investor to trader

In this blog I try to explain why and how I moved from a hard core fundamental investor to a full time trader. This is a long and tough journey especially since I took this transition in 2019 which was one of the toughest year in the history of Indian stock market after 2008. Some say 2019 was tougher than 2008 and I would agree but it all depends on individual perspective, positioning and experience. Now before I start explaining the whole journey let me note down the crux of the matter in short and also please note that this is in the context of Indian market only and should not be applied as a general investment vs trading theory.

The whirlwind of 2019
2019 was a shocking year to say the least. It was not just about slowdown, politics and policies but a series of large scams and defaults that broke out in Indian market. Now one may say .. market .. scams what's new? In 2019 the new thing was the extent and the kind of names coming out in these scams. These were not penny, B-Z category, poorly managed and operator manipulated companies. These were some of the bluest of blue chip names in corporate India. DHFL, Yes Bank, Zee Ent, Jet Airways were the kind of names that went down with entire groups of companies IL&FS, ADAG, Sintex, Talwalkars, Sterlite, Manpasand, Vakrangee, PC Jewellers, and countless other names. Scams after scams kept breaking the back of Indian market as investors looked on with complete bewilderment about the state of affairs. The biggest names and stalwarts of Indian market got caught with investments that went from blue chip to junk in a matter of few days be it Porinju (LEEL), Rakesh Jhunjhunwala (DHFL), Ramdeo Agrawal (Manpasand), Monish Pabrai (Rain Ind), Vijay Kedia (Heritage Foods) .. no one was spared. So you can imagine that small retail investors had no chance in this market. The best of the fund managers whose books are widely read across the world like Basant Maheshwari started switching investment themes overnight trying to grapple with shifting dynamics in the stock market. At one time Basant Maheshwari appeared on every news channel and asked people to buy a basket of housing finance companies blindly. What a terrible call it turned out to be (with no fault of his own) Situations changed dramatically. The contagion effect of all these coupled with slowdown lead by auto sector and a govt emboldened by it's thunder victory in the 2019 elections for it's pro-poor policy created a cocktail of events in the market that triggered a bottomless fall irrespective of fundamentals and technicals and a massive FII exit from Indian market.

Investment vs Trading

The point to note here is that in 2019 Indian market lost trust of investors more than it lost money. Almost every company listed in Indian market could be a potential scam just waiting to break out. That left 10-15 names out that could be "safe for sure" for you to invest your money like HDFC Bank, L&T, Infosys, etc. But these companies were already mature businesses. They were already priced way above fundamentals due to safety premium in a market infected with scams. At best you could expect somewhat better returns from these companies than fixed deposit and that to if the market stabilised at some point of time which was in itself doubtful. Then why take all that risk to earn 2-3% above fixed deposit ?

This was my dilemma in Indian market. What was investable had very low return potential and others could wipe out your capital with a scam any time. Neither looked acceptable ways of making a living. Hence I decided to turn into a trader from an investor. Which meant I would trade in these 10-15 "safe for sure" names but make money out of the up/down movement in their stock prices instead of relying on the annual returns from these stocks. That was the only way I could think of to guarantee both capital safety as well as reasonable return on investment. It sounds too good to be true a strategy. So what was the catch? Catch is that this is so good that almost every smart player in the stock market is trying to do exactly this and you have to compete with them to get your share of returns. Here you will be fighting with the top 1% in the market for your share. So it was a good plan but not an easy one. How I handled that will be a part of a series of blogs to follow next.

light at the end of tunnel

Status of key problem of FII selling
FII's sold 14K Cr in July + 10K Cr in Aug .. (net of HDFC Life & Shriram deal)=24K Cr. Prev large selloff was in Oct 2018 ~30K Cr .. (~40-50K Cr upto Dec'18) .. so half way through? ..

Future events & Outlook
June quarter results have been mixed but upcoming September quarter results are expected to be worse based on mgmt commentary & concalls, production cuts, job losses .. so certainly there will be pressure on stocks until Sept qtr results are announced in October/November month. But because of all the production cuts inventories will clear up in the next 2 months .. many small and less efficient companies will get wiped out which will clear the competition. Govt has learnt it's lessons based on the updates from PMO & FMO so in future shocking disruptions will be low and it is expected that the govt will work with better understanding with Investors, FIIs & Industry instead of adopting a heavy handed non flexible, we don't care approach. On the other hand it is expected that the govt will provide some relief and stimulus packages to revive the economy. Another theory is about money moving from DMs to EMs before US elections in Nov 2020 still holds but I don't know when it will kick in. All this can lead to a trend reversal in Indian market after Oct/Nov but the selloff can continue or even intensify upto that time.

