AA - Abhishek's Attic (place to store stuff to clear my head)!

[basumallick]

What to expect from the market?

I don’t know what will happen in the short term. When we invest in equities, we should assume that we will get i) a 10% fall every year, ii) a 15%-20% fall every 2-3 years and iii) a 30-40% fall every 5-8 years. If you are not comfortable with such variations in your holdings, then the stock market is unlikely to suit you.

An important point to remember is that if you keep waiting for the market to correct when things are going well, you will not be able to buy when things take an ugly turn.

Today, the broader markets, especially the mid and small-cap space, took a significant beating. If your instinct was to sell and run away today then how would you be able to buy when there is gloom and doom all around?

There have been multiple studies in the past that staying in the market through its ups and downs is what makes the difference to the long-term portfolio.

Below is the monthly chart of the Nifty 500. You will see that the index has trended upwards even with sharp corrections in between.

Also, I have attached the number of times the midcap and small-cap indices have taken a sharp cut in the last 3 years (post-Covid).

Fig: Nifty 500 weekly chart

Fig: Fall greater than 3% in CNX Smallcap 100 and CNX Midcap 100 in the last 3 years

What should be done on such days?

Now, on a day like today, when we saw broad-based selling, there are many questions that come to mind. But the main variations are:

• what do I do if I am already fully invested?
• what do I do if I have some cash in hand to deploy?

I don’t have a good answer to any of these questions. I will just say what I do.

When I get into an investment, I have a stop loss in place. The stop loss varies based on many factors but one of the main factors is the duration of expected holding. If I am buying something for the long term, my stop losses (or trailing stops) are much larger than if I am taking an opportunistic bet.

So, on a day like today, I don’t do anything.

In bull markets, there are multiple instances when we see very sharp counter moves for between 1 to 3 days. So, in general, I will not react unless a stop loss is hit. If it is, I will get out.

If I am holding a large percentage in cash, I may even deploy small quantities. The main idea is to ensure that the main trend of the market is not broken before I buy more. And that usually cannot be ascertained in one day.

The actual buy-sell decision will have to be taken over the next 2-3 days.

If I have to buy, I will stagger and buy over the next few weeks. I would also re-evaluate the portfolio to see if any switch needs to be made.

I continue to be very bullish about the Indian markets over the next 3+ years perspective. As such, these falls are opportunities to add cash to our portfolios.

The Macro Bull Case

• GFCF (investments) are rising as a % of GDP

• Bank balance sheets have improved consistently over the last few years

• India has one of the lowest debt as a country giving RBI more manoeuvrability in monetary policy

The Macro Bear Case

• MNREGA demand uptick signifies a poor rural economy

Crude is inching higher once again and could be headed to $100/bl

In Summary

• Do nothing for now.
• If you have cash, deploy slowly. Once the trend is clear, deploy aggressively.
• Be mentally prepared to book profits or losses if the market worsens quickly.

[sarthakkumar19_]

@basumallick

if you keep waiting for the market to correct when things are going well, you will not be able to buy when things take an ugly turn

Could you please elaborate this point since I have been waiting for the markets to correct for quite some time

[basumallick]

It is a very simple thing. Let’s say today the market or the stock you want to buy is at 100. You wait for it to come down to 80 before buying. There are essentially only three things that can happen.

1. It comes down to 80.
2. It falls but does not come down to 80 but maybe 85 and then reverses and goes up again to 120.
3. It does not fall at all and goes on to 120.

In cases 2 & 3, you will miss the boat completely.

In case 1, in the majority of cases, the discourse around the stock or the market will be so negative when it falls 20% that you may be scared to buy. You will then say let it stabilise and then I will buy. Then the stock suddenly reverses and runs up. Having seen the price at 70, you will find it difficult to buy it at 80-85-90 during the runup.

[cnsushil]

@basumallick

In bull markets, there are multiple instances when we see very sharp counter moves for between 1 to 3 days. So, in general, I will not react unless a stop loss is hit. If it is, I will get out.

