Category Archives: Equity

A Balancing Act Called Time

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Why am I so obsessed with the phenomenon called time?

Because time is the long-term investor’s secret weapon.

I believe that a portfolio comes into its own after 7 years of being built drop by drop.

In this initial period, the portfolio tries to find balance. Losers get established, but so do winners.

Once it has been established that a scrip is a loser, the portolio tells you to get rid of it every time you look at the portfolio. It’s the red ink on the losing portion of the porfolio that speaks to you. And the passage of time can even give you the opportunity to sell a loser for a lucrative price.

Eventually, winners stand out. Their black ink on the winning side of the portfolio asks you to buy into them again. And once again your dear friend time gives you the opportunity to buy into a winner at a reasonable price.

Finally, the portfolio has excreted all losers and now consists of candidates you’d consider rebuying into at the right price during the passage of time.

This is called a balanced winning portfolio. It is balanced because some winners are cheaply priced in it and some are expensive. You currently want to be buying into the cheap winners.

The moment your criteria point out that a winner is turning into a loser, you look for the next exit opportunity for this scrip. And time will give you this, i.e. a chance to sell this scrip at a great price.

So, use your secret weapon. Everyone knows about time but almost nobody uses it like a weapon. That’s why it’s a secret weapon. Use it.

While building up your portfolio and navigating it through, take your time.

Investing in the Times of Pseudo-Mathematics

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First, there was Mathematics.

Slowly, Physics started expressing itself in the language of Mathematics with great success. Chemistry and Biology followed suit.

The subject of Economics was feeling left out. Its proponents wanted the world to start recognizing their line of study as a natural science. So they started expressing their research results in the language of Mathematics too.

Thousands of research papers later, it was pointed out that what mathematical Economics was describing was an ideal world without any anomalies factored in.

The high priests of Economics reacted by churning out a barrage of research papers which factored in all kinds of anomalies in an effort to describe the real world.

Where there’s money, there’s emotion. The average human being is emotionally coupled to money.

Either Economics didn’t bother to factor in the anomaly called emotion, or it couldn’t find the corresponding matrix in which it could fit human emotions like greed and fear.

And Economics started getting it wrong in the real world, big time. The Long-Term Capital Management Fund (run by Economics Nobel laureates as per their pansy and sedantry office-table cum computer-programmed understanding of finance) collapsed in 1998, with billions of investor dollars evaporating and the world’s financial system coming to a grinding halt but just about managing to keep its head above water. It was a close brush with comprehensive disaster.

The human being forgets.

The last leg of the surge in dotcoms in 1999 and the first quarter of 2000 did just that. It made people forget their investing follies.

What people did remember though was the high of the surge. Investors wanted that feeling again. They wanted to make a killing again. Greed never dies.

And Economics rose to the occasion. This time it was not only pseudo, but it had gotten dirty. Its proponents were not researchers anymore, they were investment bankers, who had hired researchers to develop investment products based on complex pseudo-mathematical models that would lure the public.

Enter CDOs.

For just a few percentage points more of interest payout, investors worldwide were willing to buy this toxic debt with no underlying and a shady payout source. People got fooled by the marketing, with ratings agencies joining the bandwagon of crookedness and giving a AAA rating to the poisonous products in question.

All along, the Fed (with the blessing of the White House) had been encouraging citizens to “tap their home equity”, i.e. to take loans against their homes and then to invest the funds in the market. (The Fed creates bubbles, that’s what its real job is). And the Fed, the White House, the leading investment banks, the ratings agencies and the toxic researchers were all joint at the hip, a very powerful conglomerate creating financial weather.

So, from 2003 to 2007, there was liquidity in the world’s financial system, and a lot of good money was invested in CDOs. Nobody really understood these products properly, except for the researchers who came up with them. Common sense would have said that something with no base or underlying will eventually collapse as the load on top increases. And there was no dearth of load, because the same investment banks that sold the CDOs to the public were busy shorting those very CDOs (!!!!!), with Goldman Sachs taking the lead. So a collapse is exactly what happened.

This time around, the now pseudo and very, very dirty economics (almost)finished off the world’s financial system as it stood. It was revived from death through frantic financial-mathematical jugglery and a non-stop note-printing-press, with the Fed looking desperately to bury the damage by creating the next bubble which would lure good money from new investors in other parts of the world which were less affected for whatever reason.

That’s where we stand now. Certain portions of the world’s finance system are still on the respirator. Portions are off it, and are trying to act as if nothing happened, shamelessly getting back to their old tricks again.

I get calls reguarly from Merrill Lynch, Credit Suisse, StanChart and other investment banks. The only reason why Goldman hasn’t called is probably because my networth is below their cold-call limit. Anyways, it doesn’t matter who let the dogs out. Point is, they are out. And they are trying to sell you swaps, structures, forwards, principal protected products, what-have-yous, you name it. I remain polite, but tell them in no uncertain terms to lay off.

As a thumb rule, I don’t invest in products I don’t understand.

As another thumb rule, I don’t even invest in products which I might eventually understand after making the required effort.

As the mother of all thumb rules, I only invest in products that I understand effortlessly.

That’s the learning I got in the 2000s, and I’m happy to share it with you.

Learning to Sit

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One of the first things a baby learns is to sit.

