What did the bear market teach you ?

Lets go over what the typical investor was thinking over the last 18 months, from the peak to the current recovery phase.

Jan 2008 – Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!

March 2008 – I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more

Aug 2008 – The market is climbing again!! the bear market is over.

Nov 2008 – What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling

Feb 2008 – This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that

April 2008 – The market has risen a bit, but I am not worried. The market will drop once the election results are announced

May 2008 – The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait

Jun 2008 – let me wait for the market to drop

July 2008 – Let me wait for the market to drop

….and the mental circus continues

I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like

- The market is a casino and one has to be able to predict the market in advance to make money
- I should take more risk and should trade more frantically to make money
- One needs to be glued to the TV to make money
- All the losses are not my fault, though the gains were due to my brilliance

I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past

- There is only one person to blame for your losses – you
- There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
- Prepare in advance – I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
- Stop listening to markets forecast and silly predictions. They will cost you money in the long run
- Learn continuously. You may make money by luck in the stock market, but will not keep it.
- Stop looking backwards – I should have or would have done this, is not relevant. The question is – knowing what I know now, what do I plan to do?

What did the bear market teach you ?

Lets go over what the typical investor was thinking over the last 18 months, from the peak to the current recovery phase.

Jan 2008 – Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!

March 2008 – I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more

Aug 2008 – The market is climbing again!! the bear market is over.

Nov 2008 – What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling

Feb 2008 – This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that

April 2008 – The market has risen a bit, but I am not worried. The market will drop once the election results are announced

May 2008 – The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait

Jun 2008 – let me wait for the market to drop

July 2008 – Let me wait for the market to drop

….and the mental circus continues

I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like

- The market is a casino and one has to be able to predict the market in advance to make money
- I should take more risk and should trade more frantically to make money
- One needs to be glued to the TV to make money
- All the losses are not my fault, though the gains were due to my brilliance

I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past

- There is only one person to blame for your losses – you
- There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
- Prepare in advance – I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
- Stop listening to markets forecast and silly predictions. They will cost you money in the long run
- Learn continuously. You may make money by luck in the stock market, but will not keep it.
- Stop looking backwards – I should have or would have done this, is not relevant. The question is – knowing what I know now, what do I plan to do?

Maruti suzuki
I have written about maruti suzuki earlier here and here. Maruti recently announced great results, atleast on the face of it.

The results are good, though not spectacular. The company has shown an 18% year on year growth in volume and 25% growth in profit. The QoQ growth is -4% , mainly due to the seasonality of the sales. The company has been able to manage the costs well on yoy basis and reduce them from the previous quarter. The main reduction has been on material costs and elimination of the exchange variation losses.

So I should be doing handsprings and cartwheels ..right ? not exactly. I have written earlier on anchoring and my failure to build a full position in maruti suzuki. So a 200%+ price increase is a simultenaous reason for me to smile and beat myself :)

Bharat electronics
I have writen about BEL earlier here . BEL recently announced Q1 results and reported 180%+ growth in net profits and a 10 fold increase in profits.

I am happy about the results, but not for the reasons you would expect. Let me explain – My key concern with BEL has been that the company has been booking majority of its sales in Q4 and a result was making almost 60-70% of its profit in the same quarter.

Now the company operates in a project kind of business and hence could be booking revenue based on percentage of completion method during Q4. As a result of the skew, the company had built up high recievables and hence higher working capital.

The company seems to be moving away from the above (need to confirm from the annual report) skew which is good as it would help in improving the cash flow and reduce work capital requirements. So the results are good, not due to the growth, but due to the reduction in the skew in the quarter by quarter revenue.

On an overall basis, the core business of the company is fairly immune from the recession and the company should continue to do well.

CRISIL
I have written about CRISIL earlier here. CRISIL reported its quartely results and reported a 17% increase in topline and 12% increase in the bottom line. The offshore research business continued to show growth inspite of the chaos in the international markets.

I am pretty happy with the results in view of the macro conditions in which these results were achieved. In addition the company reported a dividend of 25Rs/ share which amounts to a 50% payout. The company management is not hoarding the capital, which is a good thing.

