I recently visited icici and HDFC bank for some personal work and some of the sales folks at these branches went into a sales pitch, pushing their respective unit linked plans. These unit linked plans are a combination of an Insurance policy and mutual funds. The key highlights of these plans are
Highlights
- An annual ‘premium’ payment towards the plan for around 15 years.
- An option to pick from a range of 100% equity to 100% debt plans
- If the primary holder passes away, the nominee get the insurance amount in addition to the accumulated value of the mutual fund component (varies by plan)
- A max total insurance cover of around 12.5 lacs even if the annual premium exceeds 2.5 lacs
- 40% premium charge in year 1, 30% charge in year 2 and 2% thereafter.
- A plethora of other charges some of which are not very clear unless you dig further such as mortality charge, admin charge etc
- A 1.25% fund management charge
Now these sales folks are well intentioned and all that. But frankly my initial feeling was that anything this complicated and convoluted cannot be very good. Lets look at some math
For ex : I invest 2.5 lacs per annum for 15 years in a 100% equity option. So around 1.75lacs are deducted in year 1 and 2 combined and around 5000 rs per annum thereafter. The rest would be invested in a mutual fund of choice.
The insurance component
Lets look at the insurance component first. A pure risk policy (which is what the above is) is currently priced at around 4000-6000 p.a premium for a duration of 15 years. So clearly the insurance component is overpriced.
There is a bumper component which is paid at the end of the policy term which equates 70-80% of the premium. If you look at it in another way, this equals the 70% you pay upfront at the start of the policy.
So in a nutshell, the company is taking 70-80% of the annual premium from you and holding it interest free for 15 years. At an interest rate of around 9% per annum that is 3.6 times your annual premium !!
The 2% annual deduction would get you a similar pure risk policy with all the attendant benefits including tax deductions.
Mutual fund component
Lets look at the mutual funds component – Nothing special here. The company is taking 60% of your premium in yr 1, 70% in year 2 and 90% in yr 3 and onwards and investing it on your behalf for 15 years. At the end of 15 years, you redeem based on the NAV then.
What are the negatives here ?
– For starters my money could be locked for 15 years – a big negative if the performance turns out to be poor.
– The brochures, which I have seen show very average performance for all the concerned funds (most of them, barely beating the index before charges and actually underperforming the index after the fund management fees).
– A plethora of charges I noted earlier, get deducted from the mutual fund component. There is not much clarity in the brochures on the quantum of total charges, but I don’t expect it be less than 1% of the total (maybe more).
Conclusion
A pretty bad investment option. The insurance component is way overpriced !!. The mutual fund component has nothing special in it and has a load of charges attached to it, which will reduce your returns substantially in the long run. I will not be surprised if the banks are getting a hefty commission or good fee from these kind of plans.
My initial feel was that anything this convuluted and complex is a nice way for the bank or AMC to make good money off the fees and leave the investor with poor returns
Recommendations
Buy a low cost pure risk policy for the insurance cover. These policies do not pay anything if you survive ( A happy outcome !! as I have survived) and have a very low premium. For the mutual fund component invest in a low cost index fund or ETF or a decent mutual fund (if you can find one).
Finally, buy something nice for yourself or your spouse/friend with the money you save and send me a gift for saving you this money (just kidding !).
Tuesday, March 17, 2009
Tuesday, March 10, 2009
Letter to shareholders from Warren buffett – Some thoughts
Warren buffett as most of you must be aware is considered as one of the foremost investors. He is the chairman of Berkshire Hathaway and publishes an annual letter to shareholders which is a must read for any aspiring or seasoned value investor. You can access his letters here. The 2008 letters was published more than a week ago and I downloaded it the moment it was posted and read through it immediately (yes I am a complete fan !).
Some thoughts –
The options bet
One of most discussed topic about buffett is the options bet he has taken. The argument goes like this – Buffett has claimed that derivatives are a weapon of financial mass destruction and yet he has gone ahead and invested in the same instruments. He is being irresponsible and has doomed his company by this bet
Those who write the above are highlighting two points of their own ignorance
- Derivatives are dangerous for those who don’t know what they are doing. This is similar to giving a knife in the hands of a child. I don’t think any journalist, no matter how anti – buffett would consider him to be a novice investor. He has clearly spelled out what kind of bet he has taken in the letter and what are the risks associated with these instruments.
Following is the comment by buffett on the same above point in a recent CNBC interview
JOE: Those are derivatives. You don't like derivatives, but you used them in that case, right?
BUFFETT: I--well, we've used derivatives for many, many years. I don't think derivatives are evil, per se, I think they are dangerous. I've always said they're dangerous. I said they were financial weapons of mass destruction. But uranium is dangerous, and I just went through a nuclear electric plant about two weeks ago. Cars are dangerous.
JOE: Yeah
BUFFETT: But I mean, every American wants to have one. You know, the--a lot of things can be dangerous, but generally we regulate how they're used. I mean, there was a--there was some guard up there with a machine gun on me, you know, when I was at the nuclear plant the other day. So we use lots of things daily that are dangerous, but we generally pay some attention to how they're used.
- They are getting confused between the possible and the probable. Let me explain – It is possible I will become a billonaire in the next 10 years and will have a personal jet . The probability of that happening is 0.0000001%. Buffett’s option bet stands to lose 37 billion dollars if the 4 indices on which he has written the puts go to zero. Let me tell you this – If these four main markets go to 0 in the next 10-15 years, money would be least of our worries. I for one be forced to work on a farm or forage for food as the markets as we know would not exist.
When I first read of these puts, my thought process was that these were akin to an insurance contract based on a long term event with the premium paid upfront (similar for CAT insurance written by Berkshire hathaway). Buffett has explained it in a similar manner in detail in the annual report. I would recommend you to read the explaination in detail.
In addition, the option bet is equivalent to taking a long term loan where the interest rate of the loan can vary depending on the final payout.
Drop in profits
Most of headlines are screaming a major drop in profits. Buffett in clear, uncertain language has written that the profits of his company are very lumpy and will vary depending on the sale of investments. In certain years, buffett sells off overvalued investments and those gains are realised in the net profit. In the subsequent years, in absence of any such gain the year on year comparison looks bad (look at page 28 of the annual report and the explainatory note at the bottom)
The company’s operating business had a approximate cash flow of 9 bn. However various write offs and other change has result in a drop in the quarter’s net profit. The bad economy has definitely affected the company, but the results are not as bad as they appear on the face of it.
Mea culpa
Buffett has admitted to two mistakes - his timing on purchasing Conco phillips and two irish banks. I have been reading and following buffett over a decade and have seen his mistakes to be sometime more profitable than most of the successes of other people. In any case, these could be genuine mistakes and could cost Berkshire 1-2 % of their networth in the worst case scenario.
Looking closely
If you look closely at the results and compare across the years, you will see that the insurance subs and utilities are doing well. Float continue to increase at a steady rate with cost of the float being below zero (which is more important than premium growth) . Both these subs which form a major portion of Berkshire’s business have actually done well compared to the overall economic environment.
The other business are doing quite fine considering the horrible economic environment (see pg 61 of the 2008 annual report)
But the price has dropped ?
Yes the price has dropped and the CDS spreads have widened. Do you always believe the market to be right and the price to be aribiter of value ? Well then we are speaking different language. The markets are often but not always right.
Berkshire CDS spreads are at record levels signalling liquidity or credit issues. To validate that, look at the balance sheet of the company and you will find that the company has 25 billion of cash and equivalents (after all the investment which buffett has done last year). Do you really think a company with 11Bn+ operating cash flow and huge cash reserves will go bankrupt ?
Buffett fan ?
You can rightly accuse me of being a Buffett fan. However to that name, please add the names of Seth klarman, Phil fischer, Charlie munger, Marty whitman, Bill miller, eddie lampart, Rakesh jhunjhunwala and Chandrakant sampat.
I am follower of all great value investors and try to use every opportunity to learn from them. I have never blindly followed their picks or tried to imitate any of these investors, but I always try to learn from each one of them, even if they have been wrong a few times.
Let me ask you this – If you wanted to learn how to play cricket or golf or tennis, would you learn it from sachin tendulkar or Tiger woods or Roger federer (if they were ready to teach someone) ? Sure these players make mistakes and lose matches, but does that take away the fact that these players are the one of the greatest sportsmen in their fields?
It is easy for armchair players or armchair investors to critize from the comfort of their seats, especially after the event with a 20/20 hindsight. Majority of the criticism I have read about buffett and the other investors lacks rigrious detail and analysis and is usually along the lines – The stock price has dropped and hence he is doing something wrong !!.
Some thoughts –
The options bet
One of most discussed topic about buffett is the options bet he has taken. The argument goes like this – Buffett has claimed that derivatives are a weapon of financial mass destruction and yet he has gone ahead and invested in the same instruments. He is being irresponsible and has doomed his company by this bet
Those who write the above are highlighting two points of their own ignorance
- Derivatives are dangerous for those who don’t know what they are doing. This is similar to giving a knife in the hands of a child. I don’t think any journalist, no matter how anti – buffett would consider him to be a novice investor. He has clearly spelled out what kind of bet he has taken in the letter and what are the risks associated with these instruments.
Following is the comment by buffett on the same above point in a recent CNBC interview
JOE: Those are derivatives. You don't like derivatives, but you used them in that case, right?
BUFFETT: I--well, we've used derivatives for many, many years. I don't think derivatives are evil, per se, I think they are dangerous. I've always said they're dangerous. I said they were financial weapons of mass destruction. But uranium is dangerous, and I just went through a nuclear electric plant about two weeks ago. Cars are dangerous.
JOE: Yeah
BUFFETT: But I mean, every American wants to have one. You know, the--a lot of things can be dangerous, but generally we regulate how they're used. I mean, there was a--there was some guard up there with a machine gun on me, you know, when I was at the nuclear plant the other day. So we use lots of things daily that are dangerous, but we generally pay some attention to how they're used.
- They are getting confused between the possible and the probable. Let me explain – It is possible I will become a billonaire in the next 10 years and will have a personal jet . The probability of that happening is 0.0000001%. Buffett’s option bet stands to lose 37 billion dollars if the 4 indices on which he has written the puts go to zero. Let me tell you this – If these four main markets go to 0 in the next 10-15 years, money would be least of our worries. I for one be forced to work on a farm or forage for food as the markets as we know would not exist.
When I first read of these puts, my thought process was that these were akin to an insurance contract based on a long term event with the premium paid upfront (similar for CAT insurance written by Berkshire hathaway). Buffett has explained it in a similar manner in detail in the annual report. I would recommend you to read the explaination in detail.
In addition, the option bet is equivalent to taking a long term loan where the interest rate of the loan can vary depending on the final payout.
Drop in profits
Most of headlines are screaming a major drop in profits. Buffett in clear, uncertain language has written that the profits of his company are very lumpy and will vary depending on the sale of investments. In certain years, buffett sells off overvalued investments and those gains are realised in the net profit. In the subsequent years, in absence of any such gain the year on year comparison looks bad (look at page 28 of the annual report and the explainatory note at the bottom)
The company’s operating business had a approximate cash flow of 9 bn. However various write offs and other change has result in a drop in the quarter’s net profit. The bad economy has definitely affected the company, but the results are not as bad as they appear on the face of it.
Mea culpa
Buffett has admitted to two mistakes - his timing on purchasing Conco phillips and two irish banks. I have been reading and following buffett over a decade and have seen his mistakes to be sometime more profitable than most of the successes of other people. In any case, these could be genuine mistakes and could cost Berkshire 1-2 % of their networth in the worst case scenario.
Looking closely
If you look closely at the results and compare across the years, you will see that the insurance subs and utilities are doing well. Float continue to increase at a steady rate with cost of the float being below zero (which is more important than premium growth) . Both these subs which form a major portion of Berkshire’s business have actually done well compared to the overall economic environment.
The other business are doing quite fine considering the horrible economic environment (see pg 61 of the 2008 annual report)
But the price has dropped ?
Yes the price has dropped and the CDS spreads have widened. Do you always believe the market to be right and the price to be aribiter of value ? Well then we are speaking different language. The markets are often but not always right.
Berkshire CDS spreads are at record levels signalling liquidity or credit issues. To validate that, look at the balance sheet of the company and you will find that the company has 25 billion of cash and equivalents (after all the investment which buffett has done last year). Do you really think a company with 11Bn+ operating cash flow and huge cash reserves will go bankrupt ?
Buffett fan ?
You can rightly accuse me of being a Buffett fan. However to that name, please add the names of Seth klarman, Phil fischer, Charlie munger, Marty whitman, Bill miller, eddie lampart, Rakesh jhunjhunwala and Chandrakant sampat.
I am follower of all great value investors and try to use every opportunity to learn from them. I have never blindly followed their picks or tried to imitate any of these investors, but I always try to learn from each one of them, even if they have been wrong a few times.
Let me ask you this – If you wanted to learn how to play cricket or golf or tennis, would you learn it from sachin tendulkar or Tiger woods or Roger federer (if they were ready to teach someone) ? Sure these players make mistakes and lose matches, but does that take away the fact that these players are the one of the greatest sportsmen in their fields?
It is easy for armchair players or armchair investors to critize from the comfort of their seats, especially after the event with a 20/20 hindsight. Majority of the criticism I have read about buffett and the other investors lacks rigrious detail and analysis and is usually along the lines – The stock price has dropped and hence he is doing something wrong !!.
Letter to shareholders from Warren buffett – Some thoughts
Warren buffett as most of you must be aware is considered as one of the foremost investors. He is the chairman of Berkshire Hathaway and publishes an annual letter to shareholders which is a must read for any aspiring or seasoned value investor. You can access his letters here. The 2008 letters was published more than a week ago and I downloaded it the moment it was posted and read through it immediately (yes I am a complete fan !).
