Tag Archives: finance

Time To Be Proactive

A relatively insignificant event triggered a massive scare in Indian financials on Friday. But, the story does not lie there. It lies in the institutional imperatives clashing with individual investor interests. When there is a problem, either of solvency, liquidity or of risks, it is the bigger investors who bail out first.

The US 64 crisis is a classic example of this behaviour. Retail investors had to wait for years to get their capital back. The loss of opportunity was significant, and strangely, retail investors bore it quietly. The current crisis in a leading infrastructure lender is many times bigger than the UTI crisis. Importantly, it comes with the same symptom of US 64. The lenders run a potential risk of getting stuck without receiving monies for an indefinite period. This is going to make corporates who have parked surplus with such lenders to rush for the exit gate.

It is fair to extend that the debt mutual funds are going to struggle to meet bulk redemptions in an already illiquid market. This was what we witnessed on Friday. While the focus was intensely on which paper got sold and for what reason, we have not got any whiff of which large investor caused this panic. That is where the challenge lies for all market participants and by extension the regulator, as well as the Finance Ministry. We need a strong proactive mechanism to provide liquidity in such situations.

Memory may be short, and most would have forgotten how the RBI and the Finance Ministry reacted to avert a crisis the last time this happened. But, we are going to need much stronger effort and heavy lifting from both in the near future. These are interesting times.

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.

 

 

Be Defensive, Stay Contrarian

The genesis for the current meltdown in Indian markets must be understood well and remembered for a long time to come. Interestingly, the indices held steady during this period.  So, what caused this downslide?

Broadly, the markets showed overwhelming faith in smaller companies over the index bellwethers between 2015 and 2017. The poor performance of index bellwethers like tech and pharma during this period contributed to the heavy concentration of investor interest in midcaps and small caps.

The belief that small and mid-cap companies will be insulated from macroeconomic challenges grew on the investor psyche between 2015 and 2017. During this phase, investors gradually moved away from large caps and raised their exposure to midcaps, small caps, and even microcaps. The heavy concentration of fund flows clearly raised returns and valuations in this phase to all-time highs. Valuations spiked up leading to a premium in midcap valuations over even the indices.  This unusual trend persisted for months together. Investors knew this was unusual. But, nobody was ready to go into cash.

It is under these circumstances that valuations in midcaps cracked. With economic macros like exchange rate, oil prices, and inflation turning the markets may be on the cusp of a new trend. This is a good time for contrarian, defensive investing.