Category: Investing

Let me begin with a simple question:

When you sense danger what is your immediate response?

While you have your answer ready, let us verify from some real life examples..

The immediate response for most of us is to immediately flee from the perceived danger!

But some of us have a slightly different response..

Some decide to confront the threat and take the danger head on instead of fleeing!

So in essence whenever we perceive danger, we have two types of response.

• Confront the threat and deal with it, or
• Get as far away from the threat as quickly as possible

Psychologists call this the “Fight or Flight” response.

It was first described in 1915 by American physiologist Walter Cannon.

Cannon’s insight was that both humans and animals, meet a sudden threat with the same biological response – a state of impulsive nervous excitement which mobilizes the body’s resources and prepares them to either run away or fight.

But hang on. There is one more response to threat that we are all familiar with.

Do you remember the first time you had to give your speech in front of a large audience?

What happened?

Most of us froze!

Most of the school shoot out out survivors also had the same initial response.

“At first, everyone just froze, trying to understand what was happening. It took a little bit for us to realize this was a shooting” – A Virginia Tech school shoot out survivor

In fact, even the legendary Arnold Schwarzenegger has used this “freeze” response when faced with danger!

Thus that adds a third response and our equation becomes :

Response to danger = FREEZE or FLIGHT or FIGHT

Now if you noticed, all the responses to the perceived danger happened lightning fast within a fraction of a second.

This leaves us with an interesting question:

How did people literally in the blink of an eye swing from a casual state to one of outright terror with adrenaline pumped into every muscle of the body?

Is there more to it than what meets the eye. Let us explore further.

A few million years back..

For answering these questions, I will have to take you back by a few million years to our stone age ancestors.

The stone age version of you unfortunately doesn’t have the comfort of Swiggy. So you have no other choice but to go out and hunt for food every day.

As you go out into the forest in search of food, suddenly you hear a mild ruffle of leaves amongst the trees a few hundred meters in front of you.

Your first reaction – You freeze.

You stop moving for the fear of attracting the attention of the unknown predator.

In a few seconds you can hear the sound of something coming towards you. In the next instant, you are running for your life and scrambling up the nearest tree.

As you watch from the top, you heave a sigh of relief. Its a harmless deer.

Welcome to the life of your ancestor – freeze, flight or fight were their day to day survival mechanism.

But hey, it was just a harmless dear. Don’t you think you overreacted. You should have just waited for a few more seconds and then decided.

Here is the problem.

If it had been a tiger instead, the few extra seconds you took to decide on whether to run or not would have meant – a nice lunch for the tiger.

The downside of mistaking a deer to be a tiger, is still minimal (just some energy wasted climbing up the tree) compared to the possibility of losing your life.

In a world filled with too many threats everyday, “React first – Ask questions later” was the modus operandi.

But there was one man who was unsatisfied with these explanations. He needed to know more, on exactly what was happening inside the brain during these moments.

Meet the American neuroscientist Mr Joseph E. LeDoux

In his endeavor, he faced a fundamental problem. Human brain is extremely complicated. So to conduct experiments directly on the brain was extremely risky. So neuroscientists mostly had to wait for people with some new form of brain damage to study the functionality of different parts of the brain. But waiting each and every time for someone with a brain damage was too time consuming.

Impatient Joseph E. LeDoux came up with a proxy to humans – the lab rat!

Now he had another problem – how will he create the emotion of fear inside the brain of the rat?

Thanks to Pavlov’s experiments, he constructed a similar one. Put a rat in a cage, play a tone, and simultaneously deliver a shock to the animal’s feet through the floor of the cage .

After a few rounds of tone and shock, the rat started to fear the tone even if was not accompanied by the shock. The fear reaction was noticeable because the rat suddenly froze in fear.

Now the next logical step was to find out which area of the brain was involved each and every time the tone was played and fear invoked. For this he used a system, which anyone used to repairing their old desktop computers would be familiar with.

He surgically eliminated different parts of the rat’s brain one by one and tested the rat’s reaction (remember these were the days before advanced imaging technology). The logic was that if you remove a region and the rat can still learn to associate the tone with the shock, then the region you’ve removed isn’t relevant to fear response. But if the rat stops learning, you know you’ve got something relevant.

This is when he found something mind boggling.

The earlier understanding was that the sound enters via the rat’s auditory thalamus (think of it as a recorder) and is sent to the auditory cortex (read as the portion of the brain which converts whatever we listen into conscious awareness).

As expected when he removed the rat’s auditory thalamus, the rat could sense no fear as it became deaf and couldn’t hear the tone.

But here comes the shocker.

Next he removed the auditory cortex which meant that technically the rat shouldn’t be able to hear anything as the cortex was the one which actually transforms external sound information into the conscious experience of sound.

But shockingly the rats froze when he played the tone.

If the rats were not consciously aware of the tone, and yet were getting afraid, it meant there was an alternate unknown route. The sound was traveling from the auditory thalamus to a mysterious region in the subconscious mind which could still hear the sound.

