Event, Reality, Life

October 05, 2011 was an eventful day for Apple as they lost their iconic CEO, Steve Jobs.

Here is a reaction from one analyst:

“Without Jobs, Apple’s rivals now have some time to step up and majors such as Google, Samsung, Microsoft and Facebook will try to fill the gap,” 

Shinyoung Securities analyst Lee Seung-woo told Reuters.

It has been over 6 years and Apple has just gone from strength to strength more than doubling their revenue from USD 108 Bn for 2011 to USD 228 Bn last year and all the attempts from the competition like Samsung and google has done nothing to dent its brand image and positioning amongst its loyal customers.

A death is an event so is a wedding

However often the event becomes the objective and not the harbinger of hope or celebration of a life?

Why Does An Event Engulf our Existence?

Look at participants in a wedding, funeral, or a vacation trip.

It seems that the conduct of this wedding, funeral or trip will be the defining moments for them and there will be no tomorrow-“life will come to an end”

That’s why the end of an event exhausts the participants as they invest so much in the preparation that, by the end, they are left with disappointment of the end irrespective of how well the event went.

The event, the frenzy that it creates in the participants and the deep sense of happiness or disappointment that it leaves behind makes it seem like “THE END”.

The Endless Wait for the Event

We often meet those who are obsessed with an upcoming event.

In-fact there are concerted efforts made often by vested interests to make the audience believes that this is the most important event of their lives and life will never be the same again;

Lets’ look at some examples:

  • The most important budget ever;
  • State Elections-make or break for opposition and the ruling party;
  • If You don’t select X, Y or Z, India will lose everything and go back 60 years

This is what great marketing is all about, play up the emotions, get the audience hooked, get your result or make your money and plan another trip for the audience:

What’s the Actual Impact?

Lets’ look at some numbers with respect to 5-year impact on stock markets post an election:

Election Month & YearOn Election Day-Sensex ValueReturn Difference Between 1 Election to Next (%)Type of Govt
Oct-99 4444.560Coalition
May-044759.627.09%Coalition
May-0914625.25207.28%Coalition
May-1424217.2465.59%Single-party majority
Jan-1936256.2949.71%??

So generally speaking over a 5-year period the markets seem to go up rather than go down irrespective of the type of govt whether coalition or single-party.

In-fact a weak coalition during 2004-2009 produced the best stock market returns.

That’s shocking

Not really because markets represent businesses and businesses get impacted by policy of the govt. (only one of the many factors that impact them) along with competition; global business scenario, ease of funding, innovation etc., that go beyond who is sitting in Delhi.

So what should you do?

  • Don’t sit on the sidelines-whether you invest Lump-sum or stagger your investment, till the time your basic strategy is in place, in the long-run the market always rewards you
  • Stick to your Asset Allocation
  • Buy Quality businesses and invest with quality Fund Managers

Stay the course?


Dadar Local, Pavlov’s Dogs and Investors

Mumbai’s Dadar Local Train Station presents a unique picture of human behavior. Over 20% of the 7.5 Mn daily local train commuters originate from or come to Dadar everyday leading to amazing scenes during peak morning and evening hours. 

Dadar station is a transit point for commuters along western and central lines.

Commuters often joke about not having to move either boarding and alighting the train as the crowd pushes you ahead anyways. This is understandable given the massive crowds waiting to board or alight the train during peak hours.

The interesting observation however is what happens during non-peak hours when trains are relatively light in terms of traffic and can be boarded without pushing.

Well the scene is exactly the same-you still get pushed.

This amazing conditioning is a results of years of experience and hardships that commuters face at the station and the herd mentality that disables independent assessment of space inside the train and makes everyone push hard irrespective.

Pavlov’s Dog’s had developed a similar conditioning of rewards and punishment. They would salivate as soon as an assistant would enter the room in the expectation of food.

Salivation, Pavlov noted, is a reflexive process. It occurs automatically in response to a specific stimulus and is not under conscious control. However, Pavlov noted that the dogs would often begin salivating in the absence of food and smell. He quickly realized that this salivary response was not due to an automatic, physiological process but was a learned behavior.

We, the Investors

Imagining arbitrary linkages is a common human behavior. We all know of that one friend who would study in one specific location because of the belief that studying at that location helps get better grades.

Its’ illogical and arbitrary, however, that’s classic human behavior for you.

Newspaper headlines declaring phenomenal returns, a neighbor, a friend or a relative making a killing in the markets initiates the “salivation” conditioning.

