Uncategorized | Portfolio Yoga

Review of the markets in 2014

And so comes to a close the year 2014 which will be remembered for the fact that after 3 decades, India saw a party come to power in the Center with a majority on its own. Markets welcomed the move by breaking out of its mutli-year high and closing the year with one of the best gains since 2009.

But the returns of CNX Nifty / Sensex which came in at 31.4% / 29.9% hides the fact that this year, stocks outperformed the broader indices in a major way.

On the NSE, we saw 62.5% of stocks beating CNX Nifty returns with as many as 40% of stocks recording 100%+ returns.

Here is a snapshot of the same

Just 16% of NSE listed stocks closed the year in negative. So, if your portfolio ended in negative returns by any chance, you have around 245 stocks to blame for the damage.

Among NSE Sector / Thematic Indices, CNX PSU Bank Index representing Public Sector Banks bounced back strongly in the year. With rising bad loans and the economy slowing down, PSU Banks had borne the brunt in 2013. But even after this year tremendous rally, the Index is still 21% from its 2008 high. The fact that Bank Nifty where the Index has private sector banks as well among its constituents is up 74% from the 2008 tells its own story.

Though CNX Metal Index closed on a positive note, this along with sectors such as CNX Energy, CNX Infra and CNX Realty have a long way to go before investors start seeing any money on investments made before the 2008 crash.

Gold continued to drop for the Second year in succession and this drop would have been even more severe if not for the saving grace of Rupee depreciation. After falling more than 20% from the peaks, Gold is now into bearish territory and unless the world sees a sudden spike in volatility, it may remain so for the foreseeable future.

Mid and Small cap mutual funds were the flavor of the season and registered strong gains with many doubling through the year. Global funds though did not have that luck with most of them ending at the bottom of the heap.

A list of the Best and Worst 10 stocks on NSE based on their returns. No major names in the winners though Bhushan makes it to the losing list having lost more than 80% of its value during the year

CNX Nifty Price Earnings ratio was around the long term average when we closed for business in 2013. This year, its testing its 1 Standard Deviation. As history shows, this is expensive, but not bubble region.

While among International Indices, we rank Number 3 in terms of Returns for the year, India has been the flavor of the season among Internatonal funds which inturn has been reflected by strong inflows from FII’s even as commodity exporters like Brazil and Russia crumbled.

This year was the second time (first being in 2012) we did not see a one day fall of 3% or more through the year. Its been 324 days and counting since the last such fall. Markets are not a one way street and we should be ready to see some amount of volatility as we go into 2015.

A histogram chart of Sensex returns by the year

This year saw the lowest intra-year draw-down ever seen in Nifty. Purely based on reversion to the mean, we should see a higher number going forward unless we get hit by a white swan 🙂

The forthcoming budget will be the first big test both for the markets and the government. But either way, opportunities are there for those prepared.

Wishing you all a happy, healthy and prosperous New Year. Thanks for reading.

The lure of Real Estate Investing

Every now and then, I see some one claim that equities are a better bet compared to real estate. For a long time, I have been a believer in that idea. But the reason people invest in houses has to do more than just the attraction of higher returns.

The biggest reason for the recent growth in investments in Real Estate has to do with “Recency Bias”. Too many people have seen how either their own or properties owned by friends have given exponential returns. With it being very easy to extrapolate such returns, people tend to believe that investment in real estate carries no risk whatsoever.

But for many, its not just the returns that lure them to invest in real estate. Owning a house is now seen as a coming of age. With the Indian economy growing and jobs in plenty (for those who are educated in the right areas), the two big acquisitions they plan to make even before marriage is owning a Car and owning a own house.

This is more pronounced in households where the kids have seen how tough the lives of their parents were and the issues that come with living in a rented house. So, once one lands with a nice job, he begins to work out where and when to buy.

Last year, I was living in Mumbai where I had rented 1 BHK on the outskirts of the city. The rent was not cheap, but then again, with limited choices, I went for the best I could get on the market. In Bangalore, a real estate agent is paid only once, when one takes a house on Rent. Amazingly in Mumbai, one needs to pay every 11 months (validity of the agreement) and since I had gone through a broker who acted more like a sub-broker in the stock market, I had to pay double (1 month for the main broker and 1 month for the sub-broker).

