tag:blogger.com,1999:blog-70044532024-03-14T00:20:43.515+05:30Understanding and applying value investing principlesRohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.comBlogger625125tag:blogger.com,1999:blog-7004453.post-67238873184942417662020-03-31T21:09:00.000+05:302019-03-19T03:05:48.427+05:30The blog has a new home<span style="background-color: yellow;"></span><br />
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<span class="rn-13yce4e"><span style="font-family: "arial" , sans-serif; font-size: 12.0pt; line-height: 107%;">After
14 Years and 600+ posts, I have finally moved this blog to my own site. Feels
good to have full control of my content. Hope you will like it.</span></span><br />
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<span class="rn-13yce4e"><span style="font-family: "arial" , sans-serif; font-size: 12.0pt; line-height: 107%;">I will be posting to the new blog going forward. If you are interested in getting email updates, i would recommend signing up on the new blog </span></span></div>
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<![endif]-->Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-316941593504397712019-03-19T03:05:00.002+05:302019-03-19T03:05:35.785+05:30Email updates from the blog<!--[if gte mso 9]><xml>
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Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-5260977614640571702019-01-19T06:05:00.005+05:302019-01-19T06:05:56.666+05:30Building an edge<!--[if gte mso 9]><xml>
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<span style="font-family: Arial, Helvetica, sans-serif;">In an <a href="http://valueinvestorindia.blogspot.com/2017/01/on-outperformance.html">earlier
note</a>, I wrote about the three factors which contribute to outperformance
(doing better than an index). I expanded on the third factor in the most recent
update.</span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
</span><div class="MsoNormal">
<span style="font-family: Arial, Helvetica, sans-serif;"><b style="mso-bidi-font-weight: normal;">Sources of outperformance</b><br />
Superior performance versus the indices can usually be broken down into three
buckets</span><span style="font-family: Arial, Helvetica, sans-serif;"></span></div>
<div class="MsoNormal">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">a.<span style="font-stretch: normal;"> </span>Informational edge – An investor can
outperform the market by having access to superior information such ground
level data, ongoing inputs from management etc.</span></div>
<div class="MsoNormal">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">b.<span style="font-stretch: normal;"> </span>Analytical edge – This edge comes from
having the same information, but analyzing it in a superior fashion via
multiple mental models</span></div>
<div class="MsoNormal">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">c.<span style="font-stretch: normal;"> </span>Behavioral edge – This edge comes from
being rational and long term oriented.</span><span style="font-family: Arial, Helvetica, sans-serif;"></span></div>
<div class="MsoNormal">
<span style="font-family: Arial, Helvetica, sans-serif;"><br />
I personally think our edge can come mainly from the behavioral and analytical
factors. The Indian markets had some level of informational edge, but this edge
is eroding with wider availability of information and increasing levels of
transparency.</span><span style="font-family: Arial, Helvetica, sans-serif;"></span></div>
<div class="MsoNormal">
<span style="font-family: Arial, Helvetica, sans-serif;"><br />
We aim to have an analytical edge by digging deeper and thinking more
thoroughly about each idea. Ultimately it, depends on my own IQ levels and
mental wiring, which is unlikely to change despite my efforts.</span><span style="font-family: Arial, Helvetica, sans-serif;"></span></div>
<div class="MsoNormal">
<span style="font-family: Arial, Helvetica, sans-serif;"><br />
The final edge – behavioral is the most sustainable and at the same the
toughest one to maintain. This involves being rational about our decisions and
maintaining a long term orientation. If you look at the annual turnover of
mutual funds and other investors, most of them are short term oriented with a
time horizon of less than one year. In a world of short term incentives, an <a href="http://valueinvestorindia.blogspot.com/2018/05/an-underappreciated-edge.html">ability
to be patient</a> and have a long term view can be a source of advantage.</span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
</span><div class="MsoNormal" style="text-align: justify;">
<br /></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><b>An enormous advantage</b></span><br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">We started the advisory in 2011. At the outset, we made a few decisions which has made our life simpler and saved us a lot of pain.<br /><br />- We will not tout the wins on social media, which are often due to luck and can easily get hit by a random event causing a loss for anyone trying to follow them. If it works well, the person taking the tip attributes it to their genius. If it fails, we are responsible. Considering that the best of investors don’t get it right more than 60-70% of the time, what is the upside other than an occasional ego trip?<br />- We will focus on the investment process as that is the only repeatable aspect of investing over which we have some control. We cannot control the outcome. <br />- We will focus on the long term as short-term results are prone to random events, but the noise cancels out over time <br />- We will not indulge in making fun of other investors when we are doing well. It is stupid behavior and extremely petty. There are times when every investor goes through a bad patch – so what goes around comes around<br /><br />Some of the behavior we see in the media, although loud, petty and promotional is not irrational. It allows the advisor/ fund manager to get visibility and increase their AUM. In the end, managing a fund is a business and one cannot live on high ideals alone. <br /><br />The problem with this behavior is the type of investors you attract. If you talk about short term performance and multi-baggers, then you will attract people looking for quick gains and easy profits. The downside of having such investors, is that they get quickly disappointed when the inevitable downturn hits the market.<br /><br />Looking for quick gains, such investors join at the top and manage to get quick losses.<br /><br />For the fund manager, there is no downside. If the market keeps going up, they get to make their fees. If the market drops and they lose a few investors, which is part of the normal business cycle. They just need to wait for the next bull market for a new crop of performance chasers.<br /><br />Both me and Kedar don’t want to play this game. We are not running this advisory for the good of mankind, but do not like this behavior. In addition, we are in a financial position, where we do not depend on the fees we earn to put food on the table.<br /><br />Why am I sharing this now after so many years?<br /><br />The reason for sharing is that a person cannot be rational and make decisions for the long term if that results in career risk. Try telling your family that you took a 5-year view which cost you your job. It is never going to happen.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br />We have taken this element of risk out of the equation for us. As I mentioned earlier – we do not depend on the advisory to put food on our table. In addition, our own money is invested in the same way as the model portfolio. Put the two together and you will realize that we are willing and able to think long term with a focus on risk reduction.<br /><br />I think this is a very important edge for us compared to most fund managers. We can safely ignore short term fads (such as the bull market in small and mid-caps last year) and panics and rationally manage the portfolio. This allows us to take bets which are unpopular and hold on to them. <br /><br />In an age of huge computing power and easily available information, one is unlikely to get a durable analytical or information edge over other investors. However, the third edge – behavioral which is durable and cannot be competed away, is available to us due to the reasons I have shared.</span><br />
----------------<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-28833142593792856542019-01-02T22:38:00.001+05:302019-01-02T22:38:43.008+05:30The journey matters<!--[if gte mso 9]><xml>
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index 9"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
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<w:LsdException Locked="false" Priority="39" SemiHidden="true"
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<w:LsdException Locked="false" Priority="39" SemiHidden="true"
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<w:LsdException Locked="false" Priority="39" SemiHidden="true"
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<w:LsdException Locked="false" Priority="39" SemiHidden="true"
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<w:LsdException Locked="false" Priority="39" SemiHidden="true"
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<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 7"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" Name="toc 8"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index heading"/>
<w:LsdException Locked="false" Priority="35" SemiHidden="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="envelope address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="endnote reference"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" Priority="10" QFormat="true" Name="Title"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" Priority="1" SemiHidden="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" Priority="11" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
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<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
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<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
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<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
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<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
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<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
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<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
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<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
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<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
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<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
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<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
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<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
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<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
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<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">Following is from my
recent annual update to subscribers</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">The journey matters</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">I wrote about bitcoin
in the <a href="http://valueinvestorindia.blogspot.com/2018/01/annual-letter-to-subscribers-on-risk.html">2017
update</a> and compared it with small caps and midcaps. Since then bitcoin is
down 75%, midcaps are down 16% and small caps are down around 30% on average. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">A lot of investors
believe they have a lot of tolerance for risk. I can tell you from personal
experience, that most of us over-estimate our tolerance to risk, me included.
There is a lot of difference between intellectually thinking of a 30% loss
versus experiencing a real 30% loss in your portfolio.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">For a check, think of
how you felt during September when the market and individual portfolios dropped
around 20%. These drops have gotten worse emotionally in the recent past due to
social media and the speed with which rumors and panic spread. The same 20%
drop causes far more anguish now than the past when such noise was minimal. In
such a climate, it is critical to insulate yourself from the noise. If you
don’t do that, it is likely you will panic at the bottom and make an irrational
decision.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">One way to insulate
yourself from this noise is to know your own risk tolerance. If you think, you
can bear a 30% loss on your portfolio – ensure that your equity allocation as
percentage of your net worth does not exceed 50%. This will ensure that the net
impact on your portfolio will not exceed 15%. In effect, ensure that the actual
loss of your net worth is less than half your estimate of risk tolerance. This
is a sort of margin of safety on your own behavior in case you have
over-estimated your ability to withstand financial pain.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">Know thyself</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">You will find a lot of
charts on how companies like amazon have given 25%+ CAGR with 60-70% drops along
the way. These charts show the 100X returns a hypothetical investor would have
made in the last 15 years of holding this stock.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">I can tell you that
such hypothetical investors are very very rare and even if they hold this
stock, it would be a small percentage of their portfolio. There is an
infinitely small number of investors who can buy and hold such volatile
companies as a large percentage of their portfolio. Try imagining your entire
net worth going down by 80% and still holding on to it.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">I am definitely not one
of those brave investors. I have a much higher tolerance for volatility and
risk than an average person, but I am not a risk savant - an outlier in terms
of my tolerance. I have developed a level of risk tolerance over time but have
always tried to remain within my limits. I see no reason for testing those
limits as I don’t want to be miserable even if I get ‘richer’ over time. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">There are no defined
limits for risk tolerance. Every individual has to answer it for himself/herself.
You will have to do same. One of the best test I have found is the sleep and
worry test. If some positions or the overall equity allocation is causing you
to worry and lose sleep, then it means that you are nearing your risk
tolerance. At that point it makes sense to drop the position or reduce
allocation before hitting the limit (and panicking at the wrong point).</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif; line-height: 107%; mso-bidi-font-size: 10.0pt;">I started worrying in
late 2017 and hence reduced the equity allocation in the model portfolio. This
allowed me to sleep better in 2018.</span></div>
----------------<br />
Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-17974429342054993182018-11-24T04:29:00.003+05:302018-11-24T04:29:47.448+05:30Missing the forest for the trees<br />
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="46" Name="List Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="List Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="List Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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</xml><![endif]--><span style="font-family: "Arial",sans-serif;">I wrote the
following note to subscribers, in context of a specific position. I have made
edits and additions to the original note for this post.</span>
<br />
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">-------------------------------------------</span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">I have a
different set of expectations from this position. The management of the company
is quite conservative (rightfully so) and as a result has always grown at a
measured pace without taking on too much debt. As a result, the profit growth
has never been too high, but at the same time the company has always been
profitable even in the worst of the times.</span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Due to this
cautious approach, we cannot expect this position to be a multi-bagger any time
soon. </span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Although a lot
of subscriber still look at individual positions, I prefer to zoom out and look
at the aggregate portfolio level. We are not in multi-bagger business where me
and kedar will run around touting our wins on social media.</span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Our focus is to
achieve above average returns at the portfolio level with lower risk over the
long run, to achieve our financial goals. </span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<b><span style="font-family: "Arial",sans-serif;">Mania of the
multi-baggers</span></b></div>
<div class="MsoNormal">
<br /></div>
<b></b><span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">The last three
years have been all about multi-baggers.</span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">The Media is
usually fixated on multi-baggers and short term price changes as that grabs
attention (which is their sole focus). Unfortunately, a lot of investment
advisories and so called gurus are the in same boat. It is not too difficult to
see the reason – you need to make big claims to grab attention and clients.</span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Touting a low
risk, steady compounder which doubles every four years is not going to win too
many fans and subscribers/investors. As a result, the focus of the industry is
to talk about high returns and multi-baggers in the portfolio, ignoring the
risk completely. </span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">On this count,
I will not blame the media and financial industry alone for selling dreams to
the general public. A vast majority of investors (if you can call them that)
are searching for shortcuts to become rich quickly. Media and a lot of
professionals are merely satisfying that demand. </span></div>
<span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">One cannot run
a business on high principles alone.</span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial",sans-serif;"> </span><div class="MsoNormal">
<b><span style="font-family: "Arial",sans-serif;">Missing the
forest for the trees</span></b></div>
<b>
</b><div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">In selling,
what is being demanded, the financial industry ends up ignoring several other
key factors which drive returns over the long run.</span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">The key point
in investing is how well are you doing at the portfolio level and if the return
is commensurate with the risk. The individual wins and losses are a driving
factor but not the only criteria. <b style="mso-bidi-font-weight: normal;">Overall
risk driven by position size and diversification plays an equally important
role</b>. I find these aspects of investing missing in most discussions.</span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">If you agree
with the above point, then you should also consider the lower risk, moderate
return ideas. In the past, I have not allocated as much as I should have to
these kind of ideas as they do not have the dazzle and fireworks. However, I
have slowly changed my thought process on it.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">A part of the
portfolio should be allocated to such low key, solid performers which act as a
ballast to the portfolio and deliver decent returns over the long run (with
much lower stress). This is now becoming apparent where some of the past
multi-baggers have left investors holding the bag.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Confusing the
means (multi-bagger picks) with the end (achieving financial goals via equity
investing) had led to investors achieving neither.</span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;"></span></div>
<br />
----------------<br />
<span style="color: blue;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-23005194366811965342018-10-06T20:18:00.000+05:302018-10-06T20:18:48.492+05:30Dont worry, there will be pain<span style="font-family: Arial, Helvetica, sans-serif;">A comment made to subscribers when adding to the portfolio:</span><br />
<br />
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<br />
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<span style="font-family: "Arial",sans-serif;">I am not
calling out the bottom of the market or anything of the sort by making the
above transactions. As I have repeated often in the past, no one other than
liars and self-delusional people can predict what the market will do in the
short term.</span></div>
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<br /></div>
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<span style="font-family: "Arial",sans-serif;">The best
approach always is to look at each individual company closely and evaluate how
it will do in the next 3-5 years including under stressful macro conditions.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">As we add to
the model portfolio, a few positions will not work out – that is a given. The
key is to ensure that we do well on an aggregate basis and the returns are
above average over time. This approach has worked for me over the last 20 years
and I think is still the best approach to follow.</span></div>
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<br /></div>
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<span style="font-family: "Arial",sans-serif;">Although we are
analyzing as rationally as possible and making a tough decision to start adding
to the portfolio, it will be painful to watch the portfolio drop almost on a
daily basis. After all these years in the stock market, it is equally painful
for me. The key is to focus on the long-term prospects of the companies and their
intrinsic value and not react to emotions which will lead you to the wrong
decisions.</span></div>
<br /><br />
----------------<br />
Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-32387127948582239872018-09-26T22:49:00.002+05:302018-09-26T22:49:20.253+05:30Blood on the streets<!--[if !mso]>
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<br />
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;"></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">I sent out this
note to the subscribers over the weekend. Reproduced below with edits</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">I am not going
to talk about risk again. I have been speaking about it for the last 12-18
months. The time to prepare for the storm was when the skies were clear. We
have a full storm now.</span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial",sans-serif;">We started
reducing some of the fully valued positions last year and raised our cash
levels to almost 30% of the portfolio. We were at 29.1% of the portfolio in
cash at the start of the year. We now have 33.3% of the portfolio in cash as of
last week. In effect, we have shuffled between the existing positions, but have
not changed the net cash position much since the start of the year.</span><br />
<span style="font-family: "Arial",sans-serif;"> </span>
<br />
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">There is no
grand strategy or deep macro reasoning behind all of this. We have been exiting
some of the positions which seemed overvalued and started positions in a few
others with good long-term prospects. As I have shared in the past, I don’t
invest based on macro factors such as interest rate changes, currency or
inflation rate. I also ignore short term panics and euphoria in the market
other than making decisions at a company level based on the valuations in each
case.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">My preferred
approach is look at the long-term prospects of a company and invest in those
cases where the we can make above average returns in the long run. In all these
cases, the objective is to make multiples of the invested amount.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Why am I
repeating this again? I am making this point because I have no plans to play
the current panic for some quick gains. There are a lot of investors and
traders who can jump in during intraday lows and make a good gain out of it.
