Portfolio diversification

I look at my current portfolio, do some analysis and think these are the few diversification I will make over the next few months ( or the year maybe) -

1. I have a decent exposure to debt - but that is primarily in the form of my provident fund which earns me 8% ( think that's what it is now). No short term debt ( have some , but a convoluted Overdraft on that is what is my working capital for a lot of expense I am incurring now). so should I increase my debt portion? not sure I want to do it. I will need some cash as backup and they will primarily go to create a OD with some debt backing them
2. Commodities - this will be the next big thing in India ( it already is) - but I don't trade commodities. ( here my attraction is in the agri related commodities and not ferrous/ non ferrous metals). Agriculture has lagged in our economy for far too long. Given the fact that 60% of the population is dependent on it and we need to secure our food security, I expect movement on this area , more out of force than genuine concern. Its a 2-3 year play and should be very rewarding. I am still not sure how to play this, but will keep you posted
3. Gold - I think this is an asset class I will need some exposure to. I can do it either thru physical gold, Gold ETFs and through a hybrid fund like DSPML which invests across the gold value chain. I am not sure if physical makes sense, but will evaluate the other two.
   
4. Commercial real estate - I think this will create a cash flow scenario. Also , when I say commercial real estate, its basically a small office/ shop version - This will need me to put down some capital and leverage hard. I am hoping the real estate will fall further to allow me to pick some up. This will need lots of cash, I might just have to team up with a few friends ( assuming they are willing). Here once the REITS come in, I should be able to build an exposure, but I think that is atleast 13 -15 months away in India.
   
5. Some other slightly weirder ideas - like financing a moveable asset like a mini truck, or some small microfinance institution, or something.
   

Keep in mind that I don't have huge sums - I am assuming here, I will find like minded people and find the right opportunities. I want to take slightly larger risks, diversify the cash flows and see if I have to guts to take the opportunity given by the Indian economy to the build capital for myself.

Anyways, My dear reader, thanks for visiting me. Some of you are regulars I know, some land up through some search engine. Keep coming back, leave a message to let me know who you are, ask if you want me to write about something you feel I am capable of having an opinion worth airing...Keep me in business. Wish you a very happy and prosperous happy new year.

Lessons for Entreprenuers - Marketshare vs. cashflow

If you are an entrepreneur, you should learn a few lessons from the current saga unfolding in the Air Deccan- Kingfisher saga. The whole episode has a lot of lessons to learn in corporate strategy – a model which worked elsewhere might not work in another as the conditions are not the same – so a low cost model in a country where most of the costs you face are the same as a full service carrier will not be the same as a south west or a Ryan air success, so think through. In game theory, we have games modeled called ‘battle of attrition’ where the first person to blink loses everything and the person remaining in the game get abnormal returns – in the airline business, that is what happened – where on the last day when Deccan was to make money, It was being priced out of the market.

But all those lessons are what have been written ad nauseum elsewhere. I look at Captain Gopinath and think of lessons for entrepreneurs. A visionary entrepreneur, who on the first counts made the right moves – built a strong team, entered the market and exploded it, had financial investors who believed in him (Ladhanis), changed the right parameters of the model (ticketing software, yield management software) and created history – but now sadly he has lost control of the baby that he gave birth to – having ceded control to Kingfisher. I think at sometime an entrepreneur has to choose whether the dream is larger or his control over the concept and I respect Capt Gopinath for the decision where he has let the dream grow, albeit with a changed identity but it will survive. Many Indian entrepreneurs can never see themselves two steps away from the company they gave birth to….

