Seeking Alpha

Vishthink's  Instablog

Vishthink
Send Message
Random Talk by Vishal Gupta Life is meant to be a random walk – my life has always been one. Through the Random Talk blog I share my experiences and perspectives on life as I perceive it. You’ll find here some original (non-mainstream) thoughts on various random topics that interest me – life,... More
My blog:
View Vishthink's Instablogs on:
  • Alternative Year-End Reading: Random Talk's Year In Review 2013

    From the Random Talk blog: http://vish4life.wordpress.com/

    "So this is Christmas, and what have you done,

    Another year over, and a new one just begun"

    So goes one of the legendary Christmas songs that one gets to hear every so often at this time of the year - on TV, on radio, and quite randomly, even on my own playlist. Amidst all the celebrations, parties and family dinners, it's a time to reflect on the year gone by, and willy-nilly answer probing questions from all and sundry about your resolutions for the New Year!

    As for me, this year I started writing the Random Talk blog (RT). I am thankful to all the readers of my blog for your support and encouragement, with RT having established a regular following of a few hundred visitors for each post. So, whether you have been following the blog regularly, or have only just started reading it, or simply looking for some alternative reading for this holiday season, here's a look back at 2013 through some of the popular posts on Random Talk.

    Reader's choice (most read posts measured by number of hits)

    1. Cometh the taxman - 4 thoughts 4 the next 4 weeks
    2. Live life 'Baazigar' style
    3. Money Money Money (Part I): Themes - Making money trendy - Social, Solar and Realty

    Author's choice (my personal pick for the year)

    100 Reasons (in tweets) Why, When & How #Twitter will be a 100 billion dollar company #PathTo100bln

    Talking the Walk

    Random Talk is a celebration of the randomness of life (read my inaugural post). It is a medium for me to share the experiences of my life's random journey by finding patterns amidst all the randomness a'la the Random Walk! I believe in a complete life experience - hence, my blog features an eclectic mix of topics that interest me - life, lifestyle, finance, social media, cricket, leisure - intertwining various aspects of life. I try and make the content original, relevant, in-depth and entertaining. If you give 10 minutes to reading a post on my blog, I promise to leave you with a feeling of contentment, an uplifted spirit, a smile on your face, and hopefully a thought to incorporate in your own life.

    "… not to be fooled by randomness that life brings, for hidden amidst all the fuzzy uncertainty there is a pattern for us to discern"

    Life & Lifestyle

    So, the year changes! Times change, people change, the world around us changes, and yet life must go on. Great revolutionary leaders Nelson Mandela and Margaret Thatcher passed away, the Fast & Furious star fell to a, well, fast and furious tragic death. Yet, the whole world had an occasion to celebrate in the birth of the royal baby. Every year, we have a few successes and a few setbacks, a few memories that we shall cherish for a lifetime and perhaps some we'd rather forget. Life is full of complex contradictions - how do we stay true to our purpose and find our way to success? This is the question I explored in my epic post - Live life 'Baazigar' style - drawing upon the plot of a famous Bollywood movie and finding remarkable links to the life and times of a legendary Tech entrepreneur. And what's life without a little humour - what better than to laugh at our own follies? So, I went from narrating my "acrogalaphobia" to dispelling the "glass half full, half empty" adage in my light-hearted exposition - 1 portion Vice + 3 portions Virtue = Full Glass of Life.

    " Stay hungry, stay foolish. Lose it, so you can win it. Give it up, but never give up. And when you get the chance, take a chance on you. That's how you live life 'Baazigar' style…"

    Money & Finance

    It's the economy, stupid! After a tumultous few years, the global economy started showing signs of finally recovering. "Taper" became quite the most used word in discussions on the economy - in reference to when the US Federal Reserve will commence the process of reducing its monetary stimulus measures. The markets were in rally mode. The S&P 500 set a new all time high. Tesla's cars were on fire (literally!), while its stock ($TSLA) went into overdrive. Netflix ($NFLX) was a blockbuster hit. Amidst all the talk of a bubble, there was a bubble, well, in the use of the word bubble! There was plenty of inspiration for me to write a trilogy on investing - Money Money Money: Themes,Rules & Styles. The 3-part feature sought to dispel conventional myths on investing while proposing various frameworks for developing a successful investment strategy. I also explored the nebulous world of tax-efficient investing - which, remarkably has been the most visited post on my blog - we all like to save tax, don't we?!!

