One thing I got right - Bitcoins

I learnt that my post on Bitcoins attracted the maximum views. What further astonished me was the view were the highest when Bitcoin was at its peak. I guess anxious investors were seeking confirmation of their bias and mistake in investing in Bitcoin (at the peak) 

Missing the Bitcoin boom and bust was the biggest learning of the year. I am happy I got it right although it may have been just luck by chance. 

My learning from this episode has been more on ‘controlling my emotions’ and urge to make a ‘quick buck’. Investing is a long term process and the feeling that you can multiply you wealth manyfold in a year is a sign of immaturity. 

Lastly, inaction is also an action. It’s good to sit tight and control one’s emotions!!! 

Investing is a mind game  but control your heartbeats!!!

Asset Class

It’s been an ugly year for all asset classes and cash has emerged as the best asset to hold. Cash is King sums up 2018!!!

However during the year the assets have been volatile. This is reflected by the movement across FAANG, Oil, EMs, US bonds and currencies. And frankly no one can predict the future and hence it’s wasteful to spend time and effort crystal ball gazing. 

‘No one knows’ is the mantra one must believe in. I bet even the astrologers would have got things wrong. 

Having said that the better approach to investing is to assess the current environment and investment climate to understand where we currently stand. This has been an idea I have learnt from Howard Marks and seems to work well in all walks of life. I encourage you to read his memos where he succinctly explains his thought process and approach. 

Preparation is better than Prediction!!!

Reflections for 2018

2018 has been a year of learnings. Investors have learnt the most on banking and financial services sector. The PNB - Nirav Modi scam and the asset liability liquidity crunch in the NBFC sector were the highlights of the year.

The year for an investor teaches us to be vigilant about happenings (good, bad, ugly) in the market, sector and companies invested. Good turns to bad to ugly very quickly and without constant portfolio monitoring one cannot sleep peacefully. Obviously even with such review unfortunate events would happen which would force us to take tough decisions. Cutting losses and redeploying capital is much better than running one’s investment operations on the hope of better performance. 

Few things we can do to manage our portfolio:

1. Limit individual holdings to max 5-7% of portfolio value and not shying away from selling / adding to rebalance. 

2. Reviewing ones under performers to assess if a) have you got in at the right price b) has the fundamentals of the business changed impacting valuations. If you got either price or valuations wrong good to cash out. 

3. My all time favourites. Increase aggression by buying more into your winners.

Happy Investing for 2019!!!

Gold 2018

The human fascination for gold will never end. This statement would have been true. But if one looks at the historic prices of gold *2013-2017) its largely been flat to falling. The redemption from Gold ETF are gathering pace with record money outflows. Without fresh allocations and no price appreciation gold has run out of flavor for the investors. The only folks buying gold in tonnes is the Governments of China, Russia and Turkey.

The prices of gold are negatively correlated with the US dollars. As we have seen the USD depreciate with US Fed increasing rates the prices of gold have rallied.

What does all this pessimism mean for gold? An opportunity to keep it on ones radar.

With the world equity market in over-heated territory in addition to rising interest rates will mean, logically investors will run for a safe havens. Eyes wide open!!!

Contrarian Thinking

One of the important aspects that help investors outperform the crowd is ‘contrarian thinking’. All successful long term value investors have facets of this quality which have helped in significantly outperforming markets and crowds. If I have to explain this through the poison curve; we need to be in the extremes rather than in the majority.

Investing is a game of opportunities and probabilities and profits are a resultant of being right and avoiding big mistakes. 

What does contrarian thinking mean in the market context? The explanations are swimming against the tide or being greedy when others are fearful and vice-versa or making more money than the crowd and losing lesser than the crowd. All this feels like the right approach to investing but how can we all incorporate this in our investment approach. Being contrarian is more a mindset that one more cultivate and this can be stretched to life 'beyond investing'.

I recommend three simple approaches that will help you gain this mindset and observe when your thinking is following the crowd.

1. Avoid the noise
By noise I refer to 'distractions'. These come from multiple sources (TV Channels, Social Media, Research reports, watsapp groups among many others. These noises force us to react and over-trade when all one needs to do is keep calm and be on the lookout. Unfortunately we tend to spend too much time creating and spreading the noise which refrains us from thinking independently and focusing on the controllable (which are usually only few!).

2. Know the cycles
All companies follow a cycle of performance. These cycles are either driven by external forces (like commodity prices, weather, government policies etc) and company factors (like management changes, product launches, mergers & acquisitions, debt restructuring etc. All these factors cause resultant prices to move up or downwards and catching them at the 'right' time up or down could be beneficial.   

