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You Shall Not Pass: Determination and Boredom in ‘Range-bound’ markets

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“You Shall Not Pass.” This was famously used in J.R.R. Tolkien’s The Fellowship of the Ring, the first volume of The Lord of the Rings. In the novel as well as in the movie based on it, the wizard Gandalf declares staunchly, “You shall not pass!” while blocking the Balrog (a demonic creature). A bit of googling reveals that the phrase was originally used during World War I, during the Battle of Verdun, by a French General, Robert Nivelle. It has since been used as a slogan or a war-cry to express determination to defend a position against an enemy.

You-shall-not-passIt was this kind of determination that was required today in the Lords Cricket Test that India lost to England. Nobody quite strongly said “You Shall Not Pass” to the English bowlers, and it was a matter of time before it was wrapped up.

For the past few months, the market too seemed to be tied in a deadlock with the bulls and the bears saying ‘you shall not pass’ to each other, and not allowing either to get the upper hand. It has been a time when most business channel anchors use the term “range-bound” so often. It is so uninteresting to them to wake up every day in the morning, cover the hectic activity minute to minute, and finally it all ends up being ‘range-bound’ activity with ‘stock-specific’ action. There have been event after event created – from seemingly important ones like release of inflation numbers, quarterly results, IIP numbers, credit policy, Greek crisis, oil prices, European debt crisis, Chinese slowdown to tactical issues like expiry of the monthly series and daily volume turnovers. But the net result for the market has essentially been status quo. The end of every event makes everyone look forward to the next one – but the market again says – You shall not pass – I stay where I am – ‘range-bound’.

For an individual investor, perhaps neglecting all the action (or net inaction if you may say so) continues to be the best strategy. Lethargy bordering on sloth remains the best policy. The formula remains the same – fix your long term asset allocation, select and regularly keep adding to those assets, and rebalance once in a while when there are major moves. To everything else that tries to distract you from this path – the response should be – You shall not pass.

What do ‘Horn OK Please’ and ‘Mutual Funds are subject to Market Risks’ have in common?

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Travellers on Indian roads would be very familiar with this sign. Almost every truck, specially the big inter state ones that cross highways, has this funny term written behind them “Horn OK Please”. I have seen it often, and have never quite understood its significance. Having asked a few people, even they seem to be unaware of the meaning of this term and why it is there. Some say it is a warning for drivers behind the truck to blow the horn before overtaking it, which seems to be the most plausible explanation. Others say that O.K stands for On Kerosene as trucks earlier were run on them, so it was a warning for vehicles trying to overtake such trucks. In any case, it seems like it was supposed to be some kind of a warning for people following a truck.

Perhaps, it is now just a meaningless tradition that most truck owners and drivers blindly follow – painting their trucks with a “Horn OK Please” sign without really meaning much. The funny thing is that no one cares for that sign too, except for some amusement factor. Sometimes not even that. No vehicle following trucks (other trucks included) cares for that sign or follows it – they overtake anyway as they wish.

So what’s the point? I got reminded of that funny sign behind trucks a couple of times today while watching a business channel. The first occasion was when watching a mutual fund ad, at the end of which there was this scrambled, hurried announcement. “Mutual Funds are subject to market risk. Please read the offer document carefully before investing.” And the second one was after a show discussing stocks, in which an expert just before wrapping up, announced a quick disclosure shown also on screen. “I, my company or our clients may have positions and interest in all the stocks discussed. Viewers are advised to take their investment decisions at their own discretion based on advice from their financial advisor.” Or something to that effect.

Both these statements and the manner in which they were made sounded to me like “Horn OK Please.” Almost all experts on the show (and all other shows) as well as all mutual fund ads ended with these statements. The people making these statements did not quite know why they were making it – perhaps they were following some tradition or regulation in this case. They were kind of making them blindly without really meaning much. Like the truck owners paint their trucks. And the people for whom these statements were made, presumably investors and traders, were not likely to take those statements seriously. They were, anyway, not going to read the offer documents, or were unlikely to neglect the advice or recommendation given just because someone had a vested interest in them. Perhaps similar to how other drivers view Horn OK Please. You read it, but you overtake anyway.

Neither the maker of the statement means them, nor do the readers take them seriously. Perhaps, both get some amusement out of it. Striking similarity with “Horn OK Please”?

No News is Good News: Is Your Expert Service Provider also Honest?

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The wife has been feeling a bit unwell with frequent abdominal aches for the past few weeks. (I am going to refer to my wife as “the wife” like the humorist Busybee used to in his articles in Mumbai’s “The Afternoon” so many years back – I used to find it so funny). So well – getting back, the wife has been a bit unwell. I have a mild version of hospital phobia, despite the wife being a doctor. In a sense, that works well because the wife takes health decisions for everyone at home – on which illness is to be neglected, when you should be happy with just some medicines and when an illness is to be taken seriously enough to visit the hospital. So this time, the wife being the patient, took a call that enough of medicines – it was time that she needed an “endoscopy”. So we finally got an appointment, went to the hospital and got it done. Well – after that, the surgeon called me in, and very dutifully showed me all the photographs and videos that the endoscope had recorded. I blankly nodded with a studious look pretending that I understood everything he said, as if I see the insides of stomachs day in and day out. And finally, at the end of it, he said something to this effect – there is nothing, it is all fine and normal. Just a bit of gastritis, let her manage her lifestyle and health, do not give her stress and things should go away. You do not worry.

