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

Investment Learning
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Sir here two scenarios are possible and in both scenarios looks like bulls will win

FIRST scenario( No lockdown inspite of increasing covid - Learn to live with covid and unsuccessful vaccine ) : Majority of deaths are in elderly people with preexisting medical conditions .India has mainly young population.

Now many countries are relaxing lockdowns inspite of increasing number of cases.As saving economy is given the priority over saving elderly population.

long lockdown will lead to poor economy and which will cause more death as people will die due to poverty,depression and hunger and hence many countries are relaxing lockdown
and people are learning to live with covid

Second scenario (early vaccine ):
we will get the vaccine soon .Uk vaccine results are coming in mid June and if it’s successful then again bulls will win

So sitting on cash looks more risky in either situation

Third scenario where bears can win is prolonged lockdown. But it’s not mandatory to have prolonged lockdown as there are options available.And if economy is crumbling then it’s practically impossible for any govt to keep going with the lockdown

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Thanks abhishek for the excellent write up. Covers all possibilities.

The feeling I get is markets seem to be held up due to gush of liquidity. But inspite of all these big doses of liquidity, they have hardly managed to retrace less than 50% of the preceding downmove.

Markets always have a mind of their own and dont play out the way people expect them to play out. Most people expected markets to correct back to 8000 levels but markets have gone sideways. All these booster doses of liquidty is almost like keeping a patient with internal bleeding alive with continuous blood transfusions. But as long as the internal bleeding is not resolved, dont expect the patient to get up and start running. Same applies to markets. After a point something has to give and then action will start, either on the way up or down. (my guess is down but I reserve the right to be wrong).

In these kind of uncertainties, it makes sense to sit on the sidelines, or if at all think about investing, then invest in strong stocks and sectors where there is visibility on business front and relative strength in stock price.

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@maheshkumar In the first scenario: We dont know about the consumer behavior, even if the businesses are open. I think this is very important. I have come across a lot of articles that say consumer behavior will never be the same. (Of course, during a crisis, people will always sensationalize things. But there may be some truth to it)
Today I went for a walk on the main road ( which has a lot of branded stores). About 70% were open. But I saw customers only in super markets. Not a single customer elsewhere. I know this is too early to make a conclusion. But still gives some idea.

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hi @basumallick
Could you share your views on the current pull back? . Of course, we will hear the usual theories like liquidity driven rally, market is always forward looking etc.
I remember one of your posts that talked about 2008 event. 25% fall, then recovery by 25% or so and then again fall. Do you see any similarity in the first round of recovery?. One main difference this time is that FED balance sheet expanded from 4.1T to 7T in such a short time. So I wonder if the disconnect between market and economy will remain or even become larger.

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Difficult to say. But I would still be cautious. I am of the view is that overall situation is very bad and if things get better then markets will be okay. But that may mean markets can be rangebound or fall. I am expecting (hoping) that the fall may not be very steep but more of a gradual consolidation. But can’t rule out a fall.

In times like this, I think it is better to be prudent than heroic. I am investing for the next 30-35 years (provided I remain alive that long). Missing a few months or making less returns than a benchmark will not make a difference in the overall scheme of things.

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Could you please clarify about stop loss when one needs to set a limit. Is the stop loss around the buy price of the stock or irrespective of the price with a trigger?

These are the 2 scenarios ( assuming a 20% stop loss scenario)
Scenario 1: Stock buy price is 50. Goes up to 100 and now at 80. So a 20% fall from 100. Is there where one has the stop loss? My question is what if the stock goes probably to 75 and then climbs back beyond the 100 ? Isn’t this wrong?

Scenario 2: Stock buy price 100. Goes to 120 but falls back to 80. (20% fall but from buy price) Is that where I need to pull the trigger?

So is stop loss relative to the buy price? Should one have it set at the price that they buy the stock, so that the moment that is breached , we can exit?

What has been your approach- i.e. set it at buy price/ SL defined irrespective of the price?

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@Vijayalakshmi

Both your scenarios are valid but scenario 2 is slightly impractical.

The first one is what is known as a trailing stop. You basically trail the price and get out at a predetermined level. A stop loss, like any other tool, has a specific purpose and cannot solve all problems. It is meant to prevent incremental losses or to lock in profits at a certain level. What happens after that is not material important. You are taking what is known as “the happy path”; where things turn out well. How would you feel if in scenario 1 if the stock keeps falling and reaches 50. Then falls more to 20. (Think Yes Bank or ILFS or numerous other such examples).

