Subramoney

http://www.utvi.com/personalfinance/financial-investment-india/15714/investing-sans-emotion.html# - is where the original is, for the others, here it is being reproduced!

Recession, slow down, pessimism about the Indian economy (of course because of the recession in the U.S. economy) are words that become common place in local lingo!

Everybody and his aunty is now convinced that the Sensex will touch 5000 very soon, and the last place to be investing now is the equity markets. Of course many of these people were sure that the equity markets will touch 25000 – just about 12 months back.

Times are tough. People who had Rs. 20 lakhs as salary and Rs. 55 lakhs bonus, however forgot that the bonus may disappear. Now the bonus has disappeared (luckily the job may still be there) but the EMI refuses to go away! Similarly the friendly agent who said that Unit Linked Insurance policy is a 3 year plan NOW tells you that there is some more premium to be paid! Forget vanishing premium, the policy seems to be vanishing!

Too many investment myths have gone unchallenged lately. And we love to believe that tomorrow will be like today. So the best thing to do is relax, and read the classics. This feeling is a little funny - today was just not like yesterday!

Let’s begin by examining the four biggest investment myths circulating right now:

Myth #1: The Market will recover in 3 months time

In case your broker, banker, relationship manager, - anybody whose job is dependent on the size of your cheque tells you that the market will recover in 3 months. He / She is praying loud. Like God, you can either listen to it, or ignore it.

Democracies, Free Markets, are the way to go. Even the Chinese believe in that! So the markets will do well – after all the index is a slave of earnings and optimism (price-earning ratio!). However, nobody can put a time line to it. That is tough.

Myth #2: Indian Growth Rate is poor!

The reality is India will continue to grow at a decent rate – 6.5% - is a FANTASTIC growth rate. All the strength of the English speaking population, BPO, KPO, software, exports are all in place. The strengthening of the US $ is a boon, the falling prices of oil is a boon, the falling wages is a boon for the manufacturing and software sectors – so just chill.

Three years ago, most of us would have given an arm and a leg for 6% growth. You need to remember that the US has a strong ability to innovate and grow. India will continue to be an important partner for the US, and we are not in a gloom only scenario. Our balance sheets are not over-leveraged (the equity markets will punish the excesses – look at Cholamandalam DBS – the share has fallen from Rs. 370 to the current price of Rs. 40!) – which means our recovery will be faster than the US economy.

Myth #3: The FII money will not come back!

The strengthening of the US dollar is surely going to make Emerging Markets as a class less attractive. However, if you believe that the US cannot go on converting all their coniferous trees into green backs, the US dollar will weaken. Thus at some stage when our earnings move up, and the markets look attractive, the monies will come back.

The flip side is there are many people who believe that the lag in the FII investment will be taken up by the mutual funds and the unit linked plan collections. This looks good in theory, however in real life it may be difficult. As downsizing happens, the first casualty will be the mutual fund SIPs and the Life insurance premium. This is a major cause of worry – as the BFSI sector is also a big employer. My take on this is very hazy.

Myth #4: Real estate and equity markets will take decades to recover!

In the more than 200-year history of equity investing in the United States, stocks have never taken decades to recover. I used the US example because Indian stock market history is not long enough. However, if there was an index fund available since 1978 (sensex base year), done a SIP, and re-invested the dividends, I dare say you would have got a great return (say 5% real return) over 30 long years. Add compounding to it, and you would be a rich person! Remember, you would have out performed your bank fixed deposit partner by a mile. (The key is regular investment and reinvested dividends, and a low asset management fee.)

The Nikkei 225 in Japan, is down more than 65% from its peak in 1989. Could India be headed for the same long, deflationary spiral? Not likely. The Japanese real estate and equity bubble was much bigger, government action there was clumsy and ineffective, and the banks were knee deep in shit. Indian economy is still growing.

In India the real estate mess is in the capital market – so risk transfer is quick, brutal and immediate. Real estate companies have fallen between 30 – 80% from their peaks.

