Commodity cycle plays are rewarding and risky. There is no proven method, other than the adage of buy low sell high. The problem is in calling peaks and troughs of cycles. Today, the world has a gross overcapacity in production facilities of all commodities. There are imbalances depending on some bunched up demand or supply getting throttled or some environmental issues. The net result is that a long term investor in commodity companies can never be a content person.  Here is a piece I wrote for Deccan Chronicle of 3rd/4th December 2017)

The performance of corporate India, in aggregate, for the listed universe, is not very encouraging. Here is a snapshot as of 29-11-2017

 

Results declared                           2089

Positive profit growth                   1112

Negative profit growth                   867

Total Revenue Growth                     7.4%

Total EBIDT growth                        3.8%

Total Oper. Profit growth                2.6%

(Source- www.trendlyne.com)

 

This is only an average.  Different companies have different stories to tell. However, this is a market where tall tales find ready acceptance and helps someone to make a ‘buy’ decision. The latest reports (https://www.ndtv.com/business/nse-firms-q2-profit-growth-highest-in-six-quarters-1781479 ) is quite encouraging. It tells us that the NIFTY companies managed to increase their earnings by nearly twelve percent. This is surely an excellent number. See the various comments in the article that is referred to.

 

I have given a link  a table of the various NSE indices which show the valuation for different segments of the market. This clearly tells us what is happening and that too in the mid cap space. And the numbers probably hide the growth expectations behind the valuations.  (https://www.nseindia.com/products/content/equities/indices/indices_comparison.htm)

 

Let us take the example of a sector like “Metals”.  After a few dismal years, thanks to China, the sector is seeing a twin barreled growth.  A domestic thrust on infrastructure which pushes the demand and a lull in the China output which gives pricing power to the domestic producers. These result in some spectacular growth in profits on the back of some dismal past. Naturally, this exuberance pushes the prices of stocks and the valuation numbers do not tell the story. For example, if a company was having an EPS of 2 rupees, and the quarter ending September shows an EPS of 4 rupees, the index measures etc do not tell the facts. The historical PE will still be based on the EPS of 2 rupees for last year. On the other hand, the investors have already put in their estimates (say 10 rupees for this year). This probably explains the dichotomy.

 

However, what is genuinely a matter of concern is the exuberance of expectations. This growth from a supine position to a standing position, cannot be extrapolated in to the future.

Commodities go through price cycles. No one can predict the highs or the lows. In general, there is global overcapacities across commodities, with China being the fulcrum. China’s output and demand make a huge difference. In addition, many commodities, being natural resources, face environmental issues as well as regulatory issues in different countries.

 

We have seen commodity companies making losses, defaulting on their loans and then coming back in to prosperity. What happens is that somewhere, someone gives up something and the notional number of ‘capital employed’ shrinks. The earnings probably suffice to service this lower number.  The other thing that happens is that a favourable price movement and a higher capacity utilization both add to the profits number. A potent combination, where the first change from a poor financial health suddenly transforms to something shining.

 

Once the prices go up ( at best case a two year window) and new capacities do not come up, the returns continue to be high. Regulatory actions, tariff barriers all come in to play and knock the earnings back. The only permanent gain that remains is the lower notional number of “Capital Employed”.

 

Thus, the earnings growth, after the first blush will taper off. At that time, debate on valuations will start. Till then, enjoy the ride. Knowing when to get off a moving train, sometimes becomes important, when we play the commodity stocks.

 

