Market Update- 22/10/2018

The equity markets continue to show signs of weakness with the index well below it's 200 DMA. We know that 10,000 on the Nifty is an important support with the index testing this in Dec-17 as well as in March 18. It will be interesting to see if the markets test this support again this time around.

The momentum indicators are recovering from the over-sold territory. We can therefore infer that the corrections may not be as sharp as we've seen them the past month. 

The index PE (Sensex) is currently at 21.9. This is still slightly above the long term average of 18.5. While this still calls for caution we are generally more positive (in asset class weightage) on equity than we were these past months. We will increase our asset allocation if there are further downside corrections in the market.

The 10 year G-Sec continues to hover at around 8%. This is a long term resistance and the markets have been testing these levels for some time now. The long term average for the G-Sec is 7.5%. We therefore believe that yields are reasonably high at this point of time. It would be good to add to debt positions.

The USD:INR seems to have found some resistance at around 74. It seems to be settling around the 73 point at the moment. The support for the INR is at 70 (the previous resistance).

The international price for gold continues to hover at around $1200/oz. This reflects a lot of confidence in the global economy.

  

Book Recommendation- Being Mortal - Atul Gawande

Atul Gawande is an American surgeon and writer. He begins this book with a very interesting and important question- 'How long should we go on prolonging life?'. While the subject itself might sound morbid, Atul takes us through real life cases of patients with terminal illness and builds his case very positively and convincingly.

The main theme of his philosophy in tackling this important question is 'autonomy'. He defines autonomy as the ability of a person to live life as per his/her terms. Atul uses live research in support of his thesis. I'm just listing some of his findings (this is from memory and not comprehensive)-

1. We define 'living' as our ability to make choices (however trivial!). We generally prefer to increase our choices rather than reduce them. 

2. We make better decisions when we know and prepare for the worst outcome. More specifically we should not focus decisions only on the best outcome.

3. We need to look at probabilities before taking decisions. 

4. We also need to look at the 'outcomes' of these probabilities. Quite often we find that in the blind pursuit of saving 'life' we get in to outcomes where the patient might actually not have 'much of a life' after treatment.

I found this book very insightful and useful not just from a general life perspective but also in the way I approach Wealth Management and my interactions with my clients and colleagues (both seniors and juniors). I would recommend this book to anyone who's struggling with philosophical questions such as- "What is life?", "What does it mean to live?", "What does it mean to live life well?" and others.   

What to expect from your investments this year

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

― Warren Buffett

With that witty quote from the great man as the opening, let me go on to break-up where we expect asset classes to end up this year based on predominantly long term as well as some short term trends. Please note that this will be a slightly long read.

For most investors 2017 has been the year of equities. The major large-cap indices have been up close to 27% for the year. Several indices such as Infra/ Realty/ Small & Midcap have rallied even more. While we may all speculate as to what has been causing the rally (there is plenty of talk around GST/ Demonetization/ Reforms/ Bank Re-Cap/ Political Stability/ etc.) the data below will be quite revealing-

Year	FII Inflows Net	DII Inflows Net
2016-17	68685	37124
2017-18	12642	90834

*FII- Foreign Institutional Investors, DII- Domestic Institutional Investors

Source: BSE India

What we are witnessing is large-scale in-flows in to the equity markets from within the country. This is unprecedented and has left most experts stumped. The probable reasons for this could be-

1.      Recency Bias- Equities have delivered decent returns over the last few years (especially since 2014) thus emboldening investors.

2.      TINA (There Is No Alternative) Factor- Interest rates are low, Real Estate is in the doldrums after Demonetization and RERA and gold has simply gone nowhere for the last 3-4 years.

These domestic in-flows are a momentum by themselves and could spur the markets even higher. We generally see that these kind of momentum plays last till a major bad news event. We generally believe that this domestic momentum should play out till the 2019 General Elections at a more subdued pace than we have been used to over the past year.  

Donald Trump’s new tax policies will mean a lot of money (FII) will go back in to the American markets. This means there will be less money available for other markets (including India). This also suggests a slow-down in the pace of growth of the markets over the past year.

"In the short run, the market is a voting machine but in the long run it is a weighing machine"

 

-          Benjamin Graham

Broad market earnings have not kept up with the movement of the markets themselves. Therefore by traditional measure such as PE the markets are over-valued. This should correct. Keeping in mind the momentum in in-flows and also that markets are over-valued we expect that the markets may not correct substantially at this point. We also expect that returns will be lower than what we’ve experienced in the recent years. It will be safer to play large-caps and sectors that have been performing not-so-well recently (like IT or Pharma) to other sectors or strategies at this point of time.

The debt markets have been extremely volatile over the past year. Most debt portfolios would have delivered very low returns (average around 5.5%) over the past calendar year because of mark-to-market losses in the underlying. Inflation has been inching up. With a general election due in less than 18 months (where we expect the Govt to be more populist and accommodating) and also crude oil prices rising we expect interest rates could go up. This will have a negative impact on your debt portfolios. We have been lucky in that we have been collecting a lot of money in liquid over the past year. Liquid funds have been the best performing of the debt categories (and this has happened purely by accident!). We will have to be very careful in how we play the debt markets in the coming few months. We expect we will have to average out our short term positions over the next year. But yields will be better.

From a home-loan perspective there could be small drop from these rates currently. But, it is likely to remain there and thereabouts for the year. If inflation spikes we could see an upward revision in interest rates affecting your loans.

