Crude Oil Shock - Again and Yet Again.

I have been 'off' from blogging for a long long time but that doesn't mean I have been away from trying to understand the stock markets. While browsing through my unpublished and incomplete posts, I realized that one of the articles was about how in 2015, the crash was inexplicable and that every sector was impacted. It was an event I had never seen in the years of trading (till then).

The last 2 odd months, Covid-19 has created a round of panic selling and immediately followed by frenzied buying. What I saw in these last 2 months trumps my previous inference. I saw Dow Jones hit 7% circuit breaker not once or twice but 3 times. That's a first for me in 20 years of trading. Crude slumped to hit multi-decade lows. Again a first. Job losses across industry sectors never seen after the Great Depression of 1929, another first. A Phoenix-like rise of the markets never seen before and today, WTI Crude Contract hitting a low of -$37.63. How does crude oil contract go negative?

The answer from various sources is that there's no storage available for the crude oil. Why no storage? Because of Covid-19, demand has been less and the oil production (though lower than usual) has not stopped. So all the oil being produced needs to be stored somewhere and there's no space to store.

So will the stock markets crash during the day on Apr 21, 2020? Dow Jones Index @ 1517 Hrs on Apr 20, 2020 doesn't show any signs of a crash.

Its a wait and watch.

When To Buy and When Not To Sell - Part 2

In the first part of this series, I had shared some 'life experiences' of friends and family who have attempted 'success on the stock markets'. I'll re-use these experiences to share the Do's and Don'ts I have learnt, practiced and continue to improve on.

Here are some of my general views about the markets:

Don't follow opinions of analysts on business news channels.
- If they were so good, they would not be on TV. They would have been making money themselves.
- Most of them do not bet their money on the stocks they advise.
- Good news about stocks you have bought only confirms your bias about your stock. Bad news about the same stock does not help you make a decision to sell.
- Business newspapers will always have more BUY recommendations that SELL or HOLD. The reasons are:

• Get you to enter the trade; once you have bought, then only SELL or HOLD recommendations become applicable

• There are higher chances that you don't own the stock. If you already owned the stock, then a BUY recommendation confirms your bias about your stock pick

- BUY, STRONG BUY, ACCUMULATE are irrelevant in the context of buying a stock.
- Similarly, SELL, STRONG SELL, REDUCE is equally irrelevant when selling a stock.

- Most irrelevant is NEUTRAL, HOLD. Does it mean our educated analysts do not know what to do?

Indian Stock Markets Rally Post RBI Rate Cut

A few days ago, I had blogged about how 'Global Stock Markets' skid on the news of falling crude prices (pre-dominant and most quoted reason), Euro-Dollar parity, and multiple other reasons which were beyond the grasp of the common man.

Today, the Indian Stock markets had their best rally in the last 68 months. So what has changed in the world since I last blogged. Crude price is down another $5, Euro-Dollar parity has worsened, Greece has not exited the Eurozone. In the last few days, the stock markets in US and Europe have been up and down and all over the place.

Today's rally was triggered by a 0.25% reduction in the repo rate (to 7.75%). Does this small reduction in a rate prescribed by RBI's mighty governor have such a mammoth impact? Before I share my views about the event, let's understand "Repo Rate".

Repo Rate is the rate at which the RBI lends money to commercial banks. Similarly, "Reverse Repo Rate" is the rate at which RBI borrows money from commercial banks. These rates act as benchmarks for the borrowing and lending rates in the markets.

Banks use deposits through 'Current Accounts - Savings Accounts' (CASA deposits) from their customers and lend at a higher rate to other customers. The difference between the rate on the deposits and the rate on loans is called the spread or margin.

Here's why this reduction is not important in the short term.
- First, any reduction in repo rate does not percolate through the banking system to consumers immediately. It takes close to two quarters.
- Secondly, banks are quicker to up interest rates than bring down rates.
- Next, when repo rates go down and if the lending rates have to go down, then rates on deposits will also go down. Banks will not compromise on  the margins they make.

