When to Sell – Part One

I’ve been spending some time digging around in my trade journal and trying to understand this. Getting a handle of this very important aspect of investing is one of my birthday resolutions. This study and therefore these series of posts are a set of steps in that direction. I’ve entered into 337 sell transactions till date. The first time I ever booked a profit on a secondary market trade was way back in 05Oct’01 and the latest one was as near as 06Sep’10. To understand more about the when of my selling behaviour I looked at these 337 in conjunction with the market and it’s valuation. I also tried to plot my sales in along time to see if there were clusters of sales happening during particular time periods. I will bother (and write) about the other questions of why, how and what regarding my selling behaviour at a later stage.

For now, I constructed this chart which shows my selling activity during the period spanning Oct’01 to Sep’10. The small green histograms at the bottom show the distribution of my sell trades. Three clusters seem to emerge: Aug’04 to May’05; Jan’07 to Apr’07 and Aug’09 till date. I have started my investing career with a handicap – which might seem like a paradox given the upward ascent of the NIFTY since 2001. What I mean is that my investing thought process has been spawned during a whopper of a bull run. Nearly anything anyone touched during 2001-03 turned to gold. Midases were everywhere, hemlines were getting higher by the minute. Then after that 2008 and the early part of 2009 was such a humbling moment. And a great learning experience. I lost money on a few trades and the flurry of sales that you see during more recent times are my unwinding of those doomed trades as they recouped some of their lost ground. The wicked blue line represents the market – NIFTY in this case. The oscillating orange band represents the value of the market – trailing 12 month NIFTY P/E ratios. If one uses this lens to view the art of getting off the train, then it’s good to be a net seller when the NIFTY’s P/E is above 25. It pays to be a net buyer if the NIFTY P/E is below the first quartile (under or at 15). Currently the NIFTY P/E is around 24 so we are entering hilly terrain – best to tighten up our seat belts. I use the terms “net seller” and “net buyer” since even at exalted heights of market valuation one can find a few lonely bulls rampaging around and likewise the depths of market penury still throw up some bears lying in wait to maul you.

The idea is that statistics and data tell a story about your trading pattern. It is useful to step out of the frame once in a while and see things from a wider time perspective. I guess successful traders need to necessarily have oodles of experience behind them. The best minds in the business have lived through at least a couple of downturns and figured out their behavioural patterns and emotional compass. Also, when you see the picture in cinemascope, a few down months don’t seem all that frightening.

The wise ‘old’ men of investing mysteriously say – buy when you see value and sell when your asset gets expensive. but how the heck does one go about ‘seeing value’? We seem to know/have heard about things like fundamental analysis, discounted cash flows, industry compares, etc. Most of us however, do not have the time to do detailed down-to-the bone analysis of company financials. Some of us don’t even know how to go about doing it. I don’t think that such people should not participate in the markets or run scared of balance sheets and mathematics. I guess what is required for this set (I may fall in this realm) is to develop and consistently use common sensical heuristics with modest return expectations. One such rule is getting in and out depending on the movement of NIFTY P/E as compared to the two control limits as depicted in the chart. You may have a better method – gazing at tea leaves perhaps – whatever it is, I think the key is to stick to it. Economies and therfore the stock markets have a slight inbuilt bias towards expansion and growth. Therefore, the dice is loaded – but only if you stick to the same dice.

I don’t drink tea, BTW.

Urinary Track Investing

Fourteen hour flights can be quite challenging. Faced with the prospect of enduring one such torture during my hop from the JFK international airport, NY to the Dubai airport I tried to prepare as best as I could. I did not sleep much prior to the flight, bought a book (A Million Little Pieces) and decided to lighten myself of some bodily fluids being coaxed out as they were by some good beer that I was gulping down to kill time.

Now, I had a good time in the toilets of JFK! At first I thought I had been incredibly lucky to have been graced by a house fly in the pit of the toilet bowl that I’d chosen. But I had the presence of mind to quickly lean towards my right and peep in the pit of the urinal bowl next to mine. There was a fly there as well! So ignoring the other fly of metal, I stepped back and realised that all gleaming pits of white porcelain had flies sitting in them! What do they eat/drink around here, I thought! I peered into the pot – not quite deep though – to realise that these were stickers of flies! Aha! They looked very real though. So, in this age of financial prudence, I think these innovations play on man’s primordial male instinct best demonstrated by a ceremonial territorial marking ritual accompanied by an emphatic subjugation of any encroachers. Modern male travellers are expected to give in to their natural calls and try to kill the fly when they go about doing their business. This adroit chaperoning of jets (we’re at the airport, you see!) must be delivering twin benefits – A) it keeps the fun centered in or around the intended target thereby minimising the chances of a spillover and B) replacing a worn out sticker of a fly would be cheaper than replaced rapidly eroding cakes of disinfectants and sanitizers. The soccer inspired toilet design on the right also achieves this goal.

