Author Archives: Uday Nath

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About Uday Nath

I'm motivated. I like to out-perform. I only strive for the best.

Both Sides of the Coin

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What’s your personal style of investing, UDN?

Well, if you must know, and now that you ask, I like putting my money on the line when the underlying has hit an all-time high.

Um, isn’t that risky, a huge gamble, actually?

Well, what isn’t risky in life? Marriage is a gamble. So is business. And the farmer gambles on the weather when he sows his seeds.

You could invest in a more cautious fashion, like buying on a dip, you know.

Sonny, you asked about my personal style of investing, not the crowd’s personal style of investing. I’ve fine-tuned my personal style as per the threshold level of my personal risk-appetite, and risk-appetite is something one discovers after being in the market for a while, and after making mistakes and learning from them.

Fine. And what’s so good about investing at an all-time high?

Good, now you are asking some right questions. Ok, investing in something which has broken out and hit an all-time high, albeit risky, comes with a few advantages. First and foremost, there’s no resistance from top, i.e. there are no old sellers waiting to sell as the underlying heads higher and higher. This means that there is nobody stuck at these new levels waiting to off-load. There can be bouts of profit-booking of course, but a real resistance level doesn’t exist as yet, because the underlying has never entered these areas before.

Then, as the nay-sayers grow, and the crowd joins them to short-sell the underlying, there can be bouts of short-covering if the underlying’s climb is not stopped decisively by the bouts of short-selling. Any short-covering propels the underlying’s price even higher.

Before you go on, why is all this better than buying on a dip?

Oh, so you want to look at both sides of the coin, do you? Not bad, you learn fast. Well, buying on a dip offers a margin of safety to the investor, no doubt about that. Nevertheless, the main point is that a dip is happening. Supply is high, demand is less. The underlying’s price is falling as per the demand and supply equation. What’s to tell you that the fall will convert into a rise very soon? Nothing. Nothing at all. For all you know, the underlying might continue to fall another 20%, or 30, or 40 for that matter. It’s a fall, remember? People are off-loading. When something falls, professionals off-load huge chunks to the crowds waiting to buy on dips. If the dip persists, the crowd gets stuck at a particular entry level.

Not the case in the all-time high scenario. Here, there is demand, and supply can barely meet it. Something makes the underlying very interesting. Then, as the story spreads, demand grows, making the price surge further. Add to this short-covering – further surges. Interesting, right? You just need to make sure that your entry is done and over with soon after the all-time high is broken, and not later.

And what if you get burnt? I mean, what if the price doesn’t rise any further after the all-time high, but dips nefariously?

Well, one does get burnt quite often in the world of investing. Fear will make one freeze. I’ve devised a set of rules for this strategy, and then I just go ahead with the strategy, no second-guessing. No risk, no gain.

And what are your rules?

Firstly, I only put that money on the line which I don’t need for at least a few years. Then, I don’t put more than 10 % of my networth in any single underlying entity. Also, after entry, I don’t budge on the position for a few years. I only enter stories which have the potential to unfold over several years. And I only close the position when the reason for entry doesn’t exist anymore, irrespective of profit or loss. Over the long run, this works for me.

It can’t be that simple.

It’s not. I’ve come to these personal conclusions after making many, many blunders, and after losing a lot of money. This knowledge can’t be bought in a bookshop, nor can it be learnt in a university. It can only be learnt by doing, and by putting real money on the line.

Well, I’d much rather still buy on a dip.

Go ahead, a few people are making money while buying on dips. But they wait for the real big dips. They’ve got one big quality that qualifies them for this strategy, and separates them from the crowd. It’s called patience. Prime example is Warren Buffett.

Who’s the prime example of your strategy?

Fellow called Jesse Livermore.

The Pros and Cons of Digging for Gold – a just-like-that guide for the lay-person

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For starters, many have not been part of the rally in gold. And, many of these many secretly wish that they were. People want to ride a winner. It’s human nature. Before these individuals wager their life-savings on what is being touted as a winner, they need to understand the how-to and the flip-side portion. Investing is as much about human nature and psychology as it is about salting one’s money away. So, people, win half the battle of investing by attuning your investing style to fit your personality and risk-profile. One doesn’t define one’s risk profile, one discovers it over time. Anything that gives one a sleepless night is outside of one’s risk appetite. Don’t put any money in any such product. And, of course, you are not selling your family silver to get your portfolio going, nor are you putting your daughter’s education money on the line. You invest funds that are extra, i.e. funds that you don’t need over x amount of time, and you decide what this x is. Investing is about you, it’s not about fund managers or financial institutions.

