Category: Investing Insight

Investing insight to make you a better investor.

FII (FPI) and Mutual Fund Investment Charts

Foreign investors love the India Story

Just look at the amount of money pumped into India: $25,347.95 million so far this year alone.

fii-investments.2012-01-01.2014-08-31

And just into Equities: $11,960.36 million this year.

fii-investments-equities.2008-1-1.2014-08-31

Domestic Institutionals have a debt fixation

DIIs have bought up Rs. 3,99,840.60 crores into debt this year alone.

dii-investments.2012-01-01.2014-08-31

And have been net sellers of equities. Taking out a total of Rs. 452.30 crores this year and Rs. 22,507.20 crores since 2013.

dii-investments-equity.2008-1-1.2014-08-31

There are signs that domestic investors are finally joining the party. Here’s to hoping that a majority of those funds will come from fresh investments rather than from rotating out of debt into equity.

Also, these trends beg a question: Have our regulatory and tax system skewed incentives toward debt at the cost of equities?

REIT All the Way

We had discussed REITs (Real Estate Investment Trusts) before. The SEBI board has approved the final set of regulations.

Key take away

  1. Tax pass-through: return from investments through these instruments will be taxed only in the hands of investors and the trusts will not have to pay tax on income.
  2. REITs and Invits should have a starting asset value of at least Rs 500 crore and the initial offer has to be Rs 250 crore or more.
  3. REITs will be allowed to invest only in commercial property. They should be completed and should be generating revenue.
  4. REITs will have to be listed. But if the experience of listing NCDs is any indication, expect little no secondary market liquidity.
  5. REITs will not be allowed to invest in other REITs.
  6. Minimum investment: Rs. 2 lakhs

Impact

This will be a good way to build a diversified portfolio. Right now, investing in any form of real estate is a nightmare. Ticket sizes tend to be more than Rs. 50 lakhs for decent properties, there’s a huge legal tail-risk associated with land, the total cost of ownership cannot be fully calculated beforehand, so ROI is a matter of gut-instinct. REITs will be a net positive for investors with white money.

Right now, small ticket purchases (less than Rs. 50 lakhs) has been focused on buying up land in the outskirt of cities or Tier-2/Tier-3 cities. If REITs end up being popular, then it may negatively impact appreciation rates in these areas.

Full text:

Why Diversify?

One of the main benefits of diversification is that if you invest in a group of assets with low correlations to one another, then you are likely to get the highest return for a given level of risk. But has it really worked that way for Indian investors? Here’s what we found while we crunched some numbers using CNX 100 and GSec 8+ year total return index since 2003.

Correlation

Yes, correlations are low: 0.0624. And we have a scatter-plot to prove it:

CNX 100-GSEC_SUB_8-2003

Returns

Here’s how the yearly returns look like (%):

stocks.vs.bond.returns

An 80:20 stocks:bonds portfolio would have had an average return of 21.43% vs 25.81% of a stock-only portfolio – a give up of 4.38% in returns – with lower volatility.

The question is, is it worth the trade off if you can stomach the volatility?

Related: BOND ≠ BORING

Using SMA to Reduce Volatility of Returns

Introduction

We saw how a CNX 100 50-day tactical investment strategy boosts returns of a naive buy-and-hold strategy (here) even while considering trading costs and other friction (here.) To visualize how this works, lets have a look at the histogram of daily returns since 2010 (1150 trading days.)

Naive buy-and-hold

bh-returns-2010
Daily Returns
<= -2%
36 days
<= -1%
165 days
>= +2%
41 days
>= +1%
188 days
Average
+0.04%
Std. Dev.
1.07

200-day SMA switch

200-sma-returns-2010
Daily Returns
<= -2%
16 days
<= -2%
85 days
>= +2%
21 days
>= +1%
122 days
Average
+0.07%
Std. Dev.
0.79

100-day SMA switch

100-sma-returns-2010
Daily Returns
<= -2%
11 days
<= -2%
66 days
>= +2%
21 days
>= +1%
114 days
Average
+0.09%
Std. Dev.
0.74

50-day SMA switch

50-sma-returns-2010
Daily Returns
<= -2%
7 days
<= -2%
53 days
>= +2%
24 days
>= +1%
110 days
Average
+0.11%
Std. Dev.
0.71

Conclusion

Even after considering trading costs, impact costs and tracking error, this strategy comes out way ahead of a naive buy-and-hold strategy. Better returns than buy-and-hold with lower volatility and at a low cost!

You can follow the Theme here.

Did Popeye have it right or wrong?

I came across some interesting articles on how urban legends are born and kept alive. This is especially true of readers who skim an academic discipline, for example, by reading Malcom Gladwell, and don’t put in the effort to stay updated. And just how the secret of advertising is repetition, repetition, repetition, some “truths” stick around long after they have been debunked simply because they get repeated often enough.

The 10,000 hour rule

Made famous by Outliers by Malcolm Gladwell, the 2008 book’s “10,000-hour rule” turned most “Soccer Moms” into “Tiger Moms.” However, we now know that Gladwell’s book mistook the average of 10,000 hours that experts took to master a skill with the total they required. Plenty of studies suggest that aside from practice hours, individual differences help explain success: from socioeconomics to coaching to I.Q.

However, they myth lives on as more and more people read the book and not the errata.

Source: National Geographic

Is Spinach a good source of iron?

In 1981 and again in 1995:
The myth from the 1930s that spinach is a rich source of iron was due to misleading information in the original publication: a malpositioned decimal point gave a 10-fold overestimate of iron content.

In 2011:
The story that the iron content of spinach was a myth based on a misplaced decimal point is itself a myth. Spinach has a lot of iron, just like other green vegetables, but it is unavailable for absorption.

So spinach is useless as a source of iron. But not because of a measurement error. Try to get your mom to believe it.

Source: SagePub

Here be dragons

Daniel Kahneman: “A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.”

People deal with statistical illiteracy by reacting with their gut. It makes us overreact to things that seem dangerous only because they’re unknown, and underreact to things that are dangerous but look benign.

But tell this to a guy who believes in technical analysis and he’ll probably kill you.

Source: Fool.com