This is not easy to think or accept. People who continued their SIPs would have also done badly – no doubt about that. Your opening portfolio (Jan 2011) would have been down, and so would have the SIP figure.

Obviously at this juncture we can ALL see the negatives and we all KNOW that the market will go down, do we not!!??. (Hey there are some readers who do not get the sarcasm, sorry). Well when on TV and other media you look at the ‘experts’ – their views are worth hearing…

-Markets will go down to 12000 (no clue why there is such a consensus for this number!) and the more optimistic ones are predicting 18000. Of course the very hardy, never say die guys predict 20,000.

Frankly I do not know what will happen.

However a bad year is rarely followed by a worse year (yes it has happened in the past, but I am taking a calculated call!)..which means a NEGATIVE 25% will not be followed by a negative year. So assuming that the index’s starting point is 15,500 for Jan 2012 (I am writing this on 2nd Jan at 9.30am and this is the current sensex), I think seeing the sensex at 19500 is not impossible. This means that the current year’s return would be about 25% – just wiping out the 2011 losses.

Will the Re – US $ be at 60? not sure. However if many NRIs start keeping their money in India (remember the rates of Nri deposits have improved) and the software exports do really well, we could see the exchange rate at 52 instead of 62!

Not guessing the sensex, but just punting on the fact that the IMMEDIATE past has NO BEARING on the IMMEDIATE future. Simple, is it not?

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Well let us look at the Indian market from a foreign investor’s point of view:

Indian markets (as also China) is down by 18% over the past one year. If you are a foreign investor add another 14% of currency depreciation. It is not a pretty picture, correct?

It must have been quite a shocker for people who thought India was a domestic consumption driven market – and actually runs a small trade deficit. The Indian markets peaked in Nov last year and then has been on a ride down. From 21000 to 16000 now.

What caused this UNEXPECTED slump? It is not clear. Indian politicians have always been corrupt – however some new social changes – of wanting to punish the corrupt suddenly found ground support and has been shaking the governments. This movement has had an impact even on a few local elections. No major polls have been announced after this movement gained momentum. Also there was a Telecom scam where the Minister in charge of the licensing process was even jailed. Jailing corrupt businessmen, their executives and even a Minister that too for 180 days is unprecedented in India.

The FII cash flow into India in the year 2009 was US $ 17 billion and they invested US $ 29 Billion in the year 2010. In the year 2011 there has been a withdrawal – of about US $ 325 Million. In a country with very poor retail participation (there are no accurate figures for this – it varies from 1,000,000 to 10 Million!) exit of foreigners’ money was bound to have an impact.

India has many problems – the rate of inflation is in double digits. The RBI would love it if the economic growth rate and the inflation rates were to trade places, but there are no indications of that happening! The Indian growth rate of 6-6.5% is not bad, but when the expectations were in double digits, such a low figure of 6-6.5% (with a downward bias) does not look good at all.

If US $ 30 billion were to come in – and that too quickly what would happen? If retail FDI was really allowed what could happen?

These are difficult to handle. However a 7% growing economy with a beaten down market and a beaten down currency is very difficult to ignore. So money will come in. Will the markets scream its way to the top? No. Frankly there are no great triggers for the market to RUSH up all the way to 21000.

However we all know that triggers for a bull market or a bear market are not visible TILL THEY HAPPEN! So suddenly you might see cash flow coming in, quarterly results being good, interest rates coming down, a feel good factor – and the index could be at 21k in no time at all !

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Let me first define best advice:

• if you hear it in 2000, 2010 or 2020 it should sound correct
• the regulator should not find it offensive
• it should not talk about any one particular company or sector
• if it is N S E you should talk Nifty…and if it is BSE …Sensex
• it should not offend anybody
• it should not be scandalous

is it easy? Well initially I thought of this as difficult…but here are a few tips on what to say :

• Equity investments are for the long term
• Stay invested for long term – when the market turns upward, you will benefit
• Keep investing in the short run and long run, you will benefit
• Buy only good shares
• Do your fundamental research and analysis before you invest
• Do not invest in a small company unless you are sure about the promoters
• If you had invested Rs. 1000  in 1980 in Wipro today it would be worth more than Rs. 30 crores
• Read the prospectus before you invest
• ……………and many more…………..

