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Hello friends,
Wish you all a very successful AUM enriching New Year. Today while driving to airport in Hyderabad, I interacted with a very dear IFA friend from Kolkata, Aajay Beell (it is not a typo-spelling is correct) who gave me food for thought for writing this article. He has been reading a book written by Howard Marks and came across some paras which made him think of me and my style of thinking and advising my clients and my IFA Friends. That according me is a great compliment. He is my Shagird and treats me as his Guru. I hope I can live up to his expectations and that of many IFAs whom I am mentoring through my A2A Platform. According to Aajay,I have Second Level of Thinking, similar to what Howard Marks has described in his book and that makes my style of advising distinct and different.
You can't be with the herd and outperform
One line which he shared from Howard Mark's book was: "You can't do the same things others do and expect to outperform". I have always believed in this philosophy and managed to THINK HATKE and OUT OF THE BOX so that I can guide my investors on the right path.
So what is this Second Level of Thinking? According Howard Marks: "First level of thinking is simplistic and superficial, and just about everyone can do it. First level thinking says, "The outlook calls for low growth and rising inflation. Let's dump the stock". Second level thinking says, "The outlook stinks, but everyone else is selling in panic. Let's buy"."
So what have been my MANTRAS for a successful Advisory Practice which has kept me in good stead and managed to maybe think differently (my Second Level of Thinking)? I am listing all these MANTRAS (my trade secrets which I am sharing with my IFA friends through this article). I had promised at Wealth Forum Conference that I will give back to the Industry which has given me so much love, respect and recognition; so here I go:
MisterBond's 10 Mantras for Successful Advisory Practice
Keep it Simple and Uncomplicated Apply Logic and Common Sense Do not think like the HERD. Can think clearly only when you stand apart from the HERD Natural corollary to above is to take Contrarian Calls One can easily generate wealth by investing in Bullish Markets (both debt or equity); but serious wealth gets created only when one invests in Bearish markets (when valuations are better) Never panic or have knee jerk reactions. Stay calm and think logically Most tend to concentrate on upside participation; thereby ignoring downside protection. Disinvestment calls are as important or more important than investment calls Never feel left out and take hurried investment decisions. There is always that next bus available for investments Always think Investor centric. If Investors make money, we will make money and if we make money, I am sure AMCs will make money Finally, Conviction leads to Consistency. Do your number crunching and back testing for convincing one's own self first
Now let me share (going down memory lane) as to which Mantra I used when and how did my Investors come out on top:
1. Call of Disinvestment from Income schemes in December 2008:
I had given an investment call to invest in Income/G Sec schemes in November 2008 when 10 year benchmark was at 7.5%. Yields softened to 5.5% by December 2008 (in a span of 20 days); thereby generating humongous returns in a short span of 20 days. I was the only one who gave an aggressive disinvestment call and rest of the Industry gave an aggressive investment call in January 2009 (looking at point to point returns).
Mantras I used here were:
Applying common sense: what we had expected to earn in one year was earned in 20 days. Logic said that if one exited and switched to liquid schemes for next 6-12 months, one would still manage very good returns
Protection of downside: since there was huge in built profits (that too unrealistic); it was imperative to protect downside by booking profits &
Taking a contrarian call: One person giving disinvestment call v/s entire industry giving an investment call
Needless to say; those who invested in January 2009 suffered huge losses over next 6-12 months as 10 year benchmark yield went up from 5% to 7% during this period
2. Call to Hold or Add in Income schemes post rise in Interest rates in June 2013:
Against the expectation of softening interest rates; interest rates inched up dramatically in June 2013. Those who had invested in duration schemes since January 2013 were sitting on huge losses in their portfolios. 10 year benchmark had breached 9%. There was huge panic and most Advisors and Investors wanted to exit (even with huge losses in their portfolios)
Mantras I used here were:
Applying common sense: There was no point in booking losses when interest rates were at an all-time high. It was like saying that you disinvest from equity when markets corrected to 8,500 in March 2009 post a high of 21,000 in January 2008. All the negative factors were priced in
Doing my own Number crunching to get Conviction: I dug out some data to show that 10 year benchmark (till June 2013) had breached 9% only 32 times over previous 10 years. Post that it had always retraced back to more realistic levels and Income schemes had never generated negative returns on one year rolling basis
Staying Calm and Not Panicking: When rest of the Industry was thinking in terms of exiting from Duration schemes; I stayed calm away from opinions of others (not being part of HERD), thought logically and gave a call to either HOLD or Invest More in duration schemes at that level (This I think is Second Level of Thinking as described by Howard Marks)
Those who stayed invested and/or added to their investments benefitted the most v/s those who exited and converted notional losses into actual losses.