Strategy from here
I can see light at the end of the tunnel but I don't know how long the tunnel is. All I can say is that it is a few months long, less than a year.  I think this is the right time to prepare a list of portfolio stocks and accumulate in SIP mode atleast 12 instalments everytime we get a large selloff in the market. Basically on those 100 plus Nifty down days.

The Year of Gloom and Doom

The last 1.5 years in stock market has tested the patience of the best of us. Major issues kept hitting the markets like a series of earthquakes & tsunamis and have caused irreparable damage to most portfolios. So first let's look at all the fault lines

Corporate Issues

• Scams and bankruptcy of large listed corporations in both debt and equity markets that wiped out  lakhs of crores of investments from the market IL&FS Group, ADAG Group, Essel Group, Jet Airways, DHFL, Gitanjali gems
• Corporate feuds yes bank, indigo, finolex 
• Scams in several well known mid and small cap companies Vakrangee, Manpasand, Sintex Group, Cox & Kings, Eros Int, LEEL, Kwality
• High leverage, debt & pledge issues Sterlite Tech, Eveready, McLeod Russel, Gati, Talwalkar
• Many Mutual/debt funds holding these entities in large chunks suffered huge losses. Add to that there was no hope of recovery as these instruments became ill-liquid and majority of these had to be written off. Poor market conditions dried up fresh investments flowing into these funds leading to a free fall due to redemption pressures. 
• Many corporate entities had invested their cash reserves into debt instruments of companies like IL&FS and DHFL which had to be written off as losses
• Many of these companies enjoyed highest credit ratings by top credit rating agencies like ICRA, CARE and audited by top auditors like PWC & Deloitte. The scams in these companies impacted trust & confidence in these institutions. This lead widespread rumours and share prices crashing at the slightest hint of possible scam based on rumours. Indiabulls Housing is a great example of the widespread mess. 

Policy changes & govt crackdowns 

While the Govt intentions were good but continuous back to back disruptions with no recovery or absorption time broke the back of the market and industries

• First shock was demonetisation that impacted several day to day income dependent businesses
• LTCG was introduced in Budget 2018 that lead to aggressive long term profit booking before such taxes come into effect
• Auto Industry was hit by aggressive transitions to BS-IV followed by BS-VI followed by EV transition
• Uber/Ola revolution has made owning cars both unnecessary & undesirable
• GST made businesses process & compliance very difficult for small players 
• Govt crackdown on benami accounts, properties and shell companies disrupted the functioning of several companies that were surviving on corruption, Ponzi schemes and  fund siphoning. This was a good measure but even if these companies were corrupt and chor companies, these were running businesses employing people and generating economic activity. The crackdown was swift and heavy handed and brought these to a grinding halt
• Over the last few decades banks had accumulated large NPAs. Most companies were servicing their loans by taking more loans. When liquidity in the system tightened primarily due to IL&FS default banks stopped issuing fresh loans which lead to several companies defaulting. Defaults lead to credit downgrades, blacklisting making it more difficult for these companies to raise fresh funds from any source banks, nbfcs, private funds ultimately leading to collapse of these companies.
• Reclassification of MF holdings that did not allow large cap funds to hold any small and midcap companies triggered a massive selloff in mid and small caps besides drying up future investments in these counters
• RBI policies continued to be very defensive in a world where most central bankers were aggressively stimulating their economies through massive liquidity infusion. RBI was taking timid & cautious steps that failed to bring any meaningful change in the economy. This coupled with several exits from the institution Raghuram Rajan, Urjit Patel, Viral Acharya and continuous tussle with the govt gave a feeling of instability in the institution and its decision making abilities
• Trade wars driven by US meant global slowdown, disruptions in import/export, forex fluctuations, commodity price fluctuations especially crude, etc caused havoc around the world. 
• Govt has been continuously sucking the money out of an already fund inflow starved market through continuous supply of CPSE ETFs, IPOs, cross selling between PSUs and instances of using LIC money to buyout stressed banks like IDBI. LIC used to usually support the market in the face of heavy FII selling but has lost its resources to forced investment by govt
• BJP lead govt was aggressive in responding to terrorism which lead to heightened risks of geopolitical tensions on borders with Pakistan and China as India narrowly escaped a full fledged war with Pakistan post Pulwama terror incident
• Election freebies like farm loan waivers, free electricity, substandard high risk loans to underprivileged sections who have no experience in starting and running businesses has contributed more to already stressed state, centre and bank finances & NPAs 
• Extremely regressive populist measures attempting reservation in public & private jobs for people belonging to specific regions (Jagan in AP) and economically backward section of the society (proposal at centre) instead of merit is extremely repulsive to foreign investments in the country who can instead setup in Indonesia, Philippines, even Bangladesh instead of India
• A really stretched polling season for lok sabha elections brought govt orders and approvals to a grinding halt stalling several projects. Even after polls things have not picked up upto July as per Industry updates probably as the govt was busy with Budget and other long term plans
• Several others .. 

