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Wonder, Wealth & Abundance

Foxy Funds, sneaky answers at IIM Lucknow Investment Summit

with 10 comments

A friend of mine, Manish Dhawan of Mystic Wealth (www.mysticwealth.in) recently shared a not so nice experience that he had
at the IIM Lucknow 2017 Investment Summit. He penned down a note post
this experience, and later discarded his note as being insensitive.

I, on the contrary loved what Manish wrote and would like to share with you the truth
of his testimony.

There were four presenters:

Mr Porinju
Mr Anand Shah
Mr Prashant Jain
and
Mr Avinish Shah

We will focus on the presentation by Mr Anand Shah.( Deputy Chief Executive Officer and Head of
Investments at BNP Paribas Asset Management)

Mr Anand Shah gave his presentation explaining the philosophy, the
rigorous research that they undertake. The fact that, its not the earnings that matter but
the quality of that earning and sustainability of the same he said. On
being asked what would be his advise to young retail investors he responded that
they have a dedicated team, different individuals for taking care of
different sectors. That kind of domain expertise is not available to
retail investors, and as such, individual investors are better off outsourcing this and let the
experts handle it.

 

NOW LET US SEE HOW THE EXPERTS HAVE HANDLED IT.

 

BNP paribas Mutual fund mid cap started with a NAV of 10 on March
‘2006. As on 3rd November, its NAV was 36.97 which gives it a CAGR of
11.5%

Similarly

BNP long term equity funds started with a NAV of 10 on November 7,
2005. As on 3rd November, its NAV was 38.68 which gives it a 12.39% CAGR

 

While achieving this respectable out-performance and justify the salary
of his “Dedicated team with domain expertise” they had to go through a
2008 ditch.

 

A 68.18% ditch.

Need we add more?

 

A 68.18% ditch to achieve 12. something cagr is A JOKE. and its NOT
FUNNY.

 

Return is ALWAYS RISK ADJUSTED. And this figure gives them a MAXDD (http://www.investopedia.com/terms/m/maximum-drawdown-mdd.asp) to
CAR ratio of 0.18%

A Dart throwing monkey can do better than that. The only difference is
monkeys work for PEANUTS, without a TEAM and do not give speeches.

This is the reason my friend does not like this industry. According to Manish, it is
an Asset gathering business run by thick skinned no skin in the game individuals.

These guys have the audacity to shed off the 2008 blood of the dead
from their clothes, wear a new robe and come on a podium and boast off
their team expertise and domain expertise and benchmark beating returns.

Peter Lynch, called BNP Funds type of ‘professional investors’ as oxymorons.
Ordinary retail investors, Lynch believes, can spot trends and pick up clues months or even years before
Wall Street figures them out. Sniff around for investing ideas at your workplace, says Lynch,
be aware of popular new products selling like oat bran, and pay attention to trends that your kids pick up on.

I recently read a study where a multibillion dollar hedge fund asks each an expert,
one in coal, other in pharmacy, third in chemicals, fourth in banking and so on….
to provide their highest conviction and the best single idea to form as 15-20 stock portfolio.
Yet that portfolio, does worse than mediocre. It turns out that in investing, while simple, but not easy, nobody is an expert.
We are less or more lucky, and those who have the discipline tend to do better.

I have found that it makes sense to take the reigns of your health, food and finances in your hand leaving
the car manufacturing to Toyota of course. Becuase these asinine companies from Dabur to Unilever,
and doctors (who do not study nutrition for even 8 hours in 6 years of study), and Investment managers
whose interests are not aligned with yours do not help you win either health or riches.

Every profession is a conspiracy against the laity. Conspiracies against the laity is a term coined by George Bernard Shaw in the play The Doctor’s Dilemma. The conspiracies refer to the methods used by professions to acquire prestige, power and wealth. What good is simple Doctor who says, eat lots of vegetables, sleep 9 hours and exercize plenty?