This gives rise to irrational behavior.

Knowing fully well that high returns in previous short/medium-term period is actually a pre-cursor to lower near/mid-term future returns, investors still go ahead and take investing decisions losing their shirt in the bargain.

Of-course often investors rationalize by telling all and sundry that we are long-term investors and understood the risk very well before investing and don’t mind losing some money as we have confidence in the long-term story-so on and so forth.

“When markets correct, people are left feeling like Pavlov’s dogs; wondering why the meal which was promised did not follow”.

Exuberance and Panic

Often investors come all guns blazing ready to invest at the end of a terrific year or increasing allocation to the best performing asset-class and panic when the market goes down.

Often such investors’ stay invested hoping for recovery till its too late as they have lost a lot and then they not only exit just as market is readying to recover, but even are scared, for a long-time to return.

Psychologists describe this as fallout of the negative memories triggered by the brain during times of stress as also the inability to exit till original investment has been recovered.

Follow the Course

As the legendary investor John Bogle said “Follow the course”-The best way to protect against irrational exuberance and panic.

However for that to happen you got to have “THE COURSE”.

Taking help of a qualified advisor, creating a plan and staying on it through a well-thought out “asset-allocation” approach is key to investing success.

Following random tips, chasing best performance and returns, trying to time the markets on the other-hand are distractions that one needs to avoid

I Am My Own Risk


The now infamous article titled “The Death of Equities” from Business Week published August 13, 1979, made the following case for equities being a dead asset class:

  • 7 Million investors have defected from equities over the past decade;
  • Institutions have been given the go-ahead to shift more money from equity and debt to other asset classes;
  • Few corporations can find buyers for their stocks, forcing them to add debt to a point where balance sheets seem permanently out of whack. 
  • Further, this “death of equity” can no longer be seen as something a stock market rally—however strong—will check.
  • Only the elderly who have not understood the changes in the nation’s financial markets, or who are unable to adjust to them, are sticking with stocks.
  • Says Alan B. Coleman, dean of Southern Methodist University’s business school: “We have entered a new financial age. The old rules no longer apply.”

Not surprisingly the next 30 years post this article produced the biggest stock market rally with S&P 500 delivering a staggering 1225% return.

Investing is a hard Game

Given below are some Excerpts from an article by “microcapclub.com” titled “Ïnvesting is hard”

On June 30th  1997, Amazon.com was trading at a split adjusted $1.50 per share and was valued at $7000 Mn. That day the stock traded 228,900 shares in a range of $1.48-$1.59. I’m sure someone traded in and out of a great business that day, not knowing that the stock was about to up 1,000X.

Bernard Baruch once said. “Nobody ever lost money taking a profit”. I don’t know about that> Investing is hard.

On April 1st 1976, Steve Jobs, Steve Wozniak, and Ronald Wayne founded Apple. Wayne drew the first Apple logo, wrote the three men’s original partnership agreement, and wrote the Apple 1 manual. Jobs and Wozniak each owned 45% and Wayne 10%. Two weeks later, he sold his 10% interest for $800. This 10% interest would be worth $90 billion today. He was closer than anyone to the visionaries of Apple, and he still sold.

It doesn’t matter how close you are to a story. Investing is hard.

In 1963, American’s smoked so many cigarettes that it was equivalent to every adult in the United States smoking over half a pack a day. 43% of American adults were active smokers. By 2014, this number dropped to 18%. But the Altria stock is up 71,000%

Sometimes the facts mislead us. Investing is hard.

Issac Newton & South Sea

“Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price – and lost £20,000 (or more than $3 million in [2002-2003’s] money.

A prime example of how even the smartest of human being are not immune to “behavioural mistakes”.

What does all of the above tells us

Even though data tells us that markets always goes up in the long term, in the short to medium-term, it goes both up and down.

However the nature of markets is such that it could stay up and keep going up as well as stay down and keep going down longer than you can anticipate thereby creating depressing and exuberant emotions to drive decision-making

Behavior, Behavior, Behavior

  • The Mutual Fund inflows in Indian MF in January 2018 was INR 23,000 crores and the same number for December 2018 is 6600 crores;
  • A pre-dominant part of these inflows were going into mid and small cap funds.
  • What’s changed for the mid/small segment during this period is that the small cap index price to earnings ratios have changed from 93.38 in January, 2018 to 43.33 as on December 2018 while the same for mid-cap index has changed from 55.66 to 40.04.
  • In simple words while the risk-reward has improved dramatically the investments have gone down.
  • The same investors who were so eager to invest in January are now running away from the markets;
  • Just when the time was right, investors are not only investing less but are even redeeming significantly.

