Friday 30 October 2009

Of Pins & Bubbles

Of Pins & Bubbles

A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons. - Warren Buffett

Considering the credentials of the Guru from Omaha, I can't take the chance of disagreeing with the sage all the time.

As enough number of investment gurus have pointed out, bubbles will keep getting formed as long as naive investors are floating around on this planet.

As long as bubbles are in existence, pins will keep searching for them.

On every such occasion when the two meet (I mean the pin and the bubble), inevitably the bubble will burst.

The whole process goes on somewhat along the lines suggested below:

  1. The smart investors would have got in there first, ahead of the rest
  2. The naive ones would have kept observing the bubble, denying its ever-expanding nature and refrained from getting in
  3. Unfortunately, just a few hours / days / weeks before the pin meets the bubble, our naive friends will go right ahead and invest in the bubble, convincing themselves that the bubble "Is different" this time around!
  4. And, pray, whom did these naive investors buy the bubble components from?
  5. Of course, from the Smart Investors referred to in (1) above!
  6. And, the Pin meets the Bubble

Moral of the story:

  • We can't do much about bubbles
  • We just need to learn our lessons from pins meeting bubbles
  • And aspire to become "smart investors" well in time to greet the next bubble.
  • And be smart enough AND fearful enough to get the hell out before the next pin meets the next bubble!

Happy investing!

Regards,

N


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Thursday 29 October 2009

World Thrift Day - Why ALL of us Ought to invest in Equity

World Thrift Day - Why ALL of us Ought to invest in Equity

Dear Friends,

Wishing you all a very happy "WORLD THRIFT DAY" - Apparently, it is celebrated on October 30th!

To me, every day is a Thrift Day.

On this occasion, I'd like to make a preposterous suggestion: All of us MUST invest in Equity (either directly or through mutual funds - at least through Nifty BEES). Many may be aghast at this suggestion, saying that Equity is not appropriate for anyone who can't afford to take a risk.

However, I differ.

Take a look at the following table:

 Reason as to why you must remain exposed to Equity!
Initial Amount Invested
Annual Return
No. of Years
Final Value of Investment
         
Even if the initial investment is half, if annual returns are much better, the final value will be much bigger over a long period of time. Moral of the story: Invest at least part of the amount in Equity to ensure higher returns over a period of time.
50,000 1.14 10 185,361
100,000 1.08 10 215,892
       
50,000 1.14 15 356,897
100,000 1.08 15 317,217
       
50,000 1.14 20 687,174
100,000 1.08 20 466,096

You'll notice that:

  • I've just assumed a one-time investment and have done the calculations for two different sums of initial investments - 50K & 100K.
  • Obviously, I've assumed that the guy investing 50K chooses to invest in Equity while the guy investing 100K has chosen debt instruments like fixed deposits
  • I've assumed a relatively ordinary level of 14% per annum returns for Equity, whereas many mutual funds have given far superior returns.
  • I've assumed truly long-term time horizons.

You'll further notice that beyond 15 years, the guy who initially invested just half the sum initially actually outperforms the other guy.

That's the power of a combination of:

  • Long time horizon,
  • Compounding and
  • Equity investing

If the above results are achieved with just a one-time investment, just imagine what you can achieve with a recurring investment in Equity with a good chunk of your disposable surplus savings!

Happy investing. May all of you grow immensely rich and wealthy beyond your wildest dreams!

Regards,

N


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Wednesday 28 October 2009

Diversification - Warren Buffett's Thoughts on Diversification

Warren Buffett's Thoughts on Diversification
And why I disagree with him for a change!

"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing" - Warren Buffett

Very interesting quote, indeed.

Specific Disclaimer: I'm not too sure whether this is an authentic quote nor am I aware of the context in which the quote was made.

However, for the limited purpose of this post, I'm assuming the authenticity of the quote and proceeding further.

Obviously, for a given time horizon, if we consider the universe of listed entities on the Bombay or National Stock Exchanges, a specific scrip, let's call it ABC Ltd., will produce the maximum returns and a specific scrip, let's call it XYZ Ltd.,  will destroy the maximum value for its investors. And all the other scrips will have performance levels somewhere within that range.

So, as rightly pointed out by Buffett, it ought to imply that all of us should sell all the rest of our portfolio of longs and go long on ABC Ltd., and, likewise, use our "Short" positions exclusively for XYZ Ltd.

I wish that life is so simple.

Unfortunately, it is not.

Here are a few reasons as to why I disagree with Warren Buffett (and why I prefer diversification any day):

  • Nobody can predict the future that precisely.
  • Any significant, material, price-sensitive event that has a positive / negative impact on either that stock or that sector or some other stock can swing the price of your stock wildly, thereby throwing your calculations out of the window. Examples abound:
    • A sudden Lehman Brothers can deplete the value of some other Financial Giant vis-a-vis a Pharma major, for instance.
    • An outbreak of Swine flu or a major Class Action Suit on an unanticipated side effect on a popular drug can impact the price of your favourite Pharma Major either positively or negatively
    • Worms in your favourite chocolate or a sudden war in the middle-east can impact the share price of some other Chocolate company or that of an Oil Marketing major.
  • If your single golden bullet misses its target, you're in doldrums.
  • On the contrary, if you are diversified across sectors, across geographies, across market-caps, etc., chances are bright that no single event is likely to significantly impact your overall portfolio performance - Your portfolio performance is, in that case, more likely to be influenced by your own overall efficiency of analysis, stock picking skills, etc.

Hence do make it a point to keep your portfolio diversified.

At least on this matter, don't listen to Warren Buffett blindly!

Regards,

N


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Tuesday 27 October 2009

Beware of Credit Card Fraudsters

Beware of Credit Card Fraudsters

Credit for this post goes to NM, an uncle of mine, who forwarded this mail to me!

There are problems enough due to credit cards - Debt traps, et al. More about them in some other post of mine.

Unfortunately, there are problems due to credit cards that ought not to occur even for spend-thrift credit-card holders. Here's a mail that talks about highlighting a few of such problems and taking care of the same.

Be sure to read Scene 3.  Quite interesting. This is a new one. People sure stay busy  trying to cheat us, don't they?

Take care!

Regards,

N

SCENE 1. 
 
A friend went to the local gym and placed his belongings in the locker. 
After the workout and a shower, he came out, saw the locker open, and thought to himself, 'Funny, I thought I locked the locker.
 
Hmm, 'He dressed and just flipped the wallet to make sure all was in order. 
 
Everything looked okay - all cards were in place.. 
 
A few weeks later his credit card bill came - a whooping bill of $14,000! 
 
He called the credit card company and started yelling at them, saying that he did not  make the
transactions. 
 
Customer care personnel verified that there was no Mistake in the system and asked if his card had been stolen..  
 
'No,' he said, but then took out his wallet, pulled out the credit card, and yep - you guessed it - a
switch had been made.
 
An expired similar credit card from the same bank was in the wallet. 
 
The thief broke into his locker at the gym and switched cards. 
 
Verdict: The credit card issuer said since he did not report the card missing earlier, he would
have to pay the amount owed to them. 
 
How much did he have to pay for items he did not buy? 
 
$9,000! Why were there no calls made to verify the amount swiped? Small amounts rarely trigger a 'warning bell' with some credit card companies. It just so happens that all the small amounts added up to big one! 
============ ========= =======
 
SCENE 2. 
 
A man at a local restaurant paid for his meal with his credit card. 
 
The bill for the meal came, he signed it and the waitress folded the receipt and passed the credit card
along.   
 
Usually, he would just take it and place it in his wallet or pocket. Funny enough, though, he actually took a look at the card and, lo and behold, it was the expired card of another person. 
 
He called the waitress and she looked perplexed. 
 
She took it back, apologized, and hurried back to the counter under the watchful eye of the
man. 
 
All the waitress did while walking to the counter was wave the wrong expired card to the counter cashier, and the counter cashier immediately looked down and took out the real card. 
 
No exchange of words --- nothing! She took it and came back to the man with an apology.. 
 
Verdict: 
 
Make sure the credit cards in your wallet are yours. 
 
Check the name on the card every time you sign for something and/or the card is taken away
for even a short period of time.  
 
Many people just take back the credit card without even looking at it, 'assuming' that it has to be theirs. 
 
 
FOR YOUR OWN SAKE, DEVELOP THE HABIT OF CHECKING YOUR CREDIT CARD EACH TIME IT IS RETURNED TO YOU AFTER A TRANSACTION! 
============ ========= ======== 
 
SCENE 3: 
 
Yesterday I went into a pizza restaurant to pick up an order that I had called in. 
 
I paid by using my Visa Check Card which, of course, is linked directly to my checking account.   
 
The young man behind the counter took my card, swiped it, then laid it on the counter as he waited
for the approval, which is pretty standard procedure.   
 
While he waited, he picked up his cell phone and started dialling. 
 
I noticed the phone because it is the same model I have, but nothing seemed out of the ordinary. ?
 
Then I heard a click that sounded like my phone sounds when I take a picture 
 
He then gave me back my card but kept the phone in his hand as if he was still pressing buttons. 
 
Meanwhile, I'm thinking: I wonder what he is taking a picture of, oblivious to what was really going
on. 
 
It then dawned on me: the only thing there was my credit card, so now I'm paying close attention to what he is doing. 
 
He set his phone on the counter, leaving it open. 
 
About five seconds later, I heard the chime that tells you that the picture has been saved. 
 
Now I'm standing there struggling with the fact that this boy just took a picture of my credit
card. 
 
Yes, he played it off well, because had we not had the same kind of phone, I probably would never have known what happened. 
 
Needless to say, I immediately cancelled that card as I was walking out of the pizza parlour. 
 
All I am saying is, be aware of your surroundings at all times. 
 
Whenever you are using your credit card take caution and don't be careless. 
 
 Notice who is standing near you and what they are doing when you use your card. 
 
Be aware of phones, because many have a camera phone these days.
 
 
JUST BE AWARE 
 
Never let your card out of your sight.....check and check again! 
 
Scary, isn't it....

Regards,

N


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Monday 26 October 2009

A Market Entry-Exit Strategy

A Market Entry-Exit Strategy

At the risk of repetition, it is worth emphasising a few critical points once in a while.

Here's another forward that I got from one of the Yahoo groups that I'm a member of.

Again, it talks of PE based investing.

The points mentioned are indeed quite relevant for many beginners and relative "amateur" investors. However, for more advanced investors, I'd recommend a minor modification in the "Exit strategy":

  • Use technical indicators, if you're familiar with the same.
  • Wait for the downward U-Turn to reach a critical support line
  • Keep your sell-list ready
  • The moment the downward U-Turn breaches your pre-identified critical support line, get the hell out of the market to the extent you want to (Activate your sell-list)
  • If it is a false breakdown, be very wary about re-entering the market to catch the last few points of increase in the already bloated PE.

The above modifications will enable you to get a few extra bucks without necesarily increasing your risk levels to unacceptable levels.

Do think about it and revert with your comments and feedback.

Regards,

N

From another Yahoo group by name "La Warren Buffett"

Cheers

Prashanth

A Market Entry Exit Strategy |

A statistically informed look at Nifty valuation levels
30 Sep 2009

Market Entry Exit Signals? The CNX Nifty is today trading at a PE of 22.9.

Many senior investors I speak to, have started getting cautious. They are cutting their exposures and not making fresh entries. While there may still be some stock-specific value left, valuations are rich in many frontliners.

With the FIIs continuing to pour in money, there is also talk of whether the market can touch new highs! With increasing inflows, the FIIs also reckon if the Indian currency were to appreciate to Rs. 40 to a dollar from current levels, even if that were to take 1-2 years, that's a straight 20% gain on the currency! As the Raring Bull is fond of saying, who's to argue with what valuation is right for the Indian market?

Having learnt my lessons in 2007 & 2008 (I remained invested throughout and did not book even partial profits), I am now in search of some kind of market entry exit decision-making models for myself. A senior prompted me to look at long-term historical Nifty Valuation data. He suggested a statistically informed look at valuations can introduce some predictability to investment returns!

Between January 1999 and September 2009, the Nifty traded at low PEs of below 11 and high PEs of 28+. It hit those extreme valuations rarely. The average PE was 17.72 while the median was 17.58 and the modal value was 14.31. The standard deviation was 3.64

The Median indicated that exactly half the time, the Nifty traded below17.58. And the Mode shows it most commonly traded between 14-15. Most of us are aware of this on an intuitive basis, even if we may not have it on our fingertips.

Let's first check whether the 10yr CNX Nifty data above holds a normal distribution pattern. The laws of normal distribution suggest valuations between 14-21 (within one standard deviation of the average) around 68 per cent of the time and valuations between 10-25 (within two SDs) around 95 per cent of the time. The actual stats are 67 percent and 95.6 percent respectively, so the reality is very close to what is expected of normally distributed Nifty PE data.

Now this is a good Bell Curve. If we look at the Nifty PE distribution data above, we can see that the market is at an unusual valuation, when outside Mean+/- 1SD. And it is at an extraordinary valuation, when outside Mean+/- 2SDs.

We are always told by seniors to look for PEs lower than the long-term average, as a buying signal. Similarly higher than long-term average PEs, would signify a sell signal, right? My market entry exit model, is now refined by the laws of normal distribution! It looks something like the following:

a. At the higher end of the 14-21 scale, start cutting exposure; book partial profits
b. When it starts creeping up over 23, start selling
c. If I am still around & milking, and it goes beyond 25, and scales the last 6200 level on the NIFTY, for example, exit almost everything; make portfolio zero equity
d. At 13 or below, start buying & heavily

In October 1999, the Nifty was at PE 23 - a strong sell signal. In May 2004, it was at PE 14 - a good buy signal. Mar 2009, the NIfty PE went to being just over 12, but that wasn't as strong a signal as October 2008, when PE went below 11. It is currently (Sep 2009) at PE 22.55 - a time to get cautious again, signal!

I am convinced by the senior's suggestion of using the long-term historical Nifty PEs as aguide for my market entry exit strategy. Executing that is another matter though, and will take loads of discipline. Do I have it in me? I am asking myself this, daily:). It might interest you to know that the Franklin Dynamic PE fund follows a similar market entry exit strategy.

If I am able to shut out conflicting emotions and decide to act rigidly on the sell-heavily signals, it probably would also mean forgoing extraordinary returns at peaks. The CNX Nifty peaked in February 2000 at 1800 levels and at PEs of 27+. It peaked again in January 2008 at 6200 level, and at PEs of 28+!

However the discipline to forgo the cream, might also mean tremendous capital safety for me. I would not again be caught in a situation of hopelessly remaining fully-invested; worse still - be unable to bet decisively, & heavily on the very stong buy signals in Oct 2008 and Mar 2009, because all my funds were tied-up in buy-and-hold!

Happy Investing! Love to discuss and refine this based on your entry-exit strategies.

Rgds,

Donald

 

Regards,

N


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Sunday 25 October 2009

Further corroboration for PE Based Investing

Further corroboration for PE Based Investing

Some time back, I'd suggested a PE based review of your equity holdings.

I just got another mail, which elaborates on the same theme - quite lucid. Do take a look.

Regards,

N

From another Yahoo group by name "La Warren Buffett"

Cheers

Prashanth

A Market Entry Exit Strategy

A statistically informed look at Nifty valuation levels
30 Sep 2009

Market Entry Exit Signals? The CNX Nifty is today trading at a PE of 22.9.

Many senior investors I speak to, have started getting cautious. They are cutting their exposures and not making fresh entries. While there may still be some stock-specific value left, valuations are rich in many frontliners.

With the FIIs continuing to pour in money, there is also talk of whether the market can touch new highs! With increasing inflows, the FIIs also reckon if the Indian currency were to appreciate to Rs. 40 to a dollar from current levels, even if that were to take 1-2 years, that's a straight 20% gain on the currency! As the Raring Bull is fond of saying, who's to argue with what valuation is right for the Indian market?

Having learnt my lessons in 2007 & 2008 (I remained invested throughout and did not book even partial profits), I am now in search of some kind of market entry exit decision-making models for myself. A senior prompted me to look at long-term historical Nifty Valuation data. He suggested a statistically informed look at valuations can introduce some predictability to investment returns!

Between January 1999 and September 2009, the Nifty traded at low PEs of below 11 and high PEs of 28+. It hit those extreme valuations rarely. The average PE was 17.72 while the median was 17.58 and the modal value was 14.31. The standard deviation was 3.64

The Median indicated that exactly half the time, the Nifty traded below17.58. And the Mode shows it most commonly traded between 14-15. Most of us are aware of this on an intuitive basis, even if we may not have it on our fingertips.

Let's first check whether the 10yr CNX Nifty data above holds a normal distribution pattern. The laws of normal distribution suggest valuations between 14-21 (within one standard deviation of the average) around 68 per cent of the time and valuations between 10-25 (within two SDs) around 95 per cent of the time. The actual stats are 67 percent and 95.6 percent respectively, so the reality is very close to what is expected of normally distributed Nifty PE data.

Now this is a good Bell Curve. If we look at the Nifty PE distribution data above, we can see that the market is at an unusual valuation, when outside Mean+/- 1SD. And it is at an extraordinary valuation, when outside Mean+/- 2SDs.

We are always told by seniors to look for PEs lower than the long-term average, as a buying signal. Similarly higher than long-term average PEs, would signify a sell signal, right? My market entry exit model, is now refined by the laws of normal distribution! It looks something like the following:

a. At the higher end of the 14-21 scale, start cutting exposure; book partial profits
b. When it starts creeping up over 23, start selling
c. If I am still around & milking, and it goes beyond 25, and scales the last 6200 level on the NIFTY, for example, exit almost everything; make portfolio zero equity
d. At 13 or below, start buying & heavily

In October 1999, the Nifty was at PE 23 - a strong sell signal. In May 2004, it was at PE 14 - a good buy signal. Mar 2009, the NIfty PE went to being just over 12, but that wasn't as strong a signal as October 2008, when PE went below 11. It is currently (Sep 2009) at PE 22.55 - a time to get cautious again, signal!

I am convinced by the senior's suggestion of using the long-term historical Nifty PEs as aguide for my market entry exit strategy. Executing that is another matter though, and will take loads of discipline. Do I have it in me? I am asking myself this, daily:). It might interest you to know that the Franklin Dynamic PE fund follows a similar market entry exit strategy.

If I am able to shut out conflicting emotions and decide to act rigidly on the sell-heavily signals, it probably would also mean forgoing extraordinary returns at peaks. The CNX Nifty peaked in February 2000 at 1800 levels and at PEs of 27+. It peaked again in January 2008 at 6200 level, and at PEs of 28+!

However the discipline to forgo the cream, might also mean tremendous capital safety for me. I would not again be caught in a situation of hopelessly remaining fully-invested; worse still - be unable to bet decisively, & heavily on the very stong buy signals in Oct 2008 and Mar 2009, because all my funds were tied-up in buy-and-hold!

Happy Investing! Love to discuss and refine this based on your entry-exit strategies.

Rgds,

Donald

Regards,

N


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Saturday 24 October 2009

Trading vs Investing

Trading vs Investing

We love views of big-shots. Rakesh Jhunjhunwala, in the world of investing, carries a lot of clout in India.

A titbit excerpt from a recent interview with him that I happened to come across::

 

Source: ET NOW, if I'm not mistaken

Question: Everyone knows that you are both a successful long term investor as well as a trader, how do you manage to balance both?

Rakesh Jhunjhunwala: Short term trading is for short term gain. Long term trading is for long term capital formation. Trading is what gives you the capital to invest. My trading also helps my investing in the sense I use a lot of technical analysis for trading at times.

If the stock is overpriced, I should sell but my trading skills tell me that the stock can remain overvalued or get more overvalued. Hence, I hold on to my investments.

So, I think they complement each other in many ways but they are two distinct compartments totally.

 

Guess that we should learn from the great Guru and prosper!

Regards,

N


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