Importance of Rebalancing for the Defensive Investor

Often investors – specially those who call themselves defensive – can’t make up their mind on when to sell, as they have no particular reasons for doing so – except looking at market levels. A good answer to that comes from systematic and regular rebalancing (almost scheduled or using some similar discipline).

Came across a good article that explains rebalancing – more important with elevated market levels almost across the board. Should be a good reminder for defensive investors to take stock.

Read it here

Interesting conversation: Mohnish Pabrai with Steve Pomeranz

Came across an interesting conversation that the famous value investor Mohnish Pabrai had with Steve Pomeranz. He talks about what value investing is, why individual companies matter to him more than broader markets (though not advised for normal passive or ‘defensive’ investors), the importance of temperament which should be a strange mix of patience and … Read more

Lessons from My Journey to Health

I was always what in India is called a “healthy boy”. And I have stayed more or less “healthy” throughout my adult life with a few minor fluctuations. I have been through some ‘before-after’ experiments over the past twenty years, but they have all been in a range. And every time I ventured down that … Read more

Known Knowns and Unknown Unknowns

“Swami uncle, how do you know that Ganpati Bappa goes to his home elsewhere after we immerse him?” asked Jigneshbhai’s son as we were returning after immersing the Swami’s Ganesh idol after this year’s festival.

It was Swami’s turn to be at the receiving end of questions this time from our broker friend’s son. Jigneshbhai was having a naughty smile as he was enjoying the reversal of fortune – from Swami’s questions to Swami being asked questions.

“How can all lakes and seas reach his home?” Jigneshbhai’s son continued. “Do you have proof that Ganpati Bappa reaches home?”

Swami was lucky that we soon reached our coffee-house, and our families left us alone with our weekly coffee routine, and so the questions stopped.

“Your son asks a lot of questions!” Swami finally said, after they were all gone.

“For once, I did not face your questions! Or his!” my broker friend laughed.

“So how would you answer them? Of course, we know the real Ganpati Bappa goes nowhere. But next he would ask me if there was any proof if Ganpati Bappa was real?” an exasperated, god-fearing Swami exclaimed.

Jigneshbhai stayed silent for a while. He was probably lost in some thought.

“Well if we don’t have conclusive proof that he exists, we also don’t have conclusive explanation to negate the theory that he does exist!” Jigneshbhai stated.

That left Swami and I a bit confused. But our broker friend continued.

“There are the known knowns – like oxygen is necessary for life, and then there are the known unknowns – like we don’t know how life originated or if God exists for sure. But there are also the unknown unknowns – like maybe we don’t even know what we don’t know about the possibilities in the endless universe or in the future!”

Swami and I looked at each other, wondering whether our broker friend was fine. He seemed in fine health a few moments back, but suddenly he had escaped into an unknown orbit.

Unlike our normal confused faces in such situations earlier when Jigneshbhai gave some profound theories, this time our faces indicated outright amusement. Perhaps that’s the reason our broker friend too broke into laughter.

“I am not joking!” he said. “Isn’t it right? Even Donald Rumsfeld when once asked if there was enough proof that Iraq had weapons of mass destruction used something like this. Maybe he meant it, or maybe he was justifying the war – who knows!”

[youtube https://www.youtube.com/watch?v=GiPe1OiKQuk&w=560&h=315]

Indeed that was true. I distinctly remembered that, and it became a topic of contention for a long time. But it actually demonstrated the realities of taking decisions at the highest centers of power with an understanding of what is known, what is unknown, and an appreciation of how little may be actually known.

While Swami and I were musing about the known knowns and unknowns unknowns in our life, our broker friend, in a jovial mood today, intercepted our thoughts cheekily. “Like whether the markets will oblige him is a big unknown for Swami!”

Obviously that little provocation was enough for Swami to get started. “Maybe” he said sarcastically, “but most else in your investing domain is based on numbers and metrics isn’t it? So it should fall into known knowns!”

“Well” said our broker friend. “Numbers give you a false sense of knowing.”

Swami and I were starting to understand what our broker friend was trying to get at, and why his answers are often in shades of black and white – specially to Swami’s questions on buy or sell. But it still wasn’t fully clear so we were lost in thought.

Jigneshbhai continued.

“There are many known knowns in investing – like high profitability is good, or low P/E is cheap. And then there are known unknowns – like what will the market do in the next month, or who will be the next RBI governor. But there are also the unknown unknowns – like we don’t know what technologies or trends will emerge and impact business.”

“The important thing is to collect as many knowns as you can, and build an appreciation of their limitations due to the possibilities of the unknowns. And then act with openness.”

While we were engaged in this discussion on knowns and unknowns, the wealthy old man in the sprawling bungalow walked over to our table. He had been quietly listening to our conversation, and as we were preparing to walk, he looked at Swami and I and left us with some words of wisdom, emerging from rock music, perhaps?