If costs of homes, cars, etc. are not coming down, does reduction in interest rates on loans 'excite' the customer to take a loan?

If companies are not running at 100% utilization of their factories, etc. as the demand for their goods is not picking up, will they take new loans to build newer capacities?

Interest movement does have an impact on a country's GDP, inflation, etc. but it cannot single handedly drive the change in a direction which the Finance Minister wants. This interest rate reduction is more of  the 'political' pressure exerted on the RBI governor.

Good Economics is Rarely Good Politics. But Bad Politics is Surely Bad Economics.

Summary - wait for a correction to buy stocks. In the interim, analyse which business / company you want to bet on for the future.

Stock Markets Skid on Global Turm-(Oil)

I couldn't resist writing on the chaos in the stock markets the world over.  In 2008, crude oil was $145 per barrel and today its close to $50 per barrel.

In the last 2 days, stock markets have fallen anywhere between 3-5%. The new year has not taken off well!! Not a single industry / company, related or unrelated to crude oil, has survived the bloodbath on the stock markets. E.g. I don't see a direct correlation between stock prices of IT companies vis-a-vis price of a barrel of crude oil!

So at what price of crude oil will global stock markets focus on nothing but the fundamentals of a company and its future growth prospects. The answer - no price is the right price.

In a market mayhem, the mantra is 'Becho Phir Socho' (Sell First and Then Think). In the last few days, I have tried to make sense of why falling crude oil prices are creating so much havoc. Some of these commenatries are as follows (my comments in italics):
- OPEC countries have not reduced supply and global demand has fallen. I don't know if demand of a growing population (across the world) in the cold winter months could actually trigger such a massive fall in demand. I am also not sure if increased use of renewable sources of energy is creating the decrease in demand for oil

- Euro v/s Dollar parity is at a multi-year low. Since the dollar has been the world's global currency, why should its dominance become a problem overnight!!

- Greece will exit the Eurozone. This small country had people panicking 2 years ago too. GDP of Greece represents 0.39% of the World Economy. Can a country cause US stock markets to tank 3%! Wow.

- The 100 day moving average has been broken and hence the trend is bearish. Though I am not an expert in technical anaylsis of stock price movement, but if the markets turnaround in the next one week and if we use say a 120 day moving average, will the trend become bullish?

I can go on and on but none of the commentaries makes sense to me. My years (not comparable to  the experience of market experts) in the stock markets has taught me one thing - any Tom, Dick and Harry on a business channel can explain just about anything of why a stock / index moved in a given direction post-facto and sound convincing. They talk with intelligent sounding stuff which the common man tends to accept as the truth. Even I sound intelligent at times. :-)

Conclusion: None of the experts on business channels place their money on their views. They even tell you that they have no personal investments in their recommendation. Take their views with a pinch of salt. Decide for yourself, place your bets, be disciplined in your entry and exit criteria for a stock. "Socho Phir Karo" (Think Before You Do).

Risks and the Stock Markets - Part 7 of 7

As I come to the end of this series, my last food for thought – If one can survive with the risk of driving a car, one can very well survive the stock markets.

• Investing in the stock market / stock is very much like buying a car
o Identify your budget
o Do your research before you buy the stock
o Compare it with its peers
o Read reviews of the stock
o Look at historic performance of the stock
o Set your return targets of the stock and time period

• Investing in the stock market / stock is very much like driving your car
o Know your limits of the return on investment from your stock
o Don’t be ‘hands-off’ your portfolio
o One will not get good portfolio managers (just like you’ll not get good drivers)
o Be wary of what others are doing in the market not necessarily follow the herd
o Be cautious of the big vehicles (FIIs) who are also invested in your stock
o Maintain the course and speed; overspeeding (taking too many risks) is sign of desperation
o Bigger the car, higher is the confidence while driving (not applicable to auto drivers)

• Investing in the stock market / stock is very much like maintaining your car
o Review your stock’s performance regularly
o Check your portfolio with a financial advisor (not necessarily me :-)!)
o Sell your stock (just the way you would sell your car) when it reaches its end of fair value

Global Events, Global Markets, Global Euphoria!!