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One topic which comes up quite often is ‘should I book profits in equities’ and ‘should I book profits in my mutual fund portfolio’.

Frankly these are 2 completely different topics and need to be handled that way.

The portfolios that I manage consists of a lot of commodity stocks (EID Parry, Hindalco, Tata Steel,…), Industrials (Cummins, Carborundum Universal, Wendt, Esab), Power (Tata, Ntpc,), Banking (Hdfc, Hdfc bank, other banks I do not wish to go public because they are in my trading portfolio, NEVER in my investing portfolio – even though I may take a 1 year view).

Now fairly obviously I cannot take a view on EID Parry based on the Sensex, right? It has to be based on the price of sugar and the political stupidity in TN and Andhra. Similarly in case of Coromandel Fertiliser – it has to be based on the fertilizer policy (I have always held if fertilizers are not subsidized, the food subsidy will go up!!). Similarly today the decision to hold on to Tata Motors has to be on the basis of JLR sales in China…

HOW THE …..do i give one answer ‘should I book profits in equity?’ as if it is some one animal? This is like our great media saying ‘FIIs are selling’. L O L. I know FIIs who are doing attractive private deals even as I write it – and it is on the buying side. So ask ‘Is it time for me to book profits in Bharti Airtel’ – NOT ‘Is it time for me to book profits in equities’.

I have not ‘booked’ profits in many shares (e.g. Proctor and Gamble, Colgate, Gillette, – or if I have, I have even bought it back in case of Gillette and Esab),…have held Hero Honda, Tata Motors, Tata Steel, Tata Power etc. over 30+ years (traded in a small portion of it, yes, but that is perhaps marginal), booked a lot of profits (inspite of some buy back in L&T)…and am happy with the performance.

Now take the case of Mutual funds. I have invested (frankly do not remember too much of redemptions except at rationalisations once in a while) into Hdfc Top 200, Hdfc Equity, Prudence, Franklin India Bluechip, Prima, I Pru Discovery, Prima Plus…..again upwards of 12-13 years plus…NEVER BOOKED PROFITS.

Now of course there can be a lot of people who can say ..’If you had sold in 2007 and bought in 2009…blah blah..’. Luckily I did sell in the end of 2007 – that was because some specific shares which I held were terribly expensive (and I did not believe they deserved that price)…but that was about 10-15% of my portfolio…and I seriously think I GOT LUCKY, not smart. If I were really smart, I would have known the following things:

when to sell

how much to sell

how long to keep money in a liquid fund

when to shift from equity to debt and

when to shift from debt to equity.

I am not that smart. However I am smart enough to know that searching for such a person is too time consuming.

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She said “The world has not seen such a turmoil ever. You can say keep investing in a SIP for 2-3-5 years, but where is the evidence that with so much of volatility, for equities to do well – is it not better to put money in debt instruments like PPF?”

Very fair question – and since I could not ask a woman her age, let me guess – she must be less than 25 years of age.

When equity markets are low one needs more confidence to be in the equity markets. To be in cash or debt markets seems to be the more sensible thing to do now. Why? Because everybody is doing it….right?

Well the market is a funny animal. It is also a slave of the earnings and another multiple called the ‘price earning ratio’. Without getting into too much of detail let us look at why does a person buy equities?

It is for 2 reasons:

- dividend income (not easy to predict, but at least an attempt can be made) and

- speculative income ( change in price earning ratio – far more difficult to predict).

Now let us take the example of a good company quoting at a price of Rs. 100. Let us assume that this company is T and has an EPS of Rs. 10 and has a price earning of 10 (Rs. 10 X 10 = Rs. 100).

Let us also assume that historically this share used to sell at a higher price earning – of say 15, but as the markets are down (i.e. the people do not want to pay a higher p-e for the market as a whole).

Now over the next 3 years – 2012, 2013 and 2014 the EPS of the company are 12, 18 and 20 respectively. What will happen to the price of the share?

Assuming that the companies future looks bright…etc. the likely scenario are as under:

Market remaining depressed ( i.e. p/e remaining at 10) the prices would be 100, 120, 180 and Rs. 200 over the next 3 years.

Market getting better (i.e. p/e remaining at 15) the prices would be 150, 180, 270 and Rs. 300 over the next 3 years.

