markets | Portfolio Yoga

Market View for 2023 & beyond

We are close to ending 2022 and at this juncture it seems that the markets will close in the positive for the 7th consecutive year. The last time we saw a similar 7 year consecutive gain was between 1988 to 1994.

The high of 1994 was next broken only in 1999. I hope that we won’t see a repeat of that but who knows how the future shall unfold. Politically 94 was the peak of strong governance and the period following that was one of political instability not to mention international financial crises such as the 1997 Asean Financial crisis.

At the current juncture, it seems that political stability will be there for at least the next few years and while there are countries which have been brutally hammered by Covid and are facing financial strain, the impact on the world economy at large should be moderate.

To understand the future trajectory of the economy, one way is to study the economic trajectory of other countries which have similarities in India.

Let’s start with next door, Pakistan and China. First a comparison with Pakistan. GDP per Capita is a data point that can be easily compared across countries, large or small. Here is the one comparing India’s GDP per capita with Pakistan’s GDP per capita.

The surprising part of this chart – Pakistan till 2017 had more or less consistently had a higher GDP per capita than India. Today, India’s is 48% higher and based on data, it seems it can only become wider.

Another country that India can and should be compared is with China. I had to use log chart here just to ensure that the Indian line was visible enough, such has been the growth of China.

The surprising aspect of this chart is that China was lower than India till 1991. Given India was lower than Pakistan, China seems to have been even worse. Then it took off. Today, China is 450% higher than India. India today is at the same place where China was way back in 2004 / 2005.

But Indian trajectory of growth vs Pakistan did not start in 2007. It was the result of all the reforms carried out since 1991. Same for China, China’s crossover in 1991 over India happened due to more than a decade of even stronger reforms and one that for now continues to bear fruit.

While I barely read Indian newspapers, I make it a point to try and read Pakistan’s (especially the Open-Ed columns). The optimist I am, I think the Indian path will mirror China’s (even though we may never grow as fast and as long as them) but the realist also wonders, what if we slip up.

In one of my previous blog posts, I wrote this

“Assume you were a rich Pakistani. You understand that inflation is high, real Interest rates are negative and hence investing in the stock markets is a better way. At the beginning of 2018, the KSE Index was at 41,000 and One USD cost 112 Pakistan Rupees. Today, the Index is at similar levels, one USD is now available 220. Basically in USD terms, the wealth has halved over a period of just 5 years”

Since 2004, Nifty 50 has gone up by 840% whereas the same Nifty 50 denominated in USD has gone up by just around 415%. A 50% decline in returns.

Why worry about USD returns when our earnings and spending is all in Rupees you may wonder. The reason is simple, Energy cost is calculated in USD and as the base accounts for much of the price rise in every product.

While India may never become the manufacturing powerhouse that China / Germany are today, Manufacturing shall drive growth in addition to the growth powered by Services. United Nations Industrial Development Organization ranks India at 40 with most trends seeing a accelerating trend since the 1990’s when the data starts

Countries make mistakes, mistakes that may not be noticeable immediately but have profound impact in the years to come. I believe Europe has made some really bad calls and the price will be paid by their citizens over the coming years and even decades. Nothing goes away scott free.

I am not in the game of prediction and yet, I predict. Prediction to me is important to have an understanding of the future to decide what course of action is best suited to allow me to live the quality of life I wish to lead.

India today I think is at a very sweet spot. Yes, there are risks especially from the North but given the recent experience of Russia with Ukraine, I feel the situation will not go down the tubes anytime soon.

The US markets have seen pretty tough days with S&P 500 giving away nearly all the gains made in 2021. Nasdaq has gone even further giving up not just the returns of 2021 but nearly half of the gains made in 2020. A bit more decline and we could see the Index being close to where it was pre-corona.