My Article : What should we do with income funds now?
3. Exit Call from Arbitrage Schemes when Markets corrected in 2008-2009:
I had aggressively sold Arbitrage schemes to my Institutional clients when equity markets were on a roll from 2005 to 2007. Arbitrage schemes perform well in bullish markets and underperform in bearish markets.
Mantras I used here were:
Thinking Investor Centric: I gave an aggressive disinvestment call during 2008-2009 correction. This asset class underperforms in bearish markets (which it did) - thinking only Investor centric; even at the cost of letting go off my own revenue stream
Giving Disinvestment Calls to protect Downside: Needless to say that the intention was to protect downside for Investors by giving a timely disinvestment call
4. Call to stay Invested or Invest more in Schemes post JSPL downgrade:
When JSPL paper was downgraded to D in March 2016; most in the industry wanted to a) exit from schemes which had exposure to JSPL papers and b) even exit out of all accrual schemes in general; thinking that there might be many such credit issues going forward
Mantras I used here were:
Common Sense and Logic: JSPL haircut in pricing and NAV was already factored in. JSPL had not delayed or defaulted on capital market exposures. Due to haircut, yield of JSPL paper had gone as high as 25% and finally benefits of diversification through Mutual Fund route would have helped to recover losses over a period of time due to already in built accruals from other securities held in the scheme
Do not panic or take knee Jerk reactions: Most in the Industry including Investors panicked and stopped thinking rationally. Their first knee jerk reaction was to exit out of those schemes which had JSPL exposure and many went to the extent of thinking of exiting all accrual schemes
Contrarian Call: When rest were saying exit, my call was to invest for reasons mentioned above
My Article: Lull after self-created storm
5. Exit Strategy from SIP:
Our Industry has given a Mantra of investing through Systematic Investment (SIP) and created slogans like SIP Karo Bhool Jao, Fill It, Shut It, Forget It. Are these right slogans and strategies?
Mantras I used here were:
Downside Protection: I don't think anyone in the MF Industry has ever spoken about exit strategy from SIP. We are only saying SIP karo Bhool Jao, Fill It, Shut It, Forget It. I have showcased in my article on the subject that this is really not a good idea. After sometime, there is no difference between a SIP portfolio and a lump sum portfolio; both are vulnerable to volatility. Then why not protect downside - switch that to some rebalancing schemes and generate better wealth over short and long term through this strategy? This strategy also creates balance between debt and equity - which so far is lacking in portfolios which are created only through SIP mode
Common Sense: Common sense says that at extreme valuations, one must exit and book profits and protect downside but not get into debt schemes. Switch these portfolios in rebalancing schemes which will Buy Low - Sell High with some constant profit booking strategies. So far an Investor is like Abhimanyu of Mahabharata who is stuck in a CHAKRA VYUHA and who doesn't know how to exit from an Asset Class called Equity after entering it.
Following table will demonstrate the importance of Exit Strategy from SIP and how it could have added further wealth in Investor portfolio:
I can showcase many such examples; it will only add up in multiple pages. However, the intention was to demonstrate how SECOND LEVEL OF THINKING, THINKING HATKE and OUT OF THE BOX can really enhance our Advisory practice to the next level.
