Category Archives: Growth

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?

Asset Management is as important as ABC, or Multiplication, or Calculus for that matter…

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Imagine having lunch with a legendary investor like Warren Buffett. The first think he’ll talk to you about is the power of compounding. And when you say “Huh, what’s that?”, he’ll ask “Did nobody teach you about money management?”

And that’s the whole conundrum. Nobody teaches us how to manage money in school. Nor is this subject taught in college. We are left high and dry to face the big bad world without having the faintest clue about how to make our assets grow into something substantial.

Now why is this so? Is it that parents, teachers and professors worldwide have decided that no, we are, under no circumstances, going to teach our children how to manage their assets. No, that’s not the case. What is far truer is the fact that most parents, teachers and professors don’t know how to manage their own assets in the first place, so there’s no scope of teaching this art to others.

And do you know why that’s sad? Because youth is a prime time to sow seeds of investment that will grow into mountains later. When one is young, time is on one’s side. Salting away pennies at this stage puts into motion the power of compounding, a prime accelerator of growth. The time factor gives one tremendous leverage to deal with meltdowns, crises, calamities, catastrophes, recessions, depressions and what have you. As one grows up, one’s intelligently invested money has a very high chance of coming away unscathed and compounded into a substantial amount.

Don’t take my word for it. Just look around you. If you’ve been invested in the indices in India since 1980, your assets have grown 180 times in 30 years. That’s so huge that one is lost for words. This is despite all issues Indian and world markets have faced in these 30 years. All political crises, all wars, all scams, all corruption, everything. And, these returns are being generated by a simple index strategy. More advanced mid- and small-cap investment strategies have yielded many times more than these returns over this 30 year period. So just forget about meltdowns and crises, invest for the long-term, invest for your children, do it intelligently, and involve them in your investment process. Teach your children how to invest rather than making them cram tables or rut chemical formulae. Get them to take charge of their financial futures. Make them financially independent.

God has given the human being brains, and the power to think rationally. Let’s use these assets while investing. We’re looking for quality managements. We want their human capital to be working for us while we do other things with our time. We want them to figure a way around inflation, so that our investment doesn’t get eaten into by this monster. We don’t want them to involve our money in any scams. We want them to create value for us, year upon year. We want them to pay out regular dividends. Let’s inscribe this into our heads: we are looking for QUALITY MANAGEMENTS.

We are not looking for debt. The company we are investing into needs to be as debt-free as possible. During bad times, and they will come, mountains of debt can make companies go bust. There are many, many companies available for investment with debt to equity ratios which are lesser than 1.0. These are the companies we want to invest into.

We are also looking for a lucrative entry price. Basically, we want to buy debt-free quality scrips, and we want to buy them cheap. For that, we need to possess the virtue of patience. We just can’t get into such investments at any given time, but must learn to patiently wait for them. Also, we must learn to be liquid when such investments become available. Patience and timely liquidity are virtues that more than 99% of investors do not possess.

Of Kalyuga and the Skewed Nature of Growth

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Once or twice a day, I need to remind myself that this is Kalyuga. Gone are the times when people were honest in general, and the human mind was not corruptible. In Kalyuga, one refers to the price at which a human mind is corruptible. That it is corruptible in the first place is a given.

One of the economic characteristics of Kalyuga is the fact that wherever there is growth, it is skewed in nature, and not uniform. Nations claiming uniform growth are often surprised by a black swan event which nullifies years of financial penance by the founding fathers of such nations. Few examples are the Iceland bankruptcy, the sub-prime crisis, a near default by Greece on its sovereign debt, with possible defaults brewing in Portugal, Spain and Ireland in the near financial future of world economics. Even 9/11 was an event that was triggered due to skewed growth. Of course that is no justification for such an event.

What meets the naked eye in developed nations on the surface is – development. Showers, telephones, infrastructure, emergency services – everything functions. So where are the anomalies that skew the path of uniform growth in such nations? These anomalies are found beneath the surface, in the corruptible minds of those in power. Whether it is the nexus between high-level politicians and bankers, or that between the former and the armed forces, such examples successfully dupe the low-level but honestly functioning majority of the population in developed countries. Ask the pensioner in Greece, who suddenly finds his pension reduced by half due to no fault of his. Or the 9/11 rescue worker, who then contracted complications and died a dog’s death because he wasn’t entitled to healthcare due to no health insurance, which he couldn’t afford. These are example of growth going skewed, that very growth that first seemed uniform in nature.

Emerging nations have never boasted uniform growth. The definition of an emerging market that you won’t find in the text-books speaks of high economic growth at the cost of a segment of the population or a culture. In India for example, 500 million citizens are enjoying growth at the cost of 645 million others, who a UN study has found to be devoid of the very basics in life. Here, corruption from the top has sickered through to the bottom, and the 500 million concerned are able to grow at about 9 % per annum. The crafters of this growth plan believe that the growing millions will pull up the stagnant and deteriorating millions ultimately; i.e. growth will sicker through. Of course that can only happen if it is allowed to by the corruptible minds in-charge.

