Category Archives: Podcast

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.

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.

 

Setting Aim

 

 

Podcast Transcript:

I met a friend after long years. He had been around the world, worked in many countries, and seen the best and worst of the oil booms. In fact, he worked in that sector and was slowly getting ready to retire. We go a long way back. All the way back to college actually. He was always someone who set his sights high and I was the opposite really. I set my expectations modestly.

Here we were again. Setting sights on what return expectations ought to be. Little had changed. He felt that India is a great story in the making. I agreed completely with him. But, my view was that one needed to be very selective. Valuations weren’t really screaming buys. He vehemently disagreed. “JUST BUY without a bother” was his screaming comeback.

To me, it was never easy not to bother. When valuations weren’t in favour, I always stayed very choosy. And, when they were in favour, I would loosen my purse strings to buy aggressively. But, here was a friend ready to do the opposite. And I was supposed to advise him.

The difficult part of giving advise lies in SETTING AIM. An adviser needs to set aim correctly and ensure his investor buys into the targeted return. Often, there can be a mismatch in expectations. If one is not careful, this mismatch can be far wider than we imagine. Being on the same page will happen only if the expectations are set carefully by the advisor and accepted by the investor.

This is never easy. My experience has always been driven by mismatches. When I was optimistic, the investor was cynical. When I was cynical, the investor was brimming with confidence. While I may eventually end up being right, it does not help the cause of my investor. After all, he needs to buy into my belief at the right time.

This is possible only if my investor agrees to the aim I set for him. This BUY-IN is CRUCIAL.

My friend was brimming with investment confidence. I had to break down his confidence and then instil realism. Importantly, I could ill afford to upset his ego. After all, everybody who has seen the world thinks that they have a damn good worldview. But a market view is not the same as a worldview. Few people recognise that home truth. Overconfidence always comes at the most inopportune moment.

Experience teaches advisors more lessons than investors. My friend had never invested in India. But, here he was more confident than me. And I had the thankless task of talking his expectations down.

This is the irony. Advisors always spend more time setting expectations correctly than managing them. In fact, most of an advisor’s job lies in rightly setting aim. Much time and effort goes into it. When they know what to expect, it is important to maintain their expectations within the realm of realism.

Setting aim right and keeping an investor focused on his aim is the most important task before an advisor. I am now working on my friend. Telling him how investing in Indian equity is not the same as investing in cannabis stocks. The highs don’t last just as well.

 

So What Really Is Good Advice?

 

 

Podcast Transcript

 

The markets are hitting new highs. But my advisor says, “Think long term”. I asked him if we need to book some profits. He says  “Do nothing, just let the investments stay.”

Friends, keep bringing up these conversations more frequently these days.

The problem with giving advice in the best of times is that it may actually alter the financial well being of advisors. Actually, it can destroy the advisor’s incomes if what is good for you is actually done.

So there is a tendency to actually give you advice which is innately conflicted. The advisors interests and yours tend to be in deep conflict. Ironically, as your investments start to perform to their peak potential, this conflict only worsens.

The most simple thing to do is to sell and go away. But, the advisor won’t tell you to do that. Instead, he would most likely make you sit and watch your portfolio fall. The advise every advisor fails to give you at the right time is the very advise that every investor would have most badly needed.

Selling and going away is just one way. It is not the only way to do it. There are better and smarter alternatives. But before we judge the smarter options, let us understand what not selling out at the right time would mean to you and your advisor.

So what is the advise likely to turn out for both parties?

 

Here is my best case argument.

The best case verdict is Good for the Advisor. And not all that bad for you.

The worst case is obvious. Good for the advisor. Very bad for you.

 

If you invested on good advice and were early to the tech boom of  2000 or the infra boom of 2008, and the advisor simply failed to make you sell when your profits were swollen and peaking, you fell under the worst case scenario.

Valuations will always be the markers. The markers must drive decisions. When the markers warn you, you have got to sell.

The long-term can wait. The immediate response is to advise you to safety. Remember, the long-term has never been as good for tech or infra since 2000 or 2008. I am sensing a similar mood in two spaces in the current market. The marquee private banks and financials is an obvious one. The not so obvious space in the midcap space. The valuations have long been running above the long-term sell markers.

This is the only thing both advisors and investors must respect. MARKERS don’t lie,  especially valuation markers. I am convinced good advice must walk you out of extremely overvalued parts of the market. If not, you will be a spectator during the bad times.

And it is not as if there are no alternatives. There are plenty of alternatives good advice can offer. If an advisor says there is no alternative to owning extremely expensive equities, then it possibly is just one of the two – lethargy or ignorance. The worst case is, that it can be both. Surely as an investor, you can’t afford to let your future be affected by both.

This is a time when we need to call our investing to sensible action. Good advice needs to call those actions of you. If it is dormant or passive, you need to question whether that is actually good for you. If you fail to question such advice, you will sow the seed of serious regret.