I can tell you very confidently that the all the sum total of physicists on earth do not understand the physical matter even 0.00001% nor do Investment managers
understand the future of companies or the functioning of human mind, the obverse side of investment returns. We play in probabilities and follow broad rules of thumb and guidelines, and hope to have a few insights now and then.

In Africa they ask you to live with jackal overnight in a room if you have been haunted by a ghost, and at Investment Summits like that in IIM L, they ask you to hand over your hard earned money to the helpers, so they can score a percentage of Assets Under Management. The difference is of a degree and not kind.
10,000 crores, and cool 100 Crores per annum fee for 1% cut by your helpers, regardless of the returns to you. The business is to increase assets rather than excellence.

Written by amitdipsite

November 7, 2017 at 9:54 am

Posted in Uncategorized

10 Responses

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  1. Dear Amit,
    Wishing a very good day.
    You have nailed them on the cross. The wisdom in your article reminds of a George Bernard Shaw quote “beware of false knowledge, it is more dangerous than ignorance”.
    Thank you for an eye-opener.
    Allah bless you. Dua

    shaukat ali

    November 7, 2017 at 10:46 am

  2. Hi Amit,

    Both Manish and you have very valid points against Mr Shah. The reference you’ve made to “conspiracy against the laity” is also very interesting.

    Wanted to know your insights on strategies available to retail investors for managing drawdowns and for protecting gains made during bull markets.

    The Problem(s) Defined

    1) Many investors do not last more than one market cycle because of their inability to manage drawdowns.
    2) WB & CM have said that when a blood curdling drawdown happens, “You will go down”. That is a given.
    3) Gains made in a bull market, if not encashed while the bull market is still underway, will likely be lost in the ensuing bear market.
    4) Anybody who is untrained & new to the markets is bound to be down and out when a severe drawdown (eg. October 2008 to March 2009) happens. Or for that matter when a prolonged bear market sets in, which need not necessarily be preceded by a severe drawdown (eg December 2010 to September 2013).
    5) Inability to fathom paper losses makes investors behave like deer in the headlight when drawdowns set in and when markets are in a free-fall.

    The Best Case Scenario

    The Best Case scenario would be to (i) Protect gains made in the bull market & (ii) Be unperturbed and to actually start buying like crazy when a drawdown happens and continue buying when the drawdown deepens.

    Possible Options for managing the Problem, with their limitations

    There are a few options that come to mind, elucidated below.

    1) Paring down of portfolios: This is the simplest way. Once the Nifty P/E crosses the 23-25 mark or the stocks that you hold trade above Intrinsic Value, it makes sense to start selling down holdings mercilessly. The maximum allocation to stocks should be 25% and 75% should be in debt/cash form. If the 25% comprises of value stocks, even better. The disadvantage with this approach is that you have to let go of the upside, since, well the Nifty P/E could go to 35!

    2) Keeping a list of high dividend yield stocks ready: My watchlist currently has Oracle Financial Services, Greaves Cotton, NMDC, Hindustan Zinc, Castrol, Oil India. Notwithstanding the fact that you could classify some of these as value traps, the first round of buying can be in these stocks when the drawdown comes in. Specifically, when the Nifty P/E goes below 20, around 30% of the available cash (ie 30% of the 75%) can be deployed in these high dividend yielding stocks. I know that the first drawdown is called the sucker’s drawdown, but I’d like to go on a buying spree into stocks offering decent dividend anyways.

    3) Purchasing OTM options: Since they’d be cheap in heated bull markets, they can be purchased. But the protection is only temporary. One could end up being tired of buying Puts till such time the drawdown actually happens. Prolonged put purchases will also turn out to be very expensive.

    4) Buying LEAPS: These are currently unavailable in India.

    5) Buying Gold: SGBs issued by the RBI are a good option. But well gold was down ~25% in 2009 too. It did rally later, so this strategy has the potential to work.

