am pretty sure it’s strongly positive. Investors have made more money compared to what they have invested.

Cost is a very relative term. Active funds are expensive compared to Passive Funds. But are they the only choices investors have when they wish to decide where to invest their excess savings?

Regular funds are expensive because there is a cost involved with having a research team and the support around it compared to copying the Index where the research is outsourced. A Portfolio Management Service company for example needs to have a AUM of at least 100 Crore to breakeven. The breakeven for Mutual Funds is way higher. Someone has to pay.

https://twitter.com/passivefool/status/1333300263612866560

I am in complete agreement here and have written it multiple times as well. But Cost is just one part of the equation – the other part being service. I have blogged about how I started out as a Fixed Deposit Canvasser when I first started testing the financial services business. I got sidetracked by the Secondary markets and did not go the Mutual Fund Distributor route.

But a MFD is not someone who just tweets about the good things you can achieve by investing. Most MFD’s are literally putting their neck on the line for the meager commissions they get for the work they put in. What work you may wonder does a MFD do – all he needs to do is select the best performing fund and have his client invest and voila, its done.

The reality though is quite different. Most clients expect the advisor to be available and not just on a telephone call but physically at least in the beginning when the relationship is still getting built and trust getting established.

Since Portfolio Yoga started its advisory services, I have talked to a lot of prospective clients. Some felt that the service was worth the price, some did not. But everyone had their share of questions which they wanted answers for. Investing is not like buying potatoes where the worst thing that can happen is that you bought rotten potatoes.

The trend towards passive in the United States has been gathering steam enormously in recent times. But is it even right to compare what advisors are able to do there versus advisors here. Let’s take a look.

The guys at Ritholtz have been great proponents of Passive in their various blog posts and books. They offer to their clients investment advisory services through Comprehensive Portfolio Management. With more than a Million followers, the CEO is a star on his own. So, who do they serve and how much do they charge?

Their minimum for getting started is $1,000,000. Not much different from what our Portfolio Management Firms though here it’s because of SEBI mandate and there it is not. In other words, if you are not having that much money to give them to manage, they aren’t really interested in you.

But if you think about it, this makes sense. It’s all nice to talk about the small investor, but who will bear the cost of helping him reach his goals and provide him the pep talk he requires when markets melt down like it did in March.

The fee they charge for the Financial Planning & Consulting (and one they are able to auto-debit) ranges from 1.25% to 0.35% based on the Investment Amount (higher the Investment, lower the scale). The asset weighted fee for Regular Mutual Funds in India is around 2%. This is higher than 1.25% but on the other hand, you can invest a small amount and still call up your ~~advisor~~ distributor whenever you feel overburdened by everything that is happening around the world and want to change your fund.

For long I was in the same camp of Passive – why are guys so stupid I have felt and many a time verablly blurted out. But the problem as I see is that I was seeing from where I stand – me being someone who is in the Industry for 20+ years and understands it much more than someone whose only financial investment before this was a Fixed Deposit (or a LIC scheme his Uncle sold him).

It takes enormous efforts to help him understand the nuances of finance and how over the long term, it can help build a reasonable nest for himself. The alternative as I wrote to Regular Funds is not Index Funds but Fixed Deposits or Real Estate or anything else where he either understands the product or is sold the product by someone who is angling for a fat commission. If anything, selling Mutual Funds is one of the toughest jobs and one that really doesn’t pay well either.

Index funds are great – but you reach that stage of Nirvana after having exhausted every other path. Most don’t get to reach that stage of enlightenment right at the start unless they are really fascinated by the world of finance and investing.

Bull Market – Are we in One

The first bull market I participated in was the Dot Com Bubble. It was where I made my first 10 baggers and 100 baggers even though to be honest I was as clueless as the next person around – or maybe not that much for I was able to squirrel away a bit of the profits and one that came in handy when I decided to become a stock broker a couple of years later.

Since then we have had two glorious bull markets – the first being from 2003 to 2008 and the next from 2013 to 2018. Five year bull markets are rare and offer great opportunities to really up the game and yet looking back, I more or less made barely anything.

While my first million was made due to lack of knowledge, the reason I could not participate in the next two bull markets which were actually more broader and much longer was because I had moved from being a novice to a expert and one who clearly felt that there was something wrong with this market and it was doomed to fail. Thanks to the company I kept during those days, any doubts were quickly dispelled by those who seemed to be more bearish than me and who have even better convincing answers than what I could offer.