Real estate should continue to be subdued. There is a lot of regulatory back-log (in terms of RERA/ Land Registration etc) that will continue to adversely affect prices. It could be a decent time to pick-up a property from a safety perspective (as in prices might not come down substantially from these levels). We however don’t expect real estate as a broad asset class to do too well over the next few years. Buyers will have to be patient with their purchases. Of course with Real Estate a lot of the investment value and risk perspective has to be looked at from the particular property under consideration.

We expect the Indian rupee to depreciate over the year. We expect that it will touch close to 70 to the USD. This is on account of a strengthening dollar (Trump’s Tax Plan) and also higher inflation in India. NRI’s and ESOP holders (of US or other foreign shares) should keep this in mind while making investment decisions.

We expect that gold will do slightly better than it has done for the past few years domestically. Internationally we don’t expect too much movement in the price of Gold. This is because we expect that general international investor confidence to be high after the tax cuts.

We expect that oil will continue to move up and push close to $70-75 per barrel. Once it crosses $70 India’s current account deficit will be under pressure pushing up inflation and possibly interest rates.

Finally we will discuss a little about the rise of Bit Coin and crypto currencies in general.

“I could calculate the motions of the heavenly bodies, but not the madness of the people.”  

-         Sir Isaac Newton

This quote is attributed to Newton after he lost a lot of money in the South Sea Bubble. We have no doubt that crypto currencies are a bubble. How long this is going to last is anyone’s guess. We generally prefer to buy investments once they’re beaten down (when the risk premium is low!) to when the prices are inflated (when the risk premiums are high!). We would recommend that lay speculators avoid crypto currencies in general and leave it to the hands of experts.   

A Note on Our Present Investment Strategy

We have the equity markets touching record highs every day. The Sensex presently stands at close to 33,400 and the Nifty close to 10,400. What are we expecting going forward and how are the portfolios positioned?

The Sensex trail PE ratio currently stands at 25. The median trail PE for the Sensex is 19. By that yardstick the markets are over-valued. We now look at the historical 3 year returns for different PE Bands.

  

As mentioned above there is a possibility that markets can continue to go up even at the PE Ratios (the highest 3 year return for the band 24-26 is 12% annualized). However, the average 3 year return in the price band is -9%. Caution is therefore advised.

Accordingly we have, on all portfolios, reduced the allocation of equity. We continue to hold on to only a very small portion of equity in the portfolio. (This

Book Recommendation- Thinking Fast & Slow- Daniel Kahneman

Daniel Kahneman is a Nobel laureate in Economics. He is considered as one of the founding fathers of the field of Behavioural Economics (where psychology and economics intersect) which is today the leading research area within economics itself. 

Many specialised departments have been created in the leading universities of the world to build on the insights of Kahneman and others who've followed him. His work has had a tremendous impact on government, policy, education and even investing. 

In the book Thinking Fast & Slow Kahneman explores the concept that the brain uses two modes of thinking. I'll explain this briefly below. 

Can you multiply 7*3? Doing this in school repeatedly the answer "21" comes immediately to mind. Now try 38*24. Now this is a little harder. Requires us to pause a moment and apply ourselves. Most of us would require pen and paper to solve this.

The first question is an example of what Kahneman calls System 1 thinking. It is intuitive and comes to us almost effortlessly. The second question is an example of System 2 thinking. It requires some application.

Now, we mostly operate in the world using System 1. i.e we make some prior assumptions of the world and rely on our intuitions to help us take decisions. This system works for us "most of the time." However, in an increasingly complex world we find that sometimes relying on intuition can have disastrous consequences.

The brain is the organ that consumes the most energy in the body. The brain typically prefers System 1 responses. This is because it requires less effort (energy) and is probably an evolutionary measure to 'conserve energy'. When faced with a tough task (or a pressing question) we often experience a loss of ability to process other tasks. This is because our System 1 is sort of facing an over-load. It is not able to process the data that is being thrown at it. This is typically when we experience 'stress'. The brain doesn't like 'stress' and often resorts to quick impulsive decisions to "ease the load". 

Thoughtful questions require us to use System 2. System 2 doesn't operate when the mind considers it impertinent to arrive at a quick conclusion to a pressing problem. System 2 is the more logical side of the brain. We often need to de-clutter ourselves (our minds) in order to experience System 2. This is a useful insight.

This book is a wonderful read and I recommend it to anyone who is interested in "thinking about thinking".

Weekend Reading- The Man who Drowned

There is a story of a man who wanted to cross a river that had a depth of “four feet on average.” Feeling fairly confident about it he set about on his journey only to drown somewhere near the centre.

Beware of the ‘averages’!

In his brilliant little book- “How to Lie with Statistics”, Darell Huff introduces us to this particular concept and how the human mind gets lulled in to understanding the term ‘average’.

Think about it like this. Suppose you were building data on incomes of all your neighbours. If we took an average then it is possible that with some accuracy we could tell you what each person was earning. But what if one of your neighbours was Mukesh Ambani? Wouldn’t the average income number be way off the mark?

Finding exceptions in your Data Set

A sense of confirmation bias (covered earlier) and an inability to conceptualize a black swan (like having Mukesh Ambani as your neighbour) can create problems for us like the man who drowned. It is therefore imperative for us to:

1. Understand the sample set of data that we are reading and 

2. Actively look for exceptions to the rule.

How does this play out in your finances?

“Equity markets have returned 15% on average over the long-term.”

“Real-estate will beat inflation on average.”

“My salary will increase at 10% per year since that has been the past average.”

Can you see exceptions to all those cases? What can cause them? Are you at the crest or trough of your sample space? Each of these can have wide-leading ramifications to the way you ‘plan’.

