Tag Archives: value investing

Expectations for 2012

As I sit down to write this note, the Sensex is down 24% for 2011. Equities have been the worst performing asset class and the reasons are clear and adequately reflected in a situation where market sentiment has been weak and investor interest quite indifferent.

The question often being asked is what went wrong in 2011? The economy was managed poorly, fiscal prudence was non-existent and reforms went into neutral gear. If that was not bad enough, corporate corruption was rampant. By any stretch, it was an awful year  for equity investors. In the midst of all, what can one expect from 2012?

To my mind, we are in a spot on both the economic  and political fronts. Our currency is dangerously above the Rs 52 levels against the dollar. The government cannot afford to indulge in populist welfare schemes when its purse is strapped. There is very little option but to bring in more reforms on the back of some serious pressure to disinvest. What has been most worrying is the political paralysis which needs to be addressed at the earliest. The hope is that economic sense will prevail after the crucial UP elections in 2012 and some economic legislations could then see the light of day.

One of the most talked about measures has been the GST. It is apparent that this will go through sooner than later. If the implementation of VAT had a positive effect on the GDP, it is clear that GST too will have a similar impact. Once it is implemented, the simplified tax structure will move businesses away from the parallel economy which, for long, has resulted in tax evasion.

In terms of the monetary policy, 2011 was the squeeze year when there was a shortage of liquidity and soaring interest rates. One anticipates that there will be less pressure on the system in 2012, which will infuse liquidity back in the system. This process may take time and the benefits will slowly be felt.

For now, the stock market could witness another rough ride accompanied by irrationality as well. Investors may miss the positives and their decision will be backed more by fear and less by logic. The way I see it, what has gone past in 2011 will ready us for a better 2012.

Happy investing during 2012!

ithoughtwealth

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.

The genesis of ithought

Hi , I invest in stocks . I study businesses and scout around for good ones to put my money on’. The moment I am introduced I can see different reactions in people. Somehow, the stock market has this unique ability to make people reactive. In 1990, when I chose to become an investor , the reactions were strong.

What ? is that all you do ? Isnt that gambling ?. Those were times when we werent even familiar with business research. So, investment research was a far cry. I hated explaining and would simply smile at their judgement. I would rarely be let off so easily. Free advice will be forthcoming about how this was not the place to be and how one should do something else. Things have changed a bit over the years as people understood that the stock markets may after all be just another place of work, albeit a risky place. The soaring indices have also sexed up the job.

But, let me tell you a truth. The stock market and the organized financial industry wasn’t exactly the right place to work and make a career. In fact, I decided that I would be a misfit if I formally worked in the industry even before I started out. There was a part of the financial world that i disliked intensely and steered clear of it. I steered clear of working for any firm, fund or financial company within the industry. The reasons were strong and i am going to put them bluntly. Integrity was and still is a serious issue in this business. It was all about selling, no matter what the outcome would be.

The financial services industry was all about misselling. They made you put your money in the wrong place just to earn a small commission out of it. They sold you products which you should not have been buying. They never tell you what you should have known about a product before buying it. They sold you a `hot-selling’ product at a time when you should be staying away from it. Investment bankers would price IPO’s so high knowing fully well that investors you stood to lose. To fulfil their interest, they mostly worked against your interest. This simply wasnt agreeable to me. To keep my integrity intact, I simply never worked for anyone. I remained an Investor.

I worked in this environ for 21 years by keeping away from the mob and doing my own thing. So I was independent and doing what I liked. Identifying good businesses and Investing kept me busy. I have no reason to complain. I always could make my choices and there was no room to compromise on anything Growth was personal and always in the private domain. But, something was missing in what I was doing. I needed to find out my next calling. It had to be in the public domain and should be an idea that would make a difference to a lot of people.