I am sure each and every one of my male readers would have experienced and participated in the “avoidance process of natural selection”. But I do have some lady audience and this might interest them as I now talk about some behind the doors stereotypes. The psychology of independence, dear ladies, and a need for marking out a personal territory distinguishes men and is quite well documented in various websites on the internet. If a man comes in to an empty bank of urinals, he will usually choose the one on the extreme end. the next one will pick up the one on the other extreme followed by a middle one getting picked up last. This is not how most men behave when making investing decisions. If you stumble on a urinal along with a Warren Buffett or a Peter Lynch or RJ, I guess its ok to break this rule, but mostly the herding instinct lives itself out in the outside world. Many years ago I used to work in downtown Mumbai and take local trains to get back to my home in the suburbs. If some day I left early (Dalal Street closes at 3:30PM),  i’d invariably come across a gentleman, chewing on chikki and calling up every contact in his phone address book to verfiy the creddentials of a hot tip that he’d received! The need to build consensus before investing/trading is rampant.

Contrarian investing can offer a good edge over conventional consensus based investing. Is today the right time for a contrarian approach? No idea – local Indian markets certainly do not look like that. But the US perhaps, yes. The approach surely works since one operates on assets that are mispriced – both too high and too low. And the good thing is that it lowers the risk in case the investment logic turns out to be wrong.

The second investing lesson which urinals can teach us concerns special situations – mergers, acquisitions, covertible debentures, buy backs, turnarounds, etc. Not many understand, but there is a very high liklihood of discovering money being left on the table in such cases. There are quite a few special situation mutual funds available for purchase in the Indian marketplace currently. Buffett did special situations investing a lot – easy pickings really, if you understood the math and risks involved.  Special situations are highly probabilistic and it’s difficult striking a home run consistently. They end up failing many times – at least for me. South Indian Bank forever remains an attractive takeover target. IFCI’s obtaining of a banking license remains in limbo. Some people talked up the story of PNB Gilts folding up into it’s parent but nothing happened. I feel it’s best to leave special situations to experts. For example, the toilet on the third picture below – built for Spiderman perhaps? The first two seem to be customised for Zohan Dvir and Borat Sagdiyev?

 Following are some examples of special situations. Trust that you will be able to spot, mergers, turnarounds, etc.




Loss of Time

Apologies. Nothing much to write today. Came back to Hyderabad and lost a great deal of time moving east. And the following things kept me occupied for the little time that I was awake:

First FIIs will froth up our markets. Then the enthusiasm will obviously dry up and things will flatten out.  Then all will fall like a pack of dominos and some of us will head for the cleaners. Housework has never been so much fun! Beware and tread with caution, if you want to have a happy Diwali

I did manage to take a peep at the markets during the trading hours though. Found nothing to sell, I think there is still some steam left. When I left the US the biggest aha! moment there was the official announcement of the end of the worst recession since WWII and the S&P 500 breaking its resistance level.

But we live in crazy times! That aha! seems like a bashful affront. Since some are saying that the S&P 500 is overbought and that mutual fund investors are still staying away from US stocks.

Buying a House – Tips and Paperwork

Rishab asked a few questions a couple of weeks ago regarding buying property and I will try my best to answer these as well as I can. I guess what I can safely say is to take as much advise as possible from friends, family, bankers, financial planners (if you have access to them) and of course, the internet. It is a great proud feeling to buy your pad (if buying for the first time) and it also involves us emotionally. Like hunting for jobs, this experience should be enjoyed and not feared or seen as a chore. We don’t hunt for jobs or houses every day, do we? Here are a few words of advise that I can suggest from my limited set of experiences so far. Caveat emptor.

1. Pre-Owned or Ready only – I would recommend that you purchase a house that is near complete or second hand only. There is too much economic uncertainty and too much of leverage on the books of real estate companies in India to share project risk with the developers. We have one life and most of us get one chance to pick up a house – we should be as risk averse as possible. With land prices in urban India being bid up higher and higher, property developers have to borrow to buy. If the interest rates rise in the future it will make the going quite though for the real estate companies. That is the reason why the business model of Godrej Properties (GPL) is so cool – they mostly lease property from owners, develop it and share the profits. And that’s one of the reasons why I consider my investment in Godrej Industries Ltd (part owner of GPL) to be a part of my core holdings. Inner core.

