Wednesday, March 25, 2015

In Praise of Idleness- An investment strategy in current times

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Doing Nothing is a Decision

“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” – Blaise Pascal

Last year, psychologists from the University of Virginia asked a number of subjects to sit in a room by themselves for a periods of 6 to 15 minutes at a time. They were asked to simply be alone in the room with their own thoughts. It turns out people have a very hard time doing this. Here’s what they found:
In a series of 11 studies, U.Va. psychologist Timothy Wilson and colleagues at U.Va. and Harvard University found that study participants from a range of ages generally did not enjoy spending even brief periods of time alone in a room with nothing to do but think, ponder or daydream. The participants, by and large, enjoyed much more doing external activities such as listening to music or using a smartphone. Some even preferred to give themselves mild electric shocks than to think.
For most people it’s nearly impossible to do nothing these days, because there are so many options available to keep us busy. It’s the same thing for investors.
With a six year bull market still going strong we’re getting to the point in the cycle where the buy and hold crowd is starting to take a few too many victory laps. I’ve seen plenty of push-back lately on the subject. People are saying buy and hold investors will be sorry some day when markets crash or go into a bear market.
It’s true. Market declines are never easy. But buy and hold as a strategy dies during every bear market and somehow comes back to life with every bull market recovery. The thing is that if buy and hold (or any strategy for that matter) didn’t “die” at some point in every cycle, it wouldn’t work nearly as well for the true believers.
But I’ve also heard people say that buy and hold is an easy strategy because it doesn’t require the investor to do anything. On the contrary, I think it’s much easier to be doing something, anything, at all times, than to be a patient, buy and hold investor. Making constant changes to your portfolio can give an illusion of control. More activity gives investors the feeling they can affect positive outcomes, even if the results don’t prove this.
Being busy has become the default move because it absolves investors from thinking long and hard about making better decisions.
Doing nothing is one of the hardest possible decisions you can make as an investor. There is an endless fire hose of information coming at you. There are always new and exciting investment products being released by the financial marketing machine. There’s a constant stream of people making proclamations of bubbles, crashes, bear markets, double dip recessions and melt-ups. Doing nothing in the face of all this along with the market action we see and hear about on a daily basis is a huge challenge for any investor.
Buy and hold investors are basically on an island.
I always say that buy and hold is the worst kind of investing except for all the others. For someone that wants to keep things extremely simple, I can’t think of many better ways to invest (assuming you have enough risk controls in place). It’s also worth noting that it’s false to assume that buy and hold is only reserved for index funds. Buy and hold is strategy agnostic. There are many stock pickers that are basically buy and hold investors who make very few moves each year. It’s rare but these types of investors do still exist.
It’s also true that many quantitative strategies are more or less buy and hold investors that only rebalance their holdings once a year or so. It can’t be easy for those portfolio managers to sit tight and follow their rules when everyone else around them is trading like crazy.
I don’t think that buy and hold is perfect. No strategy is. You always have to go in with your eyes wide open and set reasonable expectations with any investment philosophy. But one of the reasons that it works over time is because you basically get out of your own way and do the heavy lifting by making your decisions up front. If you practice a form of buy and hold don’t let anyone tell you that it’s easy.
Doing nothing is often the hardest move to make in the financial markets.

Wednesday, March 18, 2015

Time to rethink on the HNI ?

The response to the Adlabs issue is interesting.
HNI Segment subscribed to just seventy percent of what was kept aside for them.
Retail got sucked in and did 140% of what was kept aside for them.
An issue where the Retail has got suckered in big time, I think. Of course, they can still do a "STOP PAYMENT" and withdraw their application before allotment.
 The HNI segment used to be the biggest one when IPO financing was in vogue. Rightfully, the RBI put an end to that racket. So now the HNI segment (i.e. those who are not institituions and investing upwards of two lakh rupees) is deprived of IPO financing, I think it is the end of this segment as a viable window dressing for any IPO. The HNI segment used to leverage extensively, sell on listing and make money (not always). The category of retail and HNI can be folded together. Retail can always get a preference if SEBI does a simple thing of ensuring that allotments also take in to consideration the number of applicants. Need not be proportionate to the money invested. If cricket could invent a Duckworth Lewis to solve problems, this should be leasf of the problems.