In scenario 2, why would you want to give up all your gains and then so much? Unless of course you are very very sure of the fundamentals of the business and want to hold on for a much longer period. But, personally, I think its important to give yourself some leeway to think that you could also be wrong in your thesis. And if you are wrong, when would you decide to get out?

Just take the example of Buffett’s recent airline bet. Without getting into the sagacity of the investment, it is important to see that he actually got out when he thought that his thesis was no longer valid. In a technical stop loss, you should determine what level you would get out before you enter the trade.

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The Journey to be a Full-Time Investor

Since I turned into a full time investor, I keep getting a lot of questions on how, when and what to do to quit a salaried job. I don’t have a prescription. But I can share what I thought and did. I hope it helps.

#1 – Not running away from your job

The most important determinant for leaving my full time job was to have a passion that I wanted to follow. If there is nothing to run towards, I figured that the day to day life would become very boring after the initial few days or weeks, even if I had enough money to sit and do nothing. A meaningful occupation or passion is the most important factor for deciding to call it quits.

Luckily for me, investing is my passion. It is something I would do even if I did not make any money from it.

#2 – Make sure your family is onboard with your decision

Leaving a professional career was not easy. It took me 2 years to convince my family that it is not an end of the world if I did not get up in the morning and go to a corporate job. Since, I come from a very typical middle class Bengali family, with practically all extended family members working as professionals or in corporate jobs, there supposedly was a “social” problem if I had no job! My family members were worried about simple things like what would they say if relatives asked what I did for a living.

The most critical aspect, in my experience, was the uncertainty of not having the month-end sms announcing your salary credit! That is something which is not very easy to get over. That leads me to my next point.

#3 – Make sure you get your basic expenses covered from fixed income

This was something that my friend Aveek Mitra told me a few years back. He said if I was planning to be a full time investor it is important to make sure that my investing capital is never ever required for my monthly expenses and that I should be able to run the household expenses from fixed deposits.

I strictly adhered to this. And this made the decision to quit all the more easy. Because it does not really matter at the end of the month if your salary is coming from a company you work for or from a bank FD you have.

This also helped in eliminating the uncertainty of leaving a job that I was accustomed to for nearly two decades.

I understand that this criteria makes it very difficult to consider quitting because it necessitates a fairly large corpus to be put aside for fixed deposits. Unfortunately, quitting a job, in Indian context is more or less a permanent decision. It is very difficult to be able to find a job after a couple of years in case it’s required by financial exigencies. Best to be conservative than to be repent it.

Of course, if you have a spouse who can contribute to covering part of the monthly expenses, then you are in a considerably better situation.

#4 – Think about what you will do with your time

Being a fulltime investor sounds very cool and sexy. But it’s not. It is a lonely pursuit. Unless you love sitting and reading for hours every day, it is very easy to get bored very easily. It is best if you do not work from home. I have found working from home as a full time investor to be very difficult. My family thinks I don’t do anything and keep interrupting!! This wasn’t the case when I was working in my job. Have a network on friends who are also full time investors who you can speak to during the day because most of your other friends or family will be occupied in their own jobs and businesses. It is also important to have a hobby for time-diversification. As long as you are working, investing was possibly your hobby. But once your job is done with, you need something else to fall back on to divert your mind and relax.

#5 – Build a daily routine and be disciplined

Once you are a full time investor, you need to have a routine which you follow. Else you run the risk of slowly falling into chaotic stupor. I, for example, break up my work day into 2-3 big blocks of 1-2 hours each. I spend reading (books, magazines, articles, blogs), listening to concalls or videos or podcasts, stock specific work, moderation work and going through threads in ValuePickr, researching quant ideas etc. I will take each of these and put them on my calendar for each day.

#6 – Enjoy the journey

This is perhaps the most important and most overlooked. Unless you enjoy the process of investing and love the learning process, just running after the returns will be very boring and unrewarding. Only if you love what you are doing and feel energized every day, will it really be all worthwhile.

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Nice succinct insight
Thanks
Can I ask ,How long u have been a full time investor

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Hi @basumallick

Congratulations on your very progressive journey as a full time trader/investor. It takes lot of guts to leave job and take up such risk when you have family to feed.

I have one question here… Obviously it requires your experience (or a full time trader’s experience) to answer this. So posing it.

How do you get along with a situation similar to what happened in March 2020 i.e. the abrupt and quick reaction of COVID-19 on financial markets. Because these type of events can simply give lot of tension as one as a full time investor may have a portfolio to extent that unrealised loss also can sometime give pain which is unbearable.

I agree we may have fixed income to feed family but the principal amount invested in stocks , if it suddenly becomes 1/2 or 1/3rd for example. How do we take care of this.

