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A Series of Unfortunate Events

I was given the great opportunity one day of selecting the next binge series for my kids. They seemed to have watched almost everything available on TV over the last couple of months and were out of ideas, hungry for more. For those of you who don’t touch the remote (like yours truly), this is an arduous task. With the millions of videos available it’s hard to know where to start. With great power (of the remote) comes great responsibility. The father in me decided to go for quality sans cartoons, something that will instill knowledge and improve vocabulary, something they can cherish for years and time spent productively…(so much bragging!). Ten minutes of browsing took me to Lemony Snicket’s “A Series of Unfortunate Events“. It sounded like the perfect title for the occasion.

The storyline is worth mention, three little kids encounter one problem after another constantly brought about by the treacherous villain. The whole series is shot in a very gloomy background, constant playing of melancholic music, and weird looking characters. Quite often the depressing scenario and dark comedy makes us miss the brilliant attempts pursued by the children and their successful maneuvering of misfortunes against all odds.

This draws parallel to the scenario investors have been facing over the last couple of years. They got their first shock in Jan 2018, when Nirav Modi and team eloped with about $2bn, soon followed by and even bigger ILFS scam. Several corporate governance issues cropped up especially in the mid-small cap space, auditors exited one after another citing unexplained transactions. Liquidity dried in the bond markets and rating agencies went into a state of quandary. However thanks to foreign fund flows and great marketing strategies by local MFs, money continued to pour into select stocks which took the indices to all time high levels. While the markets conquered one peak after another, the quarterly GDP growth halved, auto numbers dragged, core industry growth fell into the negative, credit growth slowed. Indiabulls, Yes Bank, Karvy were some big names that fell from glory. Those who sold early lost out on the upside while those who bought got into the wrong stocks that never moved. To top it all, this year witnessed the all en-compassing pandemic. Unfortunate events, one after another!

We have become so engulfed in gloom these days. We wake up only to read about the never ending covid numbers, sad stories are shared by neighbors, no travel, no office, no pizza, no booze, dreadful emi’s, scare of jobloss, all this while you wait for your turn to be quarantined. Worst of all, the Nifty moves up everyday and your portfolio moves down by the same amount (dark comedy!)

Adversity should automatically bring out the survivor in you, if it doesn’t you are dead! But sorry, this is not going to be a motivational blog nor am I another health expert to discuss a solution to corona. My efforts are strictly directed only towards your portfolio and how to manage the same under the current situation. How do we play the market now, what strategy will work and is timing even possible.

Firstly, this is certainly not the time to pick stocks and draw excel road maps, because nobody in the world can envisage the business model two years down the line. The conventional method of stock picking from the mid-small cap space can at the least be considered as wishful thinking. Yes, several business will certainly close down forever, but there will also be those that will take up the market share from the ones who lost it. Large companies with long history, distinguished track record of management, robust balance sheet, low debt and minimal exposure to exports will be the best bets and most probable survivors. Re-balance your portfolio towards such stocks, irrespective of the profit or loss you currently incur. Remember there will always be value for quality.

Secondly, nobody is sure at the moment about how far the recession would go, hence no use of timing the market or guessing the bottom. Rather look for index PE levels and invest in phases across these levels as they move lower. We can only operate within a framework of our historical understanding of these levels and under the basic premise that all will be well someday, a cure would be found and the country will go back to glory. So keep adequate cash to average out your positions and don’t dump it all in one go.

Finally, sitting at home might tempt you to indulge in lot of TV viewing, unnecessary reading and frequent chatting with friends. There is likely to be an information overload in an already chaotic environment. The following are the suggestive techniques to overcome this problem

a. Have a rudimentary process to invest and stick to it. Complicating has never solved anything. But make sure to follow the process religiously. (Scientists have proven that…this reduces distraction levels to a bare minimum!) You will start focusing only on what you actually want.

b. It is true that risk is reduced by diversification, but that doesn’t mean we need 100 stocks in our portfolio. Meaningful diversification can happen through 10 stocks as well. Select sectors that you understand well, have tangible business and decent corporate governance.

c. Success of most investors is only due to their temperament. Hold this one tight at all times no matter what you lose.

So the story ended on a happy note with the children converting every misfortune into success and the villain vanquished. There is not a scene where they lose hope and do not look for innovative ways to stay afloat. But then I asked my kids, why they did not chose this beautiful series when they had scanned the globe…they said it was the title “unfortunate events”. Well then I thought, it is so true that nobody wants to be associated with misfortune, but we always travel with it. Isn’t it best to be prepared and turn it into an opportunity when it strikes instead of sulking over it?

That was the learning for the family. Time well spent indeed.

Deepak Radhakrishnan

Pelican PMS… The markets way…

Patience is not the ability to wait, but how you act while you’re waiting…

It has been about two years since we launched our PMS. We started the service when the PMS industry was growing consistently @ 15% in terms of AUM growth. FPI was actively investing with Rs.1.2tn coming in that year and domestic MF on their part adding Rs871bn. Interesting themes popped up every day and most fund managers were raking in millions for themselves and their clients. The benchmark indices was breaking new highs, politics continued to be stable, economy was still roaring at +7%, those were the days when ILFS/DHFL/Yes Bank were darlings still rated AA+. But we looked the other way, met potential clients, wrote blogs, invested in liquid funds.

The next year was slightly more boring. GDP started to decline, auto industry dropped to abysmal levels, employment fell to 40 year lows, debt defaults and downgrades became a daily event. Monetary and fiscal policies were made more benign to aid demand growth. Fund managers did not make as much as they did in the previous year, clients started getting jittery, not many new themes were launched. Nevertheless, fund inflows did not stop and benchmark indices took to the skies. We continued to live in boredom, met more clients and wrote more blogs, stayed put with liquid funds.

Over the past couple of years, we have written a lot about of grey rhinos, black swans, white elephants and many other animals which would have set off a trigger driving down the over valuation. But, the markets kept the concentrated rally on, priced beyond perfection. Alas! It was not an animal but a microscopic virus that triggered a sell-off. Enter Covid-19, the dreaded virus that has imprisoned several countries all at once. Never has the world experienced an episode such as this (hope it resolves soon with minimal impact on life and people’s prospects). Within a matter of days, the sentiments changed and the much awaited panic was activated.

At the core of Pelican’s strategy is gauging the systematic risk. We believe systematic risks are larger in magnitude and useful to build the portfolio. The best way to use it is by staying away when the mood of Mr. Market is in euphoria and enter when it is melancholic. Simple metrics such as index PE levels are good indicators of how systematic risk is being priced. They stay low when there is blood on the streets and move higher when in hubris. Systematic risks appearing in a complacent one-way rally often results in capitulation that would. This has happened in the past cycles and could be playing out now!

Pelican PMS has since its launch invested its entire portfolio in Liquid funds and we held our temperament all this while to invest when good companies start trading at attractive valuations. We strongly believe individual stocks are best gauged by cash flow growth and governance standards. This is generally available in large cap stocks, where timely and adequate data is available for an analysis. The chances of ambiguity and use of assumptions are also minimal in this case. A concentrated portfolio of such large cap market leaders will not only diversify risk but enhance returns when the rebound happens. The market prices assimilate all available information at a given time. It is prone to momentum, change in risk appetite and varying liquidity flows based on new information. Hence, buying quality stocks at a marked down price is best done when the overall market is on a sale i.e when systematic risk is in play.

The recent price fall and earnings growth has taken the PE to an appropriate entry level. We believe investors should now start taking exposure to equity and continue investing in a phased manner. The real outcomes in the market will depend on the cash flow impact on business and duration.

Investors should be clear that asset cycles are long, and the returns are undefined. The basic premise that we need to follow is, India is a growing economy and will overcome the current crisis. Equities are the best place to be in order to participate and benefit from this growth. However, it is also imperative that the balancing act be performed suitably.

Balancing and re-balancing the portfolio to suit the cycle is the role of a fund manager. While the objective of every fund manager is to beat the market and provide superior risk adjusted returns at a low expense ratio, seldom is the majority successful in their outcome. Beautiful presentations, road shows and media support help garner the AUM to run the business but does not drive returns. Only a minority avoid the herd and think beyond monthly performance.

Ready to ride?

One of our recent studies entailed calculating the rolling returns for Nifty 50 over several time periods. It took into account each day the index traded since 1994 (6152 days). The outcome of the study indicated the following: Investment at market peaks took as long as 10 years to turn profitable (the worst-case scenario) and investments made at lower levels took much lesser time. Basically, it quantified and re-iterated the fact that time required to make profit depends on the date/level you had invested. So, what’s the big deal, I knew that long before you were even born!!@#$

While we all know this for fact, it is seldom applied in practice. It is clear; there is only one way to make money in the market “Buy low and Sell high”. To know what is High and Low requires a good understanding of Market Cycles. Here, we attempt to elucidate this briefly-

Why study market cycles?

Evaluating the current stage in the market’s cycle allow us to envisage what will happen next with a fair degree of accuracy. This is a significant piece of information. This knowledge can prove to be paramount especially when the market is at its extremes. Simply by avoiding investing at market tops and buying lower can reduce your investment life cycle and enhance your risk adjusted returns quite significantly.

Who uses market cycles?

Rational investors; a minority, are unemotional, risk averse and skeptical but are always prepared when opportunities with returns that more than compromise the risk taken. Markets are filled with constant noise under the pretext of guidance. It is key to figure which are the ones worth hearing, make logical inferences based on those important ones and conclude on how to characterize the current investment scenario. The superior investor understands this well, it is this quality that will allow them to make superlative investments at the right stage of market cycles while being exposed to the most reasonable risk. They study market cycles to structure their portfolio optimally for the likely events that may lie ahead, understanding that they may not always be right, but will be right most of the times.

What causes these cycles?
In the long run markets move along an upward central line. This is caused by several factors namely, the economic cycle, profit cycle of corporates, global current affairs and most importantly how investors around the world perceive these events and how they react to them. The upward line represents economies tendency to grow, companies’ profits to rise and largely as a result markets rise too. However, in the short term, markets are subject to volatility and shocks in performance. These shocks instigate the market to oscillate upward and downward and brings either too much optimism among investors making them overcome scepticism as a whole and sometimes depresses their attitudes so severely that they are unready to make any investments driven by fear of losses.

Human psychology and behavior play a big part in creating cycles, hence successive cycles are not identical. Intrinsic tendencies to exaggerate beliefs provide stimulus to the market’s animal instincts that may cause it to rally in any direction. Understanding market cycles allows us to calibrate our investment strategies to be aggressive or defensive. Investor attitudes are conflicted between greed and fear for profits, optimism or pessimism about the markets, tolerance or aversion of risk on investments, acceptance or skepticism of market information, believing in future value or looking for acceptable value in the present and finally, urgency to invest or panic to liquidate holdings.

When does a cycle start and end?

Although there will be shifts in time periods and the intensity of the swings this is the pattern the market exhibits and more importantly each stage is caused by the previous one implying, they are all interconnected. The market cycle is a continuum and does not have a beginning or ending point. Recognizing this causal relationship between several cycles is hugely beneficial in developing strategies.

How to analyse market cycles?

In order to determine the stage of the market cycle we require two forms of evaluation namely, quantitative and qualitative. Quantitative evaluation involves gauging valuations by inspecting fundamentals with relevance to historical points. Significant variation from valuations in normal periods is an indicator that the cycle is to drift from the underlying central trend. Qualitative evaluation firstly involves understanding how things are priced, which is determined by the supply demand equilibrium and willingness to pay. Willingness is influenced by how buyers value investments currently and what they feel about its potential to appreciate. This relationship dictates circulating prices that are paid for investments in any sector. Secondly, we need to understand how investors are conducting themselves with respect to pursuing returns, skepticism towards information and market valuations and urgency upon which they are engaged in buying and selling. Consistently performing these evaluations will enable us to understand where we are positioned in the market cycle.

It is imperative to realize that even the best economic conditions cannot help us predict what will happen next. Meaning it is possible that the market may move upwards, downwards or be stable from any point; but that does not imply that each of those have the same likelihood.. Apart from already developed investment methods that involve analyzing fundamentals and pricing; studying the prevalent investment environment and gauging risk tendencies of market participants will provide crucial inputs that aid in decision making.

End of Gyan…

We have managed to crack most of the puzzles, turned several dreams into reality and evolved positively over the past centuries. Our lives are much easier now when it comes to travel, communication, food, accommodation, education, etc. However, despite all this we remain in status quo with regards to Stock market investing. We haven’t improved the way we invest; the same mistakes continue generation after generation. This is primarily due to the ignorance towards our understanding of market cycles and incompetence in personally analyzing investments while easily being influenced by market noise. Watching market prices on a daily basis is a fruitless exercise, rather spending time on planning the investment and patiently waiting for the right opportunity will reduce risk, enhance returns and lower your blood pressure.


Kicking the can down the road

“The definition of insanity is doing the same thing over and over again, but expecting different results.”

Policy makers all around the globe have stuck to classical theories which have suggested creating a benign environment when things go bad. They believed people would do better if interest cost and tax rates are reduced. Demand would prop up and the ripple effect will eventually get the economy going. In order to provide an accommodative stance, Fed got the rates to zero post the Y2K crisis, other central bankers followed. What ultimately took place was an artificial housing boom which went crazy and created another mayhem bigger than the previous. Billions of dollars were lost in the process, but we excused the policy makers as we thought they had learnt their lesson and this would not repeat.

Post the Global financial crisis, again interest rates were reduced to near zero both in US/Europe, and additionally the flood gates of liquidity were opened. After more than a decade, benchmark rates have continued to remain at the same levels but GDP growth has not improved. Instead we have a scenario wherein 20% of the global bond markets trade at negative yields and nearly 60% trade at less than 2%. Most of the liquidity has moved into risky asset classes such as venture capital/startups/hedge funds which have taken the stock markets beyond even the speculators imagination. Very little has trickled into real infrastructure and industry. How much more benign should the government get in order to propel growth, or is there something wrong in the way the crisis is managed. Are we repeating the same mistakes over and over again?

Clearly the relationship between interest rates and growth has decoupled and we are yet to learn from the past. Even radical steps of moving into negative interest rate territory has not worked. Interest rates as a primary tool of monetary policy, to stimulate investment, employment, and inflation is gradually failing. The situation in Japan is a perfect case study of zero growth under zero interest rates. 90% of the new money created by the Bank of Japan since 2013 has ended up back as deposit in the central bank. In the Euro zone, low interest rates have created a frightening vortex of declining margins in banks, high operating costs and no takers for loans. Reports suggest that ECB receives over €20 billion as fees from banks for parking funds at negative interest rates!

The chart below summarizes the following about the Indian scenario- Firstly, inflation has moved beyond the repo rate indicating a negative real interest rate scenario. Secondly, the rate of inflation is higher than the rate of GDP growth aka stagflation. Thirdly, the accommodative stance by RBI does not seem to drive demand as witnessed in the GDP slump despite a low interest rate regime.

Economic theories are supposed to evolve with time like any other subject. However we go by textbooks written at least half a century ago when the situation was nowhere near to what it is today. Globalisation and technology have changed the way countries operate and business models work. Old theories need an overhaul and the reforms have to be radical not superficial. Reforms that will increase demand, jobs and help execution of infrastructure.

India by following the failed routes of the west is succumbing to the same spiral. One such recent big bang reform was the corporate tax cut announced about six months ago. The cut will shave off over $20bn from the coffers. But we are yet to see any pick up in interest either from foreign or local entrepreneurs which will compensate for the lost revenue. On the flip side, RBIs recent LTRO was a timely reform and will prove effective in atleast transmitting lower rates into the system, if not deployment. It is such out of the box measures that will prove successful in the long run.

Low interest rate regimes cannot be a new normal. It will force savers to take undue risks such as allocating more into the stock markets even at record highs. Fixed income products will also fall out of favor especially with the Pension class. The dopamine effect will eventually have to subside at some point and then will occur the whiplash. The impact caused by the artificially induced low interest rates and inert policy actions will remain for generations to come. The time to make the reforms is now, even at the cost of losing elections. Precedence in policy making has to change. Kicking the can down the road will not work any further as we are soon approaching a dangerous curve ahead.

The scary Startup story

Prior to the year 2000, the companies that dominated the corporate sector were mostly traditional and related to banking, cement, auto, FMCG, metals and some other basic industrials. These companies offered relatively stable jobs, with salary packages tied to inflation and maybe some intermittent bonuses. The topline grew in the range of 10-15% and most of them were profitable. They expanded by reinvesting their profits and seldom due to leverage.

The turn of the millennium witnessed a host of new sectors such as IT, Telecom, Media. This was a game changer and the common man experienced tremendous paradigm shifts in socio economic status. These companies initially grew in the range of 20-30%. They employed the smartest and paid the highest, nowhere comparable to the old generation companies. However they borrowed heavily from banks to cater to their increasing growth requirements. Many of them lost the race half way and shut shop when they couldn’t manage the damages. The employees in these companies were qualified and skilled hence could manage to find other jobs or start their own. In the case of companies who have survived, they currently grow barely at 10% and pay salaries that hardly manage to beat inflation.

Post the global financial crisis the Fed and other global Central bank Governors kept interest rates at near zero levels in order to prop up growth rates and provide impetus to risk takers. Risk taking did happen, in a scale that was never been seen before. Investors borrowed at near zero rates and deployed heavily in ideas that had the remotest chance of success. There was very little to lose. This time companies were also careful not be caught in the debt spiral and hence most funding came via equity. Thus was born a new species of entrepreneurs who came with total disregard to losses and ran companies only with incremental equity infusions. They grew as long as the flow of funds continued and closed down almost immediately when this flow stopped. These companies were to be known as STARTUPS!

A generally agreed definition for a Startup is a company that is newly established, and expects to scale rapidly. The second part of the sentence is what bothers old school people. Scaling up simple ideas rapidly has become the success mantra for these new generation of entrepreneurs. Some have tasted huge success in terms of market share, money and media glory, becoming billionaires in very short time spans. But this is a miniscule minority compared to the number who have failed in the process. The tradeoff here is huge hence the clamor. While several of these companies have managed to identify and resolve our age old problems such as in areas of transport, healthcare, education etc. they have not been able to sort out their own!

The top 20 reasons for startup failure (as compiled by cbinsights) appear very naïve and basic –

1. No market need

2. Ran out of cash

3. Not the right team

4. Get outcompeted

5. Pricing/ Cost issues

6. User unfriendly product

7. Product without a business model

8. Poor marketing

9. Ignore customers

10. Products mistimed

11. Lose focus

12. Disharmony amongst investors

13. Pivot gone bad

14. Lack passion

15. Failed geographic expansion

16. No investor interest to continue

17. Legal challenges

18. Didn’t use network

19. Burnout

20. Failure to pivot

India is currently the 4th largest startup incubator and over $58bn has flowed into nearly 3000 such companies. Much higher than $36bn which entered via FII investments into the country. The top 15 startups have generated a revenue of over $8.5bn in FY19. This comes at a loss of $3.7bn. Losses for the last three years accumulate to over $10bn! These are companies that have been cajoled by the governments and provided several luxuries that are unavailable to stable enterprises for the primary reason that they promise to provide jobs.

But the risk to this is two-fold. Firstly, the risk of sudden layoffs. It is estimated that these top 15 companies directly employ about 1.5lac people and indirectly affect the lives of over 20lakhs (excluding the customers of these companies). With the continuous need for funds to run the show, there is always the risk of closing down lingering…a dagger hangs by the thread for most of these employees. These startup entrepreneurs are well educated, street smart, highly networked and quite capable. Hence shutting shop and starting afresh would seldom be a problem for them. But certainly that’s not the case for their staff. Compare this to the top 15 old generation companies that have grown slowly but steadily.

While they have faced cyclical downturns, there has seldom been a case of major lay-offs atleast in the scale witnessed in these aggressive growth oriented companies.

Secondly, majority of the startups are technology driven and based on a complicated algorithm. This requires very few people at the managerial level, easily scalable and asset light business model. The biggest expense is for salaries (mid/lower level support staff) and discounts. The majority are employed in low value addition jobs such as driving, delivery boys, call centers etc. There is no skill that is generated in these employees who are in the age group of 18-30yrs. Rather a large amount of skill is wasted over a period as these semi-skilled and semi-educated people could otherwise be encouraged to practice a vocation that will improve their abilities.

The startup industry is a time bomb waiting to explode. The loss numbers globally and locally are mind boggling. The money flow into startups is startling despite the failure rates. The hype and aura surrounding it should subside and capital should be put to use in more tangible real assets that offer meaningful sustainable returns. Taking eyes of the profit number and focusing only on revenue is certainly not something to be taught in schools. The most important of all, declining standards of employability will become dismal in the years to come as the youth increasingly focus on making the quick buck by doing jobs much below their potential.

5 dramatic changes in the past decade that will drive the next …

Starting early in 2000s the IT revolution bolstered India’s job market; especially for the deprived middle class. It also gave way to several varieties of jobs and innumerable travel opportunities, thereby increasing the investable surplus of this generation of workers. A generation with multiple sources of income and more than one earning member in a family is becoming common. This was something the previous generation couldn’t have imagined in their wildest dreams. As an outcome of the prosperity of the middle class; there has been gradual but definite changes, especially in the attitude of the current generation of investors. The Millennials differ significantly from their predecessors. Their awareness, accessibility and comfort in taking risks, perspectives about life and investing methods are evidently different.

We list down 5 dramatic and difficult to reverse first time changes that took place over the last couple of decades. This forms the basic premise of our positive view on Indian equities-

  1. Stupendous rise in higher education levels:

India has never in the past witnessed such an exponential increase in college enrolments as seen in the last two decades. Erstwhile investors stuck to physical assets primarily due to ignorance. Education has helped change this scenario and improve confidence and knowledge in the current generation of investors. We believe this trend is only going to get better as the affordability and importance of education drives into the system. This shift is tectonic and tops the list of changes that took place in this millennia.

Source: Central Statistics Office, India

     2.Shift towards financial assets:

Evidently, there is an increasing aversion towards illiquid physical assets that are sticky and difficult to manage vs. an increasing preference for liquid Financial assets. This has come across due to financial product innovation. Innumerable schemes, that are transparent, cheap, flexible and suit every need of the investor have flooded the market. To put things in perspective there are 43 Asset Management companies, 215 PMS entities and 57 Insurance companies managing investor money across various structures. The convenience and suitability of financial products will be a major driver for the change in asset allocation of household savings of the current and future investors.

Source: Central Statistics Office, India

   3. Technology has removed boundaries:

As technological advancement improve at a staggering rate- financial data, trading, settlement and advice have become more accessible and transparent than ever before. Internet has created a revolution in the way things work in the stock market. Conventional brick and mortar model is soon vanishing and geography is no impediment to investing. This has opened a whole new realm of opportunities and investors from remote areas are now active participants in the Indian stock market. More than Rs.10,000cr are traded in the capital market segment on a daily basis via internet (from a meagre 5% in 2002 to over 30% of the entire value traded is via internet trading). The advent of technology in the early 2000s is again another first in the history of the stock market and certainly here to stay.


   4. Size matters:

India is the 6th largest economy in terms of GDP (@ $2.8tn, nominal) and belongs to the elite group of countries that have surpassed the $2tn mark. It is estimated to reach the 3rd position in a decade. No other country in the world is of this size and growing at such a rapid pace. The size of the country and the opportunity it brings cannot be ignored. By 2020, the average Indian will be 29 years old compared to 37 for China and 48 for Japan. With 65% of the population below 35 yrs, it is imperative that the demand for infrastructure, education, services etc. will increase irrespective of the government that comes to power. The necessity to service this increasing need of the young population will keep the demand scenario buoyant. While on one side Foreign investors are lining up to service this demand, on the other side large Indian corporates that have traditionally been B2B have shifted focus to create products and services that cater to the retail crowd (B2C). India will reap the benefit of this demographic dividend in the decades to come.

Source: UN World Population Prospects 2017

     5. Regulators are working overtime:

Regulatory improvements have been part of the evolution process. The increasing investments from foreign players as well as significant local institutional participation has forced regulators to formulate policies that adhere to international standards. Corporate communication and information flow have taken a leap over the past decade providing the much-needed security in equity investing. Timely reporting of results, conference calls, investor relations are mandatory requirements now. Further, the process of reporting complaints and follow-up mechanism is much easier and effective. Lastly the numerous nosy media channels that have cropped up give little room for mischief. The Indian stock market has grown to become the 8th largest in the world in terms of market capitalisation. It has certainly matured over the past couple of decades on the back of robust process and transparent mechanisms that are worthy of emulation. This irreversible change brings great promise to Investors and they certainly feel much safer now than they did twenty years ago.

India has passed through several phases since its independence, and we believe it is currently in a sweet spot. The learning’s from the past have certainly prepared the country for the future. With solid underlying strength and improving metrics, equity participants will be the biggest beneficiaries in the times to come.

So guys, hold on and stay invested!



Twilight Of The Money Gods

Often in our daily discourse we tend to focus only on the specifics and at a very micro level. This is accentuated with the advent of social media reading habits. The holistic understanding is missed and hence the context is subverted.

The things that we use, the place of work, our thought process and every other thing that we experience is linked to several events of the past. For a serious learner it is imperative to understand how we came into being and in the current form in which we exist today. History is the starting point.

John Rapley, in his book the “Twilight of the Money Gods” has eloquently described the evolution of economic thought. He brilliantly threads Religion, Politics and Economics cohesively.

The ruling elite used one to support the other as per their convenience and success was only matter of chance. Credit for each theory survives only till another emerges, hence, it is emphasized that economics should not be compared to science. “ ‘But,’ an economist might object, ‘we alone among social scientists get a Nobel Prize for “economic science”. Even mathematicians don’t get that!’ Well, yes, but so what? The Nobel Prize in economics exists only because the economists created it, and it’s a science only because – no prizes for this one – the economists called it a science.” Science evolves in a linear fashion with one generation building on the previous one either to improve or disprove it. “Economics, however, moves in cycles. A given doctrine can rise, fall and then later rise again.”

There is a general assumption that the governments understand how to go about managing the economics of a country. “It’s like aeroplane engineering. You don’t really know how that 400-ton tube of steel you’re sitting in can lift off the ground and get you across the ocean, but you trust that someone else does.” The book quotes how mis-timed implementation of economic theories have caused large scale destruction in societies. Political leaders back economic theories, and promote relevant academicians to generate the required votes for their survival. Hence we go on to study them in school and believe in them. The critical analysis across the spectrum of time and geography provides the much required holistic perspective and the urgent need to open up to basic realities.

The author, John Rapley is a political economist at University of Cambridge. His inclination towards developmental studies, globalization and governance is amply reflected in the narrative of the book. Lot of effort has gone into drawing the picture of each event in the past and the contemporary theory that emerged. While reading becomes easy due to the indulgent humor, the sanctity of the point to be conveyed is never lost. For those interested in deep understanding of the evolution of economic thought this book is a perfect primer.

“Abba Eban used to say that humans always act wisely, but only after first exhausting all other options. Maybe we’re running through the options right now, of which denial appears pretty attractive.”

Buy the Unicorns of today not tomorrow, and still make money!

An often repeated story of a person investing Rs.1000 in an unheard of small cap company called Infosys 25 years ago to end up as a millionaire today…. Good reason to buy into the small caps?! Certainly it is nice to imagine ourselves as that person, and boast about it decades later. But how many of yesterday’s small caps have survived the market onslaught to become Unicorns (I think most of them just evolved into mules/mares/donkeys and joined the herd!). Only sheer luck (most unreliable thing in this world!) can help create wealth in this way. Even the founders of Infosys wouldn’t have envisaged such a stupendous growth, forget the analysts/advisor who claimed to have done that!


Small/Midcaps carry a huge burden of risk, most of which are undefined and cannot be quantified. Without understanding the extent of risk it would be meaningless to enter into any investment opportunity. Then why Mid/Small caps? ….maybe there is seldom a make-believe story that could be created with Largecaps, or it could be the hope of generating the enhanced greeks (alpha, beta, gamma) by undermining the Unknowns or simply just for the sake of excitement. None of them are anyway rationale investment decisions.A sustainable investment strategy should be able to create wealth on a continuous basis. Interim spikes and uncertain earnings mostly attributed to small caps will not serve the purpose. Several small cap funds recently shut shop despite making good profits for their investors as they realized it wouldn’t be prudent to hold on to their portfolios under the current exuberant conditions. It is clear that small caps are seasonal and short term, they gather pace only towards the last leg of the bull rally. When the rally ends, volatility increases tremendously and liquidity completely dries up. Another major issue with regards to small caps is the scalability factor. Serious investors will never be able to invest enough due to the small size, hence even if they manage to double their returns, the absolute profit number will still remain trivial. Our research on Indian Small/Mid cap mutual funds revealed that most portfolios have over 80-100 (some even more) stocks causing undue diversification translating into higher costs and under-performance.In order to assess the fundamentals and arrive at profit estimates in a reasonably accurate manner, the company under review should have evidenced a successful track record over several economic cycles. Management record must be clear and free from any regulatory action. Investor relations and information flow from the company should be transparent and timely.The product/services should have significant comparative advantages. There should be a proven wherewithal to survive any downturn and comeback stronger. Finally, liquidity is of utmost importance especially during bear markets. All of these points can only be addressed if the company has a long history and belongs to the large caps.I like the gyan… but what about the returns? Aren’t Large caps generally duds!

Rolling 14 year risk adjusted performance of Nifty Small cap 100 index vs Nifty 50 index

*Source:, Pelican Research

*Data taken from May 2004 to May 2018

*Risk free rate assumed at constant of 5%

Large caps offer real superior returns during both bull as well as bear markets. If one were to start at any of the previous 14 year period and rolled over their investment till date, the risk adjusted performance of the Large cap index (Nifty 50) would have been higher than the Small cap index (Nifty Small cap 100) as indicated by the Sharpe Ratio. While the small caps did outperform briefly during the years 2014/15/16, the trend did not sustain and once again odds favored the Large caps. This is despite the Nifty Small cap 100 outperforming the Nifty 50 by more than 1.5x (in the 14yr period). In other words, the risk ensued is significantly higher in the small cap stocks and does not justify the returns offered. Certainly not for the weak hearts.


The Bulls are scared, Bears are terrified, Sheep’s are skinned and Pigs have been butchered…. only the Ostrich has survived…

Nifty 50 index surpassed the 10,000 milestone on July 26th 2017. There was euphoria all over the place. Newspapers screamed about the future prospects of the country, analysts upgraded price targets based on the euphoria, economists were gung-ho on GDP growth. Fund flows into AMCs continued unabated with total addition of Rs1.7lac cr into equity MFs and PMSs (Aug 2017-18) taking the total AUM to all-time highs. HDFC AMC took the opportunity and garnered Rs.2800cr via an IPO. The Fear of Missing Out (FOMO) spread like wild fire …nothing seemed possible to stop this monster rally…. investors were ready to make the killing.

So what happened next…

The GDP which rose briefly in 2017 started sinking due to various internal and external factors to reach a low of 5%. Major sectors such as automobile and industrials started facing severe loss of revenue due to slackening demand. Production has been declining by 15-20% yoy and fear of job losses have been increasing. The Banking sector along with NBFC had a double whammy as they amassed huge bad loans and suffered from a liquidity drought. One of the country’s biggest employer the IT industry is also languishing due to redundant business models. Real estate has been the most affected sector post de-monetization and there is also an issue of oversupply in most places. Transaction liquidity has significantly eroded and there are hardly any buyers/sellers in the market. The reasons for a downward re-rating has been apparent for a while, only if we cared to believe them instead of succumbing to media noise and fund manager rhetoric.

Table:1 Returns of active equity investors (Equity MFs + PMS) during the period-

The performance numbers of MFs and PMSs speak a lot about the way investors have been misguided. 94% of the schemes (under coverage) reported returns less than the performance of the Nifty 50 index and 41% of them were in the red. This is underperformance on a huge scale. Period.

Very simply put, when there were no earnings growth for the last five years and when earnings don’t seem to be growing in the near future why would you pay an exorbitant price for investing. Successful investors are those who prudently allocate their assets depending on their understanding of asset cycles. Equities like any other asset class passes through these cycles. Near term equity cycle has peaked out and certainly warrants a good deal of correction. It would be a futile attempt of challenge the numbers that are available and a build a case otherwise.

While there might be little doubt about the potential of India to grow to the $5tn mark, the road ahead is not a bed of roses. Also it is important to understand that the stock market is the only option which offers you liquidity, capital appreciation and a hedge against inflation. The Indian capital market has witnessed noteworthy interest in the recent past on account of stability in the central government, easing of foreign regulations and improvement in business confidence. Indian participation in the global growth is inevitable owing to its size and geo-political stature.  For long term investors who are looking to participate in the country’s growth and benefit from capital appreciation, equity investment is the best option.

We are at an intercept. Don’t get nervous about what’s happening around simply balance and re-balance between savings and investing. Sometimes it is sensible to become an ostrich, do nothing and just stay insulated from the environment around you …atleast you will be rewarded with the biggest egg!

For stock market animal lingo you may check the link below


Debt: The first 5000 years – Book Review

David Graeber’ s “Debt: The first 5000 years”; is a historical journey of the concept of money lending. As a professor of anthropology at the London School of Economics, Graeber takes aim at the classical economic thought, the exploitative nature of modern debt markets and the international organisations that are enabling the growth of disparity between historically wealthy nations and not so fortunate ones.

Graeber kicks off the book describing how big banks riddled with excess deposits and nowhere to lend created a concept of marketing loans to dictators and government regimes of third world countries. Later plaguing them with compounding interest and trapping them in debt they could never come out of. Further he attacks the IMF for denying any refinance for debt laden countries and imposition of austerity measures until they were repaid. The book challenges core economic ideals that existed before market as we know it today.

To understand debt, the book explores the concepts of exchange, markets and credit systems analysing findings about Mesopotamian writings which are the earliest discovered records of credit systems until U.S. monetary policy in the 1980s and beyond. By understanding how historic practices of slavery and patriarchy functioned, we gain a unique perspective into the development of the debtor-creditor relationship. With these seemingly distant concepts analysed together over the course of history the author makes some revelations as to how these old age concepts have come to shape society functions invisible to an untrained eye. We are introduced to the concepts of Chartalism that systematically oppose this belief. The book goes on to investigate how there is no concrete evidence of barter existing in traditional societies. Money it seems has the capacity to turn morality into a matter of impersonal arithmetic-and by doing so justify actions that seem violent and obscene. The author traces how one’s debt has been synonymous with his honour and how this close relationship along with influences from religious beliefs and practices has created an environment where debt has been established as an obligation if one cares about his honour, dignity and does not intend to be degraded amongst equals.

The book is an anthropologically enlightening read, and echo’s the authors widely popular dislike of the functioning of debt markets. As an activist, David Graeber has been a vocal force in the Occupy Wall Street Movement and is widely recognised for creating the slogan “We are the 99 percent” which has since become the centre to protests against crony capitalism worldwide. His socialist leanings are evident all through the book and viewpoints may appear biased. While many of his opinions discussed may be debatable, it surely opens several new paradigms into the thinking of Debt. A good read for the incongruous mind!

Our Testimonials

Aparna Ramesh, Client

Aparna Ramesh, Client

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Ramki, Client

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Ravindran V, Client

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Revathi Sanjeev, Client

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Srikala Venkatesh, Client

Srikala Venkatesh, Client

Pelican Holdings has been advising me and managing my investments for over nine years now. The amount of time money is kept in liquid funds before being deployed into stocks, made me initially wonder whether they would invest at all. The duration of holding while the markets moved up kept me guessing when they would sell. The outcome was good and satisfying. Having gone through the cycle once I am comfortable with the process, patience & method is the theme, not excitement. I like their service and reporting quality too. I wish them all the very best.

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Vimal Kumar, Client

Vimal Kumar, Client

keeping in view the fundamentals of the investee company. They are in no hurry to deploy the funds, but rather wait till the valuation is right. This strategy has proven right especially in the current turmoil in the market for the past 2 years. – Vimal Kumar, Client. I am impressed with Pelican team’s patience to invest at the right time and at the right valuation, not swayed by market sentiments,