Wednesday, September 24, 2008

Munnabhai goes to the market

There are certain topics you should not discuss during a riverside walk.
Like office work, unless you have an office that overlooks the river.
Bomb blasts, unless you are patrolling on the riverside, not just strolling. Otherwise, you will be patrolled upon.
Windows vs. Linux, because the river can change course and wreak havoc.
And Stock markets, never, even if you work for... err..had till recently worked for... Merill Lynch.

But Bablu is not sensitive to these things. Munna bumps into Bablu on the riverside often, but they come from opposite directions for opposite kinds of reflections. Munna comes to reflect and discuss with himself, because all day he spends discussing with others. Bablu comes because he spends all day discussing with himself and Munna is the only guy who is ready to discuss anything at all with him.

Whatever, Bablu brought it up. Why does he do it all in reverse ? When the whole world is pessimistic, he brings up an optimistic 'thinko' assertion, When the whole world is optimistic, he sees through it all and reflects on their transcience. The sub-prime crisis has just worsened, well, it worsens freshly everyday. The market sentiments are on a low. Aha, what a phrase to denote about being sentimental about the market. And somehow Bablu thought of asking Munna about investing in stock markets. Not that Munna is all wisdom, though he often gives such a picture, unintentionally. Not that Bablu is all naive, but he puts up a show of naivety, intentionally, whenever someone puts up a show of wisdom. Munna had just stepped into the market in a small way, but you know Munna, he thinks he is a deep thinker. On what ? Well, pretty much on anything you ask him to think.

'I just want to beat the Post Office Returns Rate by 5%', began Bablu, 'Say 20% p.a. returns in the long term, of 7 to 10 years. I am not a trader, I want to be a long-term investor'. 'Munna noticed the data mismatch, but he knew that Poet Bablu was never good at quants, so he let it go. A professional financial advisor would ask you about your financial objectives and then about your risk profile or capability. Now that Bablu had spelt out the former, Munna asked him about the latter. 'Oh, I don't rebalance my portfolio according to my risk, I rebalance my risk according to the portfolio', replied Bablu. Munna never understood what that meant, but he knew this must be one of Bablu's eccentricities of doing things in reverse. 'I should learn this way of thinking from Bablu', he thought, 'it might help me become more creative'.

Neways, Munna went on to explain how he went about investing in the markets. 'I have pretty much the same expectation, I would bet on 12% instead, based on international data for the last 30 years', he began. 'Wow, everything about Munna is international, except the river', thought Bablu.

Munna always wanted to minimize research or studying companies or regular monitoring. This trait comes from his school days, where he always crammed on the day before the exam. We carry the same traits wherever we run. You carry your Shani, even if you run to Kashi.

Munna is also slightly inclined against timing the market. Spend time in the market instead of timing the market was his central belief. Besides, He knew Bablu falls for such puns. Also, if Munna advised Bablu to buy low and sell high, you know what Bablu will do.

Munna preferred investing little amounts regularly. Ironic, since he used to be inclined against this some time ago. But did he require permission, even to contradict himself ?

There is a slight paradox here, though. Don't want to study the companies, don't want to time the market, in other words, don't want to move your muscle, this goes against "standard" practices. But it best fits a lazy investor. Munna has a faint thought that investing without studying the companies will take a toll sometime or other, but he expected to reap some merits purely by diversification and more merits by investing in the long term. Moreover, he was always at a loss to understand Profit and Loss statements, Balance Sheets imbalanced him and his dismal performance at the Accounts courses had been meticulously documented at his university. Diversification is one good practice he happened to believe in. Thank God, he agreed atleast on one thing with the society.

Munna also avoided a few other common practices :

1. Asking Bablu where to put his money. He was sure Bablu will go reverse on this. Bablu felt like jumping into the river, but his Guru Bhakthi prevented him from responding to such humiliation in his very presence. Besides, this genre of rivers were suitable for jogging or blogging but not for drowning.

2. Asking a broker. You would have to first establish evidence enough that he is better informed, not just more informed. If you are smart enough to figure that out, you wont need one anyway.

