Portfolio Yoga

Franklin, Archegos and the power of Narrative

Franklin Templeton has made more news in the last one year or so than the rest of the Mutual Fund industry combined. Then again, I cannot remember the last time such a high profile asset management company decided to shut down and lock out investors in one of the premier funds.

Even before they shut down the funds, I felt they broke the trust of the investors in the way they handled their exposure to Vodafone. (Breaking Trust – The Franklin Experience). In a way, I recognized the problem but decided not to act as I stuck with my investments in Franklin both on the debt side and equity. (our family’s first and a major investment for those days was with Kothari Pioneer Prima Plus Fund).

While the locking out decision was painful, it did not impact me for I have always believed in diversification when it comes to debt and the percentage of funds stuck with Franklin was something I could live with. For now, the decision hasn’t been proven to be wrong though we shall have a real answer once the fund has been closed.

The selection criteria for investing in mutual funds for me basically falls into two buckets. Invest based on past performance or invest based on philosophy. Regardless of the narratives that are sold around by advisors, most just depend on the past returns marrying then with the philosophy when it suits and divorcing them when it doesn’t.

For most fund houses, Philosophies don’t change based on market trends. This maybe a weakness when it comes to the fund house for very few investors want to stick when the returns are sub-par even if the reason for being sub-par is because of the divergence we see in terms of the market vs the philosophy, but as investors I think one should see that the fund house has a strong conviction from which it will not budge much.

The following statement is of Quantum Mutual Fund with respect to their philosophy

That is by following the tenets of Value Investing as a concept for the Quantum Long Term Equity Value Fund since its inception in 2006. Value Investing is defined as “An investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued

This from Mirae

The investment process at Mirae has strict investment guidelines ensuring that we contain portfolio risk within the specified levels. We are of belief that the company fundamentals are the primary factors of stock performance.

The difference is stark. Miare is more of a growth oriented fund house while Quantum seems to believe in Value. Both are worthwhile philosophies but when comparing funds, there is no point in comparing the returns of Mirae with that of Quantum. But who has the time for all that research and hence Value funds generally tend to lose out to growth oriented funds.

Interestingly I couldn’t find any such statement by Franklin. But when you have funds that try to cater to everyone, it’s not possible to have such a mission statement in the first place. On their US site, they showcase the breadth of their investment capabilities (Value, Deep Value, Core Value, Blend, GARP, Growth, Convertibles, Sector, Shariah, Smart Beta, Thematic) just on the equity front not to mention Debt and Alternatives to boot.

Franklin talks about Risk Management being one of its most important pillars when it comes to investing client funds but today we know that it ain’t true. But then should one even be surprised. It’s only when shit hits the fan does one realize that something wasn’t right all along.

Nifty Alpha 50 is a Momentum Index that tries to replicate the academic version of Momentum Investing. It’s top two weighted stocks are Tanla Platforms and Adani Green Energy which combined have a weight of nearly 13% in the Index. I have ignored both stocks when it comes to my Momentum Portfolio because of the intrinsic risk I feel exists in both these stocks. If I were to under-perform because of the omission, the question is – am I a good fund or a bad fund.

Most investors tend to barely look at the portfolios of the funds they hold and this means that funds can claim one thing while doing exactly the opposite. A value fund holding growth stocks for example would be an example of such inconsistency and one that makes it tough to analyze the fund in relation to its competition.

It’s for this reason and the fact that finally its returns that the investor is focussed on that we see advisors choosing the best fund of the season. Currently if your advisor is advising fund houses like Axis and PPFAS, you know which data point is driving his decision making.

A couple of days back after Bill Hwang basically blew through his fortune, the Chief Risk and Compliance Officer of Credit Suisse was forced out after the bank took an enormous loss. Here is an interesting thing – Morgan Stanley took an even bigger risk with but I am pretty sure their Chief Risk and Compliance Officer will get a hefty bonus this year.

