Cash is King - 2010 Version

Cash is King - 2010 Version

A couple of days back, I came across an article which spoke about Warren Buffett holding 34% cash levels in his Berkshire Hathway portfolio as on September 30, 2010.

I've generally been increasing my cash levels for a while now.

Today, I came across this interview with another big name - Jeremy Grantham. Read this one:

• Legendary Investor Jeremy Grantham says "Sell this rally - Hold Cash!"

Lots of TV analysts and experts have also been crying themselves hoarse that our markets in India are grossly overvalued. And have been recommending that we be cautious. That we ought to increase cash levels. That we ought to be booking profits. That though the "Long-term India Story" remains intact, we ought to be wary in the short term.

I have a contrarian question:

• If so many folks are so cautious, and if so many retail guys have not participated in the rally, is it not logical that we're not anywhere close to the top, based on all the bubbles that we've experienced in the last couple of centuries?

My own answer to the above question:

Yes, indeed. We are nowhere near the top. Here's why:

• There is a good chance that with all the guys who are waiting in the wings with loads of cash, every dip will be bought into. Especially by Indian retail investors and the domestic institutions, who have actually been booking profits regularly during the past 6-8 months.
• The BIG MONEY coming from all the quantitative easing will need to be deployed. Certainly they are not going to invest in the crisis ridden markets of US or Europe. Nor will they invest in debt at yields pretty close to zilch. They will much rather park their money in good quality growh stories. Where else can they find such stories other than in the emerging markets, including India?
• The 21000 of 2008 and 21000 of 2010 are very different. A good many corporates have increased their earnings. A lot of them have restructured their leveraged balance sheets and cleaned up their acts. Many of them are much leaner, having learned their lessons. Operational efficiencies have improved. Even the reform agenda of the government has gathered some momentum. Valuations, certainly, are not as rich and as obscene as they were in January 2008.
• Even in the midst of all the corruption, there appears to be lots of political stability. We actually have a situation where there is competition to support the government. That too, publicly stated on National Television. Believe me, Manmohan Singh's position appears to be quite safe. And as long as you have political stability, one key danger for the markets is gone.
• People will make noises about inflation, but go to the malls, theatres, cricket stadiums, airports, book shops, restaurants, jewellery shops, etc. You'll be amazed at the speed with which products are flying off the shelves. You'll wonder about the existence of such a creature called poverty.

Having said all the above, you must be wondering why I'm still increasing my cash levels.

Reasons are two-fold:

• Churning of the portfolio. Some stocks have zoomed way beyond 2008 valuations. We ought to be selling them. Others are grossly undervalued, especially in the midcap space. We ought to be looking at them carefully.
• There is a lot of global economic uncertainty. In times of uncertainty, I've often come across completely inexplicable and violent levels of volatility in share prices. This volatility is a scary scenario for those who seek stability. There are others who thrive in such volatility. I prefer to think that volatility is good for me. Gives me a lot of opportunities both to get in at low levels and to get out at comparitively high levels.

So, what's the conclusion?

Simple ... ... ... ... ... ...

• Keep selling anything that you feel is overvalued today. Irrespective of what your cost price was. Profit in your bank account is better than profits in your demat account. And don't worry about whether or not the share that you just sold continues to go up further. It is always possible to have perfect 20-20 vision - in hindsight.
• Keep cash in your kitty.
• Keep buying anything that you like and you feel is undervalued today. People make more money by buying at a low price than by selling at a high price.
• And remember, you can never, never ever, catch the bottom and the top - except with some crazy luck. And I wouldn't count on getting lucky.

Let me end with a quote from Jeremy Grantham (from the interview referred to earlier in this post):

• "Cash has a virtue that people don't appreciate fully. And that is its optionality. In other words, if anything crashes and burns in value - say the U.S. stock market, if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value."

Guess that it applies to us in India as well!

Take care. Happy investing!

Regards,

N

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Buy-and-hold is Dead

Happy investing!
Regards,
N

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.

VIEWS OF Mr. N MERITS OF BUY-AND-HOLD 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!

Regards,

N

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VIEWS OF Mr. N MAKING HAY WHILE THE SUN SHINES 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.

Listen to the "Shoe-shine boys"

Listen to the "Shoe-shine boys"

(to know when the market reaches the top!)

Here's an anecdoctal piece from the famous Bernard Baruch.