In total, for living 11 months, I had to pay 13 months of rent. I have been told that this is more or less the norm in Mumbai. And the worst thing was that since the agreement was itself for 11 months, I could be out looking for a new place if the owner so decided.

My own family having lived for a considerable time in rented places understands the difficulties that come with it. Its easy to say that if one were to invest a similar amount in the markets, one could get a better return.

But what about the small joys of life. The length of our live’s being unknown, what is the whole point in struggling to make a better return on our money and yet be unable to enjoy the pleasure of it. For most parents, its a pleasure to see them owning their own house. And unlike elsewhere, most parents pitch in towards the initial investment making it easy for purchase to go ahead. How does one assess the cost of such simple joys of life?

While I continue to regard investment into real estate as not the best choice, if that gives you the happiness you crave for, why should some future return (which is pretty variable too) stop you from enjoying the same now.

True happiness is… to enjoy the present, without anxious dependence upon the future – Lucius Annaeus Seneca

Linkfest for 31.12.2014

Chart of the Day – Last 10 year moves in CNX Nifty stacked up (Self)

Last 10 Year CNX Nifty Moves

Paul Krugman | The Barack Obama recovery (LiveMint)
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How macroeconomics has changed since the crisis (VoxEU)

How Not To Give Technical Analysis Advice (CKN)

Last 10 years of #Nifty moves – Stacked in one chart

Not a Clue!

Trend following is a methodology with a simple concept. Keeps (Buy) stocks that are going up, Exit (Sell) stocks that are going down. The tendency to sell winners too early and ride losers too long is referred to as the ‘disposition effect’.

But, why despite tons of evidence do we continue to do the same mistake? The reason I feel that we do what we do is because of pure Hope and Fear.

When a stock where we are long goes down, we “Hope” that it will come back to where we bought and hence it makes sense to wait. Those with a extra appetite for risk go on to average in the hope of getting their average price down and hence profit earlier itself.

When a stock goes up, we are more times than ever riddled with fear. We fear that the profit we are seeing may soon be washed away when market trends higher. After all, having seen that markets are cyclic, we tend to fear that a upcoming fall may wipe away all our profits. As the idiom goes, “1 bird in the hand is worth 2 in the bush”. Its nice to know that there maybe even more profit going forward, but since there is also a risk of losing the current profit, better to exit than wait is the thought.

The key reason for the above attitude by most investors is that they do not have a clue as to why they have bought the stock in the first place. Most of the time, it was based on a recommendation by some friend / television pundit or the broker. So, when it goes up, one is willing to take a profit as early as possible let the profit slip out of hand.

But the same attitude is not followed in loss since it pains once to take a loss. While its one thing to see a notional loss, once its booked, its becomes permanent. Hence, the best way to avoid the pain is by hoping that it will come back some day and wait it out.

In many of my blog posts, I have emphasized on having a plan, a strategy, a thought process before one enters into a investment / trade. Without it, you will never be able to judge whether the carbon your holding in your hand is Coal or Diamond.

My thought on Net Neutrality

Over the last couple of days, I have come across a intense debate as to both the validity and the morality of Airtel to charge for calls made using 2G / 3G Networks (using apps like Skype, Viber and the like).

I would suggest you go through the following links first

Medianama

Niti Central

Personally, me & my family has been using VOIP a lot over the years though we use it using a DSL connection (Airtel) rather than a 3G (you cannot get streaming video on 2G, forget about using Skype). I pay Airtel money for providing me with a certain speed. While I would have loved not to have a FUP limit, I have been required to live with it since no Internet provider seems to provide genuine unlimited downloads (at the speed I am hooked for).

Tomorrow if Airtel says that they will charge separately for downloads (Torrents), VOIP (Skype / Google Talk), I will be immensely pissed. But for now, thankfully it does not see to be on the cards.

TRAI chairman has said that while its wrong from the angle of Net Neutrality, what Airtel is doing is perfectly legal based on current laws. Now, if the law is a ass, it makes no sense to penalize Airtel for using it to the maximum. After all, companies in US who like to showcase that they are highly patriotic do use whatever legal means available to ensure that they do not have to pay tax (especially on overseas income).