Last time I wrote the below article (barely a month ago!!), it looked like the financial markets were preparing for the worst melt-down in the Financial Markets.

As on Friday, stock markets have given fantastic returns over the 3 week period since September 22, 2011.

Brazil and Indian stock markets have returned 7.2% and 5.2% respectively in the last one week alone.

As in my previous article, even today no one has the ‘probable solution’. So why the elation in asset classes?
Case in point is though EU has cleared a Euro 400 Billion Fund, the total debt in the EU is 6,500 Billion. The EFSF is 6.15% of the total debt of the EU.

The important point to note is that stock markets have very short term memory. No news lasts forever. So don’t try to time to ‘bottom fish’ for good stocks.

Risks and the Stock Markets - Part 6 of 7

Here are the strategies for the various options you identify yourself with:
• Max profit of Rs. 10/- and max loss of Rs. 10/-
o Invest in an index linked mutual fund or an index ETF which gives you 10% returns and inflation reduces your value by 10%
o Net effect money’s value has neither increased nor reduced
o Disadvantage – you’ll never be able to keep pace with the loss in value of money

• Max profit of Rs. 20/- and max loss of Rs. 10/-
o Equity mutual funds (over 3 – 5 year periods) will give a return of 20% pa and inflation will reduce your money value by 10% pa
o This is a FAR BETTER option than PPF, FDs and endowment or money back insurance policies

• Max profit of Rs. 50/- and max loss of Rs. 50/-
o Large market cap stocks which are less impacted by macro and micro economic factors (E.g. FMCG stocks like ITC, HUL – we’ll not stop using toothpaste even if the dollar crashes, petrol becomes unaffordable )
o One needs to have some investment in these companies

• Max profit of Rs. 100/- and max loss of Rs. 100/-
o Penny stock, small market cap stocks (they rise, crash and most of the times vanish!!)
o Don’t get into these stocks
o People with very HIGH risk appetite should try

• Max profit of Rs. 200/- and max loss of Rs. 100/-
o Multi baggers like Hero Honda, Infosys and AirTel [I bought AirTel in 2002 @ Rs. 16, today the price is Rs. 744/- (price adjusted for stock split)]
o Current market provides many a opportunities of companies which will be “Blue Chip’ firms of tomorrow.

The next important rule is to split your Rs. 100 / Rs. 1,00,000/- in a mix and match of the above options. This is called portfolio diversification.

All options linked to the market should be looked as investments for atleast a 3+ year horizon.

Risks and the Stock Markets - Part 5 of 7

Continuing from my previous part of  the current series.

Now, if one invested Rs. 1,00,000/- and there was an opportunity to generate a profit or loss scenario as below, which one would you chose:
o Option A - Max profit of Rs. 10,000/- and max loss of Rs. 10,000/-
o Option B - Max profit of Rs. 20,000/- and max loss of Rs. 10,000/-
o Option C - Max profit of Rs. 50,000/- and max loss of Rs. 50,000/-
o Option D - Max profit of Rs. 1,00,000/- and max loss of Rs. 1,00,000/-
o Option E - Max profit of Rs. 2,00,000/- and max loss of Rs. 1,00,000/-

How many of you would change your choices compared to the previous illustration?

The question to all who changed their choices – the percentage gain or percentage loss was the same in both the illustrations, then why have different choices?

The reason for the change in choice is called ‘behavioral accounting’. For most of us, Rs. 100/- is an amount we are fine to run a risk of 100% loss. If one can get over this problem of mental accounting and based on your risk profile, you CAN INVEST in options linked to the stock market.

