Category Archives: ithought

Validating Advice

Podcast Transcript

Every portfolio often needs validation. Our ideas are constructed in a particular context and we find that soon thereafter the market context changes dramatically.

My own experience from previous bull runs is what comes to mind. When we come out of a bull market, we tend to think our portfolio is strong given that we built it in good times. But, on the contrary, portfolios built in the best of times almost always carry serious weaknesses. The reasons are simple.

When valuations are very high our choices are not adequate. We tend to rush into decisions which later look very ordinary. Bull markets also tend to raise the tendency to imitate. And most importantly, decision-making speeds tend to trip the quality of our investment process.

Then, when we land in bear markets, we begin to regret what we did. Often, we think we could have done things very differently. Choices suddenly grow wider. We start seeing better opportunities.  And, we tend to have little or no money.

I recall that every bear market threw this challenge at me. But what is interesting is how I learnt to face that challenge. I would take a fresh look at my portfolio. And, I would seek peer validation. So, this let me draw up a fresh list of ideas. Induce fresh thinking and put together a new line up. This gave me the choice of changing my fortunes. I would get my thought process validated by a smarter peer before rushing into action. This helped to be sure that the remedial actions delivered.

If you are an investor in shares or mutual funds, this is a time when the market context is changing rapidly. Your portfolio constructed to an earlier context needs expert review and corrective action. Merely staying put with past decisions may not end well. You need to validate that you are doing the right thing.

A review with someone who can give an objective view can be greatly helpful. Choosing the right person to advise holds the key. My own learning is that this choice can make or break your investment performance.

A review needs to happen in competent hands. I strongly believe in that. I hope you reach out to your advisor and do the right thing quickly before it is too late.

If you don’t have a competent advisor, it is the time to find one.

Debt Note: A New Stance

Investment Strategy:

The RBI’s stance of calibrated tightening indicates that rate hikes are possible but not mandatory. As investors, it is important to capitalize on rising yields to structure a layered portfolio. The spread between the repo rate and the 10 Year Government Security is nearly 1.5%. This presents a compelling investment opportunity as it is normally 0.5% to 0.75%.


The Background:
The last two months have been eventful for financial markets. September witnessed tight liquidity conditions, the default from IL&FS, a new milestone in the NPA resolution process, new lows for the rupee, and much more. All these factors have made bond investors wary of the bond market. Recent volatility and correction of financials in equity markets has raised investor concerns across the board.

Defaults have risen from “asset-liability mismatches”. This is when companies borrow money for long-term projects using short-term instruments to reduce the cost of borrowing. The capacity for these assets to generate cash in the short-term is limited and could trigger defaults and destabilize the financial system.

The RBI Policy:
Market consensus indicated that the RBI would raise the repo rate by at least 0.25% in its October meeting. However, they left the repo rate unchanged and modified their stance from neutral to calibrated tightening. This surprised participants, since rate hike expectations were already factored into the bond prices.

Interest rates are not the only way the central bank can stabilize markets. To address illiquidity, the RBI conducted OMO purchases and reduced the SLR [Statutory Liquid Ratio]. Inadequate liquidity creates panic and reduces financial stability.

Recent inflation prints have been below the targeted 4%. However, rising oil prices, the upcoming festive season, and increased liquidity could push it up.

The Way Forward:
It is important to note that the rupee has not been as severely affected as its peers. Domestic macroeconomic indicators remain promising. Growth has exceeded forecasts and inflation is largely contained. The real concern is to protect this stability and build resilience towards global threats. By controlling inflation, remaining fiscally prudent, creating appropriate capital and liquidity buffers, and continuing structural reforms, economic resilience can be sustained. A stable economy attracts investments and promises growth.

Concentration Risks Return

The crack in US markets was long coming. Lest we forget, this is America’s longest bull run in history and their economic problems are far from over.

So, what caused this euphoria? Liquidity has been at the core of America’s economic problems and solutions. For a decade, America has been grappling with how to deal with the liquidity tiger and euphoria has become the unintended outcome.

Sadly, the cause of euphoria is ETF investing. This was a way of investing that was supposed to mitigate risks.  Instead, it seems to have done exactly the opposite. ETF investing created a massive concentration of capital in a basket of stocks. As money kept pouring in, a bubble was created. Now, it seems to be unravelling.

But, Indian markets had a reason of our own to correct. We had too much concentration of financials in our indices. This will need to be fixed and our markets will do so in the coming quarters. In the interim, some pain is inevitable.