Some thoughts –
The options bet
One of most discussed topic about buffett is the options bet he has taken. The argument goes like this – Buffett has claimed that derivatives are a weapon of financial mass destruction and yet he has gone ahead and invested in the same instruments. He is being irresponsible and has doomed his company by this bet
Those who write the above are highlighting two points of their own ignorance
- Derivatives are dangerous for those who don’t know what they are doing. This is similar to giving a knife in the hands of a child. I don’t think any journalist, no matter how anti – buffett would consider him to be a novice investor. He has clearly spelled out what kind of bet he has taken in the letter and what are the risks associated with these instruments.
Following is the comment by buffett on the same above point in a recent CNBC interview
JOE: Those are derivatives. You don't like derivatives, but you used them in that case, right?
BUFFETT: I--well, we've used derivatives for many, many years. I don't think derivatives are evil, per se, I think they are dangerous. I've always said they're dangerous. I said they were financial weapons of mass destruction. But uranium is dangerous, and I just went through a nuclear electric plant about two weeks ago. Cars are dangerous.
JOE: Yeah
BUFFETT: But I mean, every American wants to have one. You know, the--a lot of things can be dangerous, but generally we regulate how they're used. I mean, there was a--there was some guard up there with a machine gun on me, you know, when I was at the nuclear plant the other day. So we use lots of things daily that are dangerous, but we generally pay some attention to how they're used.
- They are getting confused between the possible and the probable. Let me explain – It is possible I will become a billonaire in the next 10 years and will have a personal jet . The probability of that happening is 0.0000001%. Buffett’s option bet stands to lose 37 billion dollars if the 4 indices on which he has written the puts go to zero. Let me tell you this – If these four main markets go to 0 in the next 10-15 years, money would be least of our worries. I for one be forced to work on a farm or forage for food as the markets as we know would not exist.
When I first read of these puts, my thought process was that these were akin to an insurance contract based on a long term event with the premium paid upfront (similar for CAT insurance written by Berkshire hathaway). Buffett has explained it in a similar manner in detail in the annual report. I would recommend you to read the explaination in detail.
In addition, the option bet is equivalent to taking a long term loan where the interest rate of the loan can vary depending on the final payout.
Drop in profits
Most of headlines are screaming a major drop in profits. Buffett in clear, uncertain language has written that the profits of his company are very lumpy and will vary depending on the sale of investments. In certain years, buffett sells off overvalued investments and those gains are realised in the net profit. In the subsequent years, in absence of any such gain the year on year comparison looks bad (look at page 28 of the annual report and the explainatory note at the bottom)
The company’s operating business had a approximate cash flow of 9 bn. However various write offs and other change has result in a drop in the quarter’s net profit. The bad economy has definitely affected the company, but the results are not as bad as they appear on the face of it.
Mea culpa
Buffett has admitted to two mistakes - his timing on purchasing Conco phillips and two irish banks. I have been reading and following buffett over a decade and have seen his mistakes to be sometime more profitable than most of the successes of other people. In any case, these could be genuine mistakes and could cost Berkshire 1-2 % of their networth in the worst case scenario.
Looking closely
If you look closely at the results and compare across the years, you will see that the insurance subs and utilities are doing well. Float continue to increase at a steady rate with cost of the float being below zero (which is more important than premium growth) . Both these subs which form a major portion of Berkshire’s business have actually done well compared to the overall economic environment.
The other business are doing quite fine considering the horrible economic environment (see pg 61 of the 2008 annual report)
But the price has dropped ?
Yes the price has dropped and the CDS spreads have widened. Do you always believe the market to be right and the price to be aribiter of value ? Well then we are speaking different language. The markets are often but not always right.
Berkshire CDS spreads are at record levels signalling liquidity or credit issues. To validate that, look at the balance sheet of the company and you will find that the company has 25 billion of cash and equivalents (after all the investment which buffett has done last year). Do you really think a company with 11Bn+ operating cash flow and huge cash reserves will go bankrupt ?
Buffett fan ?
You can rightly accuse me of being a Buffett fan. However to that name, please add the names of Seth klarman, Phil fischer, Charlie munger, Marty whitman, Bill miller, eddie lampart, Rakesh jhunjhunwala and Chandrakant sampat.
I am follower of all great value investors and try to use every opportunity to learn from them. I have never blindly followed their picks or tried to imitate any of these investors, but I always try to learn from each one of them, even if they have been wrong a few times.
Let me ask you this – If you wanted to learn how to play cricket or golf or tennis, would you learn it from sachin tendulkar or Tiger woods or Roger federer (if they were ready to teach someone) ? Sure these players make mistakes and lose matches, but does that take away the fact that these players are the one of the greatest sportsmen in their fields?
It is easy for armchair players or armchair investors to critize from the comfort of their seats, especially after the event with a 20/20 hindsight. Majority of the criticism I have read about buffett and the other investors lacks rigrious detail and analysis and is usually along the lines – The stock price has dropped and hence he is doing something wrong !!.
Some thoughts –
The options bet
One of most discussed topic about buffett is the options bet he has taken. The argument goes like this – Buffett has claimed that derivatives are a weapon of financial mass destruction and yet he has gone ahead and invested in the same instruments. He is being irresponsible and has doomed his company by this bet
Those who write the above are highlighting two points of their own ignorance
- Derivatives are dangerous for those who don’t know what they are doing. This is similar to giving a knife in the hands of a child. I don’t think any journalist, no matter how anti – buffett would consider him to be a novice investor. He has clearly spelled out what kind of bet he has taken in the letter and what are the risks associated with these instruments.
Following is the comment by buffett on the same above point in a recent CNBC interview
JOE: Those are derivatives. You don't like derivatives, but you used them in that case, right?
BUFFETT: I--well, we've used derivatives for many, many years. I don't think derivatives are evil, per se, I think they are dangerous. I've always said they're dangerous. I said they were financial weapons of mass destruction. But uranium is dangerous, and I just went through a nuclear electric plant about two weeks ago. Cars are dangerous.
JOE: Yeah
BUFFETT: But I mean, every American wants to have one. You know, the--a lot of things can be dangerous, but generally we regulate how they're used. I mean, there was a--there was some guard up there with a machine gun on me, you know, when I was at the nuclear plant the other day. So we use lots of things daily that are dangerous, but we generally pay some attention to how they're used.
- They are getting confused between the possible and the probable. Let me explain – It is possible I will become a billonaire in the next 10 years and will have a personal jet . The probability of that happening is 0.0000001%. Buffett’s option bet stands to lose 37 billion dollars if the 4 indices on which he has written the puts go to zero. Let me tell you this – If these four main markets go to 0 in the next 10-15 years, money would be least of our worries. I for one be forced to work on a farm or forage for food as the markets as we know would not exist.
When I first read of these puts, my thought process was that these were akin to an insurance contract based on a long term event with the premium paid upfront (similar for CAT insurance written by Berkshire hathaway). Buffett has explained it in a similar manner in detail in the annual report. I would recommend you to read the explaination in detail.
In addition, the option bet is equivalent to taking a long term loan where the interest rate of the loan can vary depending on the final payout.
Drop in profits
Most of headlines are screaming a major drop in profits. Buffett in clear, uncertain language has written that the profits of his company are very lumpy and will vary depending on the sale of investments. In certain years, buffett sells off overvalued investments and those gains are realised in the net profit. In the subsequent years, in absence of any such gain the year on year comparison looks bad (look at page 28 of the annual report and the explainatory note at the bottom)
The company’s operating business had a approximate cash flow of 9 bn. However various write offs and other change has result in a drop in the quarter’s net profit. The bad economy has definitely affected the company, but the results are not as bad as they appear on the face of it.
Mea culpa
Buffett has admitted to two mistakes - his timing on purchasing Conco phillips and two irish banks. I have been reading and following buffett over a decade and have seen his mistakes to be sometime more profitable than most of the successes of other people. In any case, these could be genuine mistakes and could cost Berkshire 1-2 % of their networth in the worst case scenario.
Looking closely
If you look closely at the results and compare across the years, you will see that the insurance subs and utilities are doing well. Float continue to increase at a steady rate with cost of the float being below zero (which is more important than premium growth) . Both these subs which form a major portion of Berkshire’s business have actually done well compared to the overall economic environment.
The other business are doing quite fine considering the horrible economic environment (see pg 61 of the 2008 annual report)
But the price has dropped ?
Yes the price has dropped and the CDS spreads have widened. Do you always believe the market to be right and the price to be aribiter of value ? Well then we are speaking different language. The markets are often but not always right.
Berkshire CDS spreads are at record levels signalling liquidity or credit issues. To validate that, look at the balance sheet of the company and you will find that the company has 25 billion of cash and equivalents (after all the investment which buffett has done last year). Do you really think a company with 11Bn+ operating cash flow and huge cash reserves will go bankrupt ?
Buffett fan ?
You can rightly accuse me of being a Buffett fan. However to that name, please add the names of Seth klarman, Phil fischer, Charlie munger, Marty whitman, Bill miller, eddie lampart, Rakesh jhunjhunwala and Chandrakant sampat.
I am follower of all great value investors and try to use every opportunity to learn from them. I have never blindly followed their picks or tried to imitate any of these investors, but I always try to learn from each one of them, even if they have been wrong a few times.
Let me ask you this – If you wanted to learn how to play cricket or golf or tennis, would you learn it from sachin tendulkar or Tiger woods or Roger federer (if they were ready to teach someone) ? Sure these players make mistakes and lose matches, but does that take away the fact that these players are the one of the greatest sportsmen in their fields?
It is easy for armchair players or armchair investors to critize from the comfort of their seats, especially after the event with a 20/20 hindsight. Majority of the criticism I have read about buffett and the other investors lacks rigrious detail and analysis and is usually along the lines – The stock price has dropped and hence he is doing something wrong !!.
Monday, March 02, 2009
How we decide
I recently came across a book – How we decide ? This is a book about decision making and how humans make decisions under various circumstances. Although this book is not on some best seller list or by a very well known author, I found the book good and learned quite a bit from it.
Let me list some of my key learning’s from the book
- The rational brain - prefrontal cortex is involved in rational decision making and can evaluate only a limited number of variables and data elements at a time. However our emotional brain, the amygdala and other parts are the hidden supercomputers of the brain. They are able to process more pieces of information and can do so much faster. The reason is evolution. When facing an immediate danger, such as a tiger, the emotional brain had to process the information quickly and cause a fight or flight response. There was no time to sit and think in such a situation.
- The standard model of decision-making has been the rationality based model. Emotions are considered bad for decision making and corrupt our thinking process. That however is not true. Emotions can and do lead us astray, but they are crucial to decision making. The emotional brain and the rational brain are constantly communicating with each other and help us in arriving at our decisions.
- The decision process is a not a smooth process involving the rational brain alone. It is actually an argument where the emotional brain and rational brain go back and forth and based on the situation a final decision is reached.
- The learning process of the brain has a big emotional component. The dopamine system is involved in this process. Whenever we commit a mistake, the dopamine levels drop in the brain and we ‘feel’ bad about it. The emotional centers of the brain encode this memory and use it for later decision making.
- Emotions mislead us several situations. For example, the normal response to price drops in the market is fear and panic. The typical response of most of the investors is to exit the market to avoid the pain and fear. However this is often an incorrect response. A rational and calm response would be to look at the individual stocks and evaluate the expected value at the given price. A decision should then been taken based on this number, than based on emotions.
Some key learning’s for investors (my conclusions)
- Stock market investing is all about decision making under uncertainty. As investors, we can never have complete and full information. Perfect information is a myth. No one can ever know all there is to know about a company, much less an industry or the market.
- A perfectly rational investor is an incorrect model. The above book and several other books I have been reading, point out that the best investors are able to combine rational thinking with their emotions.
- Emotions are formed based on repeated experiences in a particular field. These emotions are referred to by several terms – intuition, gut feel etc. As one develops experience, the learning’s are encoded in the brain as emotions or intuitions. However one should not rely on emotions when starting out as an investor. At that time, one does not have enough experience and the emotions have not developed fully. However as one gains experience, one should learn to trust one’s instincts or at least be mindful of them.
I have personally faced this several times. When analyzing a company, all the numbers will look fine and the company looks undervalued. However some stray facts or a few points will keep troubling me. In most of the instance, where I have ignored such feelings, I have regretted later.
- Smart investing is a mix of rational thinking combined with emotional learning. As one matures as an investor, one should learn to tune in to emotions and gut feel and try to at least understand what they are telling us. You will rarely see investors talk about gut feel or emotions. They are considered too soft or not macho enough!. That is however foolish. The human brain does not work that way. Decision making is a mix of rational thought and emotions. Ignoring emotions means using only a limited power of your brain.
- Novel problems require thinking and should not be based on emotions. When analyzing a new company or business model, do not rely on emotions alone. One should think rationally and assemble all facts before making a decision.
- Embrace uncertainty – It is amazing the level of confidence most people have on their investment. Analysts writing about a company, will provide you projections for the next 3-5 years. Sometimes these projections are not even round numbers (like sales would 1244 crs in FY2010). What crap !. Nothing is absolutely certain in the stock market. There are only varying levels of certainty. To simplify it, I look at low (20-30% probability), medium (around 50%) or high level of probability (around 70-80%) for any specific scenario. In addition, I always believe in developing multiple scenarios when trying to come up with an intrinsic value number. As a result you would have noticed that my estimates are generally in a range and not a fixed number
- Entertain competing hypothesis – One should always be open to counter arguments to one’s investment idea. That allows one to accept contradictory information and weigh it properly. I try to constantly look for points, which go against my investment idea though i am not sure how successful I am at it.