3. Buy low and sell off high. When it comes to timing the market, Munna often remembers this old joke where a car driver asks a village kid to look out for hitting the wall, while he reverses the vehicle. The kid keeps saying ok, ok as the driver reverses and finally when the car hits the wall, he says, 'Yeah sir, now it has hit the wall'. Trying to time the market is like that. You know it after it has just gone past you.

4. Believing about some "inside" information which is not published and we think are unique in having. Munna believes that market efficiency beats insider wisdom.

5. Keep a target profit and sell. Bablu raised eyebrows, after all, what are we here for ? But Munna explained that he still had a target loss, err... a Stop Loss price, at which he would sell to minimize damage. May be Minus 25% in a year ? Whatever, but don't hug a sick donkey forever.

6. General opinion like XYZ stock is "good", or, now is the time, go go, buy that horse.

7. Reading, reacting and getting worried about everyday information about the stocks you have invested. Munna liked to look only at the "strategic" type of news. Somewhat like Lehman falls, Merrill sold and AIG totters.

Munna thinks that pretty much no one, repeat no one, has actually figured out how the machine works. We can always use hindsight to say that worked or this worked, but he didn't think someone figured it out before the machine worked, atleast at the level of the individual investor. He even asked a question on this at The Simple Dollar blog, but the answer seemed to confirm his own opinion. People who study trends and spot potential winners, like the ones who made it rich just by investing, were a different kind though. They worked like people who own a company while buying, not like people who trade a company. When it's time to sell, they work like they never owned the company and they were here just to trade it. But, we were just Post-Office-Plus-5-percent guys.

Since Munna defied some common practices and seemed pretty heavy-headed, there was quite a probability that he might get into a soup. And he knew it. If he failed, he wanted to go down in history, as the one who fully documented the soup and then went into it. He also wanted to make sure he goes into a soup based on his own decisions, good or for bad, instead of blaming some Bablu, Bujji or Broker. If he succeeded, of course, there would be enough people around to document someone's success.

Moreover, the money he put in stocks was a small percentage of his total savings, so he thought he was stoically prepared for consequences. Whether he will have same preparedness when the consequences actually reach, well, he hoped so. As they say in Karma theory, you don't have to be prepared specially, the consequences will anyway reach you. :) :) , prepared or not. It wouldn't be the first time that he leaned on Vedanta to understand his misery, he had done that before. He always fantasised himself to be like King Janaka and can invest in stocks online with the Artham Anartham verse playing in the background. Why does he always bring up that Verse 30 of Bhaja Govindam, every time he discussed stock markets ?

Munna also avoids all blue-chip stocks, since he preferred to invest in them through a diversified mutual fund. Being a fan of The Simple Dollar blog, he always preferred an index mutual fund to invest in index stocks. In countries like the US, they had funds that mirrored a 500 index and diversify across all companies forming it, but in India, you have a similar index, but not a similar fund that diversifies across all those companies. Our funds usually mirror a smaller index or draw a few stocks from the index and churn within the superset, like the HDFC Top 200. Whatever, Munna believed in his principles, but he can't shift to the US for that sake. So he chose whatever diversification the indian index funds offered.

In all, Munna did a quick one-hour "research" from the Economic Times indices. Went to their ET indices page, onwards to the page listing each of the indexes, saved the page as html, took the data to excel and onwards into Access. Then ran a couple of queries to know which are those companies that fall in most indices. With a sort by market-cap, for liquidity. Some like Nestle and Hero Honda came right on top. Then he went about picking up some stocks which he "felt" like, avoiding all Sensex stocks. Partly random, partly brand recall and partly hunch. To start with, he picked just these 12 stocks, one each from a different sector for an identical investment (small) amount in each. And he hoped to repeat the same buy, periodically. May be he'll add 2/3 more stocks to the master kitty later, like steel/cement which he had left out in the initial round. No smallcaps. Most of his picks came either from the ET 100 Growth, ET Midcap Growth or ET Midcap Value indices, but he believed, some day, 'Saara Desh isko Munna Index bulayega'.

If you thought, Munna handpicked his nuts analytically, then here is more disclosure on his sentiments:

Nestle and Airtel, though part of Sensex, still find a place, because Munna loves chocolates and hates BSNL.
Munna feels off about himself as a responsible global cooling netizen, so he wanted to have a green stock. Hence Suzlon.
Bank of Baroda is there because he vowed to buy it someday, after he wrote this blog post.
He is also reluctant to buy too many stocks from the same business group, like all of Reliance or all of Tatas. One each would do.