The risk for all the major players were the same and yet when the final numbers were counted, Goldman and Morgan came out smelling good while Nomura and Credit Suisse sucked. But what if they too had been able to get out (dumping the stocks to their clients before shit hit the fan as Morgan did), would there be any controversy or even news? I doubt so.

What is interesting for me about the entire Franklin episode is the way narratives have been built as if they were the only bad guys around. That kind of statement can be only made if every asset manager is subject to a forensic audit and the results published. But as the case of Archegos shows, it’s not the risk that you take that can bring you down as much as not getting out in time.

This is not to say there is nothing wrong with the way Franklin has gone about its business, it has a lot of wrongs that need to be answered, but if you are getting swayed by the public frenzy of opinion makers, it’s important to step back and reanalyze.

March 2021 Newsletter An existential question – When to go to Cash

I believe that an advisor’s job doesn’t end with just provide information on what to buy and get out of the way. This while helpful still leaves a gap for the investor. For the clients of Portfolio Yoga Advisory, I try to write my thoughts on the happenings of the market and how to go about thinking about it from the larger perspective / bigger picture. One such letter I write is the monthly letter which tries to tackle a subject that is generally of interest from the investors point of view. This is the letter for March 2021.

Since April, Nifty has had just 3 months where it ended in negative territory and these too were shallow with no month losing more than 3%. The only other time we had 3 or fewer negative months over the last 12 months and max loss in any month being lower than 3% was at the peak of the Harshad Mehta bull run.

With markets seemingly disconnected from the economy, One of the questions I am asked the most is – when will you go into Cash. The very question though to me exposes a bias in the assumption that a portfolio that is constructed based on a factor called Momentum is somehow way different from portfolio’s constructed using other factors such as Quality or Value (Growth is not a factor). An advisory that is based on any other factor generally is not asked such a question even though no portfolio is immune to downside risks when the market as a whole tends to be bearish.

In the past, I have had several discussions on Twitter with respect to a question as to whether an equity fund should go into Cash or not. An equity fund I liked during those days (and continue to like even today) has moved multiple times in the past to cash when they felt that the market offered no opportunities in terms of good stocks at a fair price.

Most funds though try to be invested all the time. This is not a bug but a feature since the thought process here is that the fund manager has no clue on the exposure of the client and he is just ensuring that the clients exposure to equity is 100% invested in equities. It’s either the Investor if he is investing directly or his advisor who needs to decide how much cash to hold or how much debt investments to have in the portfolio and one that is based on the risk profile of the client.

Value based funds generally go into Cash when the markets are from the fund managers point of view relatively very expensive. This again is not based on the risk profile of the client but the inability of the fund manager to find decent stocks and ones that are trading cheap as well. This bodes well for them when the markets turn around and they are able to utilize the opportunity to invest the cash back into the market. Of course, this isn’t as simple as we assume for markets can remain irrational for long while investors who have multiple other choices may or maynot be willing to bear the pain of opportunity costs that they are seen to be bearing.

Momentum on the other hand goes into Cash when the market has no Momentum. But this is not as often as people assume. Take a look at the chart below.

The Y axis represents the range of Stocks with positive momentum and the bars represent the percentage of times we were there. So for example, of the 4000+ trading dates considered, we spent around 4% at the lowest bracket (approximately 160 instances). Of those 160, just 15 comprised the year 2020 (almost every day between late March to mid April). Rest were all during the 2008 / 2009 financial crisis.

But markets are volatile and hence additional rules have been devised to try and keep out of the market. One such rule is to not add to the portfolio but take only the exits when the broader index dips below the 200 day moving average. While the rule itself is simple, this can lead to more complications than necessary since 200 day is broken quite a lot. Since 2005, Nifty has broken below the 200 day EMA 63 times (or on an average 4 times a year). To reduce whips, an envelope could be introduced though that too gets whipped and the whips are generally most expensive vs the whips for just a simple moving average. As a wise man once said, there is no such thing as a free lunch.

A secondary way would be to look out for trend breakdowns in the breadth index. For instance, historically whenever the percentage of stocks that are above their 200 EMA drops below the 20 barrier, it’s better to exit the market and wait for the crossover above 60 to reenter.