Market clearly is a slave of these 2 numbers – there is no escaping at all.

Then why is everybody not buying? Just because of the following fears:

- what if it gets worse than what it is now?

- what if the price-earning ratio goes down?

- what if the earnings of the company go DOWN instead of going UP as you are saying?

- nobody is buying…why should I buy?

- FIIs are selling, why should I be buying?

- Every expert in the media is saying ‘do not catch a falling knife’ – is it not scary?

Frankly there are no easy answers – nor does any one person have an answer to all these questions. I am very comfortable answering these questions POSITIVELY for a large number of listed shares – just as I know that many companies will do badly! So answering for individual companies looks difficult, but as usual I am optimistic on a group.

A SIP in a good mutual fund (or an index if you wish!) over the next 3-5-7 years should see a return better than a debt fund. If you are more scared stick to a balanced fund (like say Hdfc Prudence – 65% in equities) and sit through the troubled times. Like Peter Lynch says one of the factors needed for making money in the markets is the ‘stomach to see churns’…

Answering her question of  ‘Is it the worst time in world affairs’…No my dear girl, no. This is the worst churn that YOU are seeing. Markets have seen famines, depressions, tsunamis, wars, riots, world wars, cold war, epidemics, bankruptcies, insolvencies, cheating, frauds, over optimism, over pessimism, …etc. etc. See a long term chart of say 150 years of the stock market existence – each of these events look like a blip.

The most important thing for an equity market to do well is DEMOCRACY – so next time there is an election – get off your butt and vote. No democracy no markets  – no wealth

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Warren Buffet is a great investor, and a great CEO for Berkshire Hathaway. He regularly makes very profound investment statements regarding the investment world…and the other managers. One of the statements attributed to WB is:

‘When all you have is a hammer, the world looks like a nail‘.

This is easy to interpret. Take the case of a typical Relationship Manager working in a bank or a brokerage outfit. His bonus/ commission is decided by the amount of premium he collects in UNIT LINKED INSURANCE/PENSION PRODUCTS. Obviously these products are very profitable for the manufacturer and hence get a good commission. So the salesman thinks all the people he meets need and can afford an expensive unit linked product. Obviously the higher the charges, the greater the commission for the salesman and the organisation which he represents.

Now look at Mr. Warren Buffet’s investments – they are largely in the USA. Of course he says all his investments are in USA – but it could be companies which are present in a big way in India / China – and their growth could be coming from there. Look at Gillette, Coke, etc.

Look at the way he attacks Standard & Poor – whenever they take a decision – he said USA should deserve AAAA, not just a AAA. Fairly obviously if all your money is in USA, you want the higher ranking.

Look at the way he attacks gold – an investor in just gold over the past 10 years has beaten Berkshire Hathway. Of course I am not suggesting anybody to buy gold – just giving you an example. My views of gold are Buffet like too!

WB criticising Moody is completely unheard off! – Remember he has a stake in Moodys, but not in Standard & Poor.

It is not easy to understand what WB says and what he does, so one has to be careful. He is normally very critical of high salaries of fund managers – and the financial industry in general. However he has invested in the past in Goldman Sachs and Bank of America!

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Too many pundits and journalists jump to declare ‘The market is now in a bear phase’. My left foot. None of us know whether the market is in a bear phase or in a bull phase. The day I finish saying the market is in a bear phase, it can go up 5% and make my prediction look stupid. Even if it was a bear market which pundit knows whether it will remain there or will it go up?

The whole market argument (or rather pundits argument) about bear market and bull market is completely futile and absolutely useless. Markets always have good shares to buy and bad shares to sell. Check your portfolio – see what is worth selling off even today because the management is not good or the products are not selling. Shares like Gillette, ITC, P&G and Colgate also loose sheen when the markets are doing badly. However these companies are NEVER available at a price earning multiple of 10 – if that is what a bear market is supposed to mean. Does it really matter that the index is at 18000, 17500 or 15500 – but the shares that YOU want to buy are still quoting at a price earning ratio of 28 – albeit lower than 31? If you were a buyer at 31, you can buy more at 28!

Strategy for bear markets:

Let us assume that we are in a bear market. Should you rejoice or feel sad? Well depends on whether you are in an investing mode or you are in a withdrawing mode! Most people I know (from age 23 to age 84!) are still in investing mode..so a bear market (or a market are depressed at the current stage) is a blessing. I have no clue which share is a good buy and which is a good sell ..but if you are in such a doubt pick up an ETF of the sensex or the nifty.