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Very well written
It shows how much committed you were

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It’s a very important question. It is unnerving when the portfolio goes down. But if you are investing for a long time, you somewhere get used to the ups and downs. And knowing that your daily life is already taken care off helps to a great extent. That is precisely why I insist that not having to depend on income or return from the market is essential.

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My article today in ET:

The full text below:

What has happened in the coronavirus case is the media and social media spreading panic and everyone, including governments succumbing to the fear of the unknown. Visuals of thousands of people in hospitals in Italy scared the hell out of people. Even the central banks panicked into throwing unprecedented amounts of liquidity into the system. Now slowly new data and new research will continuously come to light and help us understand how to tackle Covid better; help people lead their lives. All this till a vaccine is found, which may not be very difficult as flu or related vaccines are already available for other coronaviruses.

In the process, with so much liquidity sloshing around and also central banks cushioning the financial ill-effects of the disease to an extent, we could actually see a fair pick-up in the economy. In the US, direct transfer of money to people have fuelled a massive stock market. Whether it is sustained is something that needs to be seen.

THE GOOD

The Covid situation has brought our focus back on track on a few important aspects. Spends on healthcare infrastructure and facilities is sure to go up. Preventative healthcare could also see a boost as more and more people understand the issues related to health. Hygiene is also get ingrained into the lives of people.

Another area which was already picking up but has got a major fillip will be delivery based ecommerce and digital payments.

The flexibility of work location or working from home that was seen in some industries will not die away. Some companies will continue with it atleast partially. Even employees may decide to work from home for personal reasons. This can create newer opportunities for the future where more neighbourhood co-working spaces crop up where people in one locality get together and share office space and “work-from-home” for their respective companies. More people working from home or working near home has many downstream effects. Reduced carbon emissions and reduced population density in overcrowded cities assuming that some people would want to shift away to suburbs or tier-2 cities or back to their home towns for a better quality of life.

THE BAD

The first and biggest challenge with Covid is and will continue to be the massive job losses. The economy was just beginning to get back on its feet from the double whammy of demonetisation and GST rollout when Covid hit. The damage this has done to the informal economy as well as the MSMEs is very difficult to fathom. There has been a massive erosion of purchasing power due to job losses, salary or income reductions and income insecurity. Sale of big ticket items like houses, cars may take a while to get back as people get over the psychological damage.

Any time there is an economic crisis there is a clamour for protectionism and socialist & populist schemes. The 1929 Great Depression in US was the reason for the birth of social security in 1935. In India, there has been a discussion around UBI in the last couple of years. During this crisis, the government has started paying Rs 500 by direct money transfer on a monthly basis as part of the PMJDY scheme to eligible women population. If this is continued for long, it can end up as being seen as an entitlement by the recipients. And we all know how difficult it is to take away a grant that has already been given (endowment effect kicks in). This can lead to a permanent drain on the exchequer without a commensurate benefit to the economy.

THE UGLY

Prolonged economic stress has a very high chance of leading to social unrest. It can come in different forms and at times may not even be quickly correlated with economic strife.

THE MARKET FOCUS

So, in such a dynamic situation, my focus is on looking for companies that will come out stronger during this period. Companies with good cashflow and strong balance sheets have a very good chance of taking up market share from undercapitalised and weaker competitors. Any sector where demand continues to be strong is a good area to look at. I have consistently maintained since last year that Pharma and Specialty Chemicals will benefit from the current outrage of the Western countries against China. This could be a permanent shift away from China. Personal mobility (both two and four wheelers) could see demand come back stronger than anticipated. Even education as an industry could get majorly disrupted with new business models evolving. We need to keep an eye out for it. There has been very little impact in the rural economy so agri-related business can be looked at.
With nearly all market participants waiting with baited breath for a second wave of downfall, the markets may, like it always does, surprise us. However, we as investors, need to be cautious and remain conservative in deploying our capital for now. If markets remain healthy there will be enough time and opportunity to make money.

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2 posts were merged into an existing topic: Quant Investing

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Asking the Right Questions

I am a continuous learner. One reason I gravitated towards the stock market was because it gave me a platform to use the learning that I continuously absorbed from all around me a productive and remunerative outcome. It has also helped me in being humble because I keep making mistakes. This is a big difference from academic learning where people tend to learn to get a degree and prove their competence.

Unfortunately, the world is probabilistic and most often than not, we have to face up to the fact that we may not know as much as we thought we did. The markets keep reminding us that our knowledge is never complete and we need to question our learning and inferences all the time.

