Sunday, October 26, 2014

Investing safely- a video

here is a link to a video recording of the talk I gave at Moneylife

You learnt to make money-Learn enough to keep it

(This appeared in today's Deccan Chronicle)
Most people who earn and spend money do not take a high interest in what happens to the money they save. Often, it is a cursory discussion with someone before they write a cheque for some scheme or more often than not, investments are an impulse decision. They do not bother to take the effort to understand what they are doing with the money that they save or ought to save.
If you think that by simply dealing with a financial advisor you have done the best for your money, you need to get your head examined. He is out to make a living. And it does not necessarily come by doing the best for you. Similarly if you think that the bankers with who you and your grandfather dealt with have your interest at heart, you seriously need to get your head examined. To a bank, you are a customer, with a revenue target. Period.
If you go to a restaurant, do you think they will tell you which food has the lowest calories, lowest fat content? Will the seller of French fries tell you that it could be bad for you? So is the case with a banker. The person who you talk to, does not own the bank. His salary is dependent on the revenue he generates for the bank. And unfortunately, it is very unlikely that the product that is best for you will give the banker the highest revenue. Most likely, the converse would be true.
I am sure that to earn your money, you must have studied a lot and put in considerable efforts. Some professions give more and some less. But every rupee earned is a result of some effort that you have put in for a long time. If you spend so much time and effort in earning it, you owe it to yourself to understand how saving and investment works. Often I hear people say, ‘leave it to the experts’, “I do not have a head for it” etc.  Sure, investment is not a very easy topic but surely what you know on your trade or profession is not a cakewalk either. You could manage to become proficient in that.
Expertise in money matters is claimed by many but few really ever know everything. To compare, I can say that in medicine you have a lot of specialists, a few generalists but no one is complete.
On the way to getting yourself some knowledge in matters of money, there are some (like we can only save if we spend less than what we earn) which are obvious and some ( will a deep discount bond be better than a regular coupon bond) will flummox even most of the financial advisors. So do not lose heart. Since it is your money, it makes sense for you to spend time and effort learning about how money works.<>
You could actually break down your learning in to a few convenient heads. For instance :
Emergency Funds
Managing cash
Borrowing on credit cards
Housing Loans
Mutual funds
Fixed deposits, debentures etc
Insurance (life and health)
The power of compounding
Estate planning
Drawing up a will
Timing and markets
Do I need the money /
What is my neurotic state (Nervous, Anxious, Concerned, Active worrying or Relaxed?)
Once you decide to take the plunge, there is enough material available on the internet today. Why you should become financially literate is more to do with being at peace with your money rather than trying and squeezing the last bit out of an investment strategy. Most of us spend our lives with modest means and may not need experts to guide us. However, a fully DIY may elude even the savviest investor.
Once you start studying, a sure sign of your understanding a concept is when you can explain it to someone else lucidly.
Ideally, we should have at least one (preferably two or three) financial guides or teachers who we trust and make sure that we pay for advice. If we are willing to pay for advice, there is no reason why the advisor will bother about selling a product that gives him the best earnings. If possible, it is best to use one advisor to learn from and an intermediary merely for the transaction (buying / selling etc). Today, most transactions can be done online, but the irony is that offline is cheaper than online! Once you are paying for advice, then do not hesitate to squeeze pennies on the execution side. After all, it is our money.
Of course, you have a choice to be financially ignorant. Being so makes you very likeable to bankers, financial advisors and brokers. They are working for their money, using your money.

Wednesday, October 15, 2014

DLF- Regulatory remiss?