We are back to learning basic lessons on concentration risks.

When Greed Bests Fear!

The stock markets capitulated this week. The fears were largely overdone. The sharp dip in OMCs clearly indicates the symptom. The markets are clearly gripped by the fear of loss. And, investors dump every stock where they fear further loss. And the very risk aversion they display is causing huge losses to investors.

The disconnect between decision making and value is stark. Large caps losing almost 30% in just two trading sessions is now becoming a regular feature. The most valuable index bellwether lost 12% in just two trading sessions. The cracks are widening and sentiment could well capitulate unless something calms nerves and eases the fears. Results of the better-performing companies can do their positive bit. But, even that may not last for too long.

Not everything is lost yet. Contrarians will definitely show up in this market. The coming weeks could well be their best outing. A year later, this phase will be part of folklore. But, standing out and counting on conviction is not going to be easy. The time when greed bests fear was never meant to be easy. The coming weeks will prove that for the umpteenth time.

Happy investing!

The Opportunity in Crisis


Podcast Transcript:

Clearly, our markets have walked into a crisis we could have avoided. It was in good measure… our own making.

Too much liquidity chasing stocks had made markets way too expensive. But, investors kept pouring money into SIPs. And the markets refused to correct despite FII’s selling through the year. The sharp spike in oil prices and the crisis in the financial sector spooked what seemed like a never-ending party. Within a week, the markets look to have lost all their resilience. From a time when nothing could spook our markets, we have swiftly transitioned to a point where no news is viewed positively by the markets. Sentiment has a way of swinging towards extremes very quickly. The current swing is not unusual. We tend to overdo our greed and fear alike. Now, it is the turn of fear to overplay itself.

Nobody talks of buying equities now when supply of good quality stocks at moderating valuations is rising. When we should be shopping for equities, investors are running scared. The sharp fall in financial stocks has greatly shaken up the index, and investor sentiment has been mauled. Public mood is despondent.

But is the situation so dark as the markets are making it out to be?

Probably not. While oil prices present a real risk to our macros, the situation is unlikely to prolong for too long. Trade deals and oil deals between US-China and US-Iran will probably give India much needed relief on the macro front.

But, it is difficult to predict when this uncertainty will end. So, there is no option but to wait. But waiting to undertake investment actions does not make sense.

A sharp fall in our markets presents a very attractive long-term buying opportunity. This opportunity must be selectively bought into. It is a good time to refocus investment portfolios towards the future. Deep contrarians can bet on the reversal of oil prices. Even risk averse investors can dip into defensive themes, which looks far more attractive now than a few weeks ago.

Mutual fund investors are in a bigger crisis than the equity investor. They had focused heavily on mid and small cap themes in 2017 & 2018. These are showing negative returns. Many investors are also wondering how to deal with their balanced funds which they wrongly bought to replace their fixed deposits.

A proper review of investments and a timely restructuring of portfolios is the need of the hour. Investors must now seek forward-looking advice. And, swift rejig may not work going forward. For instance, the financials theme may see rough days ahead. A new market leadership is in the making. An investor must clearly be forward-looking in his approach and be willing to walk out of mistakes. Given that most investors are fully invested now, fresh monies must be created within their portfolios itself. This can be done only by selling the weaker ideas and betting more on the stronger ones.

Crisis is always clearly an opportunity. Stocks get thrown away in a crisis. This makes it a good time to invest in mutual funds too. When more monies are invested during crisis hour, we give ourselves a better chance to leverage the opportunity. Crisis hour always tends to gradually reach their end. Then the market swiftly put the crisis behind and moves on.

A smart investor must use the crisis hour to buy cheap and then hold onto his investments for long periods of time. Buying into a crisis is the current opportunity. It clearly is too good to pass.


Reverse Mortgage Loans

What would you ideally need to retire? A steady flow of income, a sizable corpus, and a sense of financial security. Imagine you saved consistently but invested predominantly in real estate. Upon retirement, you would find that while you were still well off you might be strapped for cash. Today, young people aspire to own their own homes and buying a house is easier with higher disposable incomes and better access to home loans. So, rental income may not be as lucrative or reliable as it was before. Investments in property are capital intensive and they tend to skew asset allocation in their favour. While owning real estate imparts a sense of financial well-being it does not offer liquidity. But, financial independence is integral to a financial security. So, could a reverse mortgage be the solution for someone who is heavily invested in real estate?


What is a Reverse Mortgage?