And sitting is probably the last thing that an investor learns. Some investors never learn to sit. Their long-term returns are disastrous.

Wanna make a killing? All right, first learn to sit.

To be able to sit, one needs to create proper conditions. One needs to take “jumpiness”, or volatility, out of the equation. This is done by buying with a margin of safety.

Having bought with a margin of safety, market blow-ups affect your bottom-line lesser. You can sit thru them.

And that’s all you need to do, to allow a multi-bagger to unfold.

Wish you lucrative investing!

Noose Just Tightened

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Petrol’s up 5 bucks.

This is gonna pinch the public.

Are we now clear on the fact that a beast is on the loose? And the fact that this beast has been active to hyper-active since World War I ?

This beast is called inflation. The number 1 infectious disease that inflicts modern financial society.

We are going to have to live with inflation. Period.

What is required is long-term policy-making that will minimize the affliction. That’s not happening.

Modern financial policy seeks to avoid an existence where inflation becomes hyper. That would be when food on the table costs more that a cart-load of cash. See Argentina during its currency collapse, or Germany after the first World War.

Let’s assume that human-kind is not capable of making better policies, ones that minimize (let alone eradicate) the disease. Where does that leave us?

What do we do with our money, that’s being eaten away at 8 to 9%, year upon year?

Avenues like fixed deposits pay out lesser after tax than what inflation eats away. The 100 year return in Gold has been 1% per annum compunded, after tax. Only two investment avenues have yielded more after tax than what inflation has consumed over the very long term. These are 1). Property, and 2). Equity.

The writing on the wall becomes clear. To immunize one’s money against the disease, one needs to be invested in one or both these avenues over the long-term. Both avenues come with pitfalls, where one can lose much more than what inflation eats away.

So, one first learns how to deal with the pitfalls, and perhaps one can specialize in either of these avenues, since it is not easy to focus on both.

Then, after having learnt the ropes, one can slowly start salting one’s money away.

A Strong Case for Equity (Part 3)

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What intrigues me most about the asset-class “Equity” can be described in two words.

Human Capital.

The human being: capable of the highest but also the lowest.

So, while pinpointing which scrip to purchase, one avoids flawed human capital.

Humans have many flaws which one’s antennae are scanning for here. Some are corrupt. Some are bad planners. Some lack management skills. It’s a big list.

What one’s looking for is integrity. Also the power to anticipate in advance. Alone this trait in the management of a company can make it grow beyond inflation and slow-down. Managers with good anticipatory powers hedge against loss in the future. For example, a company that uses Silver in its manufacturing process could use up its yearly profit to buy Silver in bulk @ 40 $ an ounce rather than buy it one year later @ 80 $ an ounce.

Honest human capital is transparent. Share-holder friendly. And if you can see any intelligence along with such characteristics, just go for the scrip at a decent valuation.

A Strong Case for Equity (Part 2)

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Scams bother us. We panic, and then start cashing out of our Equities.

Can we stop and reflect?

There was some Jeep scam in ’57. Then Bofors. Fodder. Harshad Mehta scam in the ’90s. Dot cum bust. This century has been chockerblock with scams.

Let’s see how some holdings have performed over all these years. Reliance, ABB, Infosys, Wipro…these companies were microcaps at some stage in their lives. The long-term holders of these shares have raked it in big-time. Wipro has been a 300,000+ bagger over the last 31 years. The other three companies have been 1000+baggers. That’s BIG.

Some of today’s microcaps will make it as big or bigger over the very long term. They will be tomorrow’s blue-chips.

All of us want to set something aside for our kids. It’s human nature. So why can’t we think of holding equity for the very long-term, especially for our children?

What makes equity so special? Behind every scrip is human capital, which, if not involved in Scamonomics, fights inflation through innovation. The power to fight inflation is not inherent in other asset classes.

So let’s think seriously about very long-term equity holding.

What remains is the criteria for stock selection. That’s a deep topic, and we’ll delve into it some other day…

A Time for Things

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You don’t normally have dinner at breakfast time, do you?

Of course not.

Similarly, you don’t buy into a State Bank of India with a 5 year horizon when 6 years of earnings growth has already been factored into the price.

There’s a time for things.

You do buy into the same State Bank of India with a 2 week horizon when it’s shooting off the table and giving clear-cut up-moves as it makes its way into no-resistance territory.

And that’s about it. You’re in it for the short-term because that’s how the environment has defined itself. It’s a trading environment, not really meant for investors, whether conservative or unconservative. Thus, you have a stop-loss mechanism in place, in case there’s a down-swing, because up-moves can go hand in hand with down-moves. Where there’s a big money to be made, there’s chances of making a big loss too.

Oh, are you asking why you can’t enter into such stocks at this time with a long-term perspective? I see. Do you fly first class? No? Why not? Because it’s expensive, right? Similarly, such stocks are expensive just now. That’s not to say they won’t rise further. What you need to understand is that when you wake up five years from now, such a stock will have peaked and could possibly be heading for its trough. So your net returns over the long-term could even be negative.

Really wanna be a successful investor? Then you need to learn to buy cheap, with a margin of safety. You need to be patient enough to wait for lucrative entry levels.

Not getting your margins of safety anywhere in the markets just now?

Ok, just trade till you get them. Then you can stop trading, and start investing. Fine?

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 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.