Take a look at the ratio chart of S&P 500 vs Nifty 50 in USD

India underperformed big time vs US from 1994 to 1998. From there to the end of 2007, it was one way of outperformance. This even though both the Indian and US markets took a hit when the dotcom bubble melted.

Since 2013, Indian Markets and US have been in tune in US Dollar terms. Measured in local currency terms, S&P 500 is up by 131% vs 231% for Nifty 50. Kind of shows the impact of the depreciation of the Rupee vs the Dollar

The continued rise in Interest rates in the US has hit most countries with even the Euro and the British Pound unable to stem the tide of depreciated currency. Japan’s Yen has depreciated by more than 20% this year alone.

From 1973 to 2000, the Indian Rupee saw a CAGR depreciation of 6.67% to the USD. From 2000 to 2010, the Indian Rupee barely moved. From 2010 to today, its annual depreciation is to the tune of 5.24%. 2022 seems to be in line to be the 11th worst since 1973. Unless India can get to a situation where we have a trade surplus, this depreciation is bound to continue

In the last few months, there have been hundreds of reports of the coming decades and even maybe the century. I am an optimist and really wish for that to happen but unlike China which was in the right place at the right time, it will be tough for India to replicate the act.

Globalization which used to be promoted by the West is now being seen as a negative given how dependent they have come to be on China and the hollowing out of manufacturing. While global trade will continue to grow, the competition is really hot.

The biggest advantage for India vs other countries lies in the large population which provides for a huge local market. But the local market size has been trumpeted for nearly 20 years now but when it comes to consumption, we are still a pygmy.

Currently more than 50% of stocks listed on the NSE are outperforming Nifty 50. While this is not on the higher side, if historical data is any evidence, this also rules out another bull market starting anytime soon

Same is the case with the % of stocks trading above the 200 EMA

This year, the Nifty Small Cap Index saw a decent correction. But unlike say 2018 or going back, 2011, this isn’t deep enough to provide a platform for the next jump.

When we talk about correction, we always assume price correction for in majority of the cases, its price correction that sets the base for the next leg of the rally. This induces a fear that the next big correction is on the cards. What we seem to be seeing in the current instance though is more of time correction.

From India’s perspective, the Russia-Ukraine war has not had a major negative impact on the economy. While we did face some tumultuous times due to oil spiking up, today with oil trading well below $80, it has become more comfortable to manage. Same cannot be said for a host of other countries.

Based on trailing four quarter earnings, Valuations are neither cheap nor expensive. Kind of no man’s land for now.

Reasons for the 2000 crash or the 2008 crash did not originate in India. If the world catches a cold, it’s unlikely that we can stay insulated. The low interest rate prodded rallies in both Private Equity and Crypto are beginning to peter out. Will the massive reset and losses have no impact on the public equities? Only time can give the answer.

Prediction for 2023

While there are still two weeks to go, markets weren’t kind to the prediction that was evolving at the end of 2021. Here is the comparison with what really happened. As can be seen, the prediction really did not counter the deep cut we saw in the middle of this year and unless we see a decent rally in the coming two weeks, it is unlikely to close near the predicted levels.

Based on my understanding and analysis of cycle theory, this is how I assume 2023 will evolve.

What to make of the Markets

As with any other beginner, when I started off in the market, I was a Bull. I saw friends short stocks but never got enthused. Long stocks are good in bull markets but bull markets end and when it did and we went into one of the longest bear markets I have experienced (2000 to 2003), I migrated to a trader. Retrospectively with more data today vs then, this was one hell of a bad move.

It took me nearly 15 years to migrate back again – back to the camp of the bull and it has been a good time. So good that I find myself looking at things only from a bullish angle. But we have had a decade of astonishing rise – both in the markets as well as in the size of the central banks that have helped the economy remain afloat during the tough conditions.

This post is trying to, as Charlie says, invert the idea and think about whether I could be wrong.