- Finally think about thinking. One should constantly analyze one’s decision making and thinking process. You should be able to look at your thought process objectively and look at ways of improving it ( read this process v/s outcome article by Michael J. Mauboussin ). This blog is my approach of doing it, though in a public fashion. In addition, I always write down my investment thesis when I am looking at an idea and also how I feel about it (though I don’t publish it as they are my private thoughts).
I would strongly recommend you to read this book. It is a very good book and has several crucial points on how the human mind works and how one can improve his or her decision making.
Let me list some of my key learning’s from the book
- The rational brain - prefrontal cortex is involved in rational decision making and can evaluate only a limited number of variables and data elements at a time. However our emotional brain, the amygdala and other parts are the hidden supercomputers of the brain. They are able to process more pieces of information and can do so much faster. The reason is evolution. When facing an immediate danger, such as a tiger, the emotional brain had to process the information quickly and cause a fight or flight response. There was no time to sit and think in such a situation.
- The standard model of decision-making has been the rationality based model. Emotions are considered bad for decision making and corrupt our thinking process. That however is not true. Emotions can and do lead us astray, but they are crucial to decision making. The emotional brain and the rational brain are constantly communicating with each other and help us in arriving at our decisions.
- The decision process is a not a smooth process involving the rational brain alone. It is actually an argument where the emotional brain and rational brain go back and forth and based on the situation a final decision is reached.
- The learning process of the brain has a big emotional component. The dopamine system is involved in this process. Whenever we commit a mistake, the dopamine levels drop in the brain and we ‘feel’ bad about it. The emotional centers of the brain encode this memory and use it for later decision making.
- Emotions mislead us several situations. For example, the normal response to price drops in the market is fear and panic. The typical response of most of the investors is to exit the market to avoid the pain and fear. However this is often an incorrect response. A rational and calm response would be to look at the individual stocks and evaluate the expected value at the given price. A decision should then been taken based on this number, than based on emotions.
Some key learning’s for investors (my conclusions)
- Stock market investing is all about decision making under uncertainty. As investors, we can never have complete and full information. Perfect information is a myth. No one can ever know all there is to know about a company, much less an industry or the market.
- A perfectly rational investor is an incorrect model. The above book and several other books I have been reading, point out that the best investors are able to combine rational thinking with their emotions.
- Emotions are formed based on repeated experiences in a particular field. These emotions are referred to by several terms – intuition, gut feel etc. As one develops experience, the learning’s are encoded in the brain as emotions or intuitions. However one should not rely on emotions when starting out as an investor. At that time, one does not have enough experience and the emotions have not developed fully. However as one gains experience, one should learn to trust one’s instincts or at least be mindful of them.
I have personally faced this several times. When analyzing a company, all the numbers will look fine and the company looks undervalued. However some stray facts or a few points will keep troubling me. In most of the instance, where I have ignored such feelings, I have regretted later.
- Smart investing is a mix of rational thinking combined with emotional learning. As one matures as an investor, one should learn to tune in to emotions and gut feel and try to at least understand what they are telling us. You will rarely see investors talk about gut feel or emotions. They are considered too soft or not macho enough!. That is however foolish. The human brain does not work that way. Decision making is a mix of rational thought and emotions. Ignoring emotions means using only a limited power of your brain.
- Novel problems require thinking and should not be based on emotions. When analyzing a new company or business model, do not rely on emotions alone. One should think rationally and assemble all facts before making a decision.
- Embrace uncertainty – It is amazing the level of confidence most people have on their investment. Analysts writing about a company, will provide you projections for the next 3-5 years. Sometimes these projections are not even round numbers (like sales would 1244 crs in FY2010). What crap !. Nothing is absolutely certain in the stock market. There are only varying levels of certainty. To simplify it, I look at low (20-30% probability), medium (around 50%) or high level of probability (around 70-80%) for any specific scenario. In addition, I always believe in developing multiple scenarios when trying to come up with an intrinsic value number. As a result you would have noticed that my estimates are generally in a range and not a fixed number
- Entertain competing hypothesis – One should always be open to counter arguments to one’s investment idea. That allows one to accept contradictory information and weigh it properly. I try to constantly look for points, which go against my investment idea though i am not sure how successful I am at it.
- Finally think about thinking. One should constantly analyze one’s decision making and thinking process. You should be able to look at your thought process objectively and look at ways of improving it ( read this process v/s outcome article by Michael J. Mauboussin ). This blog is my approach of doing it, though in a public fashion. In addition, I always write down my investment thesis when I am looking at an idea and also how I feel about it (though I don’t publish it as they are my private thoughts).
I would strongly recommend you to read this book. It is a very good book and has several crucial points on how the human mind works and how one can improve his or her decision making.
How we decide
I recently came across a book – How we decide ? This is a book about decision making and how humans make decisions under various circumstances. Although this book is not on some best seller list or by a very well known author, I found the book good and learned quite a bit from it.
Let me list some of my key learning’s from the book
- The rational brain - prefrontal cortex is involved in rational decision making and can evaluate only a limited number of variables and data elements at a time. However our emotional brain, the amygdala and other parts are the hidden supercomputers of the brain. They are able to process more pieces of information and can do so much faster. The reason is evolution. When facing an immediate danger, such as a tiger, the emotional brain had to process the information quickly and cause a fight or flight response. There was no time to sit and think in such a situation.
- The standard model of decision-making has been the rationality based model. Emotions are considered bad for decision making and corrupt our thinking process. That however is not true. Emotions can and do lead us astray, but they are crucial to decision making. The emotional brain and the rational brain are constantly communicating with each other and help us in arriving at our decisions.
- The decision process is a not a smooth process involving the rational brain alone. It is actually an argument where the emotional brain and rational brain go back and forth and based on the situation a final decision is reached.
- The learning process of the brain has a big emotional component. The dopamine system is involved in this process. Whenever we commit a mistake, the dopamine levels drop in the brain and we ‘feel’ bad about it. The emotional centers of the brain encode this memory and use it for later decision making.
- Emotions mislead us several situations. For example, the normal response to price drops in the market is fear and panic. The typical response of most of the investors is to exit the market to avoid the pain and fear. However this is often an incorrect response. A rational and calm response would be to look at the individual stocks and evaluate the expected value at the given price. A decision should then been taken based on this number, than based on emotions.
Some key learning’s for investors (my conclusions)
- Stock market investing is all about decision making under uncertainty. As investors, we can never have complete and full information. Perfect information is a myth. No one can ever know all there is to know about a company, much less an industry or the market.
- A perfectly rational investor is an incorrect model. The above book and several other books I have been reading, point out that the best investors are able to combine rational thinking with their emotions.
- Emotions are formed based on repeated experiences in a particular field. These emotions are referred to by several terms – intuition, gut feel etc. As one develops experience, the learning’s are encoded in the brain as emotions or intuitions. However one should not rely on emotions when starting out as an investor. At that time, one does not have enough experience and the emotions have not developed fully. However as one gains experience, one should learn to trust one’s instincts or at least be mindful of them.
I have personally faced this several times. When analyzing a company, all the numbers will look fine and the company looks undervalued. However some stray facts or a few points will keep troubling me. In most of the instance, where I have ignored such feelings, I have regretted later.
- Smart investing is a mix of rational thinking combined with emotional learning. As one matures as an investor, one should learn to tune in to emotions and gut feel and try to at least understand what they are telling us. You will rarely see investors talk about gut feel or emotions. They are considered too soft or not macho enough!. That is however foolish. The human brain does not work that way. Decision making is a mix of rational thought and emotions. Ignoring emotions means using only a limited power of your brain.
- Novel problems require thinking and should not be based on emotions. When analyzing a new company or business model, do not rely on emotions alone. One should think rationally and assemble all facts before making a decision.
- Embrace uncertainty – It is amazing the level of confidence most people have on their investment. Analysts writing about a company, will provide you projections for the next 3-5 years. Sometimes these projections are not even round numbers (like sales would 1244 crs in FY2010). What crap !. Nothing is absolutely certain in the stock market. There are only varying levels of certainty. To simplify it, I look at low (20-30% probability), medium (around 50%) or high level of probability (around 70-80%) for any specific scenario. In addition, I always believe in developing multiple scenarios when trying to come up with an intrinsic value number. As a result you would have noticed that my estimates are generally in a range and not a fixed number
- Entertain competing hypothesis – One should always be open to counter arguments to one’s investment idea. That allows one to accept contradictory information and weigh it properly. I try to constantly look for points, which go against my investment idea though i am not sure how successful I am at it.
- Finally think about thinking. One should constantly analyze one’s decision making and thinking process. You should be able to look at your thought process objectively and look at ways of improving it ( read this process v/s outcome article by Michael J. Mauboussin ). This blog is my approach of doing it, though in a public fashion. In addition, I always write down my investment thesis when I am looking at an idea and also how I feel about it (though I don’t publish it as they are my private thoughts).
I would strongly recommend you to read this book. It is a very good book and has several crucial points on how the human mind works and how one can improve his or her decision making.
Let me list some of my key learning’s from the book
- The rational brain - prefrontal cortex is involved in rational decision making and can evaluate only a limited number of variables and data elements at a time. However our emotional brain, the amygdala and other parts are the hidden supercomputers of the brain. They are able to process more pieces of information and can do so much faster. The reason is evolution. When facing an immediate danger, such as a tiger, the emotional brain had to process the information quickly and cause a fight or flight response. There was no time to sit and think in such a situation.
- The standard model of decision-making has been the rationality based model. Emotions are considered bad for decision making and corrupt our thinking process. That however is not true. Emotions can and do lead us astray, but they are crucial to decision making. The emotional brain and the rational brain are constantly communicating with each other and help us in arriving at our decisions.
- The decision process is a not a smooth process involving the rational brain alone. It is actually an argument where the emotional brain and rational brain go back and forth and based on the situation a final decision is reached.
- The learning process of the brain has a big emotional component. The dopamine system is involved in this process. Whenever we commit a mistake, the dopamine levels drop in the brain and we ‘feel’ bad about it. The emotional centers of the brain encode this memory and use it for later decision making.
- Emotions mislead us several situations. For example, the normal response to price drops in the market is fear and panic. The typical response of most of the investors is to exit the market to avoid the pain and fear. However this is often an incorrect response. A rational and calm response would be to look at the individual stocks and evaluate the expected value at the given price. A decision should then been taken based on this number, than based on emotions.
Some key learning’s for investors (my conclusions)
- Stock market investing is all about decision making under uncertainty. As investors, we can never have complete and full information. Perfect information is a myth. No one can ever know all there is to know about a company, much less an industry or the market.
- A perfectly rational investor is an incorrect model. The above book and several other books I have been reading, point out that the best investors are able to combine rational thinking with their emotions.
- Emotions are formed based on repeated experiences in a particular field. These emotions are referred to by several terms – intuition, gut feel etc. As one develops experience, the learning’s are encoded in the brain as emotions or intuitions. However one should not rely on emotions when starting out as an investor. At that time, one does not have enough experience and the emotions have not developed fully. However as one gains experience, one should learn to trust one’s instincts or at least be mindful of them.
I have personally faced this several times. When analyzing a company, all the numbers will look fine and the company looks undervalued. However some stray facts or a few points will keep troubling me. In most of the instance, where I have ignored such feelings, I have regretted later.
- Smart investing is a mix of rational thinking combined with emotional learning. As one matures as an investor, one should learn to tune in to emotions and gut feel and try to at least understand what they are telling us. You will rarely see investors talk about gut feel or emotions. They are considered too soft or not macho enough!. That is however foolish. The human brain does not work that way. Decision making is a mix of rational thought and emotions. Ignoring emotions means using only a limited power of your brain.
- Novel problems require thinking and should not be based on emotions. When analyzing a new company or business model, do not rely on emotions alone. One should think rationally and assemble all facts before making a decision.
- Embrace uncertainty – It is amazing the level of confidence most people have on their investment. Analysts writing about a company, will provide you projections for the next 3-5 years. Sometimes these projections are not even round numbers (like sales would 1244 crs in FY2010). What crap !. Nothing is absolutely certain in the stock market. There are only varying levels of certainty. To simplify it, I look at low (20-30% probability), medium (around 50%) or high level of probability (around 70-80%) for any specific scenario. In addition, I always believe in developing multiple scenarios when trying to come up with an intrinsic value number. As a result you would have noticed that my estimates are generally in a range and not a fixed number
- Entertain competing hypothesis – One should always be open to counter arguments to one’s investment idea. That allows one to accept contradictory information and weigh it properly. I try to constantly look for points, which go against my investment idea though i am not sure how successful I am at it.
- Finally think about thinking. One should constantly analyze one’s decision making and thinking process. You should be able to look at your thought process objectively and look at ways of improving it ( read this process v/s outcome article by Michael J. Mauboussin ). This blog is my approach of doing it, though in a public fashion. In addition, I always write down my investment thesis when I am looking at an idea and also how I feel about it (though I don’t publish it as they are my private thoughts).
I would strongly recommend you to read this book. It is a very good book and has several crucial points on how the human mind works and how one can improve his or her decision making.
Tuesday, February 24, 2009
Bear market to end soon !!!
Did I catch you on that ? are you expecting someone would be able to predict that for everyone ?
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
Bear market to end soon !!!
Did I catch you on that ? are you expecting someone would be able to predict that for everyone ?