Many like to see their gold in physical form. It’s like when you have a girl-friend. You want her physically around you, and not as some long-distance vibration in the ether. The flip-side is, that there is storage risk (gold, not girl-friend, silly). Gold can get stolen, pal. Also, at the time of purchase, there is contamination risk. If you buy coins, you pay about 20% premium for craftsmanship, which you totally lose out on when you try and sell the coins. And there’s tension when there’s gold lying around, just as there’s tension when there’s a girl-friend lying around…

For those who have the ability to connect to long-distance vibrations in the ether, holding gold in non-physical form is a beautiful option. No contamination risk at time of purchase. No storage risk at the end of the investor. It’s just that there’s no gold to hold onto, just a paper-certificate. If that’s ok with you, go ahead and buy into a gold ETF (exchange traded fund). In India, these are still quite illiquid, so there’s a huge bid-ask difference while buying and again while selling, causing massive slippage on both transactions, so for Indians, this is not a good option. On the plus side, the gold units are puchased in demat form and rest in your demat account until you decide to sell them, just like equity, and what’s more, you can transact online, giving you full power over your investment. Also, the unitary size is of half gram gold, so each unit is very affordable. Over time, as this avenue catches on, the illiquidity will go away. There’s a small management fee of about 1% per annum that’s deducted to compensate for storage of the actual gold and to insure it. A remote flip-side could be that if the fund-house promoting the investment is shady, they could hold spurious metal, and if a scam ensues and the fund-house goes under…….actually this has never happened, so let’s not talk about it. In an ETF investment like this, there is no leverage. If gold gains some, your investment gains a corresponding some. If gold loses some, you lose some. A 1:1 win-loss correlation to gold.

There’s another avenue which offers indirect leverage while investing in gold. We’re talking about gold mutual funds. These buy equity of gold mining companies. When gold moves x units in either direction, the NAV of such a fund moves x + y in the same direction, because the underlying gold mining companies have a huge inventory of gold in their corpus, and are also hugely hedged into the future. I’ve actually seen such an NAV jump 60% when gold had moved up 35%. Careful, same goes for the down-side. Leverage is a double-edged sword. On the plus side, if there’s a mad rush for gold, gold mining companies are going to be quoting off the charts on the upside because of this leveraged correlation. For those who are comfortable with leverage, this is a great option. In India, selling one’s gold mutual fund holding for profit within 1 year of investing can result in a 30% short-term capital gains tax though for this asset class, since the underlying assets are held overseas.

And then there are some who’d prefer to buy equity of specific gold-mining companies, not a whole mutual fund. Here, one needs to differentiate between companies holding mines which yield gold, and companies holding mines where gold has not yet been discovered or where operations will need lots of infrastructure to actually yield gold, but this is not an area for the lay-person, so let’s leave it at that.

Well, happy investing, and you’ll also need to identify whether you are comfortable putting your money on the line when an asset class is at an all-time high, or whether you prefer to wait for a dip. But that’s another discussion, for another time and another place. Bye 🙂

Man, you’re such a phony!

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You are such a phony, Uday!!!

What was all that talk about never owning a government company scrip, because of the inherent inefficiency in the way the government functions?

And then you go ahead and buy into a mutual fund that will only invest in PSUs! A mutual fund! One thought you were not getting into mutual funds at all, because on market highs they didn’t book proper profits owing to public investment demand, and because on market lows they didn’t invest all they had owing to public redemption requests.

Hold it right there, Mr. Holden Caulfield! Before calling me a phony, let me just point out to you the rationale here. Every investment has a rationale, okay, remember that.

Now listen carefully. Here the rationale is simple. India is opening up its Navratnas and extended Ratnas to the public for purchase for the first time. So the government is going to hype them up, to get a good price for them.

Then, 18 of such extended “gems” are practically debt free. They quote at a lower valuation than the market average currently. They pay out a huge dividend. They are going to be let upon the public soon. I want a piece of the pie.