There are a handful who can even do this on a consistent basis.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">I am not one of
those. I know my temperament. I have a tendency to buy and hold to the point of
overstaying in a position. In some of these cases, it would have been better to
have exited earlier. However, on average I have found that, being patient and
holding on has worked out better in the long run.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">If you agree
with my philosophy, then you will understand the reason why I have not reacted
much in the last few months to the noise in the market. As always, I continue
to analyze the current and new positions and will make buy or sell decisions slowly
over time. I see no reason to speed up the decision making process unless the
current events change the thesis for the existing or new positions.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">This bring us
to the events around the NBFC space. </span></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">An obscure term – ALM</span></b></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">There is an
obscure or rarely discussed term – asset liability management in the case of
all NBFCs. This is a critical part of managing the operations of a financial institution
but is rarely discussed as it works smoothly most of the time.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">What is ALM?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">I will not get
technical on this and will try to simplify the explanation as much as I can.
Any financial institution borrows money to lend it onwards to its customers.
This borrowing is done via commercial paper, Bank borrowings, Mutual funds,
Bonds etc. These instruments have varying durations between a few days to
years. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">On the asset
side, the lending instruments also have varying durations depending on the
nature of the loan and the time left on it. At one end of the spectrum are gold
loans with a duration of 2-3 months <span style="mso-spacerun: yes;"> </span>and
at the other end are the long dated loans such as infrastructure loans with a
duration of 5-15 years (as in case of ILFS which is in the center of the
current storm).</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">If you layout
all the borrowings on a graph with amount on the y – axis and duration on X
axis, you will get the liability profile of the company. A similar curve can be
generated for the assets too. A well managed ALM operation tries to match these
two profiles as close as possible. This makes intuitive sense. You want the
short term assets to be funded by short term borrowings and vice a versa</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">I have pasted below
the ALM chart as an example below. As you can see the ALM profiles are
reasonably matched. </span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://1.bp.blogspot.com/-TIvp9yI6k04/W6u_C3wPbDI/AAAAAAAACMU/2YEgrJVaaDclQhPwTji4i8kDM7AZv9kLQCLcBGAs/s1600/pic1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="779" data-original-width="1444" height="344" src="https://1.bp.blogspot.com/-TIvp9yI6k04/W6u_C3wPbDI/AAAAAAAACMU/2YEgrJVaaDclQhPwTji4i8kDM7AZv9kLQCLcBGAs/s640/pic1.png" width="640" /></a></div>
<br />
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif; mso-no-proof: yes;"></span><span style="font-family: "Arial",sans-serif;"></span></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">ALM mismatch and funding issues</span></b></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">As a financial
institution has a mix of long and short-term debt, it has to renew its debt on
a regular basis. This means that if the company cannot renew its debt, it has
no way of repaying it via the cash flow from assets, especially if the assets
are long dated in nature.</span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Let’s look at
the case of ILFS </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">The company has
a short term borrowing of around 25000 Crs out of total borrowing of 91000 Crs.
This means that the company has renew to this borrowing on a regular basis. </span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">The company
does not break out the asset side duration, but if you look at the balance
sheet almost 80% of the assets are long dated in the form of infrastructure
assets and receivable claims etc.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">This kind of a
balance sheet works till the financial institution can refinance its debt on a
regular basis. In the case of ILFS, they have been facing cash flow issues and
losses due to various projects being stuck at different stages of completion
with claims pending with the government. At the same time, the short term debt
and interest has to be paid when it comes due. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">In the recent
months, the company started facing liquidity issues and has not been able to make
payment on its interest obligations as it cannot liquidate its assets quickly
to make these payment (keep in mind the nature of assets such as roads and
bridges which cannot be sold quickly).</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">As the company
defaulted in the last few weeks, the debt held by mutual funds and other
lenders had to be marked down. This has led to a cascade effect where these funds
have had to liquidate other instruments to meet their liquidity requirements.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">This is a
classic run on the bank. ILFS may not have a solvency issue (I don’t have an
insight on that) but has a liquidity issues which is now spilling over to the
wider market. These liquidity issues mean that all other financial
institutions, especially NBFCs which are funded via a mix of short and long-term
debt could face a similar risk if the situation escalates.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b><span style="font-family: "Arial",sans-serif;">The parallel
with Lehman</span></b></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">There is a fear
that this is similar to the Lehman crisis from 2008. There are similarities,
but it is not identical. In the Lehman crisis, the company had leveraged up to
around 100:1 and funded the derivative assets with short term funding.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">When the housing
market collapsed, the company had to write down its assets and as it was so
highly leveraged, its net worth vaporized in an instant. As Lehman was
bankrupt, the counterparties refused to extend credit and hence the liquidity
dried up. The only way to save Lehman was to recapitalize it.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">In the case of
most financial institutions in India, we do not have an asset side problem and
hence they don’t have a solvency issue. What we are seeing is a liquidity
concern and hence if the government steps in and provides liquidity, the
situation could normalize.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">Position risks <edited out from this
post></span></b></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Let’s review
the risk at the individual company level now in terms of ALM and liquidity
levels</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">Portfolio risk</span></b></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Let’s look at
the portfolio level risk. For starters, I have kept position size at 5-7% (at
cost) and the sector level cap at around 15-20%. This is to ensure that we
reduce the risk from an implosion in a company or sector at any point of time. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">This however
does not eliminate some risks completely. I have focused on the company level
and portfolio risks but cannot eliminate the second or third order effects. For
example, the recent drop has been due to the problems at IL&FS, but as the
liquidity concerns spread, it has started impacting the overall markets now. We
saw midcap and small caps drop as a result of the fear last week.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">There is a lot
of commentary around what will happen. A lot of commentators feel that the
market has over-reacted and we will back to normal soon. Anytime, I hear people
prognosticate about the market, I am reminded of a simple fact – No one cannot
predict what will happen next. If someone can, they will not share it with you
as they will use that insight to make money in the market.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">The reality of
the situation is that we do have a serious situation with IL&FS which is a
SIFI (systematically important financial institution). In simple words it
means, that the company is so large that if it goes down, there will be a
domino effect which will affect the entire financial sector.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">As this is a
private company, we have not seen any action from the government on it. However,
we are now at a point where the contagion has started spreading and sooner or
later there will be a bailout (government will have to back the company). If
this happens soon, then fall out will be contained. However, if the government
delays taking action due to political compulsion, then we have lots of
turbulence ahead.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">The first order
impact would be in the financial services sector, but it will spread to all the
other stocks as we are already seeing now.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">Action plan</span></b></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">I don’t have to
give false hope to anyone. The reality is that no one knows yet how this
situation will evolve. If the government steps in quickly, further panic will
be avoided. If, however, we do not see a firm action, then we need to ready for
some tough times.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">As I have
shared in the past, I do not manage the portfolio with an eye on reducing the
short term swings in the portfolio. I am always concerned with the long term
intrinsic value of the companies we hold. In sharing the above analysis, I have
tried to evaluate the impact of a liquidity squeeze on some of our holdings in
the long run. Inspite of the logical analysis here, it does not mean that our
other positions will not be affected if panic spreads in the market.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">This is similar
to the </span><a href="http://portfolio.rcfunds.com/2016/11/long-term-optimism/"><span style="font-family: "Arial",sans-serif;">analysis I shared</span></a><span style="font-family: "Arial",sans-serif;"> after the demonetization even in Nov
2016, when our portfolio dropped by more than 10% in a few weeks. The risk at
that time was much more wide spread and was mainly on the asset side of the
business (loans going bad). This time around a liquidity crunch will not have a
direct impact on the asset side and is more of an issue from the liability side
of the balance sheet.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">If you are
invested the same as the model portfolio, then you should not try to average
down if you already have an allocation which matches with the recommended
percentage. If however, you have not purchased any particular stock, then you
should buy slowly over time keeping in mind the recommended percentage.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Although I
don’t react to the day to day movements in the market, I do have an eye on it.
I will update all of you if there is any change in my views. For now, we have
to be prepared for some tough times</span></div>
<br /><br />
----------------<br />
<span style="font-size: small;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-91553543696458273912018-08-01T13:17:00.001+05:302018-08-01T14:34:32.601+05:30Evaluating management: Bayesian reasoning and fallacy of obviousness<br />
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<![endif]--><span style="font-family: "arial" , sans-serif;">When I invest
in companies, I don’t vouch for or give a character certificate to management. I
look at the past and current behavior and then try to arrive at a judgement. In
majority of the cases, <u>past behavior is a good indicator</u>, but we do get
surprises from time to time<span style="font-family: "arial" , sans-serif;">.</span></span>
<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">If new
developments make me change my view, I will not try to defend my past decision
which was made on a different set of facts. The key is to rationality is to
evaluate new facts appropriately and move on from there. As John Maynard Keynes
said a long time ago – when facts change, I change my mind. What do you do sir?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">Let’s move to
the point of how to evaluate management quality in light of poor behavior? For
starter, there is no formulae which will give the answer. The best analogy to
judge management quality comes from the court system in passing verdict on
defendants. A defendant is assumed innocent till proven guilty. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">I personally try
to look at management with a neutral view when I start analyzing a company.
They are neither good nor bad. This is a very important point. I have seen majority
of investors start with a presumption of a good or bad management and then
collect evidence to prove it. It is very easy to make an assumption and gather
enough evidence to prove your point.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">The fallacy of obviousness</span></b></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">See this <a href="https://aeon.co/essays/are-humans-really-blind-to-the-gorilla-on-the-basketball-court">wonderful
article</a> which makes the same point. I would highly recommend reading this
article. Some excerpts -</span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">So, given the problem of too much
evidence – again, think of all the things that are evident in the gorilla clip
– humans try to hone in on what might be relevant for answering particular
questions. We attend to what might be meaningful and useful</span></i></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">However, computers and algorithms –
even the most sophisticated ones – cannot address the fallacy of obviousness.
Put differently, they can never know what might be relevant. Some of the early
proponents of AI recognised this limitation (for example, the computer
scientists John McCarthy and Patrick Hayes in their 1969 paper, which discusses
‘representation’ and the frame problem).</span></i></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">In short, as Albert Einstein put it
in 1926: ‘Whether you can observe a thing or not depends on the theory which
you use. It is the theory which decides what can be observed.’ The same applies
whether we are talking about chest-thumping gorillas or efforts to probe the
very nature of reality</span></i></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">Equal
priors </span></b></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The key is to
start without an assumption (50-50 probability for both scenarios or equal
priors) and look at the meaningful (and not trivial) evidence to come to a
conclusion. Once you have done that, your conclusion should not be set in
stone, but treated as a hypothesis which can change based on new evidence. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">If the
management continues to behave well, your confidence is increased. If you start
seeing negative behavior, your confidence goes down and at some point (which
cannot be mathematically defined), you may lose faith in the management and
exit the position.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">The above approach is fancifully also
called <a href="https://en.wikipedia.org/wiki/Bayesian_inference">Bayesian
reasoning</a>.</span></b></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;"></span></div>
<br />
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Name="List Continue 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Message Header"/>
<w:LsdException Locked="false" Priority="11" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Salutation"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Date"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="46" Name="List Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="List Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="List Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 4"/>
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<span style="font-family: "arial" , sans-serif;">One should think
probabilistically when evaluating management and not consider these issues as
black or white. That’s the essence of Bayesian reasoning.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The central
point of this approach is to look at new evidence in light of your prior
conclusion and change it in proportion to the evidence. In some case, the new
episode may be a small one and will cause you to reduce your level of
confidence a bit. In other cases, either the episode or series of episodes will
be so awful, that you will be forced to change your mind completely.</span></div>
<span style="font-family: "arial" , sans-serif;"></span><br />
----------------<br />
<span style="color: blue;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span></span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-21050278663212114902018-07-21T12:48:00.000+05:302018-07-21T12:48:17.064+05:30Cash and portfolio rotation
<span style="font-family: "Arial",sans-serif;">This short note went out to
subscribers recently</span><br />
<br />
<span style="font-family: "Arial",sans-serif;">You may have noticed that we
have been churning the portfolio – selling down old positions and replacing
them with new ones, but have not utilized the cash. This has been on purpose as
I want to dispassionately look at all our positions and exit those where I feel
that the overall risk reward equation could improve by replacing it with
something else.</span><br />
<br />
<span style="font-family: "Arial",sans-serif;">In some cases, the expected
returns of the new position may still be the same, but the company has more
avenues of growth and has shown consistent performance in the past. In effect
the risk profile is lower for the new company. So, the rotation is not always
to improve the returns, but often to reduce the risk of the overall portfolio
too.</span><br />
<br />
<span style="font-family: "Arial",sans-serif;">I have <a href="http://valueinvestorindia.blogspot.com/2018/01/annual-letter-to-subscribers-on-risk.html" target="_blank">harped on the aspect of risk</a> since
last year and we were early on it. This will always be the case. No one can
predict when the market will turn. Those who claim to do so, are lying and
delusional. The best mindset to adopt is to focus on the performance of your
companies and ignore all the chatter in the market. </span><br />
<br />
<span style="font-family: "Arial",sans-serif;">We now have over 30% cash in
the portfolio which is slightly higher than the start of the year. I continue
to look for new ideas and that is my focus for now. As a result, I have even
delayed the half yearly note, which can wait for now.</span><br />
<br />
<span style="font-family: "Arial",sans-serif;">As the market continues to
fall, several good quality companies have started to become attractive and we
will deploy our cash when I am comfortable with these companies. I have no idea
when the current downturn will end – though I am sure it will eventually. </span><br />
<br />
<span style="font-family: "Arial",sans-serif;">In the meantime, we could
suffer quotational losses on our portfolio (based on the market price), which
should not disturb us if the companies we hold continue to perform well. The
stock price will eventually follow the earnings.</span><br />
<br />
<span style="font-family: "Arial",sans-serif;">As I have said in the past, one
needs patience to invest sensibly in the stock market. Add a lot courage and a
sense of long term optimism to it now. </span><br />
<span style="font-family: "Arial",sans-serif;">----------------</span><br />
<span style="font-family: "Arial",sans-serif;">Stocks discussed in this post
are for educational purpose only and not recommendations to buy or sell. Please
contact a certified investment adviser for your investment decisions. Please
read disclaimer towards the end of blog. </span><br />
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<![endif]-->Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-53224945084701954842018-05-27T19:43:00.001+05:302018-05-27T19:43:11.623+05:30An underappreciated edge<!--[if gte mso 9]><xml>
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Name="page number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="endnote reference"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="endnote text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="table of authorities"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="macro"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="toa heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 5"/>
<w:LsdException Locked="false" Priority="10" QFormat="true" Name="Title"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Closing"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Signature"/>
<w:LsdException Locked="false" Priority="1" SemiHidden="true"
UnhideWhenUsed="true" Name="Default Paragraph Font"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Message Header"/>
<w:LsdException Locked="false" Priority="11" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Salutation"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Date"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
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<![endif]--><span style="font-family: "Arial",sans-serif;">I wrote the following note recently to our subscribers. Hope you find it useful too.</span><br />
<span style="font-family: "Arial",sans-serif;">-------------------------------------------</span><br />
<span style="font-family: "Arial",sans-serif;"> </span><br />
<span style="font-family: "Arial",sans-serif;">I
wrote extensively on risk in the last year’s annual update (read <a href="http://valueinvestorindia.blogspot.com/2018/01/annual-letter-to-subscribers-on-risk.html"><span style="color: windowtext;">here</span></a>) and highlighted the fact that cash
levels in the model portfolio were at an all-time high. (around 30%). </span>
<br />
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">The
reason for pulling back in, the latter part of 2017, was due to the frenzy and
crazy valuations in the market. I was no longer comfortable with the risk
reward situation and decided to stick to our process even if it meant that we
had to forego easy returns. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">I
think we delivered fairly good results for CY 2017, even though we lagged the
market in the second half of the year. More importantly, we dialed down the
risk as much as we could.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">Not easy to be disciplined</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">It
was not an easy decision. It is painful to watch companies you are researching
go up by 50% in a span of few weeks, even before you get a chance to finish
your analysis. However, I have felt that a key edge for individual investors is
their ability to be patient. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">I
can assure that it is not easy to sit and do nothing. I am an Engineer and MBA
by education and have worked in a corporate job for a long time. As you all
know, being patient and doing nothing is not acceptable in these roles. The
more you do, the more you are rewarded.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">Investing
is not the same. More action in terms of buying or selling, especially for our
style of investing does not improve returns. On the contrary, as I have often
found out, may even result in worse outcomes. The work on research and analysis
of current and new position continues behind the scene, but the act of pulling
the trigger must be done thoughtfully.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">Ignoring noise</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">We
don’t have to react to every bit of news which gets published – oil prices up,
interest rates up, some news about the manager’s nephew’s aunt etc. The point
extends to the quarterly results too. I have been analyzing the results which
have been good for a few of our positions. Overall, if the long-term trajectory