This just defies all logical explanation of investing principles but does tell us that “outcome orientation” and “performance chasing” defines investing behavior.

Just like the “death of Equities” article, anyone can build a pessimistic case; let me give you an example:

  • General elections are coming and what if the ruling party loses majority; doesn’t come back or comes in a coalition; it would not be good for the country;
  • Interest rates are too high;
  • There are no capital investments in the country;
  • Fiscal and current account deficit is unsustainable;

Etc., etc., etc.,

You see how easy as well as rationale sounding it is.

However what matters and the only thing that matters is your risk-reward and the expected performance of the businesses that you or your fund manager owns.

What can you do?

  • Develop simpler principles of investing decision making;
  • Reviewing the entire portfolio and performance rather than focusing only on the declining asset-class;
  • Review and question your investment thesis defined at the time of original investing periodically with your advisor to ensure you are on the right path;
  • Be patient and get your initial price right and then forget about mark-to-market losses till the your initial investment thesis remains valid.

Ultimately remember there are no right or wrong answers or outcomes; there are only right or wrong processes and your discipline in living with them.

Your process defines your behavior and that in turn will define your long-term outcomes

SHORT-TERM IS NOISE-IGNORE IT WHILE BEING COGNIZANT OF YOUR RISK

WHICH IS DEFINED BY YOUR OWN BEHAVIOR

Where is MY Asset Allocation?

Asset-Allocation-640x300

According to a famous Buddhist parable, Once upon a time, six blind men encountered an elephant for the first time. All of them went where the elephant was. Every one of them touched the elephant and came out with different version of what it was right from; it’s a pillar, rope, and branch of tree, hand fan, and wall to pipe.

They began to argue about the elephant and every one of them insisted that he was right.

A wise man was passing by and he saw this and on understanding the situation calmly explained to them, “All of you are right. The reason every one of you is telling it differently because each one of you touched the different part of the elephant. So, actually the elephant has all those features what you all said.”

Asset Allocation is a single body with different parts, unequal, some bigger than the other, some working better or playing a larger role than the other, however a single body nevertheless.

 

So Where is the Challenge

Let me explain:

Here is a look at Retail (as categorized by Association of Mutual Funds in India) asset allocation in India:

 

Asset Class Liquid Funds Gilt Debt-Oriented Equity + Balanced Total
AuM(INR Cr.) 12,436 800 71658 474,901 559,794
% Of Total Retail Assets 18%** 82%  

**Debt portion of balanced funds added here

Clearly there is no asset allocation through mutual funds unless everyone is too aggressive which doesn’t quite add up to the overall risk-averse profile of most Indians.

Of-course the defense would be that Indian investors invest majority assets conservatively into Bank Fixed deposits and bonds (INR 43 L Crores); insurance (INR 33.3 Lakh Crores); pension funds (INR 6 Lakh Crores); Cash (INR 17.5 Lakh Crores) Provident Fund (INR 14 Lakh Crores); Small Savings (INR 7.3 Lakh Crores).

Direct equities (INR 49 Lakh Crores including promoter stake);

If you add all of the above and compare with equities as a proportion of total, it’s still a ratio of 30:70 equity: debt.

Clearly there is a skew in favor of debt

So where is the Asset Allocation?

Equities on discounting promoter stakes is clearly an under-represented asset-classes and do not seem to have the influence to hurt investors’ wealth negatively;

Even if equities fall by 50% (a “Black Swan event) and the above mentioned non-equity asset class delivery even 5% return-investor portfolio would still be at 87%, which cannot be termed disastrous

Why are investors are not following Asset Allocation?

Advisors, Asset Managers, salesmen often are seen complaining about lack of discipline among investors towards their “Asset Allocation”

There is a planning, communication, and understanding gap between the various stakeholders

Now go back to the Elephant-remember it’s a body and that’s the way the advisor/investor needs to be able to see it and not as mere parts

Challenge however arises in the way equity investments happen in India; just take the case of mutual funds-40% of retail equity assets have life less than 12-months as on Sept-2018.

This period starts in 2017 when markets were booming and everyone had a sense of

“NOTHING CAN GO WRONG FROM HERE”; “THIS IS A COMPLETELY NEW ENVIRONMENT”;

As we all know-that’s the immediate moment when the seeds of “RISK” are sown;

These are the times when host of new investors come in and older ones are sold highly complex ideas to increase allocations.