No, markets reach their top when "shoe-shine boys start asking for stock tips" - Bernard Baruch

There's this famous story about how the US markets had soared very high-up when Baruch had gone for a shoe-shine. The shoe-shiner upon learning that Baruch was an investor, asked him questions about the markets with unbridled enthusiasm. Baruch got a very uncomfortable feeling over this enthusiasm, that was indicative of a mass-hysteria (which I am sure he had discerned in other places as well), so later during the day he exited all his positions.

The next day the market crashed !!!

I had a personal encounter with the "Baruch Indicator" shortly before the Jan 2008 crash, when waiters at this restaurant I used to frequent, came up to me and started asking for stock tips and what mutual funds they could invest in. They knew for a long time that I played the markets because usually I'd go to the restaurant with a copy of the DSJ magazine or some trading-related books. But that was the very first time when a large group of them cornered me for advice !

Well in a few days time the market tanked !!!

The Baruch Indicator is timeless I think - you can't go wrong with it   :)

Everybody and his brother is sounding cautious about "overheating markets around the world" and an impending correction.

• There's talk of the European crisis - Am not mentioning any individual nation, because a different nation grabs the attention every other day.
• Folks are worried about the recurring danger of deflation in US.
• And the China scare
• And the wars of Gulf, Kashmir, South China sea, etc.
• And the potential spike in Oil

As long as enough people are freaking out buying puts, writing calls, shorting high beta stocks, etc., we can have a reasonable degree of confidence about not being at a new peak.

Enjoy the run while it lasts.

But buy puts to hedge yourself. And keep booking profits whenever you can, as regularly as you can.

Irrespective of what experts, self-proclaimed experts, business journalists, blog writers, etc. tell you.

Regards,

N

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Sensible Advise for Volatile times

Sensible Advise for Volatile times

My last post (Beware of Conmen) was about someone inviting you to take what could perhaps be perceived as "unduly high risk". A reader had forwarded this mail from HDFC Securities and asked me for my comments.

First, I'd suggest that you read the inputs from HDFC Securities:

Investors get perturbed when the markets are not moving up in a sustained manner. And rightly so, because most investors have a mindset of buy and hold. And when the markets frequently change their direction, investors find it difficult to cope with such volatility.

Changed environment calls for a change in the strategy we deploy to tackle the markets. Just as you adopt different strategies to face fast bowlers and spinners and play the ball on its merits similarly the strategies need to change to play different market condition.

The volatility could be a blessing in disguise, if you can acclimatize yourself with it.

1.Take your ones and twos

In a volatile market you should learn to take small gains and losses. Instead of yearning for a large gain, hitting a six in cricket parlance, you should settle for smaller gains and take them as they come.

A stock may not give you a 20% return in one go but may give you 25% returns in trenches.  Sounds impossible? Lets see.

We chose Tata Steel and studied how it behaved during the Months of April and May. The stock gave 5 upswings of 5% or more and 5 down swings of 5% or more during the period.  So whether you are a bull or a bear, you got ample opportunities.

The Tata Steel swings were larger than 5%. The 5% was only a filter mark. The upswings were to the tune of 18, 5, 10, 8 and 7% respectively. Even if you could catch any one of them and rode only 5%, it would have been a good return to post. 

On the downside, the swings were 9, 21, 20,10 and 6%. The magnitude of these downswings was larger than those of the upswings.

The best part of a volatile market is that you get to buy the same stock again and again at the same level or lower. The chances are that if you get this act once right, subsequent opportunities will be easier to spot and ride.

2.Create some cash

If you are sitting on a pile of cash, you will see the falling market as an opportunity to buy. But if you are fully invested you will be fearful. In that fear, you are likely to sell some of the stocks at a loss.

On a day like this, when the markets tumble sharply, the one with cash will confidently buy where as some one who is fully invested may end up selling his stocks at a loss.

I have always thought that sitting on a 20-30% cash is a good idea. The very fact that you have to maintain this kind of cash will make your investment decisions well thought out. You will research and then buy and that too when the valuations are compulsive.

And on a day when the markets open down sharply, this cash can be put to good use. The stocks that you buy with this cash will have to sell in a disciplined manner. The cash so generated will be used only when the markets tumble further or a really good investment opportunity is spotted.

If you are fully invested, sell a part of your stocks when the markets move north. Selling and creating  cash at leisure and when the markets move up is better than selling in panic. However, if you realize that the recent investment you made is not a sound decision, selling that stock at a loss is not bad idea for cash generation.

3.Buy Puts

Buying a Put in the stocks concerned protects your portfolio. Protection comes at a cost. In the beginning of the month, the costs are pretty high. So in order to reduce your protection cost, you may perhaps want to trade off writing a lower Put. Your portfolio is protected till the strike price for which you write or sell a Put. When you do such a thing, it is called constructing a Bear Spread.