Also remember the market normally does things in advance – so the battering may have happened AHEAD of the real market events. So if real estate prices were to fall (say 30%) the shares of real estate may actually go up! Logic being “Oh! After all the markets have fallen ‘only’ 30%, we had expected 80%”.

So, let’s buck the trend together - and look forward to a happy, healthy and prosperous New Year!

Happy 2009, and happy investing

Financial advisor designations and Equity valuations – there are so many of them that you put all together, you can create an alphabetic soup.

And life comes a full circle for me. When I started life (a few moons ago in the ‘80s) as a Chartered Accountant, I naively thought and believed that people invested to get returns. Working on that assumption, we made research reports for clients (imagine, they paid for the reports!!). Here we would compute the “Dividend per share” as a ratio to the price paid for the share. The contention being that the only thing of interest to a retail share holder is the dividend. It is only the promoter who can use the cash in a technology company to buy an infrastructure company – why then should it matter to the retail shareholder?

Then the best ratio was PDR (price dividend ratio). Terms like “how many years of dividend will be required to recover the price – in terms of dividend alone” were numbers which were prominently put in the report. A blue chip meant a company with a AAA rating for its debt instruments and a 10-year increasing dividend track record. Dividends, is what mattered.

However, we were told we were too conservative and we should at least use “PER” – after all management knew “how much to re-invest, and how much to pay out”. We succumbed and accepted “PER”.

Then we got an opportunity to do the brand valuation of Mr. Ramesh Chauhan’s soft-drink business – we used archaic systems like “number of years of sustainable super normal profits” – and the final price was very close to the “theoretically arrived at price”.

Then we were told forget earnings, after all how much interest a company pays, the amount of depreciation, the taxation, and the amount of money capitalized is after all a view. So the earnings prior to all these “opinions” is far more important. Surely, it took a little while before we understood the word “EBIDTA”. A few meetings were attended without picking up the courage or guts to ask “what is EBIDTA” – fearing the suited MBAs sitting in plush conference rooms. However, our research reports contained this new fangled valuation tool. We succumbed and accepted EBIDTA despite the fact that it did not look far away from the sales figure.

Then we were told, we were “not being practical” and we should actually look at the “Sales to Market capitalisation” ratio. So being practical, again we succumbed. Meanwhile Harshad had made the “asset replacement theory” very popular and we all applauded it. It made a lot of sense that if it costs Rs. 13,000 crores to set up a chemical based film manufacturing plant and the market capitalisation of the company was only Rs. 1300 crores, it was a great buy. Some of us did not see the world going to digital photography that is all.

Then came the mother of all valuations – “Eye-balls and hits valuation”. Here we were told “how many people come to the site” and how many “feet fell” were the basis of valuation. We baulked, but being ‘practical’ people we succumbed. We were told if websites were set up by doctors, Tamilians, Mumbaikars, iyers, senior citizens, lions club members, all their members would one day buy all their requirements form their websites. All of them forgot the tamilian mumbaikar iyer senior citizen doctor who was a lions club member. Unfortunately he bought only one toothpaste a month, one television a decade, one sofa in 20 years.

The index cheered us along all the way. When we started the valuation game (oops sorry!) there was no index. Then it got constructed, it was at 100, then 500, then 5000, then 21,000. Then it came down slowly, sharply, and finally to 8900. Then it inched up to 10,000.

Now in a class room they ask me things like “Dividend-yield”, “why is dividend pay-out ratio” important. I seriously do not know, what to tell these kids.

At last the market went up by almost 500 points yesterday. Not bad for a market which has had a very rough year so far, with the Sensex with more than 50% loss for the year. This is literally the worst market crash since 1993. The bull run of 1992 was followed by a 46% fall in the next year. The US media is already calling it the worst year since the great depression of 1929! (oops that is the way the media works!).