R Balakrishnan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Index Name  Index P/E P/B Div Yield
Nifty 50 10370 26.53 3.49 1.07
Nifty Next 50 30040 36.84 3.51 1.04
Nifty 100 10793 27.85 3.50 1.07
Nifty 200 5689 29.90 3.46 0.99
Nifty 500 9254 31.78 3.38 0.93
Nifty Midcap 50 5288 104.05 2.62 0.50
Nifty Free Float Midcap 100 20098 51.54 2.83 0.93
Nifty Free Float Smallcap 100 8746 101.12 1.83 0.52
Nifty Auto 11406 40.63 6.13 0.54
Nifty Bank 25846 29.83 3.01 0.18
Nifty Energy 14319 16.33 2.01 1.72
Nifty Financial Services 10545 30.58 3.58 0.25
Nifty FMCG 25936 42.18 10.67 1.42
Nifty IT 11271 17.79 4.09 2.09
Nifty Media 3361 42.05 6.52 0.44
Nifty Metal 3736 16.74 1.72 3.55
Nifty MNC 13789 27.58 5.46 1.67
Nifty Pharma 9319 45.63 4.16 0.41
Nifty PSU Bank 3985 101.36 1.31 0.59
Nifty Realty 319 59.35 1.44 0.10
Nifty India Consumption 4862 58.00 5.75 0.83
Nifty Commodities 3980 18.18 2.10 2.73
Nifty Dividend Opportunities 50 2566 18.74 3.19 2.61
Nifty Infrastructure 3524 62.92 2.31 1.12
Nifty PSE 4257 14.48 1.97 3.79
Nifty Services Sector 13682 27.77 3.38 0.74
NIFTY SME EMERGE 1479 24.93 3.53 0.30
Nifty Private Bank 14206 29.37 3.30 0.12
Nifty Mahindra Group 10483 22.22 3.39 1.28
Nifty Full Smallcap 100 4427 61.48 2.20 0.38
Nifty Smallcap 250 6902 89.49 2.42 0.40
Nifty MidSmallcap 400 6920 62.45 3.02 0.45
Nifty Tata Group 5583 34.94 4.88 1.21
Nifty Midcap 150 6937 53.68 3.48 0.47

 

 

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RATINGS UPGRADE FOR INDIA

(This was published in the Deccan Chronicle on the day after the ratings upgrade)

It is a heartening sign. The sovereign credit rating got upgraded to Baa2, from Baa3). It is a one notch upgrade.  In the ratings hierarchy, this is where we have been put:

 

(Image of table copied from http://www.nasser.ws/2011/10/rating-symbols-definitions-for-standard-poors-fitch-and-moodys/ )

The upgrade comes after years.  It is an acceptance of the fact that in the last three years, economic reforms have been of a high quality. It gives faith to the rating agency that we can manage to live within our means, with reasonable debt that can be regularly serviced.

This is noteworthy for an important reason that it comes at a time, when there is global economic weakness and every nation is actually spoiling its creditworthiness in mistaken efforts to sustain growth or stop a slowdown.

Some chronic ills have been addressed. Whether it is a clear shift from subsidies to direct transfers, using digital technology to minimize waste in targeted subsidies and taking important steps to clean up the PSU Banking space. The shift to GST is another event that is seen to be positive.

I am not commenting on where the rating was or where it ought to be. The important thing is that it is a rare UPGRADE in difficult times.  What is means is that it imparts confidence to capital. It will enhance the flow of capital to India. In my view, the single important thing that India needs is capital and this event boosts that. Thus, the benefits are going to be permanent and long lasting.

The rating changes sometime tends to be self-fulfilling. For instance, a Triple A rated entity attracts most money on best terms, helping it to grow faster and remain healthier. Similarly, this rating upgrade to our sovereign is also an indirect pressure that we continue this path.  Just to jog our memories, the Vajpayee regime has started to free the oil sector by freeing petroleum pricing. Unfortunately, a looming election halted that reform. And it took ten years to restore.

Thus, credit ratings are a reflection of things that happen outside a fiscal budget and cause long lasting impact on the fiscal situation in the future. I can always argue that India’s sovereign rating should be at A2 rather than Baa2, but do not have enough facts or views to challenge them. Ultimately, it is an independent agency’s opinion and one has to accept it.

In the market place, the level of ratings decide cost and availability of money. Many large investors/lenders base their decision on the credit rating levels. Thus, a higher level means more money at a lower cost. Further, at this borderline investment grade rating (Baa3 to Baa1), there would be many who feel psychologically more comfortable with a Baa2 than a Baa3. The logic is that Baa2 is at least two steps away from ‘junk’ and hence there is enough time to get out should something go wrong. The pricing and availability between “Investment” grade and ‘non-Investment” grade is very wide. Many doors just shut when there is a ‘non-investment’ grade borrower.

The rating upgrade is very positive news for the stock markets. While it may take more time for company earnings to catch up with the heightened valuations, this ratings upgrade would improve the flow of money in to the markets and keep the valuations in the upper ranges.