The logic here is simple – when there is no trend available and even if there are some stocks that are trending, instead of trying to chase a mirage, it’s better to wait out until the broader trend re-establishes once again.

The last time it had a sell signal was in June 2018 and the reentry came back only in August of 2020. Two problems here though – we don’t have enough signals to be sure that the strategy has its uses (a minimum of 30 trades would be required and there isn’t just that many trades) while on the other hand, it’s tough if not impossible from both a fund manager perspective as also a advisor’s perspective to be in cash for long periods of time.

Compared to using any other method this strategy seems to have limited whiplashes (but as with any trend following strategies, whips can never be eliminated). The average period of time it stays out comes to around one and a quarter year.

Bull markets are long yet can be volatile enough to make one wonder if the time is apt to move to cash. But cash is the alternative when the trend has truly broken down. This strategy for instance did not move to Cash in the depths of March 2020 but was in cash way before. This could be more of a coincidence though it does show that sometimes bad things happen when stocks aren’t at their best.

Dual Momentum is another way though because of the lagging nature of simple trend following systems, it can be delayed on both ends not to mention the dreaded whips.

A method that seems to add value especially with respect to Momentum Portfolios is to cut exposure when there is high volatility (implied) as well as deep cuts in the equity curve of the portfolio. This again isn’t foolproof but has in the past tended to provide an exit before the deep cuts in the markets arrive.

Don’t time the markets but be invested, say the experts and they are right. Timing can be risky and since markets always go up for if not growth, there will always be enough inflation out here in India and the longer your holding period, the higher the probability of ending in positive territory (even though if adjusted for inflation we may have gone nowhere for years. For instance, in dollar terms Sensex is up just 26% from its peak of 2008 – almost everything of it coming since November of 2020).

But markets are volatile and our behavior is finally the conjunction of a vast number of forces, many of which we may have no control. Human behavior can be modified but never changed. In that sense, it’s better to be safe than sorry and timing the markets can help a lot.

This financial year should be more of a consolidation of the gains we have made in the last financial year but if the volatility becomes too high, rest be assured that we will be agile in ensuing that the boat doesn’t sink with the rest of the caravan.

One year of Learning through Discussions

The best learning I have experienced has come from interacting with others. While in the good old days you could have a long email chat with co-conspirators, in these days of Whatsapp and Twitter, who has time for all these anyways.

So, to get deeper discussions going I started a Slack Channel that was free for anyone and everyone to join exactly one year today. Free forums are tough to seed with conversations for since if one is not paying anything, one doesn’t find it imperative to be online and interact with other members.

If we wish to have medical advice, we don’t take one from anyone who professes to provide a view. If the advice asks for surgery, we would rather take a second and maybe even a third doctor’s advice even though each one of them will be similarly qualified.

When it comes to financial advice, anyone and sundry seem to be able to not just provide a view but influence the investment process of investors. To just sell medicines, one needs to pass a specific 3 year Bachelor Degree. To sell investment advice, all you need is to pass a couple of easy exams and voila, you are an expert.

But this is not new, this has been the case even before the existence of Social Media though the reach Social Media allows is something else. It’s tough for most, even professionals to cut through the noise to seek out the signal. One of the best ways is to discuss with like minded professionals.

But unless you are an employee in a large financial organization, that is not evidently possible. On Twitter, those who we seek cannot really be expected to answer every question of us. A 144 character response while interesting doesn’t add value either.

As I wrote in the introductory post, a lot of my learning came from interacting with others on a Yahoo Group Forum. While the Yahoo Groups is now dead, I wanted to recreate some of the magic that happened there once again.

The first year has been promising. While I was the only real poster for much of the first year on the Yahoo Groups (while also promoting it elsewhere), I am happy to see keen interest and involvement by quite a few guys. Thanks to Abhinav Mehrotra, Aakash, Anand, Ajay P, Kesav, Mahesh, Manish, Pradeep, Rakesh Arunachalam, SK Rahman among many others who have graciously spent time and effort to answer queries that frequently come up on the channels.