We’ve been living with the downward movement in the markets for months on end, and I am at a loss for words that I have not already blogged several times before! Here is what I keep reminding myself while trying to retain sanity:

1. The market is inherently volatile, and there is no telling when the volatility is going to stop (or where the bottom is). Only invest money that you will not need for about 3-5 years.  Some  experts have  said  markets can fall 30% from now (Shankar  Sharma  in an interview  to  Cnbc)

2. The US is undoubtedly in a recession—even the bureaucrat says that! And is going to be in a recession longer than one thinks. It could be more severe than usual. However, that does not mean the end of the world. India will continue to grow – and at a clipping rate. Even if you take Merrill Lynch’s report we will grow at 6% per annum. We have lived through many tough times before, and we will live through this one, too.  I trust Mahesh  Vyas  at  CMIE  more than I trust  ML.  And Mahesh has said  7%, let me  bet on that.

3. The fundamental value of a stock is the value of the discounted cash flow the underlying business will generate in coming years. The cash flows of our companies are not as volatile as stocks have been recently.  The  company working is like a whip, the market is like the edge of the whip  - moves more and stings!

4. While our companies are dealing with the slow down, and the US companies with their recession, and we are likely to see a material reduction in earnings in the coming quarters, this does not mean that the companies are in permanent decline.

5. The market likes to extrapolate recent short-term trends, but those extrapolations lead to wrong conclusions in periods like this. Basic problem is our today is not like our yesterday, but we  believe our tomorrow will be like today. God Bless us all!

This is of course an old article inspired by Mr. Buffet’s thinking - or Mr. Graham’s thinking, language and concept of Mr. Market. It appeared in Moneycontrol long back….however things have not changed much.

Mr. Market: Good trader but a terrible investor.

When you push that ‘Place Order’ button or get that confirmation in the mail (increasingly sms), do you ever wonder who is on the other end of that trade? Who sold you those shares? What does that guy have on the
company that you don’t?

Or could it be ‘Mr. Market’ who is selling his shares to you? Mr. Market, Ben Graham’s mythical investor, acts out his mania and depression with buy and sell orders. He will sell to you when he’s desperate for an out, often at low prices. And he will want to buy shares from you at correspondingly high prices when momentum and ‘news flow’ render valuation meaningless.
And he trades much too frequently, donating heavily to the daily charity drive of brokerage commissions and fees.

These awful psychological characteristics make Mr. Market a terrible investor, but a great person to trade with. The question every investor should ask themselves–before every trade, in fact–is this: Am I being
Mr. Market?

There’s a Mr. Market in all of us, and every once in a while, I still succumb to his way of doing business. But too much Mr. Market in your investment style will almost certainly prevent you from earning a decent
return from stocks.

Do any of these statements fit your approach?

I have my brokers’ telephone number on my speed dial
If you talk to your broker five times a day, the chances are you will keep doing transactions much more than you think you should be doing.

When a stock I own drops 20%, I sell: Plenty of investors employ a rule like this. Some even dump at declines of 5% or 10%. But stocks are volatile. Mr. Market whips the price up and down, putting share prices far from what a knowledgeable, well-heeled buyer would pay for the entire business. Show me a portfolio with sell stops at 5%, and I will show you a portfolio that will lose 5% a year like clockwork.

Think back to Eid Parry and Coromandel fertilizers, are either of these businesses really worth 15% or 20% less than they were at the beginning of the quarter? Has the stream of future cash flows and dividends diminished that greatly? Are customers fleeing to competitors, or simply expiring from the planet? Or is it that people are suddenly not using sugar? Are these companies’ assets materially impaired? Hardly. The actual value of the business is at the whip’s handle - moving to and fro ever so slightly.
The market price is the end of the whip - and that whip has stung the short-term crowd badly.

Never forget that the market price of a stock at any given moment is where the weakest current owners and the most indifferent group of buyers meet. I am not the least bit concerned that ABC has been marked down from Rs 84 to Rs 69 in the past month. Mr. Market can’t have my shares for less than Rs 110.

The good long-term investors - I heard many of them speak - don’t sell at a 20% loss, but they do go back and aggressively review their investment case. If the fundamentals are unchanged, they hold or buy more. If the business is not as strong as they expected - that is, if they made a mistake analyzing the business in the first place–then, and only then, will they sell.