I started looking around. The answers came in my interactions with people I met. I was always hearing stories of how people lost money in the stock market. The stories changed with the times but their outcomes were much the same. I knew the problem. Importantly , i knew that this was solvable. So ,I thought the best thing to do was to build something that would help every investor who wants to be helped. So I chose to work in the much beaten domain of financial products like mutual funds, ULIPS etc. There was one thing i decided even before I started. I will Not sell anything. I would buy investments in a judicious way on behalf of anyone who wants them.

That was how ithought was born. I didnt start out with a business model. I went about building a Process. I knew that what made my investing deliver over the years was my investment process. So, I set about building an investment process for financial products. A small team and a dedicated office were luxuries that my earnings afforded me. Friends who knew me and my work thought that i had gone bonkers to stake my money with no clue how we will make it a financially viable. I knew the answers will be found and it was the least of our worries . We were obsessed with the process.The investment process should be knowledge- based and method driven. So we focussed on intensive research of companies and funds and then developed a method to deploy capital systematically and effectively.

The ithought way is the process that evolved from our rigorous work. While we have an intense approach to research and strategy , we chose to keep our business model simple. Clients need to know a few things. And, they need to know them for sure.

1. We will help investors plan.
2. We will take care of decision making and deployment of money.
3. We will review the investment periodically and identify opportunities.
4. We will monitor performance and measure it continuously.

The business model was to be, as we believed, simple – The client will pay a fixed annual fee to us for services rendered.

The ithought way is meant to be experienced to be understood. That is the only way to effectively judge a process which works sincerely and systematically to grow your wealth.

Happy investing!

Shyam Sekhar.
Ideator.

Stepping out of your comfort zone.

You have just finished doing 50 pushups and your trainer being ruthless orders another 50. Drenched in sweat and exhausted you don’t think you can do take one step further, leave alone do more push ups. But your trainer will not take “NO” for an answer. He keeps at it till you get back down on the floor. You manage 1, and then 5, and within a few minutes, you have done 20. Motivated, and feeling good about yourself, you go ahead and complete the 50. You rise with a new sense of confidence, one that you achieved because you stepped out of your comfort zone.

“Move out of your comfort zone. You can only grow if you are willing to feel awkward and uncomfortable when you try something new.” – Brian Tracy

Similarly, when it comes to money matters, we all have our familiar methods of operation. There are some who firmly believe having money tucked away in a bank is the best option, while there might be other who invest in stocks and shares. But, to see how far you can stretch your money, you need to take a chance, take some risk and give it a shot, to reach the goal. The first step will be difficult, but once you cross that and see the results, you will be much more willing to step out of your comfort zone and go further ahead.
For many of you, pushing yourselves into a new territory is second nature, for many it is a nagging thought hovering in their minds, but not put into practice yet.

The 5 golden points of Going beyond your comfort zone-
1. Be open to new ideas and suggestions.
2. Be willing to take risk.
3. Be patient.
4. Learn from mistakes and experiment with alternatives.
5. Have control over your decisions and never go overboard.

ithought – time to be sober & selective.

The influx of FII money into India doesnt seem like ebbing. The index is close to 6200 at the time of writing. As you read this , the markets may well be trading at an all time high. You must be wondering what you should do in the stock markets. If you sold out early , then the feeling of being left out must be troubling you no end. To the investor caught out of the markets , the IPO rush seems to be enticing. If you are still holding stocks , it is time to decide when to sell.

Decision making always works well when the macro environment and the investment sentiment is sized up properly. Let us try and run through the various factors that will drive the markets in the near term.
The markets will be completely fund flow driven in the near future. FII’s continue to invest in India and the rush of money is increasingly concentrated on index stocks. This is mainly on account of a trend among overseas investors to prefer India centric ETF’s ( exchange traded funds ). This has resulted in the valuations of the Index becoming a tad stretched and we do see PE multiples in excess of 25 in several index stocks. The overall index multiple is lower only on account of the under performance of RIL , our index bell weather stock. It is a matter of time before RIL also performs in line with the other stocks and one will see this happen in the near term. When the underperforming scrips in an Index also deliver and align with the rest of the Index, the overall PE of the index will hit all time highs. At that level , i expect money to again start chasing value in mid caps and in the oncoming IPO’s. Their valuations will need close scrutiny and considered evaluation on a case to case basis.

