Stock specific moves push Sensex up for 5th straight week

It was a week of stock specific moves. The market ended positive for the fifth consecutive week thanks to a smart rally in stocks like TCS, HDFC Bank, Axis Bank and Reliance Industries in an otherwise a holiday-truncated expiry week. Globally, low probability of US Federal Reserve hiking interest rates in US in its March policy meeting also contributed to the buoyant sentiment.

During the week ended February 10, the S&P BSE Sensex added 1.5% or 424 points to settle at 28893, while Nifty50 gained 1.3% or 118 points to close at 8939.

Midcap and Smallcap stocks also mirrored the gains in the frontline indices to rise nearly 1% each.

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Reblog: Mohnish Pabrai’s Approach To Beating The Market

Mohnish Pabrai, managing partner of Pabrai Investment Funds, speaks during the Value Investing Congress in New York. Photographer: Daniel Barry/Bloomberg News

Since inception, Mohnish Pabrai has beat the stock market by triple digit returns. What was the key to his success? Pabrai would argue nothing unexpected or surprising.  In fact, he attributes his massive success to a keen sense of cloning other super-investors like Warren Buffett and Charlie Munger. On the investing podcast, Pabrai discussed a range of topics to help explain his way of thinking and methods for achieving such strong performance.

Preston Pysh: [2:29] You have an IT background that not a lot of people know about. Would you have taken a different career path if you had found value investing first?

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Reblog: Go for the Million!

If you already have a million dollars or more, this blogpost is not for you.

For all others, I’ll cut the bullshit and get to the chase. I am just mighty pissed off.

When you have less than a million dollars –

Please don’t listen to any or all the Gurus who are propagating 16% CAGR, 18% CAGR, 20% CAGR. You know the usual spiel. Say, you have 5 Lakh rupees. Gurus recommend that you should be happy be 18% CAGR or 20% CAGR and over a long period of time (40 years), you would be so rich, that even the rich would be ashamed.

Bullshit.

For all those studies, where you read that if you had invested in quality at any price, and just held on to them for a long period of time (40 years), you would have made enough money to be proud of yourself.

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Benchmark indices settle on Friday near 5-month high; HDFC Bank up 3.6%

Benchmark indices settled the day higher, gaining for the fourth straight week driven by financials even after RBI put HDFC Bank back in the FII ban list.

The Central Bank said the private bank has crossed overall limit of 74% of its paid-up capital and no further purchases of shares the bank would be allowed via exchanges for FIIs. It had allowed allowed foreign investors to resume buying in the private bank earlier.

Nifty50 rose as much as 1.3% during the early morning trade led by HDFC Bank after it gained 9.5% to a record high of Rs 1,454.

The S&P BSE Sensex settled the day at 28,469, up 167 points, while the broader Nifty50 ended at 8,822, up 44 points.

In the broader market, BSE Midcap and BSE Smallcap gained 0.5% and 0.4% respectively.

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Reblog: How To Trade Or Invest

If you are confused about how to trade / invest when you have an opinion or follow one then you do need to get yourself a lesson in trend following. Elliott Wave analysis is meant for market forecasting but actual trades have to be taken based on classic technical tools that give you levels to manage a trade. It is my belief in this process that I do not give calls or tips. I do the difficult part of taking a view and take the flak for it when wrong.

However to successfully make money you will need to add Position sizing to either your investment decisions or trading decisions so that you can minimise losses and maximise gains. So I would expect you to learn some of that. In today’s note, I will give you a head start on this.

If you do not know how to trade at all then you first need a lesson in trend trading however if you want to know which trend to trade you have come to the right place. Learning to trade involves knowing.

1. How to buy/Sell
2. Time to monitor trades, to get out of losing trades
3. Understand support resistance

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Reblog: How Investors Should Deal With Surprises

Psychologist Daniel Kahneman said something really smart on a recent podcast with Barry Ritholtz:

Whenever we are surprised by something, even if we admit that we made a mistake, we say, ‘Oh I’ll never make that mistake again.’ But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.

This is one of those things that most people agree with but find impossible to put into practice.

What was the biggest lesson of the 2008 financial crisis? A few popular ones I’ve heard:

  • Banks use too much leverage.
  • Consumers don’t understand complicated mortgage products.
  • We need more (or less) regulation on derivatives and better accounting rules.