CRISIL is one of the few companies with enormous competitive advantages. I have always wanted to buy this company, but was put off by the steep valuations. During the downturn, I was reading an article on buffett and was struck by a comment – buffett tends to read about companies even if he has no plans to buy the stock. If he likes the company, he mentally files it and waits for the right time when the price is right.

The above comment got me thinking and on going through my notes found my analysis of maruti and CRISIL. After a quick analysis, I decided to pull the trigger.

Moral of the story :) (for me) – be prepared in advance. You never know when opportunity strikes !

Maruti suzuki
I have written about maruti suzuki earlier here and here. Maruti recently announced great results, atleast on the face of it.

The results are good, though not spectacular. The company has shown an 18% year on year growth in volume and 25% growth in profit. The QoQ growth is -4% , mainly due to the seasonality of the sales. The company has been able to manage the costs well on yoy basis and reduce them from the previous quarter. The main reduction has been on material costs and elimination of the exchange variation losses.

So I should be doing handsprings and cartwheels ..right ? not exactly. I have written earlier on anchoring and my failure to build a full position in maruti suzuki. So a 200%+ price increase is a simultenaous reason for me to smile and beat myself :)

Bharat electronics
I have writen about BEL earlier here . BEL recently announced Q1 results and reported 180%+ growth in net profits and a 10 fold increase in profits.

I am happy about the results, but not for the reasons you would expect. Let me explain – My key concern with BEL has been that the company has been booking majority of its sales in Q4 and a result was making almost 60-70% of its profit in the same quarter.

Now the company operates in a project kind of business and hence could be booking revenue based on percentage of completion method during Q4. As a result of the skew, the company had built up high recievables and hence higher working capital.

The company seems to be moving away from the above (need to confirm from the annual report) skew which is good as it would help in improving the cash flow and reduce work capital requirements. So the results are good, not due to the growth, but due to the reduction in the skew in the quarter by quarter revenue.

On an overall basis, the core business of the company is fairly immune from the recession and the company should continue to do well.

CRISIL
I have written about CRISIL earlier here. CRISIL reported its quartely results and reported a 17% increase in topline and 12% increase in the bottom line. The offshore research business continued to show growth inspite of the chaos in the international markets.

I am pretty happy with the results in view of the macro conditions in which these results were achieved. In addition the company reported a dividend of 25Rs/ share which amounts to a 50% payout. The company management is not hoarding the capital, which is a good thing.

CRISIL is one of the few companies with enormous competitive advantages. I have always wanted to buy this company, but was put off by the steep valuations. During the downturn, I was reading an article on buffett and was struck by a comment – buffett tends to read about companies even if he has no plans to buy the stock. If he likes the company, he mentally files it and waits for the right time when the price is right.

The above comment got me thinking and on going through my notes found my analysis of maruti and CRISIL. After a quick analysis, I decided to pull the trigger.

Moral of the story :) (for me) – be prepared in advance. You never know when opportunity strikes !

Quarterly results review – VST india, Novartis, Concor

VST
I wrote about VST a month back and got it perfectly wrong. The company has come out with a 60%+ topline growth and doubling of bottom line. I have not been find more details on the results, but need to figure out how the company has been able to increase topline so rapidly in a business with such a low growth.

Container corporation
The company reported a 10% topline growth and a flat bottom line. The bottom line is flat due to the 20% rise in the rail expenses. Although I don’t have the exact details, the rail charge hikes cannot be passed on the customers immediately and there is a lag in getting the price increase.
The overall results are good in view of the slowdown in the exim markets. Concor has been a long term holding for me and is a very profitable logistics company with a cash rich balance sheet, attractive margins and substantial competitive advantage.

Novartis
I wrote on Novartis earlier here. I have not completely exited the stock as I felt the buyback price was too low. The company has been able to increase the holding to 76.4% now. The company increased the topline by 7% and bottom line by around the same amount.
The performance is nothing out of the ordinary. The stock continues to be undervalued and will most likely remain so. The only upside is a possible buyback and delisting by the parent. However as there is no fixed timetable, it may not make sense to hold the stock for the long term. In my case, I will exit my position when I can find a better idea.

So how is your portfolio doing ?
I often get this question by email. The short answer is – as expected (around 10% in excess of the index returns). I started buying last year from march and went all in by Q4 of 2008. I have not been very active since the beginning of the year due to various reasons ranging from shortage of cash to lack of time.