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
Wednesday, February 18, 2009
Timing the market
Timing the market is a very enticing proposition. It is seductive to think that if one can find the tops and the bottoms of the market, then one can make supernormal returns. There are charting approaches, wave theories and a bunch of other stuff to predict the market. However most of the academic research on such 'publicly' known theories indicates that the returns after costs is lower than passive investing.
Note the word public. There maybe investors out there who have systems to predict the market and make a killing. Well, they are not going to disclose that anytime soon.
So for the common investor, we have the option to either use publicly known systems knowing that the academics may very well be correct and use it till we can prove them wrong. The other option is to develop your own systems, which yield excess returns.
The same argument can be applied to value investing. Academic say it is not possible as the market is efficient.
My own journey has been of a skeptic, to a tentative believer to a firm believer. I read about value investing almost 10-12 years back. It made a lot of sense, but I am not one to have blind faith. I was not ready to invest money in any approach till it worked for me. As a result I read books on value investing and on the efficient market hypothesis too. At the same time I started applying the principles with my own money, but on a very small scale. As my returns have outpaced the market, my confidence has grown to a point where this is the only approach for me and a majority of my funds are invested via this philosophy.
So value investing is not some religion to which I got converted one fine day. I started as a tentative believer and have got convinced as I saw my own results.
Note the word public. There maybe investors out there who have systems to predict the market and make a killing. Well, they are not going to disclose that anytime soon.
So for the common investor, we have the option to either use publicly known systems knowing that the academics may very well be correct and use it till we can prove them wrong. The other option is to develop your own systems, which yield excess returns.
The same argument can be applied to value investing. Academic say it is not possible as the market is efficient.
My own journey has been of a skeptic, to a tentative believer to a firm believer. I read about value investing almost 10-12 years back. It made a lot of sense, but I am not one to have blind faith. I was not ready to invest money in any approach till it worked for me. As a result I read books on value investing and on the efficient market hypothesis too. At the same time I started applying the principles with my own money, but on a very small scale. As my returns have outpaced the market, my confidence has grown to a point where this is the only approach for me and a majority of my funds are invested via this philosophy.
So value investing is not some religion to which I got converted one fine day. I started as a tentative believer and have got convinced as I saw my own results.
Timing the market
Timing the market is a very enticing proposition. It is seductive to think that if one can find the tops and the bottoms of the market, then one can make supernormal returns. There are charting approaches, wave theories and a bunch of other stuff to predict the market. However most of the academic research on such 'publicly' known theories indicates that the returns after costs is lower than passive investing.
Note the word public. There maybe investors out there who have systems to predict the market and make a killing. Well, they are not going to disclose that anytime soon.
So for the common investor, we have the option to either use publicly known systems knowing that the academics may very well be correct and use it till we can prove them wrong. The other option is to develop your own systems, which yield excess returns.
The same argument can be applied to value investing. Academic say it is not possible as the market is efficient.
My own journey has been of a skeptic, to a tentative believer to a firm believer. I read about value investing almost 10-12 years back. It made a lot of sense, but I am not one to have blind faith. I was not ready to invest money in any approach till it worked for me. As a result I read books on value investing and on the efficient market hypothesis too. At the same time I started applying the principles with my own money, but on a very small scale. As my returns have outpaced the market, my confidence has grown to a point where this is the only approach for me and a majority of my funds are invested via this philosophy.
So value investing is not some religion to which I got converted one fine day. I started as a tentative believer and have got convinced as I saw my own results.
Note the word public. There maybe investors out there who have systems to predict the market and make a killing. Well, they are not going to disclose that anytime soon.
So for the common investor, we have the option to either use publicly known systems knowing that the academics may very well be correct and use it till we can prove them wrong. The other option is to develop your own systems, which yield excess returns.
The same argument can be applied to value investing. Academic say it is not possible as the market is efficient.
My own journey has been of a skeptic, to a tentative believer to a firm believer. I read about value investing almost 10-12 years back. It made a lot of sense, but I am not one to have blind faith. I was not ready to invest money in any approach till it worked for me. As a result I read books on value investing and on the efficient market hypothesis too. At the same time I started applying the principles with my own money, but on a very small scale. As my returns have outpaced the market, my confidence has grown to a point where this is the only approach for me and a majority of my funds are invested via this philosophy.
So value investing is not some religion to which I got converted one fine day. I started as a tentative believer and have got convinced as I saw my own results.
Friday, February 13, 2009
Quick analysis : Two investment ideas
I have been analysing and following these two companies for quite some time. Around 1-2 months back, the price for both the companies fell to around 50% of my estimate of intrinsic value. As a result I have built an almost 70-80% position in these two companies
The companies are Maruti suzuki and CRISIL. Both companies are part of my core porfolio now, so I am very likely to be baised about them now (please do post any negative feedback about the companies)
You can find the analysis for maruti suzuki here. During the month of november, due to the credit crunch and general slowdown, car sales dropped dramatically. The market reacted sharply and pushed the stock price below 500 for a short period of time. The assumption built in that price was that maruti’s business was permanently damaged due to the slow down.
I don’t think that is the case. I agree with overall assessment that car sales would be weak for 2009 or even 2010. However my investment approach does not involve focussing on the next month or next quarter results. I prefer to look at how the company would do for the next 5-7 years as my holding period is typically more that 2-3 years.
The stock price has appreciated almost 20% since the lows. Does that prove my thesis? I don’t look at short term price action to prove my investment thesis. It is the business performance over the next 1-2 years which will prove whether I am right or wrong. If I used short term price as a validation, then I would invariably be wrong for the first 6-12 months as most of my picks have a bad short term outlook.
The second company is crisil. I have looked and written about CRISIL in the past. There is a good analysis of the company here.
Key plusses and minuses for the company
- The company has a very high competitive advantage in the business. This business has very high entry barriers and other companies cannot enter into this business easily
- The business needs low amounts of capital to grow and can re-invest this capital at very high rates of return
- The risk for ratings agencies in the US and other markets does not hold at the same level for CRISIL. CRISIL was not involved directly in rating subprime instruments and hence should not get impacted directly.
- There has been a reputational loss for the ratings agency. However in the current sceanrio there is no alternative (atleast in india) to the rating agencies.
- The current price discounts a lot of the negatives and more for these companies
There are definite risks for both the companies. At the same time, you will never find a company which has no business and valuation risk at the same time. If the business risk is low, then the valuation risk is high (sky high valuations). On rare ocassions, you may find a neglected company with low business and valuation risk. In such as case, you can load up on the company, but you will need patience for the market to discover the value
Disclosure : As I said earlier in the post, I have positions in both the companies. I have built these positions in the preceeding months and may or may not publish when I exit these positions. So please read my disclaimer and then decide for yourself.
The companies are Maruti suzuki and CRISIL. Both companies are part of my core porfolio now, so I am very likely to be baised about them now (please do post any negative feedback about the companies)
You can find the analysis for maruti suzuki here. During the month of november, due to the credit crunch and general slowdown, car sales dropped dramatically. The market reacted sharply and pushed the stock price below 500 for a short period of time. The assumption built in that price was that maruti’s business was permanently damaged due to the slow down.
I don’t think that is the case. I agree with overall assessment that car sales would be weak for 2009 or even 2010. However my investment approach does not involve focussing on the next month or next quarter results. I prefer to look at how the company would do for the next 5-7 years as my holding period is typically more that 2-3 years.
The stock price has appreciated almost 20% since the lows. Does that prove my thesis? I don’t look at short term price action to prove my investment thesis. It is the business performance over the next 1-2 years which will prove whether I am right or wrong. If I used short term price as a validation, then I would invariably be wrong for the first 6-12 months as most of my picks have a bad short term outlook.
The second company is crisil. I have looked and written about CRISIL in the past. There is a good analysis of the company here.
Key plusses and minuses for the company
- The company has a very high competitive advantage in the business. This business has very high entry barriers and other companies cannot enter into this business easily
- The business needs low amounts of capital to grow and can re-invest this capital at very high rates of return
- The risk for ratings agencies in the US and other markets does not hold at the same level for CRISIL. CRISIL was not involved directly in rating subprime instruments and hence should not get impacted directly.
- There has been a reputational loss for the ratings agency. However in the current sceanrio there is no alternative (atleast in india) to the rating agencies.
- The current price discounts a lot of the negatives and more for these companies
There are definite risks for both the companies. At the same time, you will never find a company which has no business and valuation risk at the same time. If the business risk is low, then the valuation risk is high (sky high valuations). On rare ocassions, you may find a neglected company with low business and valuation risk. In such as case, you can load up on the company, but you will need patience for the market to discover the value
Disclosure : As I said earlier in the post, I have positions in both the companies. I have built these positions in the preceeding months and may or may not publish when I exit these positions. So please read my disclaimer and then decide for yourself.
Quick analysis : Two investment ideas
I have been analysing and following these two companies for quite some time. Around 1-2 months back, the price for both the companies fell to around 50% of my estimate of intrinsic value. As a result I have built an almost 70-80% position in these two companies
The companies are Maruti suzuki and CRISIL. Both companies are part of my core porfolio now, so I am very likely to be baised about them now (please do post any negative feedback about the companies)
You can find the analysis for maruti suzuki here. During the month of november, due to the credit crunch and general slowdown, car sales dropped dramatically. The market reacted sharply and pushed the stock price below 500 for a short period of time. The assumption built in that price was that maruti’s business was permanently damaged due to the slow down.
I don’t think that is the case. I agree with overall assessment that car sales would be weak for 2009 or even 2010. However my investment approach does not involve focussing on the next month or next quarter results. I prefer to look at how the company would do for the next 5-7 years as my holding period is typically more that 2-3 years.
The stock price has appreciated almost 20% since the lows. Does that prove my thesis? I don’t look at short term price action to prove my investment thesis. It is the business performance over the next 1-2 years which will prove whether I am right or wrong. If I used short term price as a validation, then I would invariably be wrong for the first 6-12 months as most of my picks have a bad short term outlook.
The second company is crisil. I have looked and written about CRISIL in the past. There is a good analysis of the company here.
Key plusses and minuses for the company
- The company has a very high competitive advantage in the business. This business has very high entry barriers and other companies cannot enter into this business easily
- The business needs low amounts of capital to grow and can re-invest this capital at very high rates of return
- The risk for ratings agencies in the US and other markets does not hold at the same level for CRISIL. CRISIL was not involved directly in rating subprime instruments and hence should not get impacted directly.
- There has been a reputational loss for the ratings agency. However in the current sceanrio there is no alternative (atleast in india) to the rating agencies.
- The current price discounts a lot of the negatives and more for these companies
There are definite risks for both the companies. At the same time, you will never find a company which has no business and valuation risk at the same time. If the business risk is low, then the valuation risk is high (sky high valuations). On rare ocassions, you may find a neglected company with low business and valuation risk. In such as case, you can load up on the company, but you will need patience for the market to discover the value
Disclosure : As I said earlier in the post, I have positions in both the companies. I have built these positions in the preceeding months and may or may not publish when I exit these positions. So please read my disclaimer and then decide for yourself.
The companies are Maruti suzuki and CRISIL. Both companies are part of my core porfolio now, so I am very likely to be baised about them now (please do post any negative feedback about the companies)
You can find the analysis for maruti suzuki here. During the month of november, due to the credit crunch and general slowdown, car sales dropped dramatically. The market reacted sharply and pushed the stock price below 500 for a short period of time. The assumption built in that price was that maruti’s business was permanently damaged due to the slow down.
I don’t think that is the case. I agree with overall assessment that car sales would be weak for 2009 or even 2010. However my investment approach does not involve focussing on the next month or next quarter results. I prefer to look at how the company would do for the next 5-7 years as my holding period is typically more that 2-3 years.
The stock price has appreciated almost 20% since the lows. Does that prove my thesis? I don’t look at short term price action to prove my investment thesis. It is the business performance over the next 1-2 years which will prove whether I am right or wrong. If I used short term price as a validation, then I would invariably be wrong for the first 6-12 months as most of my picks have a bad short term outlook.
The second company is crisil. I have looked and written about CRISIL in the past. There is a good analysis of the company here.
Key plusses and minuses for the company
- The company has a very high competitive advantage in the business. This business has very high entry barriers and other companies cannot enter into this business easily
- The business needs low amounts of capital to grow and can re-invest this capital at very high rates of return
- The risk for ratings agencies in the US and other markets does not hold at the same level for CRISIL. CRISIL was not involved directly in rating subprime instruments and hence should not get impacted directly.
- There has been a reputational loss for the ratings agency. However in the current sceanrio there is no alternative (atleast in india) to the rating agencies.
- The current price discounts a lot of the negatives and more for these companies
There are definite risks for both the companies. At the same time, you will never find a company which has no business and valuation risk at the same time. If the business risk is low, then the valuation risk is high (sky high valuations). On rare ocassions, you may find a neglected company with low business and valuation risk. In such as case, you can load up on the company, but you will need patience for the market to discover the value
Disclosure : As I said earlier in the post, I have positions in both the companies. I have built these positions in the preceeding months and may or may not publish when I exit these positions. So please read my disclaimer and then decide for yourself.
Saturday, February 07, 2009
Learning and planning
I wrote in my previous post about time management issues, we face as non-professional investors. We barely have enough time for our jobs and family. How the hell can I one pursue an outside interest such as investing ?
I am not referring to investing one’s capital via other vehicles such as mutual funds, FD etc. These options require much lesser time and can give a decent level of returns. I am referring to pursuing investing as an interest or hobby. In such a case, one is not looking for only returns, but also at learning and becoming a better investor.