2. Documents to look for

The following documents are usually sought for when buying a second hand property:

– Agreement of sale between the builder and the first owners and all the subsequent agreements of sale thereupon.

– Papers that uniquely qualify a clear title to the land. Also known as the Conveyance Deed.

– Registration certificate of the housing society. It usually takes 1 – 2 years after posession is granted by the builder for society formation.

– No objection certificate from the society to transfer the flat in the prospective buyers’ name.

– Copy of share certificate of the society. Once the society formation is complete, it issues share certificates to its members. You should take a look at this.

– A draft agreement of purchase (between you and the seller)

– Copies of municipal tax paid by the society. This may be tough to get but you should try.

– Occupation certificate granted by the municipal corporation to the builder.

– No objection certificate from the society to mortgage the flat in the favour of the bank, along with a letter stating the lien (this is in case you want to avail a housing loan)

– Income tax clearance of the seller (for registration purposes only). Check that.

There are other sets of documents that would be required if A) buying a resale flat if the society is not formed or B) if you are buying a new flat from a builder. Let me know and I shall email these to you. It is prudent to ask for/be aware of these documents. Indeed some housing finance institutions may not ask for all of these (more on that later) and the builder/society might spin tales as to why some of these documents are really not required – if that happens just walk out of that meeting. When I was looking around for my first house, a particular builder just did not want to part with the architectural plans and other documents of a second hand, unlived flat that I had liked. Luckily for me, I did not have a penny on me (only a promise of future income) and therefore I did not have any option but to look to a bank for finance. Since the bank would not advance the loan if the architectural drawings were not made available I had called it quits.

3. Finance – I am really in no position to opine on which housing finance company you should take your loan from. This decision is not as straight forward as taking out term insurance – in that case you should simply head to the insurer that offers you the lowest premium. Most properties are on the ‘pre-approved’ list of many financers – which means that they have already completed most of the paperwork required. Buying property in such buildings from these banks reduces the risk of landing up with an unclear title as well as easing up the paper work. Public sector banks in India generally offer the most competitive rates but dealing with them may not be a smooth affair. They don’t give a rats ass whether you give them your business or not. On the other hand, private sector banks put stiff sales targets on their sales people and you really do not want an over zealous sales turk to finance what turns out to be a sand castle to you! Finally, interest rates may very well rise in the near future. Inflation is too big a monster for the Reserve Bank of India (RBI) not to do anything to the current rates. However, most banks offer only a 3 year fixed when they refer to fixed rates. I daresay that if someone is to buy a house next year, he/she should pick a floating rate – but it really depends on your view of the interest rates. 

4. CIBIL Credit Report – You should apply and procure your credit report from Credit Information Bureau India Limited (CIBIL). This is available for a nominal processing charge and is one of the things that banks look for when deciding on the grant of the loan. There are known instances where people have found errors in their CIBIL credit reports and while the RBI prescribes a time limit of 45 days for compliants to get resolved, you do not want to be running around clearing the errors in your credit report. Purchase opportunities do not last forever. In fact you should procure and check your credit report regardless of whether you intend to take a loan or not. Beware, if you are blacklisted or your credit score is very low, the chances are extremely high that your loan application will get bluntly rejected without a proper explanation. The onus will be on you to investigate and clear your name. Even if this is your first mortgage application, the fact that you might have had credit cards to your name – some of them you don’t even know if you own – will reflect in this report. Just get that report – home loan or not. My gut is that the public sector banks will be quite partisan to the credit report. At least the private banks might be inclined to help you work your way towards clearing your record (if tainted) since there are sales targets to meet.

4. Other considerations – Some other points that you might want to keep in mind (readers, please add on to this list if you can. I will keep adding as and when I get new insights):

– While the useful life of buildings is usually considered to be 70 – 80 years, do not buy a property that has had more than 2 past owners or is more than 15 years old. Maintenance expenses spike up around this point in the life of a building.

– Do not pay more than 1% as processing fees.

– Best to get a term insurance cover from the same institution to cover the quantum and tenure of the loan. Use this option to squeeze a better rate from the bank. Reveal this card only during the latter stage of rate negotiation.

– One trick that many want to play is to play one bank against another when trying to drive a bargain for the best rate. I don’t feel it’s worth it – India is a growing economy. The mortgage to GDP ratio for rapidly urbanising India is a paltry 7% which is way, way behind the developed economies (60% – 70%). So, banks are not under too much pressure to run after you.

– If the seller of the house also has a mortgage, it’s advisable for you to take your loan from the same institution.  The process gets simplified. Unless of course some other instituion is offering you a much lower rate.

– Bargain with the seller like your life depended on it. In some ways, it does. At least your financial life does. Rehearse your speech and plan your tactics, even if it means you appear like a penny pinching moron.