After this disinvestment story is over, I will let go off this investment, mind you. I’m not going to be holding on to it for longer than 5 years. So let a fund manager have the headache of when to book profits. That’s why a mutual fund, do you understand? And that’s why the dividend payout option.

So I’m not such a phony after all, right? I mean this whole PSU mutual fund thing is a black-box approach. The fund manager does his thing during the disinvestment process, and hands me out about 3 or 4 dividend payouts and then the principal in 5 years. End of story.

I can see you nodding in comprehension, Holden, thanks for the dialogue.

Wake up Uday!

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Wake up Uday!

It’s a whole new world out there. Correction. It’s a whole new financial world out there.

Institutions Finshtitutions. As a retail investor, you have unprecedented rights today, man, so wake up. Nobody can bully you any more. And no one can sell you crap anymore. But only if you wake up to your rights and possibilities.

Gosh, look at the information flow available to you. It’s the same as to your banker, or to your financial analyst. In real time. Whooaahhh. Butterfly flutters wings in New York, you get the resulting price fluctuation on your currency live feed.

And private investment opportunities, they’re available to you now, on a chicken-shit ticket size. And you don’t have to go through any bankers for such investments, you can deal one on one with the private equity house concerned, who’ll gladly reimburse you 2% mobilization fees on your investment, because you’re doing it yourself. Man, times have changed. This is amazing.

Not so long ago, such private investments were available only upon invitation, through some hot-shot banker, for a multi-crore ticket-size. The banker cashed in on a huge deal fees. So, the more the banker sold, the more his bank account burgeoned. Thus, the banker began to sell only for the sake of selling, not for the sake of your portfolio, or for its further diversification, or what have you. Basically, the banker lost focus on you, and increased focus on himself. He didn’t care anymore if what he was selling to you was a bullshit investment. If you weren’t waking up, you were going to get slaughtered because of a weedy portfolio.

Well, you didn’t wake up in time, this time. It took a financial crisis to wake you up. But you’re awake now.

And you’re still lucky, for time is on your side. Not so for the retirees who woke up alongside of you. They don’t have any time left to win their money back and then some. Their financial game is over. And they’ve lost. Badly. Butchered.

Also, when the going gets tough, the tough get going.

The financial crisis was one thing, but there have emerged tremendous opportunities in its aftermath. People with liquidity have made a killing. Those who weren’t liquid but simply reallocated their portfolios have recuperated their losses of 2008. And those who have learnt their lessons have started to use their common-sense again while investing their money. And they’re not listening to bankers anymore.

But, alas, human nature is numan nature. People will forget 2008. There will be more financial crises. But for you, these will be opportunities. Because you will not forget 2008. Never. Because you are awake now!

And what’s so cool about Private Equity?

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-> that it’s private, i.e. for example no masses prevalent that can dump stock to make a company sink.

-> that the underlying is not quoted on a stock market, so you are definitely not following your investment on a day to day basis, but only on a quarter to quarter basis.

-> that each deal is scanned and studied thoroughly, and its price negotiated extensively.

-> that deal exclusivity also leads to price exclusivity.

-> that deal anonymity leads to an unrealistically low Price/Earnings multiple at purchase.

-> that deal transformation and resale at IPO level can translate into huge Price/Earnings ratio differentials – in other words, when the public is allowed to purchase a company on the stock market that has been nurtured by a Private Equity house that has brought it to IPO level, the Private Equity house makes a killing, because it dumps all its shares on to the public in the first 2 days as the IPO opens.

-> that the high management fee, at least till now in India, buys quality professionalism that investigates and seals your investments for you. As of now, there’s less riff-raff in this field in India. Here’s my rating amongst the companies I have dealt with:

1). Milestone Capital – excellent corporate governance, sound real-estate deals, foraying into education and healthcare – the best.
2). ICICI Venture – a very close second. Happy with them. Good appreciation of 65% of deals.
3). Franklin Templeton Private Equity – good, a little slow, but steady.
4). Cinema Capital – ok, nothing unusual till now.
5). Edelweiss – avoid, lack of disclosure.

-> that for another 2-3 years, entry will still be exclusive, and after that the entry barriers will be too low to make the returns being generated currently.

-> that the inflow of foreign funds to India currently is still very small, and can grow exponentially if conditions here keep improving. And what are the bulk of these funds looking for? Private equity holdings.

Managing an Equity Portfolio

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1). Before getting into equity, pinpoint exactly your appetite for risk.