of a company is intact, I do not want to read too much into it and take a short-sighted
decision.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">Most
of you are aware of the above attitude and it is not new to you. However, it
makes sense for me to emphasize this repeatedly to all of you. In this age of
instantaneous news and social media, everyone thinks that reacting to news all
the time is the key to making above average returns.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">I am increasingly of the
view, that in the current environment of hyper speed and automated systems,
investors like us will do better by taking an opposite view – slow down, think
deeply about a few companies and focus on the long-term trends. We will win as
we simply have much lesser competition in this space.</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">Several
of our current positions exemplify this mindset. We have held them for years and
will continue to do so as long as they continue to perform and are not overly
expensive.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">Not blind to risk</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">The
above does not mean that I am blind to risk and will be patient for the sake of
it. If something goes wrong at a company level, I want to take time and think
deeply about it and then take a decisive action.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">However,
my bias is usually do nothing as I have learnt from experience that most
activity in the portfolio does not add much to the returns, only makes us feel
that we are doing ‘something’. Although some of you may not share this
sentiment and have numbers to back up a more active form of investing, I can
only say that one has to invest based on their own temperament. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">You
will have to be comfortable with our slow and plodding style of investing.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">A structural advantage</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">Mutual
fund managers and other professional investors cannot <span style="mso-spacerun: yes;"> </span>afford to lag the market for long due to
career risk. If you think otherwise, then you under-appreciate the pressure on
someone who may not be able to provide for his or her family if they lose their
job due to under-performance. A rare few can manage that pressure, but don’t
count it.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">There
is a structural advantage if the Investment advisor (we should mention
Investment Adviser) does not have a career risk when he or she makes good long-term
decisions, even if that causes the portfolio to lag in the short term. This
advantage (for the clients) is further enhanced when the manager invests a
majority of his net worth in the same manner as the client. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">Me
and Kedar have setup the partnership in such a way that we do not face any such
career risk. This edge has allowed us to be patient and not worry about the
optics of our actions. I have often ignored emails from some of you, wanting to
do ‘something’, if I don’t think it makes sense in the long run. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">In
addition to that a large part of our networth is invested in the same fashion
as the model portfolio. This does not guarantee that each of our decision will
be right, but our incentives are aligned with yours. We eat our own cooking.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">We
have also made it a point to ensure that subscribers who join us, are aware of
our approach and buy into it. We will not deviate from it even if some of you
write to me and start getting impatient (wanting to pull the trigger). </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial",sans-serif;">In the pipeline</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">Our
cash levels are around 30% of the portfolio and I continue to look at new
ideas. I don’t want to rush into it. We will add to the existing positions or
to new ones if the price is right and I feel comfortable with the company’s
prospects.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial",sans-serif;">If
all of us plan to invest for next 10-20 years, a few months will not make all
that difference. We are in this for the long haul.</span></div>
<br /><br />
----------------<br />
<span style="color: blue;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-20356557256084112732018-04-01T00:40:00.001+05:302018-04-01T00:40:18.862+05:30Get Ready<!--[if gte mso 9]><xml>
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<w:LsdException Locked="false" Priority="11" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Salutation"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Date"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="46" Name="List Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="List Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="List Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 5"/>
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<![endif]--><span style="font-family: "arial" , sans-serif;">I
wrote the following to my subscribers recently. Hope you find it useful too.</span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">-------------------------</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
am sure some of you got sick of my repeated discussion of risk management last
year. In a bull market, the last thing you want to discuss about is risk. If a
small cap stock, especially an IPO goes up by 3X in 3 months inspite of having
an operating history of just a few years, forgoing such an opportunity to
reduce portfolio risk appeared foolish.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">This
is always the case in bull markets. However, the same people who ignore risk in
the stock market, do not behave in a similar fashion in other parts of their
life. Have you ever heard someone with auto insurance, regret collecting the
assured amount, inspite of paying the premium?</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
price of focusing on risk and managing the downside during bull market is paid
in the form of forgone returns. One should think of these ‘lost’ returns as an
insurance premium you pay for the bear markets.</span><br />
<span style="font-family: "arial" , sans-serif;"> </span><br />
<span style="font-family: "arial" , sans-serif;">Let
me explain how</span></div>
<br />
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Volatility at play</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Let’s
look at two managers who end up generating the same returns over a 5-year
period.</span><br />
<br />
<span style="font-family: "arial" , sans-serif;">Manager
A (cautious and nervous)</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
1 <span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>+20%</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
2<span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>+20%</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
3<span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>
-5%</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
4<span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>
+23%</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
5<span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>
+20%</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">This
manager has delivered a CAGR of 15% with low returns in up markets and a lower
drop during the bear market.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Manager
B (bold and confident)</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
1 <span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>+50%</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
2<span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>+50%</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
3<span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>
-50%</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
4<span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>
+40%</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Year
5<span style="mso-tab-count: 1;"> </span>:<span style="mso-tab-count: 1;"> </span>
+30%</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">This
manager has also delivered a CAGR of around 15% and beats the market by a big margin
during up markets, but also get wacked during the downturn.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
reason manager B does well during bull markets, but get hurt during the
downturns is often due to a high level of concentration in the portfolio. It is
close to impossible to have a highly diversified portfolio of 30+ stocks and
deliver a big outperformance.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
price of a concentrated portfolio (and high returns)<s><span style="color: red;">,</span></s>
is the much higher volatility of returns. </span></div>
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;"> </span></b><br />
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">The guts to hold</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Now,
some of you may argue that as the eventual returns are the same, the path to it
does not matter. To answer that question, you have to ask yourself – will you
hold on if your entire portfolio dropped by 50% (and not one stock) and what if it’s the first year of your investment?
More importantly, will you stay with a manager who performed this way?</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
can state with a high level of certainty, that almost 99% of investors will
dump the manager B and exit if the entire portfolio dropped by 50% or more. It
is tough enough to hold based on your own conviction. To trust a person, you do
not know personally, with this kind of volatility is close to impossible.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
net result of the above two styles is that manager A will end up delivering a
CAGR of 15% for investors whereas those with manager B would end up with a CAGR
of around 6% (assume they exit in year 3 and put all that money in FDs).</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
above discussion is a mathematical and behavioral reason for my following
comment – ‘<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;">No point getting rich, if you had a terrifying experience reaching that
point’</i></b><i style="mso-bidi-font-style: normal;">. </i>The reality is that
most folks will throw in the towel in middle of the journey and never get rich
by the magic of compounding.</span></div>
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;"> </span></b><br />
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Time to get ready</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">We
started raising the cash levels in the middle of last year as valuations went
crazy. Our model portfolio trailed the midcap and small cap indices in the
second half of the year</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">That
was the insurance premium we paid to sleep better this year.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Since
the start of the year, the two indices are down by 10-15% whereas we are down by
much lower. I hope you are holding on and not planning to throw in the towel. I
am amused to see a lot of commentators and investors talk of this drop as some
major event. It clearly shows they have not followed the market history.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
Indian stock markets, especially the small and mid-cap indices have dropped by
this level every few years. The real bear market in this segment is when the
index drops by 25%+ and the scary one is if it drops 40%+. Will that happen in 2018?
– I don’t know and have never tried to predict.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">What
I do know is that on average the companies we hold are doing well and as prices
have dropped, the market is presenting an opportunity. By my last count, atleast
6 companies in the model portfolio are below the buy price and can be bought
upto the allocations in the model portfolio.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Will
the market continue to drop and more stocks drop below our buy price? Will the
stocks already on the buy list continue to drop due to which you could have
quotational losses (and not real losses) in your portfolio?</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">To
both the questions – my answer is – I don’t know and it’s quite possible. I
personally, don’t worry too much about these drops if the company is expected
to do well in the long term.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
have said it in the past and will repeat here again – I can supply the analysis,
but you need to come with the courage, cash and patience. If you have all the
three in place, time to get ready and start purchasing slowly for your
portfolio.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">End
note: By the way, Manager A has more career risk and will end up with lesser
assets than manager B who can tout his returns during bull markets. However, investors
in manager A come out ahead than those with manager B, as some of the investors
in the latter case just drop out and never make the stated returns.</span></div>
<br />
----------------<br />
<span style="color: blue;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span></span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-89426638919927350682018-02-28T04:24:00.004+05:302018-02-28T04:27:04.816+05:30The staircase chart<!--[if gte mso 9]><xml>
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Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="46" Name="List Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="List Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="List Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 6"/>
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<br />
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">There is a
chart pattern which can either cause dread or euphoria in the hearts of
investors.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://4.bp.blogspot.com/-K2t_hnONO-Q/WpXg1oTO_aI/AAAAAAAACHU/62NQT80eJYA3qIjX3siXC7ohMa10Mi6YACLcBGAs/s1600/Capture.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="286" data-original-width="1039" height="176" src="https://4.bp.blogspot.com/-K2t_hnONO-Q/WpXg1oTO_aI/AAAAAAAACHU/62NQT80eJYA3qIjX3siXC7ohMa10Mi6YACLcBGAs/s640/Capture.PNG" width="640" /></a></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">There may be no formal name for it from technical analysts, so let
me call it the stair case chart.This is either
a stock hitting the upper or lower circuit continuously for days at end. The
pattern looks like a staircase in a particular direction. More than the
pattern, the investor psychology during this period is instructive</span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;"></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">We had several
stocks on the ascending staircase last year. Whenever such an event occurred,
it was fascinating to read the comments of investors on social media. Everyone
was patting each other on the back, congratulating the management and generally
puffed up about their brilliance. The more intellectual types threw terms like
moat, great management and large opportunity size to sound rational.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">Of course, a
rising price tends to obscure all risks and this occurred often in 2017.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The current
year has been the reverse. We are now seeing the dreaded descending staircase
chart pattern for a lot of companies. In these cases, the stock price is locked
in the lower circuit and a lot of investors who want to get out of the stock,
are not able to do so.</span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">It is again
fascinating to watch a different set of investors (it’s never the same) now
talking of the dishonest management, bear conspiracy and the lack of liquidity.</span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">It is tempting
to make fun of others in either of the two scenarios, but I would caution you
from doing so. It is not difficult to find yourself in one of these camps in
the future. On the contrary, if you invest long enough, one of these patterns
will hit you.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span><br />
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">I track and
study such events to understand the psychology and see what I can learn from
it. This is my short summary</span><br />
</div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "arial" , sans-serif;">Do
not mistake correlation for causation. People invent reasons for quality or
lack of it based on the price action. The time to evaluate quality is before
the price action starts and not after it. Once the trend begins, it is not easy
to avoid the emotional contagion</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "arial" , sans-serif;">You
will never know everything there is to know about a company and its management.
There are always unknowns and it’s important to stay humble – that is
acknowledge your ignorance. Once you do that, you will respect risk and size
your positions accordingly.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "arial" , sans-serif;">Always
have an estimate of fair value in mind. When the market goes crazy on the upside,
reduce the position size to manage the risk of over concentration.</span><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;"></span></span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "arial" , sans-serif;">Have
a downside plan in place. If you invest long enough, one of your position will
eventually hit a wall. Know what you will do in advance as it is not possible
to react rationally at that time.</span>
</div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "arial" , sans-serif;">If
you have bought into a speculative position, acknowledge that you are riding a
tiger. As long you are in control, you are fine. If the table turns, be ready
to be eaten (figuratively speaking). Position size and risk management is
critical in such cases, so that you live to see another day (in terms of
investing)</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "arial" , sans-serif;">Finally
keep an open mind. This is of course easier said than done. The most common
reaction for almost everyone is to attack someone who is arguing against your
view point. In my case, whenever I read an opposing view, I take a deep breath
and do nothing at that time, other than make a note of it. This allows me to
calm down.</span></div>
<span style="font-family: "arial" , sans-serif;"> </span>
<br />
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "arial" , sans-serif;">I
usually come back to the argument after a few days and try to dig into the
points being made against the thesis. In my case, I will note down these points
and try to separate facts from opinion. Facts can be easily validated and
disposed off. If there are opinions, then the best option is to analyze the
reasoning and look for evidence to support it. Even if you don’t find the
evidence right away, be on a look out. If you do see the evidence supporting
the counter argument, then you know the other person is right. </span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpLast">
<span style="font-family: "arial" , sans-serif;">Investing
is all about betting on the future of a company and the best of us will be
wrong from time to time. The key is to be on the lookout, acknowledge your
mistake as soon as possible and fix it. The ones who make lesser mistakes on
average do better than others over time.</span></div>
<br />
----------------<br />
<span style="color: blue;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com2tag:blogger.com,1999:blog-7004453.post-59278882286833392592018-01-27T04:16:00.002+05:302019-01-02T22:29:51.937+05:30Annual letter to subscribers: On risk, Bitcoin and thinking long term<!--[if gte mso 9]><xml>
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Name="List Table 6 Colorful Accent 6"/>
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Name="List Table 7 Colorful Accent 6"/>
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Name="Mention"/>
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Name="Smart Hyperlink"/>
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</w:LatentStyles>
</xml><![endif]--><span style="font-family: "arial" , sans-serif;">The
following note was published recently to my subscribers. Any reference to
performance or individual companies has been removed to ensure compliance with
SEBI regulations.</span><br />
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
hope you find the note useful</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">What drove the performance</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">We
exited 5 positions and replaced them with four new positions during the year.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">It’s
a unique year that none of our portfolio positions dropped in value. It is
however not surprising considering that various indices were up 40-50% during
the year, with almost 100+ stocks increasing by 100% or more. If we just
compare the numbers, our performance is nothing to get excited about.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">If
you just threw darts at the small cap index, you could have done quite well. If,
however, you were ready to throw caution to the winds and were open to go down
the quality curve, then the gains were even higher. I am not crying sour grapes
here. Let me explain why -</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">At
any point of time, I am looking at several companies and track them over time.
If I find an idea interesting, I usually create a small starter position to
understand the sector and company better. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">A
lot of such starter positions are up anywhere
between 60 to 400% during the year. So, when I say that, if you were adventurous
and ready to take on risk, the returns were higher, it is not an academic
point. I have seen the same happen in my personal portfolio.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">You
may ask – why did I not do it in the model portfolio? To that point, let me
state something which I have repeated in the past. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
model portfolio mimics our (Kedar and mine) personal portfolios (except for a
few small positions) and that of my family and friends. I will never ever take
excessive risk just to look good and gain some boasting points.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">A year of misses</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">This
was a very frustrating year too. A few new ideas passed through the initial filter
and ended up on the tracking list.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Several
of the companies on this list seem to be decent
bets for the long run, subject to execution by the management. I prefer to start
with a small position and increase the size as the management executes as per
the plan. If, however the management slips or the business conditions change
for the worse, we will exit the position.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">In
several of these trail positions, the stock price rose rapidly, in anticipation
of the improvement. It’s quite possible that the market is able to foresee the
improvement much before I can. In that case, we may end up starting the
position late with a lower upside, but with much lesser risk.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">We
need to be patient in all such cases as you never know when opportunity would
knock again.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Change in approach: fail
fast and small</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">There
has been a subtle change in my approach in the last 1-2 years which I think
should be shared with all of you. I have become more open to trials (starting
with small positions) and then killing these ideas quickly if they don’t work
out.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">It
is one thing to maintain a buy list, but emotionally very different to actually
commit money (even a small amount) to an idea. Once you do that, you are
financially and intellectually (and even emotionally) vested into the position.
In such cases, it is important to constantly stress test the idea and exit if
the thesis does not pan out.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">A
failure on a small 1-2% position will not hurt our portfolio over the long run.
