Category Archives: Stocks

Indian Equity Markets Update

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Dear Friends,

                             As I am writing this blog the Sensex has moved up by more than 400 points and Nifty by 130. This is subsequent to the fall of Sensex closing below 24000 and Nifty by 7250. Why are the markets behaving in a bizarre way with high volatility?

No one knows the precise answer as that is how Stock Markets around the world behave and you can attribute only a few factors to it. 3 key reasons that are attributed are:

  • China Degrowth
  • Fall in commodity prices to 10 year lows (including Crude Oil). Even this has a correlation to the 1st  reason of China Degrowth as China was one of the major consumers of commodities
  • Rumours spreading that that we are trending towards another 2008 kind of crisis across the world

 

If these are the reasons and stock market pundits across the globe are able to convincing say so, most of these people would sell their equity portfolio and move to a cash/ debt position so that the overall returns of their portfolio are optimum (less downside). The reason that it has not happened is no one is sure about it and that is the nature of Equity Markets. This is akin to buying gold or real estate knowing well that the price is going to fall.

A significant number of PenguWIN clients are first time equity investors who might not have experienced the gyrations of equity market. Hence this blog is mainly for their consumption and people who know or experienced this, please excuse me. I happened to attend the Chief Investment Officers (CIO’s) market outlook of several leading fund houses in the last 1 week and some of the messages are embedded in this blog.

Sensex moved from 3,390 to 20,823 between Jan 2003 and Jan 2008, during the great Bull Run. i.e more than 6 times. Now comes the interesting point: During this period, there were 11 occasions when Sensex corrected by close to 10% and 2 times by close to 25%. The reason why I am quoting these facts is that, markets tends to be volatile and unpredictable like the current scenario and this is not a new phenomenon. 

Volatility is inherent to all Asset Classes

Until a few years back, 2012 to be precise, most of the investors in India were of the opinion that money invested in Gold and Real Estate can move only in one direction – Up! In 2012, gold prices went up to Rs. 3000+/gram. If we factor inflation to this (7%) and taking a time frame of 3.5 years, the gold price should have been 3800/- per gram today if there was no price raise and purely adjusted for Inflation. The reality is that Gold is trading around 2500/gram.

The case of Real Estate prices is quite similar. The prices have remained the same in most part of the countries whereas if you factor in Inflation of 7% it should be 26% more than 2012 prices.

Most of us did not sell our Gold nor our houses. We think that if not now, in future the prices will go up. But when it comes to Equity Markets, the investor behaviour is different. Retail investors react in a manner where, when they should be investing more when valuations are attractive, but in reality they sell and exit making huge losses, and say that they burnt their fingers investing in Equity.

When companies grow and the profits increase, the stock prices should increase logically. A good example is Cognizant stocks which has grown at a 20% CAGR since they got listed in 1997. But does it always go up. The answer is no as it took the pounding on several occasions. The same is the case with Infosys, TCS, and Microsoft etc.

Fundamentals of India are strong

China, Brazil, Russia, Japan, South Africa and pretty much all the countries have issues in their fundamentals like GDP growth slowdown, recession due to oil prices and commodities. The only 2 countries that seem to have these going in their favour are US and India.

India GDP is growing at 7.5% which is significantly higher than other countries, our Fiscal and Current Account are in control, and Government has saved 5 Lakh crores per year due to oil lower prices. This money can be used for Country’s development.

An interesting data point that I would like to share is, in the past decade, Indians have imported around $221 billion worth of Gold, Silver and Diamonds while the money that has come in through FIIs in only $190 billion.  The impact of FIIs pulling out is clearly evident but the good thing is from last year retail investors have started investing significant amount of money in Indian Markets and this has helped balance the FII sell-off to a great extent.

So the question is whether our markets continue to be heavily dependent on FII flows? The answer is, no from a long term perspective. The government has been able to push the Pension and Provident funds to invest in Equity markets which the workers union have been opposing in the past. It is not possible for government to take a hit by these players clamouring for higher interest than the market determined rates. Please note that Government has already decided on lowering Post office deposits, PPF etc and it will happen over the next few days. Today I read an article that said the interest rates would be rest every quarter (like oil prices) to coincide with market determined rates. The investment from these channels is about 5000 crores this year and is estimated to be 10 Lakh crores in the next 5 years

Some of our clients were keen on reading the Quick Updates from PenguWIN in our website itself rather than going to our Facebook page. So we have decided to provide quick updates both in Facebook page and a separate page in the website under the blogs menu. 