4.Write higher Calls

When stocks are tumbling and you are not buying Puts, it may worthwhile to write a higher call for the stocks that you have. If the markets tumble you will get to keep the premium you earn. To that extent you are compensated. Should the markets reverse and move higher, what you do next will be a function what is your trading profit or loss in the call written. If the call is going in your favor, cover it. But if you are making a trading loss, don't book it. Hold your position till settlement. On that day, if the call premium is still higher than your buying cost, let it lapse and sell your existing stock (for which the Call was written) in the last 10 minutes of trade in the cash market.

5.Keep your stop losses tight

When you are playing for smaller profits, it is advisable to keep your losses even smaller. So keep tight stop losses. Decide on your stop loss before entering the trade and make it a trailing one as the market moves your way. Even in Puts and Call options stop losses can be kept.

6.Be Nimble footed

Expecting that the markets will tank, you by puts in the Nifty. And after going your way for some time, the market changes direction. While you have the choice of selling your Put option, you may consider buying a Nifty Future to make the best use of the Put that is already bought. If the markets recover to the level where you bought the Put, your buying of the Nifty future would have been justified.

There are further games you can play with this Put you had bought. If you think the Nifty is likely to lose momentum, book profits in the Nifty, still holding on to your put. This gives you another opportunity to enter the Nifty Futures again at lower levels. You can repeat this several times in a week.

The adept amongst you would have understood that with the protection of Put to support you get the full advantage of the range of futures movement. If the Nifty moves in a range of 50 points, you get the full advantage of trading in the Nifty. Where as trading in the option alone would give you only half the range.

Similarly, when the Nifty reaches the upper range of the range, buying a Call and then shorting the Nifty Futures and covering at lower levels will be helpful. Rinse and repeat as many times as you want, till the option you have bought remains relevant.

7.Buy in small quantities

If you hate trading and are not the like who will settle for smaller profits, the least you can do is, defer your buying over three stages. You may buy a third quantity of your researched share at the first go. The next third can be bought 5% or 10% lower depending on the volatility of the stock and the balance quantity still after another same percentage gap.

You may repent buying only a third of your desired quantity if the stock surges after your buying. In such a case, you would probably end up with notional loss, for the quantity you never bought. But if the market does go down, you will appreciate your foresight.

All said an done, if you plan your trading and investing assuming that the volatility will continue, you are likely to land on your feet. As you go through this experience, keeping your cool, you will begin to appreciate the opportunities volatility offers and may in fact begin to love it.

And in a few months you will also get to trade in Volatility Index (VIX) itself. So treat the current volatility as a practice session to master VIX trading.

Sincerely,

HDFC Securities Limited

My comments:

• First, the HDFC folks are not "directly soliciting business" - That by itself makes me positively inclined about the contents of their mail
• Secondly, they do not give any "specific" tips nor any "vague" tips. Instead, they talk about a specific strategy to handle volatile markets. This makes me even more impressed, prompting me to seriously consider and evaluate their strategy.
• Now, to the contents of the strategy:
• First, by and large very sensible strategy.
• Second, this is not for novices except the bit about staggered purchases and holding 20-25% cash levels - which, by itself, is an excellent recommendation for all. The typical novice MUST not be bothered about the "notional" or "real" opportunity loss due to funds lying idle. Typically, the interest lost is of the order of 3-11% per annum. This will possibly be "more than adequately compensated" by the very real "buying low" that would be feasible by patiently waiting for opportunities.
• Third, dealing with futures and options, buying calls and puts, and, worse still, writing calls and puts - This is not for the faint hearted. As one of my favourite anchors on a business channel repeatedly says, "Remember that while you can make 40-100% returns in options in a couple of days, you can, and certainly will, occasionally (hopefully only occasionally and not frequently) lose your entire capital. That's a very real, live probability."
• This is where the importance of stop losses becomes vital. The downside to stop losses in volatile times is that it is very common to be "whip-saw"ed both on the way up and on the way down due to these "strict stop losses".

All said and done, these inputs from HDFC Securities are very valuable with the following caveats:

• Understand the inputs before even attempting to implement them
• Applicable only for "seasoned players"
• Start practicing with  "Throw-away" money, and gradually increase your exposure to the F & O segment.
• Be prepared for "serious losses" in the initial several months before you "see green"
• Make sure that "Greeed" & "Fear" are your servants and not your masters.