– If you are married, buy property in joint name. Makes things easy later on.

– Try to see the locality during the peak of the monsoon season. You’ll get an idea of water logging, seepage etc.

– refer to my other post on Buying Property for some more ideas.

The Facebook

Running around between client and my company’s offices and getting to adjust to the time that I have gained, just wanted to quickly share two updates:

A) Apropos my post of 5Aug’10, the daughter moves up to the national round of the spelling bee. This gig will be held in Calcutta on 10Oct’10 – I plan to be there (work permitting) and catch up on some friends there as well. I’ll leave the wordy matters to my daughter!

B) Just finished reading The Facebook Effect by David Kirkpatrick. The copy of the book that I have was published this year itself and is therefore quite current. As you all know this book should tell the story of the teenager that built this social networking behemoth, which it does quite well but it is a quite patronising at times. Many times the butter is laid on so thick on this new toast of the internet industry that it stops your reading momentum and distracts you. This review by Michael Arrington likens the author to Bella, painfully and proudly obsessed by the fang toothed The Facebook. Perhaps it is not The Twilight of his writing career! It’s a good read nevertheless since it allows you a peek into the culture that built the company. More than that it’s really a management lesson in one basic trait that most professionals of today must have: focus.

The one quality that Mark Zuckerberg demostrates to us in spades,via Kirkpatrick’s eulogy, is an unwavering focus on the end game: world domination of internet social communication and building a self contained universe therein. And the passion and hard work that went into building the platform that now has close to a billion people online. I keep seeing hordes of people hunched over their laptops in my hotel lobby since the lobby has free internet. Last evening, I discreetly checked out a dozen or so laptop screens and I found that 10 of them had The Facebook on them! My hotel being a touristy one, these people are obvisouly from outside of NY updating their statuses and travel notes on their The Facebook profiles telling all their ‘friends’ about the great time that they are having here. The Facebook, likewise has always been a viral phenomenon.

The possibilities on a global spider web of personal connections are endless. There are talks of a parallel economy with alternate currency units (facebook credits) and perhaps a currency exchange as well off The Facebook. And the growth has not petered out – there are still many people that are not on The Facebook. Myself included. Every month I get at least 4 – 5 invitations to join it but have resisted so far. I have my reasons and thats that but in my own little way I can see the viral effect in full play. While I remain humbled to receive such requests from my friends, I have picked up one little business lesson here – try to build solitions that can be viral in their propagation. Satisfied/ecstatic customers selling your products is the best possible thing to have. I keep trying to come up with insights and solutions that help solve a pervading industry pain point and then get happy and ‘cured’ customers to advocate their bliss on platforms specifically created for this purpose.

Mark’s platform has had its share of problems though the chief among them being intrusion of privacy and data theft by application developers/advertisers. I think that The Facebook architecture needs to evolve. Just think about how relationships are laid out in real life – our social relationships are like layers of an onion. We all have an inner circle of relationships whom we trust the most and can bare our soul fearlessly. Then there is another layer where the information is quite cordial and a lot of personal information does get shared but we would never go au naturel with them. Finally, the outmost layer are casual acquantances. I am not sure if this layering of contacts exists in The Facebook. I am sure Mark and his design team would have thought of it, but if the platform has to resemble the physical world then this layering might be required. At one point in time I was accussed of not having friends – while I don’t know which layer the readers of this site belong to, I can definitely tell you that I, for sure do not need The Facebook to keep my social synapses alive. But for those of you who are on The Facebook, please do let me know if and how I can use it to promote this website.

In the meanwhile, equity markets back home continue to rock and I feel that my trade on Reliance Industries Ltd. (RIL) seems to have redeeemed itself! I’m up 4% now 🙂

I know you do not follow the “experts” and like to think for yourself and might already be aware that India Infoline has come up with  a price target of 1,141; Geogit BNP Paribas has a long term date on RIL to end at 1,450 (16-24 mo). As far as I am concerned, I think there is a small amount of steam left here and I will get out soon (if I can remain awake during tomorrow’s India trading hours – or on my return)


In NYC till coming Monday…

The Glitter of Gold

Does Bappi Lahiri have a golden voice? Well! Thats subjective, but to me he is the golden stud, many times over. He had once walked past me in the Oberoi Mall (Mumbai) during the promos of the film, Chandni Chowk to China and even then the Au aura that emanated from him, piercing the reverential envelope of fans that surrounded him was striking. Bappi da (as he is known to Bollywood) has a penchant for gold. And boy, has be been spot on. I am sure he must be having kilos of the metal and what a climb his portfolio must’ve made during the past 10 years. I can’t wait for the film, Bappida Tusi Great Ho to get released. It’s said that the secret of his attraction for gold will finally get revealed through the film! I don’t care whether his golden sheen works on the silver screen but I think he has delivered a fitting reply to the numerous mocking references that people have made for his affinity for gold. And an awesome investing lesson for many of us. And I have a confession to make: I like listening to Bappi music in my car- esp. the variety from my younger days. But I wonder why did he say,