What was that mystery region?

In true James bond style, he injected a particular chemical called tracer dye into the rat’s brain and traced out the regions where the audio signals were being sent from the auditory thalamus.

It turned out that the signals were indeed being sent to another region

That mystery region was called the AMYGDALA!

Amygdala is an almond shaped region found at both the left and right hemispheres of the brain. Taken together, these two regions form the “fear headquarters” of the brain.

The amygdala works as a threat surveillance system and is constantly working each and every second of the day, irrespective of whether you are awake or asleep. It monitors all the sensory information around you constantly searching for potential threats.

The amygdala is alert, vigilant, paranoid and has an itchy trigger finger

The moment it detects a threat, it sends the alarm signal, setting off a flight, fight or freeze reaction within milliseconds. Its so quick that the fear reaction is fired up much ahead of when the conscious part of the brain registers the actual threat and tries to interpret it.

Thus we all react emotionally much before we actually have a clue on what is going on.

This is extremely important and let us spend some more time on why this happens..

Actually, each and every time, there is a threat, the experience of danger follows two pathways in the brain:

1. Conscious and rational (referred to as high road)
2. Unconscious and innate (low road)

It might take a few seconds to establish the presence of the threat and formulate a response via the high road, but the low road kicks the body into a freezing response within a fraction of a second.

The low road immediately pushes the body into the flight, fight, freeze response. In fact, it knows the response so well that it is nearly impossible to keep it from happening.

So the key thing to note is that, whenever our amygdala detects a threat, more often than not it overrides the rational thinking brain given its raw speed and instant push to action.

Now as a survival mechanism, in a world filled with too many threats this made perfect sense. But in today’s world which is far more safer, the amygdala might get triggered for the wrong reasons leading us to take unwarranted actions.

Now if you are wondering what does this have to do with investing.

Hold your breath.

Financial losses are processed in the same amygdala!

The amygdala has mistaken the threat from a financial loss to be equivalent to a tiger running at you.

This means much before your conscious brain can really interpret the losses, your amygdala has already set the trigger on – and mostly we take the freeze or flight response.

In an app led investing world, where it just takes less than 30 seconds to sell all your holdings, amygdala is on steroids!

Now you know the answer as to why its extremely difficult to stay sane during a bear market. As your amygdala gets triggered due to successive falls day in and day out, you eventually give in.

So the key takeaway for us is simple:

While our intentions maybe not to panic during a market crash, our brains are designed in such a way that most of us will freeze or sell out during a crash.

The most important thing is not to overestimate the power of our rational brains during these times and to acknowledge that our amygdala will usually override our rational brain.

Now does that mean all is lost.

But wait. There are some people such as army men, bomb diffusers, firemen etc who are trained to make good decisions in extreme high pressure situations.

How do these guys resist the amygdala impulse?

Wait till the next week..

(to be continued)

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You can also check out all my other articles here
Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

The stock market is falling! What do I do?

The answer to this question can never be a precise one.

As we gain experience in the equity markets, the approach to handling market falls will slowly evolve for each one of us.

Now while I don’t claim have a perfect solution, here are few strategies which I believe can help us handle market falls in a much more sane manner.

1.When it comes to decisions, less is more

All of us know that, decision making is extremely tough during a market fall.

While the “What & How” part of the decision making has finally found some audience, unfortunately the equally important issue of when to make decisions is completely ignored.

Given the reach of internet and mobiles, each and every day, every hour, every minute there is always some market related event, news or opinion out there. Add to the mix, that inevitable someone who is hell bent on scaring you with some conveniently handpicked data (sample this).

So, as the market fall continues, most of us get into the trap of constantly evaluating our portfolios and trying to make decisions on an as-and-when basis as new events/news/opinions keep bombarding us.

Each and every time the market falls, the honest truth is that we really have no clue if the fall will continue or the markets will bounce back. There are hundreds of variables determining the short run and it is impossible to predict how each and every one of them will interact together to determine the direction of markets.

So the key is not to look at each and every event/news/opinion as a reminder to take a decision!

In fact, the last thing we want to do, is to go unprepared into a falling market trying to take daily decisions based on the evolving events.

When it comes to decision making, less is more and hence we need to reduce the number of decisions to be taken. Most importantly we need to have a clear pre-decided plan on WHEN to take these decisions.

I personally use a 10% decision making trigger and have reduced my decision making points to less than five during a fall.

• Market falls by 10%?
• Market falls by 20%?
• Market falls  by 30%?
• Market falls by 40%?
• Market falls by 50%?

You can either use a common benchmark such as Sensex/Nifty or your own portfolio value for reference.

For eg, if you are using Sensex as reference, the maximum value was 38,645 (on 31-Aug-18)

So decisions will be taken at

1. 10% fall ~ Sensex@35,000
2. 20% fall ~ Sensex@31,000
3. 30% fall ~ Sensex@27,000
4. 40% fall ~ Sensex@23,000
5. 50% fall ~ Sensex@19,500

In this way, I don’t need to look at the TV each and everyday trying to decide on what to do with my investments.