Do not ignore Asset Allocation

Almost all the Investment heads (CIOs) of the AMC (Asset Management Companies) emphasized this point to get the optimum returns from the portfolio. The detailed write-up of Asset Allocation can be read from http://penguwin.com/all-about-asset-allocation/ which we had already published. Just to refresh our memories, Asset Allocation is maintenance of agreed % of different Asses classes, periodically, every calendar year or financial year. Financial year is better as the person would rebalance the portfolio after March and the tax implications can be planned with a year to go.

Let’s just consider Equity Mutual Funds, Stock options, Debt Mutual funds, EPF, Bank FDs and Postal Deposits. Let’s assume that the investor’s risk tolerance and capacity are assessed and a 50:50 Equity: Debt is arrived at. By March 31st the value of the portfolio in terms of Equity and Debt are determined. Let’s assume that Equity portfolio got reduced to 45% and Debt portfolio increased to 55%. The investor needs to sell off the debt to an extent of 5% and invest the amount in Equities. It may sound difficult to sell the portfolio which has done well and reinvest the money in a portfolio that hasn’t performed well. But for optimum returns from the portfolio this is very pertinent.

During these testing times please reach out to your Financial advisors (me in case of PenguWIN clients) so that you don’t take decisions that will impact your wealth in the long term

 <Blog # PenguWIN 1038 – Equity Markets Update>

Comparison of Stocks Vs MF Performance

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Dear Friends,

I did a comparison of returns of Blue Chip companies (Sensex Stocks) with the Top 20 Mutual Funds in the similar time horizon (Data collated from Value Research Online).

 Stocks Vs MF Performance over 10 years

There is a perception among investors that they get better returns by investing in Blue Chip Companies over MFs and hence this comparison report. While it’s true that blue chips like Sun Pharma, HDFC Bank, Axis Bank, L&T have given 25% returns, you also have big names like Hindalco, NTPC, Tata Steel, Infosys and Wipro that are languishing. Net-Net the chances that an individual investor would have made more money in Blue Chip companies than by investing in MFs is quite low.

It’s not that I have picked only a set of top performing MFs and presented here. 35 of the 52 MFs in the 10 year horizon have given 20% or more which is phenomenal.  

Unfortunately certain National Distributors and Wealth Management wings of Banks have prescribed exotic funds including NFOs and closed ended funds to gullible investors and have spoiled their experience in Mutual Funds.

I have dabbled with direct stocks and can definitely say that I am an above average investor (Else, I can’t claim to be a Wealth Management Professional). However after going through the merits and demerits of direct stock picking (read my blog which I am attaching once again for your reference) I decided  that I will rely on MFs for wealth creation and maybe stocks for the thrill of investing (though I have completely stopped it now as I have had enough in the past). 

Please remember that I am not saying MFs can always outpace direct equity investing as if you have invested all you money in say Axis Bank or Page Industries, it’s impossible for MFs, that needs to maintain a balance and not take concentrated bets, to beat them. The difference is risk reduction through diversification, convenience, professional management and peace of mind.   

Please feel free to write to me or call me if you have any questions.

<Blog # PenguWIN 1022 – Comparison of Stocks Vs MF Performance>

Category: Mutual Funds, Stocks

Why PenguWIN is not in favour of Direct Equity Investment?

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Dear Friends,

                       Several of my friends, relatives and well-wishers have been asking this question on Direct Equity Investment and I though I will publish my Point of View on this topic.

My answer to whether a normal investor can do direct stock market investing for wealth building is a resounding “No”and here is why I say so:

Each one of us is busy with multiple things and the time we get to track the stock performance is very less. Investors like Warren Buffet (Oracle of Omaha), Prem Watsa (Canada’s Warren Buffet) or our own Rakesh Jhunjunwala (supposed to be the most savvy Stock Investor in India) spend full-time on analysing the companies, researching them before they buy. They also have huge analyst teams who research the stock, rip them apart and provide inputs to these big ticket investors. Not to say that they sit on the boards of the companies and are privy to the direction that the company takes.