Think of it as the opposite of a home loan. Under a reverse mortgage, you pledge your house to the bank, who in return offers to pay you in regular intervals over a period of time. The advantage of a reverse mortgage is that you and your spouse own the house through your lifetimes.

This means that you remain responsible for the upkeep, insurance, and taxes due on your property.

Depending on the payment structure you use, you may receive an inflow for a fixed term (Regular Reverse Mortgage Loan – RML) or throughout your lives (Reverse Mortgage Loan Enabled Annuity – RMLeA).

Reverse mortgages are typically offered only to senior citizens.


Structuring Income

Banks allow you to structure your payments regularly or as a lump sum. You can also do a combination of both through either a normal reverse mortgage loan (RML) or one that is converted to an annuity (RMLeA). It’s important to understand the features of each option.

RML: The RML offers payments for a fixed term. You would receive no income if you survive the term of the loan. The maximum term that RMLs offer is twenty years but it could also be lower depending on the bank. The payments made by the bank are linked with the principal borrowed. The income you earn from the bank under an RML is currently not taxable.

RMLeA: In the RMLeA, the bank transfers the loan payment to an insurance company who would purchase an annuity on your behalf. You would continue to receive annuity payments (pension) until your death. The income you earn from the annuity is taxable.

The Fine Print

For starters, the loan issued will not be equal to the value of the house. Banks issue a loan based on the LTV (loan to value) percent, and not the actual market value of the property. The LTV depends on various factors such as the location of the property, the borrower’s credit history, the bank’s policies, etc. The LTV normally ranges between 40 per cent to 60 per cent of the value of the house.

Additionally, RMLs have higher interest rates (11 per cent per annum currently) than housing loans (8.3 per cent-8.7 per cent). Since the title is never transferred to the bank, at the time of settlement, the tax liability will fall on to the legal heirs.

The RML can be settled in two ways. Either your legal heirs buy back the house by settling dues with the bank (principal and interest payment). In this case, they would be eligible for only one year of tax benefits (at present the maximum deduction is Rs. 1.5 Lakhs of principal and Rs. 2 Lakhs of interest) on the home loan payment. Or, the bank could sell the property. The legal heirs would be entitled to any profits but would be liable to pay capital gains on the sale. This is applicable to both RMLs and RMLeAs.

There are restrictions on what you could do with the lump sum that the bank pays you – for instance, you cannot invest in equities. Over and above this, you would have to pay a processing fee and there may be other associated charges.

Reverse mortgages are expensive financial products. They limit your investment options considerably and are tax inefficient. They could also be cumbersome for your legal heirs.


What Are Your Alternatives?

If you are keen on financial independence, you could liquidate your real estate assets and downsize to a smaller apartment. Contrary to popular belief, renting makes more financial sense than buying real estate. The problem with annuities is that you don’t have access to your entire capital. If you like the concept of a reverse mortgage, you could directly enter into an informal agreement with your children instead of using an intermediary like a bank. Financially speaking this might be a better solution for the family.


This article was also posted by SilverTalkies


The Legacy of Janet Yellen


Janet Yellen took over as Fed Chair in February 2014 at which point she had already been with the Fed for a decade. Although no new financial crises occurred during her term, the job at hand was no less tricky. Yellen inherited the responsibility of reversing the quantitative easing (QE) program shortly after her predecessor, Ben Bernanke announced to taper it.

To put it simply, the QE program was used to combat the 2008 financial crisis. It injected liquidity into markets by buying debt securities. Effectively, the supply of money increased, and the cost of borrowing fell rates to near zero levels. Low interest rates were meant to stimulate economic growth. However, they had associated costs. Firstly, surplus liquidity could trigger inflation. Next, citizens were earning less from their investments. Lastly, there was a risk of another asset bubble building up, leading to a new crisis.

During her term, Yellen employed a cautious, planned, and calculated approach. Her focus was on bringing unemployment down. She avoided rash interest rate hikes by understanding that surplus liquidity would not result in runaway inflation. Rate hikes were conducted in a phased manner and the economy was prepared for each one. There has been a certain finesse and sense of judgment to these decisions.

It is often believed that a longer tenure would allow central bankers to act in the long-term interests of the economy. Yet, in her single term, Janet Yellen has managed to bring down unemployment to a 17-year low, keep inflation below 2% and economic growth at 3%. This shows promise of continued progress. Her successor, Jerome Powell, is likely to follow a similar approach, even if he entered at the start of a market correction.



Infallible? Think again- ithought’s market wrap.