If, however some of these positions work, we can scale into them and make them
much larger. <span style="mso-spacerun: yes;"> </span>This is the mental model
used by venture capital firms and it makes sense to adopt a similar framework
(even if the type of companies we target is different) for our portfolio.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">What truly drives the long-term
returns</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
have shared the changes in the intrinsic value of the portfolio with the price
changes in the past and would like to reiterate the following points again</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"></span></span></span><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;">a. Businesses and their intrinsic value
tends to be less volatile than stock prices</span></div>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">b. Over the long term, stocks prices tend
to follow intrinsic value. However, in the short term (1 year or less), these
two numbers don’t have to move in lock step.<span style="mso-list: Ignore;"> </span> </span></div>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">c. If the underlying business is increasing
in value, it makes sense to have patience as the returns will eventually
follow. As an example, if we had gotten frustrated after the measly returns of the
last two years and exited in 2016, then we would have missed the gains of 2017</span></div>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">2017 has been a year when the portfolio
price has again caught up and run ahead of the value. As a result, we can
expect lower performance for the next few years till we can get the fair value
up via a combination of new ideas and increase in value of the current holdings.</span></div>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">In the long run, this back and forth
will continue<span style="color: red;">,</span> and I don’t plan to play the game
of timing to squeeze a few extra points of performance. <b style="mso-bidi-font-weight: normal;">We will focus on increasing the intrinsic value of the portfolio as
much as possible and let the market give us gains as per its own schedule</b>.</span></div>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Measuring the risk</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
had written about risk management in the last letter, which is reproduced below
again</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "arial" , sans-serif;">I am not trying to make
the highest possible returns in the shortest period of time, but above average
returns over time with the lowest possible risk, with risk management taking a
higher precedence. Risk Adjusted returns are more important than absolute
returns.</span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "arial" , sans-serif;">This focus on “Risk” has
led us to cap our top positions at 5-7% at the time of purchase, keep sectoral
bets capped at 20% and maintain a cash level of 12-15% over the lifetime of the
model portfolio. A more aggressive stance in the form of more concentrated
positions or lower cash would have raised our returns (5% per annum by my rough
guess), but increased the risk too. I have no regrets of foregoing these
returns. I will always prioritize risk over returns and if it means slightly
lower returns, so be it.</span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "arial" , sans-serif;">If we continue to earn
above average returns in the future, the magic of compounding with risk
management will allow us to reach our destination. I want the journey to be
pleasant and would like to sleep well at night. There is no point in dying rich
if you have a terrifying time reaching that point.</span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
have discussed about risk in a subjective manner in the past, without using any
ratios or measures. One quantitative measure is drawdown of the portfolio over
various time periods. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">On an annual basis, we can see that we have lost less
than the market during downturns. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">However, we do not have enough data points
to make this evaluation statistically significant.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">In
order to have more data points, I have computed the monthly returns of the
portfolio and compared it with the large cap index. For the data purists, a
monthly period may not be the right duration or they may quibble about using a
different index for reference. My response to that – it is better to be roughly
right and directionally correct, instead of trying to get it right to the third
decimal point.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">For
the duration of the model portfolio, the average monthly loss for the index has
been around -3% (when the index has dropped during the month). In those
periods, our portfolio dropped less than the index 63% of the times and our average
drop during these ‘bear’ market months has been around -1.1% </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
above statistic is quite noisy as I think monthly returns are usually
meaningless, but over a long period this statistic can give an indication of
the level of risk in the portfolio. In other words, we have had lower drawdowns.
We cannot avoid bear markets, but if we lose lesser than the market, we should
do quite well in the long run</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
am more focused on reducing the risk, than doing better than the market. I have
always felt and continue to feel, that the long-term momentum of the Indian
economy and the stock market is such that we will do well over time as long as
we can reduce the downside risk and avoid doing something stupid.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">In
case you are curious on how we have done during bull periods (when monthly returns
are positive), the model portfolio has returned 5.3% versus the 4% by the index
during the same period.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">As
you can see, that although we have done better than the market on average
during the bull markets, our outperformance against the index has been higher
during bear markets. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">If
you are really hoping to do well with me, hope for a bear market now.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Cash is not a macro call</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">We
currently hold around 28% of the portfolio in cash which may appear to be some
sort of a macro call. However, let me assure you, it is nothing of that sort. I
have never bothered with economics forecasts around GDP, interest rates or any
global or geopolitical situations.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">My
analysis is always bottoms up with a focus on company level factors. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
reason for the high levels of cash is that the price of several of our ideas
have far exceeded my estimate of fair value due to which I feel that the long-term
returns are likely to be lower compared to the risk of holding those positions.
As a result, I have reduced the position size. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">At
the same time, the speed with which I can find and understand new ideas has
been far slower than the rate at which the market has recognized and re-priced
them. This is something I cannot fix unless I can buy some extra IQ points to
speed up the pace.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">The question I am
constantly asking</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">As
the markets have risen, I am constantly asking the following question for each
position : Will I continue to hold this position if the stock price drops by 50%?
If not, why am I holding it now?</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
time for risk management is now, when there is euphoria all around and not when
everyone is heading for the exits. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">If
anyone of you, cannot bear a 20-30% drop in your portfolio, it would make sense
to do a mental exercise now – how much should I invest in equities so that even
if the equity portfolio dropped by 30%, I will not lose sleep. <span style="mso-spacerun: yes;"> </span>No one can answer this question, but yourself
and the time to do it would be now.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Why
do I constantly harp on risk? Is it because I foresee some market crash?</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
emphatic answer for that is no! We are not in the business of forecasting which
can be left to media personalities. For me and Kedar, Risk is personal and we
want to look at it as an integral part of investing. Our monies and that of our
families are invested in the same fashion as the model portfolio. We are not
managers who will only benefit from the upside, but have no risk on the
downside.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">We
will have quotational losses from time to time, but do not want to be in a
situation where our greed or envy of some else’s performance leads to a
permanent loss of capital for us, our families and you.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Bitcoin and popcorn</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
have been asked by a few subscribers on what I think about Bitcoin. I have a
rough idea of the technology that under pins cryptocurrencies – ‘Blockchain’
and think the technology has a lot of potential in reducing transactional
costs, improve asset tracking, develop decentralized networks and several other
use cases which we cannot imagine as of today. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">That
said, I do not have a view of Bitcoin as I do not understand it well. There are
several other things I don’t understand well enough to be able to make money
such as Short<span style="color: red;">-</span>term trading, technical analysis,
Bio tech, Mongolian companies and so on. However, that does not disturb me as there
is enough for me to do within the scope of what I do understand.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">If
we can invest conservatively and earn an above average return in Indian
equities, the end result is likely to be very good. Why should we then get all
worked up if something is doing well for others and they are becoming rich as a
result? </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">There
will always be someone doing better than us in all sorts of stuff. Someone could
be running a restaurant or a tech startup which is doing very well. Does that
mean we should follow them as a short cut to riches? </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
continue to study the technology out of curiosity and watch the drama on the
sidelines. I also have some popcorn (unbuttered to avoid cholesterol issues) on
the side to enjoy the show.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">The Indian bitcoins</span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">When
I look at companies which are priced at lofty multiples, I try to break it down
to the first principle of investing – The value of an asset is the sum of its
discounted cash flow over its lifetime. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">A
company with a high multiple, is not necessarily expensive if the company can
grow its free cash flow for a long period of time. This means the market
‘assumes’ that such a company has a sustainable competitive advantage and a
large opportunity space. Please note use of the word ‘assume’. The market is
not some “All knowing” entity which can see the future. It is just the
aggregation of the combined wisdom (or madness) of its participants.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
market on average and over time gets the valuations right, but not always. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">As
I look at several companies in the small cap and midcap space now, I am left
wondering if investors really understand the implications behind the
valuations. A company selling at a PE of 50 will need to deliver a growth of
25% for 10 years to justify the price. In order to make any returns for an
investor buying at this price, the actual growth will have to be much higher
and longer.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">How
many companies are able to deliver such growth rates for so long? Let’s look at
some numbers from the past</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">In
the last 10 years, we had around 233 companies in the sub 3000 cr market cap
space, deliver a growth of 25% or higher. That’s around 6.2 % of the small/ mid
cap universe. As the market cap/ size increases, the percentage of companies
which can deliver this kind of performance only shrinks.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">How
many companies in the above space currently sport a PE of 50 higher? around 22%
or roughly 675. So, 3 out of 4 companies in this group of ‘favored’ high PE
companies are going to disappoint investors in the coming years in terms of
growth</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">In
other words, if you could buy all these ‘favored’ companies (greater than a PE
of 50), you have a more than a 50% chance that you will lose money. Why would
you take such a bet?</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">All
investors in aggregate are taking this bet assuming individually, that their
‘chosen’ companies will not be the ones to disappoint. Of course, every
individual thinks he or she is smarter, more handsome or <insert your
criteria here> than the crowd (also called </span><a href="https://en.wikipedia.org/wiki/Illusory_superiority"><span style="color: windowtext; font-family: "arial" , sans-serif;">illusory superiority</span></a><span style="font-family: "arial" , sans-serif;">).</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
odds are against everyone being right. So, it makes sense to be cautious and do
your homework well enough. <span style="mso-spacerun: yes;"> </span>Some of these
companies could turn out to be the bitcoins of our market: assets with promise
but without cash flow. In such cases, the end result is likely to be
unpleasant.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">A long-term partnership</span></b></div>
<div style="text-align: justify;">
<span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">I
repeat this every time in the portfolio review and will do so again</span></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">–
I do not have timing skills and cannot prevent short term quotation losses in
the market<br />
– My approach is to analyze and hold a company for the long term (2-3 years).
As a result, my goal is to earn above average returns in the long run and try
to avoid losses during the same period<br />
– In spite of my best efforts, I will make stupid decisions and lose money from
time to time. The pain felt will be equal or more as I invest my own money in
exactly the same fashion</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo2; text-align: justify; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"> Me
and kedar look at our association with you as a long-term partnership. As a
result, whenever someone joins us, we are very explicit in letting the person
know that they cannot expect quick wins or a stock tip a week or something on
those lines.</span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo2; text-align: justify; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"> </span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo2; text-align: justify; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"> We
want your association with us to span years, if not decades. In our view,
financial management is something which lasts a lifetime and hence, as your
advisor, we want you all to focus on the long term. We try to instill this
focus via multiple actions from our side such as <span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo2; text-align: justify; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> - </span></span></span><span style="font-family: "arial" , sans-serif;">Avoiding
a short-term focus on performance such as daily, weekly or monthly scorecards</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo2; text-align: justify; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "arial" , sans-serif;">Buy
companies and hold them for the long term as long their prospects remain above
average</span></div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo2; text-align: justify; text-indent: -.25in;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7.0pt "Times New Roman";">
</span></span></span><span style="font-family: "arial" , sans-serif;">Focus
on risk and reducing the downside</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">A
lot of subscribers have stayed with us for the long term and hopefully
benefited from that. We will continue to maintain this approach irrespective of
the latest trends in the market. If that costs us business, so be it. I would
rather have some of you disappointed with the short-term result (and
consequently leave), than lose money due to chasing the latest trends in the
market and then leave (while cursing us).</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "arial" , sans-serif;">If
you are interested in our advisory services, please email us on<span style="font-family: serif;"> </span>enquiry@rccapitalmanagement.com</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<br />
----------------<br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span></span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-36258753032726274362018-01-16T21:58:00.000+05:302018-01-16T22:05:48.415+05:30The Indian bitcoins<span style="color: blue;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: black;">The following note is from upcoming annual letter to <a href="http://rccapitalmanagement.com/index.php/contact-us/" target="_blank">subscribers</a>. I will be publishing the rest of the letter on the blog soon</span></span></span><br />
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<div class="MsoNormal">
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">When I look at
companies which are priced a lofty multiples, I try to break it down to the
first principle of investing – The value of an asset is the sum of its
discounted cash flow over its lifetime.</span></span></div>
<div class="MsoNormal">
<br /></div>
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">A company with
a high multiple, is not necessarily expensive if the company can grow its free
cash flow for a long period of time. This means the market ‘assumes’ that such
a company has a sustainable competitive advantage and a large opportunity
space. Please note use of the word ‘assume’. The market is not some all knowing
entity which can see the future. It is just the aggregation of the combined
wisdom (or madness) of its participants.</span></span><br />
<span style="color: black;">
</span><br />
<div class="MsoNormal">
</div>
<div class="MsoNormal">
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">The market on
average and over time gets the valuations right, but not always. </span></span></div>
<span style="color: black;">
</span><br />
<div class="MsoNormal">
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">As I look at
several companies in the small cap and midcap space now, I am left wondering if
investors really understand the implications behind the valuations. A company
selling at a PE of 50 will need to deliver a growth of 25% for 10 years to
justify the price. In order to make any returns for an investor buying at this
price, the actual growth will have to be much higher and longer.</span></span></div>
<span style="color: black;">
</span><br />
<div class="MsoNormal">
</div>
<div class="MsoNormal">
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">How many
companies are able to deliver such growth rates for so long? Let’s look at some
numbers from the past</span></span></div>
<span style="color: black;">
</span><br />
<div class="MsoNormal">
</div>
<div class="MsoNormal">
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">In the last 10
years, we had around 233 companies in the sub 3000 cr market cap space, deliver
a growth of 25% or higher. That’s around 6.2 % of the small/ mid cap universe.