Munna decided that he will not spend any more extra time on research but he was ready to share the fruits of his one-hour work to Bablu and give the file to him.

'See you after 7 years', said Bablu, 'I mean, we can have a discussion on the same topic only after 7 years, right? Only then we will know whether Munna was right or wrong. '. And shot off across the bridge into his rustic village.
'How about 30 years', shouted back Munna, 'it takes that long for a big recession procession to pass by!!'. And went back to the Blogger's Bench by the riverside.

Why do most discussions abruptly finish with the conclusion "It depends", "Wait and watch" or "Only time can tell" ? . Next time, why don't you begin the discussion with the same phrase, so that you can save time by not discussing at all ? :)

Munna wasn't sure about what Bablu will do with the file, let alone what he is going to do with his money. Who knows, Bablu might even share it (the file, not the money) to people who email Bablu at his blog. And he was sure, Bablu is going to find a way to use the database in some odd eccentric reverse way. He only hoped, he would share it before spoiling it by reversing the sort. At the least, Munna was relieved that Bablu won't bother him on this particular topic, of all things, during a riverside walk.

Happy Investing.


  1. Great thoughts from great people... as usual...

    You are right about no has figured what market trend will be. But I figured out one thing. How market works. It works more on mob mania (organisational behaviour if there is an organisation) and less on fundamentals. In short more mentals and less fundas.

    By this standard, a good politician, who is able to judge and/or influence a mob should be the best investor. It is only that they dont know both these are same ball game.

  2. Saaar!

    KIndly can either Bablu or Munna offer to such as those like me who can not get to concentrate beyond one page, a simplified version of the wisdom?

    Ofcourse, i also know that wisdom can not be simplified...but, who can question the questioner? :)

  3. munna to the market ....ooops great wisdom from the common style is good waiting for more...

  4. Okay!

    Here is a twitter version.

    1. Munna likes to invest in blue-chip stocks through index mutual funds.

    2. Munna thinks ET100 Midcap Growth and ET100 Midcap Value are good places to look for stocks to buy.;jsessionid=100FDAD4FBB36FE2F21710C61E7A2ACB.node1?indexName=ET+100+Growth

    Aha, what a difference between 30 words and 2000 words.
    When will Munna learn that brevity is the soul of wit ? :) :)

    Therefore, since brevity is the soul of wit,
    And tediousness the limbs and outward flourishes,
    I will be brief: your noble son is mad:

    Shakespeare's Hamlet: Lord Polonius

  5. LOL....This is really good.... I think the US markets can continue to provide fodder for your blog with news everyday!!! You can probably talk about this ban on 'short-selling' next!!:)

    Timing the markets is indeed a difficult job but when it comes to timing a blog.... I am sure you are a big hit!

    Munnabhai is so great & well-known that he could easily get an appointment with Warren Buffett!!! Why trouble himself with ET ( I honestly meant Economic Times)!!

    And is'nt our dear Munnabhai the one who took all the trouble of going to medical school? He should be ready to go to a Business School where they teach a "Trading Course" instead of doing all this heavy 'Self-study'... guess he has changed course the markets!!

    Well....your final punch is real pun....Happy Investing....Huh. Even with the right opportunity, people dont seem to be happy investing but forget that...they even fail to stay invested!! You should next blog about "Opportunity Losses" - Both buying & selling!

  6. :) Oh, YET Another course !!
    (Sighs, sinks to the ground as if tomorrow is the examination, and shoots off into a melancholic song in lament....)

    You know how Munna was humiliated by that one course he chose to take, that he almost had to drop out of the course for saying the simple things he knew. The experience, they say, even made him turn to Gandhigiri, in later days. :) :)


Thank you for your comments....

THANK YOU: These reflections draw sometimes from readers and friends who initiate ideas, build up discussions, post comments and mention interesting links, some online and some over a cup of coffee or during a riverside walk. Thank you.

Disclaimer: Views expressed in this blog are the blogger's personal opinions and made in his individual capacity, sometimes have a story-type approach, mixing facts with imagination and should not be construed as arising from a professional position or a counselling intention.