Uncategorized | Portfolio Yoga

Mother of all Bull Markets

Evenings on Twitter are generally spent talking about either our markets or the US markets. Today though, much of the discussion so as to say was with regard to making fun of RJ’s target of 1,50,000 for Nifty, mind you Nifty and not Sensex by 2030.

Extrapolation is easy given the tools we have at our disposal. But should the ridiculous target broach us away from the fact that on the long term, markets have gone only one way – Up. And before you point me Nikkei, I would request you to start your Nikkei calculations not from 1980, but 20 – 30 years earlier. From that point, even after the relentless weakness, Nikkei is still very much in positive territory.

Big targets always make nice talking points, but unfortunately, investing for that kind of growth requires a certain rigor and discipline that is not seen in most of us. The best way for 95% of folks is to have a systematic investment plan to invest X% of Salary into a few Mutual Funds (Large Cap / Small Cap) regularly come rain or shine.

Of course, doing that will mean that you may not be able to see your accounts double in a year but what it will ensure is that at the end of 15 / 20 / 25 years, you have a sizable amount as savings which has grown at a rate which would not be possible in most other asset classes (including Real Estate, though there will always be exceptions).

At the current juncture, market’s aren’t cheap by any meaningful measure, but if you are looking at the very long term, any entry is as good as another. Even opportunity costs can make a huge difference in end results.

RJ is no Buffett and as his recent investment into Spicejet shows, even when he invests into what he believes is a solid bet, his allocation is so small so as to not hurt him if it fails. But, the bottom line is that, unless one takes some kind of risk, one can never hope to get a reward.

Markets are cyclic in nature and at some point in future, we could see even a fall of 50% from the top, but if you wait for it and the 50% drop comes after market itself has moved 100% from here, you are still worse of compared to what you would be if you had invested. Worse of all, its easy to say that one will invest when blood is on the street. When blood really flows, rarely do even those with a plan can stick to their plan of action. Fresh investments generally never happen at such times even if RJ says, Sell your House, Buy Nifty 🙂

The biggest advantage (as of right now) into Equity investing is that Long Term returns are Tax Free. This is something that no other asset classes offer and if you were to believe that India has a long way to go as we try and catch up with the developed world, no date is too late.

SEBI-Research-Analysts-Regulations-2014

Research / Recommendations once upon a time required one to be connected to the right guys. Stock brokers usually seemed to be the most connected and even today, any call to a broker generally starts with “khabar kya hai” (What is the news). While stock broking in itself has come a long way since the time of out cry, the lure of news / tips has remained strong as always. Even today, in small mofussil towns, information from Bombay is seen as sacrosanct.

The advent of Internet and now Social media though has set about changes that could not be fathomed just a few years ago. These days, tips are plentiful and every other guy seems to be a expert in the market. The rules that have now been promulgated by SEBI is an attempt to ensure that there is some order to the chaos.

Hence anyone who wants to broadcast publicly his views (Television / Internet or any other public medium) is required to register himself with SEBI and provide details of his registration along with his recommendation.

A simple Google search on NSE / BSE tips turns out literally hundreds of websites peddling their wares, all for a small fee of course. With not many a site even bothering to inform as to who is the guy running the show, it all comes down to luring the chaps with promises of enabling them to make mind boggling returns. Will these guys bother to register? I sincerely doubt that since most of these are 1 man bucket shops with the intention to fleece anyone wishing to take a short cut to riches.

The rule by SEBI I believe is based on the SEC rule governing Research Analysts. But while, SEC requires one to pass a exam – Research Analyst Qualification Exam (Series 86 / 87), here all one requires is to pay a fee and register himself (if he meets certain qualifications).

SEBI has been instrumental in making the industry much safer than in the days before it came into existence when brokers used to literally do as they pleased. Broker defaults are not even heard these days even though the volume of transactions (both Qty and Value-wise) has gone up massively.

While the current step in reigning the Analysts does not meet all the requirements, it is a step in the right direction. What would be needed in future is some sort of Audit so that claims made by these research houses are backed by evidence and not just picked at random.

Gazette Notification: http://www.sebi.gov.in/cms/sebi_data/commondocs/RESEARCHANALYSTS-regulations_p.pdf

List of Registered Analysts: http://www.sebi.gov.in/sebiweb/home/pmd_mb.jsp?PmdIndxName=A&listCode=L

ITC – Sell or Buy?

The stock of ITC today saw a swift fall during market hours after news hit about the government accepted the proposal to ban sale of single cigarettes. With something to the order of 70% of sales supposedly coming through sales of loose cigarette’s, the knee jerk reaction was not too surprising.

While the thought process is that such a ban shall hit sales, we need to understand a couple of things. One, smoking is a addiction and as things stand, its tough for some one who is addicted to smoking to discontinue just because one cannot buy in loose.

Secondly, ITC despite literally yearly increase in duties has been able to hold on to its margin by increasing the price. What used to cost between 3 to 4 per stick a few years back, now costs around 9 – 10 and yet, the demand is no where lower.

