Sunday 27 September 2009

The futile quest for the mythical ‘multibagger’

The futile quest for the mythical 'multibagger'

Got this while browsing the net. Guess that the Satyajit Ray movie must be worth watching for those of us who can follow Bengali!

My own guess about the typical investors experience with 'multibagger':

  • Very few identify, buy, hold on to, and encash multibaggers.
  • Most would not have purchased the right stock at the right time - Whether it is the HLL of a few decades back or Infosys in the late 80's or Bharti  a decade back.
  • Most would have exited after the stock doubled or tripled.
  • And the unfortunate few, who actually got the multibagger returns, probably held on too long and are facing losses now because of the steep bear market fall.

In case you've decided that you've identified the multibagger, what should be your strategy be so as to optimise your returns over an extended duration of time? If you wish to know,

  • Either write to me, or, ... ... ...
  • Watch this space.

Regards,

N

The futile quest for the mythical 'multibagger'

by Subhankar Ghose

Legend has it that the Philosopher's Stone had the unique ability of turning iron and other base metals into gold - the ultimate 'multibagger'. For a long time, the quest for the stone became an
obsession in western alchemy.

"Many many years ago, a man decided that he would give up worldly comforts and riches, and dedicate his life to finding the  Philosopher's Stone. He set out on his quest with an iron chain in his hand. Whenever and wherever he found a stone, he would stoop to pick it up and touch it against the chain to see if it turned to gold or not.

Many days and months passed, but he never wavered in his quest. He became thin and his hair turned into knots and his beard became long and unkempt. But the desire in his heart didn't wane.

He travelled through many countries and continents, from the mountains to the oceans. Never did he stop to appreciate the beauty of nature all around him. With a piercing gaze he picked out every single stone and kept touching it to the iron chain to check if it had turned to gold.

After a few years, it started to dawn on him that his quest may never reach fruition. Out of sheer habit, he carried on and picked up stones and touched the chain with them. He started getting weary and his heart became heavy, and he no longer bothered to check if the chain had turned into gold.

Once he was passing through a village square, where some small children were playing. They saw this wild-eyed man in tattered clothes, knotted hair and tangled beard coming towards them. One of them exclaimed: 'Look, look! That crazy man is carrying a shining gold chain.'

The man stopped dead on his tracks. In sheer disbelief, he looked at the chain in his hand. It was a solid gold chain. During his long quest, he had found the Philosopher's Stone after all. But he had thrown it away, like all the others, after touching it to his chain without checking.

In sheer despair, he sat down and pondered his fate for a while. After some time, he sighed, got up and resumed his quest."

The moral of the story? It is the rare and fortunate investor who can find more than one multibagger stock in his entire investment career. Such good fortune happens more through chance than by design.

Why is that? Because most of us do not plan to hold a stock long enough in our portfolio for it to generate stupendous returns. Does it mean that holding any stock for a long time will automatically generate multibaggers? The answer is obviously 'No'.

That is why, selecting fundamentally strong stocks is so important. Once the preliminary hard work of proper stock selection is done, one should keep holding such stocks, and at most, book partial profits from time to time.

The trick is to keep buying back these shares during a down turn, at lower prices. Doing this with just a couple of stocks, like Tata Steel or L&T, can provide huge returns.

Can momentum, or 'fashionable', stocks provide multibagger returns? The answer is 'Yes'. Pantaloon and DLF have been multibaggers. But how many small investors were able to reap the multibagger returns?

Note:

The above story is a prose version of a famous Tagore long poem, titled 'Parash Pathor'. Satyajit Ray made a highly entertaining movie with the same title, about a person who actually finds the Philosopher's Stone and what happens to him because of it.

 


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Friday 25 September 2009

The Excuses We Make

The Excuses We Make
(For NOT Saving For Retirement)

 

Though old, this one from a recent issue of Money Today website is indeed enlightening ... ... ... ...

 

In our 20s

·       I have just started working.

·       There is nothing left after the monthly expenses.

·       I have to save for a house.

In our 30s

·       There is no spare cash after I pay the kids' school fees.

·       I have to plan for my child's higher education.

·       I am still repaying my home loan.

In our 40s

·       More money needed for child's higher education.

·       Expenses are going up.

In our 50s

·       It's too late to start now.

·       I'm close to retiring; my pension will suffice.

·       My children will take care of me.

 

What's your excuse, my dear????

Regards,

N


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Thursday 24 September 2009

Tiger Pie

Tiger Pie

If the Sensex PE is @ 21, as it happens to be right now, chances are bright that the situation described below is quite apt!

Read on & take care:

Got from the link: http://www.moneycontrol.com/news/market-outlook/powerful-bear-rally-underway-discontent-likely-enam-sec_416088-4.html

 

Q: So what sums up your strategy now? Would you say you're little circumspect about valuations but keep buying good prices?

A: Yes. At heart we are bullish folk in our firm, so every time the markets go down we like them to get cheap and like to buy them and sit tight but Nandan who is our Head of Research put a very lovely piece out where he said you have to play the tiger bird strategy. There is this bird apparently called the Tiger Pie sits and removes the picking from the teeth of the tiger while it is feasting. It is a very dangerous strategy to play and that's the phase the market seems to be in – that we are sitting on the mouth of Tiger over the next three-months – something has to happen in the world and we are trying to eke out 2-5% gains every week. It may not be the best thing to do, so for those who can afford it, you may want to lower your risk profile of your portfolio whether by more cash or having stocks which you can liquefy and then quickly go back into the markets or you have to extend your time horizon and say I do want to play this power and insurance thing and I don't care if I hit air pocket in the middle and if it does fall I will actually start increasing my weightages and holdings over there.

Q: Statistically how often does the bird live?

A: I don't know.

Q: He gets chomped by the tiger most likely?

A: Most likely.

I've started increasing cash levels in my portfolio - Would like to keep a good load of cash to invest when the markets eventually turn around.

Regards,

N


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Saturday 19 September 2009

Investment Advice - Especially for parents with young children

Investment Advice - Especially for parents with young children

Identify a suitable Equity MF (Nifty BEES would be a good idea) and start putting at least a token amount of 100-500 per month in the names of every child below the age of 21 regularly (dividend payout option) - Make it a compulsory stuff for the next few years - till the child reaches the age of 21. The results (due to the power of compounding) will be amazing by the time they reach college. Don't bother about clubbing of income because income will arise only if the MF is sold. Which, ideally, you should not do at all!

Analyse the likely result using an Excel Sheet to find out the likely cumulative amount available at the age of 21, assuming annual returns of 12, 15, 18%. You'll be zapped by the result.

By the way, the above idea is likely to be equally relevant even for adults who are planning to add a "surprise bonus" for their twilight years!

And, those of you who think that the "Growth option" in mutual funds would be a better idea, please ask me why I'm dead against the same. That'll be a good topic for another post on this blog.

Regards,

N


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Friday 18 September 2009

Commitment and loss aversion

Commitment & Loss Aversion

I recently received the excerpts from the book "Sway" given at the bottom of this page through email. I remember having seen it some time back on the web. Can't recall the source.

However, the stuff is quite interesting in the realm of behavioural finance.

After reading it, we must understand the following:

  • Money earned from Salary, Received as a gift, Won in a lottery, Obtained by providing services, Got from capital gains by selling shares - All of it is of the same value in monetary terms. For instance, just because it is money from "hard-earned" salary, it should not be preserved more carefully. Likewise, just because it is earned from an "easy" source like a gift or in a lottery must not be frittered away.
  • When your portfolio value (or the share price of one of your holdings) increases - for any reason whatsoever, you must ensure that you make all efforts to "preserve" the profits and should not treat a reduction in value as being acceptable merely because it is still higher than your original purchase price
  • In a similar vein, when your portfolio value (or the share price of one of your holdings) decreases - for any reason whatsoever, you must ensure that you do not allow your emotions to either
    • "wait till it regains its original value to get out" and keep increasing your de-facto losses (because you know that some of those scrips will never get back to their original prices) - You must just get the hell out by cutting your losses and move on to better securities
    • "Get the hell out of the scrip as soon as it comes back to your purchase price or thereabouts" (Despite knowing that it is indeed a blue chip and you've already borne the pain of the temporary downturn and you're perhaps likely to reap the rewards of your patience because the business cycle has turned positive)
    • And you must know the difference between the above two categories - After all, you need to know the difference between your "core portfolio" - the "hold for the long term scrips" and the "trading scrips - use the momentum, flavour of the season and get in and get out quickly categories"

Regards,

N

Commitment & Loss Aversion

In a great book "Sway", the authors, Ori Brafman and Rom Brafman, write on commitment and loss aversion.

 

"We've all experienced the pervasive pull of commitment in some form or another; whether we've invested our time and money in a particular project or poured our energy into a doomed relationship, it's difficult to let go even when things clearly aren't working. As difficult as it can be to ad­mit defeat, however, staying the course simply because of a past commitment hurts us in the long run.

 

Independently, each of these two forces-commitment and aversion to loss-has a powerful effect on us. But when the two forces combine, it becomes that much harder to break free and do something different.

 

It's precisely because of the compounding effect of these two forces that students in Max Bazerman's negotiations class at Harvard Business School would do well to hold on to their wallets when he introduces his "twenty-dollar auc­tion." They say it's easy to take candy from a baby; Professor Bazerman has found that it's just as easy to take money from Harvard MBAs.

 

On the first day of class, Professor Bazerman announces a game that seems innocuous enough. Waving a twenty-dollar bill in the air, he offers it up for auction.

 

Everybody is free to bid; there are only two rules. The first is that bids are to be made in $1 increments. The second rule is a little trickier. The winner of the auction, of course, wins the bill. But the runner-up must still honor his or her bid, while receiving nothing in return. In other words, this is a situation where second best finishes last.

 

Indeed, at the beginning of the auction, as people sniff out an opportunity to get a $20 bill for a bargain, the hands quickly shoot up, and the auction is officially under way. A flurry of bids follows. As Bazerman described it, "The pat­tern is always the same. The bidding starts out fast and furi­ous until it reaches the $12 to $16 range."

 

At this point, it becomes clear to each of the participants that he or she isn't the only one with the brilliant idea of winning the twenty bucks for cheap. There is a collective hard swallow. As if sensing the floodwaters rising, the stu­dents get jittery. "Everyone except the two highest bidders drops out of the auction," Bazerman explained.

 

Without realizing it, the two students with the highest bids get locked in. "One bidder has bid $16 and the other has bid $17," Bazerman said. "The $16 bidder must either bid $18 or suffer a $16 loss." Up to this point the students were looking to make a quick dollar; now neither one wants to be the sucker who paid good money for nothing. This is when the students adopt the equivalent of football's war-of­-attrition model. They become committed to the strategy of playing not to lose.

 

Like a runaway train, the auction continues, with the bid­ding going up past $18, $19, and $20. As the price climbs higher, the other students don't know whether to watch or cover their eyes. "Of course," reflected Bazerman, "the rest of the group roars with laughter when the bidding goes over $20."

 

From a rational perspective, the obvious decision would be for the bidders to accept their losses and stop the auction be­fore it spins even further out of control. But that's easier said than done. Students are pulled by both the momentum of the auction and the looming loss if they back down-a loss that is growing greater by the bid. The two forces, in turn, feed off each other: commitment to a chosen path inspires additional bids, driving the price up, making the potential loss loom even larger.

 

And so students continue bidding: $21, $22, $23, $50, $100, up to a record $204. Over the years that Bazerman has conducted the experiment, he has never lost a penny (he donates all proceeds to charity). Regardless of who the bidders have been-college students or business executives attend­ing a seminar-they are always swayed.

 

The deeper the hole they dig themselves into, the more they continue to dig."


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Thursday 17 September 2009

The importance of Timing the Market

The importance of Timing the Market

I'd posted this article some time back - Just got a feedback from one of the readers that the graph/picture that I was referring to is not visible. I've reloaded the same and the graph is now clear and visible.

More importantly, the markets have gone up quite a bit since the last time I posted anything on this blog. Hence, one could claim that this article has even greater relevance now.

Do take a look:

To repeat, the whole thing just goes to show the importance of:

  • Periodically booking profits, especially in over-valued scrips / mutual funds when the markets are overheated and quoting at crazy PE ratios
  • Choosing the dividend payout option in mutual funds
  • And keep investing the surplus generated from the above two steps in cash-equivalents to be converted into shares / mutual fund units when the appropriate opportunity arises.

Regards,

N


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