But then I ask myself how an entrepreneur can not have to go through this divorce – this premature rupture of control, of giving up the dream u built – remember the best returns are available when more and more people believe in the concept, the company and the team. So the longer you hold stake and mould the concept better it is. Remember, most Indian promoters hold substantial stakes in their companies and a slow dilution at multiple points over periods is the way to maximize wealth. The basic feature which most investors and books on investing will stress is – cash is king – topline is myth, bottomline is reality – so don’t chase marketshare at the cost of profits – I am not sure there are too many successful models where you have 60% marketshare, make losses and then due to scale economies start making money ( The other industry that comes to mind is the Newspaper industry – where larger you are ad revenues supposedly will flow in, so you have the gimmick of invitation pricing et al). Guard against managers who run and chase marketshare, it’s easy to throw money and gain marketshare, but you can’t throw money to get profits –Remember the goal of any entrepreneur should be to create an organization that not only survives him, but can’t be around after he is gone. A year in the life of a human being is long but compared to a life span of 65 years, it is small, and then for a company which is supposed to exist for centuries to come – what is but 2 years of slower growth to make the foundation stable.

I am sure people will talk of how the opportunity might go away – but that is the traders’ view of the world – an investor/ entrepreneur should believe in the power of the vision – work towards that outlive the people who saw it – yes it is difficult, non sexy, masochistic, painful and is guaranteed to give bouts of self doubt – but isn’t that the beauty of building great organizations?

Ads that get on my nerves...

Sometimes a few ads just get me irritated.... I have already cribbed about the veneta Cucine ad sometime ago.... this time -

Its I think the Aveo Uva - ( Notice I cant even seem to recall the brand name!!!) - anyways this is with Saif Ali Khan offering a stranded Rani mukherjee a lift on the roadside and then school kids rush in..... so what get me pained? In India, we lack the culture of safety. I don't have the stats but maybe 10% of users use seat belts in the front seat and maybe very few in the back.... so how can you cram 4 ( or was it 5) kids in the back seat of a car? of course, we are a nation who will turn a blind eye to 15 kids in the back of a rickshaw, so why the heck are you getting ruffled you might ask.... my only answer will be, lets move forward.... would GM have made a similar ad in the US? so why show such things in India?

The other ad which to me is puzzling is the shiny slim phone ad where the lady move through security metal detector and it beeps.... she is hiding a metal phone and the security guard cant find it.... why? becoz the stupid guard doesn't run the detector on the back...... duh , give me a break.... ( although due to association, I first thought it was airport security - now I think there is nothing to give that impression) ...... so down with dumb security guards and copy makers....

Investing in mutual funds – building a balanced portfolio

I have in the past blogged about going about investing here. I will jump a step and write about building a balanced mutual fund portfolio. I will address the debt side of mutual funds in a separate post on building your debt portfolio, so this post refers to only equity funds. Some steps I think are critical –

1. Get the funds right – Portfolio theory and investment theory says, diversification helps – the same applies for a mutual fund portfolio too. So you should plan to build one. And Remember this is going to be long time bound, non exciting, non sexy action which will make you cringe when the guy in the next cubicle is boasting of his 70% profit. But trust me, if you are not a gun in stock picking and don’t have time, go for mutual funds. A well balanced portfolio needs to have these funds I think

a. Core equity funds – Here you should have two sets of funds : one a bottoms up stock picking type with a large cap bias and will usually be stable in their returns and move with the Sensex or Nifty. The second should be a good growth fund that bets on the growth stocks. Remember although growth stocks tend to be the mid cap/ small cap stories, a growth fund targets returns and not capitalization. This should be a large chunk of your portfolio maybe ~40%. In case you are investing for the sake of tax saving in ELSS funds, then add them here.

b. Index funds / Exchange traded funds based on the index – This will allow you to ride the market direction with a lower expense load. Choose from a wide range of index funds or ETFs available. Keep in mind that if the core equity fund you chose has a largely the same companies as the index fund then you are losing the benefit of an exchange fund and losing on the expense. This should be ~20%-25% of your portfolio

c. Contra fund – This takes bets on stocks which are currently out of favour with the market. Use these funds to give that occasional punch to the portfolio and this should be about 15% of the portfolio.

d. Thematic / Go anywhere funds – These are funds with a mandate to go anywhere, invest in any story and take concentrated bets or diversify. In a volatile market like India these are funds which, if nimble, will make money due to emerging themes. This should be about 15%of the portfolio

e. Sector funds – These take concentrated bets on a particular sector. Ride the momentum and languish when the sector goes out of flavor. Send in 10% of the portfolio here.

