ET Editorial or CPI (M) Press Release???

ET Editorial or CPI (M) Press Release???

Please read this view on the edit page of Economic Times, Chennai (dated June 30, 2008):

• http://epaper.timesofindia.com/Repository/ml.asp?Ref=RVRDSC8yMDA4LzA2LzMwI0FyMDE0MDI=&Mode=HTML&Locale=english-skin-custom

I've been a regular reader of Economic Times for well over a decade. Have agreed (or occasionally disagreed) with their views but have always respected their thought processes.

The above article left me speechless. If it was intended as a satirical piece, I didn't quite get it. May be I'm getting too old. Alternatively, if this article had been a press release by the CPI (M) folks, originally written by people like M/s Karat, Raja, etc., I could possibly begin to understand it.

But coming from ET, of all the places! What can I say???

This article actually suggests that Mutual Funds should deploy their cash holdings (which, incidentally, belongs to investors like you and me - not to the general public of India) into shares. The reason: "To change the sentiment in the market".

Since when did "Changing the sentiment in the market" become the objective of the fund managers? I was under the mistaken impression that fund managers were supposed to maximise returns on my hard-earned money invested with them in accordance with the original mandate of the specific fund / scheme. If the fund manager feels that this is the right time to go out and deploy cash to meet the scheme objectives, by all means let him/her do so.

However, if the fund manager thinks that markets are likely to tank further, thanks to factors like:

• Panicky FIIs, who are getting out of emerging markets to handle their own self-created mess back home
• Zooming commodity prices, especially that of the rude crude!
• Imported inflation
• Political uncertainties
• Likely earnings downgrades

then, ... ... ... ...

The fund manager ought to wait a few more days / weeks so as to buy exactly the very same shares that he/she thinks is worth buying at an even lower price.

Economic Times, I certainly expected more from you - I didn't expect you to get swayed by such things like "market sentiment" to give such imprudent recommendations to fund managers of AMCs.

Regards,

N

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GM hits a new low!

GM hits a new low!

Recently (a couple of days back) General Motors hit a half-century low level on the exchanges - less than $12 per share, last seen in 1955 - the year in which Bill Gates was born! Talk of coincidences!

Read this link for some interesting details and statistics:

• http://biz.yahoo.com/cnbc/080626/25392542.html

What is this piece doing on this blog?

Simple - When we make investments in what we consider bluest of blue chips, we may perhaps be absolutely right - at that time.

We must, however, have the discipline to keep reviewing the investments periodically (don't bother watching the ticker every day or every hour) - at least once every few months. If the situation that warranted the original investment has changed, we must be willing to go right ahead and be willing to sell the scrip, irrespective of whether we are making some money or we are losing money on the original investment.

Regards,

N

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Catch them young!

Catch them young!

Financial planning, fiscal prudence, investing skills, knowing the benefits of the power of compounding - These are all terms that each of us should know. More importantly, these are things that all our kids should know.

When should we start teaching them? This is a very popular doubt among parents across the world. Here's an article that addresses the issue eloquently. Read on and also pass it on to your friends for their benefit:

• http://www.outlookmoney.com/scripts/iih021c1_new.asp?sectionid=10&categoryid=65&articleid=7506

Regards,

N

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Buffett on Booking Profits

Buffett on Booking Profits

The markets are turbulent. Share prices, as usual, are going up and down like crazy! In the melt-down since January, much of your paper profits have evaporated into thin air. Some of your scrips are still quoting at levels which enable you to get out with some profits. Other scrips are well below your original purchase prices.

What should you do now? Should you sell? If so, which ones? If not, when should you sell?

This has always been a major problem for investors. They get to know what to buy and when - either based on their own research, or based on "expert interviews on TV", "Wonderfully written articles" in business papers, broker recommendations, tips, etc. On the sell side, there's hardly the same quantum of advice available.

Hence, it is worth listening to the ever-green Sage of Omaha:

Warren Buffet, Mr Buy-and-Hold himself, has been known to sell. In a letter to Berkshire Hathaway shareholders in 1987, he wrote: "We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business."

In other words, he would sell when a holding rises to a price well beyond what he thinks it's worth. He has also been known to sell at a loss to raise money for a potentially more lucrative opportunity.

Becoming fixated on what an investment used to be worth is a loser's game. The money that is gone is gone, and there's nothing you can do about it. Far better, then, to focus on where your investments are now and find the best opportunities for the future.

So, when should you book profits? Ideally, when your investment goals are achieved. If a goal is achieved you should book profits and keep moving.

Hope that this gives you some nice clues on when to sell and what to sell from your wide range of winners & losers!

Regards,

N

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Handling Recovery Agents

Handling Recovery Agents

Today, we live in a world of EMIs. For the unfortunate few among us who default on loans, credit card dues, etc., we also live in a world of a dreaded species: "Recovery Agents".

My views on the matter are fairly radical and non-conventional:

• As far as possible, never take a loan - The only exceptions that I can think of are medical emergencies and low-cost loans for acquiring high-value, guaranteed income-generating assets (like a home loan, for instance - but certainly not a car loan!)
• In the unlikely event of taking a loan, stick to the mutually agreed repayment schedule, come heaven or high water. Don't ever default.
• If, for some extraordinary reason, you are unable to pay up, proactively address the issue by sitting with the lender and finding out mutually acceptable and financially feasible alternatives before the due date for the payment which you are likely to default.

Unfortunately, not many of us on this planet have such a reluctance to take loans.

For the benefit of those who do end up taking loans and more particularly for the benefit of the subset ot those who might end up facing recovery agents, here's an article which I found quite enlightening, easy-to-read AND worth learning from - Do read it definitely:

• http://www.outlookmoney.com/scripts/iih021c1_new.asp?sectionid=10&categoryid=124&articleid=7472

And, if you can, go back to take a look at my views as mentioned above and explore the possibility of following the suggestions!

Regards,

N

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Don't Pay Entry Loads while investing in Equity Mutual Funds

Don't Pay Entry Loads while investing in Equity Mutual Funds

SEBI has recently enabled us to avoid paying entry loads while investing in Equity Mutual Funds. However, I still find that lots of our friends continue to invest through distributors (and hence pay a hefty entry load) instead of investing directly - Please read this link to find out the benefits of not paying an entry load:

• http://in.rediff.com/getahead/2008/may/28sanjiv.htm

So far as choosing an apt fund for you (which is supposed to be the only reason besides "convenience" why you invest to MF distributors), all you need to do is visit websites like valueresearchonline.com to figure out the answers to all your queries!

Every penny saved is a pound saved, over a period of time!

Regards,

N

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Lessons from IPL cricket

Lessons from IPL cricket

Dear Folks,

Now that IPL is over and you've taken rest for a couple of days, it is time to share this mail that I got from a friend while the IPL was still going on. I did not wish to compete with Warne, Watson, Dhoni, Shah Rukh, Slapping Bhajji, crying Sree, etc. Hence I waited till now to share this with all of you!!!

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Unfortunately, I don't know the name of the original author - Those of you who know (or have access to the March issue of "Financial Advisor") - pl leave the name of the author as a comment after reading this blog.

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The original author of this article says: "In several of my write ups on investments I use analogies from cricket…my article in the March 2008 issue of 'Financial Advisor' was titled 'Lessons from Cricket'."

Cricket today is a highly competitive activity and it has also become a lucrative career, more than its status as a game. There is huge quantum of money involved hence it attracts a lot of attention, talent and is very competitive.

The on going IPL event is a classic case from which analogies can be drawn and lessons be learnt for investments.

(This is based on info available as on 7^th May 2008)

The Jaipur team i.e. Rajasthan Royals and Kings XI Punjab-the Mohali team head the rankings so far with 10 points each.

This is followed by the Delhi and Chennai teams running neck to neck currently, in the next slot is Mumbai and at the bottom are the teams from Kolkata, Bangalore and Hyderabad.

More than the cricket, I am fascinated by the 'out and under performance' of various teams, the 'randomness' of out and under performance, as well as the 'expert' prediction regarding this.

To refresh memories,

At the start of IPL-Rajasthan Royals were considered the weakest team. They had a bad start and so did Kings XI Punjab…both these teams are currently at the top.

The team from Kolkata had a dream start; its opening batsman from New Zealand went ballistic in the first match itself and hence the 'Knight Riders' were considered as brilliant.

The team from Chennai was among the best as it went on a winning spree and was headed by MS Dhoni. A few days back an article in a newspaper had mentioned that Dhoni had justified his large pay package, since team Chennai was on a winning streak. Ironically, soon after this, the performance of Chennai Super Kings has tanked.

Welcome to randomness of 'out and under performance'…the harsh reality in any competitive activity wherein expert predictions and forecasts are akin to throwing darts at a swinging pendulum. If the prediction (dart) hits bullseye the expert attains stardom and if his dart misses the mark-one can always give a detailed explanation in hindsight.

As the tournament got under way-the Rajasthan team proved to be better than most teams and are currently at the top of the league.

The strong Chennai team is struggling since the past 3 games which they have lost miserably and have thus fallen in the overall rankings. They were right at the top i.e. the 'top quartile' and now they are down to a lower rung.

The Kolkata team which began with a bang is currently at the bottom of the league and appears to be struggling.

'Past performance is not an indicator of the future' or 'Past is not the prologue' is a harsh reality in IPL. The 'out and under performers' are changing continuously and rapidly.

E.g. no one at the start of the competition could have ever imagined the pathetic performance given by the Bangalore side till date. This side which is captained by the solid Rahul Dravid has done so badly that the team CEO-has been sacked. This was reported by the media today.

The Hyderabad side an otherwise solid team (at least on paper) also has had a below par performance so far and is in the 'bottom quartile' of rankings.

The Mumbai team had a series of misfortunes with its captain and star batsman Tendulkar unable to play because of an injury. The replacement captain is also out of the team on account of unruly behavior.

No one could have 'predicted and forecasted' that Pollock would have to captain the Mumbai side…he has been doing it quite well. The Mumbai team had a forlorn, almost demoralised beginning but is now moving up the ladder.

In fact they beat the strongest team so far-the Rajasthan Royals y'day. The Royals were all out for a miserable score and the Mumbai Indians won convincingly. And as I wrote earlier-the Royals were supposed to be the weakest team at the start of the tournament.

The Rajasthan paceman who wrecked the strong Chennai side by taking 6 wickets just the other day-was thrashed by a relatively weaker Mumbai side y'day.

Phew! Welcome to more randomness and more unpredictability of out performance (s)!

What do we conclude?

Past performance is no guarantee to the future in any competitive activity whether cricket or investments. Some of the best players have had a below average IPL so far and vice versa. (Bad luck for some one who tried to predict and forecast).

Cricket and active fund management have highly motivated professionals-most of them with similar skill sets and talent. Their rational self interest to 'out perform' brings out the best in these individuals.

Unfortunately for them they are 'fighting' against each other in an attempt to 'out perform'. Hence by default some or a large number of individuals will 'under perform' at any given point in time.

Says Jack Bogle, "By and large, fund managers are smart, well-educated, experienced, knowledgeable, and honest. But they are competing with each other. There is no net gain to fund shareholders (unit holders) as a group."

Any competitive activity which involves a high number of skilled and motivated professionals like cricket and active fund management results in 'random individual out and under performances' time and again. This inconsistency is a fact of life when so many people using similar techniques and with similar motivation are placed against each other.

The 'man of the match' is different on different days and this cannot be predicted in advance.

One may indulge in all kind of expert forecasts-but predicting the future 'out performers' is a futile activity. Almost like throwing darts! The IPL example explains a lot.

The 'average' or index return is the average of out and under performers. In investments this represents the realistic returns from any asset class or its sub category over the long-term. This is because the 'out and under performers' will keep changing all the time.

In IPL cricket the final winner will be the long-term 'out performer' (I will not try my luck at this prediction just as I don't for the market, stocks and great fund managers).

In IPL the average according to me will be the 2^nd and 3^rd slots, as they also will get handsome financial rewards-just like long-term index fund investors.

All teams below this are the 'under performers'. Many of my (expert) friends are trying to predict the team that will win the IPL...however, like any good analyst I will personally do this in hindsight by giving a detailed explanation ! Please wait for this till the end of the event.

 

Regards,

N

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