Investor perception often gives unmistakable hints of things to come. When most investors believe a particular asset class or investment simply do no wrong, it actually would go wrong. Consensus is often the worst tool to make decisions. This is because it takes too much time to reach a consensus and by the time it is reached, it simply would be too late. Let us now evaluate the present investor perception. The consensus view on investing can be summed up like this – investors think there can be no better time to buy home assets; they feel anytime is a good time to buy gold; on equity, investors are still to get over the bad memories of 2008. In fact, investors aren’t even ready to think of equities. When investors don’t even want to rationalize the merits of equity investing, they will be passing over a great opportunity. This makes us believe that equity maybe headed for much better times in 2013. As for the investor favorites – homes and gold, one is treading on thin ice. The risk – reward equation looks loaded against the investors.

 Investment aversion and objectivity are mutually exclusive.

Market turnarounds have a way of surprising you. First, it will appear that everything is wrong with the world of money. The economy will look hopeless. Your currency will look weak. Inflation will be uncontrollable. Interest rates will be close to their highs. Crude prices will be peaking. Headlines will be bleak. No news will be good news. The markets will look like crashing any moment. Then, suddenly, one of the variables will change dramatically. This leads to a chain of events where the other variables start to look up. Gradually, the fear element will leave each domain which it occupied. Crude, commodities, currency, inflation, interest rates and economic data will all sequentially look up. Suddenly, the headlines will change. The stock indices will look up. Money will keep coming into the markets fueling a sequence of positive events. By the time you realize it, the stock markets would have risen significantly. We have described this in a racy way. But, the events have their own way of playing out. One thing is true, every bull market is born out of an extremely pessimistic state. This one will be no different.

Hoard stocks. Unhoard capital from other assets.

Beating the markets. – The ithought way.

At beginning of the year, NIFTY was at 4636. Today it is at 5664, up by nearly 22%. During this period we helped people turn around their existing mutual fund portfolios. If the indices rule higher, there is no need to worry. We can always sell unproductive funds and release cash. This cash can be redeployed in quality funds when the markets fall. We did just that for our clients and brought quality to their investing. Next , we  systematically scaled up their books and they started outperforming the nifty. Opportunity lies in buying when the market is not expensive. Our expertise lies in identifying these opportunities.
Even today, there are funds that are not expensive. Yet, the markets could well correct in the near future. This would be another great opportunity for you to exit unproductive investments and build a productive book that will outperform the market in the upcoming Bull Run.
We have had only 3 Bull Runs since 1990. Missing an opportunity to invest for the upcoming Bull Run would leave us behind by many years. Opportunity has presented itself to us, and  we feel an urgent need to cease this opportunity now.  Even starting with small and regular investments in a disciplined manner will help you create a substantial amount over a long period of time.


I wrote to a close friend in the USA a decade ago that his savings must be in gold and not in dollars. He obviously didn’t like what i said. Mails flew across the Atlantic about how resident Indians did not understand the American way. Now, I am pleading with my friends in India not to buy gold now. I believe there are much more intelligent choices. I am sure this will also receive the same share of rants.

The question really is – Why do we have so much trouble making simple and intelligent choices?

The answer lies in only one thing. The fear of being left out.

So, everybody does what everybody else does. Society gets stereotyped.

Just like everybody has a gym subscription, attends music concerts, has celebrities recognizing them, wants the comfort that a lot of people know them, buy the same mobile phones, drive the same cars, stand outside the same restaurants waiting for their turn ( I really hate this one ), we do our investing too. Salvation is about not getting left out. So, we crowd everywhere and crowd around everything to feel that we belong. The overcrowding itself will ultimately make us feel that we are only on the fringe. We really don’t belong. All our efforts actually meant little and made no difference to the outcome of our lives. And, this is the really tough one. We need to begin all over again and find another road to a new destination. Where do we go then?

There is the road less travelled. Actually there are several of them. You then try to choose one which takes you to your destination. This time you are spaced out, chilled out totally, not expecting too much, just letting things be and accepting what comes your way.

Taking this approach with material things will be disastrous. You must neither be a `Me-too’. Nor must you be a `Chalta Hai’. I have learnt this one lesson early and it helped. Actually, it made me.

But, I allowed myself to be left out to emerge later as one who called right. I still do. So, i believe in tomorrow’s world always and don’t expect today’s world to remain so. It is in this approach of envisioning the future that one can change his own fortunes. Today is all about tomorrow.

Are we on the same page?

Shyam Sekhar.

A note from Shyam sekhar, founder and ideator of ithought.