Take care!

Regards,

N

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Spain Downgraded

Spain Downgraded

Watch your portfolio:

• Spain Downgraded

Keep cash ready in the next several days / weeks. More such news follows. If you must buy, buy in a staggered manner.

Regards,

N

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Cash is King!

Cash is King!

In these times of grave uncertainty, one should pay heed to the pearls of wisdom from one of the greatest investors:

"It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities." – Charlie Munger

Regards,

N

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Unusual Alert

Unusual Alert

One of my brokers provides me a daily email alerting me on bullish / bearish technical indicators for specific stocks based on a pre-defined criteria that I've provided.

In the past week / 10 days, I've noticed something extremely unusual:

• The usual email just talks about a max of 5-10 companies
• For the past few days, it has been a bit of a laundry list (more like a google search), mentioning the "first 50 stocks" of a list of many more stocks satisfying the pre-defined criteria that I've provided - Only on the bullish side!
• The bearish side has almost disappeared or has just a single stock or two on most days!

What does one infer from the above? Some obvious thoughts:

• We're in a very strong bull market, perhaps bordering on a bubble phase
• We're perhaps ready for a really strong break-out on the upside
• Which, in turn, should lead us to the end of the next bubble phase

My own suggestions based on the above:

• Start being very careful in the market
• Be very wary about making any fresh purchases (except perhaps for the very immediate short term)
• Start booking profits gradually (if you've not already started doing so)
• Increase your cash levels
• When the market suddenly starts zooming upwards suddenly and violently, please recall the period when the Sensex moved from 17000 to 21000 in a matter of just a couple of months. And, aggressively book profits in this phase.
• Don't regret about shares which continue to zoom after you've sold them - You're better off with cash, and you're likely to get lower levels to re-invest some time during 2010.

Happy investing!

Regards,

N

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Which month is the best time to redeem Equity Mutual Funds?

Which month is the best time to redeem Equity Mutual Funds?

A few words of caution: This post might be of interest and utility only if you are:

1. Investing both in Shares and Equity Mutual Funds
2. Reasonably financially literate (so that you'll follow the substance of what I'm talking about - nothing complex, but slightly boring stuff nevertheless)

The above question, according to experts, is probably irrelevant.

They'll probably say that your redemption decision should be driven by factors such as:

• When you need the money,
• When markets are generally overvalued,
• When the PE is too high, etc.

However, let me rephrase the question.

If you need to generate some cash for a specific bulk expense from your shares or equity mutual funds, should you be indifferent about whether you sell shares or redeem mutual funds?

Or is there any logic in redeeming mutual funds Before selling shares? If so, will the answer be different in any specific month of the year?

I don't have any definitive answers Yet.

However, I've started developing a hypothesis about the same. Let me share with you the broad idea.

Well, I happened to review the portfolio (which I manage) of a family member for the month of October 2009, and I found something curious:

	% Change over the previous month	Change
	Equity MF (A collection of Equity funds from different fund houses)	-2.16
	Sensex	-7.38
	Nifty	-7.38

In all preceding months, through thick and thin, through bull markets and bear markets, the above figures used to be somewhat comparable to each other. I've never noticed a significant difference in the past. Of course, I'll need to re-check the data over the years to see if such differences have occered in the past either for this individual or for any of the other portfolios that I manage.

The difference in October 2009 appears to be huge. While the Sensex and Nifty have fallen by over 7%, the Equity mutual funds net worth has declined by just above 2%. Amazing indeed. An outperformance of over 500 basis points. Within a single month.

Have the fund managers suddenly become "super-efficient"? Or have they got plain lucky?

I've been in the market for way too long to believe in either of the above possibilities.

I delved deeper into the matter and did some quick research. I found something very basic and interesting.

This family member had received dividends (interim and final) on many shares held by him during the month of October. Obviously, many companies forming part of the Sensex & Nifty would also have paid out dividends during October (and hence gone ex-Dividend).

This implies that all those companies which had gone ex-Dividend in October 2009 would have started quoting at a price duly reduced by the dividend amount by the end of October, thereby reducing the Sensex and Nifty levels correspondingly.

On analysing the Mutual fund portfolio of this family member, most of the Equity Mutual Funds in his person's portfolio had Not Declared any Dividend during October 2009. However, most of these Equity mutual funds would have Received dividends from companies held by them in their portfolio. To that extent, the NAV of these Equity Mutual Funds would, as on October 31, 2009, be quoting at levels which would include the impact of dividends received by them.