The timing of several large IPO’s during the festive season clearly indicates that we are going to see strong participation in them. Most of those left out of this boom will seek out the IPO’s to get back into the markets. Clearly sentiment will favour IPO. But, i will advice caution and selectivity in choosing issues. Valuations of IPO’s seem stretched and issue pricing already factors in good performance by the issuing companies. The prices discount FY 12 earnings at healthy multiples. Therefore , it is imperative for the investor to be selective while investing in IPO’s. It certainly is time to be very cautious.

Mid caps continue to perform well and business fundamentals are robust in several sectors like auto ancillaries, engineering , consumer durables etc. But, one should appreciate that in several midcaps the valuations are quite steep and already factor in good performance. Therefore , one must book profits where the valuations have run way ahead of earnings. In mid caps which are trading at multiples in excess of 20, it maybe a safe strategy to sell and go into cash.

Overall , you must now be building your cash chest . Selectivity is critical in choosing new investment ideas. The liquidity driven rise of the market will ultimately turn when flows slow down or when the inflows do not match the capital requirement of the issuing companies. I believe that the never ending appetite of Indian companies to raise money will ultimately lead to a correction. The money that FII’s are putting in will get quickly absorbed and any reversal of FII flows will ultimately lead to a sharp crash in Indian stock markets. Clearly, sobriety is the need of the hour.

A case for passive investing.

 

I have been an investor for 20 years. My first few years were about active trading and dynamic churn.I believed that i could always find a better stock than what i was holding. There was no harm in selling the  stocks which had significantly appreciated. The world was always full of opportunities. I always sold a stock which doubled or trebled. After trebling my money, i never held onto a stock.My portfolio kept changing very two or three years. It looked very different after very four years. The stocks were all new. Nothing remained longer than four years.

Over the  two decades , i find that some of the scrips that i sold have done better than the ones that i replaced them with. The aggregate picture is still a strong and satisfactory performance. But , one still cant help wondering what all this activity and action was all about ?

If the first few stocks I bought were simply  held on and not churned , i will still have returned as much as i did . In some specific scrips , i would have hit the jackpot. Which made  me wonder if i had been busy all these years for the sake of being busy.

The past three years have been relatively passive. I have held onto some ideas despite the implicit short term risks of erosion in valuations. Braving out these erosions has not been easy. But, the outcome has been quite satisfactory. That is putting it midly.

Going, forward I believe that one needs to think of investment ideas that will keep working for us for many years after we bet  our capital on them.

The lack of portfolio churn will surely help in  many ways.

1. There is the power of compounding working for you.

2. The incidence of taxes will not impact returns annually. This will further improve  the compounding impact on returns.

3. The fallacy of believing that one can  constantly find great investment ideas would be fairly dealt with. One would have reconciled with the simplest option of letting a good thing run.

4. DND ( do not disturb ) works best for a portfolio with intelligently chosen stocks. The fact that one will not change his portfolio will put pressure on us to make well thought out choices. You will choose your stocks intelligently.

But, one cant become a passive investor overnight. If you have always been an active investor, your timeframe in assessing companies would not be longer than a few quarters or at best a year. That clearly means that one’s investment approach needs to be altered drastically if the move from active investing to a passive mode should succeed.

The principal requirement for passive investing is a stock ideation approach where the long term potential of a company has to be carefully assessed.One must definitely think of how a company will perform over a longer timeframe. This requires that the business of the company must be stable and predictable. That means that one can only invest in businesses whose performance does not alter drastically over longer time frames.Obviously, that means that one cant buy cyclical businesses. Several industries are unsuited for passive investing and need to be given the go-by.

The move towards passive investing involves a holistic change in mindset. The way we think and make decisions would need to change. More importantly, the way we handle ourselves after implementing those decisions is critical for passive investing to work for us. One should learn to think hard and long  before investing. And  then, one must learn to take it easy.