Great insight Sir. Stop loss is the biggest dilemma for me. How do you set a stop loss for stocks, especially when you are holding for long term?

[amishra]

Simply explained- Nice read.

Assume one buys at 85, 80 and 75. Equal tranches- staggered buying. Average buying at 80. Now market reverses and goes from 75-90-120. How would you suggest to sell and book profit. Staggered buying is easy to understand. What is tricky is how to sell. How much and at what level. Assuming he is not eternal long term investors and books profit and gets cash ready and does asset allocation.

[basumallick]

I just put out a video on YouTube some time back on selling. I am not putting a link here because it is not allowed by the forum guidelines.

I have discussed at length about my selling methodology.

[basumallick]

SIPs per month have continuously crept up over the last few years. It has more than doubled from 2020.

I would not be very surprised if it doubles in the next 3 years and at some point, the Indian markets are looking at a monthly inflow of 100,000 cars per month.

[Ascendant]

Would inflation be also updated to reflect that? Cost of daily use goods, properties have also close to doubled since 2020.

It seems investing in equities is a great way to combat inflation.

[basumallick]

This is raw data as put up by AMFI and not inflation-adjusted. Inflation in India has always been more or less around the 8-10% mark roughly, not CPI / WPI, but the normal urban middle and upper-middle-class cohort that most investors belong to, which does not account for the sharp upmove in SIPs.

In fact, with higher inflation, savings would normally have taken a hit and reduced, as people had to dip into their savings or reduce savings and spend more of their income to maintain living standards.

[asarun]

Is this net inflows? I assume so, but wanted to confirm.

[basumallick]

No, it is not. It is exactly what it says it is - monthly SIPs.

https://www.amfiindia.com/mutual-fund

[james_kerala]

@basumallick

algorithm running in Nifty 500 universe?

I started 4 months back with 0.1% of my portfolio. Now, I have scaled it up to 12%. The plan is to increase it to 30% over the next 6-12 months.

I reinvest the entire money on the reset date. I am not taking out anything from the portfolio.

I am using the 3 strategies that I have built now. The first one is the one I have mentioned here which is a quarterly strategy invested monthly. The other two are monthly strategies invested monthly. All 5 monthly transactions are with equal absolute sums of money. So, in percentage terms, the quarterly strategy takes 60% of the capital and the other 2 take 20% each

Dear @basumallick dada,

Thank you for this thread. I like to know the progress on quant strategies ? Did you increase it to 30% as planned ? Was this more profitable over fundamental yearly strategies ?

Also how this three strategies (monthly and quarterly ) performing ? Which one you scaled up and anyone you scaled down ?

Are you still continuing to use nifty 500 universe?

[basumallick]

I have made a fair bit of changes to my personal investing in the last couple of years. Now, quants play a big part even in my long-term investing as well, especially in the idea generation phase and also sometimes in the entry/exit timing phase. So, the lines between all these silos are getting slightly blurry for me.

I have started using a lot more quant and a bit of machine learning to make sense of the market context. Getting help from my childhood friend who is a master in ML and data science.

I have started learning and dabbling with machine learning now ( I get bored doing the same thing and need something new every few years) and am hoping to see how it can be used in research and pattern recognition and simulation processes.

A broad objective in my mind is to be able to create a quantamental (Quant first followed by deep fundamentals) investing process and then use that and keep refining it over time. Fingers crossed

[mrlearner]

@basumallick

October 2019: 22.06% (In Progress. Sell Date 1-Jan-20)
November 2019: 3.56% (In Progress. Sell Date 3-Feb-20)
December 2019: -1.02%(In Progress. Sell Date 2-Mar-20)
XIRR (till date): 58.8%

Hi Abhishek, though virtually, I am also testing somewhat similar strategy, it is giving good returns, it has been 4 months since I started it, so far got 35% absolute returns. I have a small question about back testing, my stock universe is Nifty500, how do we get to know historical data about which are the top stocks as the top stocks keep on changing?