DLF has always been a controversial name. Not just in the stock markets, but even out of it. They were penalised big time for drafting one sided agreements.
I recall the time they did their IPO at a fancy price in a bull market. And the market cap was huge and soon it was made part of the Sensex. The issue price was Rs.525 to the retail. Even at that time, the public was slated to hold less than 24%, with under 12% dilution through the IPO. In a way, it looked like a regulatory exemption.
Stocks that do not have the requisite free float ( or at least 25% with public) should ideally not be allowed to IPO or list. Put them on an OTC exchange and any sensible and honest Index Committee will NEVER have such a stock in any index. However, our regulators and institutions are not known for their principled stands but more for the flexibility of their spine.
Finally, after seven years, SEBI has passed an order on the IPO. In legal terms, this is an IPO that is void, “ab initio”. However, it is not feasible to trace each and every owner and make the promoter cough back the IPO price with interest. That would be ideal and would have been possible, if the action was quicker.
SEBI, in its wisdom, has penalised the shareholders of DLF. Of course, since the most shares are owned by the promoter, he loses the most in terms of notional wealth. However, the non promoter shareholder lose real money, since they have shelled out hard cash and have seen their wealth erode real time.
The three year ban on the company, denying it access to capital markets, effectively means that it cannot raise any money through a listed debt/equity or a private placement. And logically, such a ban should also mean that other sensible lenders will shy away. So unless the promoter puts in some of his personal wealth in to the company in some form or the other, the company could become extinct in three years. I could be wrong. The real estate boom could revive and DLF will make it big.
DLF will surely knock at more doors and try to get out of the noose that SEBI has given it.
The capital market regulator should have punished the promoter for the omission in the prospectus. And maybe the merchant bankers who failed in their due diligence at that point in time, should also be punished with fines totally a few times the fees they then earned and a suspension for a three year period from acting in the capital markets.
The shareholder is the one who has suffered and SEBI is making it worse for them. There should have been a huge monetary penalty on the promoter for this alleged wrong. Promoters do not need access to capital markets in so called personal capacities. They can always find out ways to come around that..
And no sympathies for the institutional investor are called for. They simply love companies that are ‘grey’ and for them neither governance nor ethics matter. If it did, I doubt if they could hold shares in more than a handful of companies. I am sure that some institutional investor will now buy more shares thinking that this fall is too steep etc.
The moral of the story? Ethics be damned. The regulator never has the interests of the investor at heart.

Monday, October 13, 2014

Mr. Modi, please have a rethink- Do not throw taxpayers money away

From a person who comes from the land of “Dhando”, one would expect a hard-nosed capitalist approach.  It is surprising when Mr Modi talks about “ways sick public companies can be resuscitated, including using cash reserves from profit-earning state firms to provide lifelines to the loss-making ones “ . Check out the article at (
This is clearly an appeasement to the votebank and is poor economics. Why throw away good money after bad?
The best way to handle unviable PSUs is to auction them- Maybe someone will have the courage or the ability to take a bet. Do not use taxpayer money. Often, the best use for a defunct PSU (defunct in business, but still carrying workers on the payroll-some real, some ghost), is to end the saga. If the private sector can kill jobs with three month to one month notice, no reason why the government should not. After all, it is Dhanda. Let us not make parasites out of our fellow Indians.
If this is the ‘reform’ or ‘development’ that Modi wants to bring about, we will soon be searching for another reformer in less than five years.