2.Pre-load your decisions with a what-if-market-falls plan

When we are calm and relaxed, we turn out to be extremely bad in imagining how we will act during times of emotional strain (think fear, anger, hunger, exhaustion, thirst etc).

Such an under-appreciation of how we behave during times of emotional strain is where the trouble actually starts.

How do you think you will behave if the market cracks by say 20%?

“I will of course buy more!” thinks the overconfident self.

But remember, this is you in your “cool & calm” avatar!

Your “emotionally charged” avatar might have different plans.. and if you are like the rest of us it will panic and freeze!

For more on this you can read my earlier post here

How do we solve for this?

We have an unusual person providing us the solution – Our friendly Starbucks Barista!

In 2007, when Starbucks was going through a massive expansion, the company was opening almost 7 new stores every day and hiring as many as 1500 employees each week.

But this came with its own issues. The biggest amongst them was to train all the new employees to provide excellent customer service.

Unfortunately for most of the employees Starbucks was their first job and they had never dealt with an angry customer before. While they obviously wanted to a good job, however as soon as they started facing angry customers, a lot of them panicked, some lost their cool and few even snapped back at the customer.

Drawing on behavioral science, Starbucks came up with a simple solution – the “if-then” strategy. They added an extra page at the end of every employee handbook which had lines like, “If a customer yells at me then I will ______”. 

The employee would then write in advance what their response would be to this and other tough situations. It allowed employees to plan their response with a cool mindset, so they didn’t need to decide under pressure and risk losing their self control.

They also provided the employees with a simple decision making framework to apply:

The Starbucks LATTE System for Customer Service

1. Listen to the Customer
2. Acknowledge their complaint
3. Take action by solving the problem
4. Thank them
5. Explain why the problem occurred

Now, instead of reacting with anger or panic, Starbucks employees had a clear game plan to deal with stressful situations.

Since the If-Then and the LATTE system was implemented, employee turnover had decreased, customer satisfaction was up and profits increased!

In essence, we also face a similar problem in a bear market as we go into one completely unprepared without a plan and overestimating our ability to handle the stress and panic.

So, let us apply the Starbucks technique to investing with our own “If-Then” plan.

1. If market falls by 10% then I will..
2. If market falls by 20% then I will..
3. If market falls by 30% then I will..
4. If market falls by 40% then I will..
5. If market falls by 50% then I will..

Sounds extremely simple, but trust me, once you start thinking about this, you realize how difficult it is to decide even in normal times.

If you have an advisor this is probably a great time to sit together and chart out a plan. If you don’t have one, then make sure you write down your plan as it’s extremely difficult to think clearly in the middle of a falling market.

Also it serves as a reference to check how you thought you would behave during a fall (in your cool and calm avatar) vs how you actually behaved.

You can also check these two posts here (from the super-smart Morgan Housel) and here for getting a rough idea on how to build this plan.

3.Identify and keep a track of experienced investors

As humans we have a natural tendency to follow and conform with the crowd. You can read more about this here

Unfortunately, this tendency of social conformity is at its highest especially in situations of uncertainty.

So in uncertain periods like a falling market, the easiest and fairly intuitive option is to look around and follow the crowd.

And unfortunately, as history has shown, the crowd usually panics at exactly the wrong time.

Now while the obvious solution is not to follow the crowd, it is far easier said than done. So instead of fighting this urge, we need to play along this urge.

I would suggest finding a group of experienced investors or fellow investors to discuss during times of panic. If this sounds difficult, you can take advantage of the internet and identify your “investors to track” list and follow them closely for their views and interviews.

Here are some people whom I personally track:

1. Sankaran Naren – ICICI Prudential Mutual Fund
2. Kenneth Andrade – Oldbridge Capital
3. Rajeev Thakkar – Parag Parikh Mutual Fund
4. Shyam Sekar – Ithought
5. Kalpen Parekh – DSP Investment Managers
6. Neelkanth Mishra – Credit Suisse

Now, by no way am I suggesting that we should blindly follow them. The idea is to carefully evaluate their views (given their experience and maturity) and take our own decisions.

Do let me know on what other strategies you use to stay sane during a market fall.

As always, happy investing!

You can follow Eighty Twenty Investor via Email (1 weekly newsletter) or Twitter

If you loved what you just read, you can check out all my other articles here

Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

Recently, I met an old school friend of mine after ages. Amidst the good old banter and evergreen memories, he spoke about his past stint at Taxi For Sure and the stressful period he had to undergo during the last few months before the company finally got sold.

Curious to know more about this, I came back home and started reading about why Taxi-For-Sure had to close. That is when I chanced upon an interesting narrative on what really happened.

The Taxi-For-Sure Saga

This is the article (link) and I recommend you to read this as it holds a lot of interesting lessons for us as investors.