Poor Monsoon 

India is still rain dependent and 2019 Monsoons were extremely poor & deficient upto 37% as of July as per IMD stats. Add to this completely dried lakes and rivers in all states leading to accute water deficiency. This has a chain effect on monsoon dependent rural economy like bikes, farm equipments, rural consumption, everything. India cannot prosper without a booming rural economy. Right now it is in complete distress.

Budget 2019

While these issues were impacting low quality companies, final blow to Indian market came with Budget 2019. Budget hit the best quality companies in the market

Tax surcharge on incomes above 2 Cr and 5 Cr was made applicable on FPIs also which would make investing in Indian markets even more unattractive compared to other markets. This triggered a massive FII/FPI exit from Indian markets

• A proposal to increase minimum public shareholding from 25% to 35% meant that companies were promoters were holding more than 75% would have to offload their holding in the market to bring it down to 65% creating excess supply in already weak markets. Trying to absorb such selling can be expected to cause considerable price damage. 
• Dividend and Buyback tax was introduced which allowed the govt take a bite out of whatever little people were getting in return from the market through these mechanisms thus reducing shareholder rewards even further
• Budget 2019 was expected to be aggressive on growth impetus especially given the mandate with which BJP won the second term. However actual budget was seen as defensive on reforms and aggressive on tax collection
• Post budget interviews, pres releases from govt dept & FM office was of no help either as govt kept on stressing that they will continue with their existing policies of increasing tax burden on contributing members and redistributing it for services to underprivileged section of the society. Govt also seemingly ignored several calls of reconsideration of such policies from fund managers managing millions/billions of FII wealth. They openly warned that it is becoming increasingly difficult to market India as a investment destination but to no avail.  

Economic Slowdown

All of the above has had serious impact on the performance of the listed companies. There is hardly any growth Q-o-Q or Y-o-Y. Weak companies have gone into losses and bankruptcies. Strong companies are facing stagnation and reduced profits and un-utilized capacities. Poor results keep the Indian markets looking expensive on P/E ratio basis despite steep corrections in their equity valuations.   

Chain reaction

The chain effect is kicking in. HNIs have lost heavily in the stock market which has impacted the sales of luxury items. You don't buy a car, you won't buy seat covers, insurance, servicing, road assistance, you won't go on long road trips, you won't take a break at the highway hotel, you won't buy cola, chips, you won't need a puncture repair. These small vendors will have lower sales, they will stick to rice daal and won't buy biscuits, they will try to save on soap, hair oil & toothpastes. When these things don't sell small vendors and factory owners will layoff labourers. When they lose their job, they will further cut spending to the most essential items only and there you go, you have a full fledged slowdown across all categories. I don't know why some people are mystified by this?

An unbalanced ecosystem

Government needs to understand the rich don't just earn for themselves. Every rich man creates employment and income for several poor men drivers, house maids, small vendors & servicemen, travel agents. You cut the the rich, the economy will collapse. The rich section of the society is like the tigers, elephants & wolves in the forest. Yes they command maximum resources, but without them ecosystem will simply collapse. 

Rest of the year

As of now there is no silver lining in the horizon. Govt continues to be adamant in it's pro-poor and tax-rich stand. Monsoon continues to be weak and FII/FPIs continue to be pissed and dumping in Indian markets. This cannot turn-around on its own without a big change. My strategy (and I don't recommend it to anyone to follow it blindly) is that I have exited almost entirely from my equity portfolio and mutual fund holdings. I am using my capital mostly to trade with a short bias but I am hyper vigilant to any possibility of turn-around given the deep oversold conditions in the market. At the same time I am very cautious of the possibility of a complete meltdown given poor fundamentals and aggressive policy disruptions from centre. We are now standing at a crossroad from where anytime either we could see a golden opportunity or a horrific collapse over the next year and half. Mid 2020 to Nov 2020 will be US election season and I do see a possibility of global fund managers shifting their money from uncertain US markets to EMs like India which could lead to a massive rally here but the question is what happens between now and mid-2020 ? slow turnaround or complete crash? That part is not clear. From the immediate data points I see a crash coming instead of turn around and we need to be well prepared for it. The only glimmer of hope is festive season that starts from October 2019. But I doubt anyone will be big on spending in this festive season given the massive drawdowns on individual investment portfolio and depressed economic conditions. A disappointing festive season can actually accelerate downturn in the market since companies will be posting poor results on high expectations leading to amplified market reactions. According to me this will be a year of gloom and doom and it is better to write it off before the doom sets in on the masses and all exit doors get crowded. Hoping for a better 2020 !