This upgrade probably helps the markets to build a base. Earnings improvement is still some time in to the future. Only thing is that there would be some short term build up of momentum. Focus on large cap stocks. As new money comes in, liquidity flow in the markets will shift in favour of large companies rather than small companies. Small company stocks may still soar, but the risks will keep increasing.

As investors, sticking to high quality continues to be important. Rating upgrade does not increase earnings. Valuations still continue to be challenging. When liquidity drives the markets, it is difficult to focus on quality. As an investor, nothing changes except the behaviour of the others. Stick to your processes and principles.

 

November 17, 2017

 

 

 

 

GOING DIGITAL – A suggestion to the PMO

Going Digital is the way forward. I think all are in agreement on this. There are some obvious places where the government CAN and SHOULD go digital IMMEDIATELY. Let me list out a few obvious places, which would help prevent lot of frauds and be in the public good.

 

  1. DOCTORS

On a public website, list out every doctor, name, year of passing and photograph. This will help weed out fakes and rogues. The details could also include names of doctors who are suspended / degrees cancelled etc.  Verification of qualifications becomes so much easier. Every recognized university should list the full details. Not very difficult.

  1. DEGREE HOLDERS, PROFESSIONAL QUALIFICATIONS ETC

Every institution that is recognized, whether it be IITs or CBSE or colleges, SHOULD put on their website, names and photos of every one who passed out of their academies, year wise. This will weed out those who submit fake papers for getting jobst etc. And will obviate the need for ‘certified’ true copies etc.

This is especially relevant for professional institutions like IIMs, IITs etc. Jobs are given before the results are out. Publicly available database of results will help weed out frauds.

These are two basic categories, which affect the public. This can be extended to various spheres of public impact areas. Whether it be IAS officers or Gazetted Officers or Public officials.

PUBLIC ACCESS OR RESTRICTED ACCESS?

Does this violate privacy? My answer is, NO. If necessary, the grades, the marks etc need not be made public. However, the fact of someone being a pass or a fail should not be hidden.

I am sure, if the government implements this, it would be of huge public benefit.

R Balakrishnan

 

ARE YOU BUYING MIDCAPS?

(This appears in Deccan Chronicle – http://epaper.deccanchronicle.com/articledetailpage.aspx?id=9339913)

As you try to exit the mid caps and you find that the scrip which was so easy to buy, is not shifted to “T to T” or “Cash” segment, selling becomes a full time operation. Enjoy the ride, take some money off also. )

THE BULL MARKET INVESTOR

I read a nice quote, which said that today’s stock prices are roaring so fast that the prices have landed in to the future. It carries a very subtle message. Markets celebrate every buy order with an uptick in prices. Bad news is greeted with ‘oh, it means the worst is over, let us buy NOW’. Every stock is a buy.

This is a market which gives you no time for thinking. The temptation to avoid process is very high. You sit down with the financials of a company and if you stupidly look at the price movements before you finish your analysis, you would despair.  Welcome to 1991. Welcome to 2000. Welcome to 2008. Welcome to 2017.

However, in this noise, I am trying to figure out some themes that will play out over the next few years.  Some of the factors at play, include:

  1. GST implementation could take two years to stabilize, but it does not seem to have dented corporate profits. Life goes on. And things shift from unorganized to organized. Things get better, bar the shouting;
  2. Consumption is the principal driver of the economy. Consumption that is aided and assisted by easy finance;
  3. Infrastructure spend is just beginning. On a scale that is unprecedented. There is a lot of action lined up;
  4. Company profitability can only go up from here;
  5. Liquidity is set to rise still higher as the FIIs will come back and domestic participation is rising day by day;
  6. PSU Banking sector looks set to bounce back to business as recapitalization plans announced, thereby increasing availability of funds for growth;
  7. Debt laden companies are getting a second life as banks are in a hurry to ‘resolve’ things and carry on with life;
  8. Valuations are not being discussed. As stock prices keep hitting new highs, the target multiples and prices also move up correspondingly;

The market mood is extremely buoyant. Mid cap stocks are the flavor. A small chat on a WhatsApp group and there is a ‘gap-up’ opening. Some speculators drop out. The seasoned punters get in and out, using a combination of inconsistent strategies (fashion for the times) to keep enlarging their portfolios. All that is needed for a price jump stretches from something earthshaking as announcement of quarterly results or a big brokerage house research report or the news of some contract coming the way of a company (does not matter that it is the routine business of the company) or the appointment or sacking of a key person or a celebrity mentioning the stock on social media.

