Investing

Breaking News: Get down on your knees and pray during market falls!

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Breaking News: Get down on your knees and pray!

It is this advice from a well known investment expert that led to a huge crowd of men and women and couples in their twenties and thirties sitting down in prayer in front of the Bombay Stock Exchange on Dalal Street in South Mumbai today.

It was a dream come true for investors when the Nifty closed below 4700 for the first time since Oct 2009. Thankfully, RBI’s credit policy did not pull the markets up, therefore providing prices that were not available for the past 25 months for investors to buy. Experts suggested that with the global turmoil continuing and a solution to India’s domestic problems not in sight, they were optimistic that investors will continue to enjoy wonderful prices to buy stocks of great businesses for some more time.

“I think given the global scenario, the party will continue for some more time”, a reliable source was heard saying. An unexpected recovery in Europe and the US may spoil the buying party, so investors should brace against that. But the likelihood of that happening seems low, so it is an optimistic scenario for investors who have not seen such prices for a while. “I have been waiting for this since the last one year”, an experienced investor interviewed by this channel said. “Prices may continue to get better over the next few months if global turmoil, the domestic situation and our government cooperates. So I am keeping my fingers crossed.”

Investors who missed the discount sale three years back were being advised to look at what’s on offer and take advantage of these prices. A young man, who missed the last mega sale in Dec 2008, and who had joined the mass prayers with his newly wed wife, said, “Well, I guess those 2008 kind of mega sale offers don’t come often. But then, this 2011 one is not that bad. So I am praying that the good going lasts.”

Yes, in fact, prayer! Experts had advised investors that they start with a prayer. A prayer that in these unpredictable times for the markets and the world economy, stock prices remain or get lower than where they are. Therefore, leading to the unprecedented flash mob prayer in front of the Bombay Stock Exchange. “If you’re planning to work for another 20 years, then pray for a proper market crash”, a reliable source was heard saying. In fact, a well-known expert went to the extent of saying, “if you are in your twenties or thirties with a steady income saving for retirement, get down on your knees and pray for a fall! And pray that it lasts!”

The Annual Performance Appraisal: Jigneshbhai and Swami

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“I must leave now”, said Swami, my South Indian friend just as we were sipping our coffee.

“Going out with family?” I asked, knowing that he was quite the family man.

“No! Don’t ask – I have this big form I have to fill after going home, and submit it tomorrow without fail”, he said.

“Hmm – something to do with your son’s school I guess. Then you better go”, I said.

“Arre – nothing like that boss! In fact, it is about the boss! I have to go home and fill my performance appraisal form, listing all that I did in the year and ensure my boss gets it by tomorrow, so that he can rate my performance! You know how this corporate thing works. You have to do this every year. I am sick of it – but kya kare? Will not get my increments and bonus if I don’t fill that form!”, an aggravated Swami said. I guess my repeated questions on why he was leaving our weekend coffee discussion early had clearly pressed the wrong button.

“Your annual appraisal system is part of the problem in our markets also”, interjected Jigneshbhai, my broker friend.

I was a bit surprised with that. I could not quite figure out how Jigneshbhai had an opinion on that too. I could see the same reaction on Swami’s face. But before we could ask anything, Jigneshbhai continued, “So your performance is also measured once every year?”

“Yes, they say they will do it twice every year, but happens only once. Increments are only given once a year”, confirmed Swami, with a sore face. Somehow the word ‘increment’ used in corporate circles seemed like a well devised tactic to set expectations on the size of salary raises, and that expectation seemed quite evident on Swami’s face.

Be that as it may, but Jigneshbhai went ahead making his point on how they were a problem.

“You see, as the time for filling your appraisal form comes near, I am sure people start frantically showing evidence of their performance? Like finishing up more projects, telling the bosses what they are doing and generally being more active?”

“Yes – that is right, more or less. But it is not fair to everyone, you know. Sometimes the good people get bad ratings, and bad ones get good ratings”, reaffirmed Swami, still having his issues with the appraisal process.

“Well life is not always fair. But this appraisal thing affects fund managers and institutions also. They know that the time for the measurement of their performance is near. So every fund wants to beat every one else.” Jigneshbhai had a good understanding of psychology.

“So what do they do?” asked Swami almost innocently.

“Well, I am not sure, but I guess it should be, more or less, what you are doing. Some researcher said that’s the reason markets fall in December. So that relative performance can be shown for the year. And then rise in January when they get fresh money”, explained Jigneshbhai in his nonchalant style. Sensing the surprise, he continued, “Of course, you cannot profit from it. When everyone wants his appraisal form to look good, this stops happening.”

