The recent mess in which many companies are finding themselves…right from Adag ….to Zee!! set me thinking on some of the worst investment blunders which keep getting repeated. Not just in 2018, but these mistakes are really..old. Let me ENUMERATE them. Though this is not really applicable to Investment or fund managers (more to businesses) some fund managers (LTCM) have also committed some of these errors.
- Excess Leverage: I don’t need to tell you the kind of mistakes that business men make especially in a bull run. Or when interest rates are beaten down to zero. Every leveraged product looks sexy and every promoter at some stage bites off more than what he can chew. Subash Chandra – look at his innovation – Esselworld, Essel packaging, and Zee. Very different and all doing well. I have met him in 1986 – and came away impressed. His take over of Propack was brilliant. Suddenly some bug bites him and he is over leveraged. Of course it is easy to find some hidden hand…we will never know. However, implosion has happened. I have no clue whether Adag, Dhfl, Zee, Essel, Ilfs, Alok Textiles, will they ever come out of this mess. Or what happens to them, how much they bleed and how much hair cut their lenders have to take.
- Concentration risk: People with esop, fund managers being asked to handle amounts far beyond their competence. Then what happens is that retail investors follow them. Look at the hit that mutual funds are taking due to the fall in Sun, Maruti, Zee, Dhfl, Ashok Leyland. Now they are concentrating on quality like Hdfc, Hdfc bank, Infy, Reliance, Bajaj finance, Asian Paints..You are able to get the drift I presume? When you have too much (no not as per your own portfolio, but much more than what the market can buy if you turn seller), their Nav will get clobbered. You want to guess what will happen if Hdfc bank stops this mad 25% run which it has been having for the past 25 years. Just tell me…who will buy? Similarly debt fund managers too have huge concentration risk. Let me not name them – go and see the fact sheet.
- Stampede: when investors want to exit. Let’s say Dhfl has a problem in the Dhfl Ltd’s balance sheet…how will Dhfl Pramerica meet its redemption demands? Such stampede is very difficult to anticipate and suppose Dhfl had debentures of India bulls or Indiainfoline would they really be liquid when Nbfcs are being spoken off? The advantage for banks is clearly the Inter bank market and RBI willing to lend at high rates. At least cash is available…but if you are a small (weak) nbfc, or even a fund manager of a small debt fund, or ……you will be killed in what can at best be called collateral damage. Exactly when bigger and stronger Nbfc like Cholamandalam thrive. (disc: I have shares of Dhfl, Chola, Bajaj Finance,…and a couple of banks).
- Co-relation: the story of 2008 in the USA. All your back testing does not reveal the co-relation of your portfolio of the portion of the market that is seriously going wrong. So recently we say one mutual fund buy debentures of a big corporate for Rs. 240 crores – the portfolio had a market price of Rs. 260+ crores and thiors was the dirty price. So the mutual fund got a great deal for its unit holders. However, it could have been reverse too. Things you expect to be uncorrelated may become correlated due to crowding, index implications, money flows, economic factors or geographic events. Imagine what happens if all mutual funds decide to sell a Reliance or a Hdfc bank. Who will buy – assuming that there is no FII interest in that week. There is little protection in a bear market outside of cash and very high quality debt paper WITH POOR YIELDS. Investment Masters tend to seek diversification, limit sector exposure, hold cash and constantly think of where the correlation risks lie in the portfolio – however when some such event happens, there is blood on the street. Many a times our own blood. You now realize how useful cash is – or say investments in US stocks or European stocks. Oops debt fund managers did not have that option….
there are a few more…but I have hit the word limit…
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