I have been lucky that my wins generally end up more than compensating for my goof-ups. It is however difficult to know beforehand which idea would be a winner or a clunker. In the final analysis, though it is the portfolio performance rather than individual stock performance, which matters more.

Quarterly results review – VST india, Novartis, Concor

VST
I wrote about VST a month back and got it perfectly wrong. The company has come out with a 60%+ topline growth and doubling of bottom line. I have not been find more details on the results, but need to figure out how the company has been able to increase topline so rapidly in a business with such a low growth.

Container corporation
The company reported a 10% topline growth and a flat bottom line. The bottom line is flat due to the 20% rise in the rail expenses. Although I don’t have the exact details, the rail charge hikes cannot be passed on the customers immediately and there is a lag in getting the price increase.
The overall results are good in view of the slowdown in the exim markets. Concor has been a long term holding for me and is a very profitable logistics company with a cash rich balance sheet, attractive margins and substantial competitive advantage.

Novartis
I wrote on Novartis earlier here. I have not completely exited the stock as I felt the buyback price was too low. The company has been able to increase the holding to 76.4% now. The company increased the topline by 7% and bottom line by around the same amount.
The performance is nothing out of the ordinary. The stock continues to be undervalued and will most likely remain so. The only upside is a possible buyback and delisting by the parent. However as there is no fixed timetable, it may not make sense to hold the stock for the long term. In my case, I will exit my position when I can find a better idea.

So how is your portfolio doing ?
I often get this question by email. The short answer is – as expected (around 10% in excess of the index returns). I started buying last year from march and went all in by Q4 of 2008. I have not been very active since the beginning of the year due to various reasons ranging from shortage of cash to lack of time.

I have been lucky that my wins generally end up more than compensating for my goof-ups. It is however difficult to know beforehand which idea would be a winner or a clunker. In the final analysis, though it is the portfolio performance rather than individual stock performance, which matters more.

Patience

In an ideal world, If I expect my portfolio to return 24% per annum, I would prefer to get 2% returns per month. That way at the end of each month, I would have a nice gain and would be feeling quite good about it.

Now all of us know that it does not work that way. In the last few years, however a lot of investors have come to expect that they ‘deserve’ to make 40% per annum and that too in equal increments with minimal drops along the way. If you think I am exaggerating, look at the mutual fund inflows and outflows to confirm my statement.

Impatience and mutual funds
If a mutual does well for a few months, they have a surge of new funds. If however, heaven forbid they drop for a few months, the money starts flowing out. In such a sceanrio a fund manager cannot be faulted for having a short term view. Mutual funds and fund managers have their faults too and I am not defending those faults. However impatient investors cause a lot of fund managers to take a short term view which affects the fund performance in the long run.

The above phenomenon is not limited to the indian markets alone. You can find it prevalent in almost all the foreign markets too. There is a lot of evidence that the average holding period for investors has come down progressively. This shows up as higher volumes and more trading in the markets.

Patience and investing
Value investing requires a lot of patience, maybe more than what most investors or individuals have. I recently analysed my performance for the last 8-9 years and noticed that quite a few of my picks (maybe 80%) have taken 1-2 years to approach intrinsic value. What does that imply?

If I buy a stock for 100 and think it is worth 200, I may end up holding it for 1-2 years without any action on the stock. Then suddenly, the gap closes. I have seen the gap close in a matter of a few weeks. So my net returns after, say 1.5 years could be 5-10% at best and then in a matter of weeks the stock doubles.

Now if you think you can predict when the gap will close, then congratulations !!!. You are on your way to becoming very very rich. However I do not have such a sixth or seventh sense. So I end up analysing the stock, accumulate it slowly and then waiting patiently for the gap to close.

I think one of the key advantage, we can have over others is to have more patience. I have repeatedly seen it work, though the interimn period is painful and full of doubt. The other reality is also that patience is the rarest commodity on the stock market.

So when does patience become stubborn refusual to accept that the situation has changed and the stock price will never improve ..well that’s a post for another day

Patience

In an ideal world, If I expect my portfolio to return 24% per annum, I would prefer to get 2% returns per month. That way at the end of each month, I would have a nice gain and would be feeling quite good about it.