As the market cap/ size increases, the percentage of companies which can
deliver this kind of performance only shrinks.</span></span></div>
<span style="color: black;">
</span><br />
<div class="MsoNormal">
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">How many
companies in the above space currently sport a PE of 50 higher ? around 22% or
roughly 830. So 3 out of 4 companies in this group of ‘favored’ high PE
companies are going to disappoint investors in the coming years in terms of
growth</span></span></div>
<span style="color: black;">
</span><br />
<div class="MsoNormal">
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">In other words,
if you could buy all these ‘favored’ companies (greater than a PE of 50), you
have a more than a 50% chance that you will lose money. Why would you take such
a bet?</span></span></div>
<span style="color: black;">
</span><br />
<div class="MsoNormal">
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">All investors
in aggregate are taking this bet assuming individually, that their ‘chosen’
companies will not be the ones to disappoint. Ofcourse every individual thinks
he or she is smarter, more handsome or <insert your criteria here> than
the crowd (also called </span><a href="https://en.wikipedia.org/wiki/Illusory_superiority"><span style="font-family: "arial" , sans-serif;">illusory superiority</span></a><span style="font-family: "arial" , sans-serif;">).</span></span></div>
<span style="color: black;">
</span><br />
<div class="MsoNormal">
<span style="color: black;"><span style="font-family: "arial" , sans-serif;">The odds are
against everyone being right. So it makes sense to be cautious and do your
homework well enough. <span style="mso-spacerun: yes;"> </span>Some of these
companies could turn out to be the bitcoins of our market: assets with promise
but without cash flow. In such cases, the end result is likely to be unpleasant.</span></span></div>
<br />
<span style="color: blue;"><span style="font-family: "arial" , "helvetica" , sans-serif;">---------------- </span></span><br />
<span style="color: blue;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span></span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com4tag:blogger.com,1999:blog-7004453.post-80838158614812364192018-01-02T04:23:00.001+05:302018-01-02T04:23:35.442+05:30Ignoring the oncoming train<!--[if gte mso 9]><xml>
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</xml><![endif]--><span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">I
shared the following note with subscribers on how the current trends in
solar/wind power and battery technology are likely to cause disruption in the
energy markets. The impact of this disruption is already being felt in the
capital goods sector, which is an early proxy of the long term trends in an
industry. Any management planning to invest with a 20 year horizon will
carefully analyze the long trends before committing capital for this duration..</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">I
have kept out the name of the company we hold, for obvious reasons, but the
conclusions are valid for any company in the energy sector value chain. In
addition, I think these technologies are likely to have a huge impact in the
transportation, oil & gas, coal, power storage and other industries too</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">--------------------------------</span><br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">I
highlighted the following risk in 2016 for our holding.</span><br />
<br />
<i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Solar energy – I
wrote extensively about it in the previous year’s update and the solar energy
market continues to develop as expected. It is critical to track this sector as
solar is a substitute for other forms of energy (such as coal or Oil) and hence
its adoption will have some impact on the demand for the products of the
company.</span></i><br />
<br />
<i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">The company continues
to focus on process co-gen, waste to energy (including biomass based power
generation) and the IPP sector. As I wrote in the previous update, the first
two sectors continue to do well as they serve as a complementary power
generation system. The IPP segment however is under threat as solar can easily
displace this at a lower cost and the company’s performance seems to bear this
out.</span></i><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">I
have been tracking the renewable and battery/ storage space for the last few
years. Let me share some data points before discussing the implications</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">The
graph below shows the price trends for the next 5 years. Please keep in mind
that the drops in the recent years have been much higher than predicted and
there is no reason why the current rate of 15% annual price drop will not
continue</span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://4.bp.blogspot.com/-LhAt6kB3sZA/Wkq4twGkRII/AAAAAAAACFA/_WQVpFj4axkDlQT2fsujU5AN8-pTBZRpwCLcBGAs/s1600/Untitled1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="435" data-original-width="624" src="https://4.bp.blogspot.com/-LhAt6kB3sZA/Wkq4twGkRII/AAAAAAAACFA/_WQVpFj4axkDlQT2fsujU5AN8-pTBZRpwCLcBGAs/s1600/Untitled1.png" /></a></div>
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"><br /></span>
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">This
is a comparative cost across countries</span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://3.bp.blogspot.com/-lmD1PHvpsec/Wkq47OiIHUI/AAAAAAAACFE/0Qi7YoJZYBcq8SzCfVPav4NMq5geCrPxQCLcBGAs/s1600/Untitled2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="435" data-original-width="624" src="https://3.bp.blogspot.com/-lmD1PHvpsec/Wkq47OiIHUI/AAAAAAAACFE/0Qi7YoJZYBcq8SzCfVPav4NMq5geCrPxQCLcBGAs/s1600/Untitled2.png" /></a></div>
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"></span><br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">As
you can see, India has the lowest costs due to lower soft costs (aka labor
costs).</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">The
recent solar auctions in India and several parts of the world are now hitting
the 1.3-1.5 Re/KWH levels already and this is expected to drop further. In
comparison, the cheapest fossil fuel generated power – Coal, is priced at around
3 Rs/KWH and rising due to transport and other costs</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">At
this point, a lot of naysayers, point out the lack of storage and intermittency
of solar and wind power. Let’s look at another data point – Cost of lithium ion
storage. This has now hit 200 dollars/ Kwh and continues to drop by around 15%
per annum. At the current rate, the cost ofs batteries will drop below 100$/
KWH in 3 years. Why is 100$/KWH important? </span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">This
is the point at which solar + Large scale storage start becoming cost
competitive with base load or Coal based power. Again, keep in mind that these
trends will not stop in 2020, but will keep continuing beyond that due to economies
of scale and new research (in other forms of batteries such flow batteries,
Lithium air etc)</span><br />
<br />
<b><span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Is
this all hypothetical?</span></b><br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">We
may assume that all this is theory and the energy markets are yet to be
disrupted. That is not true and we already have a few early signs of disruption</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">a. Gas
based Peaker plants (which take care of sudden spike in demand for electricity)
are not being built as it is cheaper to use battery storage to take care of such
spikes</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://4.bp.blogspot.com/-TW8YMp_E1Bo/Wkq5M8f1wXI/AAAAAAAACFM/WQxPz8ayeXYRT4yjIheOluh1urvqM49rQCLcBGAs/s1600/Untitled3.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="356" data-original-width="624" src="https://4.bp.blogspot.com/-TW8YMp_E1Bo/Wkq5M8f1wXI/AAAAAAAACFM/WQxPz8ayeXYRT4yjIheOluh1urvqM49rQCLcBGAs/s1600/Untitled3.png" /></a></div>
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">b. Companies
like GE and Siemens have seen a large drop in demand for gas turbines and
announced<span style="mso-spacerun: yes;"> </span><a href="http://www.genewsroom.com/press-releases/ge-power-announces-proposal-organisational-restructure-284157">re-structuring
of their power business</a>.</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://4.bp.blogspot.com/-1rDgbFcwK6M/Wkq5GMeyrDI/AAAAAAAACFI/v6Ja918CMlQIf2lLSarDE32leDwWlGd-QCLcBGAs/s1600/Capture.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="183" data-original-width="1031" height="112" src="https://4.bp.blogspot.com/-1rDgbFcwK6M/Wkq5GMeyrDI/AAAAAAAACFI/v6Ja918CMlQIf2lLSarDE32leDwWlGd-QCLcBGAs/s640/Capture.PNG" width="640" /></a></div>
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"></span><br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">c. What
natural gas did to coal, will be repeated again</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">In
2012-14, we had a new technology called fracking reach scale in the US. This
technology had been in development for almost a decade and hit an inflection
point in 2014. The resulting glut in natural gas led to a sharp drop in the
price as can be seen in the chart below.</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://3.bp.blogspot.com/-67iDMmNcKP0/Wkq5dTAS_xI/AAAAAAAACFU/_uXPkNTwGdMTzx52sAfp4d82admum1eSgCLcBGAs/s1600/Gas%2Bpricing.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="504" data-original-width="696" height="463" src="https://3.bp.blogspot.com/-67iDMmNcKP0/Wkq5dTAS_xI/AAAAAAAACFU/_uXPkNTwGdMTzx52sAfp4d82admum1eSgCLcBGAs/s640/Gas%2Bpricing.PNG" width="640" /></a></div>
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">The
result of this drop was that, natural gas suddenly became cheaper (and cleaner)
than coal and caused a switch in fuel for power generation. This can be seen in
the picture below. This in turn led to a drop in the demand and price of coal,
leading to large scale bankruptcies in the coal sector in the US</span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://4.bp.blogspot.com/-7TWO5w-1yK8/Wkq5pYwhiJI/AAAAAAAACFY/3tw-Rq4ZtR0SC58M0yLsTrZnZjOpEZJ-QCLcBGAs/s1600/Share%2Bof%2BNG.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="373" data-original-width="466" height="320" src="https://4.bp.blogspot.com/-7TWO5w-1yK8/Wkq5pYwhiJI/AAAAAAAACFY/3tw-Rq4ZtR0SC58M0yLsTrZnZjOpEZJ-QCLcBGAs/s400/Share%2Bof%2BNG.PNG" width="400" /></a></div>
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Keep
in mind that fracking only works if you already have deposits of gas/ oil in
place, but were uneconomical earlier. There is no such limitation for solar or
wind energy.</span><br />
<br />
<b><span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Please
ignore the S curve </span></b><br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Lets
go back to the first principles in economics – People respond to incentives.
Companies, individuals and governments are not going to switch to solar or wind
energy because they have suddenly realized that these are green technologies,
but the because these technologies are now becoming cheaper than the
alternatives (fossil fuel).</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">We
still have a lot of naysayers including some of the think tanks, who keep
suggesting that these disruptions are atleast 15-20 years away. If you look at
the numbers, for some reason their predictions assume that the price drop in
these technologies will change from the current 15%+ to around 3-5% due to
which the uptake of these technologies will proceed in a linear fashion.</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">You
can believe these predictions if you are ready to ignore the <a href="http://www.galsinsights.com/the-innovation-s-curve/">S-curve model of
adoption</a>, which states that these kind of non-linear technologies follow an
exponential adoption rate till they hit saturation. </span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://2.bp.blogspot.com/-UVCyAASwD1I/Wkq7TdgwmII/AAAAAAAACF4/kvvMm7lU4L4x5tdoZKboTUjWewJc6kgcACLcBGAs/s1600/S%2Bcurve.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="649" data-original-width="1072" height="385" src="https://2.bp.blogspot.com/-UVCyAASwD1I/Wkq7TdgwmII/AAAAAAAACF4/kvvMm7lU4L4x5tdoZKboTUjWewJc6kgcACLcBGAs/s640/S%2Bcurve.PNG" width="640" /></a></div>
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Look at the example of cell
phones, internet, Computers and so on which show the adoption <a href="https://hbr.org/2013/11/the-pace-of-technology-adoption-is-speeding-up" target="_blank">rates are only speeding up</a>, not slowing down !</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://3.bp.blogspot.com/-JW_5rXFynec/Wkq6nZT4fFI/AAAAAAAACFk/tAA28wcNc6Yg-QsL3lKwCZO3i8ofqRNIACLcBGAs/s1600/adoption%2Brates.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="464" data-original-width="875" height="337" src="https://3.bp.blogspot.com/-JW_5rXFynec/Wkq6nZT4fFI/AAAAAAAACFk/tAA28wcNc6Yg-QsL3lKwCZO3i8ofqRNIACLcBGAs/s640/adoption%2Brates.PNG" width="640" /></a></div>
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"></span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">We
cannot predict precisely when the inflection will occur. However, it is not
difficult to see the disruption ahead. At the current valuations, the market is
not discounting the threat of disruption for companies in the capital goods
sector, oil & Gas, automotive, power and coal sector.</span><br />
<br />
<span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">We
can wait till the threat becomes obvious and then exit our positions. I am
however not inclined to wait till the last minute before jumping off the track,
even though I can dimly see the train coming towards us.</span><span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"> </span><span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"> </span><span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"> </span><span style="font-family: "Arial",sans-serif; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"></span><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; line-height: 107%; mso-bidi-font-size: 11.0pt;"> </span>
Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com2tag:blogger.com,1999:blog-7004453.post-34437883627393684092017-10-05T22:38:00.004+05:302017-10-05T22:38:38.401+05:30Over optimizing the portfolio
<span style="font-family: "Arial",sans-serif;">I have often
been asked by </span><a href="http://www.rccapitalmanagement.com/"><span style="font-family: "Arial",sans-serif;"><span style="color: #0563c1;">subscribers</span></span></a><span style="font-family: "Arial",sans-serif;"> - what fixed income option would I
recommend for the cash they hold?</span><br />
<span style="font-family: "Arial",sans-serif;"></span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">My response is
that I usually hold my cash in short term FDs or at the most in short term debt
funds with high rating and from a well-known fund house.<o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif;">The main
criteria I use in selecting a fund are<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Fund
should have a high AUM (> 1000 Crs) for liquidity purpose <o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Should
be from one of the well know fund house, preferably backed by a bank<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Should
have a low expense ratio (as far as possible)<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Should
have a 3-5 year operating history or more<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">You may have
noticed that I have made no reference to returns. This is by design as I am
looking at high safety of capital and liquidity in this case. The entire point
of holding cash or equivalents is that it should be secure and can be accessed
at times of market stress without any loss.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">Some of you may
be unhappy that these options provide ‘only’ 4-5% returns which are quite meager.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;"><strong>Do the math</strong></span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;"><span style="font-family: "Arial",sans-serif;">Let’s do some
math. I usually hold somewhere between 10-20% cash in my portfolio. In a crazy
bull market such as now, it may go upto 30% level, but on average it hovers
around the 15% mark. Let’s assume I get very creative and aggressive with the
cash holding and can earn around 10% returns on it. Keep in mind, that the
level of risk rises exponentially in case of fixed income instruments. A
vehicle giving 10% when the risk free rate is 6%, is not 60% more risky, but
carries several orders of magnitude higher risk.</span></span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">Let’s say, that
I still decide to move forward and invest all the cash in such a vehicle. So in
effect I have made 4% extra on the 15% cash holding which translates to an
extra 0.6% return on the overall portfolio. This additional 0.6% would
translate to roughly 7% additional return over a 10 year period.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">Is it really
worth the risk? Does one really need the extra 0.5- 1% return when rest of the
funds are already invested in equities?</span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;"><strong>There is no
free lunch</strong></span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">One of the
reasons for holding cash and equivalents is to lower the risk of the portfolio,
especially when it is high in the equity market. If you are attempting to get
higher returns via fixed income instruments, then you are just changing the
label of the investment, but not the level of risk in the portfolio as a whole.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">A fixed income
label does not change the nature of risk. It is the characteristics of the
instrument and its past behavior which defines the same. The worst aspect of
investing is to take on higher risks unknowingly and then get shocked when it
comes back to bite you.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">Please always
keep in mind – there are no free lunches in the market. There are absolutely no
‘assured’ high return fixed income options (the term itself would be an
oxymoron). If someone tries to sell you one, please run away from the person as
fast as you can.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;"><strong>It is not a
race</strong></span></div>
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">I will never
tell anyone of you what to do as you need to make your own decisions. However,
let me share what I have been doing for the last 10+ years – I have my funds in
safe and relatively secure FDs earning pathetically low rates of returns. This
allows me to sleep soundly and have one less thing to worry about. If the
equity portion of my portfolio does well, then I don’t need the extra 0.5%. If it
does badly, the 0.5% will not save me. <o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif;">In the end,
investing is not a 100 meter dash where the winner gets a gold medal and the
fourth place goes home dejected. As a long as I can make a decent return (being
18 %+) over the long run, I would rather exchange a few extra points for much
lower risk. The journey would be far more pleasant and I will still reach my
financial destination (maybe a year later).<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">Ps: This does
not refer to any investment options such as real estate from a diversification
point of view. This is mainly about the desire to optimize the cash portion of
the portfolio.<o:p></o:p></span></div>
----------------
<br />
<span style="color: blue;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com1tag:blogger.com,1999:blog-7004453.post-19296384011474415472017-09-13T00:46:00.003+05:302017-09-13T00:46:54.751+05:30Discounting hope<!--[if !mso]>
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<![endif]--><span style="font-family: "arial" , sans-serif;">It is widely
understood that stock prices are forward looking – they discount the future
expectations of cash flow of a company. In bear markets, these expectations are
lowered as markets extrapolate recent trends (and assume a recession forever). On
the flip side, the reverse happens during bull markets, when investors
extrapolate the recent good results into the future and assume that there will
be no hiccups along the way. </span><br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">Finally, we
have markets like now, where investors have gone ahead and extrapolated ‘hope’
and discounted that too.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b><span style="font-family: "arial" , sans-serif;">The idea funnel</span></b></div>
<b>
</b><span style="font-family: "arial" , sans-serif;">I maintain a
50+ list of stocks which I track on a regular basis and have created starter
positions in a few companies which appear promising. The process i follow is to
create a small position (usually 0.5% to 1% of my personal portfolio) and then
track the company for a few quarters/ years.</span><br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">In atleast 50%
of the cases or more, I realize over time, that I am not too excited about the
prospects of the company and exit the stock immediately. In a few cases, however
the company and its stock may still hold promise. In such cases, I start
raising the position size in the portfolios I manage.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The above approach
allows me to run experiments with lots of ideas and controlled risk. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b><span style="font-family: "arial" , sans-serif;">Discounting
infinity and beyond</span></b></div>
<b>
</b><span style="font-family: "arial" , sans-serif;">I am now
noticing that some of the positions I hold on a trial basis have started
running up based on hope.</span><br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">Let me take one
example to illustrate – Repro India.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">Repro India is
a printing business with operations in India and Africa. The company performs
print jobs for publishers for all kinds of printed materials like books,
reports etc. The company has had a chequered past with uneven performance. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The company was
growing till 2012-14 with rising sales in India and Africa. The return on
capital of this business was mediocre as the printing business involves high
fixed assets, high and sticky receivables with average operating margins in the
range of 15-18%. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The export
business in Africa went into a nose dive in 2014 due to the drop in oil prices.
The company was not able to collects its receivables as these African countries
faced currency issues and hence incurred losses. Since then the company has
been slowly recovering the receivables and nursing the business back to health.
