Why Long Term Financial Planning Sucks

26-Apr-12 2 Comments

Long term planning lulls one to believe that the future is under control. Many of us meet fast talking financial salesmen (women?) and feel smug when we buy some investment cum insurance policy or unit linked insurance plans etc. Even a house or the index for that matter bought for the purposes of holding on to 10+ years makes us feel confident that we have secured our future. A book that I really like doesn’t think so. Its called The Zurich Axioms (by Max Gunther) and I like picking it up and reading a small chapter or two on and off, repeatedly. The fable of the ant and the grasshopper is turned on its head in the book:

The dour and practical ant works all summer long in anticipation of the winter ahead,while the planless grasshopper just sits around singing in the sun. In the end, of course, the poor grasshopper has to come around, hat in hand, to beg for food, while the ant has the satisfaction of saying, “Ha, ha, I told you so.”

In real life, however, it is more often the ant who gets himself fumigated or has his nest torn up by a bulldozer. That’s what comes of having roots, and roots come partly from long-range plans. The grasshopper, lighter on his feet, just hops out of the way.

You may have visibility for probably a week ahead (unless black swans fly over your head). If you are really gifted, maybe you can portend the events to come a month ahead. What about six months? Or a year? The visibility dims considerably, but you’d still beable to reasonably predict where you will be in your personal and professional life a year or two ahead. I can bet that you can’t predict where the markets will be a year or two ahead with the same level of confidence. Even on personal/professional matters, a period of five years  itself starts getting quite blurred to predict into, especially if you are a relatively young person who has just started his career and family. If you older, then yes, maybe you can see five years ahead. But then long term financial planning is done by young ‘uns, right? And wait, we just got to five years! What about ten years? Twenty years?

You just can’t see through the fog of time. Remember that – you just can’t see through the fog of time.

The advise: don’t try to make really long range plans or let others make them for you. Instead, be light on your feet, like the grasshopper. React to events as they unfold around you, all in the present. When you see opportunities, go for them. If you see some danger coming your way, just hop away and come back when the trouble has rolled over.

The only long term plan you need, as far as your wealth and finances is concerned, is to have a sincere intention to get rich. The ‘how’ will differ from person to person – do try to discover it, but do so in the now and operation in today’s moment with a less of a “buy and forget it” kind of an attitude. It may work for Peter Lynch or Warren Buffet – that strategy may really suck in your case.

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Moment of Truth?

23-Apr-12 Leave a comment

There are these points in time which are like moments of truth in investing/trading/speculating that I hate the most. The point where you have to take a decision and use whatever intuition, experience, awareness and knowledge that you have accumulated in your investing career till date. Where is a crystal ball when you need one?

One such moment of truth that I am facing is what to do with my Gitanjali Gems holding. The chart below shows where the share price has come from historically. Looks like the 200 DMA line has been a good support in recent times and given that it is now poised on the 200 DMA makes me pensive.

 

 

 

 

 

What should I do?

  • Nothing
  • Buy more
  • Sell

 

 

 

 

 I asked this question to some people whose opinion I value. One of the response was:

If you think it is a long term play – book some partial profits and hold on to the rest. If you have made looks like 200% then if you sell 1/3 you have recovered your capital..

Sound advise perhaps – and there definitely is a good school of thought which believes in taking out the capital invested and letting the profits run. Only in my case if I were to do this, I’d add my hurdle rate (my long term expectated rate of return that I wish to earn) to 100% and take out that % of my capital – ensuring that not only do I get my capital back but also the time value of money component. But my big problem with this approach is that once I have done that I am really back to square one. The feeling of having secured my capital is illusionary since I intend to remain invested in the markets for a looooong time to come. Who knows, I could end up sqaundering this recovered captial on a dud investment which could erode it quickly, stop losses notwithstanding. The truth is that I’d have to find another ‘sparkling’ idea like this one – or at least one that fetches me my expected rate of annualized return. That’s tough in today’s times for someone like me who cannot devote much time to studying the market. Caught between the ‘rock’ and a hard place I guess. Ultimately I have decided to do nothing and see if its breaks the 200 DMA conclusively. If it does then I guess I would fold completely.

