Volatility, Re-balancing Portfolio, New Age Companies & Disruption Beneficiary
Premium Issue - 2
Hi, Welcome to 2nd Special Edition
Brief Overview of What We will cover in this Issue
Detailed Key Takeaways from the book I am reading Currently
Key Takeaways from Investing Articles and Blogs
When to Sell Stocks
How to Think About Volatility
Rebalancing Portfolio
Small Important Investing Video Clips
Green Energy
How to play different Cycles and Themes
Disruption Benificery Investing
Subconscious Mind
Hiren Ved’s 30+ Year Key Investing Learning
Recognizing Risk
Great investing requires both generating returns and controlling risk. And recognizing risk is an absolute prerequisite for controlling it.
Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do.
Recognizing risk often starts with understanding when investors are paying it too little heed, being too optimistic, and paying too much for a given asset as a result.
The risk-is-gone myth is one of the most dangerous sources of risk, and a major contributor to any bubble
Why do Investors take more risk?
Investors have fallen over themselves in their effort to get away from low-risk, low-return investments.
Risky investments have been very rewarding for more than twenty years and did particularly well in 2003. Thus, investors are attracted more (or repelled less) by risky investments than perhaps might otherwise be the case and require less risk compensation to move to them.
Investors perceive risk as being quite limited today.
The reality of risk is much less simple and straightforward than the perception. People vastly overestimate their ability to recognize risk and underestimate what it takes to avoid it; thus, they accept risk unknowingly and in so doing contribute to its creation.
When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing since all optimism has been driven out of its price.
Fact: High-quality assets can be risky, and low quality assets can be safe. It’s just a matter of the price paid for them.
Controlling Risk
Risk control is invisible in good times but still essential since good times can so easily turn into bad times
Controlling the risk in your portfolio is a very important and worthwhile pursuit. The fruits, however, come only in the form of losses that don’t happen. Such what-if calculations are difficult in placid times.
Careful risk controllers know they don’t know the future. They know it can include some negative outcomes, but not how bad they might be, or exactly what their probabilities are. Thus, the principal pitfalls come in the inability to know “how bad is bad,”
Great Investors
Great investors are those who take risks that are less than commensurate with the returns they earn. They may produce moderate returns with low risk or high returns with moderate risk.
An excellent investor may be one who— rather than reporting higher returns than others— achieves the same return but does so with less risk (or even achieves a slightly lower return with far less risk). Of course, when markets are stable or rising, we don’t get to find out how much risk a portfolio entailed. That’s what’s behind Warren Buffett’s observation that other than when the tide goes out, we can’t tell which swimmers are clothed and which are naked.
In all aspects of our lives, we base our decisions on what we think probably will happen. And, in turn, we base that to a great extent on what usually happened in the past. We expect results to be close to the norm
(A) most of the time, but we know it’s not unusual to see outcomes that are better (B) or worse (C). Although we should bear in mind that, once in a while, a result will be outside the usual range (D), we tend to forget about the potential for outliers.
We rarely consider outcomes that have happened only once a century . . . or never
Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well.
Being Attentive to Cycles
Trees don’t grow to the sky. Few things go to zero.
The more time I spend in the world of investing, the more I appreciate the underlying cyclicality of things. - Howard Marks
In investing, as in life, there are very few sure things. Values can evaporate, estimates can be wrong, circumstances can change, and “sure things” can fail. However, there are two concepts we can hold to with confidence:
• Rule number one: most things will prove to be cyclical.
• Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.
Very few things move in a straight line. There’s progress and then there’s deterioration. Things go well for a while and then poorly.
The basic reason for the cyclicality in our world is the involvement of humans. when people are involved, the results are variable and cyclical. The main reason for this, I think, is that people are emotional and inconsistent, not steady and clinical.
Application of psychology to these things causes investors to overreact or underreact, and thus determines the amplitude of the cyclical fluctuations.
When people feel good about the way things are going and optimistic about the future, their behavior is strongly impacted. They spend more and save less. They borrow to increase their enjoyment or their profit potential, even though doing so makes their financial position more precarious (of course, concepts like precariousness are forgotten in optimistic times). And they become willing to pay more for current value or a piece of the future
When Bear Market hit: “Everything that was good for the market yesterday is no good for it today.”
Success carries within itself the seeds of failure, and failure the seeds of success.
“The worst loans are made at the best of times.”
Look around the next time there’s a crisis; you’ll probably find a lender. Overpermissive providers of capital frequently aid and abet financial bubbles. There have been numerous recent examples where loose credit contributed to booms that were followed by famous collapses: real estate in 1989– 1992; emerging markets in 1994– 1998; Long- Term Capital Management in 1998; the movie exhibition industry in 1999– 2000; venture capital funds and telecommunications companies in 2000– 2001. In each case, lenders and investors provided too much cheap money and the result was overexpansion and dramatic losses.