In addition the domestic business continues to be competitive and sub-optimal
due to the lack of any competitive advantage</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">I would
normally avoid such a company unless there are some prospects of improvement or
change in the future. One such possibility exists for the company. This is the
new BOD – books on demand business of the company.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The BOD
business is similar to an aggregation model followed by companies such as uber
or Airbnb. In the case of repro, the company has a tie up with Ingram (another
US based aggregator) and other publishers in India to digitize their titles and
carry them on its platform. These titles are then made available through ecommerce
sellers such as Amazon or flipkart. When a user like you and me finds this
title and purchases it, Repro prints the copy and delivers it you.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The business
model is depicted in the picture below (From the company’s annual report).</span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://1.bp.blogspot.com/-cpvqHxnONec/WbgyCd-wRNI/AAAAAAAACCg/Vb_5fMp16PwyHu80DFHUTTShf1yIf9rXwCLcBGAs/s1600/Untitled1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="447" data-original-width="624" height="229" src="https://1.bp.blogspot.com/-cpvqHxnONec/WbgyCd-wRNI/AAAAAAAACCg/Vb_5fMp16PwyHu80DFHUTTShf1yIf9rXwCLcBGAs/s320/Untitled1.png" width="320" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif; mso-no-proof: yes;"></span><span style="font-family: "arial" , sans-serif;"></span><br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The above
business model ensures that there is no inventory or receivables for Repro or
the publisher. The payment is received upfront and the product is delivered at
a later date. This is a win-win business model for all the value chain
participants as it eliminates the need for working capital. As a result, this
business model is able to earn a high return on capital with the same or lower
margins than regular publishing</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">Illustration
from the company’s annual report</span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif; mso-no-proof: yes;"></span><span style="font-family: "arial" , sans-serif;"></span><br /></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://3.bp.blogspot.com/-IXVMc2s54MY/WbgyHWyEkzI/AAAAAAAACCk/XzIkc6pEogE_-8k45Pk_518PlDyVnHqLwCLcBGAs/s1600/Untitled2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="280" data-original-width="624" height="143" src="https://3.bp.blogspot.com/-IXVMc2s54MY/WbgyHWyEkzI/AAAAAAAACCk/XzIkc6pEogE_-8k45Pk_518PlDyVnHqLwCLcBGAs/s320/Untitled2.png" width="320" /></a></div>
<br />
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">Repro is doing
around 40-50 Crs of sales in the BOD segment and growing at around 70-80% per
annum. The company has loaded around 1.4 Mn titles on its platform and plans to
load another 10 Mn+ titles in the future. This business is at breakeven now. The
BOD business has a lot of promise and it’s quite possible that the company will
do well. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">However, success
in the business is not guaranteed. The company needs to scale its operations
and could face competition from other print companies in the future (as the
entry barriers are not too high).</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">The market of
course does not care about the uncertainty. There are times, when markets refuse
to discount good performance in the present and then there are time like now,
when the market is ready to discount the ‘hope’ of good performance in the
future. The stock sells at around 100 times the current earnings. As the legacy
printing business continues to be mediocre with poor economics, it is likely
that the high valuations are mainly due to the exciting prospects of the BOD
business</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">I had created a
small position a couple of months back and have been tracking the company. The
stock price has risen by around <s>50%,</s> 60% since then even though the
company is just above breakeven on a consolidated level. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , sans-serif;">I am optimistic
about the prospects, but the execution needs to be tracked. I am not willing to
pay for hope and so I am a passive observer for now.</span></div>
<br />
----------------<br />
<span style="color: blue;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com2tag:blogger.com,1999:blog-7004453.post-33479767114918918582017-08-05T21:17:00.000+05:302017-08-05T21:17:41.129+05:30Proceed, but with caution<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: "arial" , sans-serif; font-size: 11pt;">I
recently published the following note to the subscribers of our investment
advisory service. I have removed any reference to actual returns of the
portfolio as I prefer new subscribers to join the advisory only if they agree
with our investing philosophy, overall process and long term return goals and
not fixate on how well we have done recently.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
</span><div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: "arial" , sans-serif; font-size: 11pt;">We
have done significantly better than our long term goal of beating the index by
3-5% per annum, but that may appear measly to many investors who consider
anything lower than 100% annual returns as sub-par.<o:p></o:p></span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
<span style="font-family: "times new roman";">
</span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">To
all such investors, our response has been that we are not the right portfolio advisors
for you as we are fairly old school in terms of targeting above average
returns, but with much lower risk. For us, the focus has been always been on
risk, especially during times such as now when almost everyone appears
oblivious to it and can only see clear blue skies.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">The
latest note was a party pooper and could have depressed some of the
subscribers. I hope, if you manage to read through the whole thing, will reduce
some of your optimism too.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">----------------------<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif; font-size: 11pt;">We
have achieved our stated goal of outperformance relative to the indices. This
has been achieved while holding around 10-20% cash at various points of time
without any leverage or shorting any stocks.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">The
impact of holding cash is that it has depressed the annual returns by around
3-4%, but allowed us to manage risk and sleep well.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Should we celebrate?<o:p></o:p></span></b></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">It
is easy to get ecstatic when the recent performance is good and depressed when
the same is poor. Although I am not immune to these emotions, I do not let it
over-ride my thinking. After a big gain in 2014, we had a weaker performance in
2015. I was not happy about this performance, but was not overly disturbed by
it. <o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">The following
comment from the 2015 review, was true then as it is now<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><i style="mso-bidi-font-style: normal;"><span style="font-family: "arial" , sans-serif;">The swing in performance
means that there is an element of luck in each year’s results and a swing in a particular
year should not be over-analyzed. In plain words, I was not a genius in 2014
and did not become stupid after the calendar changed to 2015.<o:p></o:p></span></i><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;">I have not
become smart again in 2017. <o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;">We
have tried to follow a consistent approach over time and avoided temporary fads
in the market, even if it has meant underperformance in the short run. Over
long periods of time, I strongly believe that the process of buying undervalued
stocks and holding them for the long run will result in above average
performance.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">What drove the performance?<o:p></o:p></span></b></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">I
have written earlier (see section – </span><a href="http://portfolio.rcfunds.com/2016/01/annual-review-2015/"><span style="color: windowtext; font-family: "arial" , sans-serif;"><span style="color: blue;">simple, but not easy
framework</span></span></a><span style="font-family: "arial" , sans-serif;">) that portfolio
performance is driven by two factors -<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;">Factor 1: <span style="mso-spacerun: yes;"> </span>Discount to Intrinsic value (referred to as IV
in the rest of the note) of the portfolio<br />
Factor 2: Average growth rate in the Intrinsic Value of the portfolio<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
first factor is decided by the gap between purchase price and IV of the
companies in the portfolio. This factor depends on the market mood, when
investors are often too pessimistic about a company due to short term reasons. The
second factor depends on the company performs in the long run.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">The
first factor can cause returns to spike from a single position or the entire
portfolio depending on a change in the views of the market. Most investors
fixate on this and get overly excited when this gap closes and they are able to
earn a high return over a very short period of time. In contrast, the second
factor is what allows one to compound wealth over the long term. These returns
appear ordinary in the short run, but the power of compounding results in spectacular
numbers over time.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">In
the first half of the year, we saw the first factor drive returns for the
overall portfolio wherein the market re-appraised the value of several of our
positions. The stock price for these companies rose by 50-100% during this
period. If you look at the model portfolio table, you will notice that my estimate
of the growth in IV is around 20-25% on average. So in effect, value kept
building for these companies over the last 2-3 years and was suddenly
recognized by the market over a short period of time.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Role of an Investment Advisor<o:p></o:p></span></b><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
am not trying to make the highest possible returns in the shortest period of
time, but above average returns over time with the lowest possible risk, with
risk management taking a higher precedence. Risk Adjusted returns are more important
than absolute numbers.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">This
focus on “Risk” has led us to cap our top positions at 5-7% at the time of
purchase, keep sectoral bets capped at 20% and maintain a cash level of 12-15%
over the lifetime of the model portfolio. A more aggressive stance in the form
of more concentrated positions or lower cash would have raised our returns (5%
CAGR by my rough guess), but increased the risk too. <o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
have no regrets of foregoing these returns. I will always prioritize risk over
returns and if it means slightly lower returns, so be it.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">If
we continue to earn above average returns in the future, the magic of
compounding with risk management will allow us to reach our destination. I want
the journey to be pleasant and would like to sleep well at night. There is no
point in dying rich if you have a terrifying time reaching that point.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
have written in the past that I am focused on companies which can increase
their intrinsic value by 18-20% annually (Factor 2) and are selling at 20-30%
discount to this fair value (Factor 1). I would of course love to buy a company
which can grow at 40% and sells at 50% discount to fair value. However such
bargains do not exist in the current market and we have to adjust to the
reality we face for now.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">I
have explained the math behind the returns in the 2016 note </span><a href="https://valueinvestorindia.blogspot.com/2017/01/on-outperformance.html"><span style="color: windowtext; font-family: "arial" , sans-serif;">here</span></a><span style="font-family: "arial" , sans-serif;">, and what this translates to in terms
of the long term returns. You have to keep in mind that this is a broad
framework for returns and not some mathematical formulae which will deliver
this precise level of return all the time.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
can understand that a lot of investors find 20-25% returns below par and have a
desire for much higher numbers. I have no problem with that. It’s just that my
investing approach and numbers are not suitable for them. Both I and Kedar make
it a point to emphasize this at the time of joining the subscription and we
keep repeating (to the irritation for you) it so that our mutual expectations
are in synch.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Lumpiness of returns<o:p></o:p></span></b><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
annual CAGR number tends to hide the lumpiness of the returns at the annual and
lower increments of time. If you think there is some kind of pattern to this
lumpiness, let me know – I have been searching for it and have yet to find it.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">The
only consistent pattern we have followed is to buy companies below their
intrinsic value and wait patiently for the market to realize the same. In some
cases, the wait is short and in other cases it is longer. However, if I am
correct in my evaluation, then the value is usually realized. <o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">I
have control over the process and the stocks we pick for the portfolio. The
exact timing is, however, up to the market and unlike most of participants, I
do not spend any effort in trying to get it right as long as the company is
building value over time.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">It
is however not a given that I will always be right. If I am </span><a href="https://valueinvestorindia.blogspot.com/2016/07/a-statistical-analysis-of-failures.html"><span style="font-family: "arial" , sans-serif;"><span style="color: #0563c1;">right 60-70%</span></span></a><span style="font-family: "arial" , sans-serif;"> of the time, we will do fine. Any
higher percentage would mean that I am being too cautious and sacrificing
returns to appear consistent. So, if all my stock picks are working out, don’t
be thrilled – it just means that I am being too cautious and leaving money on
the table.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">The topic of disruption<o:p></o:p></span></b></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">
I wanted to touch briefly on this subject and how it relates to our portfolio and
investment approach. <o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">This
topic is in the news and one keeps hearing of some new technology disrupting a
stable industry which was earlier assumed to be immune to such threats. We have
Amazon disrupting retail in the US, solar starting to disrupt energy markets,
electric vehicles on the horizon with a high probability of disrupting the auto
and oil markets. The list goes on and on. One often feels that a lot of this is
hype and just headlines to grab your interest.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">On
the contrary, I personally feel that markets are being pretty sanguine about
it. People may be talking about these risks, but they are not acting on it. Valuations
seem to incorporate no disruption risk at all.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">Why do I say so?
Let’s go </span><a href="https://valueinvestorindia.blogspot.com/2016/09/mislead-by-pe-ratio.html"><span style="font-family: "arial" , sans-serif;"><span style="color: #0563c1;">back to the basics</span></span></a><span style="font-family: "arial" , sans-serif;">. What is the value of a company?<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">It’s
the sum of the discounted free cash flow, the company will generate, from now
to its eventual demise. In most cases, when investors value a company, they
estimate the cash for a certain period (8-10 years at best) and then add a
terminal value to come up with a number. The key assumption behind the terminal
value is that the company will survive forever (or for a very long period of
time). <o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">For
example, a company like </span><a href="https://valueinvestorindia.blogspot.com/2008/05/analysis-maruti-suzuki-ltd.html"><span style="font-family: "arial" , sans-serif;"><span style="color: #0563c1;">Maruti</span></span></a><span style="font-family: "arial" , sans-serif;"> sells for 30 times earnings. This valuation implies that
an investor expects the company survive beyond a decade for sure. At the same time,
we have almost every other auto manufacturer such as GM, Ford, and Fiat etc.
selling at 3-4-time cash flow. In these cases, the stock market expects the
company to go out of business soon (within 4-5 years at best).<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">The
reason for such a low valuation for the almost all the auto companies across
the world (except India) is that the market foresees (correctly) a major threat
of disruption. A disruption in a company’s business model is not a slow, long
drawn process, but an abrupt one where the company goes from high profitability
to heavy losses in a matter of few quarters. Look at the examples of Nokia,
blackberry, Department stores in US and many more.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
common response to such arguments is that ‘This time it’s different’. For
example in the case of electric vehicles, India does not have a charging
infrastructure or Indians cannot afford such expensive vehicles etc etc. What a
lot of investors miss is looking closely at the cost curves of these
technologies. Batteries which are a major component of an EV cost are dropping
in price at 14% per annum and that is with the current technology (without any
radical break through).<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">In
addition to this, an Electric vehicle lasts 4 times a regular vehicle, has
minimal maintenance cost and an operating cost which is 20% that of a petrol
vehicle. If you offer a better & cheaper product to a consumer, will they
ignore it? Has it ever happened in the past? And what if the govt also decides
to push for it due to environmental and foreign exchange benefits?<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
point of all this discussion from an investor’s standpoint is that these kind
of risks are being mispriced by the market. The market will continue to ignore
these risks, until it becomes apparent and at that time the value destruction
will be abrupt. <o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><div class="separator" style="clear: both; text-align: center;">
<span style="font-family: "times new roman";"><a href="https://3.bp.blogspot.com/-pOkRdNKmLzY/WYXnBKfvAhI/AAAAAAAACBA/5SoSOvCGCpkV0TQlQyjOsCYrJLDkXXEEACLcBGAs/s1600/Untitled.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="304" data-original-width="624" src="https://3.bp.blogspot.com/-pOkRdNKmLzY/WYXnBKfvAhI/AAAAAAAACBA/5SoSOvCGCpkV0TQlQyjOsCYrJLDkXXEEACLcBGAs/s1600/Untitled.png" /></a></span></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif; mso-no-proof: yes;"><v:shapetype coordsize="21600,21600" filled="f" id="_x0000_t75" o:preferrelative="t" o:spt="75" path="m@4@5l@4@11@9@11@9@5xe" stroked="f">
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<v:f eqn="sum @0 1 0">
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<o:lock aspectratio="t" v:ext="edit">
</o:lock><v:shape id="Picture_x0020_2" o:spid="_x0000_i1025" style="height: 227.55pt; mso-wrap-style: square; visibility: visible; width: 468pt;" type="#_x0000_t75">
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</v:imagedata></v:shape></v:path></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:formulas></v:stroke></v:shapetype></span><span style="font-family: "arial" , sans-serif;">I
am constantly reading up on these new trends and try to keep an eye on it. It
is not possible for me to predict when these risks will materialize, but it is
quite evident that they will come to pass eventually. In such cases, it is
better to exit early rather than stand in front of an oncoming train and jump
out of its path at the last minute. A last minute jump is often financially
fatal if you mis-time it.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Managing risk<o:p></o:p></span></b><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;">If
there is a common thread in all topics in this note – it is risk or various
forms of it. I have spoken about position sizing risk, duration risk (lack of patience
leading to exiting a position at a loss in the short term) and business model
risk (from disruption).<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">There
are many more forms of risk, some of which we can hedge at either the position
level (proper selection, pricing and sizing of the position) or at the
portfolio level (appropriate levels of cash, reducing co-relation between
position etc).<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">I
usually discuss about the position risk in the individual notes. These half
yearly notes are more focused on discussing some aspects of portfolio level risk.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">So why this
added focus on risk now?<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">I
think managing risk is an essential part of investing and is even more critical
during bull markets (such as now) when almost everyone is solely focused on
returns.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">You
need to keep in mind that managing and reducing risk is not free in the short
run, but pays well in the long run. One of the ways we are managing our risk is
by capping the maximum allocation to a single position or a sector. Doing so not
only reduces the risk (which is not visible), but reduces the return too.<o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">In
the same manner, we have been raising the cash levels as stock prices have
increased way beyond their fair value in some cases. This decision is based on valuations
and future prospects of each position and not on some near term forecast of the
market (of which I have no idea and don’t care)<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
net impact of all these actions is that it reduces our prospective returns. In
the last 6+ years of the model portfolio, if we had kept the cash levels at 0
and a higher concentration in some of the positions, we could have easily done
a much higher return. <o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">It
would also have given us a few sleepless night during this period due to the
high volatility. I cannot speak for you, but I value my sleep and will not
trade it for a few extra points of return.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt; text-align: justify;">
<span style="font-family: "arial" , sans-serif;">There
is no point of chasing higher returns if a drop in the market causes you to
exit at the wrong time due to short term losses. In such a scenario a conservative
investor who is satisfied with lower returns will come out ahead of a more
aggressive one. <o:p></o:p></span></div>
<span style="font-family: "times new roman";">
</span><b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">For the new subscribers (and prospects)<o:p></o:p></span></b><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;">We
have faced this question often when markets are hitting highs, especially from
new subscribers – “There is nothing to buy”. To that, we have a standard
response – This will occur from time to and time and there is nothing we can do
other than ask you to be </span><a href="https://valueinvestorindia.blogspot.com/2017/07/the-logic-of-patience.html"><span style="color: windowtext; font-family: "arial" , sans-serif;">patient</span></a><span style="font-family: "arial" , sans-serif;">.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;">We
have faced the current situation several times in the past (in 2012, 2014 and
now) and it often felt that the opportunity to invest in good ideas was gone
for good. However there is always some company specific opportunity or a
general market drop (as in 2013 and Feb & </span><a href="https://valueinvestorindia.blogspot.com/2016/11/losing-your-wallet.html"><span style="font-family: "arial" , sans-serif;"><span style="color: #0563c1;">Nov 2016</span></span></a><span style="font-family: "arial" , sans-serif;">) which allowed a recent subscriber to
add to their portfolio. The only requirement at such times is to have a reserve
of cash and courage.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;">So
a simple formulae for all of us <o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">In
bull markets – have patience, avoid greed.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "arial" , sans-serif;">In
bear markets – have courage and be greedy.<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><strong><span style="font-family: "arial" , sans-serif; font-size: 11pt;"></span></strong><br />
<strong><span style="font-family: "arial" , sans-serif;">A
repeat section</span></strong><span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;"><br />
I repeat this every time in the portfolio review and will do so again<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font-family: "times new roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">I do not have timing
skills and cannot prevent short term quotation losses in the market<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font-family: "times new roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">My approach is to
analyze and hold a company for the long term (2-3 years). As a result, my goal
is to earn above average returns in the long run and try to avoid losses during
the same period<o:p></o:p></span><br />
<span style="font-family: "times new roman";">
</span><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font-family: "times new roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">In spite of my best
efforts, I will make stupid decisions and lose money from time to time. The
pain felt will be equal or more as I invest my own money in exactly the same
fashion</span><br />
<span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: "arial" , sans-serif; font-size: 11pt;"><span style="font-size: small;">Finally a sales pitch –
if you interested in joining our advisory, please email us on <a href="mailto:enquiry@rccapitalmanagement.com">enquiry@rccapitalmanagement.com</a><o:p></o:p></span></span><br />
<span style="font-family: "times new roman";">
</span></span><span style="font-family: "arial" , "helvetica" , sans-serif;">----------------
</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.</span> Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com1tag:blogger.com,1999:blog-7004453.post-9386882754169847492017-07-13T22:05:00.004+05:302017-07-13T22:05:38.616+05:30The logic of patience
<span style="font-family: "Arial",sans-serif;">Investors hear
a constant refrain – be patient, think long term, blah blah blah. Is it similar
to the sermons we hear about eating well and exercising more?<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">Let me share
some thoughts on why patience is a critical to earning above average returns. I
will try to approach it based on logic and not because the gurus of investing
have been preaching it<o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif;">Let’s walk
through a series of logical arguments<o:p></o:p></span><br />
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;"></span></span><br />
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">1.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">The
stock market is usually efficient and generally prices most companies correctly
based on their <u>near term prospects</u>. So if a company is growing at 30%
per annum, earning 25% return on capital and has great long term growth
prospects, then the market will value it accordingly.</span><br />
<span style="font-family: "Arial",sans-serif;"></span><br />
<span style="font-family: "Arial",sans-serif;"></span><span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">2.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">One
can do better than the market only if you have a view about the performance of
a company, which differs materially on the upside. If the company performs as
the market expects, there will be no impact to the stock price. Only if the
company performs better than market expectations, will the stock price will
adjust upwards in response to the positive surprise. This is something most
investor miss. They are looking for high quality companies with good
management. The trick is find those where the market has yet to recognize the
quality or improvement in performance (and price it into the stock)<o:p></o:p></span><br />
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;"></span></span><br />
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">3.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">If
you combine point 1 and point 2, it follows that some of the ways to do better
than the market is if</span><br />
<ul>
<li><!--[endif]--><span style="font-family: "Arial",sans-serif;">You are able to identify the turning point in a cyclical industry, before the market. As it not usually not possible to time this perfectly, the best option is to be a bit early when there are some green shoots visible and then increase the position as the recovery gathers strength</span></li>
<li><span style="font-family: "Arial",sans-serif;"></span><span style="font-family: "Arial",sans-serif;">The profits of the company are suppressed due to some short term issues in the industry (weather, demonetization etc.) which will be resolved soon. In such cases, one has to create a position when the outlook is still horrible and hold on to it till the external factors change for the better</span></li>
<li><span style="font-family: "Arial",sans-serif;"></span><span style="font-family: "Arial",sans-serif;">Some One-off event such as a demerger causes one of the constituents to be mispriced<o:p></o:p></span></li>
<li><span style="font-family: "Arial",sans-serif;">The profit of the company is suppressed as management is investing in the business which is hurting the reported numbers. As the market is still fixated on the reported numbers, one can create a position at an attractive price. However one has to wait for the investment phase to complete and the true profitability surface<o:p></o:p></span></li>
</ul>
<span style="font-family: "Arial",sans-serif;">If you look at
all the above cases, one needs to ignore the near term prospects which are
being overly discounted by the market, and focus on the long term. As a result,
in such cases you will not see a validation of your thesis as soon as you
create a position.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">In my
experience, one needs to look out at least 2-3 years and make a purchase
accordingly. One then has to wait patiently and keep checking if the company
continues to deliver as per your expectations<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;"><strong>The impact of
competition<o:p></o:p></strong></span></div>
<strong>
</strong><span style="font-family: "Arial",sans-serif;">For those of us
who started investing in the late 90s and even around mid-2000, the level of
competition in the market was much lower. One could find companies earning 30%
return on capital, growing at 15%+ CAGR and selling at 5 times earnings (Marico
was one such company). All one had to do was to dig around a bit and put in the
money.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">The mutual fund
industry was nascent at that time and there were very few individual investors.