Book Recommendation- The Black Swan- Nassim Nicholas Taleb

One of the most profound ideas of recent times that has become mainstay in academic and philosophical circles is the idea of the “Black Swan”. This term was made famous by Nassim Nicholas Taleb’s book “The Black Swan”. Published in 2007 this book became an immediate best seller (No 1 on the New York Times list).

Taleb dwells on the unpredictable and the uniquely human attribute of ‘rationalizing’ the past. The term is coined from the Latin expression- “rara avis in terris nigroque simillima cygno" ("a rare bird in the lands and very much like a black swan"). The ancients believed all swans had to be white. This was of course till the discovery of black swans in New Zealand. Thus a black swan is an event that everyone believes is impossible till it happens (Trump election anyone?).  

From a financial/ investing perspective the idea of the Black Swan is an important concept to imbibe in planning and portfolio construct. This is a highly entertaining and useful read.

https://www.amazon.in/Black-Swan-Impact-Highly-Improbable-ebook/dp/B002RI99IM?_encoding=UTF8&portal-device-attributes=desktop&tag=googinhydr18418-21 

Confirmation Bias

A doctor wanted to demonstrate the ill-effects of alcohol to a group of alcoholics. So he took a glass of whisky and placed a worm in it. After some time the worm dies. He turns to his audience and asks what they learnt from the experiment. Pat came the reply from one of the alcoholics- "It means if you drink alcohol you won't have any worms in your stomach." The above is an example of 'selective listening' or what we call 'confirmation bias'. We fit reality in to our beliefs and not vice-versa.

Philosophers and scientists have long-struggled with the confirmation bias. We have all come across the famous quote- "the eyes only see what the mind wants to." This sort of behaviour happens to all of us and is an example of a heuristic (short- cut) employed by the brain in order to take quick decisions. Take the case of the gambler who's on a losing streak. The evidence is clear that things are not going well for him and yet he will continue as he sees the streak of losses as a test of his 'belief' in his own skill.

One of the first steps to counter the bias is of course to be aware of it. When you want to buy that new car your mind will automatically start telling you about how fantastic the new car looks and what great mileage it gives and how your social-status improves and/or how you need to live life in the moment etc. When you want to buy a new stock you will see that the reports are great and the share price is high (or low!) and that the economy is about to take off due to GST etc. Similarly if you are going to buy a new property then your mind will tell you that real estate is beaten down (so a great time to buy!) or I need to have another house or this area will boom etc.
PS: note you will have opposite sentiments if you are looking to sell your car(look how old it has become), sell your stock (it has run too high) or sell your property (I needed a bigger house).

The second step is to actively seek dis-confirming evidence. Ask your self 'why I shouldn't do it?'. Why I shouldn't buy that car? (Not, 'why shouldn't I buy that car', small but important difference). Maybe my present car will run another few years? Maybe financially it isn't a very smart proposition? Maybe if I spent some money on the present car I could improve it's mileage etc? Maybe I could use the money better elsewhere? It's only when you look at both sides objectively will you be able to make a more informed decision.

I'll end this with a poem from Shannon L. Adler that further illustrates the concept-

Read it with sorrow and you will feel hate.
Read it with anger and you will feel vengeful.
Read it with paranoia and you will feel confusion.
Read it with empathy and you will feel compassion.
Read it with love and you will feel flattery.
Read it with hope and you will feel positive.
Read it with humor and you will feel joy.
Read it without bias and you will feel peace.
Do not read it at all and you will not feel a thing.

 

Market Update- 28/3/2017

The equity markets, Sensex and Nifty, are trading at close to their two year highs. The Sensex has moved from 25,807 (close on Dec 26^th) to 29,237.15 (today’s close) in a period of 3 months. The market absolute return over the last 3 months has been 12.3%. Demonetization has not really had too much of an effect on the economy. The market is all gung-ho with the GST bill expected to be passed shortly and the results of the UP elections indicating that the current government remains strong and popular. We evaluate to see if this rally is sustainable and what needs to be our strategy in the coming days and months. 

29,500 on the Sensex is an important long-term technical resistance. If the markets cross this and close above this for a sustained period we could be looking at historical highs for the markets. The indicators are all extremely bullish. However, this suggests that we should be cautious in ‘adding equity’ at this point of time.

 

Valuations wise we are way above long term average valuations as per trail Sensex and Nifty earnings. Earnings growth has not picked up. Accordingly we have pruned allocations to equity. This is contra to what most of the market seems to suggest but is in line with our investment philosophy of being fearful when others are greedy and being greedy when others are fearful. While GST will be a net positive for the economy, we believe that like with demonetization, there are bound to be implementation hic-cups which the market may not be pricing accurately.

ULIPs, PMS products and small & mid-cap funds have found favour with many clients and advisors basis last 3 year returns. Our call as always is to ask the investor to be cautious and do thorough research on ‘risk’ as well as return before selecting any product.

Debt generally seems to be out of favour in the market which is why we are more allocated in to the asset class at this point of time. Repeated policy flip flops by the RBI has sent the debt markets in to a tail spin. Despite this, we believe that debt will give decent returns over the next 3 years as interest rates should continue to drop. We are cautious here in indicating the time-frame. We are not suggesting a drop in the coming quarter or the next few quarters. But, the indications are that over the medium term interest rates will continue to fall considering the interest rate cycle and the general economic structure.

However, we are not going extremely bullish and putting all money in to long-duration. In fact we believe the ideal play is in short term income funds. And this is where most allocation has been made over the last few months.