[basumallick]

It is not possible to know as far as I know from the data providers available today. That is one reason why I shifted to using a market cap and liquidity filter rather than using any pre-determined index like NSE500.

This also has challenges if tested over a long term. Mcap today of 5000crs is not the same as a 5000cr mcap in 2005 due to inflation. So, there is no ideal solution to this.

Another important point for me is backtesting is an indicator of the results possible by a system. I don’t take it at full face value simply because there could be many data errors which I may not even be aware of.

[basumallick]

The Worldly Wisdom of Charlie Munger

The passing on of a hero

When a person dies whom you have only known from afar and who did not know someone like you existed, and yet, you feel a deep sense of loss, then it means the person has made a difference in your life. Today I silently mourn the passing away of Charlie Munger.

When I first started investing in 2000, it did not take long to stumble upon Warren Buffett and from him on to Charlie Munger. Over the years, Charlie has spent much less time talking about investing and more on “worldly wisdom”.

Both Buffett and Munger are my heroes and grandfather figures. I have learnt so much from them about leading a good and honourable life.

Charlie’s focus on what he called a “latticework of mental models” attracted me very quickly because I was made of the same mould (or so I would like to think) of assimilating knowledge across multiple domains.

The other thing that attracted me to Charlie was his candour. He was very clear that he wanted to be rich because he wanted to be free to pursue his passions. Over the years, I have collected his sayings and quotes and some are etched in my mind and in my life and have become my life mantras. I am putting them here more as a reminder to myself and to remember him today.

• “People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”
• “I don’t think anything that any average person can do easily is likely to be worthwhile.”
• “Nobody survives open heart surgery better than the guy who didn’t need the procedure in the first place.”
• “I succeeded because I have a long attention span.”
• “Smart people aren’t exempt from professional disasters from overconfidence.”
• “I think that one should recognize reality even when one doesn’t like it; indeed, especially when one doesn’t like it.”
• “Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day— if you live long enough— most people get what they deserve.”
• “We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”
• “It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.”
• “A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage, etc.”
• “Bull markets go to people’s heads. If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond.”
• “People calculate too much and think too little.”
• “What the hell do I care if somebody else makes money faster?” There’s always going to be somebody who is making money faster, running the mile faster or what have you. So in a human sense, once you get something that works fine in your life, the idea of caring terribly that somebody else is making money faster strikes me as insane.”
• “It’s a good habit to trumpet your failures and be quiet about your successes.”
• “If (investing) weren’t a little difficult, everybody would be rich.”
• “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.”
• “Our biggest mistakes, were things we didn’t do, companies we didn’t buy.”
• “We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.”
• “If you can buy the best companies, over time the pricing takes care of itself.”
• “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads – at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
• “Whenever you think something or some person is ruining your life, it’s you. A victimization mentality is so debilitating.”
• “You don’t have to have perfect wisdom to get very rich – just a bit better than average over a long period of time.”
• “The way to win is to work, work, work, work and hope to have a few insights…. And you’re probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It’s just that simple.”
• “Why should it be easy to do something that, if done well, two or three times, will make your family rich for life?”

Charlie Munger has passed away today. But he will live on in thousands of his followers who learnt so much from him and hopefully, we will be able to pass on a part of our learnings to the next generation.

Let me end this with a video where Charlie speaks on a number of topics close to his heart.

A Conversation with Charlie Munger (U Michigan)- 2010

[basumallick]

I am sharing some excerpts from my letter to our PMS investors. Here I am putting only the parts which are not related to the funds but have more to do with investing discipline.

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Time to be cautious

In such euphoric times, we would do well to remind ourselves of what the legendary Benjamin Graham once said and what I have personally noticed multiple times, “Observations over many years has taught us that the chief losses to investors come from the purchase of low quality securities at the time of good business conditions.”