I still recall getting blank stares when I spoke about value investing.<o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif;">This has
changed completely in the last 10 years. We now have an army of smart investors
(professional and part-time) who scour the market looking for opportunities. In
such as climate, I can bet that you will not find any obvious mispricing which
can filtered on a screen.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">In such a case,
one has to dig deeper and put in more time and effort in understanding the
business and its management. Once you get a better understanding than most
other investors , you have to buy the stock and wait till the market, hopefully
comes around to your point of view.<o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif;">It would be
foolish to assume that the change of opinion will happen as soon as you are
done with your purchase. Some of the near term factors which drive the pricing,
need to change before the market accepts your view point. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;"><strong>When is patience
a liability?<o:p></o:p></strong></span></div>
<strong>
</strong><span style="font-family: "Arial",sans-serif;">Patience is of
course tied with your style of investing and time horizon. If you are a day
trader or momentum investor, then time is not on your side. If you time horizon
is days, weeks or month then thinking of a multi-year period makes no sense.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">The trouble
starts when one does not know what kind of an investor you are? A lot of people
think they are long term value investors (as somehow that is fashionable these
days), but act like day traders – selling and buying over weeks. If you do not
get your time horizon and investment approach consistent with each other, then
you are in trouble as your will quickly tire of holding the stock and sell just
before the inflection<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;"><strong>Getting an edge<o:p></o:p></strong></span></div>
<strong>
</strong><span style="font-family: "Arial",sans-serif;">I had earlier
written above <a href="http://valueinvestorindia.blogspot.in/2017/01/on-outperformance.html"><span style="color: #0563c1;">three
kinds of edge</span></a> in stock market investing. The information edge is now more
or less gone with tools for quantitative analysis and wide dissemination of
information by management (look at the number of conference calls hosted by companies!).
One has to rely on analytical and behavioral edge to make above average
returns.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">I personally
think that analytical edge too is over rated as it is not possible to
consistently have a superior insight with all your positions. Assuming that you
are smarter than the rest of the market at all times, is pure hubris. The only
sustainable edge left for an investor is the behavioral one and being patient in
an age of distraction and immediate gratification is at the core of this edge.<o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif;">Being patient
is therefore not a moral imperative or something you need to do for the good of
humanity, but is a logical necessity to do well in the market in the long run
as a value investor.<o:p></o:p></span><br />
----------------<br />
Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com2tag:blogger.com,1999:blog-7004453.post-33794227005930040922017-06-08T22:24:00.002+05:302017-06-08T22:24:51.936+05:30How to lose money consistently<!--[if gte mso 9]><xml>
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<span style="font-family: "Arial",sans-serif;">Guaranteed approach
to losing money - <span style="mso-spacerun: yes;"> </span>Look at the last 3-5 year
returns and extrapolate mindlessly. Invest when past returns are highest and
sell after the market corrects<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">Starting amount:
Rs 100000<o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">1.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Invest
infrastructure mutual funds in 2008 (after the boom) based on hard selling by
mutual funds<o:p></o:p></span><br />
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">2.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Sell
in 2009 with a 40% loss on average<o:p></o:p></span><br />
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">3.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Recuperate
from shock for 2 years<o:p></o:p></span><br />
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">4.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Invest
in gold mutual fund in 2011/12 after seeing 5 years of boom <o:p></o:p></span><br />
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">5.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Lose
10% of principal in next 3-4 years<o:p></o:p></span><br />
<span style="font-family: "Arial",sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">6.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">Now,
invest in mid and small cap funds, after 3 years of boom.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">The investor
has already managed to lose 50% of principal by now. The above tale may be an exaggeration,
but you can check mutual funds with the above kind of performance, with most
being launched towards the tail end of the boom. Someone is surely buying these funds at the top of a cycle !</span></div>
<span style="font-family: "Arial",sans-serif;">It may not be
the same investor in each case, but I can assure there are definitely a few who
manage to achieve this ‘feat’ over a lifetime as they never get over their
greed and refuse to learn from their losses (it is always someone else's fault)</span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">If you think, I
am mocking such people – that is not the case. I did <a href="http://valueinvestorindia.blogspot.in/2007/05/my-experience-with-equity-mutual-funds.html"><span style="color: #0563c1;">the
same thing</span></a> when I started out, but the only difference is I swallowed my
pride, accepted my mistake and have tried to learn from it.<o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif;">An oversized
ego is always dangerous to the wallet<o:p></o:p></span><br />
<br />
----------------<br />
<span style="color: blue; font-family: Arial, Helvetica, sans-serif;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com6tag:blogger.com,1999:blog-7004453.post-41732455691974685812017-05-21T01:49:00.003+05:302017-05-21T01:54:57.921+05:30No pizza today<span style="font-family: "arial" , sans-serif; font-size: 11pt;">I
wrote the following note to my subscribers in response to two questions which
are frequently asked by new prospects <o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;"><span style="mso-list: Ignore;"></span></span><br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;"><span style="mso-list: Ignore;">a.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif; font-size: 11pt;">Please
share your past performance <o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;"><span style="mso-list: Ignore;">b.<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif; font-size: 11pt;">How
many stocks can I buy if I join your advisory today<o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;"></span><br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">The
note below, seeks to answer the second question</span><br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;"></span><br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;"><b>Pizza
versus investment advice<o:p></o:p></b></span><br />
<b>
</b><span style="font-family: "arial" , sans-serif; font-size: 11pt;">If
you walk into a store or restaurant, you are handed the item or service as soon
as you make the payment. Any delay or refusal to offer the said service is
considered a breach of faith or fraud.<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">The
above standard mode of exchange breaks down when we come to investment advice.
The job of an investment advisor is to ensure that his or her clients make
decisions which helps them in the long run (in achieving their financial
goals). This can mean that the most sensible course of action often is do
nothing and wait for the right opportunity to invest.<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">This
is however not understood by the vast majority of investors who behave like a
customer in a restaurant. A typical investor likes to be handed a menu card of
stocks and would like to buy as many as possible even before the ink has dried
on the cheque (metaphorically speaking). This expectation works if you order a
pizza, but not when you are investing for the long run (5+ years).<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">The
investment industry panders to this behavior and even encourages it. As much as
one would like to blame the industry (and they have much to blame), the
investor community is equally responsible for it. Stock markets are seen as a
place to pat your ego (for recent high returns), indulge your gambling instinct
or just entertain yourself. </span><br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;"></span><br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">In all my years, I have found very few who look at
the stock market for what it really is – <b style="mso-bidi-font-weight: normal;">A
place to invest your capital for the long term to earn returns above the rate
of inflation and thus achieve your long term financial goals.</b><o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">If
you are in for the long haul, it makes sense to invest your hard earned money
in the right company at the right price (price being very important). Often
this happens, when everyone is </span><span style="font-family: "arial" , sans-serif; font-size: 11pt;"><span style="color: #0563c1;"><a href="http://valueinvestorindia.blogspot.in/2016/11/losing-your-wallet.html">running for the exit</a></span></span><span style="font-family: "arial" , sans-serif; font-size: 11pt;"><a href="http://valueinvestorindia.blogspot.in/2016/11/losing-your-wallet.html">.</a> <o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;"><b>Walking
the talk<o:p></o:p></b></span><br />
<b>
</b><span style="font-family: "arial" , sans-serif; font-size: 11pt;">It
is easy to talk, but not easy to do the same thing unless your own money is on
the line. My own funds, that of my partner kedar and our families is invested in
the same fashion. Nothing focusses you on the risk, when your own money is on
the line. <o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">I
get turned off when I read about fund managers and analysts who recommend a
stock, but do not have skin in the game. It clearly means that they do not
believe in what they say. <o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">I
made a conscious decision several years back that I will eat my own cooking and
as a result, any loss in the portfolio is borne equally by me. In addition to
this point, both me and kedar have made it a point to under-promise and
hopefully deliver more. As result, inspite of a 100%+ rise in 2014, we decided
to go low key as I knew that future results could be subdued for a period of
time. I did not want to attract subscribers based on recent performance and disappoint
them when I failed to meet their un-realistic expectations.<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif; font-size: 11pt;">We
continue to follow the same approach today. We will get excited when the market
drops and go into hibernation when the market gets euphoric. The hibernation is
limited only to activity and not to the effort of finding new ideas. We
continue to build the pipeline, but the pizza will be served only when the time
is right.<o:p></o:p></span><br />
<br />
Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com5tag:blogger.com,1999:blog-7004453.post-34698907550542235562017-04-14T02:13:00.005+05:302017-04-14T02:18:41.129+05:30The Hangover from bull markets<span style="font-family: "arial" , sans-serif;">A lot of people
are celebrating these days and patting themselves on the back. We have a parade
of investors touting their returns and claiming that 100% CAGR is for chumps.
Multi-bagger could soon be a new name for kids :)</span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">A bull market
feels good and should be the best of times, right? How can one argue with that?
<o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif;">It feels great
when your stocks are going up, making you richer by the day. You feel smart, on
top of the world and in some moments can even see that retirement on the
horizon when you stop working and live on the beach < insert additional
fantasy as needed><o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">By my own
estimates, I have lived through around 4 major and a couple more minor bull
runs. It felt great during those periods as I <span style="mso-spacerun: yes;"> </span>felt vindicated for sticking it out during the
drops when everyone was rushing to the exits. It is only in hindsight, I have
realized that bull market are dangerous in their own way and I was lucky to
have survived the full cycle. <o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif;">Let me explain<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;"><b>A confluence of
factors<o:p></o:p></b></span></div>
<b>
</b><span style="font-family: "arial" , sans-serif;">A typical bull market
usually coincides with decent economic numbers when most companies are doing
quite well. As a result, most participants become over optimistic and bid up
the stocks of these companies. We thus have a confluence of factors – companies
performing better than usual and being valued at higher multiples of peak
earnings.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">In addition to
these factors, there are several psychological factors which come into play at
this time. Let’s go over some of them<o:p></o:p></span></div>
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: "calibri";">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">Social
proof: At such times, you see people around you getting rich and more reckless
the person, higher the returns. It is not easy on the psyche to watch your
friends get rich , whereas you sit around doing nothing.<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: "calibri";">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">Scarcity:
During bear markets, waiting helps. As the numbers are bad or getting worse,
stock price for most companies stay stagnant at best. As a result, if you like
to dig deep into a company, you have all the time in the world. No such luck
during bull market. Any company with a half decent results gets bid up. As a
result, you can either forgo an opportunity or buy the stock with lesser due
diligence<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: "calibri";">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">Confirmation
bias: A bull market gives a positive signal and makes you feel that you are
doing something right. As a result, there is a tendency to ignore risks and not
look for disconfirming evidence<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: "calibri";">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">Authority
bias: If you switch on a channel, every other talking head and self-proclaimed
guru on <span style="mso-spacerun: yes;"> </span>TV is painting the vision of a glorious
future where all of us would be rich. This makes you feel as the only idiot who
does not get it<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">In effect there
are multiple psychological and other factors, which conspire to get your guard
down and <a href="http://valueinvestorindia.blogspot.in/2015/09/a-catalogue-of-risk.html"><span style="color: #0563c1;">ignore
the risks</span></a><o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif;"><b>A bad hangover</b></span><br />
<span style="font-family: "arial" , sans-serif;"><b><o:p></o:p></b></span><br />
<span style="font-family: "arial" , sans-serif;">I can recall
the emotional roller coaster in the previous cycle, with the only difference
that these cycles used to run over a period of 3-5 years. The years 2001-2003
(which is ancient for most investors) was a grinding and slow bear market.</span><br />
<span style="font-family: "arial" , sans-serif;"></span><br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">It was the
exact opposite of what we see now. I can remember buying companies selling for
5 times earnings, growing at 15-20% per annum and still going down in price. If
you think these were low quality stocks, then that was not the case. I am
talking of companies like Marico and pidilite which are the darlings of the
quality school of investing now.<o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif;">A new investor
like me just could not understand why the market was behaving in this fashion. <o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif;"></span><br />
<span style="font-family: "arial" , sans-serif;">The market
started turning in 2003 and from there it took off for the next 5 years. A lot
of my personal holdings went up multiple times (no one used the term
multi-baggers as often then) and it was great to feel vindicated/ smart. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">The problem
with <a href="http://valueinvestorindia.blogspot.in/2007/09/feeling-smart-like-duck.html"><span style="color: #0563c1;">feeling
smart</span></a> was that is that you also feel invincible. The net impact of all
these emotions is that I made a <a href="http://valueinvestorindia.blogspot.in/2007/03/indo-nippon-electricals-value-trap.html"><span style="color: #0563c1;">few
picks</span></a>, which were marginal at best.<span style="mso-spacerun: yes;"> </span>These
sub-par picks came back to bite me during the next downturn when they performed
far worse than the overall markets.<o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif;"><b>A fight against
instincts</b></span><br />
<span style="font-family: "arial" , sans-serif;"><b><o:p></o:p></b></span><br />
<span style="font-family: "arial" , sans-serif;">The natural
instinct for any investor is do the opposite of what should rationally be
done.<span style="mso-spacerun: yes;"> </span>When the markets are dropping due
to poor fundamentals and bad sentiments, the tendency of most investors is to
withdraw into a shell and wait for the sky to clear up. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">This is usually
the wrong action. Unless you believe that the world is going to end (in which
case, stocks should not be your worry), it makes sense to buy attractively
priced companies as markets usually have a tendency to extrapolate the recent
trends into the future. <o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif;">The same
tendency is also visible during bull markets which leads investors to buy at
the wrong price. The right action at such times would be to sell or do nothing,
if the company is not overpriced. I personally think that one should go one
step beyond – use this period to clean up your portfolio. If you hold some
companies, which you are not as confident about, sell them down and increase
the cash holding. A bull market is a good time to <span style="mso-spacerun: yes;"> </span>swallow the bitter pill when the overall
portfolio is doing well.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;"><b>It is never easy<o:p></o:p></b></span></div>
<span style="font-family: "arial" , sans-serif;">I wrote <a href="http://valueinvestorindia.blogspot.in/2016/05/it-is-never-easy.html"><span style="color: #0563c1;">this
a year</span></a> back after the market dropped by 15% and this still holds true,
except the circumstances have changed to a bull market.<span style="mso-spacerun: yes;"> </span>Instead of courage to manage the fear, one
needs the same courage to manage greed and euphoria.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">It requires an
equal amount of effort (or even more) to watch everyone around you make easy money,
while you stick to your principles and refuse to take part in the madness.<o:p></o:p></span></div>
<br />
----------------
<br />
Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com3tag:blogger.com,1999:blog-7004453.post-87475493351612237762017-04-08T19:04:00.002+05:302017-04-08T19:07:37.620+05:30Letting go of easy money<!--[if gte mso 9]><xml>
<o:OfficeDocumentSettings>
<o:AllowPNG/>
</o:OfficeDocumentSettings>
</xml><![endif]--><span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 107%;">I recently received an email and following is my reply</span><br />
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif; mso-bidi-font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif; mso-bidi-font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Hello Rohit,<br style="mso-special-character: line-break;" />
</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 12pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; mso-bidi-font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Trust you are doing good.<br />
<br />
I have a generic query regarding one of the stocks that has created a lot of
buzz recently. Not sure, if you answer such Qs :)<br />
<br />
Avenue Supermarkets (DMart) - This stock got listed at twice the IPO issue price.