Markets can go through long periods of nothingness – we have seen that in the Indian markets themselves as they rolled around with no real returns other than a few spurts from 1992 to 2000. In fact, even in 2000, if you were not a participant in the Infotech sector, making money was pretty hard.

We have seen the same in the United States, recently between 2000 and 2010 and previously in the 70’s decade. Does investing, Buy and Hold, Value, Momentum really work during those times?

Data is scarce which means that backtesting is tough (at least in the Indian context, data for the US is available but expensive for theoretical understanding). Compared to the 90’s, Information is not scarce as it was during those times, so the easy opportunities that were found by many great investors will not be as easily found today.

What would trigger such a long term range bound market?

When a bubble bursts, markets first go into a bear market and depending on how the economy manages to hold up can go into long sideways action. We saw this in the US post the bust of the Dot com, Japan is still yet to come out of the bust it saw in 1980, much of Europe (exceptions being Germany and a couple of others) have never risen above the heights they saw in either 2008 or even 2000.

The CAC Index of France was able to break above its high of 2000 only this year. The FTSE of the UK is just above its high of 2000. IBEX of Spain is closer to the 2008 lows among others. Not surprisingly when we talk about International Investing, we focus only on the US and even there much focus is on the Nasdaq for that has generated returns like no other Index has in the past decade and more.

China has been a growth story for the last few decades but if you were an investor in the Shanghai Index, it’s been a literal no growth Index for more than 15 years now. HangSeng is pretty close to the high it saw in 2000.

India along with the US have been the most expensive markets. Russia was the cheapest. But does an expensive market mean we are in a bubble?

The biggest bubble most point out is the Federal Reserve Balance Sheet.

The Federal Balance sheet first ballooned up post the financial crisis of 2008, remained elevated for nearly a decade before rocketing up when Covid hit. But if you were to look at the chart closely, you shall see that it was not the Fed’s Balance sheet that brought about the 2008 crash or even the 2000 crash (data not available on the Fred website).

What brought about both the bubbles is an extended period of low interest rates. But inflation did not spike either of the time. This time around, while we have no bubble (housing prices have shot up in the US but not to bubble territory) in any public markets. Private markets are in a bubble depending on how you look at the valuations there but there won’t be any panic selling, just panic shutting shops when the firms burn through their capital.

Are Indian Markets Expensive?

Expensive Markets are always at a high risk of a crash when expectations of future earnings shift down drastically. Here is the monthly chart of Sensex trailing four quarters price to earnings ratio. While we aren’t cheap, we aren’t anywhere close to the high’s as well. Of course, if future expectations of earnings go down for whatever reason, even this may seem expensive.

Gone up too much and hence markets needs to fall

I keep hearing this and in a way, there is an element of truth there. When markets go up too much, too fast, it seldom has been able to stay at the higher end for long with the subsequent correction being easily to the extent of 20% to 30%. We have seen this in the past – the 2003 rally was followed by the crash in 2004 (narrative being the fall of the NDA govt) though by the end of the year, markets were positive for the year.

The last year the Index had a negative year was 2015, so with 2022 being the seventh year of a bull market, is a deep correction due?

Even internationally save for Japan where Index went closed in positive for 12 year culminating in the peak of 1989, Indices rarely sport seven or more consecutive years of positive close. Currently one of the Index that is positive for the year which is its 11th consecutive year is the S&P MERVAL Index, Argentina’s flagship index. Not sure we would want to mimic their economic performance though.

One reason for the inability to sustain a long period of continued growth comes from the fact that markets are mirrors of the economy and an economy that sees strong growth will generally be over heated to the extent that some cool off is required before the next phase can take off. Japan is an example of what can happen when Central Banks don’t pull in the plug when the economy starts to get overextended.

But if we are to look at India’s growth, or the debt of the Corporate Sector or even the Debt of the government, we don’t seem to be at a stage where excess money supply has chased growth making things expensive for everyone. We saw that in the 2003 to 2008 boom.

