Khabari network

There is an internal network that runs the market, everything is fixed and rigged. There is plan and only known to a select few. They make the markets move as per their wishes. Its Operators who make and run the markets. This is what everyone who loses money in the market believes before he surrenders. Then there are a few who look for this Khabari network and believe if they get to the inside of this network, they can make immense wealth in no time. 

Very recently, an investing fried shared is experience. He received a sms from another contact who seemingly was ‘in the inside’ of a very secretive and powerful network. His sms read, “MMTC: EGOM to fix price at Rs. 230 per share. Meeting at 2.00 PM sure shot. Stock heading towards lower circuit.. Short MMTC.”  In simple English, the news was supposedly giving away something very confidential, that the government was planning to sell part of its shares stake at 230 lower than what was it was trading at that hour,Rs 283. My friend went for the phone and placed ‘a sell’ order for a few thousand shares at Rs 283 hoping that it would slide down and he can buy at lower prices. What had happened is that almost every investor had got this information and shorted the stock ( in market parlance, it means to sell MMTC without having the stock and hoping to buy at lower levels, same day). In a few hours another Khabar made its wave that sent shivers down all the short traders. The MMTC’s banker had rejected the offer on lower valuation concerns and in moments the stock started spiraling upwards leaving all our khabari investors in a spot, as it meant they had to buy them at higher prices to square their position. My friend bought all the shares back at Rs 310, loosing effectively about 10% in a few hours and few lakhs of money. Most investors who listened to the Khabar had lost upto 15% that day.

And now the secret. All known information (and sometimes unknown) is reflected in the stock prices. There is no one capable of rigging the market. Even the entire might of UK could not be put behind to save the British pound from the crash, an event when George Soros made his billion by shorting the British pound. Where then can individuals or a group of them hold reign of influence beyond fractions of a second. However as a fund manager puts it, it is the smart money that moves the markets. Think of smart money as the largest groups of investors like fii, pension funds and other institutions that invest billions of dollars. In the short run their emotions and outlook make the markets while in the long run their beliefs would align to the fundamentals of the stock. One of the challenges faced by retail investor is that there are large number of variables that make understanding the fundamental  of a company very difficult. Remember when every learned fund manager expected Educomp to be the next infosys and a multibagger stock. Most of them got it wrong on the issue. Satyam was yet another case where till the very end no one could predict it was led by a fraud management. I guess corporate themselves are not sure of the quality of their own management, how can then an analyst and worst off all, retail investors like us, ever get a grasp of fundamentals. There are infinite variables while evaluating a company and one can never get it right. 

I remember the dialogues in the movie 21, an MIT Blackjack Crack team. As the professor says, there are those with gifted minds, if they had been able to get beyond some of their personal mistakes that were made and yet as history shows us, some students never learn. This is the state of most of us. And not everyone can do it.

You lose only out of paranoia, fear, emotions. You don't give in to your emotions. You think logically. As the Nonlinear Equations professor in the movie said”Always account for variable change".

The investing success is based on secrets that are very simple, hence does not capture people’s imagination – invest regularly, over long periods of time, preferably in the whole market index – and let power of compounding take charge.

Risk of holding vs. selling

Digest this! The risk in holding a stock that can virtually go down to zero is lesser than the risk of selling a winner too early. I realized this when Rakesh ran a few numbers to me. He had invested in Suzlon and Ultratech cements in the December 2008. Suzlon ran down from its 2008 highs of 62 to 25 now and Rakesh lost 60% of his investment. He had also bought Ultratech cements at 366 at the same time but sold it 2 months later after it appreciated by 20% to Rs. 439. He displayed a very normal behavior of holding on to the loosing stock but selling a winner. He holds the suzlon stock even now which is quoting at around 25 unable to accept the loss. He is hoping it will regain its original purchase price and he could avert a loss.

The biggest folly that leads to investing failure is not about holding on to a looser, but the selling off a winner. On one hand Rakesh held on to Suzlon hoping some day he will be able to pare the loss, on the other hand he sold Ultratech cement after it appreciated a meager 20%. Imagine a different scenario: Rakesh had held on to both the stocks until now, and that he had invested a similar amount of Rs. 1 lakh in each of them, his Rs. 2 lakhs investment would have now have become Rs. Rs 5.60 lakhs.  (1 lakh invested in suzlon would now be Rs 40,000 while Rs 1 lakh invested in Ultratech would have become Rs 5.4 Lakhs). This is a return of (cagr) 26% pa over 4 years. This is better than inflation. Imagine you virtually held on to a looser that has dented your pride, yet your action of holding on to a gainer would have more than compensated for the losses.