2. Getting the mode of entry right: I would suggest you setting up a SIP on the core equity funds and the thematic funds, while sending those sudden bonuses and one time investments into the contra and sector funds. Remember the latter will increase the risk of market timing.

3. Watch the loads: some funds levy a higher entry load while others link it to an exit load with period of investment. ETFs and index funds have a lower load structure. Remember, loads eat into your returns.

4. Monitor your portfolio regularly: I would suggest a quarterly review, with a rejig once/ twice a year. Don’t touch your MF investments for 3-5 years atleast, see them grow. Use a good portfolio tracker like the one you find on sites like www.Valueresearchonline.com

5. Options – You will find Growth, bonus and dividend options. Dividend will have reinvestment and pay out options. Forget all these, remember, if u don’t need the money, choose growth and if u need the money choose dividend payout. The others don’t matter; they are a vestige of a period long bygone where taxation was an issue. But remember, if you investing in a ELSS fund to save tax, it makes sense to always choose the dividend option, since every investment is necessarily locked out for 3 years. You don’t have an exit option.

6. Forget the NFO’s go for good old tried and tested funds – very rarely do new ideas come to the market, when they do go for new fund offerings, else just invest in funds which have a track record. Although past performance in no guarantee of future, atleast it’s a better option than the new unknown

7. Close ended fund or open ended – the spate of NFO which claim to be better because they are close ended and hence give the fund manager a better control on investments , although true a little bit, is driven by the change in rules for amortizing the expenses. So cut through the crap, go for old funds, open ended and with a track record.

8. Throw your advisor out of the window if the first recommendation he makes is to invest in an NFO, unless he has very strong reasons about what is new about the fund and how there are no such funds available already.

9. Remember the difference between absolute performance and relative performance – All Mutual funds will boast of how they outperformed the market, but they are referring to relative performance to the index they chose to be benchmarked against. So if the index fell by 150% and they fell 149% they will still claim to have done better. And remember to include that load when you are calculating the returns. Me and you are bothered about what is the absolute performance… go back open the 7^th standard mathematics text book and learn how to calculate simple returns if you are not sure..

Happy investing , in a country where financial assets are a piddle , use this mode till you feel comfortable to venture alone in the jungles of the Indian equity market

Analysing my investment performance...

Although I regularly track my portfolio and juggle around my portfolio, the last 10 weeks I have actually monitored it closely since I am trying to decide if it is worth spending time on research. Every stock pick I do takes me anywhere between 8-10 hours of research and digging that much time these days is becoming a fairly difficult, with the increasing work load... so what are the results...

During this time the market ( defined as Nifty) has given a return of 17% ( all return figures are absolute and inclusive of transaction charges - not taking into account any tax which needs to be paid if i book profits now)

I have a mutual fund portfolio, which is probably 3.5 to 4 times larger than my stock portfolio and that returned about 19% during the same period.

My stock portfolio on the other hand has returned ~37% during the same period. This is post the entry costs... So my own stock portfolio is doing better. But wait, the risk profile is not the same across these 3 things. While Nifty is mostly large cap, my MF portfolio is a mix of large cap, small cap and some minuscule debt. On the other hand my stock portfolio is more of mid to small caps... so based on risk return equation maybe they are all running their own races well enough. I think come new year, I will re jig my MF portfolio, there are some laggards and shift the money to better options.

But still, is it worth doing my own stock picking, I think I will keep trying this for another year or so, see the results and then decide... I will update this in about 2 months time again... so keep coming back.