On Twitter, more the interaction, more the followers and more the visibility. It’s kind of dopamine that keeps us coming back over and over again and tweeting more and more. On private forums though, there are no rewards and that makes it even more generous. Messages such as these is what makes the day for me

Learning doesn’t happen in isolation other than for the really genius kind of guys. Books are a major help in learning from others but the ability to discuss and debate on something takes it to the next level.

While the idea and even today the objective of the forum was to have discussions on every sphere of the markets, much of the discussions have been with respect to Momentum Investing. I am not really surprised since not only is Momentum Investing having its best days in a long time but also the fact that there are no other forums (as far as I know) where you can discuss and debate the strategy.

The secret of Momentum is that there is no Secret. This is not a black box method that is proprietary in nature. The strategy is simple and open ended. What is more important than the strategy itself is the ability of one to trust the system rather than our views. Anand kind of made it more concise in what he learnt in the year

While the total membership is more than 800, around 200 on an average read the discussions and 50 to 60 participate regularly. If you wish to join this wonderful group, do click the following link and Join (if the link is no longer valid, please DM me on Twitter)

Join the Slack Community – its FREE 🙂

The returns of 2020 – 21 may not repeat in 2021 – 22 but I am pretty sure that the lessons one learnt will be valuable even in 2030 – 31.

Charts and Thoughts on the Current Market Scenario

It’s been more than a year and Coronavirus is still impacting our lives everyday. Mumbai where the maximum number of cases have been seen is implementing a Night Lockdown. Madhya Pradesh is implementing lockdown on Sunday’s. Punjab and Rajasthan are the other states implementing night lockdown (though I do wonder if there is any scientific evidence to back this strategy as being better than doing nothing).

This along with the volatility we have seen in the markets over the last few days has meant that there is a perceptible fear of a repeat of March 2020. I still sense that we will not see lightning strike twice at the same place though I have been wrong earlier and could very well be wrong now too.

So, rather than just speculating on what could happen, I felt a better way would be to look at some charts and compare and contrast the same to February end to see if we are in similar territory.

First is Nifty 50. Here is a chart that compares how it was at the beginning of March 2020 vs today

The black line represents the 200 day moving average. While it broke at the end of February 2020, today we are way above it. While this doesn’t mean that the markets cannot fall, the probability of markets becoming bearish big time from here is rare. Bad things generally happen below the 200 day EMA though as usual, there are exceptions to the rule. In January 2008, Nifty 50 was trading 31% above its 200 day EMA when the fall started and within a couple of weeks we had a drawdown of 30% from the peak’s. Today, Nifty is 15% above its 200 day EMA (it was 30% in January of this year)

This bull market has been such that for months now, Nifty had not broken the previous month’s low (even intra-day) since October 2020. This was broken last week when February’s low was finally taken out. Not much of a negative signal though it does show that the trend is not as strong as it was in the last few months.

Volatility

India VIX refuses to rise for now and thus signalling that traders aren’t expecting a big move on the negative side (it’s implication is always the negative side). A cause for concern would be if India Vix crosses the 30 mark.

Volume Demand vs Supply

In line with market weakness, we have seen that aggressive buying has dropped off. We saw a similar trend back in September as the market seemed to weaken off before it resumed its journey.

Safe Assets performance (vs Risky Assets)

When there is an overall fear scenario, money tends to move towards safety – be it Gold or Bonds and hence they tend to perform relatively better vs the markets.

Ratio Plot of Gold Bees vs Nifty Bees seems to suggest no such move for now. I have marked a vertical line to show where this ratio was at the end of February 2020

India 10 Year Bond Yields aren’t trending down as it was for a long time now but is not trending higher either. Hopefully this means that the markets aren’t expecting a big rise in Inflation (which could be negative for the markets)

Breadth Indicators

The strongest feeling that not everything is bad is being given out by a few breadth indicators I follow.