The beginning
My own journey started more than a decade ago. I had started managing the finances for my family and had started reading up on the basic such as what is an FD, what is a stock etc. Those were pre-internet days, so access to information was limited. I remember searching for books and finding very limited numbers on investing. My main sources of learning initially were finance textbooks and economic times.
By 1998, I had access to internet and that was like opening a huge door for me. For professionals like us, the internet is god send opportunity. I cannot imagine being able to learn and develop as an investor while still working at my day job without the internet. Even this blog would not have existed without it !
Well, with access to internet and all this information, I started reading and learning the basics of investing. The period 1999-2002 was time spent on learning the basics. During the period 2002-2006, I started reading more annual reports compared to general articles and books. However the reading was random and all over the place.
Reading too random
I realised by 2006, that my reading was quite random and not directed. As a result I was reading the entertaining stuff, but not necessarily the dry and important materail such as accounting, AS standards , annual reports etc.
In order to avoid that, i now have a list of topics I want to learn and improve upon. For example, my current year plan includes learning more on behavioral finance, GAAP accounting and arbitrage.
The process
With these topics in mind, I start by looking for books and will list 3-4 books on the topic. Once I have the books I need, I will generally spend 2-3 months or more on that topic. This ensures that I maintain focus on a topic, explore it fully and at the end of it have more depth in it.
As an example, I am current focussing on behavioral finance. I have read 3 books on it already and plan to read 1-2 more books on it. Based on my learnings, I plan to review my current holdings to check my biases and will also be updating my investment templates (see here for the templates).
Additional reading
In addition to the focus topics, I continue reading annual reports and tracking the performance of my current holdings. I am currently not searching for new ideas as my current list of holdings have reached my maximum limit (in terms of number of holdings). As a result I am reviewing my current holdings and will require a new holding to replace an existing one.
The above is a reading/ learning plan. All my blog entries and updates are usually centred around the topics and companies I am reading about. So you can see, the blog is an extension of my learnings and current thoughts.
So in summary I can break down my approach into the following points
- key objective is to learn and be a better investor
- all reading and learning is focussed on the key objective
- The objective would be achieved by identifying areas of learning and then focussing on them one at a time
No shortcuts and magic bullets here !
I am not referring to investing one’s capital via other vehicles such as mutual funds, FD etc. These options require much lesser time and can give a decent level of returns. I am referring to pursuing investing as an interest or hobby. In such a case, one is not looking for only returns, but also at learning and becoming a better investor.
The beginning
My own journey started more than a decade ago. I had started managing the finances for my family and had started reading up on the basic such as what is an FD, what is a stock etc. Those were pre-internet days, so access to information was limited. I remember searching for books and finding very limited numbers on investing. My main sources of learning initially were finance textbooks and economic times.
By 1998, I had access to internet and that was like opening a huge door for me. For professionals like us, the internet is god send opportunity. I cannot imagine being able to learn and develop as an investor while still working at my day job without the internet. Even this blog would not have existed without it !
Well, with access to internet and all this information, I started reading and learning the basics of investing. The period 1999-2002 was time spent on learning the basics. During the period 2002-2006, I started reading more annual reports compared to general articles and books. However the reading was random and all over the place.
Reading too random
I realised by 2006, that my reading was quite random and not directed. As a result I was reading the entertaining stuff, but not necessarily the dry and important materail such as accounting, AS standards , annual reports etc.
In order to avoid that, i now have a list of topics I want to learn and improve upon. For example, my current year plan includes learning more on behavioral finance, GAAP accounting and arbitrage.
The process
With these topics in mind, I start by looking for books and will list 3-4 books on the topic. Once I have the books I need, I will generally spend 2-3 months or more on that topic. This ensures that I maintain focus on a topic, explore it fully and at the end of it have more depth in it.
As an example, I am current focussing on behavioral finance. I have read 3 books on it already and plan to read 1-2 more books on it. Based on my learnings, I plan to review my current holdings to check my biases and will also be updating my investment templates (see here for the templates).
Additional reading
In addition to the focus topics, I continue reading annual reports and tracking the performance of my current holdings. I am currently not searching for new ideas as my current list of holdings have reached my maximum limit (in terms of number of holdings). As a result I am reviewing my current holdings and will require a new holding to replace an existing one.
The above is a reading/ learning plan. All my blog entries and updates are usually centred around the topics and companies I am reading about. So you can see, the blog is an extension of my learnings and current thoughts.
So in summary I can break down my approach into the following points
- key objective is to learn and be a better investor
- all reading and learning is focussed on the key objective
- The objective would be achieved by identifying areas of learning and then focussing on them one at a time
No shortcuts and magic bullets here !
Learning and planning
I wrote in my previous post about time management issues, we face as non-professional investors. We barely have enough time for our jobs and family. How the hell can I one pursue an outside interest such as investing ?
I am not referring to investing one’s capital via other vehicles such as mutual funds, FD etc. These options require much lesser time and can give a decent level of returns. I am referring to pursuing investing as an interest or hobby. In such a case, one is not looking for only returns, but also at learning and becoming a better investor.
The beginning
My own journey started more than a decade ago. I had started managing the finances for my family and had started reading up on the basic such as what is an FD, what is a stock etc. Those were pre-internet days, so access to information was limited. I remember searching for books and finding very limited numbers on investing. My main sources of learning initially were finance textbooks and economic times.
By 1998, I had access to internet and that was like opening a huge door for me. For professionals like us, the internet is god send opportunity. I cannot imagine being able to learn and develop as an investor while still working at my day job without the internet. Even this blog would not have existed without it !
Well, with access to internet and all this information, I started reading and learning the basics of investing. The period 1999-2002 was time spent on learning the basics. During the period 2002-2006, I started reading more annual reports compared to general articles and books. However the reading was random and all over the place.
Reading too random
I realised by 2006, that my reading was quite random and not directed. As a result I was reading the entertaining stuff, but not necessarily the dry and important materail such as accounting, AS standards , annual reports etc.
In order to avoid that, i now have a list of topics I want to learn and improve upon. For example, my current year plan includes learning more on behavioral finance, GAAP accounting and arbitrage.
The process
With these topics in mind, I start by looking for books and will list 3-4 books on the topic. Once I have the books I need, I will generally spend 2-3 months or more on that topic. This ensures that I maintain focus on a topic, explore it fully and at the end of it have more depth in it.
As an example, I am current focussing on behavioral finance. I have read 3 books on it already and plan to read 1-2 more books on it. Based on my learnings, I plan to review my current holdings to check my biases and will also be updating my investment templates (see here for the templates).
Additional reading
In addition to the focus topics, I continue reading annual reports and tracking the performance of my current holdings. I am currently not searching for new ideas as my current list of holdings have reached my maximum limit (in terms of number of holdings). As a result I am reviewing my current holdings and will require a new holding to replace an existing one.
The above is a reading/ learning plan. All my blog entries and updates are usually centred around the topics and companies I am reading about. So you can see, the blog is an extension of my learnings and current thoughts.
So in summary I can break down my approach into the following points
- key objective is to learn and be a better investor
- all reading and learning is focussed on the key objective
- The objective would be achieved by identifying areas of learning and then focussing on them one at a time
No shortcuts and magic bullets here !
I am not referring to investing one’s capital via other vehicles such as mutual funds, FD etc. These options require much lesser time and can give a decent level of returns. I am referring to pursuing investing as an interest or hobby. In such a case, one is not looking for only returns, but also at learning and becoming a better investor.
The beginning
My own journey started more than a decade ago. I had started managing the finances for my family and had started reading up on the basic such as what is an FD, what is a stock etc. Those were pre-internet days, so access to information was limited. I remember searching for books and finding very limited numbers on investing. My main sources of learning initially were finance textbooks and economic times.
By 1998, I had access to internet and that was like opening a huge door for me. For professionals like us, the internet is god send opportunity. I cannot imagine being able to learn and develop as an investor while still working at my day job without the internet. Even this blog would not have existed without it !
Well, with access to internet and all this information, I started reading and learning the basics of investing. The period 1999-2002 was time spent on learning the basics. During the period 2002-2006, I started reading more annual reports compared to general articles and books. However the reading was random and all over the place.
Reading too random
I realised by 2006, that my reading was quite random and not directed. As a result I was reading the entertaining stuff, but not necessarily the dry and important materail such as accounting, AS standards , annual reports etc.
In order to avoid that, i now have a list of topics I want to learn and improve upon. For example, my current year plan includes learning more on behavioral finance, GAAP accounting and arbitrage.
The process
With these topics in mind, I start by looking for books and will list 3-4 books on the topic. Once I have the books I need, I will generally spend 2-3 months or more on that topic. This ensures that I maintain focus on a topic, explore it fully and at the end of it have more depth in it.
As an example, I am current focussing on behavioral finance. I have read 3 books on it already and plan to read 1-2 more books on it. Based on my learnings, I plan to review my current holdings to check my biases and will also be updating my investment templates (see here for the templates).
Additional reading
In addition to the focus topics, I continue reading annual reports and tracking the performance of my current holdings. I am currently not searching for new ideas as my current list of holdings have reached my maximum limit (in terms of number of holdings). As a result I am reviewing my current holdings and will require a new holding to replace an existing one.
The above is a reading/ learning plan. All my blog entries and updates are usually centred around the topics and companies I am reading about. So you can see, the blog is an extension of my learnings and current thoughts.
So in summary I can break down my approach into the following points
- key objective is to learn and be a better investor
- all reading and learning is focussed on the key objective
- The objective would be achieved by identifying areas of learning and then focussing on them one at a time
No shortcuts and magic bullets here !
Sunday, February 01, 2009
Time management
I received this email from vikas and thought of putting a post on it.
I had a very quick qn for you. How do you manage to find time for your daytime profession, your family and your value investing hobby? Please give me some examples from your daily life. I find myself in a very similar position and I find myself unable to spend anytime learning value investing?
This is an important question, especially for non professional investors like us. Most of us, having a day job, do not have the luxury of being able to spend 8-10 hrs a day reading, analyzing and visiting companies for our investments. So how do I go about it? It is neither a prescription nor some approach, just an idea of what I do.
Lets invert the problem. With limited time, what can I ‘not’ do?
- Cannot track stock prices, volumes etc on an hour by hour basis
- Cannot trade short term, as I may not be able to execute the trade at the right time due to other commitments.
- Cannot analyze more than 30-40 companies in detail or more than 1 or 2 companies per week.
- Cannot track market gossip, chatter, inside news etc.
- Cannot devote more than 10-15 hrs (max of 20 hrs) to investing
With the above constraints in my, I have adopted an investment style, which matches my situation. As regular readers of this blog would have realized, I typically analyze and invest in a limited number of companies. I run a few screens to generate a list of decent ideas, analyze those ideas in detail and invest in a few for the long term.
In addition, I spend 2-3 weeks analyzing a company in detail and build my position over the next few months.
A professional investor would typically be able to devote 50-60 hrs per week on investing. However due to a day job, family and other time constraints, I am able to devote a maximum of 15-20 hrs per week (on average).
I spilt this time between learning value investing, reading up on companies and on this blog. Almost 50-60% of my time is spent on reading up on companies and following my current holdings, 20-30% on learning value investing and the rest on this blog (10-15%).
The other reason for being able to devote 10+ hrs per week on investing is due to the fact that I have no other hobbies or interest (other than watching movies). So I am a pretty dry person with limited interests outside investing :)
I am not able to devote 10-20hrs per week every week. There are weeks when, due to job and other constraints, I am able to devote only a few hours a week. During other times, when work is slow, I am able to put more time into investing. In addition, I use my spare time, travel time etc to read books and annual reports.
I have been doing this for the last 10+ years and although the time spent per week or month is small, the learning accumulates over time. The initial few years were spent in learning the basics and there were several times when I felt, I was not making much progress. However over time slow and steady progress adds up.
I eventually plan to invest professionally. The main reason for that is that I am passionate about it and would like to spend more of my working time on it.
The best person to answer the question would of course be my wife and kids who typically see me with a book or on my laptop reading something or engrossed in my thoughts thinking about some investment idea :). Of course my wife does not read this blog …so I am safe!
I think the key to finding time is how passionate or interested you are about investing. Paradoxically if you love the process of learning and investing and are not into it just for the money, you will find time and will enjoy the journey more than the destination (returns in this case).
Added note: I have switched the feed to this blog. There is a re-direct of the old feed to the new one in place. I would appreciate if some one can leave a comment if they are reading this post via their feed.
Next post: How do I plan for investing (if I feel there is interest in the topic)
I had a very quick qn for you. How do you manage to find time for your daytime profession, your family and your value investing hobby? Please give me some examples from your daily life. I find myself in a very similar position and I find myself unable to spend anytime learning value investing?
This is an important question, especially for non professional investors like us. Most of us, having a day job, do not have the luxury of being able to spend 8-10 hrs a day reading, analyzing and visiting companies for our investments. So how do I go about it? It is neither a prescription nor some approach, just an idea of what I do.
Lets invert the problem. With limited time, what can I ‘not’ do?
- Cannot track stock prices, volumes etc on an hour by hour basis
- Cannot trade short term, as I may not be able to execute the trade at the right time due to other commitments.
- Cannot analyze more than 30-40 companies in detail or more than 1 or 2 companies per week.
- Cannot track market gossip, chatter, inside news etc.
- Cannot devote more than 10-15 hrs (max of 20 hrs) to investing
With the above constraints in my, I have adopted an investment style, which matches my situation. As regular readers of this blog would have realized, I typically analyze and invest in a limited number of companies. I run a few screens to generate a list of decent ideas, analyze those ideas in detail and invest in a few for the long term.
In addition, I spend 2-3 weeks analyzing a company in detail and build my position over the next few months.
