Festival Feelings

Our own experiences and understanding of Businesses is that its future can never be predicted. How else do you justify the extra adrenalin bullishness 3 years ago when Yahoo was offered $50 Billion and the then CEO Carol Bartz refused the offer expecting growth to propel into dizzier zones? And how is that today Yahoo may not even get $ 10 Billion offer? Would we have expected Dhirubhai Ambani, an uneducated Indian to create an industrial behemoth called Reliance Industries? Or would we have expected that his Wharton educated sons would pull these companies apart? Businesses are subject to unpredictable changes. From it then stems the truth why Benjamin Graham advocated investments at all times regularly, no matter what the season said. That is why extreme bullishness is a recipe for failure in capital market. And that is why we hear CEOs just say that something remarkable is about to happen... they do not know what exactly it is.

A thought that has been intriguing me is If a stock is valuable, why is someone selling? The one, who sees future earnings go up, buys. By the same reason the seller believes the future earnings are going down, all at the same time. Perception and computation of future earnings is what makes one buy or sell. Its the perception and Not the real earnings. Simply stated, when we speculate the risk is with us, when we postpone the buy decision, the risk is with someone else. Today we find many postponing investments, speculating a major event is likely to happen and cause correction to the markets. Like the CEO who does not know what the event is, but expects something world changing is around the corner. The average exposure of Indians to stock market is muted while in the USA it is about 35%. Hence the chances of Indian economy collapsing are limited. We can't say the same about stock prices however.

No wonder then that I heard Sonam Kapoor call Stocks as gambling and that she invests in real estate. What assures there is no bubble in real estate? I had the opportunity to hear an IIM Professor of Macro Ecnomics and I asked him whether real estate bubbles can be identified and prevented, and whether they have broader macroeconomics methods to know if housing bubble is building. He said that the Rental Demand should indicate and ideally move up along with the increase in real estate prices. If the real estate prices move up as an exception and rentals continue to be subdued, then that is an indication of a bubble forming. But you can never predict with certainty when it would burst. That explains how we become insightful and wiser after the event.

Let me conclude my narrating yet again an interesting thought coming back to stocks. It was in a travel that I was sitting beside a Chief Information Officer of an IT company. My favorite way to break ice is to talk about stock market and almost instantly I remember cutting ice and conversations grow. I was keen to learn from his experiences as I consider peer group learning invaluable. It is unbiased, nobody needs to leave an impression and can be open without feeling threatened. He was relating to how he learnt a few tips from his uncle. He was a horse racing enthusiast. In horse racing, the big money is on betting which horse will come first. The risk return ratio is skewed against us. The uncle would constantly bet on lower stakes with lower risk return, but over multiple races, he used make a decent sum. If we were to extend the same theme to stock markets, I would agree that it is possible to seek investments with limited upside while limiting downside considerably. With pragmatic expectation, it’s a science if not art, that one can practice to earn a decent return. Investors loose less money by overpaying good quality businesses than by purchasing low quality businesses at times favorable to them.

Here's wishing you all and your families a very happy Diwali. May this festival of lights bring in peace, joy and good luck for all of us.
Naresh

blog.learninvest.in

The Prediction Game

Its an interesting thought that you actually work only for 8 months in a year. The balance 4 months you work for the government, so it lets you earn for the first 8 months. I am talking about the taxes of 33% on your total income. That's how it literally translates. I am perfectly fine paying money as taxes but we need to have a different perspective when we look at it. Imagine the physical and mental stress we undergo for 4 months in a year and that's when you realize what a mighty fine the government imposes. It suddenly will make you remember the severity of life. 4 months of work time, 4 months of mental and agonizing moments you had to put up with at work. It could also mean missed 4 months of enjoyable time with parents and your loved ones, 4 months of holidaying etc. etc. Money by itself has little value. When you associate it with time value, it starts making sense. There are many things we could have missed out on, or looked forward to in the 'time' that lapsed. Money is not real. Money is what we make of it. I would like to unravel a mystery that I discovered recently. I was playing Monopoly, a board game with my son. If you have not played it yet, it is sought of a game where you can use game money to buy , sell, barter etc. like in real world. You start by have an imaginary amount of money and then you are complelled to take decisions (to buy, rent etc.) as the dice roll. I was eager to buy houses and estate so as to earn rent and multiply money. My son was busy buying parks and parking lots. I was trying to guide him on value of investing in real estate and security of rental income and how this could add on to his wealth. I was intrigued when the 8 year old told me he likes to buy parks so we could go out and spend time together. He bought parking lot so I could park easily in the busy street. He had no complex thoughts and valued the time we could spend together and how he could make my driving a better experience. This gave me a different perspective to life and investing. More money does not mean more happiness. Money is like a shoe, if it is bigger than your fit, you can stumble. If it is too tight, it hurts you. The right fit is a conscious decision and varies from every individual.