This was not good to hear. And it also left Swami both alarmed and confused as usual. “Hmm, so they are playing games at the expense of my money”, he thought, but did not say it in those many words. Instead, always looking for simpler answers, he asked “So even they are working for increments. So, what are you saying? Stop investing in funds?”

“Of course not, you cannot change that”, resumed Jigneshbhai. “But you can become an appraiser once a year – of the fund manager of your mutual fund. And unlike corporates where every year performance is relative to others, in markets, you have an absolute against whom to measure his performance – the market index. Put him on a performance improvement plan if he cannot beat the market index. If it still does not improve after a year or two, sack him and move your money to a low-cost Index fund.”

Guru Speak: An Uncommon Man, Philip Fisher’s Famous Words

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philfisherPhilip Fisher was an American investor best known as the pioneer of growth investing and the author of Common Stocks and Uncommon Profits, a guide to growth investing that has remained in print ever since it was first published in 1958.

1. There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish.

2. On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

3. More money has probably been lost by investors holding a stock they really did not want until they could ‘at least come out even’ than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.”

4. Investment is rarely an optimized process in hindsight. Most of the time, you can attempt to position yourself for a sub-optimal return, which ain’t too bad at all.

5. I don’t want a lot of good investments; I want a few outstanding ones. If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.

6. I remember my sense of shock some half-dozen years ago when I read a [stock] recommendation to sell shares of a company . . . The recommendation was not based on any long-term fundamentals. Rather, it was that over the next six months the funds could be employed more profitably elsewhere.

7. The stock market is filled with individuals who know the price of everything, but the value of nothing.

Guru Speak: Sir John Templeton’s Famous Words

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johntempleton1. Successful investing is only common sense. Each system for investing will eventually become obsolete.

2. The time to buy a stock is when the short-term owners have finished selling and the time to sell a stock is often when short-term owners have finished their buying.

3. Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy and sell.

4. “This time is different” are among the most costly four words in market history.

5. Search for bargains. You should try to buy that particular investment whose market price is lowest in relation to your estimate of its true value.

6. I never ask if the market is going to go up or down, because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: “Where is the one that is lowest priced in relation to what I believe it’s worth?”

7. The only investors who shouldn’t diversify are those who are right 100 percent of the time.

8. If you are diversified among different forms of wealth, nations, and industries, you’ll be safe in the long-run.

9. Experience teaches us that one of the most common errors in selecting stocks for purchase, or for sale, is the tendency to emphasize only the most obvious factor; namely the temporary outlook for sales and profits of the company.

10. The only certainty about the future is the fact that it will be different from the past.

11. For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity.

12. An investor who has all the answers doesn’t even understand the questions.

13. Diversify. In stocks and bonds, as in much else, there is safety in numbers.

14. …success is a process of continually seeking answers to new questions.

15. People are always asking me where is the outlook good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable?

16. If you begin with prayer, you will think more clearly and make fewer mistakes.

Guru Speak: What John Bogle, father of index mutual fund investing, famously said

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johnbogleJohn Bogle was the founder and retired CEO of the Vanguard Group. He is known for his 1999 book Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor, which became a bestseller and is considered a classic. A proponent of mutual funds for individual investors to build long term wealth, Bogle (through Vanguard) was the first to introduce low cost Index funds for individuals. Here are some famous words:

1. Time is your friend; impulse is your enemy.

2. If you have trouble imaging a 20% loss in the stock market, you shouldn’t be in stocks.

3. When reward is at its pinnacle, risk is near at hand.

4. We now have an equity fund industry that’s [worth] $2 trillion, and if everyone wants their $2 trillion back tomorrow, they’re not going to get it.

5. Capitalism requires a structure and value system that people believe in and can depend on.

6. The scandal is not what’s illegal. It’s what’s legal.

Book Synopsis: The Bogleheads’ Guide to Investing

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For regular investors for whom investing is not a full-time activity, the Bogleheads’ Guide to Investing is a wonderful book that asks the right questions and provides clear answers. In a single book, the authors (who also started an online forum bogleheads.org based on the investing principles of John Bogle) have explained, in a step by step, clear and authoritative manner, what a normal individual investor and his/her household needs to know about investing, and what steps they need to follow to reach their goals. It becomes clear that the authors have experienced and followed it themselves in their lives and now are keen to spread the message in their sunset years.

bogleheadsWritten by experienced individuals, this is a one-stop book for anyone who does not want investing to be a chore, wants credible advice once and for all in a single package, so that they can get it done and focus on the other things in life. Almost like grandpa’s advice, it is worth its weight in gold for new investors to learn, and for experienced investors to unlearn!