Lets try to compare the Airtel situation with say the Restaurant business. Any and every restaurant has a board that says “Outside food is not allowed”. Once you enter a restaurant, one is required to order from the restaurant itself and not take outside food.

For instance, how would Coffee Day feel if you sit inside a Coffee day cafe and then order Coffee from the nearby Shanti Sagar (where the price of Coffee is at least 5 times cheaper than Coffee Day). But go to a canteen and this distinction does not apply.

At our office, we have a canteen where we are allowed to use the infrastructure to eat eatables from outside (home or elsewhere). Tables are kept clean and if we do not order anything, we do not pay anything. Theoretically, we use the facilities for free while the cost of keeping it up (Clean Tables, Drinking water, Washbasins, Rest rooms) are all paid in one way or the other by some one. But nothing comes for free for there is always a catch.

Here, it’s possible because the canteen is not run as a restaurant. In most cases, the rent is highly subsidized, given for free or even paid to make it viable. If any canteen has to pay the market rent, I doubt anyone would want to put up one in the first place since there are always limitations on how many folks would come to eat (and pay). And they would definitely ensure that outside food (home made or not), is strictly not allowed inside.

When companies like Airtel bid for the spectrum, they are doing so in the hope of en-cashing on the usage. Of course, who knew how breakthroughs in technology would put a lid on many of their hopes. SMS used to be a big thing till the time we saw the arrival of Whatsapp. If much of Voice (especially non local) gets off the grid, the whole point of paying so much for the spectrum makes little sense.

Its all nice to say that we are in a age of disruptive economics. But no one would want to sit around while others burn their business literally to the ground. Every battle will be fought tooth and nail and this is no different.

Yesterday I was reading about Microsoft approaching the government to enable it to launch Wireless internet using what they call “Dynamic Spectrum and TV White Spaces”. If that is successful, that will change the whole game. Who knows, where go from there

I am all for Net Neutrality, but what we need is laws to ensure that. Without a supporting law, bashing a company for its policy takes us nowhere. While Airtel has been the fist to kick this off, it would be just a matter of time before other telecom operators replicate the same.

Exception to the rule

Today I read a tweet by a person who claimed that he was posting his ledger just to showcase to those who believed that “Day traders loose” that its indeed possible to make good money trading purely on intra-day scale. While I have not met him, I do take his word on faith and assume that he is indeed pretty successful in trading the markets on pure intra-day basis. And there is this friend of mine who has build a fortune (by his standards, not Fortune’s) by just being street mark and networking with the right folks.

In November of this year, a 4 year kid fell 230 feet and survived (Link). Lots of people make money in Casino’s as well despite the known fact that “the house always wins”. And this without having to do card counting.

I know plenty of long term investors who have not been able to out-perform a simple Buy & Hold returns of Nifty and even worse, many have fallen by the way side having lost a major part of the money in stocks that today are no longer even available for trading.

Vastu / Astrology are seen as bunkum, but I can show you guys whose careers have changed because of a change in the direction of the door. And there are enough people who strongly believe that homeopathy can cure a lot of diseases.

The single thread between all of them is that they are all exceptions to the rule. If no one ever made money (in short term if not over years) trading on intra-day scale, people would never try to do such stuff. And if no one won in a casino, they would have to shutter for lack of clients.

But exception to the rule does not mean that its easy for others as well. If day trading was really easy, I would doubt anyone would want to work anywhere else when you can literally make mind-boggling returns on capital (Day trading requiring very little capital is the biggest attraction).

If access to news / information ensured a success in markets, the richest folks would be those who have the first access (think of people working at Newspapers, Television studios).

If all our problems can be solved by simply changing the direction of the door, well, you should have seen that happen long back and by now we would be living in a state of Nirvana.

Beating the market is very tough and very few people are able to do that consistently year after year. There is no magic wand that can let you make tons of money without you having some amount of expertise. And the guys who have achieved that success, its not due to luck but more due to hard work and persistence. If you were to read about Sachin Tendulkar or Tiger Woods, the common thread between these guys were the fact that they were not only in the right place at the right time but also that they put efforts more than what others did and as Robert Frost would say, that made all the difference.

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