When a stock I own rises 5%, I lock in my gains ‘Nobody goes broke taking a gain,‘ or so goes the old adage. Nobody ever got rich taking gains in 5% increments, either. Peter Lynch calls this tendency by amateur investors to harvest small gains while taking larger losses on the downside ‘watering the weeds’.

To benefit from holding stocks, you have got to be willing to hang on for a long time - a horizon measured in years, not days. The events that drive share prices up in big increments (a surprise improvement in earnings, a big dividend increase, improving sales growth) can’t be pinpointed to a particular day or week. The best approach is ‘don’t just do something, sit there’. Why is this so difficult? Because every anchor for every channel somewhere seems to be working for a broker.

If the fact that a stock is ‘going nowhere’ bothers you, why not consider higher-yielding names that will pay you handsomely - in cash - to wait. A dividend portfolio provides a yield of 3% with annual dividend growth of more than 6%.

I only look for stocks that have been going up ‘The trend is your friend’ is another adage whose timelessness is matched only by its uselessness. Stocks are just about the only items that consumers buy that seem to become more desirable as they get more expensive. All being equal, as the price you pay for a stock rises, its future return potential falls. It’s not just that ‘past performance is not a promise of future results,’ as mutual fund advertisements declare in the fine print, but quite the opposite–yesterday’s performance is just as likely to set the stage for opposite results tomorrow.

I sell when a share announces bad results: I do not actually own any share that is a one ’six month’ or one ‘quarterly’ result buy. If as a trend it does badly, yes you should sell.

However, if you do not know why the results are bad and you sell, you should not be buying shares, maybe RBI bonds are a better bet for you.

I never make a loss
Chuckle, chuckle, I know a liar when I see one, or when I see a guy or a gal saying that they have not lost money in the market. The only way you can have ‘not made a loss’ is by converting all the ’short-term buys’ into “investments” thus not booking the loss.

I have a balanced portfolio created by me Creating a balanced portfolio ? one that has cut across industries, business groups, geographies, etc. is a full time job and few individual investors have the skill or the discipline to be able to do it on a continuous basis.

Grab Your Wallet
One of the amazing things about Mr. Market is how much he pays in fees. Make no mistake, these contributions to Dalal Street’s annual bonuses are purely voluntary, and they come straight out of his total returns. A Rs 5 lakh brokerage account that makes just two trades a week at Rs. 10,000 per transaction stands to shell out 4% of its value annually just in commissions. And while that 4% may not sound like much as a percent of assets, it’s a whopping 20% of the market’s historic return before fees.
In absolute terms, over a 10-year period, the fee is 40% of the starting corpus.

Dalal Street has no shortage of cheerleaders, lauding the billions of shares worth of ‘liquidity’. It provides investors and the steady decline in per-transaction commissions. But is a Rs 10 or Rs 20 trade ‘cheap’?
Dalal Street is not dumb - it’s more than made up for this with volume. It’s simple economics: Slash the price of something, and you will sell a lot more of it. This helps explain why banks promoting brokerage houses are good buys.

Every rupee they collect in revenue comes out of investors’ aggregate return. The services they provide create no fundamental business value but the churn that brokerage firms create surely creates value for its
shareholders, if not for its customers.

I am grateful for all this liquidity, but not for the same reason Mr. Market is. The ease with which Mr. Market can make bad decisions creates opportunity for longer-term investors. Every time there is a market fall I have been able to add a MICO, MRF, or the likes to my portfolio at attractive prices.

Make Mr. Market work for you Even though I think an investor can do well owning individual stocks, it’s not for everyone. If you are in the game as a Mr. Market impersonator, odds are you will be better off with an index fund. And if you just can’t stand short-term fluctuations in paper value, a savings account or a shoebox under the bed is the place for you.

I spend a lot of time thinking about the competitive advantages (or disadvantages) as an investor and as manager of an active fund. The way I see it, there are only two ways to play.

