It is amazing how day trading becomes ‘respectable’ in every bull market. I am surprised to see online trading ads on mainstream television channels now. These ads were earlier restricted to business news channels like CNBC and NDTV Profit.

There is this ad where the wife gives the husband his mobile phone, lunch box and where his mother puts tilak on his forehead. Finally what the husband does is go to his ‘office’. This is a room in his house where there is a computer with online trading facility.

There have always been compulsive traders and gamblers. However the activity of being glued to the screen and continuously buying or selling something is being given a new found respectability. I wonder what these professional traders will do if the markets were to be not so kind!

When two stock exchanges fight it should definitely be beneficial to the investors. However when the game is to snatch speculative volumes from each other it does not auger well for the investing community. The stock exchanges in the real sense are vehicles which promote the healthy functioning of the capital markets enabling the investor to participate in the capital formation process. However of lately with the advent of mutual funds and institutional investors the stock markets are turning in to glorified casinos with the pressure on the fund managers to perform in the short term. The investors have also no other choice but to play the markets on a short term basis and thus end up poorer. A good investor would have a long term horizon in mind and would access the markets a few times in a year. It is the traders and the speculators( which include institutions and mutual funds) which are the regulars in the market and the most important source of revenue to the stock exchanges, brokers, banks, government etc. It is assumed that the more time they are given , the more they will trade and more will be the transaction charges, taxes etc. The stock market business is very different. Experience shows that in bull markets even if the market remains open for two hours one can have phenomenal volumes while in bear markets even if the markets are opened for 24 hours one may not see any volumes. However the stock exchanges believe that keeping markets open for longer times the volumes will increase and the new bull market will start. They are all anchored to the crazy times of 2007 and  expecting that to repeat. Instead of thinking innovative ways to educate and service the genuine long term investors, they are facilitating speculation for the short term investor. It is only a question of time that we will see the markets open for 24 hours. We lack good quality leadership. This reminds me of the definition of “INSANITY” : Doing the same things over and over again and expecting different results.

Free Market Economy: You have two choices; Respect it or Abuse it.

For our Leaders, Regulators, Corporates, Investment Bankers and the investing intermediaries, this is a big wake up call. What is happening in our neighbourhood is a big eye opener. Grameenphone, Bangladesh’s biggest mobile firm with over 22 million subscribers is owned by Telenor a Norwegian company and Grameen Telecom a non-profit company founded by Muhammad Yunus a pioneer in microfinance.  On October 4th 2009,Grameenphone opened the largest initial public offering (IPO) in the history of Bangladesh aiming to raise 4.86 billion taka($70 Million) from Bangladeshi’s at home and abroad. Until 18^th October the issue was heavily oversubscribed.

No, there were no smart investment bankers who became selling agents.  Nor were there any advertisements creating a hype. Nor was there a grey market premium to attract subscriptions. There was an honest intention to help investors participate in the wealth building process.

True value was offered to the investors. Money was left on the table for the investors. The offer price values the company at only 3.3 times its 2008 earnings before interest, tax, depreciation and amortisation. This looks very cheap compared to Bharti Airtel, India’s biggest mobile phone company, which is valued, over 10 times its EBITDA. The idea was to make the first time shareholders very happy and build trust in the capital markets. The goal was to create an equity cult among the Bangladesh people.

Kudos to Muhammad Yunus the father of micro finance for another feather in his cap. He is a strong brand in Bangladesh and he could have used it to over price the IPO and made a huge profit, but he chose not to do so. Reputation was more important than money. A true, philanthropist, to have priced the offering so attractively priced so that every investor would benefit. This is what true leadership is about. I am sure this is going to change the way Bangladeshi’s invest and it will start a new wave of the equity cult.

India needs such leaders if we wish to achieve a double-digit growth and have a healthy and a vibrant capital market.