2). Buy with a margin of safety.

3). Buy with rationale.

4). Spread your buying over time.

5). Hold performance. Reward it with repeated buying, when markets are down.

6). Punish non-performance. Sell your losers when markets are up. Weed them out. Throw them away.

7). Let winners unfold. Be patient with them.

8). When a winner becomes a superstar, ride it till it shows signs of sloth and underperformance.

9). Learn to sit on cash when there’s no value or margin of safety available. VERY IMPORTANT.

10). Know your weaknesses. Be disciplined. Make mistakes, but don’t repeat them. Filter all information, using your common sense. Don’t listen to anyone. Learn to trust yourself.

11). What is your eventual goal? Identify it. I’ll share my goal with you. I would like to hold 20 multibaggers in my portfolio 20 years from now. It’s a tall order. But I’m gonna try anyways. Remember, 1 multibagger is enough to strike it big. I’ll give you 2 examples : Wipro multiplied 300,000 times between 1979 and 2006. Cisco Systems – 75,000 times in I think 12-15 years leading up to the dot-com boom and bust. Before the bust, it gave ample hints of slowing down, so one had enough time to get rid of it. Wipro still hasn’t shown signs of underperformance.

So best of luck, whatever your goals are, but please, know your goals exactly before you play.

The Difference between Investment & Speculation

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Investment is the low to medium risk art of conserving capital and protecting it against inflation, such that in the long run, capital appreciates. Speculation is the high risk art of trying to turn a small amount of money into a large amount.

Investment banks upon the power of compounding. It is an amalgamation of human, monetary and product capital, a combination that favours appreciation in the long run, not linear, but exponential appreciation, owing to the power of compounding. The key requirements are intelligence during scrip selection, patience and tolerance to allow multi-baggers to develop and blossom, and common-sense in handling one’s portfolio. Also, one needs to weed one’s portfolio at times, to remove poisonous scrips.

Speculation banks upon the power of leverage. This construct of finance is a double-edged sword. It can compound one’s profits, but also one’s losses. The speculator tries to cut losses and let profits run. This is easier said than done, because it goes against our natural instincts.

In the end, there are both successful and unsuccessful investors and speculators.

The key to deciding what line one should pursue here is a recognition of one’s own risk profile and appetite. What gives one sleepless nights? What is one’s pain threshold? How much loss can one bear without any effect on family life?

Such questions need to be answered before embarking upon either investment or speculation.

The How, What and When of Equity

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-> Open a demat account and link it to your savings account online.

-> Open a trading account and link it to your demat account.

-> Don’t go in for a brokerage house, but for a trinity account with a good bank, like HDFC.

-> Try and press your relationship manager for a commission of 0.25% (+ STT + Surcharge) or less.

-> Put some money aside each month, and purchase upon opportunity.

This is the “how” of Equity.

-> Buy scrips of companies with good managements, innovative products and promising futures.

This is the “what” of Equity.

-> Buy when a scrip is at least 50% off its highs.

-> Sell if a scrip in the long run doesn’t show signs of turning into a multi-bagger.

-> This way, over 20 odd years or so, you’ll accumulate a basket of multi-baggers.

-> Sell a multi-bagger only when it shows signs of an impending big collapse.

This is the “when” of Equity.

An Important Case for Equity

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There’s something that bites away at one’s money.

It’s called inflation. And, over the last 100 years, it’s been around on a habitual basis, a virus that needs attending to.

This virus attacks one’s purchasing power. If one doesn’t take any immunity measures, or if a particular country has an unsound economic policy, the disease caused by the virus is called hyperinflation, a cause for wars and economic collapses.

So, how does one immunize oneself? One example is through the purchase of Equity. Of course I’m talking about the long-term perspective during such a purchase, because that’s when this strategy will hold, over a 5-10 year period or more.

When a buyer bids for equity, he or she makes an automatically inflation adjusted bid. The bid will or will not be met as per the ruling demand and supply equation. This demand and supply equation can only balance itself after adjusting for inflation.

Thus, the buying, holding and selling of equity, over the long run, will take inflation out of the equation.

So, if one holds the bulk of one’s worth in Equity over let’s say a period of 50 years, just do the Math and see how much value one saves if the average rate of inflation is taken to be around 5-6% per annum.

This is definitely a clinching case for long-term Equity.