Sunday, October 12, 2014



The stock markets seem to have run out of breath. Ideally, the markets would have liked Mr Modi to have performed miracles in his first three to four months, what the previous governments have not done in over six decades. We all want everything in the shortest possible time.
Similarly, we all want to pile on to the stock market wagon when everything seems rosy, the markets are up and we have suddenly fallen in love with the markets after hating it for long.  There are emotions at play here which give you the environment of a casino. Like in a casino they pump oxygen, to ensure that you do not feel tired, we have our TV channels, magazines and media exhorting you to go out and buy. Suddenly, IPOs make their appearance and the mutual fund industry rolls out one new (name only) scheme after another. And we turn off our thinking caps and succumb to a product or concept that we did not even think about. It is as if we spent two years thinking about ten stocks and after that invested in to the eleventh one without a thought.
As an investor, the first thing one needs is to separate emotion from reason. Emotional approach is a sure way to lose money. A method and discipline in sticking to it are the pre-requisite.
Having a time horizon for an investment is the key to successful investing. For example, if you are a day trader, you do not care much about long term and your focus is clearly on the price volatility during the day. By and large, this day trading is done by people using charts or some mathematical algorithm that is driven by a computer. As a day trader, you do not keep any open positions after the market hours. You pack your workshop and sleep on zero risk. Ideally.
On the other extreme, I could be an investor with an infinite time horizon. I buy stocks with money that I am unlikely to need in the next twenty or fifty years. So here, I have to be patient in terms of research as well as buying at a reasonable price.  Here, I have to use crowd psychology to my advantage. I need rigor and discipline. I cannot be swayed by emotion. Analysis is everything.
One more trading approach is to place some bets on events- For example, I could be buying Oil company stocks (PSU) in the hope or expectation that there will be decontrol of oil. Here I am betting on a huge re-rating. Or I could bet on an event of the GOI realising that it should get out of running businesses and hand over the PSUs to the highest bidder.
And there is the other approach of the SIP in direct equity (of which I am an advocate) which serves most people well. The effort you need is to identify a handful of great companies and a guess on their survival for the next twenty to fifty years. Once companies are identified, and then keep buying without any worries. And the key is not to worry about the noise but stick to the discipline and not miss a single instalment of buying. I know of people who start with enthusiasm and then one fine day, just give up on it because they feel gloomy about the weather or someone has told them that the markets are tumbling and the outlook is not good.
Often, we can use crowd behaviour to our advantage. Many people say ‘trend is my friend’. It is like the old days approach. We see a queue and join it, thinking that if there are so many people standing in a line, there must be something at the end of it. Each path has its own destination and it is best to stick to ours.
For me, investment is a long term game. I always think that the short term mood of the crowd is one of unbridled optimism; I would like to wait out their optimism. I am not in a race with the fund manager at a mutual fund who is worried everyday about his NAV and peer comparison and claims to have a long term horizon. I like my freedom to buy at my price and value and not be part of the queue that is buying first and then finding out what they bought.