Rakesh was influenced by analyst’s definition of cyclical stocks and sold the cement stock expecting a glut in the industry to hamper growth prospects of Ultratech. And he reasoned the he could buy it cheaper later. The market is filled with very knowledgeable people who can define every situation and put a reason and logic to everything they have to say. The best time to sell a stock is 'never' as long as the company shows predictable earnings growth over long term.

Short term fluctuation must be ignored as long as the company is run by trusted management and the business has long term growth prospects. The risk of selling a winner far outweighs the risk of holding on to a looser. Hence it is wiser to hold and be proven wrong. A stock can only get to zero on the downside but technically there is no limit to how high it can go. Do not get swayed by stereotype definition of when to buy, when to sell. Experts can christen their style and call them such as earning or growth generator, contra strategy, special situations, mutlibagger ideas etc. These are traps for a small investor. Invest for the long term in companies managed by trusted people, who have displayed legendary commitments, where the industry has long term prospects and businesses have an irreplaceable value, provided you buy them cheap. Rakesh should have continued to hold his Ultratech cements, business that are subject to low rate of change. Cement is a mundane product that everyone needs subject to slow rate of change, as the legendary investor said, change is the enemy of investor.

 People will always buy cooker, under garments, financial services, cement, loans unless something terribly goes wrong. There is always the risk of unknown; we could face a period of prolonged recession. Risks are real, depressions are friends of investors. If you get a chance, buy distressed businesses in a distressed industry. Eventually markets will catch up with the true value of the business.

New Hope

What does a new year hold for us investors? Nothing much. The market really does not change anything that day nor do the businesses that they represent. It is still a good time to recommit on the way we will invest rather than on what we will invest. It is incidental that it was a great investing year when my portfolio returned 57% and the index itself returned about 25%. Hindsight as they say is the best sight. Not to get carried away, let’s remember how investments are behaving matters less than how we behave. And hence in this New Year blog I would like to remind ourselves on some of the healthy and profitable investing habits.

Never invest at once all the money earmarked for equity. Invest over a period of time.

Never allocate a large portion of cash into a single stock, be diversified (say 10 stocks).

Evaluate the performance of businesses, whose stocks are owned, once in 3 or 4 months

Moderate expectation of returns, do not expect more than 12 to 14% pa and make plans accordingly

Do not invest the money in stocks that you will need back in 3 years - must give time for equity to perform.

Never invest based on tips or rumors- you will win some and loose many- its a zero sum game

If you can't commit time and resources, just invest in a mutual find or an exchange traded fund of the index

I can assure you that you have reasonable chance at investing success.

The booster dose comes from many themes we have discussed earlier; today I am studying the banking and finance space. The opportunity lies with many psu banks that are undervalued due to higher provisions, bad loans and non performing assets. However reasonable valuations and profitability make up for the low asset quality. Make sure to avoid stocks that are popular with analysts as in the long run they tend to under-perform the un-analyzed ones. Analysts avoid stocks with uncertainty that make them undervalued buys today that will go on to outperform in the long run. Remember the  Cera Example

The successful investors put a process in place and stick to them, never investing on news or impulse.

Wishing you the very best in the New Year.

Surrogate Investing

On May 6th last year, I had recommended in a previous blog  of a small Sanitaryware company, Cera Sanitaryware, that i was investing in. It was available at Rs. 192. Some readers wrote to me and I shared the rationale behind this investment. The decision happened a few week earlier when I went hunting with a friend for a plot of land that he wanted to buy. I was witnessing the rapid pace of urbanization in the suburbs where there were large number of houses and flats being built. In general one could see massive build out across the country such as residential and commercial complex, malls, entertainment plazas, self-contained cities, airports. The most obvious idea would be to buy land or flat, but I was reminded that in the gold rush, people who made money are the ones who sold  shovels & pick axe, and not the gold pursuers themselves.

My friend who was excited with the commercial activity started discussing ideas such as opening a hardware shop to cater to the demand of construction. The operational and statutory challenges in managing an enterprise, the vagaries of limited economies and the tied down approach to running a specific business that won't allow for hedging across a larger market opportunity made me think differently. Why not look for existing enterprises who have far greater skills and experience in managing all of these. My search led to the very small but fast growing Cera Sanitaryware. I preferred this over its larger peers due to better ROE and to take advantage of favourable valuation that offered a decent margin of safety. It was not covered my many analyst and was a great candidate for what we call value unlocking. When you feel from the heart, you rarely go wrong. The investment has doubled in 18 months.