On a personal note, I do think this ban is good. Addiction to cigarette’s generally starts during school / college days. While they would love to have a quick smoke or two, most of them would not dare be caught with a pack by either their parents or their teachers. That in itself should mean that on the long term, we should see something positive coming out of this move.

But as a investor, does the current move offer a opportunity. ITC and in-fact literally much of the FMCG basket has been a under-performer during this rally which has been more about high beta stocks breaking muti-year barriers.

While the 5% fall in itself does not mean its a Buy, the chart seems to suggest that the stock is in very firm hands. The stock is currently trading within a Ascending Triangle and a break out on the upside can be a potential entry point. But a lower risk entry point, especially if this news continues to have impact on the stock price would be when the stock price tests the lower channel line.

Charts below;

Getting the right perspective #Nifty

Updated a couple of paragraphs at end.

Getting the right perspective #Nifty

As long as the going is good, one has not a care of the factors that are driving or the factors that are being ignored. But as soon as the markets start to react, all the worst kept fears start coming up as the reasons markets may continue to fall and even though markets are already down quite a bit, commentators make it seems that this is just the start of a massive fall that can continue for long.

Since 2008, every fall (and we have seen a nice intra-year correction every year, but more of it later) is seen as the start of the fall which will be similar if not even more severe than 2008.

In 2013, markets made the low of the year on 28-08-13. On that day, we closed 14.58% below the highest close of the year. The key reason ascribed for the fall was “US military action on Syria”. Of course, while Syria continues to burn, markets themselves made a splendid recovery.

Its interesting how media can blow up news to make it seem that the End of Day is nearby. This India Today (Link) report seemed to suggest that the end for India was near – Doomsday being the word used. Do check the date of the report – its a day before markets bottomed out. Markets closed the year flat (gaining around 20% from the day of the low).

23rd of May 2012 was when markets made the low of that year. On that day, Economic Times carried a article which quoted the following

“It seems all grim,” Morgan Stanley’s Ridham Desai said in a note. “The macro mix exposes India to global events more than it may choose to.” Morgan forecasts current account deficit — the excess of imports over exports — and fiscal deficit to fall this year, which will help equities.

Another reason for the crash was Greece. Remember the PIIGS? While once again, we are yet to see there being any recuperation by those countries from the hole they dug themselves into, markets recovered pretty strongly. In fact, one of the reasons that is being ascribed to the current fall comes back to the issue of Greece.

December turned to be a pretty bad month for Indian markets in 2011 as it capitulated towards the close of the hear. Instead of having a Santa Claus rally, we saw the fear of Halloween. The whole year as such was one of bearishness but the final cut came as RBI did not cut CRR as markets expected in face of a weak IPP indicated a economic slowdown. Analysts were worried about the worsening asset quality of banks, especially those in the public sector.

While markets did not recover in 2011, we saw one of the best rallies with the start of 2012 with January and February posting a very strong up-move.

The average draw-down we see every year comes to around 13% and this year, we had not seen a deep draw-down till date. Even after today’s fall, we have fallen just 5.43% from the peak of the year.

As the above chart clearly lays out, from the top for the year, Nifty has in no year retraced less than 10.66%. Some food for thought, eh 🙂

I strongly believe that the current situation is not anywhere close to what we witnessed in 2007 / 2008. By almost all parameters, we are much better, much cheaper and better equipped to handle any fall out that may arise out of international events. But with markets becoming volatile, its easy to lose perspective and go with the herd. The herd unfortunately as evidence has pointed out many a time in the past tends to act wrong at the worst possible time.

In my earlier view on Nifty, I had said that this time maybe different. While markets had immediately bounced back, the reasoning I had was not unfounded and I believe that even now, some more pain maybe on the cards. But instead of rushing to the exit, that maybe the best time to load onto stocks that you had missed when it had rallied earlier.

What now for DLF

DLF seems to be having an awfully bad time. First came the CCI order which for now has been upheld by all the courts where it approached for its squashing. Next came the decision of HSIIDC to cancel 350 acres allotted to it. As in case of the earlier order, its at its last appeal process at SC. And now comes the SEBI order banning the company and its promoters from accessing the market for 3 years for what is quite clearly a fraud. That it took SEBI 7 years to come up with this says a lot about the slow cycle of justice in India.

I have never been a fan of Real Estate companies and the way the Realty Index has acted in these many years just confirms as to how ridiculous a investment it could have turned out to be.

With the stock crashing 28.6% yesterday, the question on top of the mind is whether there is value in bottom fishing. After all, bottom fishers in Wockhard, Satyam have been amply rewarded for the risk taken. I defer though in case of DLF (though for now, I have turned out to be wrong in case of Wockhardt).

DLF is what could be called “Politically linked company” and I am sure owes a large part of its growth to that link which helps in various ways. Unfortunately, this political mileage can cut both ways and for now, DLF seems to be on pretty sticky ground.

