The Fundamentals of Market Tops
- The Investor Base Becomes Momentum-Driven
- Valuation-sensitive investors accumulate cash
- The quality of IPOs declines
- There is a high degree of visible and/or hidden leverage
- Elements of accounting seem compromised
The Fundamentals of Market Tops
Three Steps to Effective Decision Making
- Understand causality
- Improve forecast – inside vs. outside view
- Sorting relevance – integrate new information
How do you increase luck?
- Monitor the environment for new uses for your existing resources
- Experiment with resources at hand
- Ask for more than you can reasonably expect
- Network to increase serendipitous connections
The ghettoization of China’s new towns
The idea:
Consolidate the villages into one new town that would take up less than one square mile, versus the three square miles that the dozen villages had occupied. A portion of the remaining 59 square miles could be sold to developers to pay for construction costs, meaning the new buildings would cost farmers and the government nothing. The rest of the land would stay agricultural, but worked by a few remaining farmers using modern methods.
Reality:
The villagers ended up with less than the space they were living in previously and they found themselves unqualified for the jobs around where they lived. Shoddy construction means that the apartments are barely habitable. One term that residents repeatedly use is “biesi” — “stifled to death” in the new towers.
The markets got crushed this week. The Nifty ended -2.64% (-3.92% in USD terms).
Index Performance
The biggest losers were banks but pharma was spared most of the pain.
Top winners and losers
| ADANIENT | +6.43% |
| SAIL | +6.87% |
| TECHM | +9.77% |
| SRTRANSFIN | -12.84% |
| UBL | -12.39% |
| BANKBARODA | -10.46% |
Tech Mahindra rallied on better than expected results and outlook…
ETFs
| INFRABEES | +0.47% |
| GOLDBEES | -0.35% |
| JUNIORBEES | -1.68% |
| NIFTYBEES | -2.58% |
| PSUBNKBEES | -5.57% |
| BANKBEES | -6.12% |
Bank ETFs continued to see red. Shouldn’t an improving economic outlook help banks manage their bad loans? I’ll chalk this one up to profit-taking…
Advancers and Decliners
Yield Curve
Long-bonds would have got shellacked this week…
Interbank rates
… however, interbank lending rates (MIBOR) continued to stabilize.
Sector Performance
Titan, a big component of the “Gems Jewellery and Watches” sector got trounced when the RBI refused to hike the FII investment limit in the company…
Investment Theme Performance
| Quality to Price | +7.14% |
| Balance-sheet Strength | +2.27% |
| Magic Formula Investing | +1.33% |
| Financial Strength Value | +0.75% |
| Growth with Moat | +0.50% |
| Market Elephants | -0.40% |
| Efficient Growth | -0.63% |
| Momentum 200 | -1.06% |
| Enterprise Yield | -1.55% |
| ADAG Mania | -2.21% |
| Market Fliers | -4.22% |
Our Quantitative Value Investment Theme continued to beat out other model portfolios…
Thought for the Weekend
Scott McNealy — a co-founder of Sun Microsystems:
It’s important to make good decisions. But I spend much less time and energy worrying about “making the right decision” and much more time and energy ensuring that any decision I make turns out right.
Merely selecting the “best” option doesn’t guarantee that things will turn out well in the long run, just as making a sub-optimal choice doesn’t doom us to failure or unhappiness. It’s what happens next (and in the days, months, and years that follow) that ultimately determines whether a given decision was “right.”
“Focusing on facts” is about as unexciting as this statement was mundane to read. I mean, facts are cold, lifeless things. They’ve no heart. They’re all for the C-system, starving our X-system of the emotional satiation of stories: stories that stir us with optimism, pleasure, disgust or fear – but stories that pull us in. If you’re a TV watcher, that’s all the news channels are into nowadays – stories of past, present and future, and very little fact. Sadly, what these stories don’t take us to in the investment journey is a happy ending.
Investors ahoy! Clog your ears from the siren song of stories!
Humans are emotional beings. We’ve gone on about this attribute from Chapter 1 of The Little Book of Behavioral Investing: How not to be your worst enemy and this is certainly not the last time you’ll hear it. In the current Chapter 10, author James Montier highlights the risk in falling for stories and our inclination to draw inaccurate conclusions based on preconceptions.
Such as, you ask? “Expensive means it must be good.” Not true. Just like everything cheap isn’t always bad, everything expensive isn’t good either. Montier gives the example of IPOs. Almost always, IPOs are overpriced. While history has repeatedly shown that IPOs are generally terrible investments, constantly demonstrating long-term underperformance across the world, they continue to attract investors.
Why? Because what IPOs come with is a good story.
During 1980-2007 in USA, the average IPO underperformed the market by 21% in 3 years after its listing.
On similar lines … “admired stocks” – the one with big price tags and great stock market and financial performance stories get all the investor love. “Despised stocks” – typically low value and tagged with poor stories, are not considered good buys. Is that a biased thought or not? In reality, it’s found that usually the despised stocks are better investment – outperforming not only the admired stocks but also the market.
But how many investors go beyond the story? How many follow a reverse engineering approach to dissect the past performance of companies that launch pricey IPOs? How many get down to proving the validity of the current stock price?
Montier gives us an example of a medical story to prove its influence. Here’s a drug “A” whose effectiveness is given as a percentage of those cured overall – ranging from 90% to 30%. These stats are given to participants along with a positive, negative or ambiguous story. Remember that the base information or the facts of the drug’s efficacy has been laid out clearly. Participants were then asked if they would try the drug if afflicted by the disease:
- For a 90% efficacy rate, after hearing a positive story – 88% were agreeable.
- For a 90% efficacy rate, after hearing a negative story – only 39% agreed.
- For a 30% efficacy rate, after hearing a negative story – only 7% agreed (expectedly).
- For a 30% efficacy rate, after hearing a positive story – 78% were agreeable.
That’s the power of a story. It blinds you to facts.
Another example is used to describe the capitalization of hope. Hark back to 2003-2007 when China’s growth in production was making big news. The global mining sector suddenly became the new gold. Analysts predicted that earning per share would sky rocket at a rate of 12.5% per annum, double the rate seen historically. Those who bought the story invested. And then came the world’s largest downturn… leaving investors gasping.
See the root cause of all this trouble? It’s the enchantment of stories. So what’s our protection here? Focusing on facts – nothing more, nothing less. All investment decisions must be based on sound research that’s justified by facts, not market news and analysts’ humdrum. Stick with that and keep trouble away.
Monica Samuel is doing a chapter-wise review of the book: The Little Book of Behavioral Investing: How not to be your worst enemy by James Montier. You can follow the series by following this tag: tlbbinvesting or by subscribing to this rss feed: tlbbifeed
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