The purpose of this blog is different. When some asks what stocks I hold, the typical reply is, it is not important what stocks I hold, but what rate I bought them. The search for the next multibagger is always on.  I was reminded on a recent flight when I read that the closest exit row might be behind you. The next big investment idea is sometimes behind us, already the one we possess. With my recent analysis of Cera, I am once again convinced that it’s worth more investment if one is looking around 20% for next few years. If you are interested in knowing the rationale and risks of this investment, you could write to my researcher and friend ram@learninvest.in. I rarely recommend stocks on this blog as the original intention is to share learning from successful investors. I prefer to focus on the process than the outcome. This learning of 'a surrogate play' through my research on  Cera was entrenching and the only focus of my blog. Do not blame me for your investing success or otherwise :) 

One of the biggest challenges to the Indian equity market is the reliability of the promoters. You can have a very attractive balance sheet or financials dressed from a black sheep promoter and he would be superstitiously siphoning away the money. I know of people who do not want to invest in Indian equity markets as they are it is not well regulated. There are scores of company promoters who have made it big and got away at the cost of retail investors. You may remember how 'the darling of the market' only a few years ago, Subex systems (with then revenues about USD 50 Mil) went on to buy a company making revenue of $12 Mil, paying a whopping $170Mil. To every one's wonder, it was an all cash deal and the stocks lost from Rs 800 to sub Rs 20 levels. I have serious doubts about underhand dealings and the promoter is today freely driving in a Prado. Incidentally the company Subex systems, develops fraud management systems, just that we did not comprehend that fully.

other ideas you may like
Trap Door.
and Desire deserve dream destine .

Invisible Hand

Recently I was introduced to a real estate investment opportunity in Bangalore outskirts along with a few other friends. The views after seeing the property were very diverse from excitement to resistance to predictions of the future. It was interesting to see that, to what some of them considered a great opportunity there were an equal number who were negative about it. The ones who took a negative view said that the development had not started on the project and that it would take many years for the area to boom. Now as investor would you not look at those as reasons for a favorable valuation? Investments are made at times of extreme uncertainty and when full potential is not realized. The favorable ones said, you do not wait and invest, you invest and wait. A very successful real-estate investor remarked, with investments in real-estate, just ensures you have choices when buying and have plenty of time & patience while selling and success is assured.

This month’s investor meeting was with an equity researcher whose name I withhold. He had devised a PE ratio based contrarian program that can be used by any retail investor. It does not require a lot of time, yet very effective in the way it is designed. He has validated his research over the last 10 years data. To make the choice of stocks sound, he suggests the retail investor to look at the 100 companies from CNX-100 index. This way we ensure a level of filtering for the small investor who lacks the domain knowledge. To reduce time& amp; effort involved, he recommends transacting and examining portfolio only once a year. The investor in this program buys a list of 10 stocks that have the lowest PE from the sample of 100 CNX-100 stocks on a particular day. He then blindly holds it for a period of one year and a day. The portfolio is liquidated after one year and a new portfolio is formed with 10 new low P/E stocks, some of them might be old ones.

You are also taking out the profit at the end of every year and leave only the initial investment in it. This way you can make it an asset that is generating income, excepting when the return in a year is negative (during the research period 2000 to 2011, there were 2 such years were returns were negative). By holding it for a period of 1 year, you are not subjecting the income generated to taxation.

The results show that of the 11 years, 9 years portfolio offered superior return. The average yearly return is 51%, which is pretty impressive. We could use different variations of this program by changing the holding period to 3 or 6 months or using cnx500 companies instead of 100 etc. For a copy of the research data, please write to me on naresh@learninvest.in

The pace of change intensifies in this competitive rat eat rat environment. The lobby power still remains supreme in businesses with large capex requirements. Corruption and greed make it difficult for the just-wise to make a living as crony capitalism and muscle strength reign over knowledge and logic. The revolution for collective awareness is underway. How then do honest companies and individuals continue to grow? The power of invisible hand says if individuals pursued only their interests, they would promote the public welfare which was not part of their intentions; they were led by an invisible hand.

Other ideas you may like

 

Trap Door.

Desire deserve dream destine .

 

The Trapdoor Delight

I did not quite comprehend with Warren’s beliefs of a ‘lifetime holding’ during my early investing career. It was later when I understood that lifetime holding of a stock did not mean ‘buy it, shut it and forget it’. It is because Business landscape changes so frequently that it can devour a very successful company in no time. 75% of the fortune 500 companies that existed 20 years ago have disappeared. The very thing we are sure is that future is going to be very different. A Kodak moment can happen to any business.  Lifetime holding means no less work in analyzing a stock. It requires a persistently examining eye to know that HDFC bank with 9 branches would grow to have more than 3000 branches in 16 years, that they have being incessantly growing quater o quater by 25% for past several years. And With that knowledge, holding on to it during such period, is a lifetime investment.