A professional investor would typically be able to devote 50-60 hrs per week on investing. However due to a day job, family and other time constraints, I am able to devote a maximum of 15-20 hrs per week (on average).
I spilt this time between learning value investing, reading up on companies and on this blog. Almost 50-60% of my time is spent on reading up on companies and following my current holdings, 20-30% on learning value investing and the rest on this blog (10-15%).
The other reason for being able to devote 10+ hrs per week on investing is due to the fact that I have no other hobbies or interest (other than watching movies). So I am a pretty dry person with limited interests outside investing :)
I am not able to devote 10-20hrs per week every week. There are weeks when, due to job and other constraints, I am able to devote only a few hours a week. During other times, when work is slow, I am able to put more time into investing. In addition, I use my spare time, travel time etc to read books and annual reports.
I have been doing this for the last 10+ years and although the time spent per week or month is small, the learning accumulates over time. The initial few years were spent in learning the basics and there were several times when I felt, I was not making much progress. However over time slow and steady progress adds up.
I eventually plan to invest professionally. The main reason for that is that I am passionate about it and would like to spend more of my working time on it.
The best person to answer the question would of course be my wife and kids who typically see me with a book or on my laptop reading something or engrossed in my thoughts thinking about some investment idea :). Of course my wife does not read this blog …so I am safe!
I think the key to finding time is how passionate or interested you are about investing. Paradoxically if you love the process of learning and investing and are not into it just for the money, you will find time and will enjoy the journey more than the destination (returns in this case).
Added note: I have switched the feed to this blog. There is a re-direct of the old feed to the new one in place. I would appreciate if some one can leave a comment if they are reading this post via their feed.
Next post: How do I plan for investing (if I feel there is interest in the topic)
Time management
I received this email from vikas and thought of putting a post on it.
I had a very quick qn for you. How do you manage to find time for your daytime profession, your family and your value investing hobby? Please give me some examples from your daily life. I find myself in a very similar position and I find myself unable to spend anytime learning value investing?
This is an important question, especially for non professional investors like us. Most of us, having a day job, do not have the luxury of being able to spend 8-10 hrs a day reading, analyzing and visiting companies for our investments. So how do I go about it? It is neither a prescription nor some approach, just an idea of what I do.
Lets invert the problem. With limited time, what can I ‘not’ do?
- Cannot track stock prices, volumes etc on an hour by hour basis
- Cannot trade short term, as I may not be able to execute the trade at the right time due to other commitments.
- Cannot analyze more than 30-40 companies in detail or more than 1 or 2 companies per week.
- Cannot track market gossip, chatter, inside news etc.
- Cannot devote more than 10-15 hrs (max of 20 hrs) to investing
With the above constraints in my, I have adopted an investment style, which matches my situation. As regular readers of this blog would have realized, I typically analyze and invest in a limited number of companies. I run a few screens to generate a list of decent ideas, analyze those ideas in detail and invest in a few for the long term.
In addition, I spend 2-3 weeks analyzing a company in detail and build my position over the next few months.
A professional investor would typically be able to devote 50-60 hrs per week on investing. However due to a day job, family and other time constraints, I am able to devote a maximum of 15-20 hrs per week (on average).
I spilt this time between learning value investing, reading up on companies and on this blog. Almost 50-60% of my time is spent on reading up on companies and following my current holdings, 20-30% on learning value investing and the rest on this blog (10-15%).
The other reason for being able to devote 10+ hrs per week on investing is due to the fact that I have no other hobbies or interest (other than watching movies). So I am a pretty dry person with limited interests outside investing :)
I am not able to devote 10-20hrs per week every week. There are weeks when, due to job and other constraints, I am able to devote only a few hours a week. During other times, when work is slow, I am able to put more time into investing. In addition, I use my spare time, travel time etc to read books and annual reports.
I have been doing this for the last 10+ years and although the time spent per week or month is small, the learning accumulates over time. The initial few years were spent in learning the basics and there were several times when I felt, I was not making much progress. However over time slow and steady progress adds up.
I eventually plan to invest professionally. The main reason for that is that I am passionate about it and would like to spend more of my working time on it.
The best person to answer the question would of course be my wife and kids who typically see me with a book or on my laptop reading something or engrossed in my thoughts thinking about some investment idea :). Of course my wife does not read this blog …so I am safe!
I think the key to finding time is how passionate or interested you are about investing. Paradoxically if you love the process of learning and investing and are not into it just for the money, you will find time and will enjoy the journey more than the destination (returns in this case).
Added note: I have switched the feed to this blog. There is a re-direct of the old feed to the new one in place. I would appreciate if some one can leave a comment if they are reading this post via their feed.
Next post: How do I plan for investing (if I feel there is interest in the topic)
I had a very quick qn for you. How do you manage to find time for your daytime profession, your family and your value investing hobby? Please give me some examples from your daily life. I find myself in a very similar position and I find myself unable to spend anytime learning value investing?
This is an important question, especially for non professional investors like us. Most of us, having a day job, do not have the luxury of being able to spend 8-10 hrs a day reading, analyzing and visiting companies for our investments. So how do I go about it? It is neither a prescription nor some approach, just an idea of what I do.
Lets invert the problem. With limited time, what can I ‘not’ do?
- Cannot track stock prices, volumes etc on an hour by hour basis
- Cannot trade short term, as I may not be able to execute the trade at the right time due to other commitments.
- Cannot analyze more than 30-40 companies in detail or more than 1 or 2 companies per week.
- Cannot track market gossip, chatter, inside news etc.
- Cannot devote more than 10-15 hrs (max of 20 hrs) to investing
With the above constraints in my, I have adopted an investment style, which matches my situation. As regular readers of this blog would have realized, I typically analyze and invest in a limited number of companies. I run a few screens to generate a list of decent ideas, analyze those ideas in detail and invest in a few for the long term.
In addition, I spend 2-3 weeks analyzing a company in detail and build my position over the next few months.
A professional investor would typically be able to devote 50-60 hrs per week on investing. However due to a day job, family and other time constraints, I am able to devote a maximum of 15-20 hrs per week (on average).
I spilt this time between learning value investing, reading up on companies and on this blog. Almost 50-60% of my time is spent on reading up on companies and following my current holdings, 20-30% on learning value investing and the rest on this blog (10-15%).
The other reason for being able to devote 10+ hrs per week on investing is due to the fact that I have no other hobbies or interest (other than watching movies). So I am a pretty dry person with limited interests outside investing :)
I am not able to devote 10-20hrs per week every week. There are weeks when, due to job and other constraints, I am able to devote only a few hours a week. During other times, when work is slow, I am able to put more time into investing. In addition, I use my spare time, travel time etc to read books and annual reports.
I have been doing this for the last 10+ years and although the time spent per week or month is small, the learning accumulates over time. The initial few years were spent in learning the basics and there were several times when I felt, I was not making much progress. However over time slow and steady progress adds up.
I eventually plan to invest professionally. The main reason for that is that I am passionate about it and would like to spend more of my working time on it.
The best person to answer the question would of course be my wife and kids who typically see me with a book or on my laptop reading something or engrossed in my thoughts thinking about some investment idea :). Of course my wife does not read this blog …so I am safe!
I think the key to finding time is how passionate or interested you are about investing. Paradoxically if you love the process of learning and investing and are not into it just for the money, you will find time and will enjoy the journey more than the destination (returns in this case).
Added note: I have switched the feed to this blog. There is a re-direct of the old feed to the new one in place. I would appreciate if some one can leave a comment if they are reading this post via their feed.
Next post: How do I plan for investing (if I feel there is interest in the topic)
Wednesday, January 28, 2009
NIIT tech: A falling knife ?
I received a question : NIIT tech has dropped from 100 to around mid 50s. Is it a falling knife which one should avoid ?
I have written a post on the above topic earlier. So the point is how does one avoid a falling knife scenario ? In other words when it is wise to increase the holding as the stock price is dropping versus avoid averaging down.
Two factors
I would answer the above question based on two key factors one should keep in mind when purchasing a stock. The first factor is the intrinsic value of the stock. One should have decent idea of the Intrinsic value range of a stock. If the stock price is dropping and the stock is more undervalued now, one can look at increasing the holding.
The second factor is position size or risk management. Personally when I am looking at a stock, I make a decision on whether the stock would be a part of my core portfolio or the cheap-graham portfolio. Once I have made that decision, I have pre-set limit on the position size. One can have an amount or percentage of the portfolio - position size. I typically start off with a 50% position (50% of the full position) and keep adding as the stock price drops.
Once I had built the full position, I will not add to the position even if the stock price is dropping. This is the key to risk management. I regularly check my thesis to confirm if any of my basic assumptions are incorrect and if my estimate of intrinsic value is too high. However I will not add to my position even when the stock price falls. There is no averaging down for me, once I have built a full position
70% strike rate
I have read that most of the top investors typically have 70-80% hit rate. That is 20-30% of their stock picks result in losses, either due to bad luck or incorrect analysis. I don’t believe I will do better than that. I have now started working with an assumption that 20-30% of my picks will fail. In such a scenario, the risk management aspect is crucial. To do well on a portfolio basis, my successful picks should do better than my failures.
What about NIIT tech ?
In the case of NIIT tech or any other company, my focus is on intrinsic value and not on the stock price. The stock price can get disconnected from the intrinsic value for sometime, but it eventually converges to it.
My own estimates of intrinsic value for the company have not changed. The current quarter results show a bottom line drop of around 50%, mainly due to forex losses. I do not consider them as core losses (just as forex gains are not permanent gains). I have seen a lot of people get all worked up about forex losses, which does not make sense to me.
Unless the company is speculating on forex (via non effective hedges), I think the forex gains and losses should even out over the period of few years and hence one should be concentrating on the core profits to value the company.
As an example look at the results of the airlines such as southwest (in the US). Southwest airlines has been consistently profitable for the last 20+ years. They have had 2-3 quarters of hedging related losses due to oil price volatility. Do you think they have a problem in their core operations?
Anyway, I digress. Coming back to NIIT tech, I have not changed my estimate of intrinsic value and I have already built my planned position. As a result even if the price drops, I will not add to my position to manage the risk (if I am wrong about NIIT tech).
Management issue
However if you believe that in light of the satyam episode, you cannot trust the management , then the only course of action is to exit the stock.
Personally, the moment I lose faith on any management and cannot trust them, I will exit the stock irrespective of the loss I have to take on my position.
As an aside, my previous post was in jest. I received a few personal emails ‘challenging’ my prediction and one guy asked me why I did not predict the level, if I knew the time . I have no clue where the market will be in the future. However if you want to pay me, I can guess for you :)
I have written a post on the above topic earlier. So the point is how does one avoid a falling knife scenario ? In other words when it is wise to increase the holding as the stock price is dropping versus avoid averaging down.
Two factors
I would answer the above question based on two key factors one should keep in mind when purchasing a stock. The first factor is the intrinsic value of the stock. One should have decent idea of the Intrinsic value range of a stock. If the stock price is dropping and the stock is more undervalued now, one can look at increasing the holding.
The second factor is position size or risk management. Personally when I am looking at a stock, I make a decision on whether the stock would be a part of my core portfolio or the cheap-graham portfolio. Once I have made that decision, I have pre-set limit on the position size. One can have an amount or percentage of the portfolio - position size. I typically start off with a 50% position (50% of the full position) and keep adding as the stock price drops.
Once I had built the full position, I will not add to the position even if the stock price is dropping. This is the key to risk management. I regularly check my thesis to confirm if any of my basic assumptions are incorrect and if my estimate of intrinsic value is too high. However I will not add to my position even when the stock price falls. There is no averaging down for me, once I have built a full position
70% strike rate
I have read that most of the top investors typically have 70-80% hit rate. That is 20-30% of their stock picks result in losses, either due to bad luck or incorrect analysis. I don’t believe I will do better than that. I have now started working with an assumption that 20-30% of my picks will fail. In such a scenario, the risk management aspect is crucial. To do well on a portfolio basis, my successful picks should do better than my failures.
What about NIIT tech ?
In the case of NIIT tech or any other company, my focus is on intrinsic value and not on the stock price. The stock price can get disconnected from the intrinsic value for sometime, but it eventually converges to it.
My own estimates of intrinsic value for the company have not changed. The current quarter results show a bottom line drop of around 50%, mainly due to forex losses. I do not consider them as core losses (just as forex gains are not permanent gains). I have seen a lot of people get all worked up about forex losses, which does not make sense to me.
Unless the company is speculating on forex (via non effective hedges), I think the forex gains and losses should even out over the period of few years and hence one should be concentrating on the core profits to value the company.
As an example look at the results of the airlines such as southwest (in the US). Southwest airlines has been consistently profitable for the last 20+ years. They have had 2-3 quarters of hedging related losses due to oil price volatility. Do you think they have a problem in their core operations?
Anyway, I digress. Coming back to NIIT tech, I have not changed my estimate of intrinsic value and I have already built my planned position. As a result even if the price drops, I will not add to my position to manage the risk (if I am wrong about NIIT tech).
Management issue
However if you believe that in light of the satyam episode, you cannot trust the management , then the only course of action is to exit the stock.
Personally, the moment I lose faith on any management and cannot trust them, I will exit the stock irrespective of the loss I have to take on my position.
As an aside, my previous post was in jest. I received a few personal emails ‘challenging’ my prediction and one guy asked me why I did not predict the level, if I knew the time . I have no clue where the market will be in the future. However if you want to pay me, I can guess for you :)
NIIT tech: A falling knife ?
I received a question : NIIT tech has dropped from 100 to around mid 50s. Is it a falling knife which one should avoid ?
