Category: Your Money

Returns on Reliance

shyam February 21, 2012

We had discussed how risk and return are two sides of the same coin (read the series here). Also, we looked at the high price correlation of Reliance vs. the Nifty 50 index. The question yet to be answered is this: given a choice between owning Reliance and owning the NIFTYBEES ETF, what should an investor do?

Lets look at the pros of owning the NIFTYBEES:

The NIFTYBEES represent the broader market. Investors get a diversified, market-weighted portfolio.
8.73% of the NIFTYBEES is, in fact, Reliance. So investors do get a slice of exposure to Reliance.

Now what would be the disadvantages of owning the NIFTYBEES vs. owning Reliance outright?

If Reliance out-performs the index, then investors only get a small (8.73%) of the increase
Investors may not want to buy the entire index and might prefer a concentrated portfolio of just resource stocks, of which Reliance is one.

To answer this question, lets turn our heads to two measures: alpha and beta (discussed here.) Reliance has an alpha of -0.0002946529 and a beta of 1.027928. What this shows is that Reliance actually underperformed the index (a –ve alpha) and it more or less tracked the index (a beta close to 1; confirmed by our correlation study.)

We are in the process of rolling out alpha and beta of individual stocks against the Nifty 50 index. Stay tuned!

Categories Your Money Tags correlation, NIFTYBEES, RELIANCE, returns

China to overtake India in one more thing

Abhishek February 16, 2012

Image via Wikipedia

Warren Buffet may not like gold that much, but apparently Indians and Chinese haven’t received his latest newsletter. And not only that, China is set to overtake India as the world’s largest consumer of gold. Chinese demand has more than tripled from 2010.

Given that both growth and inflation remain high in China, it appears that gold is being seen as a hedge against inflation. Also, Beijing has encouraged gold consumption, announcing in 2010 measures to promote and regulate the local gold market, including expanding the number of banks allowed to import bullion.

After completely dominating the copper market (China accounts for 40% of global copper demand), it appears that China is about to wade into the bullion shop.

Investors looking to get exposure to gold via ETFs can look towards GOLDBEES or KOTAKGOLD.

Source: FT

Categories Your Money Tags gold

Is this going to 2011 all over again?

shyam February 16, 2012

Has the market risen too fast too soon? It feels like only yesterday that all the “green shoots” talk from the US drove Nifty to overbought conditions. And then nothing happened. Europe took center stage and the drama there still continues. Are we talking about “brown shoots” now?

We had the same sort of bullishness in early 2010 and 2011 as well. And we are yet to reach those levels again.

I think its time to be nervous.

Categories Your Money Tags reading

Top 5 Investing Mistakes

Abhishek February 15, 2012

Image via Wikipedia

I missed the rally in TATAMOTORS today. When a stock that you don’t own takes off (+11% since yesterday), you are filled with blinding rage. I made the #1 mistake of letting my individual preference interfere with my investment decision. I never liked Tata cars – I feel that they fall apart in a year and their interiors are sub-par. But turns out I missed the wood for the trees. So I sat down and wrote up a list of 5 mistakes that investors should avoid:

Getting confused between the company’s product and its stock. Very often, you may love the product the company makes. You may love the XUV 500, but that’s not a good reason in itself to own M&M. You may hate Airtel’s service, but that’s not a good reason in itself not to own BHARTIARTL.
Getting caught up in a fad without thinking through the economics. The market goes through periods where everybody is talking up one sector. I have seen infatuation with infrastructure stocks, real estate, FMCG, oil & gas all come and go. The only thing that is guaranteed with infatuation is a nasty hangover. Don’t only focus on the sector du jour. Focus on revenue growth, profitability and valuation of companies across sectors.
Hanging on to your losers. We all make mistakes. But hoping for a miracle that will somehow turn a position that is down 10% is stupidity. You should have a stop-loss, or better yet, a trailing stop. Let the losers go.
Letting go of your winners. This is the corollary to #3. Why sell a stock that’s on a hot streak. Own it till the rally exhausts itself. If you have a trailing stop setup, the exit automatically takes care of itself.
Getting confused between trading and investing. My sincerest advice is to leave intra-day trading to computers. High Frequency Trading (HFT) has pretty much taken over most exchanges in the world, driving down holding periods to seconds (on an average, the holding period of a stock in the US is around 22 seconds.) You cannot compete with the machines. Your “short term” should at least be a month. This allows you to do your homework and focus on the total return of your portfolio.

And for those who owned TATAMOTORS before the results, good job!

Questions? Email me: abhi@stockviz.biz

Categories Your Money Tags basic

Time to let the Maharaja die?

shyam February 15, 2012

There comes a time in every Government run business where tough choices can no longer be avoided. Has time come to bury Air India?

Why does a piss poor country like India need a publicly financed airline when there are plenty of private players who are more than capable of filling in?

We spend more on keeping Air India alive than we spend on Rural Infrastructure. Where are our priorities?

We seem to think that Rs. 22 a day is enough for a person to live in rural India. But nobody questions as to why every Indian is expected to take on Rs. 577 of AI’s debt?

Given the succession of scams, it appears that we have developed a high tolerance to our government flushing our tax dollars down the drain. To paraphrase the French: The Maharaja is Dead, Long Live the Maharaja. Shut down Air India.