“This is the story of how, in just two months, Taxi for Sure went from a prospective good second bet in the taxi aggregator business in India, almost on the verge of raising $200 million, to a company that no venture capitalist would touch.”

For those who don’t have the time to go through the entire article, here is a quick gist of what happened..

Taxi for sure, a cab aggregator similar to Uber and Ola, given the first mover advantage had a strong run for almost four years till 2015, facilitating around five million cab rides. It also prided itself on “being used to beating Ola with less money“.

At that juncture, it clearly looked like Taxi For Sure was a good second bet in the taxi aggregator business in India.

But its competitor Ola, had other plans.

In an aggressive move to take market share, Ola slashed the fares for its cab rides and made it more cheaper than an auto rickshaw. Further, they also increased the driver incentives.

It’s logic was simple. The company had raised Rs.250 crore in a round of funding in July 2014 and was burning money to get more customers and drivers on its platform.

Taxi For Sure, was watching from the sidelines as Ola was losing almost Rs 200 every ride and hence thought this wouldn’t be sustainable.  This was impacting them, as both the drivers and the customers given the better financial incentives were moving towards Ola. However, Taxi For Sure expected this to be a temporary tactic from Ola.

But they were in for a rude shock, when on 28 October, Ola raised $210 million (about Rs.1,281 crore) from SoftBank and its other existing investors. In the start-up world, whenever there is a large difference between two firms, raising capital becomes very difficult for the laggard.

On 1 November, Taxi For Sure decided to take the plunge and responded with similar price cuts for customers and better incentives for drivers!

The strategy worked brilliantly and they saw a 3-4x surge in transactions immediately. However there was a catch. They were making losses of Rs.36 lakh every day. This meant they were also running short of funds and they needed to go in for the next round of funding.

They immediately started exploring the market to raise funds—around $200 million.

Things  looked  great as all the concerns on the size and scale of the Indian taxi aggregation business were put to rest, thanks to the validation via the $210 million investment in Ola by SoftBank.

The company saw interest from more than 20 investors in the US. All the due diligence was done and only two steps remained; a partnership meeting with the firm, where the entrepreneur makes a presentation to the firm’s senior team, and the final nod for investment.

So it was more or less given that they would raise the $200 mn funding.

The Blackswan Event

On 6 December night (saturday), the co-founderRaghu boarded a flight from Bengaluru to San Francisco. He had lined up almost 20+ meetings with VCs and hedge funds the following week and was pretty confident on raising the $200 mn funding

But little did he know that a black swan event on the same day would end the journey of Taxi For Sure once and for all.

Late in the evening, at about 11pm on 6 December, news broke that a Uber cab driver, Shiv Kumar Yadav had raped a 26-year-old woman passenger in Delhi.

All hell broke loose, people were angry and there were widespread rumours that all taxi aggregator firms would be banned in Delhi. Other states, too, such as Karnataka and Maharashtra, were considering a ban.

Over the next week, in an unexpected twist all the VCs backed out as they were all concerned about the possibility of a regulatory ban.

A single incident had changed the entire future of the company.

Not able to raise funds, eventually they sold out to their competitor Ola.

Thus ended the story of oversized ambition, a black swan event, a govt’s knee-jerk reaction, cash burn and over-reliance on venture capital funds.

Alternate Histories – We only witness one version of what could have happened!

Now if you really think about it, what happened to Taxi-For-Sure was just one version of several outcomes that could have actually happened.

What if that fateful rape incident didn’t happen?

What if Ola also hadn’t raised the money a few months back?

What if the government didn’t take a knee jerk decision to ban the cab aggregators?

What if some investor had still funded them?

The possibilities and “what-ifs” are many.

But now in retrospect, we only see one version of history – the version where Taxi For Sure was bought out by Ola.

This is exactly what the prolific writer Nassim Taleb refers to as alternate histories.

Let us hear it in his own words..

“One can illustrate the strange concept of alternative histories as follows. Imagine an eccentric (and bored) tycoon offering you $10 million to play Russian roulette, i.e., to put a revolver containing one bullet in the six available chambers to your head and pull the trigger. Each realization would count as one history, for a total of six possible histories of equal probabilities. Five out of these six histories would lead to enrichment; one would lead to a statistic, that is, an obituary with an embarrassing (but certainly original) cause of death.”

What does it have to do with us?

In fact a lot.

While I have tried giving evidence for why performance chasing doesn’t work here and here, it is time to understand the intuitive logic behind why past performance fails as an  indicator in investing unlike most other areas in life.

The unfortunate truth in investing is that no investment style or approach will outperform at all points in time.

This is because based on the changing market conditions, various investment styles find favor at different points in time.

So, whenever a fund is outperforming it simply means that the investment style or approach has found favor in the current market conditions.

Past performance can be a good indicator only in the case where the past market conditions remain unchanged and continue to the future. But as we all know, market conditions inevitably change and some other different style or approach will find favor. A new set of funds belonging to that particular approach will become the new group of outperformers.