‘Accrual funds’, the market term for credit opportunity funds, seem to have found favour in the market (as an alternate to the perceived volatility of income funds). Here, we will advise clients to be cautious as the Indian debt markets are not deep enough and with more money chasing higher yields there are bound to be compromises in portfolio quality. Even one default can adversely affect portfolio performance and clients will have to be very cautious. We are currently staying away from credit opportunity portfolios as we believe that over a 3 year time frame (when these investments become tax-effective) there is too much risk considering the economic scenario.

The Rupee has gained in strength over the last few months indicating strong inflows from FIIs. Technically the Rupee has reached a resistance of 65 to the dollar. It will be interesting to see if the Rupee could break this resistance. However, it is our belief that the Rupee will not sustain above this for too long and will trade in between 65-70 for some time.

Market Update- 22/11/2016- Trump, Demonetization et all

Equity markets have wiped out almost all of their gains of the last calendar year.  Most investors are wary of  market movements. We look at this as a positive development.

As we've been saying continuously in these updates for the past few months the markets have been over-valued compared to historical averages. This gave us enough reason to lower our over-all asset allocation towards equities in-spite of the run up of nearly 30% from their recent lows in February. We bought more in Feb but held on to the Asset Allocation based on our models.

We now view this current fall in markets as an opportunity to "invest more" in to equities. Accordingly we will be increasing (albeit slowly)  the over-all exposure to Equities in our portfolios.

For sometime now we have been telling our investors to come out of the Mid & Small Cap space. This is based on our models that have been telling us that the space has been 'red-hot'. Accordingly, client portfolio exposure to mid & small-caps have been pruned in order to reflect our views.

The Trump presidency will be viewed as a disruptive force in the World Economy. We will have to wait in order to understand if this will be a positive or negative effect for the economy. But there will be increased volatility that should offer opportunities to the patient and prepared investor.

Demonetisation has had a deflationary effect whenever it has been applied in economic history. There is good reason to expect similar effects on the Indian economy. This could mean that corporate profits will be less than expected in the next few quarters (which will give us an opportunity to add more to equities as sentiment will be depressed). It also implies that bond yields can be expected to fall. (Home loans rates will continue to drop.)

In the bond space we took a call on duration (i.e. we bought in to investments that were expected to do well in a falling interest rate scenario) around 3 years ago. (The 10 year G-Sec was at nearly 9% and it currently stands at 6.35%. This translates to an absolute gain of 13%). This has paid of well to our investors. We expect interest rates to fall further. However, 'the juice' has dried up a bit (considering historical averages) and we will be a little more cautious in adding to duration going forward. Accordingly allocation to duration strategies have been brought down in portfolios.

Investments in credit opportunity (accrual strategies) funds have increased in the last few years. We expect some volatility in the space on the account of all the economic upheaval. Investors need to remain cautious. We have been very select in the funds in which we invest.

The US Dollar can be expected to grow stronger in the short term. It has a long-term resistance of Rs 70/-. It can be expected to test this in the coming months. This is on account of pending increase in Federal Reserve rates and also also the slow-down in the Indian economy affecting the value of the Rupee.

Gold has seen a spike recently before settling again. Brent crude has come back down below $ 50/barrel. We expect both these to trade within a narrow range going forward. Inflation can therefore expected to remain stable.







 



  

Market Update- 11/9/2016

Writing financial reviews is, as I'm learning, fertile ground for upper management and even politics. You need to learn the art of tact. You need to 'seem to be taking' a position based on a lot of thought. When in actuality you  are ensuring that you are covering your backside with the option to swing which ever way the wind blows.

However, even the seasoned politician and manager knows that he should be prepared to be surprised. And so it is with the financial reviewer.

Technically, the charts are saying that we are testing a key resistance of around 29,000 on the Sensex. The markets have so far not been able to sustain themselves beyond this. The markets are sometimes like the kid on the basketball court trying to reach for the hoop. He's managed to reach the hoop a couple of times but it still isn't easy or natural. But, someday it will become easy and then it becomes the norm. Then the good coach that the market is will raise the hoop even higher and higher and so on.

Fundamentally, the markets are like Rajnikanth's 'Kabali'. It's managed to do business (i.e. deliver returns) while the verdict is still out on the quality of the content. There's a lot of noise regarding earnings growth of India Inc. Compared to base rates we know that the markets are over-valued presently. But FII money is driving the markets. And if the Japanese/ European guy can borrow money and get paid for it (read negative interest rates) and then invest in something that gives you 5-6 bucks for every 100 invested (read sensex companies) it still seems like a good deal. How long this party is going to last is anyone's guess.

Our decisions are on base rates (i.e. historical averages) and therefore we will be pruning our over-all allocation to equities. Within the equities space the small & midcap sectors have done phenomenally well. We've managed to capture the run-up but now we believe that the space is being over- valued. We are therefore reducing allocations to the small & midcap space in a phased manner.

In the debt space we have seen the Indian Bond slowly settle at around 7.1 (i.e. 10 year G-Sec). We've played the game rather well this far (notice the pat on the back and the 'this far' as we know markets have a tendency to surprise us). For the short-term we're seeing conflicting signals coming from the Govt (repo rates and inflation numbers) vs the markets (interest rates tending down). We will need to be cautious now if we're playing an interest rate fall.

Gold seems to be steady at $ 1300/oz. All we can say is that house-wives and central bankers seem to be happy with that. 

Central banks will be watching what the Fed (US) has to say on interest rates. We expect the dollar to strengthen steadily (against other currencies) as US economic data continues to improve. As NRI's we would advise 'not to wait' to transfer money back to India. The differential in interest rates and the currency should be negligible. Also, with a falling interest rate scenario in India it might be wiser to lock in the higher rates while they are available. We expect the Rupee to trade in the range between 65-70 dollars for the short term.