Good advice is simple. Investments which are seen as worth holding now must be GOOD FOR YOU. GOOD FOR THE ADVISOR.

Sadly, a whole lot of such investments which looked so in 2014, actually don’t look good for you anymore. So you need to know what good advice is and actively seek it out. Mediocrity can hurt all the good work you did in the past few years.

Managing Conviction

 

Podcast Transcript

How we develop conviction matters. Everybody agrees that the quality of conviction will determine many things- how we translate conviction into investments, how we allocate money into an investment, and how we hold onto the investment.

 

Generating conviction, growing conviction, preserving conviction and translating conviction are four important elements in conviction management. It cannot be randomly generated. It has to originate in a certain way. The origin has to be simple and powerful. One must be able to explain in a few words about how one has generated it.

 

Then he must manage all the negatives that prevail around his conviction. This is very difficult especially if you are the kind who builds conviction before anyone else. Building conviction demands extraordinary simplicity and clarity of thought.  Importantly, one must organise his thoughts in a certain manner. When one’s thoughts are organised in a way that raises conviction, one tends to make it a holistic ally. Generation of conviction needs a state of mind where there is little or no anxiety, complete lack of peer pressure, and just a curious approach towards ideas. In that state one is able to take a clear, calm, and composed view of things. Then, he is able to grow his conviction freely.

 

Growing conviction is about validation. One must seek and address negatives. At times, negatives can be forcefully thrown at conviction. While actively seeking opinions, one must carefully find honest answers, deal with the facts and not be bothered about the opinion maker.

 

Preserving conviction is important as companies tend to sway away from our expectations when the macros shift rapidly. But, in the I long run, macros will stabilize and our original expectations will play out. During difficult times one must be able to preserve his original conviction. This needs to happen when all around, opinions constantly change rapidly.

 

Translating conviction is about ensuring that one is invested during the best phases when conviction plays out. Often people can only claim to have spotted multi-baggers. They would not have held onto them long enough. This defeats the very purpose of conviction. This has to be zealously avoided. One has to hold onto conviction till the best times arrive and play out. One needs to remember that consensus will be elusive till it is almost the time for you to sell. So, waiting for consensus to ripen is the best way to translate conviction to its full potential.

 

Managing conviction well means all four phases must be handled maturely, patiently, singularly and solidly. It is mostly about one’s self. That can at times be almost narcissistic. But, there is no escaping that. It will always be all about you. But with a little help from friends you can do better.

Managing conviction is deeply personal. But it is also innately process driven.

 

 

Dealing with Valuations

 

Podcast Transcript

When we find valuations at extremes, it usually is at the most difficult time. We struggle to decide how to deal with them. Mostly, amongst us, the risk averse find it convenient not to deal with them. We find it natural to do nothing. We avoid them. Our natural discomfort with difficult decisions stops us from approaching them. So, we simply stay away.

Alternately, if we are risk takers by nature, we may actually deal with them wrongly and end up hurting ourselves. Risk takers believe it is their will that brings outcomes. But that is completely dependent on the context. Most risk takers fail to acknowledge that when the going is good. We believe more in our risk taking that we ignore the context. But, the context is so important. And, how we deal with the context means everything to the outcome.

But the moment tends to overwhelm risks takers. We don’t want to be left out of a moment. So, we simply stay put in the game when we should have withdrawn to safety. We often fail to take a rational view of things.

Here, our understanding of risk and our acceptance of the limitations matter.

Firstly, risk taking is more of an art. It is a personality trait. It is an attitude. It is a way of life.

It rarely comes easily to anybody. So, in the world of investing, most of us seek the wrong kind of risks around the wrong hour. And, we then live through the excruciating pain of time. Seeking the right kind of risks at the right time requires a definitive personality.  It is the personality that causes one’s investing to be fashioned in a particular way.

So, when valuations rise to stratospheric levels, selling can happen only if we have the personality to do it. Or, if the decision is made by someone with that kind of personality for us. If everybody is into risk taking when it is the wrong hour, the situation will lead to an “All fall down”.

Strangely, we are in a market where indices are at all time high and most portfolios are down. The active risk takers are clearly badly down. This situation can lead us to an even more difficult place if we don’t deal smartly. A smart mind will not show excess in risk taking now. It may be a while before risk taking will work well again. An intelligent investor must seek the right risks, avoid the higher risks, and strive for return of capital.

Return on capital may anyway not be all that great in the coming months for risk seekers. Pragmatists would rather seek return of capital now. When valuations are not really in favour, one must deal with investments in a clinical, pragmatic, and decisive manner. The time to do it is now.

What Next?

Podcast Transcript:

Events are flowing thick and fast. Let us look at macros first.

A falling rupee. Rising oil. Spiking prospects of food prices. Rising inflation. Looming trade battles.

