Sunday, November 1, 2009

Investing is NOT a game with only one winner

In October-November 2008, there was excessive pessimism around. In fact that period could take the cake for being one of the most challenging periods for most investors. It was a period when not just equity markets but also bank accounts were no longer considered safe. Everyday you heard noises of FMPs, liquid funds and even banks going bust and how the financial world would end soon. In fact the only safe way was to hoard cash. One currency expert even went on air saying that he was closing all his accounts at private banks and stashing his dough at State Bank of India, SBI. Suddenly people queued outside SBI branches and SBI started collecting several thousand crore of deposits every day. It was outright foolish to do so but the herd mentality was at work and the headlines and experts were screaming doom.

One smart investment banker redeemed his FMP midway falling prey to such rumors and at a discount. The FMP is up 11% today. He regretfully now says “Sometimes it’s dangerous to know many things. I would have been better off not knowing many things.”I told him that I disagree as it is all about your ability to think rationally during such times and not following all the bull thrown at you. I told him that I know of smart people who know things as well as people who do not know much about investing who have made amazing gains because of their ability to filter the noise.


On the other hand in October 2009, one is witnessing euphoria all around with the stock markets having crossed several milestones.

There are 3 key lessons or principles that equity markets have once again taught us over the last one year and they can surely come in handy when we face a similar situation sometime later in our investing life.

1st Principle

Besides investing regularly in equities (as the SIPs during these periods have given the best gains), invest a lot more confidently when no one wants to even listen to the word equity. The whole world was full of insights, research, inputs and so on about the death of equity as an asset class. There were media reports on the poor data coming from every possible front and to top it there was the Satyam scandal which made a lot of foreign and local investors doubt the integrity of Indian managements. Everyday you read about the next set of companies who could be in trouble. A friend who wanted to invest in equities just could not because all around he read that we were headed for doom. By the way he is still waiting.

There is no way to know that the stock market has bottomed out but it’s during such times of excessive pessimism that the market turn around and this was demonstrated well even during the recent turnaround on March 9, 2009.

Do not obsess over earnings and wait endlessly for clear data points. Stock markets always try to anticipate the future and are actually well ahead of significant changes in earnings and other data points. It is quite possible that earnings are lousy or take a lot of time to catch up. However a lot of people obsess over this and miss out on huge up moves. We are currently witnessing the second quarter results which seem to be quite encouraging. The recent IIP data of a 10.4% spurt advance tax collections and a host of other factors point out at GDP upgrades in the near term.

Yes there sure could be pain as the western world is still not out of woods and higher commodity prices and inflation will have interest rates inching up next year onwards. As always there will be a lot of negative factors that could pull down markets such as interest rate hikes, oil prices rising in very high inflation, sell off by hedge funds because of poor economic data coming from western countries , geo political risks (China & other threats) and others.

However there is no way to know when a correction will happen. There is no point in meaninglessly waiting for corrections. In strong bull markets, corrections are often elusive and generally do not happen, till the market has rallied significantly. From March 9, 2009, the markets are up by 100% whereas you saw only a couple of minor corrections with one caused during the budget week. In a market that has run up sharply by 100% a correction of 15-20% is quite normal but the key question is will the correction happen now or after the market crosses the previous high. I am sure no one knows the answer to this one. If a correction were to happen, don’t just say “See I knew it , I was right. I am smart.”

Continue to invest in a staggered manner.

3rd Principle

Do not underestimate the power of policymakers to effect a change. Starting late last year one saw a spate of interest rate cuts by central banks around the world injecting liquidity in the system. Besides this there were many bailout packages and policy changes that were quickly implemented. All such actions have the potential to turn things around and before actual change is visible, stock markets change direction. We have witnessed this happen.

This is one of the biggest bubbles waiting to be burst. I have explained this with a few examples and anecdotes.

35 year old Deven Desai is a frustrated man today. He has been waiting patiently to buy his dream house in Juhu for the last 3 years. He has seen many flats so far and is thoroughly disappointed at the overall transaction and deal that he is getting. He is earning Rs. 40 lakh post tax per year and is looking at buying a 3 BHK flat. He saw one where the halls and rooms were pretty small. The builder’s sales person told him “Sir, this is the last flat left. All are sold. The price also is very reasonable at Rs 15000.”Though he was not very pleased hearing the amount he still decided to go ahead considering the area and his long wait.

He asked the sales person about the size of the apartment and the net cost to him. The sales person told him that it is a 1980 sq.ft flat super built up. “What about carpet area?”, Deven enquired. “It is 1188 sq.ft. There is a 40% loading.” Deven was annoyed and said “How is loading just 40%? It is 65% minimum as the loading must be done on the carpet area and not in the reverse manner that you are calculating. If you add 65% to 1188, then it comes close to the super built up figure that you are talking about. Why do you guys calculate loading on the super built up figure? This means that my carpet area cost is Rs. 24750 which is ridiculous.”The salesperson who had a lot of attitude said “Sir .This is a common practice and everybody calculates it this way. You take it or there are many people waiting in the queue.”

Deven decided to let this go as it just did not make sense to him.

Ashok Ganesan , a sales professional faced a similar situation in Malad. He was made to believe that the price was low and that he should buy it before prices move northwards. However the loading on the carpet area was way beyond 55%. Many people are simply unaware about this computation and often ignore this. Additionally, how many people have actually measured the super built area that they have been charged for? The absence of a regulator makes real estate a perfect recipe for abuse.

There is no correct loading figure but I can’t see why it should be more than 35%. 35% is too high a number but must be calculated on the base carpet area. There is no regulatory help or any other available but you can negotiate hard on this front as there is still a lot of inventory that has to be sold. For e.g in Andheri, Mumbai, a couple of buildings in a premium 2.5-3 BHK flat complex are completely vacant for the last 12-18 months. Investors have put in money but end users have not bought in as they still cannot afford and banks are unwilling to lend as they were back in 2006 and 2007.

There is no point in paying any price because someone else will buy before you. Prices are still not low enough to spur genuine demand in the real estate market so don’t worry, you won’t be left out. The patient ones will be amply rewarded.

Finally the key take home is “Investing is not a game where there is only one winner. Everyone can win in the investing process provided one develops the ability to filter the financial noise and take prudent economic calls rather than emotional ones.”

-- Amar Pandit

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