Yaar bina chain kahaan re. Yaar bina chain kahaan re. Sona nahi, chandi nahi, yaar to mila. Arre pyaar kar le.
[trans: Where’s peace of mind if you are loveless? x2. No gold, no silver, but at least I found love. Let’s love.]

Bappi da has enjoyed a much steeper climb than someone who would’ve been long the NIFTY during the past 10 years. The graph alongside shows the relative performance of Gold vs. the NIFTY over the past 10 years or so. The price of 10 grams of Gold was around 4,000 rupees at the start of the millennium and it is close to 19,000 rupees now. In contrast, 4,000 ‘gold currenncy units’ invested in the representative sample of the Indian economy that is the NIFTY would have fetched you just 6,000 gcus today. I don’t mean XAU when I say gcu – the latter is just a hypothetical contruct to indicate what would happen if metal became our currency and not some signed bill of paper. At one point in time (7Jan’08) it looked as if equities would cross over and start performing better than Gold. That was not to be and the NIFTY turned south from that point in time with the relative performance gap widening from that point till today. I had purchased some Gold (coins) some 4 years back (partly by design since my equity holding had risen quite a bit) and thankfully I have not unwound that trade. Actually I have the tax laws to thank since long term capital gains set in for direct Gold investments only after a holding period of 3 years.

I also took out the index data for the Dow & the NIFTY and restated the two data sets in equivalent gold weight in local currency terms. While the chart above puts out quite a glum picture for the NIFTY if seen through a golden lens, the Dow droop is even more depressing. What the chart alonside tells us is that if one would have done a 10 year swap between the index and gold, he would receive 79% less of gold (by weight) in the US as compared to a drop of 29% in India. The inflection point for the NIFTY stated in gold occurred during the second half of 2003. Differential economic growths and currency movements took the lime green line far away only to come crashing down at the start of 2008.

Indians are known to be voracious consumers of gold. Global gold analyts make it a point to understand a bit about the Indian marriage season and track it expectedly. I did spend a fleeting moment of sympathy on parents of girls of marriageable age. These guys must be getting squeezed tight unless of course, they had the foresight of Bappi da. While the assorted gaggle of relatives and opinion makers that mill around the circuses that are Indian marriages might have knowingly shifted their discussions to the value of the gold lining our marriages (as opposed to the weight), I have a suspicion that Indian mothers-in-law still regard their daughters-in-law by the weight of the gold that the latter brings into the coop. Any suggestions, on how I can get our mothers-in-law-in-waiting to read my site?

Since it’s highly unlikely that you are a prospective mother-in-law, the question that may be on your mind would be: Wither gold? Well, I dont know! But I think that it will continue to climb for some more years to come. People have started looking at gold as an investment option now. The front covers of investment magazines have started displaying the golden glow quite frequently these days. I am sure you must have noticed an increase in the number of ads selling gold backed loans, etc. Since Indians have historically stuffed a lot of gold in bank lockers, under their mattresses, on their noses, etc, it’s a good opportunity for Indians to monetise it for income producing opportunities. I personally cannot relate to gold as an investment theme. While I have added some more gold (in ETF form now) after that past investment of mine, it is largely as a hedge. If you look at the first chart above, the metal (yellow line) has climbed almost on a linear basis. But the chart spans 10 years which is less than the time that I’ve been around investing in the markets. So my sense of patience is not adequate here. In any case, gold does not produce any income – there are no dividends to be had from gold. The utility and power of equity dividends itself is not understood by many, though I do feel that the attention to dividends would be more in the developed economies as compared to India since the yields are low. Perhaps an investigation into this might be a theme of a future post but here what I can say is that the moment the price of gold departs from it’s linear trend and starts to climb at a rate depending on the square of time, then it will be the best time to get out. Parabolas cannot sustain their weight. They need continuous energy to feed it and since equities cannot keep grovelling forever to droop below their book values, there will come a day when gold will sink down. I don’t have the data set, but there are quite a few charts on the internet that depict the 200 year movement of gold (see above). And that will be the day when our statistically challenged mothers-in-law will be happier welcoming more heavily laden daughters-in-law into their fold. Till such time, enjoy the ride.

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