Category: Behavioural Finance

How did I invest during Covid in 2020?

Covid has become a bad memory, thank god for it. In investing, we hear – Buy when there is blood on the street and to be greedy when others are fearful. Covid was a perfect example to evaluate what you actually did

Three years have passed and I thought it will be a good exercise to see if it’s easy to do the right thing when there is madness all around

A glimpse of the madness

Nifty dived close to 40% from 11,000  in the space of days, this is such a rare event that it’s difficult to think about it let alone stomach it

What was one of my first decisions –  I need to protect profit in one of my big profit positions Suven Life Sciences, My rationale was

Life science component though close to Mr. Jasti’s heart, it is pure play speculative bet and tough to put a valuation figure while the pharmaceuticals component is something the management may get rid off and then at ~INR 4500 crore market cap was richly valued

In hindsight this was not a great move as Suven Pharma went on to become stronger and stronger, I course-corrected and later recreated this … Read the rest

Do Nothing?

2009

Like many MBA Business schools , my alma mater also ran an internal competition to find the best manager of a particular batch, what followed was a series of games and situations at the end of which you have your winner.

One game was to make most money in stock markets in a day – A classic day trading game, all of us were given virtual INR 100,000 and a virtual demat account, the aim was to finish with highest balance possible at the end of the day.

There were many finance wizards at my place and a variety of strategies were employed

  1. One friend read up all the latest Macro and Micro (company specific news) to make calculated bets on items that will move due to news
  2. My strategy was to run some technical analysis (which till date I have limited understanding) and find stocks that can move with momentum
  3. Another friend switched on CNBC 18 at 7:30 am to get hot picks from news Anchor to make his day trading gains
  4. My neighbour in next room had a wait strategy he wanted to see what others are doing and then copy their trades

Next morning – The … Read the rest

The agony of rising prices

Even if you are barely active in stock markets , whatsapp messages like below of technology stocks hitting all time high and making 5X or 10X in a year would be coming to you. This is in a year when we are in middle of a global pandemic

Value investors are simply downplaying the fact by calling it as 2000 internet bubble phenomenon and are not participating .

However I reckon that we are trying to fit square pegs (traditional linear models) in round holes (solving Non linear problems)

Evolution has taught us to think in terms of linearity

If you’re still having trouble grasping this, it’s not your fault. Decades of research in cognitive psychology show that the human mind struggles to understand nonlinear relationships. Our brain wants to make simple straight lines. In many situations, that kind of thinking serves us well: If you can store 50 books on a shelf, you can store 100 books if you add another shelf, and 150 books if you add yet another. Similarly, if the price of coffee is $2, you can buy five coffees with $10, 10 coffees with $20, and 15 coffees with $30.

Source – HBR

Drawing … Read the rest

Are consistent wealth creators cheap?

Many investors who haven’t seen the 2008-9 GFC crisis are thinking is the current CORONA virus crisis more severe than the previous one? Is it good time to do some bottom fishing in stock markets?

I did an academic exercise to understand how some of India’s most consistent wealth creators are faring vis a vis 2008-09. First I headed to wealth creation studies done by Motilal Oswal to shortlist India’s most consistent stock market wealth creators. Here is a snapshot from report below

Of the above list, I picked top 10 in terms of number of times they appeared in wealth creation studies in the last 5 years and then segregated them in financial services and non-financial services category as below

Non Financials

Bosch
Shree Cements
Cummins
Dabur
Titan
Sunpharma
Asian Paints

Financials
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Quality Investing

This is one of the best books to read for long term investors

Quality investing : owning the best companies for the long term.

by Lawrence A. Cunningham,Torkell T. Eide, Patrick Hargreaves.

While the whole book was a fantastic read, one thing I really found useful was patterns they shared to look in quality companies.