Thus, to predict the future winners, the real ask is to identify the future market conditions and not the past market conditions which led to the current winners.

Unfortunately, the future market condition has several possibilities (what ifs) like our Taxi-for-sure story and no one knows, which of the market conditions will really play out and when it will play out.

Eventually one of the several market conditions will play out and a particular investment approach will find favor. In retrospect the past will always look like a single clear cut outcome which could have been easily predicted.

The current winners will be chased yet again only for us to be disappointed when market conditions inevitably change.

So, in essence there is no investment approach that is consistently capable of outperformance and also there is no investor or fund manager who has managed to switch successfully from one style to another, and always remained invested in a style that was in favour at the moment.

Oops! So what the heck do we do?

1. Identify fund managers with a clearly communicated – logical, evidence based investing approach which has worked well over the long run
2. The key reason why I emphasize on understanding the investment approach and style is because otherwise it is impossible to stick on to the fund in periods where the style is out of favor and we will perennially be in the “chase the best performing fund” trap
3. Diversify across various investment approaches or styles
   • Market cap (large, mid, small)
   • Style – Value/Quality/Growth
   • Domestic/Global

Summing it up..

Any logical and evidence based investment style would pay off over a period of time, but no investment style, however sound it is, will continuously give better returns.

And as Dan Kahneman says,

What you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.

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If you loved what you just read, you can check out all my other articles here

In the last few weeks, I had discussed about a simple yet intuitive way to pick equity mutual funds. In case you are new to this blog you can check the entire series here:

1. Selecting an equity mutual fund is a pain in the neck. Find out why?
2. What if Steve Jobs was an Indian Equity Investor
3. How do we experience good performance?
4. How to select equity mutual funds the eighty twenty investor way – Part 1
5. How to select equity mutual funds the eighty twenty investor way – Part 2
6. How to select equity mutual funds the eighty twenty investor way – Part 3

Now obviously all this is just theory if I don’t walk the talk.

So I have decided to invest my own money in two of the funds chosen, each and every month for the next 10 years.

Yes, you heard it right next 10 long years (Phew! It sounds equally intimidating and scary to me as well). Hopefully we can pull it off together 🙂

While all six fund managers are good, I wanted to keep my portfolio simple and so will stick to just two funds (good enough for providing adequate diversification).

I have chosen both the fund managers from the value basket (personal bias)

1. Sankaren Naren – ICICI Prudential Large and Mid Cap Fund
2. Rajeev Thakkar – Parag Parikh Long Term Equity Fund

You are free to pick any two and don’t bother too much on my choice.

The game plan is simple.

I will be investing Rs 30,000 every month in these two funds (15K each) for the next 10 years. Hopefully every year as my salary increases I will also be increasing my SIP amount by approximately 5-10%.

I will be reviewing my portfolio once every 6 months and the link to the review will be updated in this page.

Live Portfolio Updates

1.Discipline and Behavior check

I personally believe this will be the biggest determinant for the success of this plan.

Current Plan of action – 15,000 in ICICI Prudential Large & Mid Cap + 15,000 in Parag Parikh Long Term Equity Fund on the 5th of each and every month

1. Aug-18 Done – 30K invested
2. Sep-18 Done – 30K invested
3. Oct-18 Done – 30K invested
4. Nov-18 Done – 30K invested
5. Dec-18 Done – 30K invested
6. Jan-19 Done –  30K invested
7. Feb-19 Done – 30K invested

2.Decision Journal

All decisions will be documented here every 6 months (so that we can evolve our process based on feedback)

• Aug-18 – Rationale for picking the two funds – Link

3.Current Portfolio (started from 05-Aug-2018)

As on 16-Jan-19

As on 06-Dec-18

As on 17-Nov-2018

As on 17-

As on 16-Oct-2018

As on 17-Sep-2018

FAQs

1.What will determine the success of this whole plan?

Now while this question is better answered ten years down the line, this is what I believe will be the most important contributors to the success of my investment plan.

1. Faith in Equities:
   • Investing in Equities for the long run is basically a bet on human progress
   • You are simply betting that entrepreneurs (who take higher risks) on an aggregate will get compensated with higher returns
2. Discipline to invest regularly:
   • Ability to save and invest regularly through good and bad times holds the key
3. Patience to hang on through tough times:
   • Market corrections are not a bug but a feature – and it is next to impossible to predict when the next one is coming, how steep the decline would be and how long it will last
   • It is prudent to assume that our equity portfolios will go through a 30-50% decline at-least once in every decade
   • 10-20% corrections should be expected to be a regular affair
   • It is ok to realise that you wont be able to predict the fall and in fact you don’t need to predict the fall to create long term returns
   • The way you behaviorally respond to a fall (which is completely under your control) is all that matters for your long term returns
4. Choice of funds
   • The idea is to pick funds managed by experienced fund managers with a
     • Consistent and well communicated investment process/style
     • Long term track record across market cycles (i.e periods covering up and down markets)
     • Well diversified across large, mid and small companies

The real deal breaker in this whole endeavor is not the choice of funds..