Crude oil (brent) seems to have bounced back from it's resistance of $50/barrel. We know the Arab Sheikhs are getting nervous (most budgets in Gulf countries are designed on $80/ barrel and therefore we will see significant fiscal deficits in these countries). This could also mean that China (which has been a significant importer of crude oil in the past few years) is slowing down. The commodity space looks to be in a bearish phase. This doesn't augur well for the over-all health of the global economy.

  

Market Update- 8/8/2016- (Post GST Bill)

The equity markets are edging towards their 52 week highs. The 1 year market graph looks almost like a perfect 'V' as the last time the markets were at these levels was exactly 1 year ago.

The markets have risen a mere 400 points since the passing of the much touted GST bill. Much hype & hoopla was created around the passage of the bill. This once again highlights the nature of markets to "price-in" information much before events have actually taken place. Very rarely is a 'delta' created on the basis of such plays.

The Sensex PE ratio is currently close to 21. This is above the median valuations of 19 for the Sensex (past 25 years data). While we will not add to our equity positions we will continue to hold on to our asset allocations. It is likely that, under the liquidity driven infusions from global central banks and the deflationary trends that persist in the global economy, the markets will have a new median going forward. However, we will need to be cautious in approaching this 'new-normal'.

Our debt-market strategy has played out wonderfully well . We've been envisaging a falling interest rate scenario for the last couple of years. The G-Sec has fallen from 9.1 seen in early 2014 to 7.2 (approx) today. Positions taken in 2014 have given us a significant 'delta'. The added tax benefits of holding debt mutual funds for 3 years will only enhance this 'delta' created. We continue to maintain that interest rates will fall. However, this fall will be gradual, just like what we witnessed for the last 3 years. Investors will have to be patient and treat every jump in rates as an opportunity to add to their 'duration positions'.

Brent crude seems to have settled around $50 to a barrel. Crude has bounced off it's lows of last year and is looking at a settling at these rates. This implies that global investor risk-appetite is improving. But, it also implies that global investor sentiment has changed quite significantly from the days in which crude used to trade at close to $ 80.

Gold also seems to have bounced of its lows and is now settling in a range of $ 1300-1400/oz. This could be an indication that liquidity infusion is finally making its way back in to gold again. However, commodity markets in general are yet to recover from their recent bear falls. We don't read too much in to the price of gold at this moment.



  

    

An Interesting Parable on How to Go About Creating Wealth

Just after college I had tried my hand at many different job profiles which included a brief interlude with 'Network Marketing'. Through it I was introduced to this wonderful story that has since formed a philosophy basis on which I advise my clients and also look at creating my own wealth. I thought I'd share the same with you.

A long time ago there were two boys who had just finished schooling and were ready to start work. They lived in a village and the head-man made them an offer of bringing buckets of water from the river located at some distance from the village. They had to fill all the tanks in the village and they'd be paid basis each bucket of water that they brought in.

The boys jumped at the opportunity and within a few days they were making good money. They spent it on clothes, accessories and parties and they were having a good time. Young, healthy and rich they made the most of this present moment success.

One day one of the boys ended up with a severe back spasm because of all the lifting. He was advised bed-rest for a month. Being good friends the other offered to take care of him and share his earnings with him. The sick boy was grateful for his friend's generosity but the long period of idleness got him thinking of what would happen if there were no friends. How long would or could he continue lifting buckets? And suddenly an idea sprouted in his head.

That same evening, when his friend returned, the boy put a proposal forward. "What if we build a pipeline from the river to the village?", he enquired with his friend. The friend scoffed at the idea. "That would take way too long and we'd be losing out on earning money today and spending it on good times now"- he said. This was true but the boy saw the potential in his idea and wanted to follow through with it. His friend didn't want to participate in the project and so once they boy got fit again he began spending only half his time in lifting buckets and the remaining he would use to work on the canal to lay the pipeline from the river.  

His friend in the meanwhile continued to lift the old quantity of buckets and so his earnings and consequently lifestyle were twice as good as the other boy's. He began to mock his friend publicly for chasing his elusive pipeline dream. It was a very long-term project and made much tougher because he had to work on it on his own. And initially it didn't look like anything great was going to come from these efforts. But, slowly and surely, the boy kept up his efforts in building his pipeline.

The friend continued to lift buckets and fill tanks. Though the pay was good, with the passing of time he could feel his hands and back getting sore with all the lifting. He didn't really look forward to each day's work. But he had no choice because if he didn't lift he wouldn't get paid. 

After a long time they day finally came when the boy's pipeline was ready. Water came gushing through the pipeline and filled all the tanks in the village. Not only was the boy a hero but he was also getting rich as he was getting paid for each bucket of water that was being filled. And this was only going to continue from now on forever without any efforts going forth. His friend was left flabbergasted. 

Building wealth is the process of building pipelines for yourself. This could be through Business, Real Estate, Gold, Equities or Debt. The means maybe different but the fundamental idea is to build pipelines. 

The deeper question for you dear reader is are you only lifting buckets or are you also building pipelines?

*Material from Burke Hedges- The Parable of the Pipeline

You can buy the book here- http://www.amazon.in/Parable-Pipeline-Ongoing-Residual-Economy/dp/189127922X

Market Update – On the Global Economic Scenario and the Indian Budget- 21/3/2016

The equity and debt markets have found some stability at the current levels. This is after the extreme bout of volatility witnessed in the months of January and February.

The general global macro consensus is that China is slowing down, along with Europe and Japan. The US is showing some sprouts of economic revival but the Fed cannot formulate policy in isolation and will have to keep tab of the global economic scenario.

