Investment method: You choose it or it chooses you?

Dec 23, 2010

In this issue:
» Domestic funds turn net buyers of equities in December
» Consumer goods makers in the usual topline-bottomline quandary
» Higher inflation still possible, says RBI
» India Inc can face attrition problems along with wage hikes
» ...and more!!

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00:00
 
We have been observing financial markets for quite some years now. And we have made one interesting observation. It occurred to us that there is no investment method or investment philosophy that works successfully at all the times. A certain environment would be conducive for value investing. On the other hand, things like technical analysis and momentum investing would require an altogether different environment to succeed. Funnily, there are also philosophies that preach exactly the opposite of each other. Yet, all of them tend to succeed at one point in time or the other. What further reinforces this is the fact that each philosophy or investment method has produced quite a few success stories. Warren Buffett, Peter Lynch, George Soros and Marc Faber are the ones that come to mind. Indeed, all of these titans cannot be typecast into one common investment method.

Now, the question that remains to be answered is whether these extremely successful investors knew themselves all too well and hence, chose the philosophy that fitted well with their personalities and behavioural traits? Or did they choose the philosophy that made the most sense to them and over time, altered their behavioural traits to suit the philosophy? Well, we don't have a definite answer to this.

As far as we are concerned, we believe it is the latter. Value investing as an investment philosophy makes the most sense to us and hence, we try and discipline ourselves to the rules of value investing. However, there is no harm in adopting the other route as well. One can most certainly choose an investment method that goes well with one's traits. The most important thing though is the fact that once one has chosen an investment method, one must be extremely meticulous in following it and not violate its rules under any circumstances. And this is the key to successful investing more than anything else we believe.

What about you? Do you choose your investment method or your investment method chooses you? Let us know your views

01:09
 Chart of the day
 
Not just the humble onion but its price too is making the common man weep these days. Indeed, its prices rise in recent days has put even commodities like gold and silver to shame. Today's chart of the day shows the extent to which this commodity that is grown underground has reached sky high levels in terms of prices. People in the capital city of Delhi appear to be the worst hit as prices have edged higher by a whopping 173%, a near threefold jump. Mumbai on the other hand has been spared a bit with prices doubling from year ago levels. Given the swift Government action, chances are that by the time this writeup reaches you, prices would have already come down. But until the next crop arrives, we are unlikely to see the low prices that we were more used to seeing.

Source: Business Line

01:49
 
You can't make money just selling stocks. You first need to buy them. And if the time of showcasing your performance is near, you need to be even more proactive in your buying and selling decisions. And this is exactly what the Indian mutual fund industry is doing.

Source: SEBI

After being net sellers of stocks for almost the entire of 2010, mutual funds have been net buyers in the current month (at least till the 16th of December). What it means is that this is the first month in 2010 when funds have bought much more than they have sold. We however fail to understand the rationale of the same, if not for the purpose of pushing up performance as the year comes to a close and thus doing everything possible to get a better return.

Indian markets have not fallen much so as to generate a higher interest from fund managers. And there has not been outstandingly good news that could make them think that the future will be rosier than what it was seen last month or the month before that! So this behaviour is perplexing for us, like most behavior is from the fund management industry!

02:34
 
Makers of consumer goods in India are in a quandary. Sales of ACs, refrigerators, televisions, washing machines and the like have been growing at an impressive pace. But the good news ends there. These companies do not have much to boast about when it comes to profits. The reasons are not hard to find. The persistent headache for consumer durables makers have been rising input costs. The obvious solution then would be to pass on these hikes to consumers. But that is easier said than done. For starters, demand for these goods is highly elastic. This means that any price hike is immediately likely to see a drop in demand. Not just that, the competition in this industry is fierce. Thus, raising prices is not easy with the prospect of erosion in market share looming large. The fact that supply is outpacing demand means that raising prices does not seem an attractive option. What these companies are instead doing is focusing on ways to reduce costs, especially by adopting newer technologies. Others have realised that innovation, brand building and superior after sales service will ensure loyalty from consumers. Indeed, we believe that the only way for this industry to survive is by thinking out of the box.

03:16
 
Discussion on food inflation has assumed ridiculous proportions in recent days. Everyone from the roadside hawker to the sleepy parliamentarians are voicing their opinions on it. Onion prices are typically at the centre of this discussion. But food prices which account for a sixth of the overall inflation index has caused headaches for policymakers for quite some time. The RBI, in particular, has been proactive in dealing with the issue. But unfortunately without much success. Now as the last quarter of FY11 draws near, its inflation target seems to be blurring. Liquidity easing measures are being considered to rein in the price rises.

But as we have said earlier, the RBI cannot be the lone soldier tackling the inflation issue. If the government is caught napping while traders use the demand supply dynamics to their favour, inflation is but a given. Globally nature has played truant in unduly raising commodity prices. Cartels like the OPEC have done their bit in keeping oil prices high. Thus, try as it might, the RBI is unlikely to succeed in its price control measures in the near term.

03:53
 
Human nature is a mixture of greed and fear. When times are bad, there is fear but when times are good, there is greed. This holds most true for the employee base in India. With corporate India going great guns and expecting almost 9% growth in revenues next year, little does it come as a surprise that the employees expect higher pay scales. In fact, HR firms and recruiters expect pay hikes in 2011 to be in the region of 25-30%. But when people start expecting pay hikes then they also start getting dissatisfied if these expectations are not met. On top of this, if there are better offers from other firms, then switching jobs also becomes a common thing. Net result, attrition rates start to rise. As a result, recruiters predict that attrition rates in 2011 may go north of 20%.

We feel that some amount of attrition is good as it helps to get fresh ideas and develops the organization. But if it is too high, then it has a negative impact as employees may not understand the organization and have time to optimize their strengths. Another issue is that higher pays and attrition rates lead to higher wage bills. But unless revenues grow in line, this would start to impact margins. This was seen in the Indian IT industry over the past few quarters, wherein the higher attrition rates had started to show in the margins. But we are sure that the employees won't be complaining about getting fatter paychecks which are definitely expected in 2011.

04:45
 
Meanwhile, Indian markets continued to trade lackluster today with the BSE Sensex down around 25 points at the time of writing. Heavyweights like L&T and Tata Motors were seen adding maximum pressure. Furthermore, most Asian indices also closed weak today whereas Europe is trading mixed currently.

04:56
 Today's investing mantra
"Bubbles have always given back everything. There have been no exceptions, none." - Jeremy Grantham

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12 Responses to "Investment method: You choose it or it chooses you?"

Anand Sundaramani

Dec 23, 2010

For the graph that MFs have been net sellers through the months, perhaps a correlation with volume of redemptions & cash in hand % would be a relevant mode of comparison. In its own graph I am not sure, we are in a position to comment on fund managers.

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ravichand

Dec 23, 2010

My two cents:

I believe you should have a knowledge of all the availabale methods and select the one appropriate to the situation. Its like a quiver with different types of arrows. Select the arrow depending on the requirement / situation.
Lastly i believe the investment corpus available also plays a role in the method chosen. Deep value investing is practical when a sizeable pool is kept in cash off the market and ready to make the kill when the oppurtunity arises

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