Friday, March 13, 2015

Cairn, Vodafone etc- The bumbling and fumbling tax authorities of India

The Income Tax department are like the Keystone Cops Now they are harassing the shareholders of Cairn India by slapping a demand on it for not deducting tax at source on the consideration paid to the existing shareholder by the incoming shareholder.
In Vodafone case also, the department did the same thing.
Here is a link to the Cairn story : 

Modi and Jaitley merely seem to be mouthing promises of not harassing people. If I read between the lines, it looks like the new owners of Cairn India have not fully met some demand of you-know-who.
Like in the Vodafone case, the Income Tax dept of India is the only body in the world which does not approach the seller who made the capital gain (In Vodafone case, it was Essar & Hutchison Whampoa) but rather wakes up after a few months or years to chase someone else. It clearly is a sign of a failed extortion attempt..

Friday, March 6, 2015

PPF- The building block to a happy retirement

I have always tried to keep a distinction between ‘Savings’ and “Investments”.  To me, savings is the first level of comfort I must absolutely have and where I do not want to take ANY chances with capital erosion. Generally, we are asked, how much money do I need  when I no longer can bring in a regular monthly pay cheque home?
Blessed is that person who can give a precise answer. Too many imponderables, that include things like longevity, health, dependents (it is possible that you stop working at sixty and your children are still in college, given the late marriages that happen nowadays), loans etc. And to that we have to add a guess number for the monster called inflation. And of course, our ‘needs’ at that age can vary from person to person.
I do not like to walk that track. I would like to make the best of  what I earn, what I can save and what I can invest.  My approach does not start with economics or finance or numberwork. I am merely trying to address mental security or stability.
This is where I start with PPF as the first and compulsory outlay, each year for the entire working life. The initial period of fifteen years can be extended by five years at a time. Do not close your account after the first fifteen.
If you have the will to put aside a lakh and fifty thousand, every year, in the first week of April , then this is the tax free amount that awaits you:
            At the end of  15 years                                 Rs.44 lakh
            At the end of  20 years                                 Rs.74 lakh
            At the end of  25 years                                 Rs.118 lakh
            At the end of  30 years                                 Rs.183 lakh
Even accounting for inflation, the amounts are not small. And the importance of starting early is apparent from the above table. Simply take sixty as the retirement age and work back to see how many years of PPF investing you will do. If you start five years late, the amount you have drops dramatically.  For not saving in the first five years of your earning life, your final corpus could be lower by as much as Rs.65 lakh!

This amount provides the first level of savings that accumulate over time. So long as inflation is under eight percent per annum over this thirty year period, your monthly savings are protected. And all interest is tax free.

At the end of thirty years, if we close the PPF account and put the money in to a liquid fund, it will easily provide us with a lakh of rupees every month for nearly twenty years.  So a core part of your lifestyle could easily be met.
Yes, your investments will be there too. The amounts that you put in to equity after putting away the full extent of PPF every year. Depending upon your earnings, the investment portfolio will take care of the rest. I do not think there is too much number work involved now, if you take this approach.
Of course, if you are a double income family, then the PPF can be double of what this is. Once you see the numbers, you realise the magic of compound arithmetic.

Wealth that you create through your investment portfolio should be yours to liquidate, at a time of your convenience. Never depend on liquidating an investment to meet a known need. What could happen is that at the point where your need materialises, the market value of your investment may not be what you want or you are forced in to liquidating at a distress price. Barring medical emergencies, I guess most needs can be estimated in an approximate fashion. The important thing is that for known needs, the money we need should be without risk to the capital amount.
What I am saying above is not guaranteed to get you the best returns. At the same time, you will not be at the mercy of market forces and worry over economic uncertainties.  I am a strong believer in equities as the vehicle for wealth creation, but to me equities can never be part of any savings portfolio.

The important thing is to start saving as early as possible. Today, most of the younger generation can afford to start early. It is a question of choices. Whether you want to spend the money on a movie or at a pub or put the money in to a PPF account first and then plan the finances.

R Balakrishnan
February 23rd, 2015