Now all of us know that it does not work that way. In the last few years, however a lot of investors have come to expect that they ‘deserve’ to make 40% per annum and that too in equal increments with minimal drops along the way. If you think I am exaggerating, look at the mutual fund inflows and outflows to confirm my statement.

Impatience and mutual funds
If a mutual does well for a few months, they have a surge of new funds. If however, heaven forbid they drop for a few months, the money starts flowing out. In such a sceanrio a fund manager cannot be faulted for having a short term view. Mutual funds and fund managers have their faults too and I am not defending those faults. However impatient investors cause a lot of fund managers to take a short term view which affects the fund performance in the long run.

The above phenomenon is not limited to the indian markets alone. You can find it prevalent in almost all the foreign markets too. There is a lot of evidence that the average holding period for investors has come down progressively. This shows up as higher volumes and more trading in the markets.

Patience and investing
Value investing requires a lot of patience, maybe more than what most investors or individuals have. I recently analysed my performance for the last 8-9 years and noticed that quite a few of my picks (maybe 80%) have taken 1-2 years to approach intrinsic value. What does that imply?

If I buy a stock for 100 and think it is worth 200, I may end up holding it for 1-2 years without any action on the stock. Then suddenly, the gap closes. I have seen the gap close in a matter of a few weeks. So my net returns after, say 1.5 years could be 5-10% at best and then in a matter of weeks the stock doubles.

Now if you think you can predict when the gap will close, then congratulations !!!. You are on your way to becoming very very rich. However I do not have such a sixth or seventh sense. So I end up analysing the stock, accumulate it slowly and then waiting patiently for the gap to close.

I think one of the key advantage, we can have over others is to have more patience. I have repeatedly seen it work, though the interimn period is painful and full of doubt. The other reality is also that patience is the rarest commodity on the stock market.

So when does patience become stubborn refusual to accept that the situation has changed and the stock price will never improve ..well that’s a post for another day

Things I don’t understand

Why does one have to focus on daily stock volumes. If I am small investor and confident that the I am buying a good company at a discount, how does the daily volumes matter?

How do elections matter ? have they mattered in the past ? how does the long term economics of a company such as Colgate palmolive change if congress comes to power ? Will I use more toothpaste if they came to power ?

Why do people base their decision on CNBC or other financial channels ? do any of the anchors talk anything useful ? All that I can see is minute by minute commentary of what is happening in the market. Even the cricket commentators provide a more in depth analysis than these talking heads

Why do people base their investment decision based on brokerage report ? The best you can get from a brokerage report are some facts and data. The worst is to depend on their price targets. The same analysts cannot be a 100% sure of what will happen to him after 6 months, but can pin point a precise price target for a stock

Why people blame others and the stock market for the losses, but themselves for the gain ?

Why people constantly want to stock tips and think that the stock market is an easy way to make quick money, but know of no other activity in life that gives something for nothing?

Why every new investor in the bull market after investing for six months thinks he is the next Rakesh jhunjhunwala or warren buffett?

Why some investors after investing for a few months think they are smarter than a buffett or a jhunjhunwala if they make a mistake on a stock?

Things I don’t understand

Why does one have to focus on daily stock volumes. If I am small investor and confident that the I am buying a good company at a discount, how does the daily volumes matter?

How do elections matter ? have they mattered in the past ? how does the long term economics of a company such as Colgate palmolive change if congress comes to power ? Will I use more toothpaste if they came to power ?

Why do people base their decision on CNBC or other financial channels ? do any of the anchors talk anything useful ? All that I can see is minute by minute commentary of what is happening in the market. Even the cricket commentators provide a more in depth analysis than these talking heads

Why do people base their investment decision based on brokerage report ? The best you can get from a brokerage report are some facts and data. The worst is to depend on their price targets. The same analysts cannot be a 100% sure of what will happen to him after 6 months, but can pin point a precise price target for a stock

Why people blame others and the stock market for the losses, but themselves for the gain ?

Why people constantly want to stock tips and think that the stock market is an easy way to make quick money, but know of no other activity in life that gives something for nothing?

Why every new investor in the bull market after investing for six months thinks he is the next Rakesh jhunjhunwala or warren buffett?

Why some investors after investing for a few months think they are smarter than a buffett or a jhunjhunwala if they make a mistake on a stock?