And, it is crossing new boundaries every week. There’s lot of positivity about
this stock (like next Infosys etc) and founder Mr Damani (value investor)
in market and news.<br />
<br />
Its very difficult to resist the temptation to grab this opportunity but not
sure if this is the right time. So should we consider this opportunity or just ignore it as temporary heat in the air.<br />
<br />
Kindly advise if possible.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 12pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; mso-bidi-font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">hi XXXX</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 12pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; mso-bidi-font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">
let me share a couple of points on this :)</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 12pt;">
<span style="font-family: "arial" , sans-serif; mso-bidi-font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"><span style="font-family: "arial" , "helvetica" , sans-serif;">
- i never invest in IPO (see </span><a href="http://valueinvestorindia.blogspot.in/2007/04/why-i-avoid-ipos.html" target="_blank"><span style="font-family: "arial" , "helvetica" , sans-serif;">here</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> and </span><a href="http://valueinvestorindia.blogspot.in/2006/04/good-idea-carried-too-far.html" target="_blank"><span style="font-family: "arial" , "helvetica" , sans-serif;">here</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> )<br />
- i never chase hot trends in the stock markets<br />
- i never buy momentum stocks, especially ones selling at high valuations<br />
- i have never invested in retail companies as this is a very tough business.<br />
<br />
i may be wrong here and this could be an exception to all my rules. maybe this
stock will keep rising and people will make money. however i am fine with it
...i dont need to make money in all opportunities.<br />
<br />
so my short answer is - i have no plans of considering or putting a single
paise in such opportunities and am fine if others make money. as far as
temptation is concerned ..i cant help you there :)<br />
<br />
i hope i have shared my views clearly ...you have to make your own decision.
dont hold me responsible if the stock doubles :) ...i am fine with letting go
of such opportunities<br />
<br />
regards<br />
rohit</span></span><span style="font-family: "arial" , "helvetica" , sans-serif;"> </span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">----------------</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com0tag:blogger.com,1999:blog-7004453.post-89701970067480187362017-02-20T02:18:00.002+05:302017-02-20T02:18:24.212+05:30Mental capital
<span style="font-family: "Arial",sans-serif;">This is a term
I like to use to represent the time, and mental energy devoted to each position
in my portfolio. I would also add mental stress to the equation. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">I have realized
that in a lot of cases the percentage of mental capital allocated to each position
does not match with the allocation of financial capital. On the contrary, some
of my top position have needed the least amount of mental energy on an ongoing
basis and caused the least amount of stress. This has been mainly due to the quality
of the business and management.<o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif;">On the other
hand, some of the smaller positions in my portfolio have resulted in a much
higher allocation of mental capital and that could be also the reason why I
never raised the size of these positions. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;"><strong>Not a
mathematical exercise<o:p></o:p></strong></span></div>
<strong>
</strong><span style="font-family: "Arial",sans-serif;">Unlike the
amount of financial capital, one cannot calculate the percentage of mental
capital allocated to a position. However there are several pointers one can use
to see if a particular company is taking a dis-proportionate amount of your
mental energy</span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">You
are regularly surprised by the quarterly results<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">The
management makes your stomach churn and causes you to worry about the safety of
your capital<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">The
industry is undergoing a substantial amount of change and you have no means of
evaluating the economics of the business even for the short to medium term<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">You
keep coming up with new reasons to hold on to your position, even after your
original thesis has been invalidated. The word ‘hope’ keeps coming up in your
thinking<o:p></o:p></span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-family: "Arial",sans-serif;">You
‘worry’ about the position for any of the above or other reasons<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;"><strong>The killer
combination<o:p></o:p></strong></span></div>
<strong>
</strong><span style="font-family: "Arial",sans-serif;">If the financial
and mental capital allocated to a position is too high, then we have a deadly
combination. This is kind of an extreme situation can make you act irrationally
and in the end be injurious to both your financial and mental health, if the
position turns against you. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">I have realized
over time, unlike financial capital which can compound, mental capital is
limited and does not increase much beyond a limit. <span style="mso-spacerun: yes;"> </span>It is important to use it smartly both for
your financial and mental health and finally for your quality of life.<o:p></o:p></span></div>
<span style="font-family: "Arial",sans-serif;">A certain level
of mental capital has to be invested when investing directly in stocks (instead
of an index or mutual fund), but in some cases the level can go much beyond the
amount of financial capital allocated to it. In such cases, I have usually
found that selling down or completely exiting the position has freed up my mind
to look for new ideas and devote more time to other stocks in the portfolio. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "Arial",sans-serif;">The tail
(portfolio) should never wag the dog (your life).</span></div>
----------------
<br />
Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com3tag:blogger.com,1999:blog-7004453.post-11513066639489950782017-01-20T21:14:00.001+05:302017-01-20T21:17:00.453+05:30On outperformance<span style="font-family: "arial" , sans-serif;">Some excerpts
from my annual review to subscribers. Hope you will find it useful <o:p></o:p></span><br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;"></span></b><br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Sources of outperformance<o:p></o:p></span></b><br />
<span style="font-family: "arial" , sans-serif;">Superior
performance versus the indices can usually be broken down into three buckets<o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;"></span></span><br />
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">a.<span style="font-family: "times new roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">Informational
edge – An investor can outperform the market by having access to superior
information such ground level data, ongoing inputs from management etc.<o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">b.<span style="font-family: "times new roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">Analytical
edge – This edge comes from having the same information, but analyzing it in a
superior fashion via multiple mental models<o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">c.<span style="font-family: "times new roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">Behavioral
edge – This edge comes from being rational and long term oriented.<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif;">I personally
think our edge can come mainly from the behavioral and analytical factors. The Indian
markets had some level of informational edge, but this edge is slowly reducing
with wider availability of information and increasing levels of transparency.<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif;">We aim to have
an analytical edge by digging deeper and thinking more thoroughly about each
idea. However in the end, it also depends on my own IQ levels and mental
wiring, which is unlikely to change despite my efforts.<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif;">The final edge
– behavioral is the most sustainable and at the same the toughest one to
maintain. This involves being rational about our decisions and maintaining a
long term orientation. If you look at the annual turnover of mutual funds and
other investors, most of them are short term oriented with a time horizon of
less than one year. In such a world of short term incentives, an ability to be
patient and have a long term view can be a source of advantage.<o:p></o:p></span><br />
<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">How does patience help?<o:p></o:p></span></b><br />
<span style="font-family: "arial" , sans-serif;">Take a look at
the 5 years history one of our oldest positions – Cera sanitaryware.<o:p></o:p></span><br />
<br />
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<a href="https://3.bp.blogspot.com/-lz4N82EDo7Y/WIIvOr9oMjI/AAAAAAAAB7c/ZKz_PzuaswMm4zshWewYCcq_SwpcGgREwCLcB/s1600/Untitled1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://3.bp.blogspot.com/-lz4N82EDo7Y/WIIvOr9oMjI/AAAAAAAAB7c/ZKz_PzuaswMm4zshWewYCcq_SwpcGgREwCLcB/s1600/Untitled1.png" /></a></div>
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</v:shape><![endif]--><!--[if !vml]--><!--[endif]--><span style="font-family: "arial" , sans-serif;">The company
has performed quite well in terms of profits in the last 5 years and grew its
net profit by 30% in FY 15 and 23% in FY16. Compare this with the stock price –
The stock dropped from a peak of around 2500 in early 2015 to a low of 1500 in
the span of one year, even though sales and profit continued to grow at a
healthy pace.<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif;">These swings
are usually due to short term momentum traders who want to move from company to
company to catch the incremental 10%. I am glad that we have such investors in
the stock market as it gives us an opportunity to buy from time to time when
the price drops below our estimate of fair value. <o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif;">We will
continue to get such kind of opportunities in the future. The key is to be patient
and act when an opportunity is presented.<o:p></o:p></span><br />
<br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Skin in the game<o:p></o:p></span></b><br />
<span style="font-family: "arial" , sans-serif;">It is not easy
to remain focused on the long term. In my case, I do not feel any pressure to
negate this advantage and let me share why.<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif;">The reason for
holding onto this approach is that this is something which has worked for me
over 20 years and for others over a much longer period. If one can identify good
quality companies at a reasonable price, then the returns over the long term
will track the performance of the business (more on it later in the note). The
value approach works <u>over time</u>, even if it does not work <u>all the time</u><o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif;">In addition to
the above, my own net worth and that of my close friends and family is invested
in the same fashion. I will not take the risk of blowing up to show short term
results. Nothing focuses your mind, when your own net worth and that of friends
and family is invested in the same fashion.<o:p></o:p></span><br />
<br />
<span style="font-family: "arial" , sans-serif;">Let’s try to
understand the math behind my expectations of the long term returns. This is a
repeat for some of you, but is worth reading again.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<b><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";">The math behind the returns</span></b><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";">At the time of starting the model portfolio, I stated 3-5%
outperformance as a goal and this translated to around 18-21% returns over time.
How did I come up with this number and more importantly does it still hold true?</span><br />
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";"></span><br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";">Let’s look at the math and the logic behind it. The
outperformance goal ties very closely with my portfolio approach and
construction. We typically have around 15-18 stocks in the portfolio, bought at
60-70% discount to intrinsic value on average. Most of the companies we hold
have an ROE of around 20-25% and are growing around 18-20% annually. These numbers
may vary, but on average they will cluster around the above figures over time.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";"></span><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";">Let’s explore a specific example based on these numbers.
Let’s say a company valued at 100, growing at around 20% is purchased for 70.
Let’s assume I am right in my analysis and the stock converges to fair value in
year 3. If this happy situation comes to pass, the stock will deliver around
34% per annum return. <o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";">Now in year 3, we could sell the stock and buy a new one
again and make similar returns. This may occur from time to time in individual
cases, but is not feasible at the portfolio level unless the market is in the dumps
and stocks are selling at cheap prices. It is unlikely that our positions would
be in a bull market and selling at full price, when other stocks are available
at a discount. </span><br />
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";"></span><br />
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";"></span><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";">In such a case, <span style="mso-spacerun: yes;"> </span>if
the quality of the company is high and we continue to hold on to it, it will
deliver a return of around 20% per annum in the future (assuming the stock
continues to sell at fair value going forward). If you add 2 % dividend to this
20% annual increase in fair value, the stock could deliver around 22% for the
foreseeable future.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 8pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<b><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";">The portfolio view</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";"><br />
</span></b><span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";">The math, explained for a single stock, works at the
portfolio level quite well. As per my rough estimates, the model portfolio has
grown at around 22% per annum in intrinsic value. It was selling at around 27%
of intrinsic value when we started and is at a 20% discount now. You have to
keep in mind that there are just estimates on my part and I cannot provide any
mathematical proof for it. However I have found that these two variables have
worked quite well in understanding the performance of the portfolio over the
long run – discount to intrinsic value and growth of the value itself.<o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif; mso-fareast-font-family: "Times New Roman";">As the intrinsic value has grown over years and the gap
closed, we have enjoyed a tailwind and hence the returns have been a bit higher
than that of the intrinsic value. The returns are often lumpy as can be seen
from the performance. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "arial" , sans-serif;">Where will these returns take us?<o:p></o:p></span></b></div>
<span style="font-family: "arial" , sans-serif;">If you talk to
some investors, they would scoff at 20% returns. Let look at this table for a
moment<o:p></o:p></span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://4.bp.blogspot.com/-7Y_hRVrRbv0/WIIvhqRf8EI/AAAAAAAAB7g/XRWLxQuiyw0I3E2LmAQTlOS1KspCqr-DQCLcB/s1600/Untitled2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://4.bp.blogspot.com/-7Y_hRVrRbv0/WIIvhqRf8EI/AAAAAAAAB7g/XRWLxQuiyw0I3E2LmAQTlOS1KspCqr-DQCLcB/s1600/Untitled2.png" /></a></div>
<!--[endif]--><span style="font-family: "arial" , sans-serif;">I am sure a lot
of you have seen the above table. It shows how much 1 lac will become if you
allow it to compound at a certain rate of return for 10, 20 and 30 years.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">There is
something different in the table, from what you would have normally seen. The rate
of return numbers seem to be random – 7%, 13% etc., but they are not. Let’s
look at what they signify<o:p></o:p></span></div>
<span style="font-family: "arial" , sans-serif;">7 % - This is
normally the rate of return one would get from a fixed deposit in the bank<o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif;">13% - This is
the average rate of return from real estate over long periods of time. I would
get eye rolls when I quoted this number in the past. The recent and ongoing
experience is changing that now.<o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif;">16% - this is
roughly the kind of return you can get from the stock market index over long
periods of time<o:p></o:p></span><br />
<span style="font-family: "arial" , sans-serif;">20% - This the
level of returns we <b style="mso-bidi-font-weight: normal;"><u>‘hope’</u></b> to
achieve in the long run (3+ years or more)</span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">There are a few
key implications of the above table<o:p></o:p></span></div>
<span style="font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">-<span style="font-family: "times new roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">A
small edge over average returns adds up to a lot over time</span><br />
<span style="font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">-<span style="font-family: "times new roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span style="font-family: "arial" , sans-serif;">The
key to creating wealth in the long run is not just super high returns, but to
sustain above average returns over a long period of time. It is of no help if
you compound at 30% for 20 years and then lose 80% of your capital in the 21<span style="font-size: small;"><sup>st</sup>
year. The key is to manage the risk too. <o:p></o:p></span></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 8pt;">
<span style="font-family: "arial" , sans-serif;">If we achieve
our stated goal over the long term, the end result will be quite good. There
are two risks to this happy end – avoid blowing up (which I am focused on) and
early retirement (mine), which you have to hope does not happen either
involuntarily (I get hit by a bus) or voluntarily (I head off to the beach).</span></div>
----------------
<br />
<span style="color: blue; font-family: "arial" , "helvetica" , sans-serif;">Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog. </span>Rohit Chauhanhttp://www.blogger.com/profile/00356455735241398199noreply@blogger.com4