In this bull market, there is no need for news to be earnings boosting. Mention gets a few percentage up on the stock any way.

And the ‘rumorists’ are having a field day. One speculative item in the social media and the stock price does high jumps. And then after a few days, a quiet ‘denial’ to the exchanges. The sheer magnitude is such that law enforcement will not just be able to catch up.

As a desperado in the stock markets, one has to now ‘anticipate’ which stock or group of stocks will be the prime & price movers on any given day. And the winner of the daily lottery is the one who has the best ‘hunch’ or the best ‘source’. And all the action is in the mid-cap and small cap space.

So what does one do? Either we are brave and ride the surf. Keep our eyes on the screen without blinking and press the ‘buy’ and/or ‘sell’ buttons without bothering to think about any ratios or business. I can see that this has become an occupation for many. Whether one makes profits or losses will depend on the character. In this day trading, you have to be brutal about not keeping a stock with you for long and be in love with prices rather than the company. This way, you also get to test your temperament.

For the more sober persons, who do not have a heart that is strong enough to bear the pressure, or for those who cannot spend the time needed, life becomes simpler. It is a good time to shift some money to large caps from mid caps. Not all sections of a market are equally valued. The large cap stocks will be less volatile. Will fall less than the mid caps, should the tide change. Correction can take two forms.  One is by prices going down to make valuations reasonable. The other one is by prices stuck in a range and earnings catching up over time. In effect, both mean that the ‘prospective’ returns for the asset class is lower than what one would like, at this point in time.

 

IPOs Ahead….

(This is a piece I had written for Moneylife in 2008- Before it became readable- the rough draft)

IPO’s and the merchant bankers- Takeaway for investors

Quotes from a newspaper:

“regulator’s inspection showed that the details of the promoters as mentioned in the IPO document were different from the one filed with the Reserve Bank of India.

, the merchant banker had not even verified the plant and machinery of the companies, the issues of which they had managed

one IPO, the regulator found out that the post-issue capital of the company was higher than its authorised capital —“

Above are some “omissions & commissions” by merchant bankers whilst managing IPO’s, according to a press report. The report also says that the regulator is likely to impose penalties on the merchant bankers concerned.

IPO business is funny business. Every issuer wants to sell shares at the highest possible price. Obviously, once an issuer short lists a few merchant bankers, then the actual choice would be made on who would offer the highest price. In any IPO, the fee is large. It could be a lowly 1% to as high as 5%. For an issuer, the total expenses can be in the range of 7 to 11% of the issue. Naturally, a 10% higher pricing means that the issue expenses are covered.

IPO’s, under the book building route can only proliferate in a bull market. In general, most IPO’s tend to be overpriced. All IPO pricing is based on some rosy picture of the future, so it is but natural that at least half of them will fail to live up to promises.

Once an IPO goes under water, the IPO investor feels cheated. Once many go, the noise levels increase. Investor forums start shouting and ask for action against lead managers etc.,

Firstly, no investor is forced by anyone to invest. He makes a conscious choice. He is being misled by the noise surrounding an IPO. He has no access to the prospectus or has no expertise to understand the same. So, he goes by his broker/friend/media views and plonks his money. Most investors I know want to keep flipping each IPO on allotment and move on to the next. One group just keeps piling up the IPO allotments. Over time, they sell where they see gains and hold on to the ones under water. In many cases, the reasons for holding on are psychological. Further, in each issue, the amounts involved are small (though it all adds up to a tidy sum) so there is a tendency to hang on. Over time, some of them become worthless and move on to the “vanishing companies” list.

What about the lead manager? To my mind, the lead manager/s should be punished only if there are compliance issues. If there are mis-statements, suppression of facts (which any due diligence should have thrown up) or any other act/omission which could have materially altered the story, then they should be punished. Here, the punishment should be severe and not nominal. I would say that suspending all the business of the entity for six months to a year plus a financial penalty which is at least four to five times the total fees involved in the issue should be levied. The penalty should hurt. A few lakhs does not make a difference to most merchant banks. Suspension of activities (all business done by the entity/group) in capital markets is a must. Only then would it hurt.