When looking for quality companies, the desired outcome is always clear: strong, predictable cash generation; sustainably high returns on capital; and attractive growth opportunities. Yet the building blocks that enable companies to achieve these results vary widely,

Examine these routes, however, and patterns emerge –   similar combinations of strategies, techniques, or capabilities that transcend companies or industries,

Patterns are great reusable templates and ones which can be used successfully across different companies and sectors. This then becomes an essential tool kit to develop in search of finding quality companies. Let’s learn some of the patterns discussed in the book

  1. Recurring Revenues

Recurring locked in revenues lead to predictable cash flows and in turn exhibit business quality, Keep below the table in mind

Type License Service Subscription
Common In Large Software Companies Industrial Companies Marketing, Software as Service companies, Platform Business
Key Success Factor The software
… Read the rest

Relying on Expert opinions

In general on this blog, I have not been very kind to stock market experts ( pundits,opinion baazs), you can read through some of my previous outbursts here

In late 1980s, psychologist Philip Tetlock began an important research projects of the past three decades, studying how experts make predictions, who gets things right, and who gets things wrong. His inspiration came from watching experts predict the future of the Soviet Union — an event that very, very few got right. Notably, most of those who misjudged the event wouldn’t even admit that they got it wrong. The book draws one big conclusion: Most expert predictions are the equivalent of random guesses.

The stock market is a perfect to see this unfolding every day, In this post I am showing you just one example but the place is full of such pundits

Last year around April 2016, India’s first e-commerce company was planning to list on Indian bourses (previously makemytrip and others have also listed but overseas) , The overwhelming opinion  from expert reviewers of IPO was that issue from Infibeam was untouchable

Let’s look at some of them

Some claimed, Infibeam is unsuitable for retail investors

infibeam -1

more

infibeam - 2

While few pointed … Read the rest

How to spot bargains – Graham Style

Ready to spot a bargain ?

To do that you have to play a game with me.

Imagine you have a choice to invest in one of the four companies below, What price you would be willing to pay for below companies ?

MRF-1

May be profit and sales data can’t be solely used to decide, to help you  let me throw some more numbers at you

MRF-2

All four companies operate on decent margins also they are not commodity business as their margins are improving, While Company B is asset light but overall proxy pre-tax ROIC for all four companies is above ‘AAA’ bond yield. (In India pre-tax yield of an ‘AAA’  bond is about 9%). Also all four companies have negligible debt on their books. This is reflected  in their ROE as their long term ROE is similar to last year proxy ROIC we calculated above.

MRF-3

As a rational investor who is not biased you would pay relatively more for A,B & C which have better ROIC/ROE compared to D.

Right ?

What if I told you that Company B is selling 8 time of company C  (in relative sense)  you would say I must be kidding 🙂

Now let … Read the rest

Why it is difficult being contrarian ?

In December 2014, I wrote a book review of  investment classic from Howard Marks – The most important thing, Here is a reprint of passage from that post

[My re-emphasis in red]

What makes people and markets in general to commit mistakes ?

  • Greed – An extremely power full force that overcomes common sense
  • Fear – Prevents investors from taking constructive action when they should
  • Herd behaviour – Thinking and behaving like crowd
  • Dismissal of historical pattern – reason for so many bubbles and burst

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All of the above come naturally to any investor and this is the reason they are very difficult to let go  only few individuals develop habits to negate above

Now how does one combat above –

… Read the rest

An investor’s dilemma

An investor’s dilemma is perfectly captured in below lines

To be, or not to be, that is the question Whether ’tis nobler in the mind to suffer, The slings and arrows of outrageous fortune, Or to take arms against a sea of troubles

Shakespeare would have never thought that centuries later lines from Hamlet will truly reflect the state of Indian investors.

Re read [ Interpretation Mine 🙂]

To be, or not to be: that is the question Whether ’tis nobler in the mind to suffer [Notional loss of having missed the biggest bull run in Indian equities in last 5 years], The slings and arrows of outrageous fortune [Envious pain of neighbours making baggers overnight], Or to take arms against a sea of troubles [Jumping and buying companies touching 52-week highs every day and selling winners]

During a bull run (read now) an investor is trapped in various dilemmas, on one hand he is reluctant to buy  businesses making sequential 52-week highs, I did a post on why it is not a very smart idea to overlook stocks hitting 52-week highs, however the bigger dilemma is right under his nose his very own portfolio

Imagine this,

As … Read the rest

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Playing against the tide

I vividly remember when we were kids we were seldom taken to waters for outing ,blame it on my Mom’s water phobia ( it’s till date with no cure) or our lack of swimming skills 😀 So whenever we could — thanks to our maternal uncle we were never allowed to cross even a meter into shallow water. This developed a water phobia in lot of my cousins including me 🙂  In a way elders were right as you go farther in water there is a chance of high tide swamping you away.

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… Read the rest