The percentage of stocks above their 200 day average has slightly tapered off from the highs we saw earlier this year but still going pretty strong even though Indices like Nifty Smallcap 100 are yet to reach the highs they reached in January 2018

In a kind of a conundrum, the percentage of stocks that have positive momentum is still pretty much close to its peaks. I say conundrum since the above chart seems to showcase a bit of weakness. This could be explained by the fact that many a time, the 200 day is not broken because the stock has fallen substantially but because the average is lagging, it has caught up with the price and even a small fall can mean a break below it

Another indicator I have started tracking recently is the percentage of stocks whose 1 year trailing returns are higher than Nifty 50. The reason to follow this is to gauge whether the market is bullish owing to a few heavy weights moving it around or there is general bullishness around. While we aren’t close to where we were when the 2014 bull market started, the trend seems to be bullish for now.

Maybe due to new margin rules kicking in or maybe due to other exogenous factors, Nifty has opened this month with one of the lowest open interest since September of last year. While I wish to draw no conclusions, this seems to be generally not a great sign for bears.

Based on my understanding of the data and the overall scenario I am painting as to how the markets may behave in the forthcoming months and years, I continue to remain bullish and hence these charts and the analysis may be tainted to that extent.

Finally, Since 2012, Nifty has been trending in the same manner as S&P 500 even though we have had divergences along the way. As long as S&P 500 is trending higher, we should hence be safe from seeing a large fall which has been historically rare (I will need to go back to 2004 and the fall of the NDA government to find such an instance).

Portfolio Yoga is a SEBI registered research advisory and nothing in this post or elsewhere on the site should be constructed as Buy or Sell recommendations.

When the Fund Stops – A Book Review

“You are as good as your last trade” is something that is often said to traders. Investors generally have it more easy. Fund Managers when they are generating returns are seen as the Gods of Men and yet as soon as they hit a rough patch, they are thrown to the wolfs and the search for the next Fund Manager with a Midas touch begins once again.

Don’t look at performance alone says everyone and yet its fund performance is the only real signalling mechanism as to whether a fund is doing good or not. What this also means is that when funds are managed using vehicles such as Mutual Funds where investors can withdraw at ease, straying outside the zone of what is seen as acceptable can have very huge consequences.

A book I just finished reading is David Ricketts – When the Fund Stops . The book looks into the downfall of Neil Woodford who was once Britain’s most successful fund manager. It’s a pretty slim book and one that seems written to throw the fund manager under the bus for his omissions and commissions.

From the Indian perspective though there are certain interesting differences in how funds are managed in India vs UK. For instance, its surprising to learn that most funds don’t disclose the total portfolio holdings (Neil tried to do it differently and was more transparent than the law required by disclosing the portfolio fully). Also surprising to learn that there seems to be no limit on the percentage of equity of a company that a fund manager can own.

In many ways, it seems that if someone tomorrow wrote a story about Santosh Kamath and the demise of Franklin Templeton (at least on the Debt side of the table), the story would be similar in many ways. The only difference though is that Santhosh blew up when at Franklin while Neil blew up after leaving Invesco and starting on his own.

It’s easy to blame Neil’s blow up to his decision to own a larger portion of the portfolio in low liquid stocks / small cap stocks which in hindsight seemed to be risky with many losing tons of money. But we get no details about the contribution of similar small stocks in his long career when he generated strong returns for the investors. If he was doing something similar earlier and had succeeded, did he really change gears as the Author seems to suggest I wonder.

The similarity with Franklin is also about how the fund was shut down to allow for an orderly sell off though unlike Franklin, this decision was taken by the Custodian of the fund. On the other hand, the Custodian’s decision to sell the portfolio slam dunk seems to have made matters worse for the investors. For now, Franklin seems to be able to redeem without having to for a firesale and one that would regardless of the quality of assets hurt the investor.

Fund management is tough but so are the rewards. Neil and his co-partner Newman had paid themselves 111.5 Million Pounds since they had launched the fund till their exit. Most investors on the other hand would have suffered.