The setting reset has already started reflecting in stock prices.

A sharp cut in midcap stocks and indices reflects a clear reversal of investor optimism. This reversal is still fluid and nowhere near pessimism. There is a tentativeness in the air. Fence sitters stand watch, looking for sentiment to improve in midcaps. Contrarian buyers are thinning. Fewer people think that this situation will reverse soon. But, not too many think it will get much worse. The majority think valuations will stay this way.  That prediction stands delicately on thin ice.

The construction of benchmarks, the portfolio orientation to benchmarks, alignment of domestic flows to specific parts of the markets, and the risk aversion of professional managers are all likely to work against the dominant investing styles that worked in 2017-18.

Governance is sharply in focus right now. Auditors are resigning rather than signing books they are not comfortable validating. This trend is likely to gain further momentum. Evidently, more midcap, small caps, and microcaps are likely to be affected by this trend.

Meanwhile, the index seems to be stronger than the rest of the market. It is ironic that investors have failed to capture the emerging strength within even the index. Large cap funds are struggling against the very index they choose their stocks from. Thus, it seems like a nightmare to even beat the benchmarks.

Investment performance in times like this is going to be choppy.

All the while I talked about the returns beating benchmarks. Now, let us discuss the prospect of negative returns. This is a very uncomfortable thing to talk about. But, investing will grow and succeed only if we can face our mistakes with honesty. This concerns smaller companies, their valuations, and the downside that seems probable.

We saw small, mid, and micro caps beating the benchmark by miles. The outperformance was so strong that it almost became a de facto strategy for many investors to focus only on them. This approach has not played out well. The midcap and small cap indices have taken a beating in the past few months. We see further downside in these segments.

With sentiment seeing churn and with index showing a clear rebound, a rethink is now inevitable. As losses mount in the smaller companies, the flight to safety is going to be crowded with scarred and scared investors. Those who got in towards the end of the bull run are going to run out of this space. This could lead to much pain.

Staying away from midcaps has been a good strategy. It has worked very well for those who chose the difficult path. Losses have been avoided. Profits booked have been protected. Getting into them should be gradual, rehearsed and well thought through. There is no rush to take more risks in one’s portfolio. Clearly, one’s risk mosaic is needing a quick reset if it hasn’t gotten one yet.

Making SIPs Work

 

Podcast Transcript:

When markets reach all time  highs we are always told SIPs are the best way to invest in equity. Just starting an SIP is seems as a formula for success. Initially, this works extremely well. But, when markets peak out, the problems begin.

While all of know SIPs are a Great way to deploy money into equities, not all SIPs end up  being successful. The SIPs started in tech in 2000 and infra in 2007 never really did well. They failed to earn positive returns for years and actually may not have compounded enough to beat long term inflation. Investors who stopped them in sheer vexation never returned to markets for many years. What went wrong? Afterall, a good number of investors did well with SIPs during the same phase. What makes some SIPs tick?

While SIPs are good, choices are critical. Choosing in which part of he market your SIP must run is very critical. While it looks simple, it is not easy. The reason is the manner in which we arrive at our choices. We mostly choose the funds which show the highest returns over he recent past.  This often leads to our buying SIPs into funds when their peaking out and then continuing them when they lose sheen. But, does this happen only to us?

Strangely, around market peaks, most Indian investors choose to start SIPs only in the wrongly chosen funds. This Makes them easily disheartened.. Often, investors drop out midway never to return again.

What cause the idea of SIP To fail ? One needs to understand that while SIP is a healthy way to invest, choices must be extremely carefull. We should choose funds that will do well over very long periods of time.

At the time of choosing, you are likely to see several better performing funds. This will tempt you heavily to invest based on past performance. Often, funds chosen this way tend to fade away  conceding most performance gains easily. Often we see these SIPs even dipping into losses.  It is chooses funds which provide a sustainable long term performance. While looking at them we must choose with the intent of ensuring a long relationship and enduring faith.

Placing faith in your investment  is crucial. Placing  faith in the right choices  is critical.

Rigour and Regimen

 

Podcast Transcript:

We attribute investment success to many things. Most of these attributes tend to be external factors. The easy list of attributes tends to gravitate towards luck, timing and capital. But these are intangibles without clear patterns and to-do methods. Often, they  are best explained only in hindsight. But we need something we can do prospectively.  After all, our quest for wealth Is classic prospecting. We are going in search of something with no clear maps. There isn’t a GPS to wealth. Uncertainties galore and no two situations are the same, no two decisions are the same either.

 

So we battle along in a terrain that we can’t predict, against an enemy within, whose behaviour we need to control. We know we need to overcome our own faults and then stick to what we know for sure. But, that seems very simple to say and extremely difficult to practise. But there is no escaping this quest. After all, the journey must go on and we need to give it our best shot.

