Friday, July 23, 2021

Markets near lifetime highs

Many investors try to time the market when we hit an all time high, stopping the ongoing SIPs.

History shows that we can go wrong in timing the market. Time in the market is more important than timing the market. 

This image shows the number of times Nifty made new highs each year. Just because the markets hit new highs doesn’t mean they have to fall. Even if you were to time the market, i.e., sell at the peak and buy at the bottom, you need to be right twice. As much as we humans like to think we’re good at predicting things, we aren’t. And even if you time the market perfectly, you aren’t guaranteed to beat a simple SIP. (Source : Zerodha)

Equtity is good to reach your long term goals and these are 5+ or 10+ years away. It is easy to get carried away by short term market gyrations and stray away from your investment plans and break the discipline. To be successful in investing, we will have to focused and keep emotions at bay.

1) Find your risk score using a risk profiler

2) Create an asset allocation for equity / debt based on the risk score, Eg. 60/40 

3) Rebalance your portfolio of either equity goes beyond 60 or falls below 60, this way you do not fall for emotional bias, at the same time you are protecting profits made and investing when markets are cheaper.

Saturday, May 29, 2021


Smart Investment Solution

Buy and hold vs. smart investment solution

The same equity scheme thru smart invest has genereated 16% return

(based on back testing)

What is smart investment solution?

At certian extreem valuations (red zone) based on valuation trigger, funds will move from pure equity to dynamic equity/ liquid funds,

& at exteem low valuations (green zone), funds move from dynamic/liquid to pure equity funds

this cycle continues and protects downside at the same time participate in the upside

During the 5 year period the sensex delivered negative returns (see graph below), 

Rs 10,000 SIP for 5 years of 6 lakhs delivered 0.42% in a popular equity mutual fund

But the smart exit strategy of ensures you would have got 12% CAGR in the same mutual fund by exiting when markets were expensive and by re-entring at a lower level

This was the year when market corrected -60%, the exit strategy helped us create 12%

October 2007, the smart solution triggered an exit form pure equity owing to high valuations, but advised continuing the SIP in Debt fund, in march 2009 when market became cheap, the funds moved form debt to pure equity

(based on back testing)

Protecing the downside

Investing & dis-investing in the right asset class at the right time is the secret ingredient of the smart exit strategy

Green zone - if investors had invested in Nifty and held it for 5 years there after, you would have made average of 26%;

Yello zone - the average came down to 15% ;

Red Zone - Average return came down to 7.5% ;

80% of investors invest in Red zone (due to biases such as FOMO, Herd mentality etc.) only 1% invest in green zone smart investment solution automates this process thru pre-defined triggers so as to not fall for biases (greed and fear) which is the single most important reason preventing investing success

Tuesday, April 20, 2021

Excellence in Investing

Excellence in investing is not any different from other fields.

Daniel Chambliss followed an experiment and determined what led to success.

Excellence is mundane.

Investing has to be lacking excitement; must be a dull process. Anything else is not investing, it is speculating.

 Excellence is coming together of many small things done consistently and over long periods of time. He said “maintaining mundanity is the key psychological challenge” in the pursuit of excellence.

We underestimate the impact some habits can create, like Savings & investing for example.

The Brain seeks thrill and excitement, in overanalyzing and predicting the future. It can not fathom a simple mundane process to follow a systematic investment. If we start one, it creates noise either with over excitement or lack of any, creating roadblocks to the process.

If you pursue 'returns' too vigorously, you’ll never get them

Patience is the most crucial element. Most of the investment philosophies will be effective, just give it enough time. Our ability to stay the course matters the most.

The Formula for Excellence in Investing (Mundane!)

Sunday, September 01, 2019

The moral is - the more you lose the tougher it gets to get back to your original price

Rule No 1: Never lose money 

Rule No 2: Don’t forget Rule No 1 

-Warren Buffett

Can most investors follow the two rules? Not really. Simple behavioral changes can help investors to implement these two rules in their portfolios. 

Consider two investment options, which one will you choose?

The first option offers very large double-digit returns in three years and one large negative return in one year.
The second is a “little boring” option. It offers modest double-digit returns, all positive, in all the four years.

When asked to Choose an option, most investors chose Option A because it shows a higher average return on investments than Option B. 

Take a look at the results which will surprise most investors 

Rs 100 invested in option A became Rs 139 at the end of four years, much lower than Rs 194 accumulated in option B. Option B might look boring, but it is giving very decent stable returns compared to Option A by not losing money.
The point here is to make sure there is no big negative in your portfolio. The idea is to expect and go for reasonable average returns and let it compound over a long term if you wish to make money.

How badly can a single big negative return hit your portfolio?
Suppose if a stock worth Rs 100 falls by 25 per cent to Rs 75. Your stock has to jump by 33 per cent to recover to its original price. Similarly, if Rs 100 stock falls by 50 per cent, it has to go up by 100 per cent to reach its original value. Likewise, if it falls by 75 per cent, the stock needs to gain 300 per cent to recover and if it falls by 90 per cent, it needs to jump 900 per cent to recover
The moral is - the more you lose the tougher it gets to get back to your original price. Little five, 10 or 15 per cent is normal in the market to go down but if you go down around 30-40 per cent it is really hard to recover to your principal.

Preservation of capital, earning a reasonable rate of return and investing in a disciplined manner can help you to avoid big negative returns in your portfolio.

Sunday, May 06, 2018

Value Investing

Amongst the various thesis and styles in investing, value investing is very relevant at the moment where the markets have hit a high and there seems to be minimal upside and more downside.

It merits to look at this style where we pick stocks that are trading at a discount to their intrinsic value, offers reasonable margin of safety. Other metrics to look for, is if company is operating in a space that has room for exponential growth, and the overall quality of its business. Generally in markets like today, we will be able to identify such companies which are no so popular and are mid-caps in category.

Better still if such companies are going through temporary disruption or through a difficult period. You get to buy a bargain when the seller is selling in distress. The famous example is of investing in Rain industries which was available at P/E of 1 when the profits were Rs 90 crores and the company was going through disruption. The company then multiplied its profits over the next few years by 10X to Rs 800 crores profits. An investor would have multiplied his wealth 10 times in this period.
The most important criteria in value investment is that the down side should be minimal which makes the investment 'low risk'. As they say, Minimize the downside and upside will be taken care of by the business.

Currently a company in the mid cap space that adds value in commodity space is available for a mcap of Rs 390 crores with headroom for growth. Aluminum is consumed by almost every industry one can think of and offers exponential growth prospects. The business is cyclical as it is closely connected to commodity cycle but available at reasonable valuation. Because these companies are small in size, they have a lot of room for growth and could even become potential multi-baggers. An ideal time frame for which to invest in these companies would be 3-5 years.

As the legendary investor said “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results”. India continues to offer businesses with prospects for long term growth and opportunities for multi fold returns to investors.

Saturday, December 30, 2017

The Best Investments are made during difficult times

As a legendary investor said we are all eager to buy bargains but are not willing to endure the pain of price decline that creates bargains in the first place.

Today, no respectable business is available to be bought with a margin of safety, they are overvalued, so the question is which is the cheapest of the expensive ones, this has led to competition from investors which is driving price up. You have to invest when competitors are not there and not when they are willing to pay up more than you are.

investors are hyper worried they may miss out on the rally and are willing to pay a premium, this can lead eventually to a crash as they run out of funds with strong hands unwilling to back them, and then the same investors will regret their decision and leave the markets thus creating huge value for investors, that’s when bargains will be available

As the markets decline, the risks also vanish, on the contrary as the markets spike the risks only increase. A bull market lays the seeds for a bear market and is preceded with the Suspension of all logic in valuation or financial analysis, saying no price is high for this great company.

And suddenly the future changes in unexpected ways. A brief history look up says that the entire business idea itself has disappeared from the canvas, let alone successful businesses, as a result of unforeseen changes and newer ideas replacing them.

People get lucky but they think it is skill. Hyper growth is risky, the best growth is that which is profitable and that can be financed by a company by its own internal resources.

Bruce Greenwalt said growth is not worth very much unless the profit is at the margin they are already doing and can be financed without weakening the balance sheet.

Many Indian companies chase growth blindly by taking on debt and weaken balance sheet or sacrifice incremental profitability for that growth which both leads to unhappy outcome. So growth should be such that capital efficiency is not affected.

Experience has shown the futility of forecasting. When everybody forecasts the same future and it turns out to be so, there is no profit to be made as the probability has been discounted. However when someone is able to forecast a very contrarian view and that turns out to be the outcome, there is profit to be made, but such forecasts can rarely be consistently made and hence it is pure luck.

Today most investors are knowledgeable, thanks to the internet and ‘forward the message’ culture. But what we lack is the judgement and discipline which is a fine art. As Edgar Wachenheim puts it, Knowledge is knowing that Tomato is a fruit, Judgment is not putting it in your fruit salad. To have good judgment you need knowledge + common sense, stable emotion, confidence and a sixth sense.

Tuesday, December 12, 2017

Carpe Diem

The addressable market-size is the base foundation on which successful businesses are built. In the last 5 years, we have seen that companies like Page industries, which commands high valuation, have continued to grow and offer profits to investors. They were able to grow owing to the large size of the addressable markets that they were in. The story is about where you can go, and not about where are you today. We are constantly in search of companies that are hungry to go far, and when this is coupled with a market that is large enough to grow and a management with a growth mindset, there is no stopping them. Look at Suprajit Engineering, which has delivered in excess of 300 times since listing, or Page or Edelweiss- these are examples of compounding machines, because they were in businesses that could scale. So while evaluating a stock, it is important to estimate the size of the market at a future time and see if the business can have a long runway, so that the stock (business) can compound and create value. The essential question is therefore whether the market potential for the business can become very large.

The character of the management and the economics of the business will be the catalyst for compounding. Take the story of TTK Prestige, the cooker business that was impacted by what we refer to as “value migration”. The onset of nuclear families meant that more people will need cookers. So the trend was that of nuclear families, and the outcome was a long run-way, where companies manufacturing cookers could sell more for a long period of time, as the size of the market expanded.

The “New Generation” business offers an opportunity in outsourcing: companies like T Q S are in the range of 4000 crores to 14,000 crores MCAP. We do need to visualize which of these could grow 2x or 4x in the very big pond of outsourced services, staffing and facility management. For instance, we are witnessing a one-time opportunity in ARC resolution, that Uday Kotak calls a “once-in-a-lifetime” opportunity. (Article link here)

Here we see an E NBFC that has put up a system in place to capture the ARC headroom for growth and is available at a reasonable valuation compared to the growth opportunity; and with a market cap of 24,000 crores- run by a management with vision and integrity.
A growing company needs a large opportunity-size for it to sustain high growth and become a compounding machine. There is a trap in this that sometimes, large market-size does not necessarily contribute to profitable growth like we have seen in the education sector, or in the retail. Merely a large opportunity size is not sufficient; the business should have the right character to seize the moment.