Signs of turnaround to watch

• Look for resolution in high profile scams & bankruptcies IL&FS, DHFL, Zee, ADAG, Jet Airways 
• Look for reversal in FII sell numbers. I would be comfortable if they buy back atleast 1/3rd of what they have sold in this post budget cycle (14K Crore in the month of July and counting) 
• Look for acknowledgement from govt about the issues and some solid steps towards rectifying it like FPI tax issue
• Look for aggressive promoter/HNI buying
• Look for any big bang reform or infra project .. anything revolutionary coming from govt which was missed in Budget 2019
• Look for extreme pessimism and complete bloodbath in the market that makes Indian market look cheap even with current earning numbers. Something like even highest quality stocks trading below 25 P/E
• Look at signs of fund shifting from US to other markets as 2020 election chatter heats up

One day to day one

The Thinking
When I was trading part time, after lot of study, practice and following other fellow expert traders I started getting some success in it. I used to trade small amounts since I was just exploring and experimenting. From making losses or random trades most of the time, I was able to successfully establish a model where I started making profit consistently. I was also slowly preparing to move into full time trading.
One of my calculations to quit my regular job and move into full time trading was as follows (please don't laugh)
Assume I can make X per month by trading using a capital of 1 Lakh. Then to match my current income I need to make n times X per month, for which I will need a trading capital of n times 1 Lakh.
Right ? .. Unfortunately wrong .. as you will see this has the potential of becoming a great blunder for me. I used to try bigger trades sometimes, it used to fail wiping out the accumulated profits of past 10-20 successful trades in one go. I did not get the right message out of it. I thought that the large trades are failing because I am not giving full attention to the trade because of my day job. If something can work on a trade of 1 Lakh, it should work just as easily for a trade of 10 Lakh or for that matter a trade of 1 Crore .. after all these are probably big amounts for us but at market scale these are nothing amount, practically zero amount. Now comes the second bad conclusion. I thought I will be able to make it work easily by just scaling it up once I start doing it full time. You see where I am heading.

The Beginning
So I quit my job, move to a new place, set it all up for a trading desk and start trading full time. I think by now you have a fair idea of what happens next. To warm up I start with few small trades. Make good profits and then I try a big one. This time watching it carefully and BOOM wipe out all the profits accumulated until now. Ok shit happens. Probably a matter of chance, bad luck, statistics. So I again do a series of small trade to regain confidence and build my profits back and then try a big one. BAAM .. all profits for the last 10-20 trades wiped out in one go. Now I start to worry a bit. Read a few things, watch few videos, try minor tuning in my trading strategy here and there. Then repeat. So probably a little better this time, but net result is same. My big trades were always failing me. My small trades always worked consistently. It puzzled me .. it frustrated me ..

The Options
Now this was getting serious. I had two options.
Option#1: I need to do lots and lot of small trades to match my (now) previous income which would have been painful
Option#2: Time to pack up and go back or look for something else.

This ordeal lasted for almost 2 months. It was getting frustrating. I was quiet sure that I have to have a strategy in place by the end of 2018. I was not going to waste another year in experimenting and exploring considering this was looking like an endless pursuit mostly ending in failures. My core and biggest assumption that the trades can scale linearly and infinitely had just bombed right in my face
I was heavily invested into this. Had left too many things behind. This was Nov of 2018. I thought I should atleast try few things until 2018. Give myself one last chance and then decide what to do in 2019.
This time no books, no videos, no following what others are doing. This time, it was introspection time. I had read and watched enough over the past several years and was not hopeful about finding anything dramatically new on the internet.

Figuring it out
I went back to the trades that failed. I looked at what specifically was going wrong. Initially it all looked random. Then I started trying to do some incremental trades. Something in between. Not too big, not my regular small trades. This time I was trying to look at what was going wrong with the trades still open/active. Earlier I used to do this analysis only retrospectively. One of my important observations was that I was panicking too easily when my trading position was large. There were few other observations about myself that were quiet funny.  Anyways my small trades used to make a profit or loss of something like 500 to 1500 Rs per trade and I was able to hold on to these trades throughout the day (6 hours of market time without any panic) since these were small amounts even if it was a loss. My large trades would easily move up or down by 4-5K almost instantaneously and it caused me to panic thinking I am losing all the accumulated profit over the past 5-10 trades in just an instant. Once I entered the panic mode I would get filled with imagination if the loss is this much in just few mins what would happen in 6 hours.. setting off a chain effect of doing too many wrong things. Closing positions in panic at obviously wrong levels, over exposure to trades gone wrong instead of exiting them, revenge trading, multiplying my errors and losses. What was I thinking? What did I expect? my regular trades would have a position size of 1 Lakh and my large trades had position size of anywhere between 10 Lakhs to multiples of it all the way upto 1 Crore. Obviously it would move up and down by a similar quantum 10-100X in profit/loss also. For all the numbers, maths and stats love I pride myself with, I was committing some of the most basic mistakes. It is easy to get emotional when large sums of money is involved and difficult to look at them as just numbers.