The investing brain fools us into thinking we have far more mastery about the future and are aware of it. It makes us believe we have a intuitive power to know something special about a stock. Thats why every analyst on business Channel necessarily has an opinion on which side markets will sway, what industries and sectors will do well next year. Why can't we say we don't have an opinion? Is it difficult to understand that we can't be right more than 50% of the times? When SKS Microfinance came up with an IPO it had 36 anchor investors at the upper-end of the price band at Rs 985 per share. It was inclusive of legendary investors like George Soros and Infosys founder NR Narayana Murthy. During the IPO, an analyst report quoted like this " SKS's core strength lies in effective risk management, governance, advanced technology, wide product portfolio, diversified sources of capital, strong pan-India distribution network, and lowest cost of credit to the poorest to, unlocking tremendous latent demand". There was none who could recognize the risk of government (ir-) regulations.

The company's shares were listed at 1040 and currently trades at 212 and Investors lost three-fourth of their investments in one year. since listing, the Andhra Pradesh government introduced a law to ban unfair debt collection practices, which impacted its loan recoveries and resulted in the company posting losses. Now this was totally unexpected. It is perfectly normal for every fund manager and investor to have not foreseen. Investing is an art for the moderate who is neither an optimist nor a pessimist. Investing should look boring and dull and that's when it delivers.

The story of SKS plays out every day in our lives, in different hues. That’s the way our brains have been wired. The only way one can win the prediction game is by refusing to play it.

Happy Investing,

Naresh

http://blog.learninvest.in/

The Prediction Game

Its an interesting thought that you actually work only for 8 months in a year. The balance 4 months you work for the government, so it lets you earn for the first 8 months. I am talking about the taxes of 33% on your total income. That's how it literally translates. I am perfectly fine paying money as taxes but we need to have a different perspective when we look at it. Imagine the physical and mental stress we undergo for 4 months in a year and that's when you realize what a mighty fine the government imposes. It suddenly will make you remember the severity of life. 4 months of work time, 4 months of mental and agonizing moments you had to put up with at work. It could also mean missed 4 months of enjoyable time with parents and your loved ones, 4 months of holidaying etc. etc. Money by itself has little value. When you associate it with time value, it starts making sense. There are many things we could have missed out on, or looked forward to in the 'time' that lapsed. Money is not real. Money is what we make of it. I would like to unravel a mystery that I discovered recently. I was playing Monopoly, a board game with my son. If you have not played it yet, it is sought of a game where you can use game money to buy , sell, barter etc. like in real world. You start by have an imaginary amount of money and then you are complelled to take decisions (to buy, rent etc.) as the dice roll. I was eager to buy houses and estate so as to earn rent and multiply money. My son was busy buying parks and parking lots. I was trying to guide him on value of investing in real estate and security of rental income and how this could add on to his wealth. I was intrigued when the 8 year old told me he likes to buy parks so we could go out and spend time together. He bought parking lot so I could park easily in the busy street. He had no complex thoughts and valued the time we could spend together and how he could make my driving a better experience. This gave me a different perspective to life and investing. More money does not mean more happiness. Money is like a shoe, if it is bigger than your fit, you can stumble. If it is too tight, it hurts you. The right fit is a conscious decision and varies from every individual.

The investing brain fools us into thinking we have far more mastery about the future and are aware of it. It makes us believe we have a intuitive power to know something special about a stock. Thats why every analyst on business Channel necessarily has an opinion on which side markets will sway, what industries and sectors will do well next year. Why can't we say we don't have an opinion? Is it difficult to understand that we can't be right more than 50% of the times? When SKS Microfinance came up with an IPO it had 36 anchor investors at the upper-end of the price band at Rs 985 per share. It was inclusive of legendary investors like George Soros and Infosys founder NR Narayana Murthy. During the IPO, an analyst report quoted like this " SKS's core strength lies in effective risk management, governance, advanced technology, wide product portfolio, diversified sources of capital, strong pan-India distribution network, and lowest cost of credit to the poorest to, unlocking tremendous latent demand". There was none who could recognize the risk of government (ir-) regulations.

The company's shares were listed at 1040 and currently trades at 212 and Investors lost three-fourth of their investments in one year. since listing, the Andhra Pradesh government introduced a law to ban unfair debt collection practices, which impacted its loan recoveries and resulted in the company posting losses. Now this was totally unexpected. It is perfectly normal for every fund manager and investor to have not foreseen. Investing is an art for the moderate who is neither an optimist nor a pessimist. Investing should look boring and dull and that's when it delivers.

The story of SKS plays out every day in our lives, in different hues. That’s the way our brains have been wired. The only way one can win the prediction game is by refusing to play it.

Happy Investing,

Naresh

http://blog.learninvest.in/