After the global financial crisis of 2008-09, most governments in the world eased up on liquidity hoping that this would lead to a revival in the investment as well as consumer credit cycles. What happened instead is most of this money landed in the hands of speculators and financial firms chasing high-returns (on the quick).

China launched a massive fiscal expansion program in the wake of the Financial Crisis. This meant that credit was easy and the world’s largest exporter went in to over-drive in trying to corner the global market for goods and commodities. Other G20 countries also created conditions for a global credit glut thereby creating a massive rally in commodities (including Oil and Gold). Speculators also bought in to this frenzy creating an even larger commodity bubble.

What we are witnessing now is that the world has finally realized not enough people are buying these goods and commodities. So, even at super-low interest rates, many firms around the world are struggling to repay their debts because of ‘lack of demand’.    

This is difficult terrain for the global economy to navigate and we expect that in the absence of any other ideas monetary and fiscal expansion will continue. This means that debt will continue to remain cheap. However, this time money may not pour in to commodities. We believe that some of this money will make its way in to ‘emerging markets’.

In this context it is good the Government has decided to focus on macro-economic stability in this year’s budget. This allows us to attract global capital. We will (over-all) be beneficiaries of the commodity bear market. This has created room for India to be extremely attractive to foreign capital.

India’s primary concern is that we are capital starved. Coming on the back of a high interest rate regime as well as the huge burden of NPA’s, banks will find it difficult to bring down interest rates quickly. What we could instead witness is an expansion of the corporate debt market with significant foreign investor interest. The finance minister has already indicated that he would like to focus and develop India’s corporate bond market.  This should be an interesting space for investors in the coming years.

We also believe that there will be a slow-down (correction) in the domestic business environment. This is on account of both global and local factors. Credit (at present) is hard to come by for Indian businesses. The global slow-down will also affect demand. While over-all regulation and governance has improved, credit- growth is still low indicating a lack of business and consumer confidence. Government spending on infrastructure has been increased. We expect that it will take at least a few years for the ‘trickle-down’ effect of these initiatives to come to fruition.

A stable macro-economic environment also creates room for the RBI to reduce rates. This could create a major fillip for the economy. The debt markets will be the most interesting to watch and will give us good long-term asset allocation indicators.

The equity market is currently trading at 18.85 time trail. This is slightly higher than its long term averages. The market (Sensex) has rebounded quite smartly from 23,000 to about 25,000 today. For our long-term asset allocation we will continue to remain under-allocated to equities.

The 10 year G-Sec has had a tremendous rally post the budget (benefitting from the finance minister’s commitment to rein in the fiscal deficit and the over-all budget’s commitment to macro-economic stability). From 8% in February, yields are now close to 7.5%. Duration plays would have benefitted from the rise in prices of bonds. The macro-economic environment has also created conditions for a slight over-allocation to bonds. We recommend this strategy for our investors.

Market Update 2/2/2016

We've had a very volatile period in the equity markets between this post and the last. The markets are down nearly 6% in the interim.

Technically the Sensex broke an important psychological support of 25,000. The short-term momentum indicators are now in the neutral area. This makes it difficult to predict in the short-term ( In our last post we'd mentioned that the momentum indicators were neutral but we had a period of extreme volatility immediately post that. We admit to our mistake.)

Fundamentally, the markets look more attractive since the correction. The markets are now close to their long-term median valuations. However, we don't recommend a 'jump-in and buy' yet. We still recommend holding on to the previous asset allocation. If the markets correct quickly or, if the markets remain in this range for an extended period of time, then we will re-visit our allocation.

Corporate earnings remain weak and we could see some downward revisions in expected earnings. The budget will also be announced towards the end of the month. Both events will be watched closely.

The 10 year G-Sec is currently at 7.845. This is marginally above what it was in the last update. Hardening of yields would have had a negative effect on duration plays in portfolios. Inflation has inched up to  5.61. The RBI kept rates unchanged in its policy meet today. While duration is a technical play, we believe that the continuing gap between inflation and repo rates gives the RBI room to reduce rates.

Crude oil continues to remain weak. Gold has jumped slightly and crossed the $1100/oz.  This gives worrying signals about the global economy.         

Market Update 28/12/2015

Before we begin analyzing the markets we would like to make clear the following-

1. The attempt of these market updates will be to look at the market in easily identifiable quantitative terms that should help in bringing about more informed investment decision making.

2. These posts are not going to assign reasons for short terms trends. They would rather look at long term trends based on quantitative parameters and this writer's macro-analysis.

3. There will be a mix of technical (study of graph patterns) as well as fundamental analysis used in these studies.  

4. We will also look back at past market updates to 'check' on how we've been doing.

The markets are up slightly from the last post (dated 23/11/2015). For the month however the Sensex is down slightly by about 0.4%. The Sensex is currently at around 26,000. It came close to 25,000 in early December before bouncing back. 

The momentum indicators suggested a small bounce back in the last update. Right now the momentum indicators are in equilibrium suggesting that the market might have found some "short-term" stability. 25,000 on the Sensex is a clear technical 'support'. 26,300 seems to be a short-term resistance. The technicals suggest that the markets look 'range-bound' for the near term.

The Sensex trail PE ratio is at 19.8. This is down from 20.47 in last month's update. It is still, however, above our long-term average of 18.5. The Return on Equity (RoE) for Sensex companies is 15.58% and the Return on Capital Employed (RoCE) is 7.8%. The spread for RoCE vs the 10 year G-Sec is marginal. 