Given that Corporate earnings are good, most Twitter Analysts have veered to Macro to forecast doom and gloom.

Macroeconomics is tough. Professional Economists have got it wrong so many times that Paul Samuelson joked years ago, “Economists have predicted nine of the last five recessions. Even when they get it right, the claims are muddied somewhat by how early many would have given such a call.

Take this opening para from the book, The Economists Hour

In 2016, Warren Buffett had this to say on Economists

“I don’t pay any attention to what economists say, frankly,” Buffett said two years ago. “Well, think about it. You have all these economists with 160 IQs that spend their life studying it, can you name me one super-wealthy economist that’s ever made money out of securities? No.”
“If you look at the whole history of [economists], they don’t make a lot of money buying and selling stocks, but people who buy and sell stocks listen to them. I have a little trouble with that,”

But can we dismiss economics as modern day voodoo? As investors, does it really matter a lot?

I believe it does matter. When we study markets, much of our focus other than the local markets is on the US markets. There has been so much inflow of funds into the US from Mutual funds here that they have exhausted the RBI limit on the max allowed.

But this attraction in itself is very new. Motilal launched their Nasdaq 100 ETF way back in 2011 but only in the last couple of years did the assets under management really take off.

First, let’s take a look at why Inflation was on the boil in US (even before the Russia Ukraine crisis sent prices of commodities sharply upwards)

Across two presidencies, Congress approved an unprecedented $5.8 trillion in relief spending that included new interventions such as forgivable loans, direct payments and an expanded child tax credit that was deposited into people’s bank accounts monthly.

The Federal Reserve Balance sheet was 3.8 Trillion USD before Covid crisi hit and the Balance sheet was expanded.

Here is an interesting data point. The Central Banks for most part are behind the curve, they then start aggressively tightening and from being behind they end up being ahead which in multiple cases have resulted in a recession. The way out of recession, to again aggressively go back behind the curve.

From the book,. The Great Crash 1929 by John Kenneth Galbriath

Speculation on a large scale requires a pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich. People must also have faith in the good intentions and even in the benevolence of others, for it is by the agency of others that they will get rich.
In 1929 Professor Dice observed, The Common folks believe in their leaders. We no longer look upon the leaders of the Industry as glorified crooks. Have we not heard their voices on the radio? Are we not familiar with their thoughts, ambitions and ideals as they expressed them to us almost as a man talks to a friend? Such a feeling of trust is essential for a boom. When people are cautious, questioning, misanthropic, suspicious or mean they are immune to speculative enthusiasms.

In late 2007, things in India were going so well that any doubts of a crash were not even considered as possible. Yes, there was some issue with the housing market in the United States but its impact was seen as being limited to the US. Decoupling was a word that CNBC commentators started to use to claim why Indian markets were continuing to rise even as the US markets had started to react.

The last time I remember such enthusiasm was in the Dot Com bubble and for a short period in 2004 when India was supposedly shining.

Markets have seen a significant rise in the last 18 months. That combined with low interest rates and high inflation seem to suggest that the future will be tougher. Question though is how tough and how steep a fall should we anticipate from here.

The Federal Reserve has started to hike rates. The last couple of days’ fall in the stock markets can be directly linked to the hike. But as Powell seems to suggest, they will not go all out hiking Interest rates to the extent of pushing the economy into a deep recession.

While we have seen deep corrections in the past, its tough if not impossible to predict normal corrections where there is no bubble visible. Even when bubbles had been visible, for example the housing bubble, timing was the key and it’s doubtful to have been able to time ot a T.

My personal view for now continues to be bullish. I see no reason to jump out. Breadth has started to decay but is still well within the historical range. The icing on the cake will be if Oil starts to come down.