Once I got out, I asked the wife – so you have no illness? No indeed. So there was no news as such. We got through a procedure and there was no news. Which actually was good news.

The wife was pretty cool about it. This happens all the time she said. Patients who feel they have a serious illness due to pain in the stomach turn out to be simple gastritis patients 80% of the time. As the conversation progressed, she continued – “In fact, doctors admit them just because patients refuse to go back often. And sometimes, not just that, the patient who is not ill ends up picking up an infection from the hospital! So, if you are seriously ill, your odds of getting better improve when you get admitted, but if you are not seriously ill, the odds of getting worse are more! Now you understand why I neglect most of your petty illnesses at home.” Towards the end, I thought that was not the doctor speaking, it was the wife.

Be that as it may, it sounded amazing to me – but then I guess doctors are people too, doctors are wives too. The wife continued – “But this doctor was good and honest too. He did not tell you that we will need to observe and prescribe something more. Maybe because I am a doctor here.”

So that was it – we found a doctor who was honest enough to tell us – you do not need me. And a patient who was obedient enough to listen to him.

This is not as common as it looks. Perhaps in medicine, you have more honest doctors and more obedient patients – because it is about your life and health. So the chances of coming across such doctors still is high – despite all the corporatisation of healthcare and the works. But it struck me that in other areas where people are supposed to be ‘doctors’ or experts in their fields, they do not always act with that kind of integrity. How many experts at auto service stations tell you when you take your car for a check up that “Your car does not need me”? How many accountants will tell you – well, everything is fine with your accounts, why don’t you file your returns yourself? How many financial advisers to whom you take your portfolio are honest enough to tell you “Your financial health is fine and this is why you do not need me”? And finally, how many of us would be happy with these kind of advisers, and like good patients – obedient enough to take their advise? Has it ever been the case that when you engaged some of these ‘doctors’ you were perfectly fine and then caught an infection?

Something to ponder upon. Well – the fact is that instances of finding experts who say – “you do not need me” are few and far between. It is possible that you do need some medicines some time, but if according to your expert, you need them all the time, perhaps it is time to change your doctor for these areas. Move to someone who gives you no news. Sometimes, no news can be good news.

The Price of Everything and the Value of Nothing: Recognizing Intangible Value in a Business

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I am a Maruti vehicle owner, and a highly satisfied one at that. The overall cost efficiency of their vehicles and the tremendous value they provide is legendary. It is aptly shown in that funny ad in which a rich man is being sold a luxury ship by a sophisticated salesman, and at the end of it he coolly asks – “Kitna deti hai?” Maruti can take the credit for (or is guilty of – based on how you look at it!) making Indian car owners used to a certain minimum standard of fuel efficiency. And that sort of dependability (and many other benefits that car owners attribute value to and which Maruti has mastered) tends to tilt the car buyer’s decision in favor of Maruti more often than its competitors – at least on Indian roads. In a very conscious or unconscious way, customers assign a value to their purchase, and compare it to the price at which it is being offered, and if the gap is there – they seem to go for the purchase.

In my profession (technology and management consulting) often I am required to sell our offerings to other companies using what is commonly known as “Preparing a Business Case”. In most cases, the approach taken to create a business case is what I broadly like to refer to as the ‘route of efficiency’ rather than the ‘path of effectiveness’. And the reason for it is simple: it is easier to quantify efficiency, and very tough to quantify effectiveness. So for whatever it is worth, one goes about getting some numbers around how much time will be saved due to automation, or how many man hours will be saved due to process time reduction, or how much material will be saved due to lesser turnaround time. Despite that exercise (which has its own value), I have often experienced that companies that finally end up buying do not do so, only because of the price justification in the business case, but due to some additional value perception that they see. That value perception often means different things to different customers in different circumstances, but unless that happens, the business case alone is not enough and the sale does not happen. And in a competitive environment, that value perception is the ‘thing’ that tilts the customer to choose a seller.

price-value-compete_on_valueIt is easy to offer a price, but very difficult to quantify that value perception. Companies that can consistently offer this value relevant to their markets, and whose customers choose them for this intangible value perception are themselves candidates for outstanding long term value.

As customers of various products, we are exposed to offers on multiple things at multiple prices everyday. As prospective customers, most of us are smart enough to evaluate the value in what is offered, then check the price, and if there is a gap, we grab it with both hands. A lot of ‘up to 30% off’ offers are simply stripped down products at slightly lesser prices, and most of us, after checking on them – reject those kind of offers. Some of them are genuine ‘sale’ offers or turn out to be great bargains, and we are smart enough to recognize those too.