I have written a post on the above topic earlier. So the point is how does one avoid a falling knife scenario ? In other words when it is wise to increase the holding as the stock price is dropping versus avoid averaging down.
Two factors
I would answer the above question based on two key factors one should keep in mind when purchasing a stock. The first factor is the intrinsic value of the stock. One should have decent idea of the Intrinsic value range of a stock. If the stock price is dropping and the stock is more undervalued now, one can look at increasing the holding.
The second factor is position size or risk management. Personally when I am looking at a stock, I make a decision on whether the stock would be a part of my core portfolio or the cheap-graham portfolio. Once I have made that decision, I have pre-set limit on the position size. One can have an amount or percentage of the portfolio - position size. I typically start off with a 50% position (50% of the full position) and keep adding as the stock price drops.
Once I had built the full position, I will not add to the position even if the stock price is dropping. This is the key to risk management. I regularly check my thesis to confirm if any of my basic assumptions are incorrect and if my estimate of intrinsic value is too high. However I will not add to my position even when the stock price falls. There is no averaging down for me, once I have built a full position
70% strike rate
I have read that most of the top investors typically have 70-80% hit rate. That is 20-30% of their stock picks result in losses, either due to bad luck or incorrect analysis. I don’t believe I will do better than that. I have now started working with an assumption that 20-30% of my picks will fail. In such a scenario, the risk management aspect is crucial. To do well on a portfolio basis, my successful picks should do better than my failures.
What about NIIT tech ?
In the case of NIIT tech or any other company, my focus is on intrinsic value and not on the stock price. The stock price can get disconnected from the intrinsic value for sometime, but it eventually converges to it.
My own estimates of intrinsic value for the company have not changed. The current quarter results show a bottom line drop of around 50%, mainly due to forex losses. I do not consider them as core losses (just as forex gains are not permanent gains). I have seen a lot of people get all worked up about forex losses, which does not make sense to me.
Unless the company is speculating on forex (via non effective hedges), I think the forex gains and losses should even out over the period of few years and hence one should be concentrating on the core profits to value the company.
As an example look at the results of the airlines such as southwest (in the US). Southwest airlines has been consistently profitable for the last 20+ years. They have had 2-3 quarters of hedging related losses due to oil price volatility. Do you think they have a problem in their core operations?
Anyway, I digress. Coming back to NIIT tech, I have not changed my estimate of intrinsic value and I have already built my planned position. As a result even if the price drops, I will not add to my position to manage the risk (if I am wrong about NIIT tech).
Management issue
However if you believe that in light of the satyam episode, you cannot trust the management , then the only course of action is to exit the stock.
Personally, the moment I lose faith on any management and cannot trust them, I will exit the stock irrespective of the loss I have to take on my position.
As an aside, my previous post was in jest. I received a few personal emails ‘challenging’ my prediction and one guy asked me why I did not predict the level, if I knew the time . I have no clue where the market will be in the future. However if you want to pay me, I can guess for you :)
I have written a post on the above topic earlier. So the point is how does one avoid a falling knife scenario ? In other words when it is wise to increase the holding as the stock price is dropping versus avoid averaging down.
Two factors
I would answer the above question based on two key factors one should keep in mind when purchasing a stock. The first factor is the intrinsic value of the stock. One should have decent idea of the Intrinsic value range of a stock. If the stock price is dropping and the stock is more undervalued now, one can look at increasing the holding.
The second factor is position size or risk management. Personally when I am looking at a stock, I make a decision on whether the stock would be a part of my core portfolio or the cheap-graham portfolio. Once I have made that decision, I have pre-set limit on the position size. One can have an amount or percentage of the portfolio - position size. I typically start off with a 50% position (50% of the full position) and keep adding as the stock price drops.
Once I had built the full position, I will not add to the position even if the stock price is dropping. This is the key to risk management. I regularly check my thesis to confirm if any of my basic assumptions are incorrect and if my estimate of intrinsic value is too high. However I will not add to my position even when the stock price falls. There is no averaging down for me, once I have built a full position
70% strike rate
I have read that most of the top investors typically have 70-80% hit rate. That is 20-30% of their stock picks result in losses, either due to bad luck or incorrect analysis. I don’t believe I will do better than that. I have now started working with an assumption that 20-30% of my picks will fail. In such a scenario, the risk management aspect is crucial. To do well on a portfolio basis, my successful picks should do better than my failures.
What about NIIT tech ?
In the case of NIIT tech or any other company, my focus is on intrinsic value and not on the stock price. The stock price can get disconnected from the intrinsic value for sometime, but it eventually converges to it.
My own estimates of intrinsic value for the company have not changed. The current quarter results show a bottom line drop of around 50%, mainly due to forex losses. I do not consider them as core losses (just as forex gains are not permanent gains). I have seen a lot of people get all worked up about forex losses, which does not make sense to me.
Unless the company is speculating on forex (via non effective hedges), I think the forex gains and losses should even out over the period of few years and hence one should be concentrating on the core profits to value the company.
As an example look at the results of the airlines such as southwest (in the US). Southwest airlines has been consistently profitable for the last 20+ years. They have had 2-3 quarters of hedging related losses due to oil price volatility. Do you think they have a problem in their core operations?
Anyway, I digress. Coming back to NIIT tech, I have not changed my estimate of intrinsic value and I have already built my planned position. As a result even if the price drops, I will not add to my position to manage the risk (if I am wrong about NIIT tech).
Management issue
However if you believe that in light of the satyam episode, you cannot trust the management , then the only course of action is to exit the stock.
Personally, the moment I lose faith on any management and cannot trust them, I will exit the stock irrespective of the loss I have to take on my position.
As an aside, my previous post was in jest. I received a few personal emails ‘challenging’ my prediction and one guy asked me why I did not predict the level, if I knew the time . I have no clue where the market will be in the future. However if you want to pay me, I can guess for you :)
Friday, January 23, 2009
Hoping for a quick rebound ?
Have you been hoping for a quick rebound and a re-start of the bull market? I would not hold my breath on that. No one knows when the market will rebound. Those who claim to know are guessing. If you need a forecast fix on when the rebound will start, let me give you one – 11:22 am, 22 April 2009.
If the above forecast comes out to be false, I will just keep mum and issue a new forecast.
If the above guess turns to be correct, expect a banner on the blog proclaiming my brilliance and infinite wisdom (hail rohit !!). I will start issuing regular forecasts after that and will charge you for it.
Now this would be an easy way to make money, as long as I can find enough suckers …sorry ‘investors’ for it.
So are you willing to sign up for my hourly, daily, weekly, quarterly and annual forecasts? If you sign up today, I will give you a special 20% discount and throw in two extra forecasts, absolutely free !!!.
Moving the feed account
The feed to this blog is on feed burner (see here to understand what is a feed). Google (which owns feedburner) is moving all feedburner accounts to google accounts.
I am planning to move my account to google too. Hopefully it should be a non event. However in the event, there is some technical glitch and you do not receive an update in 3-4 days, I would request you to check the blog and leave a comment for me. Being a super duper tech whiz, I will immediately get down to fixing it :).
In case you are new to the blog or have not subscribed to the blog, you can use this link to subscribe to my blog. you could all the juicy forecasts in your mailbox :)
If the above forecast comes out to be false, I will just keep mum and issue a new forecast.
If the above guess turns to be correct, expect a banner on the blog proclaiming my brilliance and infinite wisdom (hail rohit !!). I will start issuing regular forecasts after that and will charge you for it.
Now this would be an easy way to make money, as long as I can find enough suckers …sorry ‘investors’ for it.
So are you willing to sign up for my hourly, daily, weekly, quarterly and annual forecasts? If you sign up today, I will give you a special 20% discount and throw in two extra forecasts, absolutely free !!!.
Moving the feed account
The feed to this blog is on feed burner (see here to understand what is a feed). Google (which owns feedburner) is moving all feedburner accounts to google accounts.
I am planning to move my account to google too. Hopefully it should be a non event. However in the event, there is some technical glitch and you do not receive an update in 3-4 days, I would request you to check the blog and leave a comment for me. Being a super duper tech whiz, I will immediately get down to fixing it :).
In case you are new to the blog or have not subscribed to the blog, you can use this link to subscribe to my blog. you could all the juicy forecasts in your mailbox :)
Hoping for a quick rebound ?
Have you been hoping for a quick rebound and a re-start of the bull market? I would not hold my breath on that. No one knows when the market will rebound. Those who claim to know are guessing. If you need a forecast fix on when the rebound will start, let me give you one – 11:22 am, 22 April 2009.
If the above forecast comes out to be false, I will just keep mum and issue a new forecast.
If the above guess turns to be correct, expect a banner on the blog proclaiming my brilliance and infinite wisdom (hail rohit !!). I will start issuing regular forecasts after that and will charge you for it.
Now this would be an easy way to make money, as long as I can find enough suckers …sorry ‘investors’ for it.
So are you willing to sign up for my hourly, daily, weekly, quarterly and annual forecasts? If you sign up today, I will give you a special 20% discount and throw in two extra forecasts, absolutely free !!!.
Moving the feed account
The feed to this blog is on feed burner (see here to understand what is a feed). Google (which owns feedburner) is moving all feedburner accounts to google accounts.
I am planning to move my account to google too. Hopefully it should be a non event. However in the event, there is some technical glitch and you do not receive an update in 3-4 days, I would request you to check the blog and leave a comment for me. Being a super duper tech whiz, I will immediately get down to fixing it :).
In case you are new to the blog or have not subscribed to the blog, you can use this link to subscribe to my blog. you could all the juicy forecasts in your mailbox :)
If the above forecast comes out to be false, I will just keep mum and issue a new forecast.
If the above guess turns to be correct, expect a banner on the blog proclaiming my brilliance and infinite wisdom (hail rohit !!). I will start issuing regular forecasts after that and will charge you for it.
Now this would be an easy way to make money, as long as I can find enough suckers …sorry ‘investors’ for it.
So are you willing to sign up for my hourly, daily, weekly, quarterly and annual forecasts? If you sign up today, I will give you a special 20% discount and throw in two extra forecasts, absolutely free !!!.
Moving the feed account
The feed to this blog is on feed burner (see here to understand what is a feed). Google (which owns feedburner) is moving all feedburner accounts to google accounts.
I am planning to move my account to google too. Hopefully it should be a non event. However in the event, there is some technical glitch and you do not receive an update in 3-4 days, I would request you to check the blog and leave a comment for me. Being a super duper tech whiz, I will immediately get down to fixing it :).
In case you are new to the blog or have not subscribed to the blog, you can use this link to subscribe to my blog. you could all the juicy forecasts in your mailbox :)
Monday, January 19, 2009
Cash - good or bad ?
I was recently referred to an article by Prof. Bakshi (read here). Prof bakshi has written about a few companies which seems to be cash bargains (selling less than cash on the books), but are suspect due to their accounting and corporate governance.
Readers of this blog would be aware that I have a bias for companies with low debt and high cash on books. I do not get excited by growth as high growth companies are usually fairly valued or overvalued. However slow to moderately growing companies with a solid business model are frequently undervalued. Excess cash on the book only adds to the attractiveness of these companies.
Low debt and cash on books is usually a good thing, but excess cash holdings for long periods of time are not good for shareholders. It usually signifies that the management is allocating capital poorly and in absence of high return opportunities is letting the cash idle. This is ofcourse better than spending the cash on stupid acquisitions. However a shareholder friendly management should return the cash through dividends or buybacks.
The above holds true if the cash is actually present. After the satyam episode, one cannot be completely sure of that. I have always looked at the management quality and corporate governance of a company in the past, before committing my money to it. It is easy to identify cases of bad (see aftek here, which the prof has also referred to in his article) or good governance. The problem is identifying managements which are not good, but not overtly bad. The bigger problem is identifying complete frauds, where the !@## (put your choice of expletive) auditors are hand in glove with the management.
There are books, which discuss this topic (of financial fraud) in detail (see here). There are no clear-cut formulae to identify aggressive or fraudulent accounting. A deep understanding of accounting and experience, will throw up red flags when one is reading and analyzing the annual report of a company. A single red flag may not be a cause for concern, but several of them together should alert you. I will be covering some of these red flags in a future post.
Let me come back to another example in the article – HTMT global. I have discussed about the company in the past and have a small holding in the company (it is part of my diversified graham styled portfolio). The key reasons for my investment are – cash on books higher than the market cap, decent topline and bottom line growth and ultra cheap valuation. However the negative on the stock is corporate governance. As indicated in the article, the cash is held in a subsidiary in Mauritius.
The CFO indicated in the analyst meet that the cash is being held to avoid the 30% tax and for acquisitions. During the analysis of the company, I read this explanation (I was searching for it) and found it plausible. However on reading, prof bakshi’s article I was disappointed to read this
HTMT has deposited cash in Mauritius. When asked about keeping its money outside India, Anand Vora, CFO, said: “We have been getting a lot of queries, because PwC is our auditors and have a considerable amount of cash on our books. We don’t want to comment till we get a clearance from our legal team. So, while your questions (on overseas accounts and account balance and cash on books) may not be very sensitive issues, we will still like our legal team to go through it.”
There are two red flags in the above statement : PWC and the reluctance of the CFO to give a straight response. If you have cash on the books, why do you need the legal team to go through it?
Does the above mean that the cash does not exist? Should one exit the stock? To be honest, I don’t have an answer for that. If one cannot trust the management and the auditors to tell the truth, then it is not possible to invest in a company. The entire financial system depends on this trust. No one will invest, if the management and auditors cannot be trusted to tell you the truth.