Risks and the Stock Markets - Part 4 of 7

Over the last 3 parts, I have touched upon the following:
• Perception of ‘Risk’ as the measure of ‘gain’
• Money can never be completely safe – its ‘purchasing power’ diminishes
• Zero ‘Risk’ is Zero ‘Gain’
• Governments don’t have the mandate to keep your money ‘safe’ and keep it ‘growing’
• Saving is not investing

Let’s now identify the degree of risk aversion one is comfortable with:
If one had Rs. 100/- and there was an opportunity to generate a profit or loss scenario as below, which one would you chose:
o Option A - Max profit of Rs. 10/- and max loss of Rs. 10/-
o Option B - Max profit of Rs. 20/- and max loss of Rs. 10/-
o Option C - Max profit of Rs. 50/- and max loss of Rs. 50/-
o Option D - Max profit of Rs. 100/- and max loss of Rs. 100/-
o Option E - Max profit of Rs. 200/- and max loss of Rs. 100/-

In the above illustration, inflation is considered as money value destroyer. Hence, profit and loss scenario can occur at the same time.

Global Events, Global Markets, Global Turmoil

Events like The World Wars, Great Depression, Lehmann Crisis, get etched in our minds by the sheer uniqueness or the magnitude of their occurrence.

Also, by virtue of the huge advances made in technology over the years, information (rumours, lies and truths) get disseminated ever so quickly.

Fortunately or unfortunately, in this ever increasingly connected world, making decisions for our investments becomes much more harder.

Today, among many other events, the global markets crashed. Over the last few months, every government, central banks, financial markets, commodity markets are clueless about the real problem, a probable solution, effectiveness of the solution and time period within which the solution will take effect.

Some countries are fighting high inflation, others are focusing on improving growth of their economies, some others fixing their debt crisis and a few are recovering from natural calamities . Since, all countries are not facing similar issues (pretty much expected at any given time), ‘One Size Fits All’ solution does not work.

Surprisingly, despite the varied issues countries are facing today, at the time of writing, stock markets across the world have fallen anywhere between 2% and 6%. Currencies have fallen between 2% to 7% against the dollar. Crude oil has fallen 3% to 5%, gold has fallen by 4%, silver by 10% ALL IN A SINGLE DAY.

Few of the key reasons for the current chaos (and at all other times :-)) and the root for the ‘negative perception of risk’

• Fear

• ‘Following the Herd’

• Greed

• Knowledge is power, ignorance is bliss – little of both is a recipe for disaster

If we can control the above reasons and ‘react’ better with our behaviour, global events will become less unique and smaller in magnitude.

Risks and the Stock Markets - Part 3 of 7

In the last part, my closing view was that money under our pillows / beds / piggy banks were the safest places :-).

Arguments I have received in response to the above are:

• Money under pillows (and other options) is not ‘investing’ as money does not grow and it still has the risk of being robbed.

• Money in a bank (savings, FD, et. al) is ‘invested’ as money does grow and the risk of the bank going bust is minimal.

We all know that ‘risk-reward ratio’ implies a higher risk is an opportunity for higher gain (and also loss :-)).

And hence, the rationale for the views from people is driven by:

• One would rather keep the money in a bank than under a pillow as the ‘risk’ (the chance of loss to burglars, IT Department) for the latter is higher.

• Banks rarely go bust

• Keep your risks as low as possible as long as the principal is safe

Here’s a fact – there have been atleast 6 banks in the last decade which have been forced by RBI to be merged or acquired by larger Indian banks as the banks went bust or were on the verge of it (E.g. Global Trust Bank was force merged into Oriental Bank of Commerce).

Indians, by virtue of our social training, have a ‘saving’ mentality and are focused on preservation of capital even at the expense of being in a low return (low risk) investment. Unfortunately, rarely do we realize that other important macro-economic factors (inflation, government administered interest rates, etc.) are reducing the purchasing power of our savings.