One of the smartest moves in hindsight that Warren Buffett did was to build a moat around himself by ensuring that his investment vehicle was one with permanent capital and hence not subject to the vagaries of customer’s wishes and wills. Doing different from the crowd doesn’t mean it shall work out all the time or even in time but doing different requires a different type of capital than one that could be called back any day. That seems to be the greatest mistake of both Neil Woodford and Santosh Kamath. They tried to be different while investing money that they knew could be called back any single day.

All in all, the book is a easy read. Not much to learn from it though. I rate it 3/5

The New Normal – Change is the only Constant

Bitcoin keeps breaking new barriers, NFT’s are now being sold for Millions of Dollars and IPO’s are red hot. The most recent IPO, Roblox was sold at a Price to Sales ratio of 26 times – Sales, not Earnings.

The high end of Roblox sales estimates for 2021 is $1.52 billion, which equates to a price to forward sales ratio of 26x. $RBLX https://t.co/FeZQrvlPc9 pic.twitter.com/S2Ydhsdydr
— Charlie Bilello (@charliebilello) March 11, 2021

If you follow me on Twitter, you know I am not a fan of Bitcoin and definitely not a fan of NFT’s though NFT’s still tend to have some logic. NFT’s are more like Kindle books – you are paying for the content even though there is no physical aspect to it. Whats better, unlike Kindle book which you cannot even share, let alone sell to anyone, you can always sell the NFT you acquired.

I like Physical Books and Physical Art. But if one is buying a book or an Art not just to enjoy but also use it as a store of value and one that could appreciate over time, why not invest in Digital Art. Only this can explain why some one paid $69 Million for “Everydays — The First 5000 Days,” by the artist known as Beeple.

Crypto universe is worth $1.7trn. What happens after enormous wealth creation? You have some fun. You buy status symbols.

Behold this generation of the nouveau riche about to flaunt their success. It's going to get weird and creative.https://t.co/y4zd7FuY8a
— Frederik Gieschen (@FrederikNeckar) March 11, 2021

It’s easy to dismiss these things as a consequence of either free money or a fad that runs out in time. Or maybe we are at one of those times when things are changing right under our noses and we are unable to get a hang of it.

Money for long existed as a physical medium of exchange once we ditched the barter system. From Conch Shells to Gold, there have been various currencies that have been in existence over time. While paper is assumed to be relatively new, Paper Currency was first introduced in the 11th Century by the Song dynasty in China.

For a while, Paper was backed by Gold for there was an enormous lack of trust in the Institution. But over time it came to the realization that there was just not enough gold to go around for all the requirements and secondly there was a greater amount of trust and hence yanking off the support of gold would not materially change anything.

If you think deeply about money, everything is literally based on trust and relativity. The price you pay for an asset is not based on what it means to own that asset but what others would pay for that. So, real estate prices are based purely based on what others are paying for similar property and art is based on what others think it would be worth paying for.

The stock market is supposed to behave better for unlike a Painting which you can only admire when you are the owner, a company has real earnings that can help pay you back the amount paid for the acquisition. Yet, stock markets are driven by humans and if humans are willing to pay millions for a JPG, why should not companies be priced based not on earnings but whatever the future one assumes will unfold.

As part of my momentum portfolio, I bought a stock called Dixon in May of 2020. When I started investing in the Momentum Portfolio in 2017, I tried to read as much about the company as possible even though I was not buying based on the company’s fundamentals but purely based on its price performance.

By the time I bought Dixon, I had shed all such notions. I would just buy whatever the algorithm threw up and one that did not seem like a total fraud (I have a negative checklist of companies I wish not to buy even when they pop up on my Momentum screen). By August, it had shot up sharply and I was beginning to get worried, real worried. The PE touched 100 and I tried to read up on the company and the more I read, the more I wasn’t sure if I wanted to hold onto the company.

The thing with Momentum is that when stocks go up exceptionally fast, the ranks don’t deteriorate till it has given away a lot of the gains and I for one did not want that to happen. I decided that I knew better than the market and booked profits (so much for advising others on sticking to the system). But the stock seemed to care less about my beliefs and continued to head higher. Thankfully in late September, the stock had a small correction and by then I had the realization that I should stick with the system and took that as an opportunity to get back in.