Instead its actually our ability to stay disciplined (invest every month) and stay patient through bad times (which is inevitable at some point in time).

And here is the best part..

Both these are completely in our control!

2.Is an SIP completely risk free?

How I wish!

Unfortunately SIP while it has a tremendous behavioral advantage, there are also certain risks that you must be aware of. You can read about it in detail here

3. Why do I not follow an asset allocation plan?

This is one of the common mistakes which most of us do. When you are in your 20s or 30s you forget the fact that you have a long investment time horizon & large human capital (i.e the amount of money you are yet to earn using skills, knowledge and experience, over the course of your career). This essentially means your current savings is a paltry amount compared to the expected corpus 15-20 years down the line.

I am in my early 30s and the amount that I am saving right now is a minuscule component if I take my entire future savings over the next 10-20 years in context. So to take advantage of this long investment time frame and human capital, I am going for a equity heavy portfolio as I have my short term requirements sorted through safer avenues such as fixed income funds etc

You can read more about this here

But if you have a large portfolio, then you will have to follow an asset allocation plan as wealth preservation takes a higher priority over wealth creation.

Just remember, if you are young – your ability to save is more important than picking the best fund!

3.Why do I do this?

Most of you must be going through the same problems as I am – difficulty to save, extremely complicated investment world and the problem of getting scared out of equities during a market fall.

The hope – is that you and me together will be able to solve this.

This journey which will be available in the public domain, will attempt to give you an idea of how living through an actual SIP portfolio looks like. Together, if we are able to stay invested without panicking through a bear market (which will inevitably happen sometime in the future) and invest regularly, then the long term results would be awesome and we could have our investment journey sorted!

I have always believed that investing needs to be simple and if we just got our behavior in place, all of us can have amazing results. This is my humble attempt to prove it.

Someday I hope of making you financially free and playing a small part in helping you follow your dreams.

I know its a tall ask. But nevertheless..

Overall, if things work, then this page will be a inspiration for many people to start investing and appreciate the journey of what it really takes to be a long term investor.

If in case the whole concept is a failure, you can rip my case off via the comments explaining what a stupid jackass I was. For me while that would mean I would go down as a dumb guy, the best part is since every decision is documented I can always go back and analyze as to what actually went wrong and based on the actual evidence, you can avoid all my blunders.

Either way, its a win-win for you!

4.Any hidden agenda?

I am a nice guy and want to genuinely help you out. Err..Partly true.

But let me be brutally honest. I have a selfish motive as well.

Here goes my story..

Most of our parents were phenomenal savers (mine were for sure!). If you really look at why this happened, most of them took a huge loan and invested in a home early in their life. And this meant each and every month for the major part of their working years, they had to forcefully save and pay for the EMI. All their expenses were post their EMI.

Unfortunately I am not too keen on buying a real estate despite my mom trying day in and out to convince me.

The result – I am a terrible saver and a super spend thrift!

Since I have no loans, I end up spending a lot (especially impulse purchases). Adding to the pain, the Facebooks, Instagrams, Amazons, Flipkarts, Swiggys, Zomatos, Netflixes, Ubers etc of the world are making my savings habit almost next to impossible.

So unless and until I force myself to save I won’t be able to do it. The moment I have given a public commitment (to save 30k every month), then I suddenly become accountable to all of you and most importantly myself!

If I don’t save up every month, I will end up looking like a failure – the man who only preached.

So this is my selfish motive – to help myself get the discipline to save each and every month straight for 10 years – come what may!

5.Should you follow this portfolio?

The whole idea is to view this as a reference point and you can evolve your own plan based on this. Always focus on the thought process and my logic behind the plan and don’t blindly go by my choice.

Personally, I believe in this plan and hence I am investing my own money in it. So to trust me or not, I leave it to your own judgement.

6.Will there be tough times?

Obviously. There will be several periods where you will feel you would have been much better off investing in an FD instead. In a bear market, the portfolio returns will be extremely disappointing and I have no magic wand to save you from the pain of seeing temporary losses in your portfolio.

And again, at all points in time there will always be some other fund doing better than the ones I chose. I profess no special ability to spot future winners.

Simply put, this is a plain vanilla investment portfolio which will test our patience and discipline at several points of time. If you are not ready for it, then you need to evaluate safer options with lower return expectations.

7.Will I change the funds?

Yes, I will change the funds if

• The fund manager changes (because that is the basic premise of our investment)
• The performance over a cycle under performs the index
• The size of the fund becomes too big
• The fund manager does not stick to his communicated mandate and investment style
• Corporate governance issues
• Does not communicate in plain English during tough times

8. Should you pick the same funds?

Not at all. You can actually pick any fund based on your conviction. There are several good funds out there. The key is that we need to invest regularly and have the conviction to stay put through bear markets. The big idea is, if we can do it together, the journey of ups and downs become a lot more palatable.