One way is to pursue superior information. If you know much more about the business than the average holder of its shares, you are in a better place to judge whether the current price is too high or too low and can act accordingly. But this is very tough to do, even with tiny firms. Dalal Street pays its analyst ranks millions to cover large-cap firms like Reliance and Infosys, yet they’re usually caught off guard on short-term problems like the rest of us.

The other way is to pursue a superior point of view. I can’t tell you whether my portfolio is going to meet, beat, or miss on its next quarterly earnings report. I guess I was late for class on the day they handed out clairvoyance.

My point of view (which is borrowed or stolen from the greats) holds that a stock’s total return over time will equal the dividend yield I get on day one plus the subsequent growth rate of dividends per share. I rely on dividends to provide my return. I can judge that my portfolio yields are attractive and the dividends themselves will continue to grow at very healthy rates. What’s more, by evaluating the businesses from the standpoint of competitive advantage, they should both be able to maintain high rates of dividend growth for very long periods of time. If I hold the stock long enough, my total return will converge to this combination of yield and growth and I won’t have to donate to Dalal Street’s charity drive to earn it.

So if i do not want to learn about portfolio construction, market timing, dollar trades, carry trades, risk, …etc. and I want to separate the “ego” of my stock picking skills and my wealth creation, I should choose an Index fund.

Some of the great classic advice that you will hear in an economy that slows down are the following:

1. Shift to cash - it is safe, at least it will not go down!

2. If you must invest, be safe get into gilts - it is almost capital protected, interest rates can only go down, so you will get “good” returns.

3. If you still insist, buy “large cap” stocks - like L&T, Bhel, Reliance, SBI, Hdfc - how much further can they fall?

Surely you must have heard all this advice, have you not?

Let us look at each one of them!

Normally the least attractive asset class gives the best return - over a short period - but this logic cannot be extended indefinitely. For example equity has given 19% return over the past 25 years, but -40% over the past 6 months. Why do we take the last 6 months figure and extrapolate for the next 35 years? This is plain stupid. So will cash be the best asset class? You ought to be joking if you are thinking say for 15 years.

Debt products are good and surely have a place in your portfolio - for portfolio protection for short periods of time. However debt products which give -5% return (taking taxes and inflation into account) cannot create WEALTH - can it?

When the markets go through a turmoil shift to LARGE caps - they will recover first. Great in theory. However liquid shares are the LIQUIDITY providers. So every person who is liquid and wants to invest will invest there - so these shares will always quote at a high premium compared to other shares!

So what to do now? let us see in a few days time….

Have you ever been tempted by newsletters, sooth sayers, channels, websites offering you immense riches by “timing the market”? I bet you have been.

Each year millions of people (worldwide) spend ‘000s of dollars to subscribe to newsletters, email services, sms alerts, phone calls, etc. trying to beat the market. If you see the long term charts of most equity indices, intutively this looks very appealing. There is only one problem, it does not work. This is because the guru of investing late John Templeton says “I do not know of anybody who knows anybody who has made money timing the market”.

Is market timing difficult, NO, it is almost impossible for the common man - so the best thing to do is to stay away. The best 10 days can give you say 55% of the total return for the year! So for whatever reason you stayed away - if you did stay away those 10 days, your returns could be below Savings Bank ratel

One organisation with whom I am associated has many 22 year olds working on technology, news, financial calculators etc. - all this work is somewhat connected to equity markets. Most of these people have a brokerage account - and based on their own knowledge try market timing. It is surely a brokers delight. Most of them do not calculate how much returns they get, so there is no comparison to market returns. Talking to them on a adhoc basis, I know most of them are getting below bank FD rates - at the gross, subject to taxation, as most of the “gains” if any are short term

“I have invested in M/F near 2.9 lacs in various funds in various firms. Now NAV of all the funds is lower than the NFO. It is worth about Rs. 1.9 lakhs. Should i continue or exit?”

In such extra-ordinary times this is a pretty normal question. All those investors who were brave in Jan ‘08 when the index was at 21000 are now panicking. Co-incidentally the index at the time of writing is HALF of the Jan index! Risk, they say is counter-intutive. When you think is highest it perhaps is lowest and vice-versa.