3. Ask yourself 'why' are your right or wrong
We all like to be correct with our perspectives, predictions and views. This coupled with confirmation bias results in us reading and following views that confirm our thinking. Effective thinking would be to ask why is it wrong and why we must not listen to our confirmation bias. Reading sell reports of stocks you own are an excellent way to start! 

In the investment business, avoiding the pitfalls or unforced errors is as important in a game of average players. Happy Investing !!!  

Bitcoins

As Howard Marks said, first the innovators followed by the imitators and finally the idiots. This though has stuck in me every time I evaluate an investment decision. It was the case for Bitcoin too. I first heard about investing in Bitcoin in early November 2017 when the price was rallying and had touched $7500. Not knowing much on what was the fair price I curiously asked question on the value. Got a bunch of funky answers by the millennial speculators and I resisted the temptation to add myself to the list.

By end of 2017, prices had doubled and and at some point touched $ 20000. I seriously felt I am missing something. 

But then experts everywhere were rubbishing this as the bubble of the century, comparing it with Tulip mania, governments started banning the exchanges and putting out caution statements, and my father-in-law asked me What is Bitcoin and how it works?...And then the prices started to crash, every expert and persons who missed the rally (including me) feeling vindicated. I must say it’s been one hell of a rally and crash...

Now where is the bottom? I do not know but it will be when no one is concerned about the price of Bitcoins and the world has forgotten about the latest financial innovation and caught on to the next ones....till then it will be volatile!!!

PS: I have purposely not gone into the merits of valuing Bitcoin since I still do not understand it completely and cannot imaging how it will be used. My low IQ could be blamed for this behaviour. 

India Budget 2018

The Union India Budget was announced on Feb 1, 2018, a good month ahead of its historic schedule.

As investors, long term capital gains tax was imposed which caused some ruffle and disappointment. I must say the Rs 1 lac relief to the small investors was a welcome respite. 

Investors over a period of time will adjust to this new normal with a higher risk return ask to compensate for taxes. I personally believe taxes are part of life and it does not change the long term opportunity and potential of the Indian economy and promising companies. 

Having said that, overall valuations are remarkably higher than one can stomach and corrections would be healthy to keep everyone on their toes and accept volatility and risks as part of equity investments. I feel this has been forgotten due to the stellar returns of the past year. 

So what next from here? It’s going to be a bumpy ride full of volatility. This will indeed give some good bargain opportunities to the patient, curious and observant investors. 

Happy investing!!!

Portfolio strategies

The UP elections 2017 have given a formidable mandate to the Modi's NDA Govt. Predictions have also been made on this momentum continuing on to the 2019 general assembly elections paving the way for a stretch of strong government focusing on execution, creating jobs and improving the quality of life in the country.

The euphoria of the elections were carried to the stock markets with 5+% moves and BSE SENSEX making an all time high. I do believe this is just the tip of the iceberg and start of a long term bull cycle for India.

However, as an investor I would like to have some stock caps to ensure I manage overall portfolio risk exposures.

An important risk management process I follow is; No stock in the portfolio has a weight-age of over 5%. (Depending on ones risk-appetite one may keep this between 5-20%, but not over 20%)

Now why is this important? Risk management would mean ensuring your portfolio is well balanced to prevent any downside portfolio risks. This just ensures when there are bad days (and there will always be) your diversified stock holdings with capped risk exposures protect your overall downside risk and allow you to sleep peacefully.

Another more structural portfolio approach is to have a clear weight-age between large, mid and small caps. I follow a 30-40-30 allocation strategy.

This strategy does force me to sell companies I truly love and believe in, but it gives me a good nights sleep!

Economic Moats

My learning for this weekend is based on the book 'Little book that builds wealth' by Pat Dorsey.

The book is all about identifying economic moats which are companies which have a competitive advantage in the market they operate, protected from competition and ability to earn more money for a long time.

Economic moats can be broken down into three categories
1. Intangibles either in the form of brand, patent, technology, regulatory environment etc
2. Network effects through multiplying customers through ones reach in manufacturing, distribution and reach.
3. Customer switching costs which ensures hanging on to the customer giving it pricing power.
4 Cost advantages from process, location, scale or access to a unique market.

A caveat is one of the above characteristics with a reasonable valuation and you have found an economic moat...Let's find a few!

Soft skills for a successful investor

A few basic skills one needs to be a successful investor:

1. Patience to work through mountains of financial informations and invest & hold on to what you truly believe. 

2. Discipline is following a consistent and hard working approach coupled with a diligent investment ethic. 

3. Perseverance would be having an independent approach and not shying to stay away from the crowd. 

All of this starts with knowledge of once investment operation and humility and gratitude for the results achieved.