There would be instances where the lead manager is taken for a ride by the company. Such cases would be complex in nature. For instance, one of the cases cited above relates to the company filing some return with the RBI. It is very unlikely that the merchant banker would be able to verify this and to my knowledge, would not fall in the check list for due diligence. However, non-existence of plant and machinery is something that is amazing. So is the case of the authorised capital not being adequate. These are elementary errors and the punishment should be very severe. In fact, taking away the capital markets business licence would be a fit action in these cases. When a merchant banker takes on an IPO mandate, his responsibilities are huge. He may not have all the expertise himself, so he has to hire the right people to help him in this. On pricing, it is what the traffic can bear, so no issues with them. I would not blame a merchant banker on this. If he does this frequently, the market place would judge him over time.

Pricing is something we all like to hold the merchant banker responsible for. If an issue lists at a huge premium, then the issuer has lost. Similarly, if the issue lists at a discount, the investors get hurt. There is no answer to this. The merchant banker gets paid by the issuer. Naturally, his first loyalty lies there. As far as the investor is concerned, he has to take his call. There is no point in saying that if institutional investors put in money, they would have done their homework. World-over, there is an unholy nexus between institutional investors and merchant bankers (who also are brokers). The institutional investor can move more quickly, he has access to much more information than the retail investor would have.

The retail investor is all alone in this. The IPO grading system has been discussed in our magazine. Whilst it is a useful tool, it gives no help on pricing. This brings home the lesson that equity investments are fraught with risk. IPO investing is perhaps more risky than a secondary market investment. In the secondary market, you would have access to more information, research and price history. Further, in most IPO’s one has no idea about the management quality and capabilities. You may end up with a multi-bagger or end up with tissue paper. It is best to be cautious. In IPO’s, the advantage is typically with the issuer. He comes in at a time and price convenient to him. It need not coincide with what is good for an investor.

One issue relates to pricing disclosure. Whilst giving the mandate to a merchant banker, all issuers insist on a “price range” at which the merchant banker can place the shares. Without this, no issuer will give a mandate. However, the public get to know of a price only when the issue is about to open. All offer documents have a blank in the price disclosure. I understand that pricing can change, in tune with market conditions. However, why not give the indicative price band whilst filing the red herring or the draft prospectus with SEBI? This would give time to analysts to give their views on the issue. Today, most analysts do not get time to do this efficiently, because the price band fixation and the issue opening happens with a gap of a few days. This is something for the regulator to consider. Let the issuer be free to fix a totally different price when actually opening the issue. By giving the indicative price range up front, it would help the investor to take a better view and lead to more analysis and information to the potential investor.

The funny thing is that we all get introspective and rational when the markets are down. When a bull market resumes, all of us forget our lessons and plunge headlong in to putting our money back in to the markets, hoping to make a quick killing. By and large, IPO’s do give an opportunity to make money, depending on whose greed is greater at a point in time. In a bull market, the issuer takes advantage of the investor greed. In a bear market, unless the issuer is desperate, he waits it out.

 

 

August 23, 2008.

AXIS BANK- THE MIS-SELLER

One of the Axis Bank account holders got a ‘free’  Group Insurance policy from Apollo Munich insurance co. The account holders do not have a say in this.  Axis Bank gets noted as the insurance broker and in exchange has sold the data base of account holders. The account holder will now be a victim of calls and emails from the insurance company.

The account holder contacts AXIS Bank to get out of this mess and is directed to the Insurance company. It is a nice merry go round created by the crooked banksters in search of a few rupees of commission.

With bankers like AXIS BANK selling your information in an illegal manner, your privacy is shot to hell. And RBI may impose some idiotic fine of a few rupees and let the dishonesty continue

Wonder if RBI or IRDA or anyone has anything to say on this.

Of course, it is useless to expect any degree of honesty or ethics from this shady bank which has its roots in the erstwhile scam tainted Unit Trust of India.

Come in to the parlour… The markets beckon

(This appears in yesterday/ today varied editions of the Deccan Chronicle. Essentially a view about bull market and how the push happens to get us in to the market. And the world of ‘top picks’ based on festivals .. A ritual that the ‘sell’ side excels at .. Luring you to part with your money)

Diwali Sale is yet to come to the markets

 

Another Diwali. Another list of ‘best buys’ from all the brokers in town. You have new money. Last year Diwali picks? Confine them to the dustbin. Keep buying more. After all, the brokerage industry has to feed on your trades.

Diwali, English New Year, Financial New year and all seem like major events which change the direction and/or quantum of earnings of companies, going by the stock market recommendations. My inbox and WhatsApp groups have a total of around thirty recommendations urging me to put money in their “top ten” or “top five”.  One interesting thing is that these brokers do not seem to have anything in common. So now I have a list of around one hundred stocks that are compelling ‘diwali’ buys. Some brokers have put price targets, some have not.  Alas, none of them have also published their last ‘diwali’ recommendations to see how good their festive forecasts are. SEBI should do something about this.

Armed with a hundred ideas, I have just one thing stopping me. I do not have too much money and the brokers have not given me what to sell from my portfolio, so that I could buy in to their new festive ideas. I think it is very unfair on these brokers.

I prefer the Amazon and Flipkart mails that hit my inbox, with Diwali discounts on stuff that I do not need, but with large discounts. No one gives me Diwali discounts on Sugar or Cashew Nuts or Edible Oil or even the humble daily vegetables. It is available only on ‘smart phones’, wireless speakers and their like. Stock brokers must learn from these sellers. Tempt me to buy shares by offering me a discount.

Now, these brokers will have Diwali recommendation, then the English new year will come round, then Pongal, etc. How much money should I allocate to each of these festivals to buying stocks? The brokers should think of all these things. What if I blow up my entire cash on the Diwali ideas and have no money to buy their ‘new year’ ideas?

I do not know why an advisor or broker cannot tell us about ‘good’ or ‘high quality’ companies that one should consider owning, instead of telling me to buy and sell. Just give me  a pool of good companies (surely not too many that are worth investing for keeps) and tell me if it is a good ‘price’ to buy. Why does not any broker or advisor give us that service? Why have a view on every stock, most of which are of dubious quality, with no mention of promoters, business etc?

As an investor, I have to be on my own, if I have to build a portfolio for the long term. I have to either put the money in to a ‘diversified’ equity fund or in to an ETF (which will mirror the market).  SEBI has so many requirements to become an adviser/broker etc but I wish there was a way that they are also measured and their quality is up in the public domain. Today, the brokers are not accountable to anyone. Everyone in the game is a part of this circus to make sure that the investor is kept in the dark and keeps giving business. Even the ‘business’ media does not track the ‘sell’ side broker recommendations. For mutual funds, there is evaluation from brokers, from independent agencies and so much micro regulation from SEBI etc.

If you are a ‘qualified’ investor in equities, it would be a good idea to make a ‘short list’ of good companies (high quality of earnings, likelihood of surviving ‘long’, good promoter reputation, predictability in their business etc) and build your portfolio out of that. You may like to build your long term portfolio from that ‘short’ list. You could build your strategies to time your buys. This can be discussed in a separate article.

Outside of this ‘investment’ list, the rest would fall in to the ‘trading’ bucket, if you are so inclined. You buy them with a view to sell them in a short term. Many of them will be stocks from the commodities sector. Essentially, it is taking advantage of the behavior of other investors. When commodities cycles turn weak, these companies’ earnings suffer and there is sell off. We buy them on the assumption that the cycle will turn up. And when it does so, people once again start to buy them and push prices high. We could discuss this also in another piece.

I know that this makes investment in to stocks a very boring thing. The excitement created by the ‘sell’ side is not something that helps you in your investment returns.

 

 

Please sign this to help abolish personal income tax

I have initiated an online petition through change.org to make a radical change to the personal income tax imposition. I am seeking total abolishment and I am sure you will all support me in this.
I also request you to circulate this as widely as possible to your friends, colleagues and groups and help me reach a respectable number that will make the powers that be sit up and discuss this.

Here is the link

https://www.change.org/p/the-prime-minister-of-india-abolish-personal-income-tax?recruiter=1668472&utm_source=share_petition&utm_medium=copylink&utm_campaign=share_petition

 

Portfolio Management Services- Fees etc

Recently, some one wanted to check with me the ‘terms’  of a portfolio management scheme being offered by a broker.

As per the offer, the portfolio manager would be paid management fees whenever he beats the ‘hurdle’ rate. And this was an ‘annual’ measurement rather than a full period one.  What it means is that let us say that in year one, the portfolio dives 20%, the manager gets no money. In year two, if the hurdle is ten percent and the fund value moves from 80 to 91, he will get management fee!! The portfolio is still under water.