Thursday, October 9, 2014

ETF- 3 stocks- L&T, ITC, AXIS Bank-

Investing in a concentrated ETF

(This was published in the Deccan Chronicle/Asian Age , recently)
The erstwhile Unit Trust of India (UTI) was used as a parking lot for many things.  From denying a genuine promoter his stake or protecting a bunch of self appointed custodians from hostile takeovers, UTI was a convenient vehicle. Finally when UTI was wound up, some shares were transferred to a special vehicle with the acronym “SUUTI” and funded by the GOI. The shares are in companies like ITC, L&T and Axis Bank.
Surely there are vested interests which prevent the GOI from getting best value. For example, ITC shares should be first offered to BAT, the original promoter. They would offer the best price. However, there are vested interests which do not want this to happen. Similarly, stakes in L&T or Axis Bank will realise better money if sold in an auction to someone who can get hold of the company.
So, now the wise investment bankers have found a way to address the issue. The GOI will get lesser money and no one will be able to control the blocks held in SUUTI. All the holdings will be pooled together in to a “ETF” or a special vehicle which will hold only these shares. These will become like a permanently closed ended fund, with units on offer for sale and for subsequent listing and trading. This will get some money to the GOI and the Trust that holds these shares will surely serve the vested interests.
Leaving aside the politics, let us examine the merits of this ETF as an investment opportunity.
For those who do not have the inclination or time to invest directly in equities, this is a great opportunity, should it materialise. The shares of the three companies would be bundled in to a package, units issued on those at a price. There would be a fixed no of shares of each company in one unit (or parts of shares of each company).  The unit price would reflect the prices of the components in the market place. It would technically be an Equity product, with all the tax advantages that go with it.
Let us assume that there would be one share each of ITC, L&T and Axis Bank that go to make up one unit. In other terms if the prices of these three shares are Rs. 350, Rs.1450 and Rs 400/- respectively. The value of one unit would be Rs.2200. It is possible that the GOI may decide that each unit will have one tenth of a share of each of the three companies. In which case, at the above prices, the NAV of each unit would be Rs.220/-.  Depending on price movements in each of the underlying shares, the NAV would fluctuate.
Each unit gives the owner an exposure to three distinct companies with one common thread. All three are driven by employee directors and not by promoters.  ITC has two businesses- Vice and FMCG- Both are reasonably recession proof. L&T has history plus some major interest in finance- Average returns but strong liking with the investor community and Axis Bank is among the rising stars in banking. It is unlikely (not impossible though) that all three stocks will go bad at the same time. Going by past performance, these three stocks have beaten the indices very comfortably. If you owned these three stocks over the last ten years, you would have done extremely well.
Well, the past is great.  My view is that these three companies are well positioned for the future also. There is also the possibility (remote?) that L&T and Axis Bank could get taken over in the not to distant future.  L&T and ITC have several businesses that may be spun off and bring value. Maybe one day the FMCG business of ITC will stop pulling down the ROE of the vice business. So there are upside possibilities on the stocks.
So, should such an offering (an ETF of these three stocks) hit the market, I would recommend a ten to twenty percent allocation of your equity money in. And since this would be traded on the exchanges, a SIP should be also a good option. And once listed, traders will also smell arbitrage opportunities if there is a mismatch in the ETF price as compared to the prices of the underlying. This is unlikely, but not impossible.
I would recommend this product to those who always wanted to buy direct equity, but did not do so for want of time or effort. I would expect these three stocks to deliver returns superior to the index itself.

Wednesday, October 8, 2014


(An Extract from Multi-Act Equity Consultancy P Ltd’s newsletter)

 Back to the basics: Finding your “edge” as an investor.
There are 3 key elements that give an “edge” to an investor over other market participants–Information, Process & Behaviour.
Information edge is the possession of more information about a company quicker than others either by meeting management, through channel checks, meeting suppliers, customers and competitors, etc. This does not necessarily mean inside information.
There are 4 issues with trying to develop solely an information edge –
1. It is difficult to replicate over time as it depends on the availability of “differentiated” information.
2. What one sees as information may in fact be “noise” and could have already been incorporated in the structure of prices 3. Technology has helped bring down both the cost and time to gather information; which is in many cases, widely disseminated over the internet and hence has led to a diminishing information edge: and
4. Regulators and companies are more sensitive about ensuring a level playing field between institutional and retail investors in getting the relevant information in the public domain as quickly as possible.
Behavioural edge is when an investor is able to control his emotions by eschewing either greed or fear and is conversely able to exploit these twin emotions of other market participants in his favour.
We believe a behavioural edge can be more easily developed by having a sound investment process and having the confidence to follow that investment process. We believe a “process driven” behavioural” edge that benefits from the mood swings of market participants is a sustainable edge as (study and observation of)  human behaviour has been ingrained in our DNA, our “wiring” as Buffett calls out, over millions of years.

Markets movements have an uncanny ability to distort the vision of an investor. In a bull market as market prices go up, the downside risk keeps getting blurred and there arrives a point at which the only parameter visible to the investor is the upside potential. In the current market, certain pockets (especially in the cyclical space) have reached a point where investors seem to be completely driven by the potential upside and are willing to fully factor positive outcomes into the future, while completely ignoring the probability of a negative outcome which could prove to be a much bigger risk on the downside. We feel it is extremely difficult, if not impossible, to predict a particular outcome based on a particular narrative (for example in the current context that economic growth will revive) that sounds plausible but has uncertain implications for market process of specific companies. A process driven investment approach therefore, can help an investor avoid behavioural traps, have a clearer roadmap as to what action to take and thus on average take more correct than incorrect decisions.