When markets are euphoric, and everyone around us is bullish, it makes sense to remain on high alert. Years of observing the market has taught me that everyone cannot and does not become rich in the markets. So, when the pendulum of consensus swings to one extreme, it tends to autocorrect. The time to be most vigilant is when there are no dark clouds on the horizon. More because everyone around us has thrown caution to the winds.

My first instinct is to protect capital. Always. I want to ensure that the hard-earned money that we invest is not lost permanently. And the easiest way to lose capital is to chase poor companies in cyclical industries by paying very high valuations.

Market buoyancy led by liquidity

Today it is not easy to find very good businesses with some amount of earnings growth and visibility at cheap valuations.

The main reason is the deluge of both foreign and domestic liquidity. Indian investors have become a force to reckon with and in 2023 pumped in Rs 1.85 lakh crs compared to Rs 1.45 lakh crs by FIIs.

The financialisaton of savings is well underway with SIPs in mutual fund becoming a major investment and savings tool for the common person. This is a long-term trend in India and the SIPs are only going to increase as more and more see the benefit of regular savings in equities. I see this as a similar phenomenon as the 401(k) plan in the US in the 1980s which led to huge participation of common Americans in the US markets leading to a two-decade rally. Given Indian demographics, economic development and progress, it would not surprise me to see a similar run in the Indian markets.

That does not mean it will be a straight line up. There will be a lot of ups and downs over the years but our job is to stay invested and keep the faith.

[basumallick]

Intergenerational Investing: The challenge of protecting and preserving wealth across generations

Most of us, when we start investing, it is with a very small corpus, unless we are lucky to have an inherited portfolio. The lure of making a lot of money in the stock market beckons. Reading the exploits of legends like Buffett or Jim Simons or our very own Rakesh Jhunjhunwala, we dream big. The problem we try to solve is wealth creation.

On the other hand, there is another class of investor, who has a completely different challenge. They have made their money, mostly from their businesses, and have either sold out or taken out a substantial portion to create a sizeable portfolio. And now they wish to invest it. This takes many forms – family offices, family trusts, family portfolios etc.

In the last few years, I have been associated with a few large family offices and have gathered a fair understanding of the psychology of this type of investment. The most important aspect of this form of investing is not wealth creation but wealth preservation. Here, the objective is not to look for the next multibagger but to ensure that the family retains buying power at the same level in the next generation.

Capital Preservation: play defence before offense

When I was first asked to help guide the investment of one such family a few years back, in the midst of Covid, it gave me a great sense of responsibility. Here the capital is all that the family had. It was irreplaceable. If it was lost, it can never be replaced. It represented a lifetime of effort, earnings and savings of the family. Now that the business was sold, there was going to be no more capital coming in. So, capital preservation had to be the most important factor.

The question is how to preserve capital. I use multiple ways to manage risk.

Risk Management: modes of survival

First and foremost, my focus is to buy high-quality businesses. The longevity and endurance of a business becomes one of the most important criteria for stock selection. This ensures a very low probability of permanent capital loss.

Secondly, I use a stop loss. This sounds sacrilegious to many value investors, but I am strongly of the belief that no investor can know all that is to know about any investment. I mean, even promoters don’t know everything. We deal with the future when we invest. And the future is always uncertain. So, I use a stop loss. It is my insurance against catastrophic loss. This provides a floor to the loss I can take at any time and provides a fair deal of comfort to me and the investor family as well.

Thirdly, I diversify. Depending on the size of the portfolio, the diversification varies. Usually, I prefer having 10-20 stocks in my portfolio. But for large portfolios, I sometimes would have more stocks.

Asset Allocation: spread it out

Another aspect is to have multiple asset classes in the portfolio. Equity, bonds, gold, silver and real estate are the ones that are good options. As I am personally only focused on equities, I suggest they consult with specialists in each area. Moreover, a broad per cent allocation needs to be agreed upon and an annual check is needed to adhere to the allocation.