What should this reader do? Simple he should stay invested. Assuming that the investments were made in a lump-sum his portfolio could be down anywhere between 40 to 70 percent. It is all right to lose money, but do not lose the lessons of investing.

What caused it? – Lack of understanding that a market which goes up can also come down. The speed with which the equity markets went up were matched in viciousness in the downward journey. If he knew AND he was investing, he was understanding the risk. However if his agent (or relationship manager) told him “next month the index will be 25000 and he believed it, it is his fault – NOT the markets’ fault!

Most agents and relationship managers are rewarded better on a lump-sum basis than on a SIP basis. However, readers should push the agent for a SIP form rather than a lump-sum investment.

Investing through a SIP is a safe and sensible way of investing – so all readers who have invested should start a sip at least now. Over the next 4-5 years you will get a return superior to debt market returns. However stop tracking your portfolio on a daily basis. Just relax and let the fund manager do his job. Most people who have done a SIP in a balanced fund (like Templeton India pension plan) for the past 4 years are also in the red. However if the markets were to suddenly bounce to 14000, they might suddenly be in the black!

In all market conditions remembering that equity markets shudder, quiver and fall – dramatically. However, it is the markets resilience that it comes back usually stronger. So go out there and read about equity markets, keep learning, do a SIP and please appreciate that equity markets are for the long term. When I say long term I mean 7 years plus – and I have friends who think I am being aggressive. The real good fund managers normally mean 20 years as a long term period!

If the market goes up 3 days in a row, i get emails / queries asking “Is this the end of a bear market”. UNfortunately I do not have any simple answers.

First of all the market does not announce the starting of bull / bear markets. Pundits have chosen the names and almost always tell you “This was a bear market” after the event is OVER. Similarly in case of a bull market. Also people who have got the predictions correct may have got it by luck. They have no clue how long it will be there - and what rate will it come up. If it does come up, will it come up at the same speed at which it went down. Or let us say in case of Indian conditions will the journey from 14k to 22k take much longer than it took last time? Nobody has the correct answers to these questions.

However let us look at the industries which were directly put to inconvenience - BFSI. In the mutual fund space a beginning has been made. Lotus India Amc has been taken over by another new comer Religare. Similarly there are some talks about 2-3 other mutual funds being on the block. It may or may not happen. However, salaries will take a whiplash.

One large broker has recently cut salaries - in the trading team. Another large player has downsized aggressively. One shipping company (non bfsi) has not paid salary for September….the list is long.

At the end of a bear market, at least half the brokerage terminals have to be shut, mutual funds have to downsize their working force, while increasing their aum. This will lead to lesser amc charges - and hopefully to better returns to customers.

So is the bear market over? I Have no clue!

This headline is so contagious that everybody will want to know what is inside this! However, tips on which share to buy does not create wealth. So if you were expecting me to say “Buy Hindalco, Tata steel, Tata Motors, etc. you will be disappointed. Sorry!

Here are some tips however, on how to behave in a falling market. Well you need to remember the following:

1. Why did you do your SIP: Most SIPs are done to meet some target - child’s education, own retirement, etc. so if that goal is intact keep paying your SIP amounts. One big advantage of an SIP is it allows your investment to be free of emotion (emotions are perhaps your worst enemy, not market behavior). So keep your SIPs going.

2. Failing to follow through your ideas cost you more: People promise themselves that they will buy when the market falls - but when it falls they keep waiting till eternity. Do not do that. Just let your SIPs run…do not panic, do not over do - in a bull market or a bear market.

3. Do SIP in mutual fund portfolio NEVER IN A SINGLE SCRIP. If you were (are) doing SIP in Biocon, MindTree, Silverline, Crest Animation, ….you will be in the RED…and you may lack the conviction to do follow through purchases. This fear is increased when the media says “Breaking News….markets have fallen 7%….” etc.

4. A fund with a high beta is something most investment advisors avoid. However from a SIP POINT of view, the more volatile a fund, higher impact of Rupee Cost averaging.