This could be one of the possible reasons for he huge difference of 500 basis points in the performance of Equity Mutual Funds vis-a-vis Sensex / Nifty during October 2009.

If my above hypothesis is indeed true, while you can be indifferent about whether you sell shares or redeem equity mutual funds in other months, in those months when you receive lots of dividends from companies whose shares you own, you must prefer to redeem equity mutual funds rather than sell shares. Like in October 2009, for instance.

As a corollary, if you must either invest in shares or equity mutual funds in months such as October 2009, obviously, you must prefer to invest in shares directly rather than investing in equity mutual funds.

Think about it. Perhaps there's a grain of truth.

Also, do give me your feedback on the same after making a similar study of your own portfolio.

Regards,

N

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Power of Trading

Power of Trading

Many people misunderstand the concept of

• Long-term investing - To mean that one should sell only when one needs the money
• Asset Allocation - To mean that one should have a by-and-large-fixed proportion of surplus money to be invested in different asset classes at any given life situation (age, number of kids, etc.)

Both the above are completely wrong. I'll explain in greater detail in later posts.

In this post, I'm going to share with you hypothetical figures of the difference that one can make with

• Periodic trading, ie., periodically booking profits and re-entering at lower levels
• Slightly higher levels of returns by allocating a larger share in riskier asset classes.

Take a look at this table:

	Power of Trading, rather than holding long-term! Wonder if it is feasible???	Initial Amount Invested	Annual Return	No. of Years	Final Value of Investment
	Impact of buying shares at just 3% lower cost and trading periodically so as to get just a 2% additional return annually	97,000	1.20	10	600,598
		100,000	1.18	10	523,384
		97,000	1.14	10	359,600
		100,000	1.12	10	310,585

You'll realise something that ought to be obvious:

• A 6% higher return can mean an enormous difference to your portfolio value at the end of a decade. Hence, do ensure that you allocate a higher proportion of your disposable surplus in riskier asset classes like equity if you are looking at the long term
• A strategy that involves periodical profit booking and re-entering at marginally lower levels has quite a significant impact on your portfolio value at the end of a decade. Hence, make it a point to book profits regularly. This will also ensure that you
  • Review your portfolio regularly
  • Cut your losses from unintended dud investments far more quickly

Think about it!

And Act!

Regards,

N

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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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Accumulate Free Shares

Accumulate Free Shares

Simple means to get rich

I've reproduced excerpts of an email that I got from one of the many forwards that I keep receiving. Unfortunately, while the stuff is interesting, the original source is unknown.

Am quite sure that all of us would have come across quite a few such stories in India about guys who invested in Hind Lever, TISCO, Infosys, Reliance, etc.

I've modified the system suggested in that mail and refined it with my own suggestions - this involves something wonderful, and almost incredible - Accumulation of Free Shares!!!

Key steps to get rich - without much efforts - over a period of a decade or beyond:

1. Identify companies with a track record of consistently paying dividend for over 5 years - preferably over 10 years from the major indices - like Sensex, Nifty, BSE 500, Nifty Junior, etc. - Folks who pay dividend must be profitable, must be generating cash flows, must be bothered about rewarding shareholders, must be having a reasonable degree of managerial integrity. In a nutshell, these chaps must be decent blokes, and their scrips warrant taking a look for investing (y)our hard-earned money.
2. Identify a relatively "disposable" sum of money - let's say, 15 days salary per company as an initial investment - Let's say, Rs. 25000/=, for convenience of calculation and allocate it as "Reserved for Company ABC"
3. Identify the broad PE range within which the company moves over an extended period of 5 years or more
4. Wait patiently till it reaches the lower end of the PE range referred to above (Very likely to happen at least once a year for each company)
5. Buy for Rs. 25000/=, as mentioned in point 2 above at the current PE (let's say, at a PE level of around 12). If the share price of company ABC is Rs. 100, you'll have around 250 shares now.
6. Wait patiently till Company ABC reaches the upper end of the PE range referred to in point 3 above (Let's say, at a PE level of around 20)
7. The price of Company ABC would have gone up a bit faster and a bit more than the rise in PE - because along with the increase in PE, the EPS would have also gone up due to the passage of time.
8. Hence, when the PE goes up from 12 to 20, the probability is high that the share price of Company ABC would have almost doubled to around Rs. 200
9. Sell shares worth Rs. 25000/= - Now, after selling around 125 shares of Company ABC @ Rs. 200/= per share, you'll have around 125 shares of Company ABC, virtually free of cost. All further dividends from this Company ABC will also be completely free income for you - not merely tax-free income!
10. Repeat the steps from Point 4 to Point 9 repeatedly for Company ABC.
11. Repeat steps from Point 2 to Point 10 regularly for each of the other companies that you've identified from Point 1 above

Over a period of 3 years, you'll be surprised at the results.