Wrong for the nth time

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

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

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

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

Eddy Elfenbein in his CWS Market View posted this,

The Limits to Growth Turns 50

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

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

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

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

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

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

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

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

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

Should you Panic – CoronaVirus

Coronavirus is said to have been transmitted from Bats to humans first. Today, it has spread from humans to stock markets as markets around the world tumble on the likely economic impact of the Virus that currently doesn’t seem to have any known cure.

Panic happens when we have inadequate information and coronavirus is one such case. On one hand, there will be an impact when an economy such as China more or less shuts down even partially. On the other hand, how should we act is a question that props up.

Let’s start with the worst case scenarios taking the idea from thousands of fictional novels and hundreds of movies which have dystopian futures as the key element of the plot. 99% of humankind is wiped out and the survivors fight back.

If that is to be the case, should you sell everything and buy Gold (which is rocketing currently). The answer of course is Nope for what use is Gold when it cannot protect your life or the ones of your loved ones. Heck, it may actually turn out to be a liability given the ease at which it can be stolen.

Should you Sell everything, convert your fixed assets to cash and wait to see how this pans out? Seems like a great idea, but like in Gold, this has a draw-back. What happens when there is a cry of Fire in a crowded theatre? A stampede.

If things go really bad, the first thing to shoot up would be Inflation as everyone wishes to stock up. While having cash may help you in the first phase, as prices keep going up, your money in the Bank like the Zimbabwean Dollar becomes a worthless currency.

Most conspiracy sites quote the “Spanish Flu” as bearing resemblance in terms of spread and hence in terms of damage. The difference in my opinion though is that unlike 100 years ago, we have much better knowledge and much better infrastructure to treat those who have been infected.

But since our focus is on markets, let’s look at its impact on markets. The Spanish flu killed Millions worldwide including an estimated 5% of India’s population at that point of time (Link). In the United States, 28% of the population of 105 million became infected, and 500,000 to 675,000 died (0.48 to 0.64 percent of the population).

Since we have US Dow data of those times, it’s pertinent that we visit them to see how badly it impacted them. The key here is understand the Risks that may be out there and try to prepare for them rather than panicking like everyone else.

Do note that the period of time was also the same period when World War I was finally coming to a close and hence there would have been overlapping factors at play.

If you were to start when the Spanish Flu first erupted till when it halted, the Dow actually was higher than where it had started. Do note that for the Dow 1917 was a bad year and 1920 turned out to be another bad year (down 30%). Post that though, Dow shot up 400% in the coming years until the crash that brought upon the Great Depression.

I don’t believe that now is the time to dump stocks and move to cash. Instead, if the crash continues, I would rather be adding for its only in hindsight we recognize good opportunities.

Nifty 50 has not seen a fall in a long time even as the economic situation has deteriorated around. Not surprisingly just 2 days of fall seems to be creating some amount of panic when the truth is that only today the index closed slightly below its 200 day EMA

Before the financial crisis, Indian markets like a clock easily slid down 20% from its 200 day EMA literally every alternate year. Post 2008, we are yet to see one such move.

Plot of how far away has Nifty 50 swayed from its 200 day EMA

It’s important that you have a plan of action for having a plan in advance avoids panicking and behaving like the rest of the herd. If you strongly feel that markets may melt down, it’s not wrong to exit and reduce the risk exposure even now.

If you think that even this shall pass and are comfortable with the current asset allocation, moving higher or lower based on market triggers is the right approach.

Do note that as Equity markets fall, so shall your exposure to markets even without you having to do anything (as total percentage).

Every time markets fall, it seems that the world as we know is ending and everytime we are in for a disappointment as it did not end. If the world does end due to this virus, I doubt you shall complain to me that I was wrong, if it doesn’t hopefully this post would have given you an ability to create a framework on how you shall deal with this crisis – both financially and personally.

Investing in Markets – Ways and Means

We have hundreds if not more number of studies that has shown that over the long term, the best growth is delivered only by equities. While in India, Real Estate has also proven to be a bonafide wealth generator, I strongly believe that growth over the next decade or two will more likely come in Equity with Real Estate more or less providing sub-optimal returns.