Typically, the so called stock pickers among us, watch NDTV Profit, Money Control, read Economic Times, Mint, discuss with friends and colleagues over a cup of coffee or during lunch and based on inputs that we get, take a position in stock – buy or sell. The information obtained and decisions made using such inputs is very subjective and speculative in nature without sound logic. Compare this with the Mutual fund houses who have dozens of Fund Managers (invariably these fund managers are from premier B Schools and have a solid Finance background), similar or more research analysts who track the stock market full-time and take calls based on established processes (that is why they charge us the expenses). The question is can someone who does it part time without a proper infrastructure in place can excel the experts? The answer is “Yes”, at very few times but mostly “No”

Now let me share my own personal experience to further strengthen my argument. I have dabbled with stocks directly using ICICI direct, talking to my friends and colleagues and have also made money. Let me say with absolute conviction that people who directly trade in stocks enjoy the associated thrills. The question is whether they have been able to build wealth through direct equity investment like the Warren Buffets and Vatsa’s. What I realized after several years is that a normal investor trying to do direct stock picking is nothing more than “Intelligent Gambling”.

 I had worked in Cognizant for close to 15 years and can say that I know quite a lot on how it operates and can sense the outcomes (quarterly results), being part of it. We have a 90 day period before which the employees who resign have to exit their ESOP (Employee stock options). I had a few left and was selling it in tranches, the last one was planned after the June results (Cognizant announces the quarterly results 5 weeks after the close). Seeing the positive results from the Indian behemoths like TCS, I was holding my ESOPs in Cognizant thinking it will go up (I had no reason to feel why our performance would be poor). Finally when the results came out, I lost a couple of lakhs in a single day (CTSH tanked 15% after results were announced due to revised guidance). I see no way to recoup my losses as there are no more triggers before the next results which will come out in Nov 1st week, whereas my ESOP expiry is 30 Sep 2014. If I can’t predict what is happening in my own company then on what basis or better knowledge will I have on other companies to buy or sell them?

Let me quote the famous words of Warren Buffer which I use it many times:

“Only when the tide goes out do you discover who’s been swimming naked”

People who have invested in stocks and made money should realize that when the going is good everyone is an expert stock investor (as in the past 4 months due to Modi Euphoria). Another interesting quote that I use often is

If you are a good stock investor, then you are in the wrong profession”. Remember that for small ailments like headache or common cold you can pick up an OTC drug but beyond that you need to seek professional medical advice and that is where the doctors and similarly professional fund managers (for wealth building through equity investments) come to play

Now let me share another interesting example. I have my cousins who is a doctor couple (Husband is a Radiologist and Wife is a General Practioner) and live in UK. When they came home with their 2 kids, we were having a causal dinner conversation and my cousin said that one of their kids fell ill and was taken to a doctor. I was shocked to hear that as both parents were doctors and why would the kid be taken to another doctor. Apparently the answer is as per UK medical Ethics you are not supposed to treat your blood relatives due to the emotional attachment as the decision making will suffer.

I can see similar thing happening when we do direct stock investing. Let’s say I invest in a stock now after all the so called research (News Papers, radio, TV, friends etc.) and the stock tanks by 10% in a week; typical human psychology is I can’t be wrong so let me buy some more to average the same (have personally done many like Reliance Power, Reliance Communications, DLF) or let me hold for further period as it’s just a short term trend and the fundamentals are very strong. How can Reliance group fail to deliver? – in the past 7 years this group has really failed to deliver when compared to the broader markets, whether it’s the Mukesh’s group or Anil’s group. But Mutual funds don’t get influenced by emotions and have solid processes in place. If the stock has not performed or if the fund manager realizes that he/she has entered a wrong stock they come out of it or cut their exposure. It is not that only when a stock does not perform do the MFs sell them, but they also have price targets and on achieving the same they sell it (and maybe buy at a later point in time for based on their research forecast).

 Agreed, MFs can’t give phenomenal returns like a concentrated portfolio of half a dozen stocks can give. But the question is ‘which half a dozen?” and how would we get to know them? I got this wisdom after 8 years of direct stock market investing and now reconciled to the fact that the only option to build long wealth for ordinary investors is through Mutual Funds.

Nowadays I tell people that you have a separate allocation of say 5 to 10% max if you want to really play in stock market directly for the thrill of it (don’t we pay huge money to take some theme park rides knowing very well that we would be tormented for a few minutes and its really scary!) which you won’t get in Mutual Funds. Atleast that way you can appease your ego and also ensure that you are building enough wealth by investing the rest through Mutual Funds!!!

<Blog #PenguWIN 1009 – Why PenguWIN is not in favour of Direct Equity Investment?>

Category: General, Stocks