Pick a real low cost etf (if you are aggressive pick the Sensex etf and if you are not so aggressive pick a Nifty etf). If you are already an investor in a mutual fund, just pump in some money into the funds that you are already investing in.

A SIP is a good idea, but so is picking up some stocks which you understand…However I do not think markets are at mouthwatering levels for many shares, so please be careful…Remember roses are surrounded by thorns!

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Investment in turbulent times!

The market has gone nowhere in the past 4 years. When your financial planner / relationship manager / advisor told you that equities are for the long run he/she also said ‘long run’ means more than one year, correct? Well you invested when the index was 20000 and after that the market has just gone down. First it went all the way to 9000 and then it came up to 20000, but now is at 17000.

Far more importantly the shares that you bought and the mutual funds in which you invested have fallen by almost 40%.

Your advisor has started some other business, and is now not taking your calls. Your wife is screaming at you for putting HER money into direct equity – and she is not able to withdraw it for her sister’s wedding. She had promised her dad she would pay Rs. 100,000 for the same, but the shares are worth only Rs. 62,000! You are at your wits end.

What is to be done?

Just go back in time. Rewind to Diwali 2005. All the bulls including die-hard bulls said the market would have done great if it ended Diwali of 2006 at the same index as Diwali 2005. No expert was willing to brave even a 9000 call.

What actually happened? Just go back to your older files, and refresh. The market made these bulls look ordinary. January, February, March…. the markets cross 11,000 then April sees 12,000. Then, we celebrated. We made 12,000 stickers and stuck it all over the place. We made T-shirts, mugs and celebrated 12,000.

We assumed that the market is a place where there is no downward risk!

Let us rewind even further, say 1993 to 1999. The year 1993 was perhaps the worst year in the equity market and was a virtual bloodbath. Markets lost 46% in the financial year ending March, 1993. The returns for the years from 1993 to 1999 are as follows:

-46, +65, -13, 3, 0, 15, and -3.

An arithmetic mean is 3 of these numbers is 3. So we assume that if you had put Rs 10,000 in 1993, you would have got back 10,300 in the year 1999, correct?

Well let us see what would have actually happened:
1993 you would have got  -46  and your corpus would have reached Rs. 5400.
1994  ——-do—————-65 —–do———————————–8910
1995 ———do——            -13 ———-do—————————-7751
1996 ————-do——–     3 —————-do——————— 7984
1997——————-d0 —- 0 % ———–do————————–7984
1998 ———-d0————–15%—-do———————————9181
1999   you would have got     -3% and your corpus would have reached     8906

Over the years this is what would have happened to your Rs. 10,000 – now include 2% amc charges…and that would be even worse

Well it would have been worth Rs. 8906, and not 10,300.

The year 2000 was a good year and gave a return of 33% – so yes you would have RECOVERED your capital. In the national savings certificate it would have doubled.

The key takeaway, ‘The market will do what the market will do. You have to do what you have to do’.
Markets will be volatile. You will see a sensex of 15,000, 18000, 20000 and even perhaps 25,000 in a 12-month period. As a rule everybody loves a bull market. So the FM, the SEBI Chairman and everyone else will look worried and will try to talk up the market.
Keep in mind – for 3 years we have believed that markets cannot come down, and interest rates cannot go up. That might be about to change. We believed that a 2-day fall would be followed by a rise. We believed that the market is fairly valued at 3000, 5000, 8000, 10000 and 12000. We may rethink. We believed that you could go to the terminal in the morning and come back richer at the end of the day with Rs 5,000 or Rs 50,000 simply by buying. The bigger you bet, the greater was the gain. We may rethink on that. We believed that we could build our own portfolio and save the asset management charges that mutual funds charged. We may rethink on that.