So, how does one go about in investing into the markets. For a lay man, there lies there options of investing his savings into the markets

1. Investing via a Mutual Fund

Theoretically speaking, this is the easiest way to gain exposure to the markets. But then again, not all Mutual Funds are the same and hence some amount of research is necessary to ensure that we invest in the funds that have showcased long term growth vs chasing funds that have made a mark in the very near past.

While most mutual funds in United States haven’t been able to beat the benchmark consistently, in India, we have hordes of fund managers who have beaten the benchmark returns year after year. Whether this is due to they being Genuis or whether its because of the fact that the benchmarks are not really that good a criteria to compare against is a story for another time.

But having said that, its a fact that top funds keep changing over time. Prashant Jain is a much acclaimed fund manager, but lets face the facts – his top fund, HDFC Top 200 has generated a CAGR return of 13.36% DSP BlackRock Micro Cap Fund which over the same period has seen a CAGR return of 24.5%.

What I have done above is known as Selection bias. I have selected the DSP fund not by foresight but by using current returns. In 2008 and 2009, the best large cap fund (5 year returns) was Reliance Growth Fund. Over the last 5 years, this fund has provided a CAGR return of 12.8%.

Over a similar period Nifty Total Return Index has shown a CAGR growth of 11.68%. While one can still argue about there being a alpha out there in funds such as HDFC Top 200 and Reliance Growth, we need to also consider the fact that they hold stocks outside of Nifty constituents and in essence, comparing the performance to Nifty is erroneous.

Personally my family is invested into multiple funds across the spectrum and overall, returns have been decent enough. As Warren Buffet once said, diversification is the only free lunch and this applies to Mutual funds as well.

A step above Mutual Funds comes a more personalized investment vehicle.

Portfolio Management Scheme (PMS for short):

Those who follow me on Twitter know that I am a very strong skeptic of PMS as a investment vehicle. My main objection comes from the fact that for most brokerage led PMS, this is not something where the objective is to generate above market returns for the client but is a nice way to churn the portfolio as much as possible in an attempt to garner as much brokerage as can be culled from the account.

In fact, it is a surprise that Assets under Management of PMS has growth substantially over the years despite most of them not even providing decent returns (let alone market beating) and worse of all, hiding the facts from the potential investors.

I do not have the break-down as which firm manages what amount, but just as a simple exercise, lets review the performances of top names in this business

Coming up first would be Sharekhan (Link)

AUM: Around 32 Crores

What surprises me is not the under-performance but the fact that NSE Nifty returns are shown as having given different returns when compared with different products.

India Infoline (Link)

AUM: 4600 Crores

India Infoline runs a multitude of funds

IIFL-1

Motilal Oswal (Link)

AUM: 1400 Crores

One of the few which has beaten their benchmarks. But then again, these are 1. Weighted Returns (and not everyone would get the same) and 2. Am not sure if these are after fees or before fees (Fees are substantial in nature, refer to page 14 of the document).

There are at least another 25 – 30 firms offering PMS, but I do hope you get the idea. PMS is not a ideal vehicle to ride the markets. In fact, one PMS firm actually managed to lose money when the markets were going up and lost money when the markets were coming down. The fund manager is now a star investment advisor 🙂

Last but not the least

Direct Investments into Equity:

Directly investing into equities is one of the most risky ways to put savings to work if you are neither willing to work hard nor have a clue about how markets work. Too many folks have burnt their hands in equity investing to swear off anything related to equity (Direct or not). But having said that, the only way to beat the returns generated elsewhere can be found here.

But if you are willing to put in the hours required to learn and understand the various way to analyze the markets, its a effort that can provide for worthwhile returns with total control in your hand.