There are things known, and things unknown, and in between are the Doors.

Of Gardening and Investing Lessons

“To plant a garden is to believe in tomorrow” said Audrey Hepburn. I realized the truth in it over the past few months. The wife has been venturing into gardening – a small beginner home garden – for the past few months, and as an observer, contributor and co-passenger, the ride has taught me a … Read more

Double-Edged Sword

“It’s a bit like Karma. Every entry on the debit side has an entry on the credit side. There cannot be a single absolute good or bad” said the old man in the sprawling bungalow sitting next to our table while Jigneshbhai, Swami and I were enjoying our coffee.

Today while we were silent, the old man was speaking. I wasn’t quite sure what he was referring to, but he seemed to react to Swami’s exuberance on the markets reaching new 52-week highs this past week. Swami was in a great mood today, and had nothing to complain as he thought about how well his investments were doing. When he has nothing to complain, generally he has nothing to say.

“Everything is so good. Markets are going up, hitting new highs, and they say this is just the start” Swami had said, a few minutes earlier when we were starting our coffee.

The old man in the sprawling bungalow was probably reacting to that, I thought.

“There is nothing like only good” he asserted.

My broker friend Jigneshbhai was listening attentively. When the old man spoke, all of us generally listened. But today Swami’s exuberance got ahead of him.

“How can you say that? Brexit is behind us, the GST bill is going to be passed, earnings have come up well, and the markets are going up. How can all of that be anything but good?” he protested.

Jigneshbhai and I waited but the old man in the sprawling bungalow did not say anything.

Swami directed his gaze at my broker friend, expecting an answer. There was a silence.

Finally knowing well that the old man in the sprawling bungalow doesn’t speak much and whenever he does, it is quite cryptic, Jigneshbhai thought that it might be time for him to speak.

“Well – for every buyer there is a seller. And both of them think they are right. Both of them think what they are doing is good for them.”

My broker friend seemed to agree with the old man. But Swami clearly wasn’t in agreement. And I was confused, trying to digest what both of them were saying.

“But isn’t good earnings good?” Swami revolted.

My broker friend smiled. And after brief thought replied. “Yes – but the buyer of shares is buying because earnings are good, and the seller of the same shares is selling because of the same reason – earnings are good. And both of them think they are right.”

Swami was still not convinced. And I was wondering what’s the truth in this circular argument of my broker friend.

“This is all philosophy. Markets are up and that is good. Nothing else is right. How can there be two sides to that?” Swami finally concluded with a tone of confidence.

My broker friend continued with the same logic that he had earlier.

“Sure – but the buyer of shares is buying because markets are up, and the seller is selling because of the same reason – the markets are up. And both of them think they are right.”

“So what? Who is right? And isn’t it all good?” asked Swami, by now quite impatient, and finally added, with an uneasy tinge of uncertainty “And finally what should I do?”

Despite the tacit explanations of my broker friend, Swami wasn’t convinced. All he knew was markets were up and he felt good about it. My broker friend had tried to explain the duality of markets.

“That’s the thing about economics and finance. No right or wrong, no good or bad in absolute sense.”

But clearly the message of balance was lost in Swami’s exuberance. But it had, nevertheless, raised some doubts in our mind on what’s good and what to do anyway.

And while Swami and I were musing about it, the old man in the sprawling bungalow got up and prepared to leave. And he left us with some food for thought.

“There is no good or bad. Markets are always a double-edged sword. For every greed buying, there is a fear selling. For every greed selling, there is a fear buying. You just need to go beyond both, so that you are never on the edge.”

 

The Madness of Crowds

Either I am a completely outdated, antique piece who doesn’t get it, or I may be a very calm composed person. I tend to give myself a positive spin with a benefit of doubt thinking it is the latter, but I suspect the former is perhaps closer to the truth.

The last week has seen me pose a dumb look on two seemingly obvious phenomena that I supposedly should have been lapping up and going crazy about. Both of them made me feel like that guy in the ‘Yeh PSPO nahi jaanta’ advertisement with the sheepish smile.

The first happened earlier this week when everyone was talking about a new game called Pokémon GO and I made the mistake of asking a colleague ‘is that a new cartoon series?’ And the second one, perhaps an even bigger faux pas yesterday, specially in Bangalore, was to ask a friend ‘What is this Kabali?’ I probably might have narrowly escaped a thrashing from the onlooking crowd.

I find myself in numerous such situations of late. Perhaps such situations are happening more often in this new age of social and mobile and trending or whatever – again my own benefit of doubt to myself.

Mark Twain said that a ‘Classic′ is a book which people praise and don’t read. In that era, it probably took a long time after a book is released for it to achieve this kind of status. A few of Twain’s own books achieved that kind of status.