A satisfactory experience
Once I root caused myself in panic state, it was a turning point for me. After which I took several steps to fine tune my trading, execution, record keeping, analysis and several other aspects. By the time I arrived at it I had only 3 trading sessions left in 2018. I will not go into the details of strategy, etc because it depends on individual personalities. However I am happy to share that I was able to execute 3 ultra large trades today successfully in profit, without panic and as per plan. I also  closed today with 3 largest booked profits of my entire trading career of more than a decade including part time and last 2 months of full time. More than anything else today I just felt satisfied. Not euphoric, just satisfied, peace and calm.


I think I have reached day one today. On the way there will be more learning, more tuning, more experiments and more scaling but the starting point is to reach day one .. from one day. It is now time to say Happy New Year 2019 !
Few other interesting problems to look at would be the winners curse, stop loss hunting and supertrends.

Horrible September of 2018

It started with IL&FS default .. and it brings back memory from the Satyam scam way back in 2008 .. the fact that these two are actually connected in some way provides little relief

Satyam scam was a Rs 6000 crore scam .. IL&FS has a debt of Rs 91,000 crore and is defaulting on it's payment obligations. Fortunately in case of Satyam entire 6000 crore vanished into thin air and in case of IL&FS it is less of a scam and more of a mismanagement. There are some assets that have been created over time and might help recover some of the debt but as it happens in most cases like these, there are going to be huge drawdowns and write offs. Govt moved into action swiftly after the default (ideally speaking it is 10 years too late .. as it should have put in checks and balances way back in 2008 after Maytas created one of the biggest crisis in Indian market.. until 2008 .. now it is IL&FS)

It is a bit too late. IL&FS crisis caused corporate bond yields to spike, liquidity freeze in the bond market. Hit the likes of DHFL, IndiaBulls Housing and many other NBFC's very hard. DHFL lost 40% plus in a single day. Over the month of September most stocks in the BFSI sector lost 30-50%. No discrimination was made between small and large, good and bad quality. The most resilient stocks like HDFC, Bajaj Finserv and Piramal Ent had their backs broken.

Goes without saying the plight of good quality stocks looked mediocre compared to what happened to stocks with questionable fundamentals, rumors, and manipulation. Infibeam lost 71% in one trading session. yes 71% in one trading session.

 Few other notable victims of regulatory action includes Yes Bank, Bandhan Bank, 8K Miles and many more ..
 

USD/Brent Crude
A market that was already weakened by rising dollar and crude had a lightening strike straight from hell

 

Good news is bad news

Currently even good news is working as bad news in Indian market. US markets and economy are firing on all cylinders. Unfortunately this will embolden FEDS to take up aggressive rate hikes which will further strengthen dollar and bond yields. Unfortunately that is not so good for equity investments and especially for equity investments outside US as you are earning terrific returns in low risk instruments and low risk markets then why invest in foreign high risk countries

Add to this continuous weakness in Emerging Markets and continuous outflows of FII/FPI from India. The draconian measures from Indian regulators, and Finance Ministry and PMO did little to help except add more oil to fire and more salt to the wounds of investors. (Read LTCG, KYC, and Indian origin foreign fund managers saga) .. the back and forth on these issues was even more pathetic. Market is good at absorbing bad news but doesn't do so well with chaos, confusion and loss of trust which creates panic. I had hoped that regulatory authorities and finance ministry would have known this .. but doesn't look like it. 

Anyways the market doesn't spare anyone .. including the govt .. they will have to take their share of hits for creating and unleashing absolute havoc in the market from time to time ..

Off-course the collateral damage here is much higher. Only the toughest and the most sorted will survive this. Market has become a war zone.  Make no mistake, blood will be spilled, lives will be lost and dreams will be crushed.  Everyone will have to go through the iron test ..

 

However note that this is not the first time and not the last time either .. this is how market cycles work. Periodically it takes out all the weak hands mercilessly and unapologetic.. Market was and always will be the place of only select few .. they are not the heroes .. they are survivors .. 

I would like to end this on a positive note .. for people like us who worship markets, there are no losses .. there are only lessons and an opportunity to grow bigger and stronger with every such cycle .. happy investing !