On the other hand there are investors who specialize in situational opportunities; they use the very rapidly changing and uncertain business economics to their advantage. They work on special situations. They enter the trapdoors that others frown upon. I met one such investor,   Rahul Paliwal who invests only in exceptional condition, trap doors. He waits patiently for policy to be passed, ban lifted, patents infringed, war waged or fraud revealed.  This person has been holding on to Hawkins for a long period of time although it has not performed brilliantly in this period. He is working on the knowledge that there is unmet demand for their cookers that was not served due to deteriorated labour relations and an order of Pollution Control Board to cease operations as they were allegedly producing polluting effluents. Rahul knows that it is a matter of time before they work the approvals through. He admits that this is a hard job, requiring him to be on top of things, but the returns have an honest upsides and situational investing is all he does. The FDI in retail is a case in point and I had highlighted this in a previous blog although one never knows when it will really materialize. Kingfisher or the UB Spirits were also trapdoors of special situation and so were Satyam computer, when the scam was revealed.

To put an element of investing perspective in it, I may say that there are opportunities that exist based on arbitrage of either time or information. Investing Opportunities that exist for a brief period of time or based on specialized knowledge, dilute in their essence with time or upon event happening.

This method of investing must not be confused with speculation based on tips. Hence it requires knowledge of fundamental analysis and that of business- economics. Rahul is currently investing in another special situation stock that he expects to give him a mutibagger returns.

I would not recommend this to the uninitiated and it would be ideal for serious investors willing to commit time and take those risks. As David madden says through one of his characters ‘a person who risks nothing, does nothing and has nothing’.

Meanwhile my exotic PMS managed by a well known fund manager has severely underperformed my own Nfty ETF investments by a huge margin.

Our cumulative learning over time proves high sounding, exotic investments from elite fund managers does not better the returns from effortless investments with low charges.

http://blog.learninvest.in/

Mutual Fund with a Twist

This week I had the privileged opportunity to meet Professor Narasimhan who teaches corporate finance at IIM Bangalore. No matter how much you know, one can expect something new in such interviews. Prof overwhelmed us with his very simple yet powerful insights into how to invest in equity and markets in general. He was addressing group of final year MBA students who sought it as a parting gift. He explained Relative strength analysis in detail and suggested that to people who would have a lot of time. And for those who were entering the busy corporate world he gave away another easy program that I guess makes a lot of sense to many of us who are working on urgent but less important issues.

The program was to invest in mutual fund investment with a twist. He suggests that one should not invest in stocks directly unless he is prepared to spend several hours in a week preparing for it. For the rest he suggests investing in a systematic investing plan in a debt fund initially. He explains that we then look up for the 100 day ‘daily moving average (DMA)’ of the index as a whole. This can be looked up under ‘technical analysis section’ after getting stock quote price of ‘S&P CNX NIFTY’ in finance site like yahoo. The DMA is an average price graph that removes the noise in the market; it’s a smooth line that cuts a second choppy price line. Here is the method he recommends. When the price curve cuts the 100 DMA curve from below (bottom to top), move the entire holding from the debt fund to the top diversified equity fund. In the reverse when the price line cuts the 100 DMA from the top, switch the holding from equity fund back to the debt fund. This, he reasons, as the safest strategy that ensures two things. One: Yor wealth will never get eroded due to a huge market fall and second: ensures you will never miss out a huge upward movement. This is like ensuring you exit before the market crashes and enter before the market goes up. This system allows you to sell at higher price and buy at lower rates in general. If you have a look at the 100 DMA for a period of 5 year, you would be able to relate.

Now let’s talk of the flip sides. You may do multiple transactions in a short time if market is volatile and incur trading cost. But if you see the last average of last 5 years, you would have done about 5 transactions a year, a small cost for the advantage it offers. You will never be caught napping if there is a sharp correction or again you would be invested before the market moves north. The second flip side is that you will not be able to enter at the lowest level or sell at the absolute peak. The third factor as you will make out from the graph is that you may buy at higher rate causing regret or you would have sold too soon loosing potential gains. Blame this on behavioral problem and to be successful he advises “never develop regret factor in investing”. The lighter way of saying that is leave some money on the table for others to take. He assures this method will allow you to make significantly higher returns than investing directly or through a mutual fund.

He reasons that you will be able to beat the market because you are constantly selling and as per him selling is how money is made as most us are very bad sellers either selling at lows or not selling at all. Selling at right times will help us out-do the market in performance. The other behavioral aspect he asks to overcome is the anxiety of the future not of the financial markets in particular but of the personal life in general. He exhorts students to be relaxed and not chase money rather have a balanced approach as nobody who ever had lot of money was always happy. In As Kartik Sharma said ‘There is a middle path, a happier path. Where we do not have to give away all those things that make us human, just to get an excess of one thing – money’.

David Geffen knew it when he said “Anybody who thinks money will make you happy, hasn't got money.”

blog.learninvest.in