They’re all specific to the 2008 financial crisis, and implicitly offer advice on how to avoid a future financial crisis.

Which makes sense. People want to learn their lesson so they don’t fall for the same mistakes next time.

But that’s a hard way to learn a lesson. Learning specific lessons are only relevant if the next financial crisis is caused by the same thing as the last one. But it almost never is. The next recession is rarely like the last recession. The next bubble is rarely caused by the same forces as the last one. So the specific lessons we learn from each crisis may not help us avoid or navigate the next one.

You can see people falling for this error all the time. In an interview with The Motley Fool, Jason Zweig of the Wall Street Journal said:

I often like to say that people are too good at learning lessons, and the lesson that people should have learned after the Internet bubble burst in early 2000 was that day trading is a really bad idea. But people are too good at learning lessons, so they learned an overprecise lesson, which was that day trading *Internet stocks *is a really bad idea. So in recent years we see the same people who day-traded internet stocks going into day-trading foreign currency.

In the 1990s people were so busy trying to predict the next crash of 1987 that they missed the internet bubble.

In the 2000s people were so busy trying to predict the next internet bubble that they missed the financial crisis.

Now people are so busy trying to predict the next financial crisis that they’re almost certainly missing whatever will cause the next crash. (I don’t know what it’ll be. Neither do you.)

Here’s the problem: We want to think the economy and stock market are rational, like a machine. They’re easier to stomach if we view them that way. Since we think of them as rational we think they should move in predictable patterns. And if we think they move in predictable patterns we assume we can get better by avoiding tomorrow what didn’t work yesterday.

But markets aren’t rational machines. They’re adaptive and emotional. They have moods and tastes. They change. Since what hurt us yesterday isn’t likely to be what hurts us tomorrow, you can spend a lifetime “learning lessons” without those lessons leading to better outcomes.

That isn’t true of, say, airplanes. Airplanes are machines that operate in predictable patterns, so after each crash we can figure out what went wrong and implement a fix that will actually make flying safer – since, say, a poorly designed vertical stabilizer that caused one crash is likely to cause another. The NTSB is extremely good at correcting these errors, which is why flying has gotten so much safer.

But airplanes don’t have lobbyists, hormones, bonus incentives, or off balance-sheet trading entities. They don’t have tastes, and they don’t adapt. They don’t dangle nine-figure paydays in front of pilots who figure out how to skirt and exploit new regulations.

Markets and economies do. And since they do, no two recessions, bubbles, bear markets, or meltdowns are even remotely alike.

This doesn’t mean we can’t improve our decisions. We just have to be more humble about our lessons.

The most useful lesson from the 2008 financial crisis is that big risks hide under your nose and cause more havoc than you imagined, so having more room for error in your finances than you think you need is a smart idea. Less reliance on forecasts, more time to wait things out, a greater willingness to accept lower returns than you’d prefer.

That’s broad and unspecific. But being broad an unspecific makes it more likely to be relevant to the next crisis.

The original article is authored by Morgan Housel and is available here.


Markets settle on Friday flat ahead of Dec IIP data; TCS gains 2%

Benchmark indices settled the day flat even ahead of December factory output later today on hopes of reviving economy. The factory output grew by 5.7% in November even after the note ban announced by PM Narendra Modi.

 

Sentiment was also affected as Asian shares rallied to an 18-month peak on Friday, as investors cheered upbeat Chinese trade data.

 

Nifty 50 continued to hover around 8,800 levels, gaining for third consecutive week, led by TCS, Grasim, Tech Mahindra and Infosys.

 

The BSE Sensex index rose 0.4% this week while the NSE added 0.6% even after the RBI held rated for the second time and changed its stance to ‘Neutral’ from ‘Accomodative’
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Reblog – Behavioural finance: Money illusion

Money illusion describes the tendency of people to think about money in nominal rather than in real or inflation-adjusted terms. In other words, it’s when people focus on the absolute amount of money rather than what that money can buy.

The concept of money illusion was first discussed by Irving Fisher and later popularised by John Maynard Keynes. Fisher defined it as “the failure to perceive that the dollar, or any other unit of money, expands or shrinks in value”.

In behavioural psychology terms, the issue of money illusion is an example of a broader cognitive failing known as frame dependence where perceived losses tend to have undue prominence in our decision-making.