A quick summary of the Bogleheads’ Guide to Investing is presented below:

1. Choose and Live a sound financial lifestyle: “Decide whether you want to be a borrower, consumer or keeper. Graduate from a paycheck mentality to the net worth mentality. Most people fail to go beyond this step.”

2. Start to save early and invest regularly: “For most people, the most difficult part of the process is acquiring the habit of saving. Clear that one hurdle and the rest is easy. Adding time to investing is like adding fertilizer to a garden. It makes everything grow.”

3. For most investors, mutual funds offer great diversity in a single investment: “I have found that when the market is going down and you buy funds wisely, at some point in the future you will be happy. You won’t get there by saying, ‘Now is the time to buy.’ “

4. Figure out approximately how much you might need for your retirement.

5. Indexing via low-cost mutual funds is a strategy that will, over time, most likely outperform the vast majority of strategies. If you decide to own actively managed mutual funds, choose managed funds with low expenses.

“How investing is different from most of life: Through education and experience, most of us come to learn and practice certain life principles that serve us well. But the complete opposite is true in investing. For example:

a. Don’t settle for average

b. Listen to your gut

c. If you don’t know how to do something, ask the expert

d. You get what you pay for

e. If there is a crisis, take action

f. The best predictor of success is past performance

Well, guess what? Applying these principles to investing is destined to leave you poorer.”

6. An asset allocation plan based on your personal circumstances, goals, time horizons, and need and willingness to take risk is the cornerstone for reaching your goals.

7. Costs matter, specially in the long run.  “The shortest route to top quartile performance is to be in the bottom quartile of expenses.”

8. Taxes are your biggest expense. Invest in the most tax-efficient way.

9. Rebalancing is important. Rebalancing controls risk and may reward you with higher returns. Stick with your chosen rebalancing strategy.

10. Market timing and performance chasing are poor investment strategies. They can cause investors to underperform the market and jeopardize financial goals.

“The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I do not even know anybody who knows anybody who has done it successfully and consistently.” – John Bogle

11. Tune out the noise and do not get distracted by day-to-day events.

“A fake fortune teller can be tolerated. But an authentic soothsayer should be shot at sight.”

“It’s in the best interest of Wall Street that the public believes that they can beat the market.”

“The simplicity of sound investing creates a real problem for the investment media.”

12. Protect your assets and life with adequate types and amounts of insurance. Insurance is for protection, it is not an investment. Don’t confuse the two.

13. You need to master your emotions if you want to be a successful investor. Letting your emotions dictate your investment decisions can be hazardous to your wealth.

14. Finally, Stay the Course!

Guru Speak: Famous Warren Buffett Quotes

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1. Only when the tide goes out do you discover who’s been swimming naked.

2. A public-opinion poll is no substitute for thought.

3. Beware of geeks bearing formulas.

4. Derivatives are financial weapons of mass destruction.

5. Never ask a barber if you need a haircut

6. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

7. We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.

8. If a business does well, the stock eventually follows.

9. If past history was all there was to the game, the richest people would be librarians.

10. It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Warren-Buffett-9230729-1-40211. Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

12. Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.

13. Our favorite holding period is forever.

14. Price is what you pay. Value is what you get.

15. There seems to be some perverse human characteristic that likes to make easy things difficult.

16. Time is the friend of the wonderful company, the enemy of the mediocre.

17. We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’

18. We enjoy the process far more than the proceeds.

19. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

20. You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.

21. Lethargy bordering on sloth remains the cornerstone of our investing style.

Book Synopsis: Benjamin Graham, Building a Profession

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benjamin-graham-building-a-professionAgain continuing on Benjamin Graham, this weekend I was privileged to have read a book by this title “Benjamin Graham, Building a Profession”. It is a collection of rare writings by and interviews with one of financial history’s most brilliant visionaries. The book presents Graham’s evolution of ideas on security analysis spanning five decades.

