Welcome 2015!

After what seems to be a fabulous year for the stock markets in the hope of ‘acche din’, we seem to be headed for a confusing year in 2015. More on that later.

Massive year for the stock markets. I am yet to come across any person in my circle of investors who have not made atleast a 100%+ gain on their portfolio. The extreme I have heard is a 600%+ gain. Multiple nuances to these claims obviously. Suffice it to say that all the hard work on investing in 2011, 2012 and 2013 paid off in 2014 in my personal portfolio too with 300%+ gain (and obviously, the CAGR will automatically get bumped up). Let’s see how it goes from here.

More than the monetary gains, which are no doubt important, I have made some highly knowledgeable, highly networked and yet very humble friends in the bargain and I immensely thank God for this blessing. Markets and studying about Markets have taught me way more than I could ever imagine – useful stuff not just for Markets but in personal and corporate life. The role of luck is hugely understated in every success is one of my most important learning. Stellar stuff in finance, behavior, management, logic, probability, luck, black swans – I mean, the range of thought processes that I was exposed to, thanks to friends, well-wishers and various social networks, has made life that much more richer (and more unsure of?). They say that Ignorance has the highest courage and the more you know about something, the more you realize you know less about that something. I guess that’s true across all aspects of life, including markets. And also perhaps the reason why older folks are more circumspect than the young folks about any decision they make/take.

Since multiple blogs have been talking about successes, I want to go a bit contrarian. What I want to do in this post is not to talk about successes, which obviously involve luck too, but talk about failures. Failures in thought processes than any price action per se (as it was very difficult to lose money in the 2014 bull market even with a faulty thought process).

As the Prof says, there are two types of mistakes – mistakes of omission and mistakes of commission. I committed both types of mistakes in this year. My selfish effort in documenting these mistakes on the blog is to publicly put pressure on myself to minimize these mistakes to re-occur again (and a bear market is very unforgiving).

Mistake of Omission: This is a easier form of mistake, as opportunity cost doesn’t get reflected in numbers or CAGRs. But opportunity cost is a cost and it needs to be accounted for. So, in this year, I missed two stocks – Symphony and Eicher Motors.

Of course, it’s easier to say that in Bull markets all stocks go up, so what if you missed a couple of them? The point is, there was a flaw in the thought process which led me to not invest in any of the two.

Symphony – It’s a little strange as to how much time I spent studying this stock, business, management, listening to their concalls, doing localized scuttlebutt etc. The price was around Rs.325. My logic of not buying this stock hinged on two reasons –

a) Historically, the management of Symphony was known to give very aggressive targets that they were not able to fulfill. Classic case of overpromising and under-delivering.

b) The Sales growth year on year (unless you took the low of 2009 and calculated CAGR) was not encouraging at all. In all stocks I invest, I try to check the historical sales growth and see if the management had the capability to ramp up sales and if there was a temporary industry/global issue. Symphony sales growth was left wanting. \

And then, the Prof also wrote a great blogpost on Symphony and its business. Q2FY14 results came in very well. I bought a token position of 1% at around Rs.370 post Q2 results. However, I was not convinced that Symphony was a stock I wanted to invest (I am usually a concentrated investor, with no more than 7-9 bets). Inspite of all these good indicators, I sold out the stock at Rs.450 and moved on to something else.

You may call it price anchoring. You may call it wrong judgment of business. Or maybe – and this might be my learning –  I underestimated the market’s power of re-rating a stock with an asset-light model, good dividends and a demonstrated quarter-on-quarter sales growth for two consecutive quarters. I really should have bought a chunk post Q2FY14 results. But I didn’t.

Of course, I never expected the stock to go from a 20 PE to a 60 PE to the current price of Rs.2000. But, at a bare minimum, I missed a 3-4 bagger from Rs.370 levels in a easy to understand asset-light business with high dividend payouts coming up the curve on sales growth.

Similar mistake of omission occurred on Eicher Motors. Saw it at Rs.1000. Never expected the RE division to contribute so heavily. Was always thinking that CV division is the one that will turn around Eicher. Totally under-estimated Siddharth Lal’s vision, inspite of seeing a rapid increase in Royal Enfield’s on the roads. The learning – Reading all those Peter Lynch’s books over and over again came to nought. Absolute zero understanding and implementation of Lynch’s statements and thereby losing out on a massive gain (my view has always been, if you can’t implement even such simple things, why read at all?). Of course, never expected this to go to 85 PE. Even at 40PE, I missed a 4-8 bagger from Rs.1000-2000 levels. At current levels, the margin of safety seems quite less, although every analyst and his friends think this is a Rs. 1 lakh stock price business as the CV business is also turning around. If it does go to Rs.1L, I’ll probably write another mistake of a mistake, a meta-mistake blogpost 🙂

Mistake of Commission: A more grave mistake, and probably a bear market would have destroyed my CAGR. I got out unscathed, with some decent returns, but the thought process was pretty sub-standard.