There is this story I remember having read that talked about how Churchill when the tide of the War (the Second World War) had shifted to the side of the Allies changed his experienced Generals for they were experienced in Defense while what he required that point was Offense even if it came at a cost and one that only a much naiver General would agree to. I don’t know how true this story is or not but it has struck a chord with me in terms of how to think in Bull Markets and how to think in Bear Markets.

In Edwin Lefèvre’s evergreen book, Reminiscences of a Stock Operator there is a particular paragraph that is constantly quoted around as if it is the Holy Bible itself and yet quoting is one thing and executing is quite another. The paragraph in question,

What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market. The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his own human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to resist and had always proved expensive to him, as it was to me.

I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.

There is another famous quote by John Templeton

“Bull markets are born on PESSIMISM, grow on SKEPTICISM, mature on OPTIMISM and die on EUPHORIA.”

But how does one identify a bull market and how would one know it has ended. Being wrong in identifying correctly the start of a bull market would mean a loss of opportunity while being unable to identify the end of a bull market would mean a substantial correction not only to one’s net worth but also the beliefs we hold to be true.

Timing is Impossible say the experts while themselves timing every other day in a variety of ways. Or maybe they believe that they have better skill sets than the ordinary guy on the street and hence feel that What’s good for the goose is not good for the gander.

If you take the best textbook in economics by Mankiw, he says intelligent people make decisions based on opportunity costs – in other words, it’s your alternatives that matter. That’s how we make all our decisions – Charlie Munger

Quote Source: The Joys of Compounding

The only reason to play the game of the stock market is simple – the alternative is worse off – either in terms of returns or in terms of liquidity or in terms of size of the market itself. So, once we have decided to play, the question is how to ensure that the odds favor us.

The markets these days are on a tear. On an average, we are seeing 50+ stocks hitting a new 52 week high every single day. But are markets up unreasonably?

Let’s assume for a moment that we did not have the health crisis we have on our hands due to Covid. Would you have assumed that the markets were irrational in making a new all time high? My guess is that you wouldn’t have.

But Corona and the impact it has had on the economy makes up question the new reality. When the financial crisis erupted in the US, it had an enormous impact on the general population of the United States. Out here in India, it barely logged other than those who were directly in the line of fire such as the Stock Markets.

Corona has been different – the impact was felt not just among the small population that invests in the market but the general population at large. The impact is very much visible – from the empty restaurants (though they are now getting back to normalcy) to businesses we touch base in the course of our daily life and have suffered.

The impact makes it tough for us to acknowledge why the markets are shooting up right now when news all around seems to be more bearish. In the United States, the markets are rocketing higher even as the number of Corona Cases per day has crossed the Lakh mark per day.

In March, just a couple of days before we made the final low, I wrote this post

Mayhem in Markets. Will it End | Portfolio Yoga

Markets have historically bottomed well before the trumpet of victory was sounded. This time it has not been different. Markets and Life itself has moved even though we are yet to fully conquer the disease.

In the summer of 2003, after having suffered through a gruelling bear market, markets suddenly started to rise. In the space of less than a year, Nifty doubled and made its first all time high since the peak of 2000. While that victory was short-lived thanks to the fall of the NDA government, it was in hindsight the start of the biggest bull market India had seen.

Markets have this ability to surprise us in both ways – on the upside when things seem to be wrong all around and on the downside when things are supposedly going all too well.

One of the ways I have found helps in participating is having the tools that provide you with a perspective on what works and what doesn’t. Personally I favor tools that look at the breadth of the market and try to determine how they behaved in similar situations of the past.

One such indicator I look out for is the % of stocks that are trading above their 200 day EMA. When they have crossed the 60% mark (after earlier having dropped below the 20% mark), Markets on an average have moved up 50%. This was triggered in August of this year and we are up 15% as of date, so who knows.

One thing I believe in though is that markets are not in the Euphoric stage even though on the outside it appears so. For example at the beginning of 2004, 90% of the stocks that were trading were having positive momentum (in a way I define it) vs today’s number of 55%.

One simple definition of the start of a bull market comes from Barry Ritholtz who holds that the Bull Market starts not at the bottom of the last Bear Market but at the breakout above the high of the previous bull market. In that sense, the journey has just started. Too early to fail?

Another would be the 200 day EMA on the Index heralding a bull market. Nifty crossed over that barrier in July and currently sitting 23% above it.

The future is unknown though. This post may after all be the final nail in the coffin or maybe not. I for one am happy to have finally been able to participate in the bull market with as much exposure as I can afford. Like Mr. Partridge, I have come to accept that while there are a lot of reasons for markets not to move higher, there is nothing worse than staying out of a trend which could in hindsight be one of a longish phase.

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: