Thursday, 21 October, 2010

What will be the next trigger for the flight of FIIs?

What will be the next trigger for the flight of FIIs?

All of us and our brothers have been told ad nauseum about the liquidity driven rally that we're enjoying on Indian bourses right now. Apparently, the FIIs are pumping in money into India as if there's no tomorrow.

Big names from the big Fund Houses like Reliance Mutual Fund, L & T Mutual Fund, etc. feel that the India Story, being as attractive as it is, will continue to see the inflow of FII money. In hoardes.

Conservative folks like the ones from MoneyLife question the inflows without giving specific reasons as to why the inflows can quickly and violently turn into outflows.

Here are a few of my thoughts on the plausible causes for such outflows:

  • Simple profit-booking urge, followed by the herd mentality
  • Crisis in some corner of the world, followed by the herd mentality - Crisis can occur in
    • US - With the mortgage and/or foreclosure mess
    • US - Job loss mess
    • China - Forex rate mess
    • France / Germany - Xenophobia and the repercussions
    • Afganistan / Iran / Pakistan - The Taliban & repercussions thereof
    • Kashmir - Pakistan - India & repercussions thereof
    • Expansionary policies of China - The South China Sea islands, Arunachal Pradesh, Taiwan, Tibet, Skirmishes with Japan, etc.
    • The Korea problem going out of hand
  • Re-emergence of some new medical emergency like Swine Flu
  • Natural calamities like an earthquake / tsunami / floods
  • A data-entry error leading to a sudden crash in some global market, followed by the herd mentality
  • Interest rates going up in US / Europe
  • Danger of inflation in India
  • Earnings not matching expectations in India
  • Earnings downgrades by Indian corporates
  • IIP slowing down in India
  • Political uncertainty catching up with India (due to some electoral reverses for the Congress)
  • Mercurial Mamata Bannerjee / Karunanidhi withdrawing support for some reason
  • Sudden death of a key political leader - due to natural causes or due to the efforts of an assasin
  • Increase in violence due to naxals
  • Increase in the Telengana problem
  • North-east Blockade re-starting in places like Meghalaya
  • The re-emergence of the Ayodhya problem either due to the far-right BJP / RSS / VHP types or due to the fundamentalist fringe elements of the Muslim fraternity
  • Sudden rule changes by folks from SEBI / RBI with respect to key policies like interest rates, M & A norms, de-listing rules, Capital controls, etc.
  • Adverse changes in either the Direct Taxes code or GST

Believe me, once the outflows start - for any reason whatsoever, the herd mentality will ensure that it will quickly turn into a flood.

And, domestic insitutions will not be able to hold up the markets because:

  • They can't - The figures of funds available with them vis-a-vis the funds likely to go out through FIIs will just not be comparable
  • They won't - Being the smart folks that they are, they will at best make a few token purchases to satisfy the Government, but the real money will be invested only if and when the markets have settled down at sufficiently attractive levels.

If you are a long-term investor,

  • Book at least partial profits
  • Sell all your cats and dogs - with or without profits
  • Don't build aggressive long positions
  • Keep enough cash
  • Don't wait for the bottom to buy - Buy on the way down for every 5-8% correction in the Nifty



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Monday, 11 October, 2010

Buy-and-hold is Dead

Happy investing!

Buy-and-hold is Dead
Long live Buy-and-hold!
Apparently, once one starts writing a blog on any subject, one is inundated with absolute gems from all around on that very subject.
This post is also based on one such gem that I got from some unknown source. First, the original mail:
Buy-and-hold is far from dead but perhaps it has been misunderstood. As with many other investment topics, it is instructive to look to Warren Buffett's example.

Perhaps no other investor personifies buy-and-hold more than Buffett, who has stated that his preferred holding period is forever. But as with all things Buffett, this folksy tidbit is not his final word on this topic. When it comes to the Oracle of Omaha, we need to observe Buffett's actions as well as his words and for that, we go back to Buffett's early days running his hedge fund.

In letters to his partners, Buffett laid out three investment categories (later expanded to four): generals, workouts and controls. The generals were the buy-and-hold portion of his portfolio and usually comprised the largest portion of his holdings. These were value stocks he bought but was unable to predict when he would realize the expected gains. In fact, he warned that these stocks could suffer long periods of underperformance. The controls were similarly undervalued companies but where Buffett could take an activist (or controlling) role which could provide an impetus for realizing the value in these positions. Both of these categories could be labelled as buy-and-hold strategies.

The workouts, by contrast, were short-term investments with defined timelines and catalysts for validating the investment thesis. By their nature, these were not buy-and-hold investments yet they were an integral part of his early investment strategy. It is important to remember that Buffett was running a hedge fund and unlike today's charlatans, refused to be paid unless he made money for his partners. This provision also ensured he was very motivated to deliver positive annual returns. The workouts segment was instrumental in providing near-term, relatively dependable returns to balance out the buy-and-hold portion of the fund's holdings.

My take:
This had been a much-debated topic for discussion as well as introspection.

I was thoroughly convinced about the need to "Buy & Hold". It is quite apparent that it generates untold of long-term wealth. All of us have our own favourite examples. Mine is TITAN INDUSTRIES. A couple of decades back - perhaps around the time when Titan was just listed, I was a newbie to the stock market.
I'd identified it as a good pick, and picked up a then "huge" quantity for me - 200 shares at Rs. 30/=. As I'd predicted to myself, over the next few months, it moved from strength to strength, and, within 5-6 months, crossed Rs. 60/=.
I was thrilled. I'd doubled my money in less than a year.
And, I sold all my Titan. Doubled my money in less than a year. The rest, as they say, is history.
In due course of time, I learnt one of my most valuable lessons.

I've certainly not come to any conclusions about dumping "Buy & Hold".
However, it is absolutely imperative that we must not be wedded to the "Buy & Hold" strategy. Or else, we would have got sub-optimal returns by holding on to our shares (like most of us did) between November 2007 and February 2008.
Each of us ought to identify our own personal style of investing which works best for us.
I personally prefer to classify stocks into the following categories:
  • STEADY BLUE CHIPS - A good example would be a scrip like HDFC Bank - Always looks expensive on PE terms. A couple of quarters after you refrain from buying, if you take a look at it, it would have gone up even further, and will still look expensive. But, surprisingly, the old price at which you originally refrained from buying will now appear to be an attractive price based on the current earnings. The only problem - You'll never be able to catch it at price levels acceptable to you. With such stocks, there are only two alternatives - either buy with either blind faith or conviction and hold forever - or forget about holding them at any point of time!
  • UNSTEADY BLUE CHIPS - A good example would be TISCO - Thanks to the commodity cycle (or whatever) it gyrates wildly, but nobody ever disputes about whether it is a blue chip. After all, it belongs to the house of TATAs & it has been around for more years than most of the investors' parents have been around on this planet. With such stocks, try and identify good levels to get in and to partly get out, and keep accumulating ever-increasing quantities. On those rare occasions when you end up buying such shares at the equivalent of January 2008, you can still mentally afford to keep them for good, as part of your long-term portfolio.
  • MOMEMTUM BOYS - An excellent example would be Aban Offshore - Of course, the momentum boys keep changing in every cycle of 4-5 years. In some yester years a Silverline or Pentamedia or NEPC could have been momentum boys. These scrips gyrate without any rhyme or reason - and sometimes with reason. In percentage terms, they move around very violently. My strategy for such stocks is to allocate relatively minor sums of money, identify good entry / exit levels, keep buying and selling quickly, and maintain very strict stop losses. The last part about strict stop losses is the most important part, but has been perennially difficult for me. Reason - Behavioural Finance fundas (either listen to people like Parag Parikh to know more or wait for a future post on the subject of Behavioural Finance)
  • OVER THE HILL GRANDPAS - These are the stocks that were, once upon a time, great companies. Perhaps were part of the SENSEX in yester-years. And belong to very reputed business houses - with promoters who are typically part of the "Old Rich". These companies may or may not recover their old glory ever again. However, the probability of their disappearing altogether is quite low. And, surprisingly, every couple of years, they end up quoting at sub-par levels (like Rs. 8-10 for a Rs. 10/= share), and in every couple of years, they also reach modest levels (of Rs. 20-30 for a Rs. 10/= share, for instance). Examples of such stocks would include companies like Hindustan Motors, SPIC. I'll be willing to have greater confidence on these stocks than the momentum boys. Hence my allocation could be slightly more. However, I'll strictly look at them as mid-term trading ploys with strict stop losses. Buy when they go to sufficiently low levels and get out when you've doubled your money a few weeks / months or a couple of years later. It is bound to happen. But, please don't ask me why or how - I have no reason to proffer!
Happy investing!


I was equally convinced about the wild swings of the "Manic-Depressive" "Mr. Market" - After all, the indices keep going up and down all the time, taking all kinds of good, bad, ugly and crooked stocks along with it.
An interesting way to make money would be to keep "trading" by buying 2-5 times a year and selling 2-5 times a year the very same stock. This would also fetch lots of money, provided, of course, you choose the right stocks.
Good examples of pretty high quality companies which keep going up and down in 2-3 year cycles would include TISCO, ICICI Bank, etc.
If only we learn to use the ups and downs, we can freak out with many of these stocks. I did that with a couple of stocks, and benefitted significantly.
In due course of time, I learnt another of my most valuable lessons.
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Tuesday, 5 October, 2010

Can you afford to live till 99???

Can you afford to live till 99???
Take a look at this article that talks about the real implications of low interest rates, especially for thrifty savers:
We, in India, are nowhere near this kind of situation. However, we are moving in that direction. Our interest rates, in the long run, are bound to be aligned with global rates. I distinctly remember getting fixed deposit interest at rates upwards of 11-12% per annum in the 80's & 90's. We've already reached 6-7% levels, and are sure to go down further in the years to come.
And, the average age till which we will live has already gone well past 75 for the middle class and upper middle class. √Čven the poor and lower middle class people have started living till 70.
Inflation is far higher than the official government figures. Just check out the prices that you paid for various items like tooth paste, biscuits, dal, oils, petrol, shaving cream, medicines, restaurant dinners, movie tickets, auto fares, etc. just a year back and compare the same with current prices.
To top it off, most of us do not have a good enough pension plan.
The combination of low interest rates, high inflation, increased longevity, nuclear families, and absence of high quality social security systems can be killing.
Awareness is the first step and a key pre-requisite to actual preparedness to face the situation depicted above.

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Sunday, 3 October, 2010

Ben Graham on Speculation

Ben Graham on Speculation
What is in the best interests of brokers--that is, maximizing commissions--is not in the best interests of investors.

Wall street historically has prospered from speculation, according to Ben Graham, but he believed that speculators themselves on the whole lose money. "Hence," he stated, "it has been logically impossible for brokerage houses to operate on a thoroughly professional basis."

If only we could actually listen to Graham, the father of Value Investing, and actually force ourselves to follow the above advice, we would all be:
  • Richer
  • Able to sleep peacefully at night
I must admit, however, that despite trying for at least a decade and beyond, I have not been able to overcome the temptation completely!



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