9.Which platform do I use to invest?

As of now I use Kuvera. I find it simple and good enough. The newly launched Paytm Money might also be a decent option.

10.What about asset allocation?

Once my portfolio size grows to lets say 5 times my yearly spending, then I will start implementing an asset allocation strategy.

11.What is my risk profile?

I have my entire savings till date invested in equities (primarily via stocks). All my tax savings is in ELSS. I work for a wealth management firm and hence my career is also equity market dependent. My better half is an amazing entrepreneur and she runs a chain of dessert joints in Chennai called The Brownie Studio (if you drop in sometimes to this part of the country, try us out and do let me know). So in effect both of us are basic believers in the Indian entrepreneurship story and all our investments reflect this.

I am a very high risk taker and hence this SIP portfolio again falls into the pattern. My reason for choosing an SIP is because I am trying to automate my savings behavior.

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If in case you have any other questions, do let me know. I shall try to answer this in the same post.

Until then, happy investing folks!

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Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

In the last post here, we had selected fund managers for the value bucket.

Now we are left with the blended bucket and growth bucket. So, let us pick fund managers for these buckets today.

Picking fund managers for the quality/growth bucket

1.Axis Mutual Fund – Jinesh Gopani – Axis Focused 25

Axis MF in all its external communications have highlighted their quality & growth bias (vs say an ICICI where contrarian/value is the predominant bias)

While quality is a vague term, this is how they try to define it:

In their recent note Quality Matters (link), this is how they describe their investment philosophy

• Strong corporate governance/Strong promoter pedigree,
• Secular growth rate of the sector, which is anywhere around 1.5 to 2x of GDP;
• Strong business model, which demonstrates its pricing power in the product category and the business it is in, and ultimately
• Good ROE’s and cash flows

About 80% to 90% of our portfolio is based on this philosophy and have been continuing with it since our inception in 2009.

The key to note here is there is no mention of valuations. Usually most AMCs would have added the line that “we also buy quality and growth at reasonable valuation”!

It gives us a subtle indication of where their priorities lie.

Let us also hear it from their fund manager Jinesh Gopani..

“We concentrate on high quality stories with a long term view as such stories are able to sail through market ups and downs while containing volatility. We tend to stay away from any momentum or hope stories without any support of underlying earnings or fundamentals. Adding to that, we have always stayed away from highly cyclical and highly regulated sectors or stories. Market has rewarded our philosophy and helped us earn superior returns.

Source: https://www.valueresearchonline.com/story/h2_storyview.asp?str=45972

Similar to value investing, long term evidence supports outperformance for quality driven investing as well.

What is his investment style?

• Quality + Growth Bias
• Valuations take the last priority
• Concentrated portfolio (Top 15 stocks account for 70-75% of the portfolio)
• Buy and Hold

Wow Factors

• He really tends to buy and hold – (around 65%+ of the Axis Long Term equity portfolio stocks are held for more than 5 years)
• He sticks to his style – The quality bias is evident even if you cursorily glance either Axis focused 25 or Axis Long Term equity portfolio (both are managed by Jinesh)
• Since it is a concentrated portfolio it is easy for us to track and understand the portfolio

Performance across market cycles

Performance has been consistent and decent across time frames

However, Axis long term fund was started only in Dec-2009 and hence hasn’t gone through the bear market of 2008.

Communication

They have a nice website here where most of the details regarding their funds and investment philosophy are available.

Concerns

• Jinesh has been managing Axis Focused 25 fund only since Jun-16. His performance track record has primarily been built via the ELSS fund Axis Long Term Equity Fund (managing since Dec-2009)
• The fund manager is yet to be tested in a bear market
• Valuations of several underlying stocks are pricing in very high expectations such as Avenue Supermart, Page Industries, Maruti, Bajaj Finance etc (subjective opinion of course). Personally, I feel overvaluations can be the biggest risk to this investing style.
• The style is currently in favor. Need to evaluate how they adapt when the style is out of favor.

My View

• This fund will fit perfectly in the quality/growth end of the style spectrum
• While it is not fair to evaluate a fund by taking a view on the underlying portfolio stocks, since I have an inherent value bias some of the valuations of these quality names make me very uncomfortable
• That being said the good thing is that they have followed their investment philosophy to the tee and stuck to quality names despite high valuations
• The fund manager is yet to be tested over a bear market and this is a concern for me
• Summing it up, its an interesting fund with a solid fund manager. However given my concerns on valuation (maybe biased due to my inherent value inclination) and lack of bear market experience, I would give it some more time before considering it for my final list.

2.Motilal Oswal – Raamdeo Agrawal (guidance) + Gautam Sinha Roy (fund manager) – Motilal Oswal Multicap 35

Raamdeo Agarwal, Joint MD & co-founder, Motilal Oswal Financial Services Limited

While Gautam Sinha Roy is the actual fund manager, I have also considered the founder Raamdeo Agrawal as my guess is that he would obviously have a significant influence on the investment philosophy and process.