There are newspaper reports that a lot of real estate companies are readying themselves to tap the IPO market in view of the changed sentiment in the markets. When investors turn greedy we have companies/ investment bankers ready to capitalise on that greed. Now lets for a moment stay away from the market irrationality and think like a rational human being. Lets understand the nature of the real estate business rather than be carried away by the noise in the markets. Investing is all about buying a good sustainable business which is easy to understand and which is run by a credible management. Then comes the different characteristics of the business like, strong brand, distribution network, pricing power, moats around the business etc. Lets deal with the first aspect of the real estate business: Is it is easy to understand? This is where I disagree. It is an illusion if you believe that it is a business you understand. They possess land banks which are valued and reflected in the balance sheet. Does anybody know the real value of the land banks? I doubt. In our country it is a known fact that cash money changes in real estate deals, wether you are buying land or an appartment. In such a scenario can we truly assess the value of the land banks? Then what is the authencity of the balance sheet of the real estate company? Is it giving a true and a fair picture? As a value investor the balance sheet is the only document an investor can rely on. If that is misleading how does one know the real value of a real estate company? How are Investment Bankers able to value such companies? Corporate governance issue? In spite of this we have fund managers (qualified)of mutual funds making big investments in such real estate companies. This is reported in various newspapers thus adding credibility to the issues. This should not be the guiding post for genuine value investors as they got to understand that these mutual fund managers are investing other peoples money. What incentives are given to them is anybody’s guess.  So do not be carried away by the hype of these real estate companies IPO’s. The markets are hot and this is the best time to dump their stocks at ridiculous valuations on you. Never chase a fancy in the market as you always end up paying a fancy price. Investors need to understand that investing in real estate as an asset class is very different from investing in to a real estate company. It is this misconception that makes investors flock to real estate companies IPO’s.

The markets are showing signs of improvement and slowly the sentiment is changing from one of excessive fear to one of subdued optimism. However the stock markets are more governed by excesses be it bull market or a bear market. Investors need to be equanimous and not be carried away by the noise of the markets. Don’t be too guided by what you read in the papers and what you see on your favorite stock market television shows or listen to fund manager talk shows. You tend to make decisions based on the vividly displayed available information which is hammered on to you continuously. Here is the word of caution: do not be carried away by the current fads and fancies of the market. You are bound to get trapped. The markets are showing signs of revival: What does that mean? Investors are turning greedy and willing to pay any price for stocks. So, who is hunting for these small investors? Barbarians are waiting to cash out on the greed of these investors. They are ready with their Initial Public Offerings (IPO’s). You have already started hearing of plans to float IPO’s and more is yet to come. There seems to be race to get as much money from the markets before the party ends. Every time the theme changes in the markets. In the last three years we had the themes of Real Estate and Power collecting huge sums of money through the IPO route and leaving the investors nursing their losses. These themes were the fancies and investors chased them in the hope of making money. But the Barbarians were smarter than you. Remember one important lesson: Nobody can cheat you without your consent. So if you got cheated the fault was yours as you were greedy. Keep your greed under control and you will be the winner.  Take a current example. After the election results all of a sudden the Infrastructure stocks started going up and the Infrastructure Industry became a fancy. Most of the Mutual Funds were in the markets offering Infrastructure Fund Offerings within a week. They knew that the name Infrastructure being fancy investors would be too willing to part with their money in such Infrastructure Funds. So now what would be the next fancy in the markets? Not difficult to guess if you have your emotions under control and are able to see the greed of the barbarians. It’s going to be “Insurance”. With the government willing to open up the Insurance sector we will see a flood of IPO’s in the sector. Investors would do well not be carried away by this euphoria and think ten times before paying excessive prices for such IPO’s even if they happen to be from big multinational faceless organizations or from Indian business houses.

None of the IPO opportunities were offered to you last year. Why? Because you were too scared of investing in the markets and were much wiser with your money. You would not have paid any fancy price for such offerings. If you were not a fool to pay a fancy price they were not fools either to offer you the shares at such low prices.

I was talking recently with a couple who are our clients. The couple wanted to invest regularly for their children and were looking for alternatives. Since they were just starting off and the amounts were relatively sdirect equity investment was not very practical and hence I suggested Systematic Investment Plans in Mutual Funds. They were somewhat skeptical. They said that their experience with SIPs had not been too good.

Now there may be some subjectivity here because they (like most people) did not know the exact capital invested and the annualised returns that they had got. They only knew that the returns were “not very good”. It could be a case of wrong interpretation of returns, excessive expectations, bad choice of mutual fund schemes etc.

However it got me thinking. What if someone had invested in a SENSEX index fund on a SIP basis? What would have been the experience? I have taken SENSEX instead of NIFTY as it has a longer period for which to make calculations. I have ignored dividends as they would go towards asset management charges, entry loads etc.

The first chart indicates the terminal value if a SIP has been done for Rs. 10,000 every month starting in various months from 1979 to 1999 and ending 10 years later from 1989 to 2009. This would involve a capital investment of Rs. 1,200,000 (Twelve lacs) or 10,000 multiplied by 120 months.

The terminal values would range from Rs. 120 lacs to Rs. 10 lacs. At Rs. 10 lacs terminal value obviously there would be a loss since Rs. 12 lacs would have been invested.

The annualised yields from 10 year SIPs would range from +43% p.a. to -3.6% p.a.. Obviously a very large and unacceptable range for financial planning purposes. A long term investment horizon and a Systematic Investment Plan would not be a fail safe formula in many cases.

 I had a re-run of the investment performance assuming a time horizon of 20 years. The results here were more heartening.

The chart below indicates the terminal value if a SIP has been done for Rs. 10,000 every month starting in various months from 1979 to 1989 and ending 20 years later from 1999 to 2009. This would involve a capital investment of Rs. 2,400,000 (Twenty four lacs) or 10,000 multiplied by 240 months.

The terminal values would range from Rs. 252 lacs to Rs. 77 lacs. Even at Rs. 77 lacs terminal value obviously there is no loss since only Rs. 24 lacs have been invested.

The annualised yields from 20 year SIPs had a much more acceptable range from +20% p.a. to + 10.5% pa. A long term investment horizon of around 20 years and a Systematic Investment Plan would most likely not result in hardship for investors.

So what are the lessons from this exercise?

1. Long term as is normally understood is an underestimate. The Government classifies an investment more than a year as long term. The investment professionals sing virtues of having a long term investing horizon defined as a 3-5 years horizon. I would propose that an investment horizon of around 20 years would be truly long term!
2. Long term is in reality not very long. Considering the fact that a person joining employment at the age 25 and retiring at 60 spends 35 years waiting to grow a retirement corpus or the fact that a new born will go to college around 15 and join a business school at 20 or get married between 25 and 30, in our lives the goals that we want to achieve are sufficiently long for equity investments. 
3. While market timing does not make sense, valuing the market may be very important. If one were to avoid investing at times of bubble and actually reduce equity exposure and increase equity exposure in down markets, the results would be dramatically different.
4. Avoiding some perennial value destroying sectors would also improve the results dramatically. 

Points number 3 & 4 are subject matter for further calculations and a future post. Happy investing!

The ability of Mr. Market to contradict perception held by market participants, who themselves constitute it, continues to be a great mystery. Ever since the emergence of financial markets, this elusive trait of Mr. Market has continuously caught investors on the wrong foot and, in the process, cost them billions.

This has been made possible by the fact that crowd, which is much influenced by fear and greed, continues to make the same mistake again and again. Also, the fact that the brunt dealt by such blows to one generation is lost on the younger generation, does not help the cause.

As an investor, our goal is to try to ensure that we do not end up committing the same mistake. Following the advice of Santayana, who observed, ‘those who do not learn history are condemned to repeat it,’ let us reflect on what successful investors have done to deal with this problem.

Benjamin Graham answered it best when he said, ‘in the short run, stock market is a voting machines and in the long run, it is a weighing machine.’ There is much wisdom in this one stanza than in many a book on the subject of investing.

It is like you concede defeat to Mr. Market in the short run, yet emerge as a surprise winner in the long run. It requires a sound temperament to accomplish this task but it is well rewarded.

A natural consequence of this lesson is to not succumb to ‘timing the market’ syndrome and follow the ‘time in the market’ rule towards investing.

In a nutshell, ‘time in the market’ rule says that if you appreciate the fact that predicting market movements is not a rational course of action then it becomes much easier to stay invested for longer periods of time, which is the cornerstone on which wealth is created in the stock markets.

Any investor following this rule would have reaped the benefits of this rule immensely during the last few months as Mr. Market caught the investor community on the wrong foot once again. It will happen again but you need not worry much, if you can remain equanimous.

Let me end the write-up with Rothschild’s Law. The legend goes like this:

‘When asked if there was a technique for making money in the stock exchange, Nathan Rothschild said, ‘there certainly is. I never try to buy at the bottom and sell at the top.’