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
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
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 :
Borrowing on credit cards
Fixed deposits, debentures etc
Insurance (life and health)
The power of compounding
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
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.
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
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
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
The moral of the story? Ethics be
damned. The regulator never has the interests of the investor at heart.
is clearly an appeasement to the votebank and is poor economics. Why throw away
good money after bad?
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.
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.
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
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
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.
(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
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
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.
(An Extract from Multi-Act Equity Consultancy P Ltd’s
Back to the basics: Finding your “edge” as an
There are 3 key elements that
give an “edge” to an investor over other market participants–Information,
Process & Behaviour.
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
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
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.