Continued Market Mayhem in October 

Govt goofs again!

When the going gets bad .. the bad gets going! Govt goofed again. Considering the impact of rising crude and upcoming elections both state and center, our dear govt decided to be extra generous to the public and asked the OMC's to subsidize the fuel retailing by Re 1 per liter. This was enough to send all the OMC's crashing down. 40-50% lost in couple of days. 1.3 Lakh Crores wiped out, further weakening one of the only steady pillars in the market. The scene was almost like govt is triggering a systemic demolition of the markets. Here are some tables and reactions

Regulator goofs again!

I am not an expert on macro economy but sometimes common sense works better than all the institutional expertise .. when INR vs USD was already gasping for breath what could have been the logic to surprise the market .. liquidity concerns? RBI surprises the market using status quo instead of hiking rates that could have helped somewhat to arrest the fall in INR. However market did not like it and it made it very clear. Check out the last hour reaction post RBI announcement. This is however a 50:50 chance decision .. the reaction on the other side could have been bigger on liquidity concerns .. we will never know. Current mood in the market is "Good news is bad news" and "Bad news is panic button being pressed hard" 

Hopefully we are mostly done now .. only time will tell .. but the next important events are the upcoming state elections and couldd be a difficult one for ruling BJP given the overall negative and pessimistic sentiments. 

Silver Linings

• One silver lining in all this mayhem was that promoters have started acquiring their shares. Pilani Investments did a basket buy on all the Birla group companies Century, Hindalco, Aditya Birla Cap. Significant buying was seen in across the board in mid caps also.  
• Another one being India decided to continue to trade oil with Iran despite possible US sanctions. If it manages to avoid US sanctions it is a net positive. Also US was forced to soften it's sanctions on Iran since many countries had indicated that they are not going to follow it. This would also lead to downward pressure even on OPEC oil price that has already fallen from $86 per barrel to a little over $83 per barrel
• A developing positive is the huge defense, nuclear energy and SME deals signed with Russia and bilateral deals between India <-> Russia and India <-> Iran to deal taking place in local currencies instead of using dollar denominated trades. Russia also expressed interest in investing in the infrastructure and energy sector in India
• Venezuela launching it's asset backed crypto currency instead of $ is another indication that $ domination has peaked off and the havoc it is creating in the world currency market is going to pass. Venezuela being a oil exporting country, if it stabilizes will bring additional oil supply into the market and further discourage OPEC cartelization
• SBI decided to purchase the asset providing some support to liquidity strapped NBFC's which will help tide over the temporary liquidity squeeze situation created by IL&FS fiasco

Relief Rally in Oct 2nd Week

There was a huge relief rally in Oct 2nd week. Few events that helped the same. US markets cracked especially NASDAQ and FAANG stocks, this was mostly triggered by fear of FED rate hike in Dec. IMF came up with a lower growth projection in world GDP over trade war concerns, this also triggered a fall in $ and oil. At the same time India got the crown of being the best Emerging market among Emerging Markets. I think there was some rotation happening from developed markets to emerging markets. Oil correcting from $86 per barrel to $80 per barrel was a huge positive. Regarding the liquidity problem triggered by IL&FS crisis, SBI and other large banks announced that they will buy good quality loan assets from NBFC's to give them some liquidity. This was a great boost to hugely battered NBFC and BFSI stocks. Results season had also started on a decent note. On the other hand few factors to worry included FED rate hike in December, Possible US sanctions over India's S400 deal with Russia and Oil deal with Iran, upcoming state elections in MP, Rajasthan with expectations of huge losses for BJP, general implications of continuing trade wars, Italy going bust the Greece way and a possible bigger than expected bust in US stock markets instead of controlled correction

Confluence of factors

2018 is interesting enough with some great lessons that needs to be documented for any investing career that is supposed to last long. What I mean by interesting can be gauged from the NIFTY midcap graph below.

LTCG
The whole tumble started from the introduction of the LTCG in Budget'18. Certainly a very poor move by the Govt of India that soured the mood for many large investors especially foreign investors with options to invest in multiple countries and India overnight started looking considerably less attractive investment destination. It was a sad moment because things had just started picking up and no one came out a winner from such stupid policy decisions. Investors lost wealth and there were no gains left to pay taxes on for a majority of the investors.
Now we cannot put 100% blame on the Govt and their stupid LTCG for sure. Soon afterwards started a confluence of multiple strong headwinds that shook the Indian market one after another and never gave it a chance to recover.