The fundamentals of the company is pretty bad. 5 Year compounded sales growth is -5.75%, 5 Year compounded profit growth is -26.78% and 5 Year compounded ROE is at 4.73% (All data from www.Screener.in). With yesterday’s fall, market capitalization of the company is at sniffing distance of its Debt, something that tells its own story.

FII’s own a large part of the free sharholding in the company. I assume that this is due to DLF being a proxy to exposure to Indian Real Estate as well as compulsion due to DLF being part of Nifty. But if rumors circulating about the stock being excluded are anything to go by, one may see further pressure on the stock as Institutions start to exit enmasse.

On the other hand, DLF is no small company to go down without a fight and I wonder as to at what price, market shall realize that its something that is worth risking. Unlike many Infra companies where debts exceed the assets owned the company, DLF indeed has assets which should be more valuable than the total debt it has.

The book value of the company is 154 and I wonder if at a price of around 75, the stock makes for some high risk buying. After all, its when blood is on the street that valuable assets are available for a price that is lower than what it ordinarily would have sold. On the other hand, with quality companies available (sector being the same), there is also this line of thought that there is no point in trying to catch the proverbial falling knife when the same risk could be taken with a good share and one where the probability of success is much higher.

Since the stock is hitting all time lows, there is no point in looking at the stock technically until it starts trend reversal happens. All in all, I think at the current juncture, buyers of this stock would be literally buying a lottery ticket though the jackpot at best maybe 2x the investment and even that could take years to come.

Eliminating Mistakes

Mistakes are the hubris of most investors / traders and its no wonder they generally are doomed to fail regardless of what superior qualities they may possess elsewhere. But many investors and traders who aren’t affected by that characteristic still fail and the reason for the vast majority of them comes down to avoidable errors, some that they knew about and did not implement and some they did not even know about (the Unknown Unknown).

Right from Warren Buffett to the ordinary investor, mistakes happen by everyone. But while the professional investor understands and rectifies his mistake, the amateur investor believes that the mistake is not his but his bad luck.

The biggest mistakes happen due to the fact that we ignore the Heuristic Biases that affect our way of thought, way we understand things and how we go about implementing them. I come across investors who choose to ignore such biases rather than learn how to avoid the traps laid out by such biases.

I am generally a skeptic of strategies which cannot be tested using a software and while patterns can be tested, ability to code and test is not something I have the ability and hence will rather ignore such strategies than do a manual test which shall suffer from all kinds of biases (Selection of only those that have succeeded being the major bias here). Again, I am not suggesting that patterns aren’t a way to make money in the markets. After all, one of the top Hedge Funds with incredible returns is rumored to use patterns (though they aren’t the general ones we find in every TA text book).

The other day I met this friend of mine who believes in patterns and he was saying about how high a success rate this particular pattern had. The only catch being that you need to recognize it correctly. Wanted to inform my friend that this is a circular logic that leads to one over-estimating the predictive nature of the pattern, but then again, have burnt too many bridges trying to correct the logical errors of others and hence kept quiet.

The same error affects Elliot as well. If the move is not as per what Elliot logic predicts, the way out one is told is to go back and change the wave counts till the current action matches the one that was supposed to happen. If only the broker allowed me to change my trades after they failed 🙂

Every mistake in markets costs not only in terms of money but also can wear us down to the extent that after X number of losses (many of which could have been avoided), we feel that the mistake lies in us coming to the markets in the first place. The churn ratio at any big brokerage firm shows how a large set of investors and traders bow out every year just to be replaced with new sheep most of whom too will bow out in time.

Elimination of mistake requires two things. One, the ability to understand that you are wrong (and not the market) and Secondly, the openness to accept that my chosen method / path / logic is wrong and try to see where and how one can make amends to that.

Checklist is now seen as a proven way to reduce and eliminate mistakes that we have either made earlier or know about it. If you are yet to read The Checklist Manifesto by Atul Gawande, I urge you strongly to do as soon as possible. A checklist before you commit a trade is one of the easiest way to eliminate simple mistakes.

Once known mistakes are reduced, the next step comes in trying and reducing mistakes that we do not know we are making in the first place. Compared to the ability to reduce mistakes that we know is happening, this is quite difficult but not impossible.

To me, eliminating the unknown unknown mistake requires constant effort on part of the investor / trader. Profits occur due to combination of Luck and Skill. There are quite a few ways to separate the two – Bootstrap and Monte Carlo testing being the ones I prefer and use.

Every trade / investment has a expected return and a real return. One needs to constantly check for divergence between them and then focus on whether the divergence is due to something that can be avoided / acted upon or something that we just have no control upon.

Eliminating mistakes is a process and it has no ending since our aim always has to be becoming a better investor today than one we were yesterday. But that requires quite a bit of effort and that can come only if you are passionate enough as well as have the ability to understand, accept and rectify mistakes. If you cannot do that, its always better to invest in MF’s / ETF’s and spend the time in activities that bring pleasure to your mind.

Investing / Trading has no shortcuts to success. You either are the hunter or you are hunted. The choice is yours as to what you want to become 🙂

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