It seems that this period has been drastically cut of late. And it applies to not just books, but probably to movies, new products, games, apps, mobile phones, electronic devices, and what have you. And it looks like most of them become classics before they are released. Things people praise, talk about but haven’t yet read or seen – because they are not yet released. And I am left wondering what to do every time such a phenomenon turns up with the ‘Yeh PSPO nahin jaanta’ sheepish look.

This phenomenon was probably started by the iPhone mania in the US. For apps, maybe Angry Birds started it. Harry Potter movies used to see these delusions before release. And lately every new mobile phone release is ‘highly awaited’. So the stampede surrounding Kabali is hardly a surprise.

madnessofcrowds

In the 1841 book, Extraordinary Popular Delusions and the Madness of Crowds, Charles MacKay wrote of the crowd psychology that drive numerous “National Delusions,” “Peculiar Follies,” and “Psychological Delusions.”

“We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

It does look like these delusions are more frequent of late – perhaps because there are so many objects attracting the attention of these minds (and their pockets) with easy channels of communication.

Many of these delusions are fleeting of course, and in all honesty, quite entertaining. All of them have the common result of getting some money out of your pocket. Some high, some low. A movie ticket here, or a book there, or some paid app, or at best a higher sum for a new electronic device maybe. So the harm is limited somewhat – for all the mania, it won’t leave a big hole in your pocket before, or even if it turns bad, a lasting one on your mind after.

But in the financial markets, these delusions are dime-a-dozen, and can be quite harmful. In fact, much of the day-to-day markets run on some delusion or the other – big or small. Many of them can also last quite long pulling even the most patient and experienced hands in. And with Love in the air (as in my last post), there are lots of new money-dwindling devices (like IPOs, new fund offers, expensive stocks, research reports, technical tips, stories of riches, business news, what have you!) waiting for your mind to get fixated on them. That’s where the madness of crowds can be not just entertaining, but positively harmful as well.

In such delusions, a dissenter from the crowd can look foolish, and despite all the patience, can eventually end up joining in for the fear of missing out. It is only later that one can learn whether one was sane or stupid. It is better to miss out on such madness of crowds – due to being outdated, lazy or composed, or some other reason.

It is worthwhile to remember what Charles Mackay rightly wrote in 1841.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Now let me go get my ticket for Kabali.

Love Hate Aur Dhoka

“Indians have a love hate relationship with stock markets” said the CEO of the Bombay Stock Exchange a few months back. And he goes on to add “We have a market that is not safe for investors to a large extent.” Further he adds “Only 2% of India i.e. 20-25 Million people invest in shares or mutual funds.”

My broker friend was reading out from a magazine as we met for our coffee this weekend. Swami and I were wondering what he was getting at. But he continued, this time from another article.

“SIP inflows are now about 3000 crore monthly as against 2500 crore six months back.” “FII inflows till date are about 22000 crores this year against 60000 crores last year.”

Swami and I were thinking that our broker friend will now tell us what he was getting at. But he continued again. This time with even more exclamation.

“Quess IPO was oversubscribed 147 times, L&T Infotech IPO was oversubscribed 12 times, Thyrocare was oversubscribed 62 times, and Ujjivan was oversubscribed 41 times. And I am sure there are more to come.”

Finally he looked up at us, smiled and said, “Looks like we are falling in love again.”

Swami and I looked at each other kind of wondering “What’s love got to do with it?”

“The hate of the past few years is gone. The love was cooking, now it seems it is served.”

Swami and I still confused. Love, Hate, Cooking and Investing. We just weren’t getting it.

Finally Swami had just one question “So?” Our confused state of mind was amply clear to our broker friend from the question itself. He finally obliged with some explanation.

“Well – it does look like there is increased participation in the markets from individual investors now. Which is great. But I hope it is not out of love.”

We were finally getting some of what Jigneshbhai was trying to say.

The quotes he was reading from did seem to indicate that individual investors were putting in money in the markets faster and in greater amounts than earlier. More money in SIPs, more money in IPOs, and lesser impact of foreigners’ money seemed to suggest that.

As we were musing over the apprehensions of our broker friend, he continued speaking.

“Because even if you love the markets, it won’t love you back. This kind of love can quickly turn into hate with the slightest mishap.”

That got Swami and I thinking about our broker friend’s skepticism.

The old man in the sprawling bungalow who was listening to our conversation walked over to our table. He always spoke cryptically, and this time was no different, albeit a bit clearer.

“Don’t love the markets. If there’s no love, there’s no hate. And if there’s no hate, there’s no dhokha. Go by your long-term plan, love it and stick to it, so that there is no love, hate or dhokha with the markets.”

Nothing is Impossible

“What’s up? Where have you been?” asked Swami, when we finally met after a long gap over coffee last weekend. It was indeed a long time since we had met our broker friend Jigneshbhai. “So many things have happened, and you have disappeared!” Swami repeated while sipping his coffee. Our broker friend had a sly … Read more

Ranjit’s Newsletter

Loading