Even within equities diversification across sectors is important. No sector should become too large to hurt the portfolio.

Defensive factors to the fore

In factor investing parlance, while constructing a defensive portfolio, the preference should be towards selecting stocks which correspond to factors such as dividend, value, large size etc. Sometimes a combination of such factors could be a good starting point. For example, stocks which are large-cap with a good dividend yield could be a good choice. Or stocks which are cheap and offer good dividend yield.

Market timing: tactical market timing

Market timing, another topic which is anathema to the investing pundits, is something which everyone wishes to do but admits not to try!! As a student of the craft of investing, I always try to get better at the craft. And that includes market timing. In fact, observing markets and participants over the years has taught me that timing is one of the most critical aspects of investing. If you are too early to enter you will get sub-par results. If you are too late to exit a stock, again you will get a sub-par result.

Market timing can be attempted in many ways, and none are foolproof. You can use technical or quantitative analysis. You can use absolute or relative valuation-based methods.

Active quant-aided: custom indexing can help

When you start playing defence you may be drawn towards a broad index like Nifty and invest passively. Although it is a perfectly good course of action, a much better approach is to build a custom index based on your preferences.

I have used simple quantitative methods to create a customised index which improves upon the vanilla Nifty index by changing the methodology of stock selection, sector weightage and entry and exit criteria.

With large portfolios, more fundamental oriented long-duration quant models are required to be implemented.

Playing offense

Some amount of playing offense is needed to enhance portfolio returns. When we look at building a portfolio from a factor investing model, offense would mean adding growth and momentum as major factors in the portfolio. Although commonly momentum is synonymous with short-term trading, it need not be so. Longer-term momentum strategies are also extremely effective and can be used in portfolios of large size.

Summary

Over time and with increased portfolio size, the objectives of an investor can change. Kahneman & Tversky introduced the prospect theory, for which Kahneman later received the Nobel Prize. At a very high level. The theory says that investors value gains and losses differently, placing more weight on profits versus losses. That is people are more averse to making losses than gaining. It is said that for every rupee lost, an investor feels double the pain than for a rupee gained. This is more the case when the capital is irreplaceable.

History is replete with families who were once mega-rich but over generations have not been able to compound their wealth. A strong mix of strategies with defined risk management can help protect and generate wealth over very long periods of time.

This post first appeared on Moneycontrol.

[basumallick]

Views on News: The annual budget and other thoughts

On 1st of February, we will have the annual budget in India. This time, since it is an election year, we will have a vote on account or interim budget.

As normal, all of the traditional media is focused on the event. Many articles and talk shows would have taken up investors’ time discussing expectations of various industries and policies that might be announced in the budget. Then you would also have some “experts” talk about what they hope to see in the budget.

The net of all this is zero. All of it is a waste of our time. Don’t waste too much time before the budget forecasting what will happen. Listen to the budget highlights or read it the next day in newspapers. Nothing earth-shattering happens in the budget in 99% of the years. In most likelihood, you will not remember anything from the last budget or any other budget. I barely remember 1-2 budgets in the last 25-30 years that I have been following the budget for.

Having said that, what is it that you need to watch out for in any budget? Broad-level allocations to different ministries and projects. This shows the intent of the government and gives a sense of the priorities of the government. For example, in the 2023 budget when railway allocation was increased to 2.4 lakh crs compared to 1.4 lakh crs the year before, it signalled the intent of the government.

Markets are at a high. Should you invest now or wait?

Markets are always uncertain. If they are going up, you feel happy and scared. If it is going down, you feel sad and scared. Ultimately, the market brings out the most prevalent emotion within you. If you are scared, you will find reasons to be scared. If you are optimistic, you will find reasons to be bullish.

The point I am making is that don’t let your emotions get in the way. Keep investing and stay invested in your portfolio. Individual stocks will go up or down but as long as you are invested in good businesses you will get rewarded over time.