    6) Going Long Cryptocurrencies: If a cryptocurrency backed by Gold as an underlying or guaranteed by the IMF were to be issued, then this option could be considered. Hard Fork 2 for Bitcoin that’s coming up right now makes me think that cryptocurrencies can go the Fiat currencies’ way eventually. The Hard Fork 2 implies that anyone can create and issue their own cryptocurrency, so this option’s currently risky.

    Need your views

    1) Which of the above approaches do you prefer?

    2) What strategies do you currently use for managing downside risks in your personal portfolio & your funds portfolio?

    Cheers,
    Sam

    Sam

    November 7, 2017 at 12:05 pm

    • Good problem and options Sam,

      Manish is very active with options and I also envy Edward Thorp, (A man for all markets) hence they can manage MAXDD more than I can dream of.

      I am long only, above are long short or hedged portfolios.

      Cheap LEAPS is the best option imo for a person like me who does not have time for options.

      Most retail investors can follow 1 and 2 for practical application.

      3 can be expensive. 5&6 I don’t really believe in.

      I try to buy low PE stocks and sell High PE stocks in the bull market. There are stocks at 10-15 PE growing above 10-15% in the world. If you are not managing 20 billion dollars, another plus for managing own money you can buy those type of companies.

      I myself need to do more work on protecting downside with LEAPS. I am in 11 equity market currencies at this point and currency risk is unhedged, more expensive to hedge than unhedged ESP. African currencies.

      Best regards

      Amit

      amitdipsite

      November 7, 2017 at 5:39 pm

      • Hi Amit, thanks for the revert, appreciate it.

        Ed Thorp is an extremely unique and gifted individual, its quite challenging to understand his strategies, leave aside implementing them.

        Hope that LEAPS start getting traded in India sooner than later. Good to know that you second options 1 & 2 for retail investors, they’re easy to implement.

        The stocks that you aim to buy (10-15 PE, 10-15% growth), how do you manage to find them in these overheated markets? Is it easier for you to hunt for them since you look at companies all across the globe? Are you finding such opportunities currently as well?

        Being in 11 market currencies simultaneously sounds daunting. Hats off to you for managing the market risk on your portfolios!

        Had one more query. Do you invest in statistically cheap stocks as well, or is visibility on growth quintessential? Eg, a stock like Gazprom. Its statistically cheap, but there’s no visibility on growth at all. Would you take a position or pass given non-existent growth?

        Kind regards,

        Sam

        Sam

        November 8, 2017 at 2:00 pm

        • Dear Sam,

          They are in South Africa, U.K., Australia, Africa, Vietnam etc. In India these companies are in financially leveraged sector, PFS, GICHF, MUTHOOT etc. In other countries it’s hard but possible to find 20-30 such companies.

          If the PE is 6-7-8 and debt free plus dividend paying then I ignore growth, at 12 PE I want some growth. At 20 PE or above more then 20% growth. Most money is made in 10 PE and 20% plus growth.

          Best regards

          Amit

          amitdipsite

          November 10, 2017 at 5:35 pm

  3. hi Amit, Thanks for posting the article.
    A disclaimer: It mite have come across as if I was picking on just one individual, however that was not the intention. This is an industry wide problem.

    the root cause of the problem is misaligned incentives.
    Solution probably lies in skininthegame incentive plan.

    1. No fees for negative years.
    2. performance calculated from new highs. (u start with 100, reduce the capital to 80, from 80 to 100 shall not be treated as performance)
    3) tactical allocation. factor based rotation. (cape or momentum)

    Manish Dhawan

    • 🙂 You are welcome

      Reminds me of a joke:

      Father: Never hit in the school back at anyone Son.
      Son: No dad, never. I am always the first to punch in the face.

      Cheers

      amitdipsite

      November 8, 2017 at 3:59 am

  4. Saikiran Pulavarthi

    November 8, 2017 at 10:36 am

  5. Thanks for sharing the metrics, Amit.

    Cheers,
    Sam

    Sam

    November 11, 2017 at 3:54 pm


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