Tuesday, June 19, 2018

Trade wars will make India stronger

India’s GDP growth is driven by consumption and not by international trade. In fact, India has a trade deficit, it imports more than exports. When there are trade wars, it greatly affects those countries like China, Germany and Japan whose economies are export driven.

For India, if our exports are affected it would affect Pharma and IT but take a close look. Most of pharma exports are low priced generic drug. There are not may places you can make it cheaper than in India. Similarly, IT service exports are driven by the talent availability along with low cost. Again, you can’t easily get those millions of English speaking IT engineers at the cost which India operates anywhere else. Given these competitive advantages, though these two sectors will see a setback they don’t vanish. Other exports such as Textiles, Jewellery, Agri commodities have loyal consumer base for Indian exports. They too will see headwinds but their survival may not be under threat.

When it comes to imports, though oil & gold have the lion share but there are lots of other stuff like industrial equipment, automobile spares, etc. which in the times of trade wars becomes expensive and create a fertile ground to make them in India. That, over a period, will drive investments, creates new jobs and saves import bill. Remember that auto industry was non-existent in the 1950’s in India and now our car makers produce indigenous designs made for Indian consumers. Similarly, our defense spending, which is mostly spent on imports now, can slowly transform into the one which drives domestic industry growth. Since trade wars make imports expensive, it makes commercial sense to produce them out of India, wherever possible.

I hope and wish that India makes use of the opportunities provided by the trade war and come out stronger.

Monday, June 18, 2018

Sugar: The problem of plenty

Excessive sugar in our body affects our health. Excessive sugarcane output is hurting the farmer’s health who are already lean and do not consume much of what they grow. The bumper crop output for second consecutive year in Brazil, the world’s largest sugar producer and India, the second largest sugar producer, took the sugar prices down from Rs 50+ per kg to the levels below Rs. 30 per kg.

Sugar consumption or demand growth is in the range 5-10% year on year. But on the supply side, crop output is cyclical and in the last two seasons crop output is 50% higher than usual. Also, the extraction rates (percentage of sugar out of sugarcane) is also improving. That damaged the sugar prices significantly.

The optimum price level needed is Rs.40 per kg for both farmers and sugar mills to survive. Govt. has announced few relief measures that lets the farmers barely survive but the profitability is out of scope. Since the sugar stocks are already high in warehouses, best way out of this is to export them. There are few takers like China who import sugar in large quantities. There are trade wars and sanctions which may act as a hindrance yet whatever can be moved out needs to be done quickly.

Alternate markets for sugarcane like Ethanol, which is used as a bio-fuel, also molasses making for liquor industry are not encouraging as those markets are limited in size and can’t consume the million tons of additional crop output.

If no effective solution is found soon, farmers are likely to stare at huge losses. They better limit the acreage for this crop in future and move on to other non-cyclical crops. Considering sugar cane is water guzzler crop, it would be good to discourage as that much of water can be used for other productive purposes. Lower prices of sugar are already driving farmers toward discarding it. Had they reduced the acreage after one bumper harvest last year, they would have avoided the mess they got into now. I wish our farmers make more informed decisions.

Sunday, June 17, 2018

Science creates history and not vice versa

Lots of feeds on my Facebook on how great ancient India was not only annoys me but makes me worry about the state of our society. Sure, our forefathers achieved lots of great stuff. They could do so because they thought innovative. Had they spent singing how great their ancestors i.e., cave men were, there would not have been any development of a subject like Ayurveda. While numerous of them worked on studying and developing subjects from Astrology to Astronomy, ancient India flourished building upon the expanding knowledge base. They made India great, a sought-after nation by remaining relevant to their times and not getting lost in their past. Their contributions to science created history.

Now many of us spend time praising achievement of ancestors on a smart phone manufactured in Taiwan or China on Facebook application which is developed in the US using the Internet as a medium, the technology of which again is not developed in India. I wonder those spam the Facebook feed, don’t they feel ashamed? What is the use of saying that aircraft technology is many centuries old and it was in use in ancient India? Why and when did it disappear? What point do they want to prove tracing the evidence of Mahabharat? I think what else we are doing apart from it is more important.

Greatness comes from creating new solutions for the current problems. Go and find solutions for new age diseases, that would make India great. Grow the talent who will rule the space technology and challenge Elon Musk. Build finer products than Apple does. Find newer materials for battery technology and free up world’s dependence on oil. Help farmers increase output multiple times using less land and water and make sure no one in the world goes hungry. Things like that will make India great. Contributions to science creates history. Just praising history leaves us where we are and we lose the race to those who live in current times.