But a caveat first – International evidence has shown that the average equity investor under-performs the markets very badly. In fact, many would have been better off just putting the cash under their pillow than investing into markets

While the above data comes from Mutual Fund investments and redemption by individual investors, with human psyche being the same, direct returns by investors would not be too different.

Investing (no matter how large or small your investments is) is a full time endeavor. Unless you are willing to devote a substantial amount of time, this is definitely not a area to dabble in since not only would the returns be below par, but the time spent could have been better utilized elsewhere.

To fill this gap, we have many a person offering to advise (Newsletter based generally) for a small fee. But with the vast majority of them being pure snake oil sellers, I would generally avoid all such stuff unless they have proof of their pudding (Audited returns of their own funds which in turn should be substantial portion of their net worth)

To conclude, while its true that some funds have shown ability to beat the markets, I recommend novice investors to distribute between a few select funds and a few ETF’s that track the index (Index funds). Invest regularly and you would turn out fine regardless of the gyrations we see in markets.

Getting carried away

Way back in 2007, a good friend of mine called me to ask me to check out a company by name Jindal SouthWest Holdings Ltd. He said that he had heard from some one that it had quite a nice value and was currently trading at pretty discounted rates.

Checking on what I could, I saw that the Intrinsic value of the company (based purely on what it held) came to around 2500 – 3000 per share and the company was trading around 500 bucks (though a couple of years ago, one could have had it much cheaper). While in US, most holding companies are valued at pretty low discount rates, in India due to the fact that most of these holdings will never be sold, holding company valuations have never been aggressive to begin with.

Yet, the deep discount did entice me to invest into the same. The timing of my entry in hindsight proved to be one of great acumen as the stock straight away started to move substantially higher. At 2000, I decided to get rid of half my quantity but the stock showed no signs of weakness. At 3000, I got rid of the rest of it as well (to fund some other idea which ultimately ended up eating both my capital & profits :P).

But before I sold, I did a revaluation of the holdings and voila, instead of the 2500-3000 which was there before this rally started, the valuation had now changed to 5000-6000 🙂

This is not a story to boast my stock picking ability (which I have none anyways) but to remind one not to get carried away with the momentum. Some months back, I got into another stock – a very small quantity but one that has been moving pretty strongly on the back of a report of a small cap fund manager initiating a position in the said stock. While there has been no change in the fundamentals of the stock, the hype given the story and the person who picked it up has meant that the stock is now 300% above my purchase price.

But this cannot really last unless there is really a pot of gold at the end. I do not know when this will end, but the ending generally is not good either. A stock that moves up in Buying freeze generally comes back in selling freeze making it tough if not impossible to exit such stocks.

While not everyone can have a deep understanding of the DCF / SOTP), as a investor, its essential that you know what you are paying for. There is no point in paying 5 times the price just because of some hidden quality which may or may not materialize in the future.

Even in this bull market, there are plenty of stocks that are moving down and hence its always pays to be cautious and fearful than let the greed of easy money carry us away. I am a guy who can be called a perma-bull, but just because the long term is good and the road ahead is a path of roses, there will always be thorns that can cause significant damage to those who are unprepared.

Random thoughts on a volatile market day

We are all familiar with Notional Loss and Permanent Loss but what about Opportunity Loss (Cost). Compared to the other two, this is not painful since Ignorance is Bliss. But then again, while the other two losses are something that has occurred due to action, opportunity cost is one which takes place due to inaction.

For Investors, the cost of opportunity is not being able to en-cash the gains in their portfolio. Warren Buffet says that he loves to hold stocks to infinity (speaking in a literal sense). But how plausible it is for a ordinary investor who has invested his money not to make wealth for the next generation but to achieve certain targets in his own lifetime.

A portfolio of IT stocks would have skyrocketed in value when the 2000 IT boom happened. Once it burst, the portfolio could have never recovered even though its been 14 long years. Even a Index (which has the advantage of being able to jettison weak stocks and add new stocks instead) like the Nasdaq Composite has not been able to conquer its 2000 peak. If you consider the impact of Inflation, the break-even cost will be even higher.