Anything can give under such circumstances (a regulatory change-introduction of capital gains on equities; a big companies up/down returns etc.,) leading to risk-on environment and portfolio losses.

 

Do You Exercise only your Biceps?

Imagine if you only exercise one part o your body what would happen

It will look disproportionate; attract all the attention and if you don’t exercise for a day-will make you feel inadequate;

Great emphasis on one asset-class at the cost of others;

Looking at only the part and not the body

Will cause great grief if that one part doesn’t work out the way fantasized

 

What to Do?

Understand “RISK”-A common perception is that “High Risk Translates to High Returns”;

It doesn’t work that way, on the contrary-

“A high risk category is not worth it unless it justifies the risk through the returns”

This change of definition can help the investor and advisor do the right thinking before taking up any investment:

 

Look at your over-all portfolio and determine your Risk

Ideally share your entire portfolio with your advisor so that you continue get a wholesome advice and not piecemeal

Remember “RISK” can be managed only when known and unless your advisor has your entire history

Their advice will be like a Band-Aid

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You, Experts & Decisions

Andrew Cochrane, A revered figure in medicine had a momentous experience in 1956. His dermatologist suspected cancerous growth basis spots on his back, pathologist confirmed it as basal cell carcinoma which was promptly removed but and Andrew still went ahead to consult a specialist.

The specialist discovered a lump in his right armpit and advised removal. Surgery was booked and while the specialist informed Andrew at the end that he has done his best to remove the cancerous cells, the prognosis was grim and it seemed Andrew didn’t have much to live.

Alas the specialist was wrong, there was no cancer, as the pathologist confirmed after evaluating the tissue removed during surgery.

Andrew later said “I didn’t doubt the surgeon’s words”.

Unfortunately Andrew didn’t think, decided too quickly and by the time he realized his mistake it was too late.

This coupled with delay in changing your mind can aggravate the situation

Screen Shot 2018-11-27 at 5.15.18 PM

 

Typical Investor Decision-Making Cycle

Screen Shot 2018-11-27 at 5.05.04 PM

Investors find it easier to blame everyone and everything except for their own decision-making process.

Advisors driven by revenue-considerations often fail to challenge and end up supporting the outcome-oriented approach of the client failing to address the risk-reward of the decision.

How to Think?

 As Geoffery Caveney points:

Robert Shiller’s Cyclically Adjusted Price to Earnings (CAPE) ratio is now around the level of 1929, and it was only higher in the late 90s dot-com bubble.

Many commentators have pointed to this indicator recently as a danger sign for the stock market.

However, this is misleading right now because the CAPE ratio’s 10-year back period begins with the Great Recession in 2007.

If you had used this as an indicator you would have probably exited equities in early 2017, however that would also meant losing the fantastic returns of 2017 and first half 2018.

As pointed by Michael Batnick, if you look at a simple strategy of buying when index is below average CAPE ratio and sell when it’s above, this is how it turned out:

1926-55-same return as buy & hold-9.9%

1955-till today- Buy & Hold 10.2% Vs. Above/below CAPE-7.3%

What gave-while from 1926-55, the above strategy would have kept you invested 68% of the time from 1955-till today, it kept you invested only 25% of the time.

Clearly this explains a lot on “timing strategies” that a lot of investors use as a “rule of thumb”

Think Differently

This needs the investor to think very differently about their investment decision-making.

Here are some points to consider:

  • Use your past experience to understand the gaps in decision-making rather than a judgment call on the asset-classes;
  • Remember asset-classes work in cycles; so don’t congratulate yourself for a right decision or curse yourself for a wrong one; Perhaps the only thing that worked for you was catching one cycle while missing other one; Use that learning to understand cycles before taking a decision;
  • Bit of looking behind and a bit of crystal ball grazing;
  • Evaluate current risk-reward;
  • Understand the investment process of the investment under consideration;
  • Look at recent past outcomes to evaluate over-heating in the underlying portfolio to evaluate value consideration and whether the underlying is already pricing in future growth or not;
  • Ask your advisor for opportunities which have under-performed or neutral performed to understand future trends; Ask about the quality of the underlying;
  • Retain objectivity and be dispassionate

Most importantly – leave the baggage behind unless you know something that’s others don’t and that’s based on facts not feelings;

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