So where do we go from here? For starters I am reviewing all my holding to check their cash holdings closely and tie it with the interest income. I have checked these numbers in the past, but with only a passing interest. I will however be looking at these numbers far more closely now.
In addition, though I have focused on corporate governance in the past and rejected several ideas for my core portfolio, I have been more tolerant in my graham styled portfolio. I plan to give more wieghtage to this factor in my stock picks in the future. I have purchased companies, which are statistically cheap, even if they are not upto the mark in corporate governance. I plan to put more wieghtage on this factor going forward.
I am still thinking about HTMT and have not decided yet. However my comfort levels have dropped a lot with this company and my gut feel is not good (yes, I listen to my gut feeling ..ignoring it in the past has been costly). I may decide to exit the company even if I have to take a small loss. This may be an over-reaction to the satyam episode as there is still no factual basis to distrust the company. However there should be no tolerance on corporate governance and transparency. In the end i would rather err on the side of caution than repent later.
Added note : I just glanced at Satyam’s annual report. The company reported 3300+ crs of cash with scheduled banks and an interest income of 270 Crs. The scheduled banks seem to be bank of baroda, BNP, citibank, HDFC, HSBC and ICICI bank. How the hell did the auditors certify the cash if the management says all this cash was fictitious ? If this news report is true, then one could derive comfort that the statements were not fraudulent and the cash was actually siphoned out.
Readers of this blog would be aware that I have a bias for companies with low debt and high cash on books. I do not get excited by growth as high growth companies are usually fairly valued or overvalued. However slow to moderately growing companies with a solid business model are frequently undervalued. Excess cash on the book only adds to the attractiveness of these companies.
Low debt and cash on books is usually a good thing, but excess cash holdings for long periods of time are not good for shareholders. It usually signifies that the management is allocating capital poorly and in absence of high return opportunities is letting the cash idle. This is ofcourse better than spending the cash on stupid acquisitions. However a shareholder friendly management should return the cash through dividends or buybacks.
The above holds true if the cash is actually present. After the satyam episode, one cannot be completely sure of that. I have always looked at the management quality and corporate governance of a company in the past, before committing my money to it. It is easy to identify cases of bad (see aftek here, which the prof has also referred to in his article) or good governance. The problem is identifying managements which are not good, but not overtly bad. The bigger problem is identifying complete frauds, where the !@## (put your choice of expletive) auditors are hand in glove with the management.
There are books, which discuss this topic (of financial fraud) in detail (see here). There are no clear-cut formulae to identify aggressive or fraudulent accounting. A deep understanding of accounting and experience, will throw up red flags when one is reading and analyzing the annual report of a company. A single red flag may not be a cause for concern, but several of them together should alert you. I will be covering some of these red flags in a future post.
Let me come back to another example in the article – HTMT global. I have discussed about the company in the past and have a small holding in the company (it is part of my diversified graham styled portfolio). The key reasons for my investment are – cash on books higher than the market cap, decent topline and bottom line growth and ultra cheap valuation. However the negative on the stock is corporate governance. As indicated in the article, the cash is held in a subsidiary in Mauritius.
The CFO indicated in the analyst meet that the cash is being held to avoid the 30% tax and for acquisitions. During the analysis of the company, I read this explanation (I was searching for it) and found it plausible. However on reading, prof bakshi’s article I was disappointed to read this
HTMT has deposited cash in Mauritius. When asked about keeping its money outside India, Anand Vora, CFO, said: “We have been getting a lot of queries, because PwC is our auditors and have a considerable amount of cash on our books. We don’t want to comment till we get a clearance from our legal team. So, while your questions (on overseas accounts and account balance and cash on books) may not be very sensitive issues, we will still like our legal team to go through it.”
There are two red flags in the above statement : PWC and the reluctance of the CFO to give a straight response. If you have cash on the books, why do you need the legal team to go through it?
Does the above mean that the cash does not exist? Should one exit the stock? To be honest, I don’t have an answer for that. If one cannot trust the management and the auditors to tell the truth, then it is not possible to invest in a company. The entire financial system depends on this trust. No one will invest, if the management and auditors cannot be trusted to tell you the truth.
So where do we go from here? For starters I am reviewing all my holding to check their cash holdings closely and tie it with the interest income. I have checked these numbers in the past, but with only a passing interest. I will however be looking at these numbers far more closely now.
In addition, though I have focused on corporate governance in the past and rejected several ideas for my core portfolio, I have been more tolerant in my graham styled portfolio. I plan to give more wieghtage to this factor in my stock picks in the future. I have purchased companies, which are statistically cheap, even if they are not upto the mark in corporate governance. I plan to put more wieghtage on this factor going forward.
I am still thinking about HTMT and have not decided yet. However my comfort levels have dropped a lot with this company and my gut feel is not good (yes, I listen to my gut feeling ..ignoring it in the past has been costly). I may decide to exit the company even if I have to take a small loss. This may be an over-reaction to the satyam episode as there is still no factual basis to distrust the company. However there should be no tolerance on corporate governance and transparency. In the end i would rather err on the side of caution than repent later.
Added note : I just glanced at Satyam’s annual report. The company reported 3300+ crs of cash with scheduled banks and an interest income of 270 Crs. The scheduled banks seem to be bank of baroda, BNP, citibank, HDFC, HSBC and ICICI bank. How the hell did the auditors certify the cash if the management says all this cash was fictitious ? If this news report is true, then one could derive comfort that the statements were not fraudulent and the cash was actually siphoned out.
Cash - good or bad ?
I was recently referred to an article by Prof. Bakshi (read here). Prof bakshi has written about a few companies which seems to be cash bargains (selling less than cash on the books), but are suspect due to their accounting and corporate governance.
Readers of this blog would be aware that I have a bias for companies with low debt and high cash on books. I do not get excited by growth as high growth companies are usually fairly valued or overvalued. However slow to moderately growing companies with a solid business model are frequently undervalued. Excess cash on the book only adds to the attractiveness of these companies.
Low debt and cash on books is usually a good thing, but excess cash holdings for long periods of time are not good for shareholders. It usually signifies that the management is allocating capital poorly and in absence of high return opportunities is letting the cash idle. This is ofcourse better than spending the cash on stupid acquisitions. However a shareholder friendly management should return the cash through dividends or buybacks.
The above holds true if the cash is actually present. After the satyam episode, one cannot be completely sure of that. I have always looked at the management quality and corporate governance of a company in the past, before committing my money to it. It is easy to identify cases of bad (see aftek here, which the prof has also referred to in his article) or good governance. The problem is identifying managements which are not good, but not overtly bad. The bigger problem is identifying complete frauds, where the !@## (put your choice of expletive) auditors are hand in glove with the management.
There are books, which discuss this topic (of financial fraud) in detail (see here). There are no clear-cut formulae to identify aggressive or fraudulent accounting. A deep understanding of accounting and experience, will throw up red flags when one is reading and analyzing the annual report of a company. A single red flag may not be a cause for concern, but several of them together should alert you. I will be covering some of these red flags in a future post.
Let me come back to another example in the article – HTMT global. I have discussed about the company in the past and have a small holding in the company (it is part of my diversified graham styled portfolio). The key reasons for my investment are – cash on books higher than the market cap, decent topline and bottom line growth and ultra cheap valuation. However the negative on the stock is corporate governance. As indicated in the article, the cash is held in a subsidiary in Mauritius.
The CFO indicated in the analyst meet that the cash is being held to avoid the 30% tax and for acquisitions. During the analysis of the company, I read this explanation (I was searching for it) and found it plausible. However on reading, prof bakshi’s article I was disappointed to read this
HTMT has deposited cash in Mauritius. When asked about keeping its money outside India, Anand Vora, CFO, said: “We have been getting a lot of queries, because PwC is our auditors and have a considerable amount of cash on our books. We don’t want to comment till we get a clearance from our legal team. So, while your questions (on overseas accounts and account balance and cash on books) may not be very sensitive issues, we will still like our legal team to go through it.”
There are two red flags in the above statement : PWC and the reluctance of the CFO to give a straight response. If you have cash on the books, why do you need the legal team to go through it?
Does the above mean that the cash does not exist? Should one exit the stock? To be honest, I don’t have an answer for that. If one cannot trust the management and the auditors to tell the truth, then it is not possible to invest in a company. The entire financial system depends on this trust. No one will invest, if the management and auditors cannot be trusted to tell you the truth.
So where do we go from here? For starters I am reviewing all my holding to check their cash holdings closely and tie it with the interest income. I have checked these numbers in the past, but with only a passing interest. I will however be looking at these numbers far more closely now.
In addition, though I have focused on corporate governance in the past and rejected several ideas for my core portfolio, I have been more tolerant in my graham styled portfolio. I plan to give more wieghtage to this factor in my stock picks in the future. I have purchased companies, which are statistically cheap, even if they are not upto the mark in corporate governance. I plan to put more wieghtage on this factor going forward.
I am still thinking about HTMT and have not decided yet. However my comfort levels have dropped a lot with this company and my gut feel is not good (yes, I listen to my gut feeling ..ignoring it in the past has been costly). I may decide to exit the company even if I have to take a small loss. This may be an over-reaction to the satyam episode as there is still no factual basis to distrust the company. However there should be no tolerance on corporate governance and transparency. In the end i would rather err on the side of caution than repent later.
Added note : I just glanced at Satyam’s annual report. The company reported 3300+ crs of cash with scheduled banks and an interest income of 270 Crs. The scheduled banks seem to be bank of baroda, BNP, citibank, HDFC, HSBC and ICICI bank. How the hell did the auditors certify the cash if the management says all this cash was fictitious ? If this news report is true, then one could derive comfort that the statements were not fraudulent and the cash was actually siphoned out.
Readers of this blog would be aware that I have a bias for companies with low debt and high cash on books. I do not get excited by growth as high growth companies are usually fairly valued or overvalued. However slow to moderately growing companies with a solid business model are frequently undervalued. Excess cash on the book only adds to the attractiveness of these companies.
Low debt and cash on books is usually a good thing, but excess cash holdings for long periods of time are not good for shareholders. It usually signifies that the management is allocating capital poorly and in absence of high return opportunities is letting the cash idle. This is ofcourse better than spending the cash on stupid acquisitions. However a shareholder friendly management should return the cash through dividends or buybacks.
The above holds true if the cash is actually present. After the satyam episode, one cannot be completely sure of that. I have always looked at the management quality and corporate governance of a company in the past, before committing my money to it. It is easy to identify cases of bad (see aftek here, which the prof has also referred to in his article) or good governance. The problem is identifying managements which are not good, but not overtly bad. The bigger problem is identifying complete frauds, where the !@## (put your choice of expletive) auditors are hand in glove with the management.
There are books, which discuss this topic (of financial fraud) in detail (see here). There are no clear-cut formulae to identify aggressive or fraudulent accounting. A deep understanding of accounting and experience, will throw up red flags when one is reading and analyzing the annual report of a company. A single red flag may not be a cause for concern, but several of them together should alert you. I will be covering some of these red flags in a future post.
Let me come back to another example in the article – HTMT global. I have discussed about the company in the past and have a small holding in the company (it is part of my diversified graham styled portfolio). The key reasons for my investment are – cash on books higher than the market cap, decent topline and bottom line growth and ultra cheap valuation. However the negative on the stock is corporate governance. As indicated in the article, the cash is held in a subsidiary in Mauritius.
The CFO indicated in the analyst meet that the cash is being held to avoid the 30% tax and for acquisitions. During the analysis of the company, I read this explanation (I was searching for it) and found it plausible. However on reading, prof bakshi’s article I was disappointed to read this
HTMT has deposited cash in Mauritius. When asked about keeping its money outside India, Anand Vora, CFO, said: “We have been getting a lot of queries, because PwC is our auditors and have a considerable amount of cash on our books. We don’t want to comment till we get a clearance from our legal team. So, while your questions (on overseas accounts and account balance and cash on books) may not be very sensitive issues, we will still like our legal team to go through it.”
There are two red flags in the above statement : PWC and the reluctance of the CFO to give a straight response. If you have cash on the books, why do you need the legal team to go through it?
Does the above mean that the cash does not exist? Should one exit the stock? To be honest, I don’t have an answer for that. If one cannot trust the management and the auditors to tell the truth, then it is not possible to invest in a company. The entire financial system depends on this trust. No one will invest, if the management and auditors cannot be trusted to tell you the truth.
So where do we go from here? For starters I am reviewing all my holding to check their cash holdings closely and tie it with the interest income. I have checked these numbers in the past, but with only a passing interest. I will however be looking at these numbers far more closely now.
In addition, though I have focused on corporate governance in the past and rejected several ideas for my core portfolio, I have been more tolerant in my graham styled portfolio. I plan to give more wieghtage to this factor in my stock picks in the future. I have purchased companies, which are statistically cheap, even if they are not upto the mark in corporate governance. I plan to put more wieghtage on this factor going forward.
I am still thinking about HTMT and have not decided yet. However my comfort levels have dropped a lot with this company and my gut feel is not good (yes, I listen to my gut feeling ..ignoring it in the past has been costly). I may decide to exit the company even if I have to take a small loss. This may be an over-reaction to the satyam episode as there is still no factual basis to distrust the company. However there should be no tolerance on corporate governance and transparency. In the end i would rather err on the side of caution than repent later.
Added note : I just glanced at Satyam’s annual report. The company reported 3300+ crs of cash with scheduled banks and an interest income of 270 Crs. The scheduled banks seem to be bank of baroda, BNP, citibank, HDFC, HSBC and ICICI bank. How the hell did the auditors certify the cash if the management says all this cash was fictitious ? If this news report is true, then one could derive comfort that the statements were not fraudulent and the cash was actually siphoned out.
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