Particularly striking are the changes in thinking that occurred in Graham over time from the pre-1929 to the Great Depression era when security analysis as a profession was not even defined, and then later from the World War II to the post 1950’s to the late 1960’s and 70’s when stock market levels and the approach to security analysis had changed quite dramatically. While this set of writings are not in the nature of an investing bible, like ‘Security Analysis’ and ‘The Intelligent Investor‘, there still are numerous nuggets and views specially provided to his own industry. They also reflect Graham’s lifelong effort to bring science into his own fraternity, his numerous attempts to bring integrity into the methods of Wall Street and the sheer difficulty of doing so due to the nature of the beast, and his honest effort to help ordinary individual investors. Here are a few excerpts from the writings:

1. On the Accountability of Security Analysts: We have no scoring system for security analysts, and hence no batting averages. Yet it would be anomalous indeed if we were to devote our lives to making concrete recommendations to clients without being able to prove, either to them or to ourselves, whether we were right in any given case. (1946)

2. On similarities between Medicine and Security Analysis: Both medicine and security analysis partake of the mixed nature of an art and a science; in both the outcome is strongly influenced by unknown and unpredictable factors; in both we may find “the concealment of ignorance, probably more or less unconsciously, with a show of knowledge.” (1946)

3. On the performance of security analysis: The greatest weakness of our profession is our failure to provide really comprehensive records of the results of investments initiated or carried on by us under various principles and techniques. We have asked for unlimited statistics from others covering the results of their operations, but we have been more than backward in compiling fair and adequate statistics relating the results of our own work. (1952)

4. On the change in valuation thinking from relying on past records to future expectations: A large part of the discrepancies between carefully calculated formula values based on the past and the market prices can be traced to the growth factor, not because the formulas underplay its importance, but rather because the market often has concepts of future earnings changes which cannot be derived from the companies’ past performance. (1957)

5. On the use of complex mathematical models in analysis: The combination of precise formulae with highly imprecise assumptions can be used to establish, or rather to justify, practically any value one wishes. Measuring imprecise variables with highly precise tools is not better than using crude tools. In fact, it may well be worse because over precise formulas tend to trigger overconfidence in those who wield them – creating the illusion of certainty in areas where no certainty is ever possible. (1958)

6. On the accumulation of equity using systematic plans like dollar cost averaging: The computations made of theoretical dollar averaging experience in the past embolden us to predict that such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions. This is by no means a minor proviso. It presupposes that the dollar-cost averager will be a different sort of person from the rest of us, that he will not be subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past. This, I greatly doubt. No technique or tool can ever impose complete external discipline on an investor who lacks internal discipline. (1962)

7. On market forecasts and their future: My views on the validity of stock market forecasting have been unfavorable for about half a century. Let me make a guarded prediction here. It is more than just possible that the investigations of Wall Street’s practices in the future will include a really comprehensive study of the claims and accomplishments of the leading approaches to market forecasting. The opposite possibility is merely that all such prognostications will be required to bear in large type the legend: “For entertainment purposes only. Do not take seriously.” (1963)

Guru Speak: Some More Excerpts from Benjamin Graham’s Writings

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Continuing on the topic of investing wisdom from Benjamin Graham, here are a few more excerpts from the Master’s writings.

1. On Portfolio Policy: We are thus led to put forward for most of our readers what may appear to be an oversimplified 50-50 formula. Under this plan, the guiding rule is to maintain as nearly as practicable an equal division between bond and stock holdings. When changes in market level have raised the common-stock component to, say 55%, the balance would be restored by a sale of one-eleventh of the stock portfolio and the transfer of the proceeds to bonds. Conversely, a fall in the common-stock proportion to 45% would call for the use of one-eleventh of the bond fund to buy additional equities.

2. On The Defensive Investor and Common Stocks: No one has yet discovered any other formula for investing which can be used with so much confidence of ultimate success, regardless of what may happen to security prices, as Dollar Cost Averaging. (Quoted by Graham from another study)

3. On Portfolio Policy: Investment policy depends in the first place on a choice by the investor of either the defensive (passive) or enterprising (aggressive) role. There is no room in this philosophy for a middle ground, or a series of gradation, between the passive and aggressive status. Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement.

4. On Market Fluctuations: In any case, the investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say 50% of more from their low point and decline the equivalent one-third or more from their high point at various periods in the next five years. A serious investor is not likely to believe that the day-to-day or even month to month fluctuations of the stock market make him richer or poorer.

5. On Market Fluctuations: It is for reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio. The chief advantage, perhaps, is that such a formula will give him something to do.

6. On Market Fluctuations: A true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would be spared the mental anguish caused to him by other persons’ mistakes of judgment.

7. On Investment Advisers: If the reason people invest is to make money, then in seeking advice they are asking others to tell them how to make money. That idea has some element of naiveté.

8. On the Central Concept of Investment: In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, “This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.

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