Category: Mutual Fund

First off, the Title is a Rip off of a very interesting book by Ned Davis that I read and recommend you read it if you are interested in looking at market in different ways. Of course, not all the charts that are provided in the book can be easily re-created, but at the very least it will give you a idea on what to look at.

Yesterday, Bloomberg carried a report on  Khmelnitsky, an analyst at Veritas Investment Research Corp being the only Analyst to issue a Sell call even as hedge funds piled in. While he now turns out to be right, in the interim, the stock had doubled (from time of his Sell call). In fact, its still yet to reach the price where he called “Buyer’s Beware”. Chart from Bloomberg below (article link)

On Social Media / Television, Analysts keep calling for either a strong fall or a strong rise (new Low or new High in their lingo) even as much of the time, market seems to do the opposite of what they are calling for. But markets being markets, they do get it right at some point of time. The question as in case of VRX above is, does getting it right after being very wrong for a large period of time makes enough amends?

As one very well knows, Being Right is easy, making money, well that is a problem that sometimes seems absolutely insurmountable. But to make money, one needs to be right in the first place and right in the right time frame. There is no point in being right but being unable to make money due to the pains that the position caused first.

Investing / Trading is all about timing and positioning (size). If you get the timing wrong, you will end up taking substantial losses (Notional or Real) whereas if you get positioning wrong, you either end with too small a profit to bother about or too large a loss to be never able to trade again.

The reason Systematic Investment Planning (SIP) is most preferred is because rather than doing the hard work (of both timing and sizing), one hopes that over a long time, everything will average down and provide a better return than what one time lump-sum can provide (a thesis that can be easily tested).

Yet, its surprising that the very same people who argue for SIP argue against a Exchange Traded Fund claiming that since some funds (remember, Survivor Bias makes the whole testing meaningless) have given true alpha and hence in the Indian context Mutual Funds are better than Exchange Traded Funds. If timing is not possible, how can you really hope to pick up the right funds (average return of funds are generally lower than their bench-mark which means that there are a lot of funds that under-perform) all the time?

But I am digressing, this post is not for or against SIP. This post is about whether it makes sense to even follow Analysts / Fund Managers who claim to be right. Today morning for example, a famous PMS fund manager posted about how he hoped investors took advantage of his bullish tweets and invested in the market. But guess what, I scrolled through the gentleman’s twitter feed and he has tried to call markets bottom at every major level.

His target for Nifty (since Jan 2015) is 10,000 and I am sure he will be right. But how many have the ability to withstand the pain that came in between. Stocks, fancied or not have had a hell of a time in recent months with even marque names taking a substantial beating.

To me, timing is crucial – its easy in hindsight to say that, all you needed to do was sit tight, but sitting tight is not the answer most of the time unless you want to be like the average investor. But a average investor has no clue and does no home work, so why should your returns mirror his?

The future is unknown. Yes, we can make speculative / probability based guesses about it, but truth be told, no one has a clue of how it will unfold. The investors who have done big for themselves didn’t make it by taking small risks that will not hurt them if they got their Analysis wrong. Concentration was the key – it made some guys while broke many others.

As a parent, would you ask your ward to give his best (and hopefully come on top) or say, you know what – do as much as the average kid on the street. Why bother with hard work as Edgar Bergen says — ‘Hard work never killed anybody, but why take a chance?

Over last couple of days, my timeline has witnessed immense activity between various persons on whether or not SIP is the best way to save and invest in markets. My last two posts were a consequence of trying to put my thoughts on the same.

To clarify before I move further, I am not against saving and not against SIP as a medium to save. But, please, lets not consider it wealth building giving it value more than what it deserves. Adjusted for Risk, any investment that provides a positive value adds to our kitty, but the definition of Wealth is somewhat different since it brings out dreams of one being able to afford things that he doesn’t seem to think is possible in the current.

