Beware the ides of March

It's popular to do what's popular, but its not profitable to do whats popular - Rakesh Jhunjhunwala

The current rise in the market has been dramatic and a lot of people have made significant money in the last month. FIIs have pumped in dollars and that has helped both the equity markets and rupee-dollar conversion ratio.

Most people have turned bullish and are trying to follow the herd and buying stocks. As history has repeatedly showed, retail investors usually get in at the wrong time in a market rally. It is important to ignore the liquidity and be cognizant of the event risks that are coming up.

March 16th Pranab Mukherjee is going to present the Union Budget. UP elections results should be also available at that time. There will be more news flow with respect to Greece's debt situation.

It is probably the time to be more cautious than adventurous. If you have spare cash, get into debt funds or buy into good fundamentally strong companies. Increase your time horizon of holding your stocks - buy to hold for the next 2-3 years.

I am looking at a couple of companies at this time and will post details about them once I complete my study.

Counter-thought - A process

Most of us do not think of how or why our investments can fail. While buying, we either look at the fundamentals or consider technical charts or do a mix of both and then buy. However, we are sometimes fooled as something that we may not have considered in our analysis takes place and our investment goes down in value. For this it is critical to have, what I term, as Counter-thought.

In counter-thought, you do a sort of crystal ball gazing and think that you are one year from now and your investment has turned you a loss. Now looking back you have to point out the reasons why it did not work out as you had planned or hoped it would. Looked at it from this perspective, it is much easier to figure out the major risks that can result in a loss. For example, if you are buying a company based on its ability to rent out its real estate (e.g. Nesco), then one loss-case can be a natural disaster like earthquake/flood/fire which destroys the primary asset. Another one can be a overall slump in industrial and trade fairs and reduction of demand. If you sit down with a pen & paper (notepad on a computer would do just fine as well), then you can chalk out multiple similar scenarios.

Once you have these items in your investment risk list, you can categorize them based on probability of occurrence and its possible impact. Again, taking the same example, a natural calamity at the primary convention center for Nesco is a very remote probability event but with extremely high impact (i.e. its effect is potentially catastrophic for the company).

So, before you put in your money in a stock next time, do spend a bit of time on counter-thought.

Debts Funds: Their time has come

The expectation that interest rates in India will stabilize and then subside over the first half of calendar year 2012, has given rise to a good opportunity for risk averse investors to invest in debt funds. Not only risk averse investors, but also people who are usually fully invested in equities, would do well to put some of their money in them.


Historical Returns
In the past,October 2008 to January 2009, when RBI cut the Repo rate by 3.5% from 9% to 5.5% with WPI inflation trending down from 11% to 1%. The Gilt-Medium and Long Term category funds appreciated to 19% compounded return while Income Category increased by 11%.


My Personal Bets
My recent additions in this category are Pru ICICI Gilt Fund and Birla Sun Life Dynamic Bond Fund (G) in these two categories. I expect the gilt fund to do better than the income one, and so have a 60-40 split between them. Return expectation is about 12-14% in a year's time.

Motilal Oswal Wealth Creation Study: Panel Discussion

Here are the 2 videos of the panel discussion at the Motilal Oswal Wealth Creation Study conference. 


Panelists are Ramesh Damani (host), Rakesh Jhunjhunwala, Madhu Kela and Raamdeo Agarwal

Portfolio Performance - 2011

2011 was an interesting and eventful year (probably like any other). For the Indian equity markets, it was full of fears that was imported from first US and then Europe. This year started with the Sensex at 20509 and Nifty at 6134. It closed the year at 15455 and 4624 respectively. This amounted to a decline of 24.6% on the Sensex. Along with the general market, my portfolio also fell. For the whole year, the portfolio was down 15.19%. That is a substantial percentage. The fall was especially vicious during the last couple of months. When I look back, the portfolio was generating positive returns till the end of October and then fell off sharply. This is because the only stocks I hold are mid and small caps and they have been beaten down in the current environment of extreme uncertainty with respect to the currency depreciation and Eurozone problems.


Although, I do not expect a great turn around in 2012, I would continue to deploy most of my savings to stocks. This is primarily because I am more convinced about the future of businesses to generate above inflation returns than any other form of investment I am aware of. With the market fall, stocks (specially the small and mid-cap variety) are available at good valuations for someone with a reasonably long time horizon. I am not very concerned about short term currency fluctuations and other issues. I don't expect basic business demand & supply to alter based on macro economic concerns, and good and resilient businesses should be able to weather the storm.