What is his investment style?

Their entire investment philosophy is explained in detail here

You can also check this link by the super awesome Venkatesh Jayaraman (@VenkateshJayar2) which has a compilation of all Raamdeo Agrawals interview here

This interview below also provides a lot of clarity on how they manage their funds

Wow Factors

• Brilliant communication: Their communication is one of the best and their investment philosophy is crystal clear and well articulated
• Their chairman Raamdeo Agrawal, CEO Aashish Sommaiyya ,PMS fund managers and MF managers frequently write articles and provide public interviews – thereby helping us keep a tab of what is their current thought process
• Not averse to closing their funds if size becomes large: They also close their funds if their funds become too big to manage – sometime back they closed their mid cap PMS offering citing size constraints (read their newsletter with the rationale here)
• Equity Focus: The fund house is equity focused and has few but clearly differentiated products
• Easy to monitor: Since it is a concentrated portfolio it is easy for us to track and to understand the drivers behind the performance
• Skin in the game: The promoter to show their conviction in their strategy moved their entire prop book into their 3 funds (predominantly the Focused 35 scheme) in 2015 (source: Forbes article)

 “Moving our proprietary money into the mutual fund was the best way to tell the customers about our conviction in the product,” Motilal Oswal

Recently, their CEO had tweeted that the promoter investments in their funds are a whopping Rs 2800 cr!

While skin-in-the-game doesn’t indicate future performance, but gives us a sense of how serious they are about the money being managed.

• Proactive in communicating when performance drops: They are also extremely proactive and communicate even during times when there is a drop in performance. This is very important as it helps us derive conviction and stay put with the investment style during periods where it is out of favor. Check out a sample of how they communicate here.

Performance across market cycles

Their mutual funds were launched only in 2013-14 period, which means their funds are yet to be tested over a bear market.

However, their PMS strategies have built a long term track record of 15 years as seen below since Mar-2003

To put the performance of Value Strategy in context, this is the returns of top 10 diversified equity mutual funds during the same period

The first 4 funds are mid cap funds. Considering that Value Strategy was a multicap strategy the returns over the 15 years is comparable to top notch fund managers such as Prashant Jain of HDFC, Siva Subramanian of Franklin etc.

Concerns

• In twitter, there were some concerns raised on the fund house not sticking to the “sit tight” portion – in the current portfolio almost 60% of the portfolio has been held for more than 3 years which seems fine. So while we need to monitor this metric, I don’t see any issues here as of now.
• Also keep a watch on the twitter account by the name @contrarianEPS who constantly raises concerns on MOSL Funds. While he does not undermine the long term returns, his primary thesis is that MOSL follows a momentum investing style to derive returns (which is not wrong) but markets itself as a value driven style which in his opinion is not right. Usually his tweets get a response from the equally vocal and active MOSL AMC CEO @AashishPS . While I don’t see anything to worry as of now, but I would keep a watch for his tweets and the response from the CEO.
• The recent issue of Manpasand Beverages was obviously blown out of proportion despite the small weightage in the overall portfolio. All fund managers will have few stocks going wrong or otherwise you don’t need a portfolio. So I think we need to keep in perspective the mistakes vis-a-vis overall portfolio returns over the long run. That being said, the focus should be on trying to understand the process better whenever such accidents happen – what went wrong and how did the particular company get past the fund manager’s quality filters? How did the fund manager manage the scenario? How does the process adapt to avoid such events going forward?
• The fund is getting larger in size (currently at Rs 14,000 cr). Given, the style of running a concentrated portfolio, size might start impacting portfolio construction some time in the future.

My View

• This fund will fit perfectly in the quality/growth end of the style spectrum
• They have built a solid long term track record by following their investment philosophy of Buy Right – Sit Tight
• Skin in the game with a whopping investment of Rs 2800cr provides us with significant conviction on their seriousness and integrity.
• Their communication is top notch with clear communication both during times of outperformance and underperformance
• Concentrated portfolio makes it a lot easier to track the fund performance and understand the strategy
• Summing it up, its an interesting fund with a solid investment process. I would add it to my final list under the growth/quality bucket.

Other funds following this Quality/Growth strategy with good communication

UTI Equity Fund which is managed by Ajay Tyagi has also recently repositioned itself as a quality/growth style fund.

You can read about his investment style here and here.

While this fund house ticks my checklist on clear communication, I have not included the fund as the fund manager is relatively new – only two years of managing the fund.

Its an interesting fund to keep a watch on and I would wait for a market where the style is out of favor and monitor on how the fund manager behaves during that period to build my conviction.

The Final List

Now that we have filled our “growth/quality” bucket, the selected equity mutual fund list looks like this

In the next week, I will fill the remaining “Blend” bucket and we shall be all set to build our portfolios.

Till then, cheers and happy investing!

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If in case you have any feedback or need any help regarding your investments or want me to write about something, feel free to get in touch at rarun86@gmail.com

Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments