Haphazard Linkages

One cannot prove an investment idea or theme 'right'. A better way is to take an idea and try to falsify it as much as possible. The 'best' investment idea/theme then is the one that best withstands the test of falsification. Lets see how the "Long-Volatility-Around-Elections" trade played out.... Volatility exploded and how! Through the election months of April and May-2009, market participants grew increasingly nervous on the election outcome, resulting in a volatility spike. Volatility nearly doubled in the space of around two months. Long-volatility trades (straddles/strangles) worked out beautifully. Indeed some Long Straddles/Strangles nearly trebled in two months. While it is nearly impossible to time entry and exits to perfection, this theme would have resulted in an indecent return anyway! Another addition to my Investment History notebook! Time to stick my neck out. Where do we go from here? I can't see any significant volatility-expa...

My posts seem to have a direct relationship with liquidity and credit availability in the markets... both have dried up! In this post I draw insights from the beautiful, non-linear world of Options. The title is a grammatical mess but it captures the central idea behind this post. I make a case for increasing volatility over the next two months in the Indian markets and possible ways for investors to play this. I'm am azed at the near-term thinking manifesting even in the options world. The markets are so riveted on the near month expiry that th ey forget there's a next month...and a month after that. India will go to elections starting mid-April and the spectacle will be for everyone to see over a 1 month period. As always, this time will most likely see tugs-of-word wars and plenty of ego-massages as one party tried to outdo the other in gaining the coveted majority number. Pre -election opinions point to a fractured mandate and there's a very high probabili...

The frequency of my posts have dropped drastically. I am at a loss to decide whether this is attributable to market conditions, or me not having anything significantly intelligent to say...I am tempted to vote for the latter. After months of contemplating what to write, I settled for an exposition on something that I term "beautiful". Capital structure is something that does not get as much importance as it should by investors, analysts and management in general. What is the optimal capital structure? I wish someone knew the answer. In this post, I take a look at how the markets treat two companies that are similar in most respects except for their capital structures. I then take a look at a case of possible mis-pricing and how often, even 'good' companies never seem to get their due. Capital Structure irrelevant? Hmm... I consider Chambal Fertilizers and GNFC (fertilizers again!) for this post. Most finance experts and academics advocate having 'some' ...

My brain requested me to let it go on a vacation...So I listened and went on a sabbatical. I hope you missed me! Much has changed - both in India and globally - since my last post. Markets around the globe seem to have caught a collective cold. I am probably feeling happy after quite a while in the markets, with so much pessimism going around. The markets have now tuned their radars to pick up the slightest of negative news flows to go on a free fall. In this post, I take a look at some interesting developments in delinquency rates related to real estate and the response of the equity markets (S&P 500). Admittedly there are number of factors that have a bearing on the movement of the S&P 500 and one cannot see the causal effect of one on another in isolation. But as they say…sometimes the part is better than the whole…especially when trying to get a sense of how things fit together to form the larger picture! Delinquency rates – to put it crudely – measures how many lo...

A lazy afternoon opened my eyes to the perils of inaction in the investments business. When going through some of my old files, I came across a company that I had identified about a year ago (October 06). I had done all the hard work, done the numbers, saw the opportunity…and did not do anything. I share some valuable lessons in this post with the company as the protagonist. This story is about Gujarat Narmada Valley Fertilizers Company (GNFC) Inefficiency manifests itself GNFC is engaged in the Fertilizers business. What was so special about a company operating in a regulated, commodity business where no one player seemed to enjoy a strong ‘moat’? There were better investment opportunities elsewhere in other industries. I don’t disagree. As a Buffett follower, I wouldn’t have touched this company, never mind the price…But as a part believer in Benjamin Graham’s ‘cigar butt’ type stocks, I couldn’t pass this company over after what I saw… Cigar Butt stocks: A discarded cigar b...

Two unrelated cases happened over the past week that compelled me to pen down my thoughts on them. Both are, of course related to the markets, but they aren't related to one another. The common tether that binds them is investor psychology. Read on... Black Monday October 19, 2007 marked the 20th anniversary of the demonic 'Black Monday' crash that shook the markets exactly 2 decades ago. On Monday, October 19, 1987, the Dow remarkably dropped over 20% in one day's trade. Most global equity markets suffered declines of over 20% by the end of that fateful October month. Experts continue to argue about the possible causes behind the collapse. Program trading, bulk selling, overpricing, illiquidity were all put forth as reasons behind the event. In this section, I will write about human psychology 2 decades since. Maybe there was some pattern somewhere? The table shows 1-day price change for selected major world indices on three specific dates, beginning wit...

The financial world seems to be coming a full circle. While the global markets are busy trying to adjust to the problems triggered by the sub-prime meltdown in the US, data on the economic front threatened to spoil the recovery party. Suddenly, everyone is worried about 'risks', which they thought had been effectively 'diversified' away. The very financial innovation (Structured Products) that made investors happy till recently has suddenly turned their worst enemy. And, as usual, turmoil in the markets leads to a round of scapegoating and finger pointing. The scapegoat ranged from rating agencies to the structured products themselves. In this post, I put investor behavior under the scanner. We will see the extent to which man - greedy as he already is - can stretch himself for that extra penny. I look at the whats-n-whys of 'Structured Products', the resulting collapse, and end with a commentary on investor thinking.  'Structured' to perfection...