Debt and Equity markets in 2018:
2017 delivered excellent returns in equity but very poor returns in Duration schemes. Looking at past performance, most investors have started thinking that it is bad to invest in debt but good to invest in equity market. Even newspapers like Economic Times are carrying articles with Titles like "Equity to do better than Bank FDs in 2018". What an absurd comparison of two asset classes at diametrically opposite ends of Risk Matrix!!
This is the time when we will have to use some or many of my Mantras and Second Level of Thinking to guide investors from their own illogical thought processes. Use the Mantras like common sense, downside protection, your own number crunching and conviction, do not think like the HERD, invest in bearish markets (better valuations in Debt currently) and finally never feel left out (those investors who could not participate in current equity rally) and tell them that there is that next bus called Asset Allocation for participating in equity market upside.
Specifically on Debt:
Refer to my article on when one should invest in Duration schemes (My article: Words of wisdom from a duration call champion). My caveat remains that Duration schemes should not be recommended to retail investors. This call is only for HNI/Corporate investors - more like a trading call. If one were to invest in Income/G Sec schemes in a staggered manner over next 3-6 months; one will be able to generate good returns as investment timing would have been very good (read valuations would be good). There are head winds due to inching up of oil prices, inching up of inflation, fiscal slippages due to Bank recapitalization and extra borrowing by the Government and deteriorating CAD (Current Account Deficit). 10 Year benchmark has almost gone up by 100 bps over past one year; thereby generating very poor returns. Following picture depicts the debt market constituents and their impact (+ve or -ve) on interest rates. If anyone understands this correlation, one can on a reasonable basis predict interest rate movements based on some of the macro factors (Mantra of doing your own number crunching and back testing to have CONVICTION). Data on deteriorating CAD and Fiscal Deficit point towards elevated levels of interest rates for some more time. Most in the Industry are thinking of exiting from investments in Duration schemes whereas according to me one should be investing (my above caveat for retail investors stays the same) in duration schemes over next 3-6 months. Yields will remain at elevated levels for some time and then soften once the Government starts to follow the fiscal consolidation path.
Here we are using Mantras like: do your own number crunching (as mentioned in my article), take contrarian call and do not panic (those who are thinking of exiting due to poor returns) and invest in bearish markets (better valuation).
Specifically on Equity:
Let me quote Howard Marks once again: "Once in a while we experience periods when everything goes well and riskier investments deliver the higher returns they seem to promise. Those halcyon periods lull people into believing that to get higher returns, all they have to do is make riskier investments. But they ignore something that is easily forgotten in good times: this can't be true, because if riskier investments could be counted on to produce higher returns, they wouldn't be riskier".
We are in a similar situation as far equity markets are concerned as mentioned by Howard Marks above. That is not to comment on whether equity markets will deliver returns in the current year or not. It is only to inform your investors of the additional risks they would be undertaking in their portfolios with diminishing returns potential going forward. As Taher Badshah - CIO Equity Invesco MF had mentioned in one of the articles in WealthForum that Bear Markets emanate from Bullish Markets and Bullish economies(Click Here). Currently we may be in Bullish Markets but not bullish economy. Following Table will confirm the same. Once the earnings growth will start to pick up (that journey has already started) current extremely high PEs will get rerated. Hence, we do not expect extremely sharp corrections like those witnessed in Bear Markets. We will still witness moderate corrections going forward due to various points mentioned above. Hence, we may not witness similar returns as witnessed during 2017 CY and hence we need to moderate Investor expectations from this asset class.
Also, to embrace volatility and make it a friend in your Investor portfolios - look to invest in Asset Allocation schemes for better risk adjusted returns going forward.
I hope I have been able to capture the essence of a good Advisory Practice by sharing my experiences and ideas as above and converting them into what I have just called them as 10 Mantras of MisterBond to help you go to that Second Level of Thinking.
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