We need to be proud of ancestors. But need to remember that they fell victim to invaders because of their own weaknesses. Blaming the foreigners for today’s issues leads us nowhere but building upon the good things done by our forefathers can make India great again.

Why does Investors have an edge over Traders?

Why do most traders lose money?

1. If you observe most of the large cap stocks produce 15-20% annual returns on average. But the same stocks, on daily basis, move up or down easily to the tune of 1%.

2. There are 5 trading session per week. In an year, there will be 250 sessions approximately. (5 per week x 52 weeks = 260 less 10 general holidays = 250 trading days). If market is unidirectional, those stocks would produce 250% gain or losses. But markets go in both directions or remain sideways. Considering 20% gains a year on an average, which can come in 20 sessions, what the market does in rest of the 230 sessions? It plays ping-pong. Gains will be reversed and falls will also be reversed, resulting in no net gain. Take away is, for 230 sessions, probability of gains or losses is roughly equal.

3. If you are a day trader, going by simple arithmetic of 230 sessions erasing gains and losses of each other, every day you have an equal chance of winning or losing. But consecutive win probability reduces with the time. For example, first day it is 0.5, winning the next day too is 0.5 x 0.5 = 0.25. Probability of consecutive win for 5 days is, 0.5^5 = 3%. So your winning streak or luck does not last long.

4. Psychology impacts decision making skills and staying rational. If someone wins for few days, he becomes overconfident, increases his bets while his chances are winning again are reducing with each day. You know what will happen to him when his luck vanishes. Similarly, when someone loses consistently, he loses the confidence and reduces his stake. He does not know that probability of losing consistently is reducing with each lesson.

5. A trader can train oneself to play a bull or bear. Trying to be both is hard. Changing track is not an easy thing as one can interpret the signals wrongly and increases the losses.


What works for an investor?

All the disadvantages which the traders face are not shared by investor community as they largely ignore the daily volatility. Their focus is on the annual gains and not the short-term volatility. So they need not worry about law of probability of winning everyday. Yet they too can lose money, if they had picked a wrong stock or paid a wrong price.

One of the famous quotes from Warren Buffet is, “Rule 1: Do not lose the money. Rule 2: Don’t forget the Rule 1”

Well, how can an investor not lose money in the stock market? The stock you pick may go down the next moment you bought it. But there are many measures you can employ of setting the game in your favor.

1. Avoiding a wrong pick: You should learn about due diligence. You need to learn about business valuation. You should understand the underlying business, not just the stock. How does that company generates revenue? Who are their customers? What drives those customers to buy the products or services of the business you are evaluating? How long the revenue growth will last? How is their financial model? What are the margin structures of the business? Does that company generate sufficient cash to honor their payments, also invest into the future? Finally, the intention of promoters. Are they willing to share the profits with a common investor? Have they paid dividends in the past? Are they honest enough in their communication? Getting answers to all these questions is a lot of hard work and better you do that else you run risks of losing your hard-earned money. Proper due diligence is the only way out of a wrong pick.

2. Diversification: You do not invest all your eggs into a single basket for a reason. You want to live another day to fight back and not lose out if the only stock you hold runs into an unknown issue. Building a portfolio gives a balance. It reduces risks and also returns. Since our Rule 1 is to avoid losses, building a portfolio and avoiding concentration in just 1-2 stocks makes sense. As you build portfolio of 15-20 stocks, you need to make sure those stocks do not belong to the same industry or sector. Take a look at any mutual fund portfolio and observe how many stocks they hold, what is their Top 5 stocks concentration and also Top 3 sectors concentration. You will get a fair idea of how they structure a portfolio. You also want to have a fair mix of large cap, mid-cap and small cap stocks.

3. Avoiding wrong pricing: Once you have identified the stocks for your portfolio, you do not want to put all the money in one go. You will identify the fair price band for each stock and you will wait patiently for a discount before you invest into it. You do not want to enter at whatever price the stock is trading but buy at only discounts as per your estimate. Since you will put only a fraction of money in the market each time and continue that way over a period of 4-6 quarters to fully invest into a stock, it gives you good time to study that company and assess if your estimates were right or not and take necessary corrective actions.

With this knowledge, you can very well say now “When a trader makes money it is mostly luck at play, while an investor makes money it is mostly patience and hard work”. Many traders struggle to earn a living while many patient investors earn their fortunes in the stock market. Capital follows knowledge. Acquiring knowledge should become the primary aim of investor. Fortune will follow subsequently.