But as investors, a lot of us are not that smart when choosing company stocks to buy. We forget that price is one factor, but whether the company is of value is the important one. A new promoter tries to sell part of his company which has just started making profits (an IPO is just that!), but we still buy it even when an established company is available for purchase every day – perhaps because “it is cheaper”. We see on business channels, the reporter routinely making statements like “retail investors seem to have come back  to the market as there is more action seen in mid and small cap stocks” – thereby meaning that they buy the stocks that have lower price. A friend of mine ‘invests’ in penny stocks because “it is 12 rupees, so even if it moves by 10 rupees my money will almost double”. Another acquaintance never understands why buying a 10-year-old mutual fund unit costing Rs.200 per unit is better than buying in a new fund offer for Rs.10 – “I am getting 500 units for Rs.5000 in the new fund”. It is almost like going to a grocery store and asking for a soap for under Rs.5 – well you may get a soap, but it is not going to wash anything much!

That is not to say that there is no value in low-priced stocks. Like bargains for any other product, there could be, but price cannot be the sole reason of purchase. It is best if the starting point of any purchase is at least a broad evaluation of what constitutes value for you. When the value seen is reasonably close or under the price at which it is offered – be it for someone buying cars, software or company stock – it results in a good purchase. But a great purchase is perhaps made, when you not only get some of these quantifiable measures of value, but also know that there is some more value offered that is pretty certain and perceived, maybe not easily quantifiable and replaceable. The kind of value you have when you know that customers in India prefer Maruti cars for some reason. Or that it is almost impossible for someone even with a lot of money to replace Cadbury or Disney from a child’s mind. Or Americans for some reason love Coke. That is when you know that when such value is available cheap, it is not a “up to 20% off, conditions apply” kind of sale, but a genuine bargain on a quality product.

Buffett said that price is what you pay, value is what you get. The ability to get this difference is critical. Else like Oscar Wilde said we will “know the price of everything and the value of nothing”.

Of Barbers and Brokers: Why it is important to know what you are looking for

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Every few weeks, Saturday mornings are reserved for the barber. Today was one of those, so my son and I had our visit to the salon. After our customary drive and parking, and a few minutes of waiting for our turn, we finally were called in and sat into our ‘throne’ to get started with his ‘services’. Mind you, salons in major cities in India have got quite savvy. So unlike a few years back when you just went to a barber shop to get a haircut, now you go to a wellness salon which provides ‘overall hair and beauty services’. They have a quite a range of services on offer to grab more ‘share of wallet’ from you.

But despite that some things have not changed. So the first question I get when I am seated is still – ‘do you want it cut short, medium or long?’ I have never been able to figure out what to answer this question with. Obviously, long is out of question, else I would not be here. But between short and medium, I have never figured what I really want. When I say short, I kind of need to clarify that I do not want an army crew cut. When I say medium, I generally follow it up with some comment that suggests – but do not cut just a bit! After that, I hope he has got what I want and then silently sit waiting for him to do his job.

This is similar to the ‘agony aunt’ stock question-answer programs you have on TV. So the caller asks – I bought so and so stock at Rs.100 two weeks back – what should I do now, buy, hold or sell? And the advising broker asks him – can you hold for short-term or long-term? Similar to ‘do you want your hair short or medium?’, this question has no clear answer. So the caller answers, long-term, and just to clarify – adds 2-3 months!! Providing clarity for his definition of long-term.

The other similarity I find between barbers and brokers (or as they are called hair and beauty service, and financial service providers respectively) – is their nice guy approach when the first service is over. So I am nearing the end of my hair cut, and typically I am asked – “Sir, will you like a hair color?” Now at this point, if I am not clear on whether I want it or not, it is quickly followed by something like – “It will look good on you Sir” or something to that effect telling me why I need it. Depending on the tone of my answer, the same service is pursued, or a new item in the menu card is proposed – the hope being that the 5 minutes between now and the end of my hair cut yield an add-on service that I purchase.

This is again similar to my experience with financial services providers of late. If I visit a bank, a ‘relationship manager’ arises from somewhere telling me that he will be the point of contact for me. So after some mundane task like submitting an application for a bank stamp on an ECS mandate is done, and I am waiting for the processing, the relationship manager quickly asks me if I am looking for stock and mutual fund advisory services, or else for insurance, or for credit cards – for something. A little bit of confusion shown on my face, and I am drowned in information on why I need it. Only when there is no option but to give me my ECS mandate, I am free to go.

So here we are, in the savvy new world of services with so many things on offer. A slight bit of confusion on your face is a sure sign for marketing spiel to follow. In such a scenario, whether it is barbers or it is brokers, it is important that the buyer is clear on what he wants, and not just that, is quite staunch about it. An extra hair color at a salon may not cause much harm, but a wrongly bought financial service or product is likely to do so. So as has been said by famous investors earlier, never ask a barber if you need a haircut (or for that matter any other hair and beauty service). It is in your interest to be clear about what you want. If at all you have a need to ask, ask someone whose advice you trust and will provide advice that is in your interest. Because whether it is a barber or a broker, like Lewis Carroll said – “If you don’t know where you are going, any road will get you there.”

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