Recalibrate Now

There is something about how retail investors measure performance. First, they anchor performance to their own expectations. Secondly, they want their whole portfolio to do as well as the market’s best performing fund. Finally, they believe that their portfolio performance should be independent of the market’s. You will notice that all three reflect linearity of thought. In this calculus, risk and macros hardly find a place. Investors also tend to slight processes in their quest for performance. This usually leads to wrong expectations, behavioural asymmetry, and ordinary returns. Having the best advisor may still not help an investor if he does not show the right mindset and investment behaviour. Another common phenomenon is the calculation of fees and comparing its computing versus returns. As an equity investor, I never measured stock performance Vs management remuneration. What is important is how the business is run. Similarly, investors need to appreciate how their investment process is run. If one finds a mature, measured approach, it is best to leave the rest to the advisor. Often role play works to the detriment of portfolio performance. A typical example is “I will give you more money if you perform well for one year.” Most investors say this at a time when one should be aggressively investing. Little do people realise that when portfolio performance is exceptional, it maybe the time to recalibrate portfolios and not to pump them up in a hurry with more money. Markets rarely give time to investors to ponder over their own behaviour. When they do, like in the present, it will be every investor’s calling to utilise the window of opportunity. One year is too short a time in markets. You don’t need to be a wizard to know that.

You can be sure of an investment idea. But, you are never sure of the investment horizon. 

Waiting for the Booster shot!

The rate hike in US finally happened. As an event that was long expected and widely speculated, it didn’t carry any surprise element. Now that the event is behind, markets will need to focus on how global investors reset their emerging market allocations for 2017. Usually, these allocations start showing in January’s FII flows. The global strategists from stock brokerages will start calling out how funds should plan their strategies. These will be the first pointer of emerging market fund flows. Domestic inflation is set to further fall in the coming weeks. This will be despite a hike in domestic fuel prices. The government will need to come up with a strong signal to revive retail sentiment and reboot consumption. This booster shot should be the next big trigger in the market. The demonetisation exercise will soon draw to a close and the action has now shifted to the tax and enforcement follow though. GST framework is also likely to be finalised in the coming weeks. Overall, December promises to spring a surprise or two in some late policy actions.

“In investing, what is comfortable is rarely profitable.” – Robert Arnott.

Awaiting Cash

The Math of Demonetisation is slowly emerging. Money mostly is finding its way to the bank. The banking system seems to be coming under the scanner for helping cash hoarders launder money. This is something we will hear more about. Consumption is slowing. Indirect Tax collections are likely to follow suit. Service tax will also see some impact. The parallel economy has been stalled. Money changing however seems to continue. But, the cash in people’s hands seems to be extremely tight. Clearly, this means cash meant for circulation among the ordinary citizens has found its way into hoarders’ hands. It is also in the hands of the exchange trade. Naturally this adversely affects normal economic activity. The Government needs to put enough cash to lubricate the economy. This is the immediate priority. What the markets will keenly watch is the Re-onetisation of the economy. This process must be handled much better than the Demonetisation process. If done correctly, it will change the optics and bring confidence back. The Government needs to be fighting bravely to pull things back. Direct tax collections will be another point of focus. While sentiment is driving the present, the future will be driven by hard numbers.

The investor’s tool kit – A cool head, Adequate liquidity  and A strong urge  to buy good stocks.

The Wait Continues

Demonetisation became the side story on Tuesday evening. The real story was reported in almost invisible columns in the dailies on Wednesday. What are we talking about? We are talking to the most deterrent tax law passed in our nation’s history. The Government amended the taxes related to concealed income. If one is found to have concealed his income, the regular tax laws and the discretionary penal powers in an officers hands no longer exist. Instead, we have a harsh tax structure that takes away 85% of the concealed income. In one stroke, the Government created the strongest disincentive to evade taxes. Why didn’t we make a big thing out of this historic move?

The answer lies in our ingrained cynicism about the system’s effectiveness. So we miss the woods for the trees. Bringing in such a law just before implementation of GST is a sign of what’s in store. The news could not get any worse for habitual tax evaders. And, it couldn’t get any better for tax compliant businesses. Clearly, we are en route to establishing the economic new-normal. The magnitude of even a great decision will still need to wait for its manifestation to show up.

“Greed, in the end, fails even the greedy.”- Cathryn Louis

Derive from December

The economy is set to slow down on the consumption side. Clearly, the financial results for the third quarter will be nothing to write home about. It is clear that the news flows will be bad in the coming weeks. The markets seem to be taking a stoic view of this unexpected turn. Domestic investors haven’t really reacted to the sudden shift in sentiment. FII’s have also reacted with limited selling. The markets are still waiting anxiously to see how FII behavior will impact global emerging markets. This  isn’t clear yet. The coming weeks will see the markets play this guessing game. A few players will move with greater conviction and take a stance on market direction. The majority among market players are not expected to do much. With market direction not clear, investor anxiety is centered around the currency. The dollar is hardening again. The imminent interest rate hike is creating a trend of flows away from global emerging markets back to the US markets. The lack of clarity on how a Trump regime will help the US economic performance improve is not helping matters. How rates, flows and growth play out in the US markets will determine global fund flows in 2017. For now, everybody is only clear on the rates. The exchange rate and policy direction of a Trump regime are still  subject of intense guessing. What we are seeing now is the habitual year end away trade from emerging markets. We will only know in January if this trend will reverse and the intensity of the trend reversal is still a matter of speculation. This leaves the field open for a few high conviction players who will take an early start and prepare their action list for 2017.  The battle will clearly belong to those who build conviction correctly and action on their conviction in a realistic manner. Keeping quiet and waiting is clearly not going to help much.

“An investor should always realize that some mistakes are going to be made.” – Philip Fisher