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KSE 100 vs our Thrifty NIFTY

20-Apr-12 Leave a comment

Two news topics on Pakistan – the air crash and accounts of the new found bonhomie between India and Pakistan gave me the thought to look up the stock market there. I was a bit lost trying to find out historical data on the KSE 100 (Karachi Stock Exchange – 100 stock Index). It’s certainly not available on the KSE website for people like me. The exchange, set up during Partition in 1947, actually sells that data! So I got it from the yahoo!finance website instead – but hold on a minute! Doesn’t this mean that…nevermind. ;)

As is my wont, I plotted NIFTY data for the period corresponding to the KSE 100 data that I could find on the internet. The result as you can see in the chart above is astonishing indeed. I mean – I don’t just get it. Neither does this paper that I scourged from the internet which inter alia says:

…the analysis of KSE 100 Index reveals serious structural flaws in true return of the companies in the Index and it is unable to represent the economy. These conclusions pose a serious threat to the use of KSE 100 Index as a benchmark for market return in Capital Asset Pricing Model (CAPM) in fair value calculation of Pakistani stocks. This also creates doubt about the forecasting ability of KSE 100 Index about the GDP growth rate of Pakistan.

Indeed, the paper does note that the correlation between GDP growth rate of Pakistan and what many consider to be its benchmark equity index is quite low. Who knows – maybe there is a flip side to what I learned today which may explain what meets the eye. The NIFTY on its part may also lend itself to some criticism for all you know.

However, I for one is quite happy for what the folks at Dalal Street have done recently to the Sensex – they caught up with the NIFTY in one aspect by including Dr. Reddy’s Labs into the Index!!!! Cool. :)

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United Phosphorus

17-Apr-12 Leave a comment

Sorry about the boring ‘stock forecast’ type of posts, but the United Phosphorus (UPL) chart set-up has caught my eye and I thought I should record this here today to come back and revisit the idea at a later date to check if the hunch was right. The chart clearly shows a very reliable support level of 125 – the stock has always bounced up a bit from that level giving returns in the range of 21% to 36% each time it has touched that level (see dotted red line on the chart). To me this looks like a good short term opportunity to pick up a 10% till the stock’s relationship with its 200 DMA becomes clearer. On their part various brokerage houses have come out with predictions for the stock ranging from 172 to 196 so there indeed looks like sustained buying interest.

UPL ranks 4th amongst the top global agrichemical generics companies with presence across the US, EU, Latin America and India. The market is divided into innovators who sell patented molecules and the generics. Given that a lot of patent expires are due in the next couple of years, this should serve as a good pipeline of opportunities for the generics companies. UPL gets 80% of its revenues from international markets and 20% from domestic sales. So buying this company again means that we are effectively shorting the INR. And important factor in this case since forex benefit due to favourable exchange rate movement contributed to ~19% of UPL’s 3Q12 revenue growth when compared to its 3Q11 revenues. The company is selling for a price of ~INR 127 per share today and given an expectation of a FY12 EPS of INR 14, this implies a P/E of 9 (looks attractive on this front). Equity research reports point out that its other Indian competitor, Rallis India Limited is ~50% – 60% higher on the 1 yr forward P/E front.

What is not clear to me is the company’s ability to hike prices in case it experiences margin pressures. I doubt it would have too much of pricing power – which means that if the exchange rate turns unfavourable (RBI cuts repo rates even more) or if their working capital requirements continue to zoom up, then UPL may have to take a hit on its margins. Since most brokerages are targetting a price range of 172 – 196, this target range could scale down to the 165-168 range in case these risks materialize. Incidentally, 165-168 may also be the resistance level for the stock. Regardless, the prospect of a 10% short term and a 35% medium term gain isn’t bad.

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