I continue to hold Dixon as of today and the PE it quotes has risen to 155 times its trailing four quarter earnings. Does this mean looking at PE ratio is useless – absolutely not. PE has as huge signaling mechanism and that generally comes true in time. But you need to think about it differently.

When we buy a stock, we are buying a part of the company and yet we aren’t really buying the company itself and that is a huge difference. When I bought my Stock Broking Membership card, I bought it at a price of 1 year future earnings. Dixon in the last four quarters made about 82 Crores in Profit. For me to get a similar deal here, Dixon needs to make 23,500 Crores next year. I know, even impossible is meaningless here.

The thing about buying stock is that we wish to participate in the growth of the company and yet unlike the promoter, we need not be stuck with it. If tomorrow I sense I feel that I wish to get out, I can. the promoter on the other hand is unlikely to get a exit at even half the valuation of today if he wants a exit tomorrow (remember GMM where one of the promoters sold their stake at a discount of nearly 30% to market price recently)

Mixing fundamentals and momentum to me appears dangerous. The only reason I have list of negative stocks is because I sense that the exit door is too small and unlikely to allow me a clean exit in case of a fire. Else, I wonder why should I really bother about things that are above my paygrade.

In the 20+ years I have been in markets, I have had great times and pretty miserable times though I would think that the current time is great not just because of the gains I have made but because I have been more organized and clear about what I am doing and more importantly why.

The first bull market I participated in and made some serious money was way back in the 2000 dot com bubble. What I remember most about it was that I did not stop to ask questions. My fault though was that I did not know when to dismount the tiger either.

The toughest thing about riding a tiger it’s said is getting off it without getting killed. The current state of the market to me is suggestive of riding the tiger and while the cost of getting off is not equivalent to getting killed, without a plan on what will lead to us once again getting back on the tiger, it makes no sense to try and get off.

This is the 4th consecutive quarter that markets are positive. This is not really a rarity. Post the crash of 2008, Indices saw quarterly positive close for a consecutive 8 quarters. Since 1979, Sensex has had a consecutive positive close of 4 quarters or more 13 times with the average gain being to the tune of 173% (we are as of now approximately 133% up from the March Quarter close)

I have some very intelligent perma bear friends but who pretend to be bulls. The thing about their reasoning is so comforting that you are sure that the only thing that can happen to market is a big fall and one that is right around the corner. The last time I met him, he was certain that markets will fall before Summer starts and what has Summer to do with markets fall. Well, it’s in Summer he said China will attack India and that will be the end of the bull market.

Markets spend more time in bullish phase versus bearish phase. If you toss a coin, you should expect, in the long run, 50% of the time to have heads and 50% tails. In the shorter term though, this could vary dramatically and yet unless you seriously have questions about the coin itself, you understand that this randomness is to be expected.

Markets are no different. Since 1979, Sensex has seen 53% of its days being positive – slightly better than 50% of a coin toss and one which in finality accounts for all the difference. If you were to think about the stock markets as a Casino, the house has a negative edge. This means that the longer you play, the surer you are to come out as a winner (in a casino, the longer you play, the surer you are going to lose everything you have and more – that is the house edge).

A friend asked me if I had the yearly drawdowns on Nifty handy. I had not updated it for a while but I updated and posted it on Twitter.

If you look at the chart, you can observe that every year we go through a drawdown of some kind. Exception years being 2014 and 2018 when we saw single digit drawdowns. Markets though have continued to rally through and through over time. One can be worried forever and make no money or worried but with a plan and make money. I for one choose the latter.

Everyone Gets What they Want

Google’s top Search Prediction for “Stock Brokers are” is Scum. That is not too surprising either given how many have been ruined by brokers eager to make their dough. While things have improved a lot, even today one keeps hearing about scams run by brokers either with the knowledge and tactical approval (as long as it seems working) of the client or skim them off without their knowing. Anugrah Stock and Broking & Karvy come to mind as big ones in recent times.