When we start to learn, most follow a standard process progressive elaboration - of understanding the basics and then going deeper into individual facets. That is what I used to do for the most part of my life. That is how we have been taught in school. But I am following a system that has started working much better for me.

When I start to learn something new, I jot down the questions I want to answer once I go through the topic. I typically take notes in OneNote. I have a box marked “Questions” on the top of the topic page. As I go through the learning process, I keep adding more questions that keep cropping up. Below the “Questions” box, I have my “Notes” box where I keep running notes, usually in bullet points. When I think I have understood the topic, I will revisit my questions and see if I can answer all of them. If not, go back to the learning process. Depending on the topic, it takes weeks or months to go through a topic.

After having followed this process for some time, I have now come to realize that the learning is not dependent on the notes that I am taking from the material I study. It is more from the questions I seek the answers to. Because subconsciously I am directing my learning to answer those questions. And therein lies the answer to a better system. Trying to constantly improve the questions. Asking the more difficult questions. Questioning the questions.

Just to give an example of a mini-project I am doing now (more on them later) on valuations.

Questions related to business valuation

  • What are the most common ways to value businesses beyond DCF and Earnings multiples?

  • Can one method be used to value or are multiple methods necessary to be used at the same time?

  • Can businesses be valued accurately (even within a range)?

  • Why does Buffett not use a spreadsheet? Does he do a DCF in his head? Or is DCF not that important as long as you have a good understanding of the business?

  • How good are simple heuristics like PE, PEG, EV/EBIDTA in valuations?

  • Can a multi-factor model work for valuations?

  • What does history tell us about the correlation between valuations and stock price performance?

  • What are the most common assumptions about valuations?

  • How to know when my valuation is wrong?

  • How are intangibles, corporate governance, management competence etc valued consistently?

  • Is buying companies with low valuations better than buying companies with high valuations?

  • Does market cycle determine valuation?

  • Stan Druckenmiller says interest rate and currency influence valuations more than earnings. Is he right? Is it supported over time and across markets?

  • Is narrative more powerful in the short run than valuation?

  • Why is there such disconnect between private and public market valuations? Startups with no discernible earnings are being valued astronomically.

  • Is there a model to accommodate systemic liquidity into valuation models

  • Can valuation be disregarded altogether? How does a coffee-can portfolio generate above-average returns over time? Or a momentum portfolio for that matter.

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Stocks and markets move on three things:

  1. Earnings
  2. Liquidity
  3. Narrative

You get a multibagger when all three are in alignment and in your favour.

Most fundamental investors focus on the earnings. Most technical analysts focus on the liquidity (price, volume). Very few focus on the narrative.

If you look back, markets and individual stocks are always built around “stories”. The dotcom boom was based on the story of the rise of ecommerce. Then in India we had the infrastructure story, the “Indian decade” story, the BRICS story, “the Modi rally”. And the list goes on. Same thing has happened in individual stocks and sectors.

The IT story, the consumption story, the Pharma story, the Chemicals story, the agri story, the intelligent fanatic story. People call it by difficult names - “megatrends” or “long cycles”. But at the end of the day, it is nothing but a story we tell ourselves.

If the earnings and liquidity fits the story line, you get a self-perpetuating story!! Then mediocre or poor managements start look visionary. Valuations reach the sky. Corporate governance is swept under the carpet. Promoter shenanigans are spoken of in hushed tones. Believers are heralded and disbelievers are trolled.

These three are inter-related. Most of the time, you start with one and the other two follow. Sometimes, earnings come first, and at other times liquidity. Rarely does the story come first. Usually, the story gets built on the prevalence of the first two. But for the long term returns, the story is as important as the other two.

Bottomline - Be aware of the story in the stocks you buy or the sectors you invest in. Be tuned in to any changes in the story.

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The biggest money is made when you have a lollapalooza effect - a strong trend in increasing business momentum and stock price momentum.

At times the trend can continue for years. The real multibaggers come from those who can ride such stocks.

Page, Eicher, Symphony, Divis, Aarti, Atul, Pidilite, Asian Paints and many such companies.

It usually starts with increasing earnings and low valuations. Then the business continues doing well and the growth keeps coming. Others get attracted to the growth and low valuation and start buying. Increased buying increases the liquidity and attracts the big boys. Then they start getting in and the price momentum accelerates. And the company keeps defying the odds and posting good results and consistent growth. The PE keep re-rating upwards. The valuation after a point goes out of whack. Some investors book out.

You need to keep abreast of the developments in the company. There will come a time when the growth will slow down. Try to assess if it is a short term blip or a medium to long term slowdown. That is the cue to get out.