In Russia, high growth is enjoyed by those who’ve joined hands with the Mafia. Those who take the plunge commit all kinds of crimes from murder to child pornography. Those who choose not to, lead endangered, poor and suffocating lives in their efforts to stay clean.

China has a labour portion of its population and an entrepreneur portion of its population that are growing economically. The former has no time to enjoy the USD 750 – 1000 salary per month because of a 12 hour working day and perhaps 2 or 3 free days a month. Mostly, man and woman both are working, and due to non-overlap in free days, they rarely see each other. Their economic growth will be enjoyed by their children perhaps. The entrepreneur portion is of course splurging. What of the farmers? They haven’t really grown economically. And the vast and spiritual Chinese culture of olden days, i.e. the Mandarin essence of China? Gone into hiding, where it cannot be prosecuted or finished off by the mad-men in-charge. And what of Tibet? Suppressed and destroyed. Some parts of it filled with nuclear waste. And what of freedom of speech and expression? Never existed, and when it started to exist, was finished off from the root in the Tiananmen Square massacre. Heights of skewed growth.

So where does one put one’s money to work? After all, there are problems everywhere. Good question, and one that needs to be sorted out by everyone on a personal level. One thing is certain though. These are times of uncertainty, and in such times, Gold gives superlative returns. So, one needs to get into Gold on dips. There’s no point leaving money in fixed deposits, because inflation will eat it up. Also, one can start identifying debt-free companies with idealistic and economically capable managements, who can boast of uniform and clean growth within their companies (yes, there are encapsulated exceptions to skewed growth on the micro-level). It’s these exceptions one needs to be invested in.

From Crisis to Crisis : The Concept of Pain-Threshold

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Mid-flight, you hear a bang, and start going down. There’s panic everywhere, and the aircraft is starting to lurch one last time. The guy next to you is praying loudly. Before the last thud, you wake up. Bad dream. You wake up, because your pain-threshold is crossed, and your subconscious machinery notices this, thus pulling a trigger.

You are in a live poker game. Losing, of course. An hour gone, down a hundred dollars. Another hour goes by. Down three hundred. It’s starting to pinch you. Your mind is reporting to you that you are nearing your pain threshold, and is trying to make you leave the table. You ignore this report, and are down six hundred in the next few hands. Another pang. One last attempt from the mind. You ignore your pain threshold repeatedly. Now things really start to go wrong. When your opponent puts you all-in for fifteen hundred, you go with the move because you are making a set of nines, promptly ignoring the three heart cards lying on the table. Your opponent shows down the nut heart-flush to bust you completely. So, down US$ 2100, a hefty fine for ignoring your pain-threshold. Once it is crossed, you don’t feel any difference between losing US$ 600 and US$ 2100, until you lose that US$ 2100 and come to your senses. For the next seven nights you don’t sleep too well.

You work in a chemistry lab. Your absent neighbour in the overlooking cubicle is performing an experiment that springs a hydrogen sulphide gas-leak. The lab starts reeking of rotten eggs. You are at a crucial stage in your particular experiment. Can’t leave. Your mind is currently so focused on your experiment that it ignores all the warning bells being sent by your sense of smell. It forgets temporarily what it has learnt in safety class, that hydrogen sulfide lames the power to smell after a few minutes, and that of course the gas is poisonous, and because one can’t smell it after the first few minutes, one can drop unconscious, and then eventually die due to gas overdose. That’s almost exactly what happens, with the good fortune that just when you fall unconscious, your neighbour returns, and rescues you. In this example, because your sense of smell has been lamed, it cannot warn your system that your pain-threshold is soon going to be crossed.

When a market crashes, there’s pain amongst investors. Those with low thresholds bail out immediately. Those with high thresholds take time. Trending markets move fast, so almost always, they manage to cross the pain-thresholds of the majority of investors. These investors don’t feel the difference between being down 20% and being down 50% before they are actually down 50%, but by then half their equity corpus has been lost.

This is the age of crises. There’s one, and then there’s another. And so on and so forth. Having learnt from experience that markets are inefficient with the rider that the over-efficient media makes markets specifically over-efficient during a crisis, one learns that it is extremely lucrative to buy for the long-term in the aftermath of a crisis.

Needless to say, one is buying for the long-term in a market where there are good prospects for future growth. Crisis after crisis is triggered by markets where there are no prospects for future growth. Such markets take down even those markets with bright futures. During the first few crises, the dents in the market with growth prospects are big too. As crisis after crisis keeps coming, this particular market falls too, but lesser each time. Simultaneously, quarter after quarter reveals strengthening growth. Eventually, the nth crisis does not trigger a fall here, because a certain pain-threshold has been crossed amongst the investors of this growth market, who by now cannot ignore the quarter upon quarter net increase in sales and profits for the last numerous quarters as exhibited by this market, crisis or no crisis elsewhere. This particular market decouples, on the basis of its own strength, and its intrinsic and burgeoning growth. In this example, the pain is being caused by unhealthy markets, whereas the market where one is invested into is in good health. Here, crossing the pain-threshold makes the healthy market immune to the disorders that the other unhealthy markets are causing.