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How Do You Solve a Problem Like Vakrangee?

Feb 2, 2018

Rahul Shah, Editor, Smart Contrarian

Henceforth, if any of your stocks is the envy of the world one moment and falls from grace the next, you can jolly well say you were 'Vakrangeed.' There aren't many stocks that can wipe out investor wealth to the tune of more than 20,000 crores in a few trading days flat and still not be done yet.

To be honest, the SEBI order alone cannot be the reason for the stock's collapse. There is seldom one cockroach in the kitchen. I won't be surprised if few more are found crawling around in the days to come.

In fact, I will have to give it to Tanushree and other colleagues for suspecting their presence in their investigation of the company. Which is why, despite the heady growth in its profits, they chose to give it a miss.

My Profit Velocity subscribers weren't so lucky though. Yes, that's right. We had given a buy on the stock some time back.

And it all looked hunky dory for a while. The stock was a star performer, up more than 100% in a few months flat and playing a big role in the service earning 20% in 10 months. However, with the bottom falling out of the stock, the overall performance has also taken a hit.

To say that I am utterly disappointed with this recommendation would mean giving in to the 'outcome bias'.

It is wrong to judge the quality of your decision making based on just one outcome, especially in a field like investing.

What's needed is a thorough examination of the process underlying the recommendations and how a large number of outcomes panned out.

Vakrangee was recommended in Profit Velocity, a momentum based service, as it was in a strong uptrend - our number one requirement for a stock to be considered for recommendation. It is a high risk, high reward bet and to be honest, we do expect a few stocks to go the Vakrangee way.

However, once you understand the reason why it is being bought, and have enough safeguards in place so that a few stocks don't wipe out the entire portfolio, you shouldn't fret too much about errors like Vakrangee.

There are investors who, given a choice between a certain 15% returns per year and an 80% chance of earning 25% would always want to choose the former. Mind you, logically, it is the second option that makes more sense as it still gives an expected value of 20% (80% of 25%).

There's a 20% chance that the investment may go to zero but over a large number of stocks, it could be well worth the risk taken.

Happy Investing,


Rahul Shah (Research Analyst)
Editor, Smart Contrarian

PS: At a time when market rallies have crossed the point of euphoria into a point where a correction is inevitable, you must stop to think about those stocks that can protect your portfolio. Tanushree is the fore most 'safe-stocks' investor - and her ideas will help you tide the storm when it comes. Sign up here.

Brain Food for the Day

The Budget Did Not Ban Bitcoin

India's Union Budget 2018 had something in store for the cryptocurrency investors, startups and exchanges in the country.

In his Budget speech, the Finance Minister said:

  • 'The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system. The Government will explore use of Blockchain technology proactively for ushering in digital economy.'

This statement, has resulted in much speculation on whether cryptocurrency has been banned, or what is the government's legal position on it.

Unfortunately, major media outlets have misreported the finance minister's statement as a death knell for bitcoin and other cryptocurrencies in India. The noise has created a lot of confusion, and has triggered a sell-off.

Let's try to cut through the noise, and break down what the Finance Minister said.

  • 'The government does not consider crypto-currencies legal tender or coin...'

What this means is that the Government does not consider cryptos as money. For years now, the Reserve Bank of India and the Government of India have never considered bitcoin and cryptos as legal tender. For that matter, there is no country in the world - except Japan - which has done so. Every government has been very clear on this.

The same way that you cannot go to your neighborhood kirana shop and buy groceries with gold, you cannot use bitcoin to buy products in India.

Similarly, the US dollar is not a legal tender in India. Does that make the US dollar itself illegal?

  • '...Will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system...'

The payment system includes the banking mechanism and the settlements system. Recently, digital wallets and mechanisms like UPI have been added to the entire system. What the Finance Minister seems to be saying is that bitcoin and cryptos are not a part of this system. Just like gold is not a part of the payments system, people still use gold for barter transactions.

However, there is still a bit of ambiguity on this matter. Can cryptos be bartered for other cryptos? We will have to wait for clarification from the government...

The Finance Minister also stated that the government will crack down on individuals and bodies which might use crypto for illegitimate activities (like terrorist funding). The government has been doing the same for other valuable instruments as well. So, it is no surprise the government is taking cognizance about cryptos, especially with prices shooting up.

So, this changes nothing. Mr. Jaitley merely reiterated the government's position on bitcoin and cryptos. There has been no indication by the government that it is banning exchanges. Neither does it stop people from holding a cryptocurrency. It is just saying that the government doesn't recognize cryptocurrency as money, which no country in the world does except Japan.

  • 'The Government will explore use of Blockchain technology proactively for ushering in digital economy '

While we don't know if the government would eventually regulate the cryptocurrency space, either by creating policies to regulate and tax exchanges, or shut them down by making it difficult to access banking. We do know that the government is positive about the blockchain technology.

It is indeed a big thing for something as nascent as the blockchain technology to find a mention in India's Union Budget.

Understanding and leveraging this technology early can lead to a lot of profitable opportunities.

And I can point you to the right resource to learn more...

Prasheel Vartak and his guru Tama Churchouse, who have been researching cryptos and the blockchain technology for years, will keep you on top of the happenings in the crypto world.

Join them here.

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2 Responses to "How Do You Solve a Problem Like Vakrangee?"

Emilio

Feb 9, 2018

Mr Vaidya is right. In this case, if Vakrangee was one of a basket of 5 stocks (20% failure with the 80% returning 25%), the stock having dropped over 50%, the returns for the basket of 5 stocks is less than 10%

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C K VAIDYA

Feb 2, 2018

Hi,
I would like to point out that the calculation of Expected Value done by you. what you have stated is and I quote:
"There are investors who, given a choice between a certain 15% returns per year and an 80% chance of earning 25% would always want to choose the former. Mind you, logically, it is the second option that makes more sense as it still gives an expected value of 20% (80% of 25%).

There's a 20% chance that the investment may go to zero but over a large number of stocks, it could be well worth the risk taken."

You have obviously not considered the possibility of negative returns. If in 20% cases, the returns are -25%, then statstically, the Expected Value is 15%. Why should an investor take additional risk for no returns? Even if the returns are not as bad as -25% but, say, -10%, the Expected Value of 18% is not a great improvement for additional risk.
An investor has to consider not only the Expected Value but also the variance of results before taking a decision.


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