While SIP’s in Equities can provide a much better return than Bonds, please do note that if you are not used to seeing months of gains wiped out and threat that even the principal maybe at risk, you may not be the ideal candidate to make such investments. For better or worse, sticking to tried and tested methods will ensure you get a good night sleep even if your returns are below what can be optimally achieved by taking a small dose of risk.

Difference of opinion in markets is normal – I for instance have for long received brickbats for insisting that any and every strategy needs to be validated using non discretionary tools. As a Technical Analyst, we as a group are held at ridicule by investors / advisers who believe that Balance Sheets and Cash Flow provide a better understanding of the company than how the price moved over the last ‘n’ periods.

Efficient Market Hypothesis, a subject that is taught to every Management student claims that stock prices reflect all available information about companies and investors can’t beat the market indexes by stock picking. In fact, when some one says markets cannot be timed, he is knowingly or unknowingly reflecting the same. But ironically the same persons then go out in search of funds that are consistent in beating the markets.

Every fund manager tries to time the market in his own ways. The fund manager of Quantum for example took to timing by reducing exposure to stock in the hope that markets will weaken at which point he can re-enter providing value and a better return to his clients. He had done this before and it worked, but this time, he went to cash a bit early and given the current fall, added exposure a bit more early.

Prashant Jain of HDFC is a case of taking risk on a sector which did not turn out the way he would have thought it will. But go back in history, and risks taken by him gave him a pretty large addition that what other managers could deliver.

You can see this in the International arena as well with Bill Ackman having a ball in 2015 but facing literal rout in 2016 (even though we are just 1.5 months into it). LTCM delivered superlative returns for 4 years before it fell of the sky and went under.

On the other hand, we have John Bogle of Vanguard who makes the following points when it comes to Mutual Fund investing

1. The vast majority of managed funds underperform their respective relevant market indexes
2. There is no reliable way to predict which few managed funds will outperform the market
3. The intelligent investor therefore invests in index funds

He believes that most investors are better off with a cheap (and his company Vanguard has shown time and again, how cheap index investing can be) ETF that tracks the Index.

When it comes to leverage, literally everyone is against it. But does it mean that leverage trading / investing is bad?

I believe the bulk of what we believe is based on two factors

1. What appeals to us the most
2. What seems to provide what we are looking for (Long Term Returns / Regular Income / Stability {Real Estate}

For me, the appeal has been to Technical Analysis since end of the day, I believe that trying to gauge the quality of management of a company or my ability to understand the nitty-gritties of how the business is run is beyond my understanding and abilities

But some one who has the abilities I am missing on the other hand will be fascinated by how one can go about picking great business which can provide returns better than market.

In India, Mutual funds are pushed since historically they (or at least funds that have survived) have proven to be market beaters. But without the evidence that comes from analyzing survivor free database, its similar to claiming that if only you had invested 10K in the Infosys IPO, you could have retired way before time.

As a full time trader and investor, my bias is towards attaining absolute return regardless of the behavior of markets. This cannot be done without some kind of timing tool and while my time frame is short, testing (by self and others) have shown that you can get way better returns by having a simple 60 – 40 (Equity:Bonds) asset allocation than by trying to select the best funds and hoping that the fund manager does the right things all the time.

Each and every one of us develop our own biases based on either the focus of our work or what we have observed over time. This bias affects our judgement to make the right decisions and hence the reason to turn towards experts. But unfortunately experts too are biased and would not change their view even if provided with contradictory data.

Most of us spend 8 hours or longer to earn the Income, a part of which gets saved. If you cannot spend a bit more time in understanding the various facets of market and what is that you are really looking for, nothing really can help you out.

As a Idiom goes “You can lead a horse to water, but you can’t make it drink”. How you deal with your money should be your concern, else some one will take the decision on behalf of you – something that could turn out to be good though generally its outcome is lousier than the worst thing you could have accomplished yourself.