One classic behavioural finance text showing the existence of money illusion was written by Shafir, Diamond and Tversky in 1997. It was based on experiments and real situations. Participants, for example, were presented with the following scenario:

Imagine that Adam, Ben and Carl each receive an inheritance and buy houses for $200,000.  Each sells their house one year later, but under different economic conditions. Adam sells his house for $154,000, 23% less than what he paid for it. When Adam owned the house there was 25% deflation. Ben sells his house for $198,000, 1% less than what he paid for it. When Ben owned the house, there was no change to prices. Carl sells his for $246,000, 23% more than he paid for it. When Carl owned the house there was 25% inflation.

When subjects were asked to rank these transactions in terms of success, the results showed that they were influenced by nominal values. The majority of subjects (60%) ranked Carl as having done best, Ben second and Adam third.

In real terms, the reverse is true. Adam did best because he made a real gain of 2%. Ben did second-best, making a nominal and real loss of 1%. Finally, Carl did worst, making a real loss of 2%.

The behavioural explanation for money illusion suggests that people’s thinking is driven by automatic, emotional reactions to the perceived changes in nominal values. While the calculation to account for inflation is not difficult, it involves an extra step and at least part of the brain seems strangely anchored to nominal values.

There are financial implications with this. One of the key problems is the situation where nominal increases in income are mistaken for genuine gains in purchasing power, when inflation may be diminishing the real worth of money. In fact, money illusion has been cited as why small levels of inflation are desirable for economies at least in terms of earnings growth. Having low inflation allows employers to modestly raise wages in nominal terms without necessarily paying more in real terms. As a result, many people who get pay increases make the mistake of thinking their wealth is rising, since they fail to adequately account for inflation.

In periods of rising inflation, income and prices tend to be correlated and there have been wage-price spirals where the two factors feed off each other. In periods of deflation, in theory, the process should work in reverse with downward wage price spirals, but in reality this tends not to happen. The reason is that labour is resistant to nominal wage decreases, partly due to money illusion. Unemployment tends to be the outcome because firms react to falling prices and declining profits by cutting staff.

In investment, the challenge is to make a real return on an outlay. If inflation is 3% and your investment gives you 5%, the real return is 2%. With the ability of inflation to act as a tax that erodes purchasing power over time, the best way to counteract inflation is to invest money in assets that can provide a return above inflation.

With record low interest rates, keeping money in a bank account or a money-market fund may not generate enough return to keep pace with even moderate inflation.

Despite this, the evidence suggests investors are more averse to nominal risks than real ones. Consider the “flight to safety” that occurs during most economic and stock-market downturns. Investors flood into safe assets such as bonds, which do not keep pace with inflation, while ignoring equities, despite the fact they may have cheapened considerably.

While the idea of holding cash may be emotionally appealing as it feels like a safe trade in nominal terms, such conservatism runs the risk of reduced purchasing power.

Assuming we do not strike deflation, in the prevailing environment of historically low interest rates, some analysts believe that cash and government bonds run the risk of providing negative real returns. This is encouraging many investors to look for real returns in high-yield bonds, real estate and equities.

Investors with a time horizon of five or more years should consider shifting surplus cash into assets where there is a prospect of a real return. Equities can offer attractive inflation-proofing characteristics as many companies can pass price increase onto consumers to protect their profits.

The original article appears on bull.com.au and appears here.


Reblog: Frank Martin of Hummingbird Partners on Cyclical Investing

This month’s issue of Value Investor Insight contains an interesting interview with Frank Martin of Hummingbird Partners.

Since his Martin Capital Management embraced equity investing in 2000, Frank Martin has achieved a truly impressive record of outperformance. His firm’s equity composite has beaten the S&P 500 by some 700 basis points per year since inception. However, thanks to his cautious stance, Martin has underperformed. Throughout the period he has only been 30% to 70% invested.

Still, Martin’s new venture, long/short hedge fund Hummingbird Partners, which he co-founded with Peter Wong, promises to replicate his strategy and help investors recognize his stock-picking acumen. Hummingbird is looking for opportunities in such areas as jet engines, agriculture and industrial and auto supply. Here are some of the key takeaways from the Hummingbird Partners interview.

