Category Archives: Podcast

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.

Anchoring Bias

Podcast Transcript:

My stance on mid-cap funds has been bearish in a while. After the dream run between 2013 and 2017, I started to feel very uneasy about them from September 2017. I had been advising clients to invest in the very funds when the valuations were softer and definitely attractive. But once these valuations went behind levels I consider reasonable, I turned cautious.

Firstly, I was advising clients to avoid investing aggressively into mid-cap funds. Then, I advised them to gradually move their monies into safer parts of the market. The decisions seemed out of sync with what industry was telling customers. Every dip was being bought and it appeared the best thing to do. The mid-caps simply kept going higher after every fall. This made investors believe that every dip must be bought. Implicit was the belief that the stocks will only go higher.

The current capitulation in mid-caps is also being bought into based on the same belief. The fact that stocks went higher after every previous occasion is why people are hurrying to buy this dip. But, this time could well be different. The reading of investors could well be wrong. Here is why.

We are thinking that the high valuations of 2017 are the new normal. But this belief has little or no basis. It is merely a demand-driven phenomenon. Now, supply promises to be abundant in quality equity paper. This only means we are going to see scarcity go away. Finally. So, sustaining valuation in a supply driven market will turn to be a challenge.

Investors seem to be ignoring the headwinds ahead. The reason is simple. Anchoring is biasing them. It so happened that everyone who bought previous dips made good money. That is biasing investors heavily inducing them to aggressively buy every dip.

But we are not necessarily going to be right going forward. There could be a long period of lull when performance could be ordinary. It is doubtful if investors will show the required patience in mid-cap funds for such a long time. Negative returns or non-performance may even get punished. Redemptions cannot be ruled out. If, and when they happen, they could be a major spoiler. We are going to see smarter investors selling into rallies. This would mean those buying the dip and not selling the rally may suffer in the end.

Rising oil prices and interest rates can dampen earnings. This may well lead to contracting valuations. As valuations fall, it can well lead to a reverse spiral in stock prices.

This turns anchoring biases into a grave risk. We need to be aware of what can happen if the situation creates furthers fears in investors’ minds. And what if the fears refuse to go away?

I believe we now need to avoid anchoring biases. The times are different. It is important to be in sync with the emerging market context. Anchoring biases may now prove to be very costly.