The Way to Invest Now

One of the best ways to invest in an uptrending market is to do a SIP. If you are buying stocks yourself, buy on the days the markets are down. Don’t have to rush in to buy everything in one day. There will always be opportunities in the market.

With a regular SIP mode of investing, you will be better psychologically positioned than investing in a lump sum.

[basumallick]

Investing in volatile times

Markets have been extremely volatile in the last two or three days. There has been a sharp decline in stocks especially in the mid and small caps. This is a feature of investing in such stocks. The ride is bumpy but has better longer term rewards.

In such a volatile market environment, what should an investor do?

The market can do one of three things at any time.

1. It can go up
2. It can go sideways (consolidate)
3. It can go down

The probability of markets going up or down linearly is usually very low. That means you will not find stocks going up every day for very long. Every few days, it will correct or go sideways.

When markets are going down very rapidly, you again have three choices:

1. Do nothing

My default position is to do nothing if I have conviction in the stock(s) that I am holding. Exactly like I do nothing when stocks are going sharply up. Most of the time doing nothing works to your advantage. The problem with investors is they are mostly looking for action. They are glued to their mobiles checking the broker account or moneycontrol portfolio and this creates an itch to do something at all times. The other problem is they don’t have any conviction in the stocks they have bought because usually it is based on hearing a tip from some random person (and that includes analysts on TV, Twitter, YouTube, Telegram etc). So, a person who has very little conviction will be the first to throw in the towel when the going gets tough.

2. Sell (trigger your stop losses)

The next course of action I think of doing is to cut losses and triggering my stops. This is because I usually do not want to fight with the market. The market can decide to behave completely contrary to what I expect it to do. I respect both my capital and time. But this also means that you need to give a certain amount of breathing room for your stocks to bounce up and down without taking you out of your position.

3. Buy (averaging)

The last option for me is to buy. And 99% of buying is if I am averaging up. I have stopped averaging down with only one exception - when I am in building a position.

If I have cash and the market falls and I wish to enter what do I do?

First is to look at my portfolio or my watchlist and see if there is any stock where the allocation is lesser than what I wish. If so, then I top it up.

The other aspect I do is I will divide my capital to be deployed into 4-5 chunks and then use that every day the market goes down.

In case my allocations are as they should be, and still I have additional capital to deploy, then I will deploy it across all the stocks in my portfolio.

If some stocks fall more than others should I buy more of those?

Only if there is very high conviction in those stocks. Currently, the market is doing a sector rotation every few months and stocks or industries that have done really well see more correction (both price and time-wise). For example, PSU stocks, railways and defence sectors have seen more severe falls than other sectors in the last three days. It is always prudent to let a stock stabilise before jumping in. That may mean you buy higher than the lowest point. But it also means the probabilities are in your favour.

It is results season, so if some stocks fall more based on their results, should I buy more of those?

These are two separate decisions. Do not club them into one. Whether you want to buy a stock based on its results is a separate decision. If you think the results are bad and you wish to exit, then do so.

Always keep in mind the basic tenet of doing nothing if nothing much has changed that warrants action.

SIP is the way to go

Short, sharp corrections are par for the course in a bull market. One of the best ways to invest in an uptrending market is to do a SIP. If you are buying stocks yourself, buy on the days the markets are down. You don’t have to rush in to buy everything in one day. There will always be opportunities in the market.

With a regular SIP mode of investing, you will be better psychologically positioned than investing in a lump sum.

In Summary

When markets are volatile, it is worthwhile to remember these basic tenets:

• Do nothing
• Sell if you stop losses are triggered. sometimes, partial selling is a good option. Here again, my maxim of “When in doubt, sell half” comes in handy.
• But if you have cash. Spread out your buying. And let the market and stocks settle down to an extent before buying.
• If all this sounds complicated, just stick to a monthly SIP mode of investing and keep a long term orientation and you will come out fine.