“If you build it, they will come.” In the financial world, if you offer cheap money, they will borrow, buy and build— often without discipline, and with very negative consequences.
Bull Market Observation (Upcycle)
Companies will anticipate a rosy future during the upcycle and thus overexpand facilities and inventories; these will become burdensome when the economy turns down. Providers of capital will be too generous when the economy’s doing well, abetting overexpansion with cheap money, and then they’ll pull the reins too tight when things cease to look as good. Investors will overvalue companies when they’re doing well and undervalue them when things get difficult. And yet, every decade or so, people decide cyclicality is over.
The future will look a lot like the past, with both up cycles and down cycles. There is a right time to argue that things will be better, and that’s when the market is on its backside and everyone else is selling things at giveaway prices. It’s dangerous when the market’s at record levels to reach for a positive rationalization that has never held true in the past. But it’s been done before, and it’ll be done again.
Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do. People oft enact as if companies that are doing well will do well forever, and investments that are outperforming will outperform forever, and vice versa. Instead, it’s the opposite that’s more likely to be true
Awareness of the pendulum
Investment markets follow a pendulum-like swing:
• between euphoria and depression, • between celebrating positive developments and obsessing over negatives, and thus • between overpriced and underpriced
Two Main Risk Of Investing
The risk of losing money and
The risk of missing opportunity
It’s possible to largely eliminate either one, but not both. In an ideal world, investors would balance these two concerns. But from time to time, at the extremes of the pendulum’s swing, one or the other predominates.
In 2005, 2006, and early 2007, with things going so swimmingly and the capital markets wide open, few people imagined that losses could lie ahead. People weren’t concerned about losing money, they didn’t insist on low purchase prices, adequate risk premiums, or investor protection. In short, they behaved too aggressively
In late 2007 and 2008, with the credit crisis in full flower, people began to fear a complete meltdown of the world financial system. No one worried about missing opportunity; the pendulum had swung to the point where people worried only about losing money.
Most people do the wrong thing at the wrong time. When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so.
Three Stages of Bull Market
When a few forward-looking people begin to believe things will
get better
When most investors realize improvement is actually taking
place
When everyone concludes things will get better forever (People become willing to pay prices for stocks that assume the good times will go on ad infinitum.) What the wise man does in the beginning, the fool does in the end.”
Stocks are cheapest when everything looks grim
Three stages of a bear market:
When just a few thoughtful investors recognize that, despite the prevailing bullishness, things won’t always be rosy
When most investors recognize things are deteriorating
When everyone’s convinced things can only get worse (Major bottoms occur when everyone forgets that the tide also comes in. Those are the times we live for.)
The air goes out of the balloon much faster than it went in.
There are a few things of which we can be sure, and this is one: Extreme market behavior will reverse.
Excerpts and Learning from Articles/Blogs
1. The Art Of Selling Stocks
World Of Changed (Business):
Ex. Music Broadcast due to shifting from Radio to Youtube, Insta, FB
Amarraja Batteries and Exide Batteries (Shifting from Traditional Battery to EV
Whenever the world changes, it is often better to leave what is disrupted.
Bent, Broken, and Beyond Belief: If reasons for buying is not valid longer
Ex. Sequent Scientific (Thesis and Management Changed)
Valuations: Alkyl Amines (Peak Margins and Peak Valuations), IEX
Look at the most aggressive scenario, if you don’t see yourself making money even in the most aggressive scenario 3 years out. It’s better to sell and move to something else.
Better Opportunities Available: Warren Buffett’s IBM Example
Sector Risk: Set Limit to Maximum Sector Allocation
Stoploss: Revisit Thesis and do Research if Portfolio Company decline more than 30% without a broader market correction
Large Numbers Base: If a business scaled a lot then higher growth on a very large number is not possible easily
(Here is the link to the article if any wish to read it in detail)
2. Saga Partner’s Semi-Annual Letter
It is easy to look back at prior highs or lows and say, “I knew I should have sold” or “I knew I should have bought.” The thing is, I didn’t know, otherwise I would have done so. If the outcome was so clear, then the decision to act would have been simple. If I had absolute conviction how the market would twist and turn each day, month, or year, I would invest in a much different manner and provide perfectly consistent market-beating returns. Of course, if I knew what the market would do next then it is likely that others would as well, which would negate that insight…one can see the circular logic.
Why Average Investor Earn Less
A 2019 DALBAR study found that the average investor in any equity mutual fund underperformed the S&P 500 by nearly 5% annually over a 30-year span. The primary reason for underperformance points to the investor retention rate data within the mutual funds, or rather the lack of investor retention, i.e. investors trade too much. There is an inflow of money into mutual funds that recently outperform and an outflow following underperformance. Just as the best investments underperform the market at times, the best actively managed portfolios also underperform the market at times and investors sell following that underperformance. Peter Lynch discussed, “when he would have a setback in performance, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, with investors having missed the recovery.” Expecting a company’s stock or an actively managed portfolio to outperform at all times is sure to disappoint.