 

Once we accept that this needs to be done, then we are onto improving our results. So what can we do to overcome our faults and what should we stick to? How should we ensure we stick to doing the right things.

 

Firstly, we need to appreciate that sustained success at anything is so full of hard work, consistency, and persistence. The only way to achieve that is by following a regimen.

 

Check out the icons in any walk of life. There will be a regimen. Be if Buffett and Munger who sit around reading for hours, or Iconic sportsmen who train with unfailing dedication to keep fit, or musicians who do hours Riyaz every morning. The most unmistakable element of lasting success is regimen.

 

I recall watching an iconic musician as a teenager. He would leave at a particular time early morning from his house to his studio. Within the studio, he followed a regimen. That he was in a hugely creative pursuit hardly mattered. He actually accomplished his need to be creative all the time by adopting a regimen. Over a thirty year period, he achieved more than anyone could have imagined. But the importance of regimen almost went unnoticed by everybody. His peers and professional ecosystem found it very uncomfortable to adapt to his regimen. They found him too rigid.

 

What made them so uncomfortable? That brings us to what makes regimens work. Regimens always work only because of their inbuilt rigour. Usually, there will be no compromises. Or, the compromises will be rare and reasoned. When you watch Federer or Nadal consistently best players half their age, you think they are just Superhuman. But that is not their winning secret. The secret is their rigour and regimen. It is sheer hard work for long years.  Rigueur and regimen are closely connected. Every little aspect of one’s life is connected to it. Often, when icons fail briefly, the comeback is always engineered on their platform of rigour and regimen.

 

Investing is a classic craft of this. Iconic investors use both consistently. They know how to use them in their own quest. Building on elements that are essential, consistently practising them, improving on critical aspects by persistently working on them, keeping networks active and working, and following a pace of life that is almost perfect.

 

This is how investors use rigour and regimen. Strangely, huge success almost always keeps a person tightly aligned to rigour and regimen. The more successful an investor becomes, his reliance on these tools rises even more. Breaking away from them often takes him away from his comfort zone into unknown terrain. This always leads to serious problems.

 

When the going gets tough for an investor, it is almost inevitable that his rigour and regimen get going. It keeps him ticking well and battling hard. Until bigger success is attained or bigger challenges are presented before him, rigour and regimen drive his success. Like trains run on rails, success can be kept on track with rigour and regimen.

At The Crossroads

Podcast Transcript:

When markets are overvalued, what should an investor do? Should we buy overvalued stocks which we really like? Or, should we stay in cash? Or, should we go where others don’t dare to go and invest? This was the dilemma of 2017-18.

This dilemma was not merely that of ordinary investors. Expert investors, professional fund managers, and portfolio managers have lived down this dilemma for the past year or so. During this phase, we have seen monies flowing fast into equities. This only made things worse for everybody. Logic demanded we should not do what we are not fully convinced about. But, if you were in the business of managing money, turning away money was simply not the done thing.

So, we saw the experts themselves enter the domain of identifying companies outside the proven stock universe.  This hunt for new blue chips became the hotbed of action. We saw more and more people coming out with ideas they believed were deserving blue chips. The race started to get even more racy as money continued to chase ideas. Private investors too began to start identifying themselves too closely with companies.

The business of investing turned more and more aggressive. Governance started to be given more license. The mutual funds started to join this party. Micro caps, Small-caps, and mid-caps became the only saleable flavours. A peculiar situation soon emerged where these new flavours sold at higher valuations than the index bellwethers.

Briefly, this situation seemed to be sustainable. As an investor, one could either learn to live with it or just stay away for a while. Or, go where others dared not to. This was hardly as simple as it sounds.

Advisors began to feel the very dilemma pinch their decision processes. The events of April and May 2018 have again triggered a search, rekindled anxieties, and opened up serious fears. For one thing, the trend has broken down. And, large caps have done better than emerging companies. There are clear indicators of changing trends in money flows, valuation perspectives, stock choices and performance expectations.

Clearly, the liquidity will not sustain for too long. In the absence of liquidity, the valuations look suspect. In such a scenario, only companies that do better than expectations and retain the respect of investors will be able to hold onto their valuations. The others may only break down.

This is the emerging scenario which advisors, fund managers, portfolio managers, HNIs, and retail investors are heading into.

What should one do?

Stay safe. Move to safety. Exit overvalued parts of the market. Focus on the more liquid parts of the equity universe. Don’t make the lack of liquidity your biggest portfolio risk.

This is my simple approach. To agree or disagree is a personal and professional choice.

But, there is no escaping this choice. It cant be put off anymore. One needs to stand up and be counted on any one side.

Staying outside this game and focusing on other asset classes may need to be done very carefully given the global interest rate risks and regulatory overhang on other asset classes.

So, equity remains a good bet. But not an easy one to make.