From the technical and fundamental readings of the equity markets we believe that the markets are still 'over-valued'. We would recommend that we continue to prune the allocation to equities. The over-all allocation to equities for investors with a very long-time frame should be brought down  slightly below their risk-profile based allocations to the asset class.

The benchmark 10 year G-Sec is at 7.76 currently. Up slightly from the last market update. It was a very volatile period in the debt markets with the US announcing an interest rate hike in early Dec. The benchmark went up all the way to 7.8 before prices recovered slightly. 

There still is a comfortable spread between the inflation rate and the repo rate (nearly 110 basis points). This will give RBI the opportunity to reduce rates going forward. We will still continue to remain slightly over-weight in duration strategies in our portfolios. 

Crude prices continue their free-fall. Brent crude is currently trading at $37 per barrel. This could imply concerns over weakening global growth as well as a strengthening of the US dollar (in the wake of interest rate hikes). 

Gold continues to remain at around $1070/oz. While fall in crude as well as gold prices are sort of giving out contradicting signals regarding the global economy we would like to believe that the indicators are that the general sentiment is weak but the worry is not of catastrophe for the global economy.  

Market Update- 23/11/2015

The equity markets have had a tough time last month with both the benchmarks Nifty and Sensex down between 5.5% - 6%.

Technically the market seems to be in a bear trend with the daily moving averages (50, 100 & 200) all appearing in descending order. The momentum indicators indicate some kind of bounce-back in the short term. The market also seems to have achieved some kind of equilibrium with the prices right now somewhere in the central region of the Bollinger band.

Fundamentally the Sensex is valued at 20.47 trail earnings. This is still higher than the long term average of around 18.5. There is talk of companies moving in and out of the index and the earnings ratio is expected to come down to 19.5 or thereabouts at current prices. This is still above our historical average.

Our outlook on the equity markets are therefore that they remain slightly over-valued at this point of time. We would therefore recommend to not over-allocate in to equities. Our technical reading at this point of time is that the markets could be range-bound. Should they remain range-bound then a time correction of valuations should take place and will give us opportunities to pick up more equity.

In debt, the benchmark 10 year G-Sec closed at 7.7% today. This is up from 7.55% a month back. Duration strategies have taken a knocking. While we are looking at a rate cut cycle certain events have lead speculators to expect a temporary halt in the reduction cycle. News from the US Fed that rates in America could increase as early Dec (based on better than expected economic data) has increased the value of the dollar and has had an inverse effect on the value of bond prices in the world as well as in India.

While the up-move in rates has affected prices in bonds we still remain confident of an RBI interest rate cut cycle over the long term. The targeted inflation is 6% for Jan 2016 and 5% for Jan 2017. The Consumer Price Index (CPI) currently is at 5% which will keep the RBI comfortable. The macro-economic situation is also more or less in control with the Current Account Deficit and Fiscal Deficit all at manageable levels. The economy also has been slowing down which makes it an ideal scenario for reducing interest rates. The RBI will have to watch developments in the global economy.

Brent Crude is currently trading at $45/ barrel. This is helpful to the Indian economy in the short term. However, the fall in crude in the last year could also signal weakness in the global economy and could raise concerns on global growth especially for economies not yet out of the woods.

Gold is at it's 6 year low in the international market. Currently trading at $1070/ oz, gold has been in a bearish phase for some time now. This signals that it's not all gloom and doom for the global economy.

Dealing with Uncertainty

I’m sure all of us have gone through the- “Will she? Or won’t she?” dilemma at some point in our lives. Ah…to be a fool in love (or as some would say needn’t mention ‘fool’).

I’ve tossed coins, played ‘flame’, tallied names, plucked petals from flowers, even stared at the moon, all in the hope for some ‘divine revelation’. Did any of it work? Well, I’ve had my fair share of both. She said ‘yes’ because the 7^th toss came out heads and she said ‘no’ because of the petals in the flower.

It is an interesting habit that we all have of ’assigning superfluous reasons’ to phenomena that we don’t fully comprehend. And, the funny thing is, if for some reason we meet with success using, to put it mildly, ‘out of the box thinking’ then we tend to repeat it. For example, if the first time the ‘coin-toss’ worked then in the next adventure I would use the same system.

George Soros explains this in his “Theory of Reflexivity”. There is a part of thinking that is forever trying to ‘manipulate’ the external environment. This manipulation is of course fraught with risks because you don’t have sufficient information to make informed decisions. You judge the manipulation based on the result(s). He calls this a ‘feedback loop’. A positive feedback would mean that you would repeat and maybe even enforce the process (imagine me tossing a coin for all of life’s important decisions because it’s worked ‘so far’) and a negative feedback would mean that you suddenly doubt the validity of the action/ manipulation (imagine me looking at the coin and scratching my head). A positive feedback tends to distort reality even further whereas a negative feedback tends to bring you back to reality.

Look at it like this, if the coin-toss worked, I would continuously be tossing. I would develop a quirk to deal with uncertainty. You can almost see how religion, rituals and other dogma came in to existence because of the same system being applied by everyone.  

Well, so the ‘wiser’ me has figured that, for example, while the coin tossed in the air my heart would beat a lot harder and in the process revealing to me what my ‘true fear was’. In other words it would reveal my ‘anxiety’ to me.

Now, assume a young man in love has come to you for advice. How would you approach advising him? Remember, you’re not trying to out-guess him, you can’t. You don’t have sufficient information unless, of course, you know the young woman responsible for the poor boy’s condition. Assume that you don’t know her. Then the primary aim should be to help the young man ‘handle his anxiety’.