EM Exit
LTCG announcement was followed by a mass exit of foreign investors from emerging markets as a basket that included India. Why? Strong growth in developed markets like US made the riskier EM's less attractive. When you can earn at home why move the money around the world.
This was followed by increasing weightage for EM's like China in MSCI index, which meant reduced weightage for EM's like India which belonged to the same basket. Simply put India was left with a small share of foreign capital investment quota in a scenario where all the money was already fleeing back from EM's to US. The SGX Nifty controversy made matters worse for India. In a bid to disallow Indian instruments being traded more in foreign exchanges compared to local exchanges, India decided to stop sharing data with foreign exchanges like SGX and was perceived as anti free market and was being further threatened with lower weightage in MSCI as a retaliation measure.

We are just starting folks ....

MF Categorization Restrictions
SEBI introduced a new law that all MF can have only few broad categories in Large, Mid, Small cap and there can be no cross holdings, i.e a Large cap fund cannot hold even a small percentage in mid/small caps and if they do they must sell. Also they cannot come up with fancy categorizations to find a way around this. So you cannot call your fund something like Future Focus and hold stocks belonging to mid and small caps along with large caps.

Banking Mess and NPA's
Then came a series of NPA resolution mess. Indian Banks especially PSU had loaded up on several non performing assets for several decades on their books, however they were yet to recognize the fact that they have fucked up. New RBI guidelines (starting with Raghuram Rajan) went aggressively after the Indian banks to clean up their books. This lead to several decades of toilet being flushed from the banks in just last couple of years. NPA's soared from 3-4% to as high as 25-30%. Banks like IDBI, Bank of Baroda, Bank of India, Indian Overseas Bank went belly up. The list is really long and includes almost all the PSU banks. A special mention to Punjab National Bank that had handed over their SWIFT passwords to fraudulent loan takers like Nirav Modi to borrow as much money from the bank as they desire. After the scam broke out PNB swiftly lost over 50% of its market cap in few days. India's third largest bank was now trading in two digits. Several scams came to light after this one by one. Many of these fraud corporate had to make a run from India leaving the banks with very few options to recover their loan Nirav Modi, Mehul Choksi of Gitanjali gems and Vijay Mallaya deserve special mention here. Lakhs of crores of loan book had to be written off. A pretty alarming situation. Private banks were not spared either. A special mention to Chandra Kochar of ICICI Bank and Shikha Sharma of Axis Bank who provided their valuable contributions in destroying whatever little trust was left in Indian Banks.

Share jacking up and corporate frauds in mid/small cap
Then came the Vakrangee fraud. A company that had risen from Rs 10 to Rs 1000 per share. India's rural network poster boy was caught jacking up the share price of it's company. It got caught when it declared a substantial treasury investment in PC Jewellers that brought to light another mega scam in Indian markets, mid cap companies buying shares in each others company and jacking up share prices in collusion. After this several mid and small cap companies crashed. 70-90% loss in market cap examples became abundant.

ASM
Then SEBI introduced ASM or Additional Surveillance Measure leading to restrictions on trading of several midcaps. Many renowned and reputed companies got caught in ASM which lead to a mass panic exit from all counters. Dilip Buildcon, 8K Miles, Graphite stocks, one by one a large part of the midcap universe got hammered and started a bloodbath of lower circuits in the Indian markets.

Audit Compliance 
Indian Govt lead by Modi had made it clear that auditors and independent directors will be held accountable for company frauds. This lead to auditors of several companies resigning instead of agreeing to adjustment in accounts. Notable story here is of Manpasand Beverages

Policy disruptions
GST, e-way bill etc had lead to lot of disruptions in the SME segment leading to reporting of poor numbers and results in the previous quarters

There is still more...

Global Trade War & Currency weakness
Donald Trump wanted to even out America's trade balance with rest of the world which lead to a global trade war. Companies started imposing import duties on each other. Local manufacturing started taking hit. Businesses on the ground were now struggling for profitability and survival. The notable story in this trade war was China vs US. The two countries slapped each other with billions of dollars of tariffs and duties. Yuan tumbled over 8-10% from the start of the year.
Strong dollar made life even more difficult for countries like India which is a net importer, i.e pays in dollars but earns in rupees. For FII's also Indian market became worse because of forex conversion losses.

The Iran Saga
Donald Trump also does not like Iran. He imposed several sanctions on Iran a major importer of commodities and a major exporter of cheap oil and gas. This created havoc for the import export players and sent the crude price surging. By sanctioning Iran crude market is easy to control by Saudi Arabia that can then demand whatever it likes from crude importers. 

Poor Monsoon and Farm loan waivers
Poor monsoon this year is already sending jitters across the investing community and rural population. Huge protest by farmers on MSP and ensuing farm loan waivers for political gains by state governments is adding to the fiscal burden of the state and central governments and making the inflation more unpredictable.