Sales is the cornerstone that defines success or failure for any product and company. If you buy a bad product in the normal world other than finance, the damage is limited to the amount you have spent. Buying a wrong financial product has implications beyond just your investment for they also create a narrative which is tough to counteract with.

Trading for example has been repeatedly shown as something that won’t make you rich or wealthy and yet the income for most brokers is driven by investors who are these days fighting the machines and if Kasparov could not beat Deep Blue way back in 1997, I wonder how much of a chance most traders have these days.

As a broker I was able to get a ringside view of the world of traders and I doubt I have come across a single successful trader who won regularly and consistently. Of course, on Twitter I now come to know that trading is as easy as ABC. While brokers I assume even today entice clients with the riches they could bekon my trading, trainers and advisors I assume are the real guys making the moolah.

Trading for a Living (which is what most want to do in life) is what most people dream about while having a capital that is fit for trading at best on the monopoly game board. I am pretty sure there are wonderful successful traders who make a good living by trading, but it has the same odds as the guy who won 1 Crore on Kaun Banega Crorepati.

Trading is addictive in nature regardless of whether you made a profit or not. I remember reading somewhere that the average time frame a trader survives in the market is 6 months.I guess the data is wrong for I know of unsuccessful traders who have survived the markets showing its displeasure for years.

Like a drunkard who cannot but stop by the bar every day after work, so are some of these traders who are successful elsewhere but decide that it’s in their destiny to win the battle of the wits.

Before the arrival of Futures & Options on our exchanges, fortunes were made and lost by traders but the number of traders were fairly limited given the limitations exchanges of those days had. Technology and Futures and optiosn today on the other hand provide an easy way to take exposure greater than one’s net worth on nothing more than just a whim.

The odds of success being so low, it has always fallen upon the brokers and advisors to take up cudgels on behalf of the successful trader who is mostly seen missing in the woods so as to speak. How dare you point out the low odds of success here, don’t you know that 9 out of 10 businesses fail in the long run and yet there is no end to a new set of entrepreneurs who wish to do something different. On twitter, such a riposte would be seen as “whataboutery”.

Jack D. Schwager has in time written a few books in the Market Wizards (his latest book is out by the way – Unknown Market Wizards ). His previous books are worth reading and hence reading these should be fun. There are a few evergreens featured in his earlier books Bruce Kovner, Paul Tudor Jones, Ed Seykota, Michael Steinhardt, William O’Neill, and Richard Dennis who continue to command attention even today. What about the rest of the guys though – googling a lot of them ain’t easy but some of them did make news (not of the good variety though).

Nothing can be tarred and so is the world of trading. Even if we have just 5% of traders who are the real outliers, we are looking at a few thousands if not lakhs of them. Who doesn’t want to be that 5% and yet the 95% who fall by the wayside have a different story to tell altogether.

Investing is tough too. Just look at the number of fund managers with degrees more than you can count and deep research scholars secured at a pretty expense trying and failing miserably to beat a simple system that is the Index.

But on the other hand, if you remove the unfairness of that comparison which to me kind of reminds me of this cartoon

what is actually true is that in the long term most funds actually end up making money (even if lesser than the Index). Of course, many funds don’t survive so long because investors always want the next best thing, not something that seems to have tripped on its own shoelaces.

One of our family’s earliest mutual fund investments was made around 25 years ago. This fund was not the best for a long time (it was under par if my memory serves me right for the first few years since its NFO) and yet over time it has delivered around 14% CAGR. Over time the fund has changed its name and even the nomenclature but in the long term, its returns that count and its delivered.

I like to make fun of Venture Capitalists as Philanthropists but the true Philanthropists are the traders many of whom are willing to burn their own home for the ability to light the home of the broker.

As my good friend Sriram likes to say, there are old traders and there are bold traders but there are no old and bold traders.

The Title of this post comes from an Ed Seykota saying –

“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.

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