The incentive for investing is not the safety of the capital (though people do not realize this fact). The BIGGEST DRIVER for people to ‘invest’ money under pillows, FDs, PPFs, NSCs, (all the safe investments) is because the fluctuations of expected return is the least in all these forms. In any or all these investment forms, we know the final return for the tenure the capital is invested. This is not true for any investment form linked to the stock market.

If an FD gives you a 10% pa return on your capital, and if a stock can give you 3% return in a quarter (approx. 12% pa) then given a choice, where will you invest your money?

Food for Thought: If we know what return we want / are expecting from an investment class / form for a given tenure, then why not use the same tenet in the stock market.

Risks and the Stock Markets - Part 2 of 7

I’ll like to keep emphasizing through these series that one needs to look at ‘risk’ as the measure of gain / opportunity.

We all by training are conditioned to risk in almost everything we do which also includes our views about investing.

To invest (especially money) by definition is always about a profitable return. If you notice, ‘investing’ has no risk!!

Essentially, the problem lies not with investing but with the latter part of the definition, ‘profitable return’. This brings the concept of the risk-reward ratio.

From childhood, we are trained to save. The simplest form of saving was not to spend the money but to keep it aside in a ‘piggy bank’. Our parents saved in a slightly organized manner – they saved in PPFs, FDs, Savings Accounts, NSCs, etc. Fortunately, all these gave very ‘profitable returns’ and since most or all these instruments were backed by the government, there were ‘safe’.

But in our childhood did we realize that the money in our ‘piggy banks’ grew only if we saved more? By saving we only postponed our impulse to spend.

If I told you that the ‘Deposit Insurance & Credit Guarantee Corporation’ (a wholly owned subsidiary of RBI set-up in 1962) guarantees ONLY Rs. 1 lac regardless of the number of accounts (or type of accounts) held by a person in same capacity and the same right.

Essentially, if you held a savings account and / or current account and / or fixed deposit with one / more branches of the same bank, AND if the bank went bust, the MAXIMUM amount RBI will compensate will be Rs. 1 lac or the sum total of your money in all accounts whichever is LESSER.

With the above new input, is money in the Bank really safe? Is the return risk-free? Shouldn’t we just keep money under our pillows / beds (like the big politicians do) or just keep it in a PIGGY BANK!!

References –

www.dicgc.org.in

www.dictionary.com

Risks and the Stock Markets - Part 1 of 7

My next multi-part series deals with ‘Risks and the Stock Markets – Part 1 of 5’ (not sure how many parts it will be :-)).

Every now and then I get a new prospect for my portfolio management services (through a reference) and the varied responses I get to my question ‘Why do you want to invest in stock market and it’s varied derived forms?’ are:

• I have burnt my money; want to recover some of it

• Get better returns than a fixed deposit / recurring deposit / savings deposit

• I have no other place to invest

• Other people have made money

• Am not sure what to buy

• No time to track what I have bought

One of the most important aspects of investing which people disregard is the concept of risk and the associated perception of risk.

Risk by definition is the ‘exposure to chance of injury or loss’. Humans attach various perspectives to risk and decide the quantum of risk one is willing to undertake. Unfortunately, the definition of risk also has a bias – it tends to be negative in thought.

When I was working with TCS and had to travel quite often by flight, my father used to be extremely nervous. Reason – if I could reduce the frequency of my flights, I reduce the risk of being hijacked / being in an air crash, etc. Many of you will cite the fact that air travel is the safest mode of transport but still for a parent the perecption of the risk is very different from my perception.

Similary, for every situation, the appetite for risk and the amount of loss which one is willing to suffer varies from our own social upbringing, our sense of security (job, personal, emotional, etc.) and mental accounting of the quantum of loss we are willing to take.

Food for thought – how difficult will it be for you to accept risk as a measure of gain / an opportunity; positive thinking :-)!!