SEBI should look in to this.  Fees which are based on performance, should be calculated at the end of the term or exit. Hurdle rates, should be compounded. For instance, if the hurdle rate is ten, then it should be taken to understand that the goal post is a ten percent CAGR.

 

Addendum” A gentleman pointed out that as per law, there is something called ‘high watermark’ which actually covers this. I am not very sure, but if that is so, I stand corrected.  I however strongly believe that the fee should be taken when the investor exits rather than annual basis.

 

 

Lure of the Trading Ring

(This appears in Deccan Chronicle. Today. Maybe now the number of stocks to read up and track will increase as the exit door gets crowded. Another lesson. Forget. Next time will be different. Like this time is different)

Bull markets are a great thing. Apart from happiness to those who trade in the market, it also makes us feel very intelligent and confident. Without being an analyst or a professional investor, we start to build portfolios. There are so many recommendations and tips that come, we tend to buy as many different shares as possible. Every share comes with ‘hot’ news and they all tend to move rapidly when we hear about them the first time.

 

In the initial phase, we want to be sure. We take the recommendation. Then we check out the highs and lows and the recent moves. We see that the sharpest moves have happened just before the recommendations came to us. So we say, let me wait till it goes down a bit. It has gone up too fast. This way, we see that in a week or so, some shares do not come down. At the same time, we have received a few more ‘sure’ winners’ tips.

 

Now, we decide to buy small quantities (instead of twenty-five thousand rupees per share, we will limit our first buy to fifteen thousand rupees) and then add up. So as soon as we get the tip, we buy first. Afterwards we find out the spelling of the name, the business and maybe some headline numbers. Our comfort is the fact that the ‘source’ of recommendation is good and probably he makes so much money and is intelligent that we cannot question or doubt. If we ask questions, we think that we will sound silly.

 

Thus begins our journey of growing up.  Soon we have more number of shares than we can remember. And we follow a simple rule of selling off those that make us some money. We may all have some rules or we may just get negligent and keep watching them every hour without doing anything except searching for our next hot number. Slowly we see some stocks slipping in to the red. But then we rationalize. At some stage we use our second instalment to buy more. On those that rise, we are hesitant to spend our second instalment. We think that once it ‘corrects’ to our original buying price, we will buy the lot.

 

In all our decisions, we have let our common sense go to sleep. We had a fear of ‘being left out’ in conversations and WhatsApp groups. What we have done is to bet on price behavior of unknown bunch of stocks. We look at the insides of the buys we did and decide not to discuss it at any forum. We never had a strategy in mind about how much gains or when to get out. We remain in this suspended confusion for a long time. We now start tracking buys by big names of the market and try to tailgate them. The problem here is that by the time we get the news the price runs up and we will never know when they get out. Many ‘big’ names use this crowd following to make quick bucks. Large lots are bought. News is made public AFTER their buying is over and prices already show some jumps. Now the fans get in. No one asks the ‘big’ name about why he bought it or when will he sell it or how long he will hold it. Some of the ‘big’ names even mislead with public talks or selective leaks. Then the ‘big’ names will sell in small quantities at higher prices and totally exit their positions. They make their quick money. And now we see the prices slowly crashing. We do not have the heart to cut our losses and become wiser till the next tip comes round.

 

Some of the trades will NEVER make money. Some will make money in a bull market. The important thing to see is that the overall returns are not going to be something that you will boast about. The average returns will be just around the index. The more likely possibility is that after some time, we will realise that we cannot make money continuously, even if we spend more and more time.

Sometimes, it is good to have a break from routine. Keep your regular investments as they are. Do not listen. Do not track things that will never qualify for long term investments. Remember that only success stories get told. Even a Warren Buffett admits that some calls go wrong. We are not him. And the other thing is that the ‘big’ names probably devote a small part of their portfolio to this kind of aggressive or momentum trades.

 

Always have a plan for exit before you buy enter. And lay down rules and follow them. That way, your trading experience may not become sour and drive you out of investing. Fundamentals and prices can be at disconnect for a long time. Like there is no reason for a rise in the market, when it falls, you will still keep searching for reasons.

 

 

R Balakrishnan