How to Think About Volatility
One thing will always remain true so long as human behavior does not change, people get excited when stocks go up and scared when stocks go down. With the help of hindsight, every market drawdown has been an opportunity. However, as we live through each new drawdown it always makes one consider, “is this time different?” We are wired to panic when others panic and get greedy when others are greedy despite the exact opposite behavior being far more lucrative when it comes to investing in publicly traded stocks.
the market is valuing the stock at its current price. Stocks can swing wildly for many reasons and sometimes for no reason at all.
If it was legally required that shareholders could not sell shares for at least five years, people would act more like rational investors and less like emotional speculators.
Successful long-term investment typically includes two factors: 1) a high-quality company, and 2) beats the market’s expectations.
On Selling: selling the truly rare company with strong prospects that you understand well simply because the current multiple might appear to have gotten a little ahead of itself has been a mistake on average.
The lower the price a company sells for relative to its intrinsic value, the higher the future rate of return
(Full 17 Page Semi-Annual Letter by Joe Frankenfield)
3. Should you Rebalance your Portfolio Or Not (Riding Winner or not?)
There is nothing wrong with changing a plan when your circumstances or the facts change.
changing your tune based on how high or low prices are is not a sustainable investment strategy.
Rebalancing Portfolio
When the risky allocation of your portfolio is flying high, you’re going to regret not owning more of it. And when the risky allocation of your portfolio is getting killed, you’re going to regret now owning more cash and bonds.
you have to ask yourself the following:
Is this a portfolio or a plan?
Why did I create an asset allocation in the first place?
All investing is a form of regret minimization
4. Stop Listening
Short-term market predictions are worse than meaningless. They’re dangerous.
Forecasters understand we can’t accept uncertainty. Any story is better than “I don’t know.” Markets are complex open systems.
When we’re not certain of the right answer, the best approach is to have a portfolio, a range of bets that reward us with resilience and significant upside.
5. In case anyone wondering about RJ’s Investment DB Reality
Big Bull has been invested in the stock for more than nine years, without having made any meaningful returns
the stock was minuscule in the context of his overall portfolio
Excellent Write up by Santosh Nair
Small Video Clips
Investing Opportunities in Green Energy | Understanding Green Energy Sector Twitter Space Session by Kumar Saurabh
00:00 Introduction 03:10 Green Energy Brief Outlook 06:37 Decarbonisation Theme Play 12:51 Why Renewable Energy is on Focus (Pre & Post Covid), Interest rate impact, Wind Energy 21:44 Opportunity Size & Sub-Sector (Renewable) 28:38 Risk Factor & Survival (Chinese Market Study) 37:04 Other Challenges than inflation and Interest rate 40:58 Solar Power Cost and Capacity (Opportunity Size) 45:53 Multiple Growth Revenue 48:26 EV, Hydrogen and Ethanol 52:17 Potential of Bio-Diesel 53:18 Renewable Energy Future 55:32 Green Energy (Regulations Ease?) 57:32 Green Hydrogen And it's Industrial Use (Electrolizing) 01:02:20 Steel Plant (Power from Waste) 01:04:30 Solar Module Life & Utilization 01:06:15 View on LNG as Transition Fuel 01:08:10 Demand-Supply 01:10:04 Solar Power Generation Risk to Power Company? 01:11:22 Thank You Note
(I added a link to all timestamps so whenever you click on any link will land you at certain timestamps as written above)
Hiren Ved investing learning from 30+ Years career (Insights on Microcap investing) 11:32 to 22:08
How to play different cycles and themes in the stock market 23:59 to 32:15
New Age Companies 01:09:24 To 01:10:35
Disruption Beneficiary (Learn how to invest Prox-play) Tata Elxsi, Saregama, Map-My-India 01:11:07 to 01:13:32
Next Sectors to focus on: Tech, Financial, Manufacturing, Speciality Chemicals
Personal Story of Arnold Van Der Berg (02:10 to 12:55)
Benjamin Graham’s Influence on Arnold Van (57:07 to 59:13)
How Arnold Van started Investing after studying History (01:00:12 to 01:02:26)
The secret of Subconscious Mind and How it changed his life (01:04:37 to 01:14:30)
(Discussed Hypnosis, Subconscious Mind, Happiness, Meditation, Love, Greed, Life, Honesty, Anger, Achievement, Exercise, Internal Truth)
You only should watch 2.5+ Hour Long video if you love the above things otherwise skip (Great video for Arnold Fan)
Thank you for reading! see you at the next one.
Great read, Thank you for the deep insights offered. Loved reading it. Looking forward to your articles now every week :-) . Keep up the good work