Over a longer period of time, you'll stop looking at this blog because you'll be freaking out at the beaches of Florida during summer and enjoying the concerts of Sudha Raghunathan in December at Chennai!

Regards,

N

Source unknown - got through email - Original Source unknown:

Simple means to get rich 

Let's say you had picked up 160 shares of Pepsi in 1980.

It would have cost you $4,000.

However, that amount would have automatically grown to over $300,000 by 2004, without you investing another penny. Not bad?

Now let's try the same with Philip Morris... starting with the same dollar amount, which would have amounted to 58 shares. By the time you'd finished, your $4,000 would have ballooned to nearly $600,000... and over 4,300 shares.

Without you putting in an extra nickel.

Here's another one. Say you put $5,000 into a company called Terra Nitrogen in 2003. That's 1,136 shares at the then-price of $4.40 per share. Today the share price has exploded to $110 per share. Pretty good. But the "Plan B Pension" income on top of that could have exploded your $5,000 into $151,026 in just five years.

Like I said, it's an almost perfect self-growing cycle.

Like a tree that waters and fertilizes itself.

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Why individuals have an edge over Fund managers - Prisoners' Dilemma

Why individuals have an edge over Fund managers - Prisoners' Dilemma

For your benefit, let me explain the old but eternally relevant concept of "Prisoners' Dilemma":

Imagine that you and another armed man have been arrested and charged with jointly carrying out a robbery. The two of you are being held and questioned separately, with no means of communicating. You know that, if you both confess, each of you will get ten years in jail, whereas if you both deny the crime you will be charged only with the lesser offense of gun possession, which carries a sentence of just three years in jail. The best scenario for you is if you confess and your partner doesn't: you'll be rewarded for your betrayal by being released, and he'll get a sentence of fifteen years. The worst scenario, accordingly, is if you keep quiet and he confesses.

What should you do? The optimal joint result would require the two of you to keep quiet, so that you both got a light sentence, amounting to a combined six years of jail time. Any other strategy means more collective jail time. But you know that you're risking the maximum penalty if you keep quiet, because your partner could seize a chance for freedom and betray you. And you know that your partner is bound to be making the same calculation. Hence, the rational strategy, for both of you, is to confess, and serve ten years in jail. In the language of game theory, confessing is a "dominant strategy," even though it leads to a disastrous outcome.

If we extend the analogy to Fund managers of mutual funds, we'll comprehend their compulsions:

• Logically speaking, investors like consistent, long-term outperformance vis-a-vis peers and the benchmark indices
• However, magazines, newspapers, business channels tend to publish comparive performance data on a weekly, monthly, quarterly basis. This creates a lot of "noise"
• Fund managers need to be evaluated for determining their increments, bonuses, promotions at least once every six months - this would again involve comparing their relative performance over short durations of time such as a quarter or six months.
• Hence, fund managers are forced to think of an investment horizon of less than six months, even while advocating a long-term view for investors
• This results in a peculiar situation where:
• If the market is overheated according to the fund manager, he may be fully aware that any minor negative trigger can cause a significant downfall. However, he'll be equally conscious that if he is in cash and the other fund houses stay invested and there is no negative trigger for a couple of months or thereabouts, markets are likely to continue to rise with irrational exuberance for quite some time. If your fund manager wants his increments, bonuses (and even his job), he is forced to go against his own better judgement and remain invested in the market - with the hope and prayer that he'll be successful in bailing out at the very peak
• If there is a savage bear market, the fund manager may be aware of huge upside potential over a longer time horizon. Many scrips will be available at mouth-watering levels. However, if he invests and the market continues to tank  and other fund managers remain in cash, he'll underperform his peers in the forthcoming quarter. And in bearish times, he can ill-afford - He may be out of a job before he can say "Long-term".

If you're an individual investor, you must be conscious of these compulsions of typical fund managers before investing in mutual funds.

Mutual funds will be relevant for you if and only if:

1. If you lack the skills or
2. Can't afford the time or
3. Don't have an inclination

to study and invest directly in the markets.

Regards,

N

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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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Fear & Greed - 2008 Version

Fear & Greed - 2008 Version

Self-explanatory (Original source unknown - got it through email from a friend):

Regards,

N

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