While we all learn from our childhood the importance of savings, Governments and experts believe that if left to our own devices, we would either splurge out or make wrong investments that is bound to hurt when we need it the most.

Using a combination of Carrot and Stick, the policies of the government try to ensure that one ends up with a decent amount of savings by the time of his retirement. So, a part of one’s income is deducted and which goes into a Provident Fund Account which over time, thanks to one’s own investment + employer’s contribution + the accruing interest makes it a sum worthwhile to retire upon.

Housing Loan payments are set off against tax liability to make it worthwhile (rightly or wrongly) for everyone who desires to get a roof above his head. Same goes for various other deductions which essentially  are investments for the future (one’s own or of ones children).

Investing in equities, specifically mutual funds has been pushed by providing various tax benefits, benefits that hopefully provide a impetus for the investor to make it a worthwhile asset class to invest, risk not withstanding.

One of the ways for many investors to invest is to set up a Systematic Investment Plan (SIP) so as to ensure

• A continuous contribution to equity which can provide a better return than other fixed asset classes
• Enable one to average out his purchase price by buying with total disregard to happenings in market

Systematic Investing is pushed a product for all seasons. Any attempt to provide perspective on the nature of the markets and hence how SIP’s can actually be detrimental to the wealth of a investor falls upon deaf ears and more fixed positioning.

Lets start with asking a basic question.

Who or what kind of Investor is SIP meant for?

The answer I have heard and read about is that this is the best and maybe only possible way for those with a full time profession and unable to understand the market or valuations as such. SIP is also a tool I am told that enables those with buttery fingers when it comes to spending to save a bit from their Income. In other words, SIP is a attempt to force those with no clue of markets to invest in the hope of a better tomorrow (which generally means a decade or two from now).

Despite the good (?) intentions, one of the cribs of fund managers is that even when people enroll for a long tenure of, say, five years, they generally stop after two-three years. Should not one question what makes one stop their SIP early than what they signed up for?

To me, the biggest reason would be under-performance. Just today I tweeted this

If the Mutual fund you are invested in has correlation of 1 to Nifty 50, any SIP started after November 2012 will be under water.

— Prashanth, CMT (@Prashanth_Krish) February 12, 2016

Being a full time professional I understand that markets moves in cycles and how even this bear market will end at some point of time. But what of a lay man who has been promised a CAGR return of 17% (since that is what Sensex has supposedly delivered) over time and how this is a way better investment than any other asset classes.

How many advisers out there start of by showcasing the risks that come with investing in Mutual Funds? Funds have dropped 50% / 60% and more from their high points. Is a lay investor ever educated with the risk he is taking?

In times like these, when theoretically one should be adding to allocation, those chaps would actually be jumping off the burning bridge. Its laughable when advisers say that they shall hand hold the client (and hence justify their fees) during tough times such as these and help them to continue investing.

But how many actually provide them with the real picture of what to expect and the probabilities of what is the worst case scenario’s. Most advisers try to shove the risk under the carpet while showcasing only the good parts. How different this is to real estate builders printing out brochures where it seems that you will be surrounded by nature when the reality is the fact is that the builder has absolutely no control of what happens outside.

Markets deliver higher returns because there is a risk involved, a risk that can lay waste to investments. Mutual funds can help by enabling one’s investment to be handled by a professional and by pooling reduces the risk of a single bad apple destroying the whole basket. But extrapolating the last 20 years over next 20 years which most advisers do while being the easiest path, is certain to bring disappointments on your way.

To conclude, SIP is a good way to instill investment disciple. But unless the risks are fully known and accepted, the risk of early abandonment after being disappointed is pretty huge. Preparing the investor for the risk rather than focus on reward (Gains / Goals) is a much preferable way.

Yet, despite all that, a investor who only knows to invest but is clueless about times when he should reduce is bound to get average returns and in-turn be disappointed by the whole system. There, only Allocation and continuous re-balancing holds the key to a more satisfied client and a better off investor.