The lessons are very simple.
1.    Asset prices fluctuate and they are inversely related to the interest rates. Markets are but an asset class. If it goes up, it will come down.
2.    Individual investors will come, conquer, panic and leave. FIIs will do similar things. You need to act sane. Nothing changes in the economic situation. The solution lies in having an investor mindset rather than a trader mindset.
3.    If you have money for the long run (I mean 4-5 years at least) you should be in the market. If you need to pay your EMI by selling shares, you should be praying in a temple.
4.    If you have an advisor who says 1 year is long term, get another adviser. If your CA says 1 year is long term – he means the Income tax act, not the equity markets.
5.    If you think you understand arithmetic mean, please go back and learn geometric mean, harmonic mean, standard deviation, median and mode.
6.    Equity markets have returned about 22% over long periods of time – with reinvestment of dividend, but please note all calculations ignore taxes and fund management costs. If you include that the final result is not so rosy.
7.    It can take the market say 10 years to touch the previous high. In markets like Japan, it only made new lows!
8.    Be patient do a SIP in a good big fund from a good fund house. If you are worried about fund manager risk, just put it in an index.

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Subramoney: Yes, of course.

R: Good i bought it at Rs. 240.

S: Hmm good. What is the price of the share now?

R: Such a good company sir, I thought you would know the price! It is Rs. 174 now…(not sure about the date – a few days ago)

S: Oh! so you are at a loss….

R: No sir I further averaged at Rs.180…so my cost has gone down…and this time I bought 200 shares.

S: What is the price now?

R: Sir the price is Rs. 147, I bought another 200 out of my last 2 months salary and by selling some Reliance Industries shares..I have bought some more at 124…now my average cost has come down quite dramatically.

S: so you at least made money on Reliance?

R: Sir you must be joking. I bought Reliance Industries at 1243…and sold it now at 834 Rs.

S: OMG….why did you sell Reliance?

R: Sir it is not increasing at all.

S: what is your time frame for Hindalco?

R: Sir long term sir…I will be invested for 2 years sir. My first purchase I am already holding for one year. I am sure in 3 more years at least, I will be able to sell on a no profit no loss basis.

R: Sir I listened to all that you said – a) bought a good company with good management.

b) As you have been recommending averaging (SIP) I have averaged also.

c) I do have a long term horizon – more than one year. (My CA and my broker told me that < 1 year is short term and > 1year is long term).

Still I am losing money……………what to do sir?

Readers willing to answer are welcome….I will share my reply after a few days..

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To me the answer is NO. I am not saying that you should wait for the bottom – I have my shopping list and have already bought some shares, but no we may not be at the bottom. Friday was a shopping day..and I did buy..

Am I not happy with the 7.5% growth rate? You got to be joking – it is one of the best in the world.

What is worrisome is the way the great MMS is ‘managing’ the economy. If India grew at 8% for 5-6 years, and US grew at 1% during this period, why is the Re-$ rate at 1=45? why not 1=35? Simple. Our internal fiscal discipline is ZILCH. Of course there is the macro explanation of wanting to keep the $ at that rate so that our exports do not look too expensive…be that as it may..

The US market has many shares available at 2.5% yield – remember their Gilt is giving you <2%. Very few good quality Indian shares are available at 2.5% yield – and we have SBI bonds available at 10%p.a.

Let us take the growth argument – Exxon, Chevron, Goldman Sachs, …will all grow at 17-18% + rate – I would be surprised to see Goldman Sachs growing at anything less than 25% for 2012. All these shares are available at a low p-e, double the gilt dividend yield, and with zero currency risk for an average American investor. You have to be very stupid to look outside of the US for investing – at least till the end of 2012.

Having said that, 2012 will be a tough year for the global economy. India might be able to weather it better than other countries, but the price earning ratios, dividend yield ratios, etc. are not mouthwatering. MBA colleges are still able to place all the people – even 2008 was more difficult. Salaries are still going up in double digit numbers, banks and life insurance companies are still opening branches.

Brokerage houses still have targets for account opening – but the number of active accounts may not be going up. The turnover at the exchanges are not going up – and frankly the FII should be able to find more lucrative markets abroad.

Let there be a few thousand job losses, let interest rates go down (somebody is still borrowing at 12% for industrial use, right?) and let builders repay 28%p.a. loans……then I would be willing to say ‘markets are at mouthwatering levels. Currently I am a nibbler, not an eater. And nibbler I always will be – at 9000, 18000, 21000 as well as 59000. After all I bought even when the index was 100, did I not?

Moral: do not wait for the waves to stop if you hope to take a dip in the ocean.

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