So, I bought this auto-component stock owned by a private equity player as I thought it was highly undervalued at Rs.110 bucks and kept buying till Rs. 120. Nothing wrong with that. But greed overtook me. What I did, since I didn’t have any surplus cash, I sold out most of a artificial leather company, a cpvc company and a three-wheeler company for buying this stock. The thought process was – I will sell these three -> invest in the auto-component story as I saw private equity triggers coming through -> once it becomes fairly valued, I will sell that –> get back into these stories yet again.

The reason why I called such a thought process pedestrian is because I was betting on a series of probabilities rather than a decision or two. I was selling three very good compounding stories, which had given me stellar returns to buy a stock which was only undervalued but not really as great as those three stories with a hope of getting back into those three stories. I was basically trying to time the market, as I thought those three stories were fairly/over valued and this one was undervalued. I got out once I realized the gravity of this mistake (and thanks to the bull market, sold out at Rs.160 in about 2-3 months I think).

The learning, really was, and I keep repeating this to myself over and over – is to never sell a longer term story for a shorter term story. Sell a longer term story for another longer term story. Once in a while, like in 2014, you escape unscathed (with decent returns for a bad process). But in a bear market, such mistakes are going to cost me a lot.

Anyway, those were my mistakes. I may have committed more, but I have probably not yet realized them 🙂

Back to the initial statement about confusing state of affairs in 2015. The markets seem fairly to over valued depending on who you ask. Nobody in the market is saying that markets are undervalued at this point in time. There are a lot of discussions (maybe more than necessary), across all channels of communication, about raising cash to prepare for a crash.

This blogpost should hopefully clarify matters – http://calculatedwagers.blogspot.com/2015/01/when-to-sell-and-when-not-to.html

But my personal view on cash is this – Given that Nifty is not over-valued by traditional means (TTM PE < 24-25 PE) and given most stocks in my portfolio are fairly to slightly over-valued, there is no hurry to get into cash. Cash gets built over time. Of course, there might be minor crashes (10-15%), but that’s the nature of equity markets and you probably shouldn’t be in the markets if you are not ready for such corrections. My view is either be in 0% cash (and expect these minor corrections, and if the businesses you have bought are good, there is only going to be a temporary loss) or be in 30-40-50% cash (which is really like preparing for a crash). Having a 10% cash for example, is only satisfiying the psychological urge to assume you are in control than help you in any sort of corrections. Past corrections in this bull market have led me to believe that quality is not going to correct much – so a 10% cash may not really help in minor corrections. In major corrections, everything’s going to fall and a 10% is no respite.

Disclosure: I am not a financial analyst nor a research analyst. All posts on this blog are only for my documentation and educational purposes. Please contact your financial adviser before taking any decisions.

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  1. #1 by aussie on January 15, 2015 - 11:19 PM

    So what are your new ideas ??
    IGSEC is up 6 times .. Luckily you got it at 1100 in PCA…
    Suggest one 10 bagger please
    Regards

  2. #2 by Madhu on January 16, 2015 - 1:26 PM

    Bravo, Kiran, for coming out in the open and acknowledging your mistakes! Such posts help the readers, not only you.

    Keep writing.

  3. #3 by shankaryes on January 16, 2015 - 3:31 PM

    Excellent post Kiran, A journal of mistakes would be a great way to start the year !!, after all there are many who will write how i bought Prestige as my wife cooks with it especially after the stock moves 10x !!

    All the best for a great year ahead.

  4. #4 by Kiran on January 16, 2015 - 9:19 PM

    @aussie – ISGEC was not in PCA. In this bull market, difficult to find ideas. A 10 bagger needs to be in relation with the timeframe. Unfortunately, I have no quick 10 baggers.

    @madhu – Thanks Madhu. Hope it helps.

    @shankar – Thanks man 🙂 I thought I should just put public pressure on myself by acknowledging mistakes..so that I minimize them in future 🙂 And that Prestige anecdote…man, how true is that!!

  5. #5 by a18ps on January 17, 2015 - 9:40 AM

    Hi Kiran:

    Very honest post. I am sure this public confession will help you going forward.

    Going through this post, I thought it is important to learn from things which went right as well. Can you please share some examples where you avoided the company and it turned out to be a good decision. Idea is to know about the thought process just like what you did for Symphony.

    I know this raging bull market most probably must have delayed/kept in abeyance the “judgement day”; however, any idea where you strongly feel things will not turn out to be so well as they are currently.

  6. #6 by sanjeev jain on January 19, 2015 - 12:12 AM

    dear kiran on your advice i bought 100 shares of polymed and have doubled my money in it .kindly advice if it can be kept for further gains or should be sold .regards sanjeev

  7. #7 by kdaaku on January 19, 2015 - 7:05 PM

    @a18ps – Thanks. There were a lot of stocks which were a pass either because I didn’t trust the management or didn’t understand enough of the business and industry dynamics. My problem arises when I miss some stocks when both these variables are in place 🙂 Too many to mention actually.

    @sanjeev – No clue Sanjeev. I am, unfortunately not an investment advisor nor a research analyst. So, I will have to pass this one.

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