Hummingbird Partners

Hummingbird Partners

Frank Martin of Hummingbird Partners on Cyclical Investing

Martin starts the conversation by discussing what makes a good business. He believes, along with many other investors that the key to a lasting business model is “structural competitive advantages, those inherent features that prevent rivals from entering a company’s business and/or competing effectively with it.” He goes on to give some examples such as “monopolies or oligopolies, razor/ razorblade businesses, enduring brands, network effects, high switching costs and economies of scale. Perfect business models don’t exist, but many come close to varying degrees.” An example of which is Gentex, which owns the market for auto-dimming mirrors and lights:

“It has such a strong position in a small-enough niche that companies trying to wedge their way into the market are likely to have a terrible return on capital for many years. It’s run by an owner-operator, Fred Bauer, who founded the company in 1974 and is just a first class operator who funds very-productive R&D and maintains a balance sheet with what some might call too much cash, but which we love because of the optionality it provides. That’s part of being anti-fragile.”

But Hummingbird’s co-founder isn’t just attracted to good businesses in niche markets; Martin is also interested in large companies trading at attractive valuations where he can act as a contrarian:

“For instance, we took advantage of the fairly recent break in oil prices to invest in energy-services companies like Baker Hughes. Rather than try to figure out which of the exploration companies to bet on, we went for “picks-and-shovels” type companies…We will also at times walk toward controversy when others are running away. In 2010 I bought BP in this case primarily as a trade, right in the middle of the Gulf-oil-spill mess…Sometimes the impetus is less dramatic. With Wal-Mart, we’ve seen sentiment ebb and flow over the extent to which Amazon is going to eat its – and everyone else’s – lunch. Our basic view is that there will continue to be space for Wal-Mart, especially given that 50% of its revenues come from groceries, which has proven a tougher sale online.”

Cyclical businesses are also an area of interest for Martin. While most investors would shy away from cyclical businesses fearing earnings volatility, Martin and team like to make the most of volatile earnings and the favorable share price movements they produce:

“Many people associate cyclical businesses with bad businesses because they don’t produce stable, consistent cashflows like bonds. We disagree. A good business to us is one where we can assess its earnings power over a full cycle and buy it when its shares are attractively priced relative to that earnings power.”

Agriculture is one such industry. The sector is currently suffering from an earnings recession “since the cycle turned in 2013, farm income in the U.S. is down approximately 40%, ” yet the “U.N. projects that world population by 2050 will grow by a third, to 9.7 billion. Nearly all of the increase will come from developing countries, where income levels are growing.” Farms will have to think up new ways to increase yield to get meet this growth. “Estimates are that crop production will have to grow by at least 60% from current levels to meet estimated demand by 2050…all of the 60% increase in crop production will have to come from increasing yield.” The best way to play this trend Martin believes is via “agricultural companies that reliably prove capable of facilitating yield growth.” Hummingbird’s goal: buy the best ones when they’re out of favor.

Martin’s entire investment strategy is based around business cyclicality. When it comes to valuation and timing acquisitions, he says:

“I’ve always found the best place to start is where the company has been priced over its history, relative to itself and to its industry. From there, we try to buy against some reasonable estimate of earnings power when it’s out of favor and to sell when it’s in favor. We use as a threshold that the price can at least double in five years through a combination of business performance and improved valuation.”

From all of the above, it’s clear Hummingbird’s investment strategy is a contrarian one so it could come as no surprise that the fund currently owns some down-and-out businesses. On top of Gentex above, Martin likes Rolls-Royce and Fastenal, both of which have seen their shares slide recently.

The original article appears on ValueWalk.com and is available here.


Sensex ends on Friday marginally higher ahead of RBI policy meeting

The benchmark indices on Friday ended flat as investors preferred to stay on the sidelines ahead of the Reserve Bank of India’s policy meeting next week. The S&P BSE Sensex settled the day at 28,240, up 14 points, while the Nifty50 quoted 8,740, up 7 points at close. In the broader market, BSE Smallcap index outperformed the frontline indices and BSE Midcap to gain 1%. BSE Midcap added 0.6%. The market breadth, indicating the overall health of the market, was strong. On BSE, 1,600 shares rose and 1,187 shares fell. A total of 159 shares were unchanged.

Shares of Bombay Stock Exchange (BSE) made a strong debut on Friday, with the scrip listing at Rs 1,085, a 35% premium over the issue price of Rs 806 on the National Stock Exchange (NSE). The stock hit a high of Rs 1,200, up 49% against its issue price within minutes of listing. The stock eventually settled the trade 33% higher at Rs 1,070 against its issue price.

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