A portfolio which was heavy on Infrastructure / Energy would have seen it soaring in value in the years between 2005 – 2007 (in India). But how long before they come back to their highs (and will many of them even survive in the interim).

Some stocks though have never bothered to look back too much. But the question that you need to ask yourself is, how likely do you think that your portfolio consists of such stocks and hopefully everything bought at prices which are not tested when the larger trend reverses?

Some Small caps move onto Mid Caps and later on become Large Caps. The question though is, what is the % of stocks that advance such. On the other hand, what is the % of stock that move the other way round.

Index stocks are seen as the bluest of the blue-chips. But 20 yeas later, how many companies have survived and thrived. If you had bought (for equal amounts / stock) all Sensex stocks in 1994 and looked at your portfolio today, the CAGR gains you would have seen is somewhere around 12% (Of the 30 stocks, 29 are in existence with Philips India being the only company that got de-listed).

If you were to think that maybe investing in Mutual Funds would have given you a better return, think again. While you would have gained handsomely if you had invested in Kothari Templeton Prima Plus, your investment (adjusted for Inflation) would have wiped out if you had instead invested in CRB Mutual Fund (and both were launched in the same year, 1994).

Ask any stock broker / Analyst and he shall be happy to share the huge gains that could have been made by investing right and sitting tight. Heck, as the list below compiled by friend Girish showcases, your returns would beat the hell out of any other asset classes

Of the list, I have been into a couple of stocks. But then again, like any other investor, I have not held to-date and missed a pretty nice opportunity. But then again, I do hold a couple of stocks which have given me 100x returns (UTI Bank / Indocount), but since my quantity of purchase is small, even though the percentage returns seems awesome, the amount is pretty meager. A lakh of Rupees 10 years back is not the same 10 Lakhs now.

In fact, its not about identifying a 100x opportunity but ability to buy it big is the key to making wealth in markets. But how many have the confidence to buy a stock and invest say 10 / 20 or even 30% of their networth into it?

Recently I was reading a tweet by a Mutual Fund manager where he professed as to how investors would have made handsome returns by investing in markets and as an example showcased how Sensex has grown to 27,000 from 100 in 1979. What he forgets is that 100 was the base price and secondly, there was no way to invest into Sensex / Nifty till 2002 when Benchmark Nifty Bees came into the picture. So, when people talk about the long term returns of market, do take with a few kilo of Salt.

Over the last few days, Russian Markets have literally imploded. Things have come to such a pass that one is hearing that people are buying iPhones to hedge their currency risk. What is the probability that we may get hit with something similar and what is the plan of action if that does indeed happen. How hedged is one’s portfolio to international moves that we may have no control.

Without a plan, most of us move with the herd making it easy for the hunters to cull us. But how many have financial plans in the first place. Today youngsters take loans which they repay for most of their lives to buy asset such as Land / Appartments. While that has worked well in last 15 / 20 / 30 years, what is the probability of it working in the next 30 years?

We are happy to see advent of Flipkart / Uber / Zerodha among other disruptive companies. But what if the next disruption makes us jobless with our domain expertise not worth the price we deem its worth. What is the plan of action?

Writing this blog is a way for me to express my inner thoughts and if its boring, I apologize. But think deep, do we have a plan to achieve our goals if the Plan A bombs. How many have a Plan B or even a Plan C to take care of us when shit hits the fan?

A couple of interesting recent reads that may have influenced some of the thoughts above;

On the Shortness of Life

How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness

Hand to Mouth: Living in Bootstrap America

Do check out the books above. Deeply inspiring to say the least. Made me think of what Warren Buffet calls the Ovarian Lottery and how lucky we are (regardless of the challenges we face).

This has been one hell of random writing. Thanks for reading. Hope its worth your time

sayonara 🙂

Prediction for 2023

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