Typically, a company is able to grow well for a period of 3-5 years after which the growth stops or slows. If the quality of the company is good, investors stick around and the price consolidates in a range without falling off (example, PI Ind in the last 2-3 years, before the growth again picked up).

To understand and ride such big moves, you need to have an understanding of both fundamentals and technicals. One without the other results in a sub-optimal outcome.

Never get scared of rising prices. That’s the only way you make money!!

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Journey to Financial Freedom

On India’s Independence Day, let me tell you my journey of financial independence.

When I was in class 11, my father, who was the sole earning member of our family, became seriously ill and had to leave his job, one where he had worked for over 25 years. Our family came face-to-face with a massive financial setback. From being reasonably well off to suddenly barely making ends meet, was a massive shock to my psyche.

When I started my job after finishing my engineering, a friend gave me a book which changed the trajectory of my life. Robert Kiyosaki’s Rich Dad, Poor Dad . The book talked about financial freedom and drilled in me the fact that depending on a salaried job is not going to make me either financially independent or wealthy. It stressed on becoming either a business owner or an investor as a way out.

Now, no one in our family had ever run a business. At 22 years of age, with no understanding of business and no money and parents to support, starting a business was out of the question. The only way left was becoming an investor. I came up with the same problem here as well. No one in our family had ever invested in the share market. I practically knew nothing. But as luck would have it, I was working in an IT company and had access to the internet after office hours on our project manager’s desktop (Odd as it may sound now, that is how it was in 2000!!)

I started reading up whatever I could on equity investing. I opened an online trading account, something that was just being launched around that time. I started reading up all the research reports I got from the brokerage. I read all (and I literally mean all) the articles in investpedia.com and fool.com. I used to have trouble even with basic terms. I did not know what EPS meant or what book value was. So, I started taking notes and learning.

I was always an avid reader and I started devouring books on investing. It was like a new world had opened in front of me. I discovered a person called Warren Buffett. He seemed to talk sense. Plus he had made this humongous amount of money. So, he became my first role model. Later I discovered Charlie Munger who has been an equally big influence on my life. Later on discovered many stalwarts in the investing world and tried to learn as much as possible about them. So, the journey started. Buying stocks, making mistakes, learning, reading, reflecting on the process of investing. This went on in cycles.

I had internalised the concepts of compounding and had gravitated towards buying quality companies which would compound well over time. I started investing with five thousand rupees and used to put in a couple of thousand every month.

The concept that I can be a part-owner of a business and participate in the profits of an enterprise fascinated me. I have always loved to follow the life and narratives of great businesses and business people. With history as one of my favourite subjects, I loved reading up on market history and finding patterns woven in the tapestry of past events that resonate even today.

Due to family commitments, I could not add any additional capital in my portfolio after 2010. But the 8th wonder of the world, compounding, kept working and by around 2017, I was well on my way to being financially independent. It took another 2 years to convince my family to leave my job and becoming “just an investor”. Then I started the advisory, again against the warnings from quite a number of close friends and well-wishers. But that’s a story for another day!!

Investing has given me freedom – financial and that of time. I know of no other way one can create serious wealth without having a lot of money to start with . It just requires patience, hard work, discipline in learning and an open mind to learn from one’s own and mistakes of others. Investing is a creative pursuit. The best thing about investing is, you enjoy the process and get handsome rewards while doing something you love!

Wish you all a Happy Independence Day. May you take a small step towards becoming financially independent yourself.

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Dada it is fascinating to learn your journey’s ups and downs, convincing family and spouse is really hard . How you sum up your key learning of two decade of experience which is helpful in learning ( which is offcource ever evolving and dynamic in nature ) the art of investing five lineers if you could spare and share your wisdom

Stock screening
Stock picking.
Evaluating Management
Fundamental analysis of company
Forensic in balance sheets .
Riding the company in downturn movement of price or holding the nerves while upward movement or getting rid of price anchoring .
Which triggers to watch that which will be coming sectorial movement ?
Best Capital allocation strategy and max core portfolio or satellite portfolio positions ?
How to complete sold Decision making ( it is toughest for me )
Regards
on the lighter note " A married person can’t have independence DAY In his life :stuck_out_tongue_winking_eye:"

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Hello Abhishek,

Would you please share your pointers on selling stocks? I am struggling with selling and to top it all the capital gains tax which is off putting. Do you not worry about the tax component? (Never knew buying was so much easier!!). Rebalancing or otherwise I am unable to push the sell button :slight_smile:. Does this get better with time ? Does it get easier once you sell more? How does one make selling a cold unemotional process?
Looking forward to your insights.