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A question on trading

By Rohit Chauhan
In Non-equity assets, Uncategorized, Views on news
June 25, 2008
2 Min read
11 comments
A

06/27

some more observations from an outsider

– i have generally noticed that the younger crowd is more attracted to trading. that does not mean older people dont trade. just that if you talk to 100 young guys who are interested in stock market, a sizeable numbers would be into trading
– A lot of my friends who are into trading have a bias for action. There is the thrill of being right and knowing that pretty soon.
– there is more sense of company. you get to discuss about it with more people. value investing is pretty lonely. you buy ugly beaten down stocks. who wants to discuss companies no one has heard of ?
– media and the environment like brokers also encourage trading. no one will recommend buying a stock and sleeping on it for 5 years.

if you are a trader, please do not take this as a criticism of trading. These are just neutral observations (maybe incorrect) of an outsider. I may have bias against trading, but not a bias against people who do trading.
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I have noticed in general that the number of people interested in trading are far more than those interested in long term investing or value investing. For ex: there are far more blogs on trading than say value investing. There could be an overlap between the two groups too. I however have no aptitude for trading and it does not fit my temprament. I have said so in the past.

I can understand why there are more folks interested in trading. Trading does have an element of excitement. You get to do something quite often, whereas value investing or long term investing is as exciting as watching grass grow or paint dry. So this is my question – What are the average non – leveraged returns experienced by traders over a multi year period ..say 5-6 years (including a bull or bear market) ?

I agree there are several trading strategies and so to lump all of them under ‘trading’ is not smart. But at the risk of sounding dumb (which I am in terms of trading), I was curious to know what kind of returns do most people get ?

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Old flames and Old affairs

By Rohit Chauhan
In General thoughts, Uncategorized
June 22, 2008
2 Min read
6 comments
O

I have had love affairs with Gujarat gas, concor, asian paints, Blue star etc in the past. The original thesis when investing in these stocks played out and the final results were far better than what I had expected.
Then like all affairs, it was time to part. A few of these stocks got overvalued and I moved on.

Now unlike old girlfriends, there is no harm in revisiting these old relationships from time to time. You know the company, its management well and if you held it for a long time, then you would have become comfortable with the business too. So I tend to track these old flames regularly and if I find them to be attractive again, I will go ahead and invest again in them.

They key point when investing in the same stocks again is to avoid becoming emotional with these stocks which have treated you well in the past. It is important to analyse these companies as if you are analysing a new stock and check the price value relationship. If there is a substaintial gap, then I am fairly comfortable re-investing again.

Case in point : Gujarat gas. I sold off this stock by end of 2006 thinking that the stock was overvalued, after having held the stock for 3 years. Then last year on checking the fundamentals, I realised some of the risk in terms of gas pricing had been handled pretty well by the company. In addition the company has expanded its area of operations further and is doing very well. With the current spike in fuel prices, I think the company should do well for the next few years.

So no harm in revisiting these old flames from time to time and re-starting the old relationships again. Ofcourse I mean stocks and not girlfriends 🙂 . Now this is one post my wife should not read (she hardly reads them anyway, so I am safe I guess).

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Inflation and debt

By Rohit Chauhan
In Uncategorized, Views on news
June 17, 2008
2 Min read
5 comments
I

I have been reviewing the results of some companies and a few points are standing out

– raw material cost, over heads and labor costs are now increasing faster than sales
– Net margins are stable or coming down. Profit growth has slowed
– Debt may start getting repriced soon. As a result interest costs could start increasing

Maybe this is not news. However the above has the following implications

– valuations for the market and several companies is still based on the low inflation, high growth and high ROE environment of 2002-2007. If we have stagflation (high inflation and low growth), we could see prices drop sharply.
– Some companies in response to high growth, have taken on large amounts of debt. If we have stagflation, these companies could get hit very badly. The stock price for such companies could plunge sharply.
– In contrast companies with strong competitive advantage and low debt can maintain margins due to pricing power of their products and low interest costs. Such companies may see lower impact to their stock price.

I am not predicting a long period of high inflation and low growth and cannot be sure if we will see drop in stock prices. History (mid 1990’s) gives us a clue. During mid 90’s in response to high inflation, RBI hiked the interest rates to around 15% and we had a period of low growth from 1997-1999. Stock market returns were also poor during this period.

Does it mean that we should sell our stocks and wait for the clouds to clear. I would say no. The future is never crystal clear. It never was and never will be. What we can, however be sure is that good companies, with strong sustianable competitive advantage, will do well in inflationary and recessionary times.

What such times gives us is low prices due to the pesimissm. These low prices can be used to invest in good companies at attractive prices to build a good portfolio. However this is not easy and not for the faint hearted. If the inflation drops and the growth picks up quickly , then the returns could be good in the short term. However if economic situation takes time to turnaround, then be prepared to wait for a long time for the returns to materialize.

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What is hot today ?

By Rohit Chauhan
In Uncategorized
June 14, 2008
2 Min read
3 comments
W

I wrote about ‘rear view mirror investing’ in my previous post. What it essentially means is buying yesterday’s winners. As a far as long term investing is concerned, you will rarely make money buying yesterday’s winners. If like me, you believe that value investing is the way to go, then the focus has to be on companies and sectors which are currently out of fashion.

Lets try to invert – What is hot today. Let me think aloud and put a quick list below

Oil
Gold
Other Commodities like wheat, corn, metals etc
Energy companies (out of india ofcourse)
Real estate – In india it is a sure thing to make money and get rich 🙂

If you thought that this kind of investing was limited to investors, think again. Seasoned businessmen are prone to similar biases. Think telecom in US in 1998-2000 when companies invested huge sums of money in building capacity and then went bankrupt when the demand never materialized.

The same may be happening in real estate ..see this article and this. Maybe this is just a blip. But when real estate price (per sqft) starts becoming costlier than US, singapore, UK etc there is something funny happening.

So why do most people do it ? two reasons i can think of
– social proof : if everyone else is doing and making money, it must be right and i must do it too.
– laziness : If you imitate others, you dont have to think and take responsibility for your own decisions

Like driving, if you invest looking into the rear view mirror, then be prepared to get hurt (hopefully not badly).

The above may work for traders, momentum players etc. That is however not my area of competence and so you have to evaluate the above statement in light of long term investing.

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