Tuesday, April 18, 2017

I wish Dara Shikoh was not killed

He was the eldest son of Mughal emperor Shah Jahan and also his favorite. He was the crowned price and an able administrator. He was rational. He was on a spiritual conquest. He tried to understand the meaning of life. He got Upanishads translated into Persian. He respected all religions. People loved him. Army generals hated him. Spirituality and wars, they do not get along well. Dara Shikoh lacked the skills of an able warrior. He understood the secrets of religious texts but failed to understand the secret plots his younger brothers. He went to war to fight his brother Aurangzeb who was everything that Dara was not. Dara lost the battle and ran away for life seeking help. He never got it. He was hungry for days, his wife died on the way. He was easily conned and handed over to his brother. An enlightened man had to meet a brutal death along with his son. You can call it fate or destiny, but it is all history. Dara was dead and religious extremism was born.

I wish things have had happened otherwise. I wish Dara was less spiritual. I wish Dara knew how to fight a war. I wish Dara knew moves of enemies. I wish Dara had got help. I wish Dara was not killed. I wish Dara had become the emperor. I wish people had understood what Dara knew very well. I wish there was only one religion. I wish Dara gets another opportunity.

Income from your investments

Lots of us have bad experiences investing in the stock markets directly so would prefer the route of Mutual Funds. That is fine. The only problem I see is, Mutual Funds are skewed towards companies with higher market capital. That is to balance the risk-reward profile. As the assets of the fund grow, they find it difficult to earn higher returns than the index as their portfolio gets wider too. And each fund house has their own bias too. That is counter-productive. So all of this will lead to returns generated by mutual fund is almost comparable to index. Stock concentration gives higher returns than the market but can increase risk profile too. Is there a way, individual investors can manage their portfolio risks? Yes, if we can harness our emotions and invest with a sane mind.

o Have realistic expectations: We want to earn higher returns than benchmark index but we do not aim at windfall gains. Higher expectations makes us take higher risks and increase the chances of losing out. Capital protection is as important as growth.

o Give time: Think of portfolio creation like constructing a building. You cannot have rental income from a building which is not complete and it may take many months to years to complete and until then you are not expecting a return. And you are not judging the valuation of the building on daily or monthly basis during that period.

o Due diligence: Choose stocks wisely. Identifying fundamentally good stock with growth potential is a primary filter. Revenue and earnings growth have to be consistent and any deviation should have valid reasons. Risks in balance sheet should not be unhealthy. Cash flows have to be sensible and should triangulate with the state of business. Strategy as explained in investor presentations, conference calls, public interviews by the management should invoke confidence. Look at co-investors through share-holding pattern. Before you put money, spend time studying the company, their business, products, customers and competitors. The more time you invest here, higher is the quality of your portfolio.

o Techincals: Learn to identify supports and resistances. You may use chart patterns or look at option-chains or any other technical tools. Buy only at support levels. This will give a good start. If the stock falls after you buy and hits the stop-loss, it is better to get out. You did not study it well or you could not get the rhythm of that stock. Averaging it would potentially become a trap. Journey has to begin positively. Cut your losses at the first instance and retain those you get it right.

o Add only when there is price difference (and not every month): Do not buy in bulk but invest in small amounts. You will buy the next lot only when the stock moves up significantly and not periodically. If a stock stays at same level for months, there is no point in investing in it every month. We do not know the next move, it could be break-out or break-down. We are in the stock market to earn money which comes with price difference. Unless the positive price difference comes, it does not make sense to put additional money in the same stock. You may lose out on the initial rise if stock does well immediately after your purchase because your volumes were not high but you also avoided big loss potential too.

o Keep moving the stop loss level up:  This is to safeguard your profits. Since you have added more quantity only when the stock has moved up, there is a positive difference between your average price and the current market price. There is a always cushion of profits for your portfolio. But when the fundamentals change and you decide to exit, you should do so without incurring losses. Revising the stop loss levels up helps us to retain profits and realize them.

o Portfolio mix: We do not want to hold 50-100 stocks in our portfolio but wish to have around 10 stocks any given time. These stocks should not be from the same sector (for example, all should not be banking stocks or cement stocks). Ensure they are un-related, that would reduce industry risk. If regulator or the Govt. makes any policy changes, it should reduce the impact on the portfolio if the mix is not concentrated.

o Keep good cash: Keep some-thing like 30-40% of your portfolio in cash (it could be in the form of deposits or bonds or demat gold). Since stock markets surprise us often and give discount buying opportunities, we need to have cash (or equivalent) to make use of the opportunity. During your portfolio building years, you would not invest more than 70% of your money in equity. Once it begins to perform, you would book profits regularly to keep the cash levels at 30-40%. This may not look like efficient when the going is good but when there are shocks to market, the discount buying opportunities produce higher returns, this would give you an upper hand in the overall returns of the portfolio.

If you study the points listed above, we are doing everything right from identifying the quality stock, to entering at the right price, to managing the risks (credit risks, industry risks, portfolio risks) and also making good use of the opportunities.

If are too enthusiastic, you are likely to lose the money in the market so invest enough time until the euphoria is replaced with balanced perspectives. Then your investments will begin to produce positive cash flows. This journey will take at least five years. And you don’t learn to manage any business efficiently in lesser time than that.

Monday, April 17, 2017

Leave to Live!

Purna Chandra Tejasvi, a noted writer had said in a casual conversation that Bangaloreans, when they die, directly go to heaven as there would be no hell worse than Bangalore in which they had spent their life time. Well, he had said that a long time ago, and it was a dark humor with a warning then. Now that has become reality.

Ask any resident who has stayed in Bangalore for long about how it is transforming, you will realize how a paradise gradually turned into a hell. Ponds and lake beds became space for public utilities and residential townships. Green cover had to be sacrificed for roads and highways. Natural resources got depleted at an alarming space. Now how and why do you expect Bangalore to remain cooler?

Around 15 years ago, it was possible go around Bangalore in a bike like how one would do in any other town. But if you attempt it now, you would return home not just exhausted but with extreme rage and uneasiness. It won’t be a surprise if you woke up next day coughing which won’t leave you for days.

Bangalore is one of the fastest growing cities in this world. It kept growing for its ingredients. In the post-independence era, Bangalore became home to many public sector companies like, BHEL, HAL, BEL, BEML and many more. Industry got developed. There was Indian Institute of Science and good number of Engineering colleges attracting and growing the talent feeding the developing industry. Then came the IT wave which changed the geography of Bangalore completely. Sleeping farm estates of Whitefield turned into a silicon valley of India. People came to Bangalore and they never returned as they built there home here.

It was difficult for Govt. machinery to cope as they had not anticipated this kind of growth. Coupled with their inefficiency, temporary measures adopted by the residents such as improper disposing of waste, drilling deep bore-wells along with unscientific ways adopted by the construction industry including sand mafia helped accelerate Bangalore reach the present state. All of us living in Bangalore, directly or indirectly have contributed to this mess. There are many videos being circulated in social media and numerous articles being published on newspapers and magazines on how Bangalore would become unlivable soon. As we just keep talking and not do what is necessary, we would consciously walk into the reality of unlivable Bangalore.

Then what? Many of us would be forced to leave Bangalore and build home elsewhere. Our employers would change their base. Government may move out some of its offices too. Before that happens, lots of residents would be losing their health for the ill-effects of pollution of every kind – water, air and noise primarily.

So why not leave early? Don’t we deserve a better a life? Of course, there are practical issues like job opportunities are not there outside Bangalore. But for those of us who can find an alternative, it would be worth considering. Cities are harsh on daily life leading. Higher the time spent in commute, lower the time available to do anything else. Higher is the exposure to pollution, lower is the life expectation. Higher earning in Bangalore would also mean higher costs with health deteriorating and reduced ability to earn or remain in job over a long period. Considering the opportunity costs, it would become economically viable to leave the high-paying job in Bangalore to lower earning but a simple life of a small town.

To me (and to some like-minded) this discussion is making sense. I hope I would be able to leave Bangalore before I am forced to.

Wednesday, April 12, 2017

Stock Holding Patterns and their impact on pricing

In the Short term the market is a voting machine, but in the long run it is a weighing machine.
- Benjamin Graham in “The Intelligent Investor”

We all agree with legendary Benjamin Graham. But have you thought how the transformation of scale happens with transit of time?

Every business has multiple class of investors.

1. Promoters: They form the base, they might be at the forefront of running the business or passively influencing it but they do define the ethics, value and culture of the business. Mission and Vision is defined by them. All the successful companies will have promoters with great business sense & skills contributing towards the business they are promoting. Increase or decrease in holding of promoter share would change the direction of company’s value too.

2. Growth Investors: They may not be actively participating in how the business is run but they firmly believe in the business they have invested in. They are aware of business-cycles and ignore the short-term fluctuations. They would be happy getting dividends rather than cashing out their stocks. They are in perfect alignment with promoters in the ideology and likely to hold the stocks for really longer times, if not forever.

3. Value Investors: Whenever a stock is under priced, these kind of investors will step-in and hold until their target is achieved. (They might short sell when a stock is overpriced too). Their holding period would be typically range from a few months to couple of years. They are more of a theme based investors and are in play with an expectation, so they would make the difference (profit or loss) for their expectations and sell out.

4. Short term traders: These provide liquidity to the stock. They holding period could be few minutes (algo-trading) or as long as few weeks. They would get out for very small gains or losses and would move to other counters quickly. Stocks just pass through these hands when expectations are high so there is momentum for the stock. As they get out volatility gets reduced too.

Promoters and growth investors bring in stability to pricing, their increase in holding may be an indication that stock has growth potential and is not overpriced. They reducing their stake would be an alarm. Retail investors, as shown in the history, usually come when the stock is topping out. They do not have long pockets and are not equipped emotionally to handle the stress, so they are unlikely to take the price up further steeply. That would leave the value investors which are mostly mutual-funds, big-institutions (like LIC), foreign investors and high net worth individuals. They make the most out of the market in the medium term. They have access to information, they have the buying and holding power, so can move or break a stock. But how will you know who is coming in and going out?

Promoters and large investors have to declare their trading to exchange, that information would be available to public in a day or two. But remember their moves either indicate the floor price or a high (if selling) but not necessarily the momentum which is mostly driven by value investors. To know what they are doing, look at the stock holding pattern which is published on monthly basis. If mutual funds, FII are increasing their stakes, they would not be in a hurry to sell out, they would be in the stock to get some 30-50% returns at least. Become a co-investor with them, you would be able to ride the wave.

It is presumed that you would have done your research like studying the financial statements, estimating the expected earnings growth and the risks to it. If that is all convincing, get to know the promoter and the management better. Pay attention to what the management told in their quarterly calls, investor conferences or their public appearances through interviews to media. Observe if there is a positive change and quantify that in your model. And wait for the value investors to come-in, this is for the confirmation on your research and also for timing of the entry. You would behave no differently than a fund manager but your portfolio could be better (or not) than theirs. If you have done this well, assets under your management would have grown and you have honed your skills as an active investor.

If this seems lots of work, yes it is. Investing is a serious business. If you do not have time or not serious with your investments, you are better off hiring a fund manager (invest through mutual funds and not stocks directly). But if you can pull this off, it would change your fortunes. (I am still having a day job and have not made any serious money yet from markets but slowly getting the confidence to say this.)

Thursday, April 6, 2017

Fiction: Dairy pages of an old Tiger

You humans call me a big cat. Well, the comparison looks awkward to me as I don’t like playing with kids or getting pampered by women. I would rather eat them for breakfast. Calling me a Tiger though look appropriate, I would have preferred a much scarier word than that. I did overhear the story of Rudyard Kipling’s ‘The Jungle Book’ in which a Tiger is the chief villain. Hmm…you people make up the stories rather than telling the facts as they are. For that reason, I would have behaved no different than ‘Shere Khan’ and I would never have made friendship with ‘Mowgli’. I was governed by laws of the nature until I met with an accident.

Tigers do not believe in luck or fate. So I think my encounter with human beings is purely an accident. When I was growing up, I did not know that human race existed. Playing with two siblings under the protection of my mother was the world to me. Mother would take us out and let us watch from a hiding how she hunts. All four legged animals, thinner the legs, bulkier the stomach, better the meal for us. Time was running fast. I did not know then what it meant when they say happier times. Wait for the right moment, Attack! Mother had trained us well and I learnt to hunt on my own. That is when mother’s affection started fading and soon she pushed me out of her territory.

         I was on my own comfortably. An ambush strike on the way to waterhole would keep my hunger satisfied for couple of days, then I would sleep well and keep my cool before the need to hunt again. During my walks marking the territory instinctively, I noticed how scared other animals are seeing me. Am I the prince of this jungle? Yeah, looks does matter. Scarier the appearance higher the respect. A plain growl would keep my path free. It did not take much time to transform from a prince into a king.

All was well until I met a human accidentally. There was not one but many. They appeared like large monkeys (you remember you called me big cat), walking on two legs but they were not jumping from tree to tree. They appeared weak. I did not want to eat them but I was irritated a lot by their presence. I waited until one of them singled out and made an appearance before him. My intention was to scare him out of my territory. No doubt he was scared but he shouted and all the crowd began to gather. I just disappeared from the scene, not of out fear but sheer disgust.

After that incident, I had a sense of being watched whenever I went out. Soon I had to meet a human being again. At some distance he was standing on the top a tower, holding a stick aiming at me. Blood rushed to my face and I instantly jumped on him. What a surprise, his stick fired something which pierced my hind leg. I fell down and could not run anymore. In no time, I lost my senses and collapsed.

After what it appeared to be a deep sleep of many days, I woke up in a small island like place surrounded by barricades. There is room to walk but not big enough as few steps would bring it to end. Go back and go round. ‘Oh, this is a confinement’ I realized. I was captivated. Food came regularly, what a relief but it is boring to eat at same time of the day. I missed unpredictability of the jungle. I hear sounds of other animals in the vicinity and understand that they are captivated too. Each animal has a confined space here. What kind of a place on earth is this? No exercise to muscles and I am not using my paws and teeth which were my ultimate tools in hunting. I started looking at what is outside of those barricades. There were humans, tens of them, standing on the other side iron bars and staring at me. The moat is wide between us. While I can attempt a jump off the moat, those iron bars would still hurt me else I would have taken lives out of those bodies one after the other. I am out of options. I just lie-down and stare back.

You know no Tiger keeps a dairy. Reading and writing is such a waste of time and a Tiger would rather live life to fullest remaining in action. As my hunting skills and tools are rusting, I am learning to think like humans. Yes, there is nothing else to do. I don’t mean life is bad in confinement but there is no excitement. To kill time, keeping a dairy, spending time in the reminiscences may not be a bad thing. Will they ever leave me back in the jungle? I am not sure if I want to go back. You think Tiger loves freedom over timely food? You can find out for yourself which Tiger lives longer. Then extended life is the price for freedom. Is not it? I don’t like thinking this much. Let me take a nap.