RBI hawkish policy
Now when infaltion is unpredictable, RBI comes into action and has been steadily increasing interest rates making loans which is the lifeline of any business more and more expensive, just what we needed .. isn't it ?

Political Uncertainity
Add to this the political climate was aso heating up. Noises of Mahagatbandhan started becoming stronger after the Congress won the Karnataka election over BJP by forming an alliance with JDU. A minority party now ruling the state.

Investment sentiment 
And so the overall investment climate was bitter, people suffered huge losses. Technicals and panic threw the Indian market in the grip of bears. Bulls made a huge retreat. New investors got scared off. Mutual Fund inflows slowed down and everything went spiralling down. A point to note here is that all this is happening in the larger context where central banks around the world are tightening market liquidity by rolling back their QE program that started in the post 2008 world. While the markets have generally absorbed it well, at some point this might pinch hard.

Winds of change
Few things brought a turn around in the Indian market starting July

• All countries ignored the US sanctions on Iran and continued to trade with Iran as exception. Ultimately US had to soften it's stand on Iran
• Crude softened signalling a peak in crude prices. Iran has threatened to disrupt trade routes in crude if sanctioned and that remains a risk 
• Donald Trump tweeted about being unhappy with strong dollar which signaled a peak in dollar as it puts America also at an disadvantage since manufacturing is cheaper in other countries
• Developed markets were overheated due to huge inflows. The FANG stocks now have a market cap greater than the GDP of several countries. Apple is a trillion $ market cap company now. This should lead to some of the foreign investments coming back as they book profits in developed markets and look for value investments in EMs
• Trade wars have become a common news and seems to be fairly discounted by the markets
• Indian Bank NPA's seem to have peaked and a recovery is projected soon. Govt helped by using large capital infusions in several affected banks
• Congress lost and BJP got a huge victory in the vote of no confidence motion against the govt which reinforced confidence in the future prospects of BJP 
• The Congress debacle in no-confidence motion also helped to put in place regional leaders like the Shiv Sena and TDP in their right place who were becoming a bit too noisy for their own good. It also re-inforced that the winking Gandhi is at best a poor comedian and not a future PM candidate. 
• Quarterly Performance and results by listed companies has been generally good and signals future optimism
• Indian large caps held the investor flag high admist all the bloodbath.  RIL, TCS became the first two Indian companies to hit the $100 billion market cap. Few others who deserve a mention are M&M, Bajaj Finance Group, Consumer and IT stocks HUL, Page Industries, etc
• Major relief was given in GST by reducing tax slabs for several goods
• Poltical and policy uncertainties, global trade wars, and poor monsoon continue to be a risk 

Things are going to continue to be interesting atleast upto 2020 but we market players are not here only for the good times. We as much cherish the downs as we do the ups. That is what makes it thrilling, the bull needs a bear to fight and win ... so bring it on !

Bitter Lessons from Uniply Investments

The Golden Goose
Uniply industries was a great investment bet. A small player in the plywood industry space with great brand, great products and ambitious management. Great market scope with "Housing for all" initiative of the government and lot of commercial and office space developments along with huge FDI investments again thanks to the aggressive push of the central government in this direction.

And suddenly out of nowhere came a shocker news

The Ugly Swan
The company announced a diversification into Civil Construction work ??? While Civil and Mechanical work also has good scope with lot of infrastructure push in the country and  on a standalone basis is not a bad business, but when you compare it with the plywood business it sounds like a horrible decision. Plywood is a consumer business with high margins whereas Civil and Mechanical work is long gestation, capex intensive and low margin business. Uniply was trading at high P/E's that are suitable for consumer business and suddenly it announces a plan to diversify into Civil and Mechanical business, which commands much lower P/E's, makes the business way more complex to understand. There is doubt on the management ability to make a successful foray into a business segment that is already overcrowded with large, small and medium sized players of all types. It is a non-transparent and corruption ridden business segment.

The smart market and the foolish me
A great business was ruined in a single day. Market realized it, however I didn't. I realized it only after all my gains (over 30%) was washed away over the days following the announcement. However what doesn't give you profits, makes you wiser. I had read the announcement, somehow didn't register or analyze it properly, kind of ignored it thinking it was not a big deal. However it was. Once such lessons are absorbed, small losses of today can be converted into huge benefits in future as an aspiring value investor.

*Note/disclaimer: As always I try to share my most important lessons for free and with all the good intentions and do not intend to manipulate or profit from it in any way. Many of you have started investing in stock markets by following me and I feel responsible to share anything good I learn. However it is advisable for you to do your research & verification independently and not follow anything blindly.