I would approach advising him primarily from two sources- one is an ancient Greek philosophy known as stoicism (or pessimism) and other is from a wonderful book that I recently read called “How to stop worrying and start living”-by Dale Carnegie ( I strongly recommend it).

The first step is to get the guy to understand that there is an ‘uncertainty’ and ‘accept it’. This is the most basic requirement and there can be no progress if we can’t drill this in to his head. What we have to do now is to help him ‘deal with his uncertainty’.

The next step is to understand the various outcomes (think probability in statistics). This is a straight forward case with two probabilities and we can apply a 50-50 chance to each outcome.

Now, we need to look at ways of improving the odds. Can we use evolutionary psychology, for example, in wooing the lady? Can we try poetry, gifts, singing, etc.? (Try doing direct things instead of esoteric stuff like tossing coins and picking flower petals.)

And now, this is where stoicism will come in, despite the young man’s best efforts the result could still be a negative. He needs to be prepared for that. If he can ‘accept failure’ or even if he’s aware of it then he can be better prepared for it. In management parlance they call this a Plan B. What is the plan B? It needs to be clearly defined.

This has more to it than meets the eye. Practise of stoicism is tough but it makes you tougher to handle the knocks that you’re bound to get in life. By keeping the right mental attitude (Dale Carnegie) one can then-

a.       Look forward.

b.      Create more flexibility.

c.       Play with more confidence.

d.      Have peace of mind (and handle your anxiety).

Simple right? We’ve dealt with uncertainty in 4 simple steps. Is there a corollary to this same process in the investment world? I’ll leave you with that.

What you should look for in a Financial Advisor

“It's not what you look at that matters, it's what you see.”

-Henry David Thoreau

Some financial advisors are wise, others are otherwise. And over the course of your investing career (which is lifelong) your investments will go through quite a few ups and downs which will make you wiser about your advisor(s). As Jean Racine- the famous French dramatist from the 17^th century, once said- “There are no secrets that time does not reveal”.

However, the challenge is to spot a good advisor without having to go through the pain of delayed realization. How should one go about that?

There are two key aspects to the delivery of financial advice. One is “service” and the other is “knowledge”. If your advisor is able to service your requirements well then that is a good portion of the battle one. Service is also easier to judge and predict. It is the knowledge component that becomes tricky for the client to breakdown and judge. The attempt of this note is to break down the knowledge component for you to be better able to understand the ability of your advisor.

I’m realizing more and more that a good financial advisor is also a ‘wise financial advisor.’ Therefore, the knowledge aspect has more to do with ‘worldly wisdom’ than it has to do with strutting facts about markets and GDP data. Why is this so?

One of my senior colleagues has this wonderful way of connecting the vagaries of life with the markets.  He’s always able to break-down my challenges for me and relate it to the movements of security prices. Investments are after-all a human endeavour and therefore it must be expected that all the challenges that one faces in other human endeavours are equally true about the markets. The only way to approach life’s challenges is through the continuous application of time tested principles and values. What we simply call ‘wisdom’.

Patience is one of the key-pillars of financial advice. You should, as a rule, stay away from anyone promising results quickly. If good results happen in a short period then this is more to do with luck than any amount of skill. A good advisor should be able to admit to this. It takes time for the efforts of a good advisor to show.

A good advisor should also be willing to invest in you just as you are investing with him. Don’t construe this to mean that you should “slowly test the waters”. Quite often we find that clients are slow in investing with their advisor. Today’s economics demands a “certain viable” size for a mutually beneficial relationship. You must understand this. Also if you have a good financial advisor and you don’t back him early then you could suffer from what in financial terms we call “opportunity cost” and in layman terms we call “regret”.

When I say ‘invest in you’ I mean he should follow a process and take the time and efforts to understand your current situation and requirements completely before proceeding to advice on investments. He needs to present his findings, explain his plans and take the time to break it down for you. And, most importantly, he should be looking at a long-term relationship.

Another aspect of financial advice is discipline. He should be able to stick to his processes and evaluate the performance of his strategy in a timely manner. He should also stick to his long-term strategy no matter the ‘noise’ coming from the markets. He should also, and this is extremely important, get you disciplined. As in all other human endeavours discipline is the key to creating long-term wealth.

You should also evaluate the intelligence of your financial advisor. Throw him off-guard asking him random (but relevant please!) questions. Evaluate his responses. Try and judge how well he understands the “basics”. Also, extremely important, evaluate the strategy that he plans for your investments. You evaluate a strategy not based on past performance but on the flexibility of the portfolio if things were to go wrong and also on the underlying investment philosophy in terms of what opportunities is he trying to exploit with your investments. Remember that he has to always be thinking about the “long-term”. Also, see how he incorporates “tax-planning” in to your over-all investments.

And lastly you should evaluate his commitment to the cause of your wealth. Are his incentives aligned to your “long-term wealth creation” or is it otherwise? How much effort and time is he willing to put in to making sure that your wealth is preserved as well as increased? Is he constantly updating his skills?    

Good advisors are like good opportunities- a rare species. When you find a good advisor you should back him to the hilt and it will make all the difference in your wealth.   

Market Update- 29/7/2014

The markets are going through some short term consolidation. Corporate results for the last quarter have been neutral to positive. The underlying trend still remains positive. We expect to go in to a period of consolidation moving forward. 7900 seems to be a short term resistance and 7500 the short term support. Markets should be playing in this region for the short term provided there are no macro triggers to break the support or resistance.

Fundamentally, the markets are trading slightly higher than their average Price to Earnings. It is a slightly tricky situation for the investor who is looking at past valuations to determine what kind of asset allocation he/she should be looking for at this moment.