Serial #	Name of Company	% of Portfolio (Dec'11)	% of Portfolio (Jan'11)	Since Jan'11	Comments
1	Astral Poly	4.94%	0.00%	New	Accumulate
2	Balaji Amines	5.19%	8.34%	Down	Hold
3	Balkrishna Industries	4.49%	3.59%	Down	Accumulate
4	Cravatex	4.22%	0.00%	New	Hold
5	Elecon Engg	2.43%	0.00%	New	Accumulate
6	GEI Industrial	3.77%	0.00%	New	Accumulate
	Hira Ferro	0	5.12%	Sold
	Indag Rubber	0	0.95%	Sold
7	JK Lakshmi Cement	2.38%	3.32%	Down	Accumulate very slowly
8	Lloyd Electric	1.67%	5.03%	Down	Hold
9	Manjushree Tech	3.70%	0.00%	New	Hold
10	Mayur Uniquoters	10.44%	5.29%	Up	Accumulate aggressively on every dip
11	Opto Circuits	6.05%	8.32%	Down	Hold
12	PI Industries	6.51%	0.00%	New	Accumulate
	Pidilite	0	0.00%	Sold
13	Poly Medicure	1.34%	0.00%	New	Hold
	RSWM	0	6.68%	Sold
14	Shriram TransFi	7.37%	10.90%	Down	Accumulate aggresively on every dip
15	Sintex India	4.02%	9.97%	Down	Accumulate aggresively on every dip
16	Supreme Ind	16.86%	20.65%	Down	Hold
	Supreme Infra	0	3.64%	Sold
17	Titan Industries	4.36%	0.00%	New	Accumulate very slowly
18	Yes Bank	6.86%	5.88%	Up	Accumulate
19	Cash	3.21%	0.09%	Up
20	Nifty Put Option	0.19%	0.00%	New

Buy insurance for your portfolio

This is that time of the year when most salaried employees start thinking about tax saving and inevitably one of the first things that people think of is insurance. It is probably our conditioning that we buy LIC (and these days from private insurers) policies without blinking much of an eyelid. 
What exactly is a life insurance policy? It is nothing but a put option on your earning power. Basically, it protects your family from the loss of your earnings if and when you are no longer there. Simple.


However, a lot of stock investors do not think of buying similar "insurance" policies for their portfolios. I call these stock insurance policies "catastrophe insurance". No, they are not sold by LIC or other such insurance companies. They are traded on stock exchange in the form of PUT and CALL options. 


One way of buying such an insurance is to buy out-of-the-money PUT options of the index for a long duration. For example, if you buy a 4000 or 3900 PUT option for the month of February or March now, you are sort of covering a part of your losses in case the markets tanks. This typically makes sense for people who have very large equity portfolios. You pay a low/moderate premium to get some peace of mind. The way the markets are poised right now, I think it would be a prudent thing to do.

Margin of Safety - The most notable quotes from Seth Klarman's investment classic - part III

I just finished re-reading Seth Klarman's "Margin of Safety". This time I made notes of all the important lessons from the book. This is the last and concluding post of this series. Read them at your leisure. In it is some of the best wisdom on the stock markets from a person who is a "Investment-Hall-of-Fame" life-member.


Part I
Part II


On Portfolio Management

An investor's portfolio management responsibilities include maintaining appropriate diversification, making hedging decisions and managing portfolio cash flow and liquidity.


For the many investors who prefer to remain fully invested at all times, it is easy to become complacent, sinking or swimming with current holdings. "Dead wood" can accumulate and be neglected as losses build. By contrast, when securities in a portfolio frequently turn into cash, the investor is constantly challenged to put that cash to work, seeking out the best values available.


There is nothing inherent in a security or business that alone makes it an attractive investment. Investment opportunity is a function of price, which is established in the marketplace.


Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years. While such a strategy may have made sense at some time in the past, it seems misguided today. This is because the financial markets are prolific creators of investment opportunities. Investors who are out of touch with the markets will find it difficult to be in touch with buying and selling opportunities regularly created by the markets. ... Being in touch with markets does pose dangers, however. Investors can become obsessed, for example, with every market uptick and downtick and eventually succumb to short term oriented trading. There is a tendency to be swayed by recent market action, going with the herd rather than against it. ... Another hazard of proximity to the market is exposure to stockbrokers. Brokers can be a source of market information, trading ideas and even useful investment research. Many, however, are in the business primarily for the next trade. ... Never base a portfolio decision solely on a broker's advice, and always feel free to say no.


On Trading
The single most crucial factor in trading is developing the appropriate reaction to price fluctuations. Investors must learn to resist fear, the tendency to panic when prices are falling and greed, the tendency to become overly enthusiastic when prices are rising. One half of trading involves learning how to buy. In my view, investors should refrain from purchasing a "full position" (the maximum dollar commitment they intend to make) in a given security all at once. Those who fail to heed this advice may be compelled to watch a subsequent price decline helplessly, with no buying power in reserve.


Evaluating your own willingness to average down can help you distinguish prospective investments from speculations. If the security you are considering is truly a good investment, not a speculation, you would certainly want to own more at  lower prices.


Decisions to sell, like decisions to buy, must be based upon underlying business value. Exactly when to sell - or buy - depends on the alternative opportunities that are available.