    "You didn't have to be a rocket scientist… all you need to do is observe trends, aggregate them into themes and distil some monetisation strategies from the themes"

    Social Media

    The year of social media! From Twitter to Facebook, WhatsApp to Snapchat, social media is one of those revolutionary changes that impacts our life in multiple ways: 1) how we connect and communicate with people 2) how we access information and discover what's happening around us 3) how we use it in our professional lives for the business or job we are involved with - or indeed a greenfield avenue to make a fresh career start 4) as an investment opportunity to capture the enormous value creation from companies involved with social media. 2013 was an year of exponential growth for social media, not just in terms of usage. As Selena Gomez celebrated her 21st birthday, Wall Street fell in love with Facebook ($FB) and then temporarily fell out of love when a few of Selena's younger fans appeared not to be using the network as much. This on-off love affair featured in my blog post - Valuing the Social Network: Wall Street doesn't get it, Selena Gomez might! The social network most in the news this year was Twitter - it is the one growing fastest. And when Twitter ($TWTR) listed on the stock market in November, from Al Gore to Ashton Kutcher to Richard Branson to Mrs Watanabe to the Joneses down the street - all took note. Twitter is my pick for the "Phenomenon of the Year" and hence I dedicated one full blog post, written as a tweet-log, in tribute to the company. Whether, you are interested in Twitter as a user, an observer, an investor, or as a cynic do read my blog post about Twitter - of course, it carries its own hashtag - #PathTo100bln

    "Much like the BRIC (Brazil, Russia, India, China) economies formed the growth story of the last decade… the TGLF (Twitter, Google, LinkedIn, Facebook) communities would together form the highest growth marketplace in the years to come"

    Cricket & Leisure

    It was fun! Life is busier than ever - we are constantly juggling with multiple commitments from work to family to running the daily chores. Yet, to keep ourselves going, it is important to make time for our interests and activities of leisure - that is the only way to relax, unwind and recharge! From the time my dad presented me my first cricket bat for my fourth birthday, I have been an avid follower of the sport of cricket. 2013 saw a lot of cricket action - both on and off the field! England and Australia battled it out in back-to-back Ashes series, with England handing out a drubbing to the Aussies over the English summer, with the Oz duly returning the favour a few months later. Off the field, one David Warner and Joe Root had a boxing duel of their own! It was the end of an era as many of the games stalwarts - Dravid, Ponting, Tendulkar, Kallis, Swann, to name a few - called it day. Yet, the show must go on. And it certainly did - with the top 8 cricketing nations getting together to vie for the Champions trophy - the win for India inspiring my post - We are the champions (of cricket). The new age and fast paced Twenty20 cricket continued to capture the imagination of fans - and as the top cricketers from the world battled it out in the IPL - I explored the economics and strategic nuances in my post - IPL-onomics: It's not just cricket (sic). Meanwhile, it was summer in England alright, and as the Shard emerged as the newest star on the London horizon, it was the season to visit rooftop bars - find my favourites here.

    "While you're in London, do as the Romans do in New York… if you want to get high, get high. Climb high while the sun shines"

    Special topic: Personality

    Who am I? Which personality type best describes you?

    #1 Stable Cautionary - safe, pragmatic and reliable

    #2 Mainstream Conventionalist - moderate, balanced and progressive

    #3 Commanding Enthusiast - energetic, dynamic and resourceful

    #4 Eccentric Visionary - intellectual, free-spirited and adventurous

    Read my post - What shade of grey are you? - And figure out yourself!

    Happy New Year

    So, what memories and learnings will you be taking forward from the year gone by? I learnt a lot about human character this year. I kept my spirits high in the face of various personal setbacks. When the chips were down, a few friends stayed by me, a few tried to pull me down. We can't change the world, but we can always find a reason to celebrate. I say bring on the New Year. Put on your dancing shoes, get out that bottle of bubbly, and get the party started. "Champagne for my real friends, real pain for my sham friends".

    As we cross the blurred lines between 2013 and 2014, here's wishing all the patrons of the Random Talk blog a very Happy New year! Don't forget there are many ways to continue following the Random Talk blog - visit the website (http://vish4life.wordpress.com), follow me on one of the social networks, or e-mail me (vg0706@yahoo.com) and I'll add you to my mailing list. This New Year's Eve, whether you are watching the ball drop in Times Square or the fireworks go off from the Harbour Bridge or London Eye, let's raise the bar and our cups to the stars. Hope you have some fun, I just want to get lucky!

    Have a great MMXIV.

    Disclosure: I am long TWTR, FB.

    Dec 30 11:19 AM | Link | Comment!
  • Money Money Money (Part III): Styles – What Shade Of Grey Are You?

    From the Random Talk blog - third part of the Money trilogy

    http://vish4life.wordpress.com/

    Summary: Why is personality important to your investment style? The four personality type-investment style combinations - Stable Cautionary, Mainstream Conventionalist, Commanding Enthusiast, Eccentric Visionary; what does your social media activity say about your personality and investment style? Stocks or Bonds? Value, growth or special situation investments? Bonus: What's your favourite Cluedo character!

    This blog post is the third and final part of a 3-part money trilogy:

    Part 1 - Themes: How to build an investment portfolio based on major themes of the moment to make it "trendy" (pun intended)

    Part 2 - Rules: Some basic tenets to test your investment ideas and make them work

    Part 3 - Styles: Selecting an investment style consistent with your personality

    The winter has set in, the weather's been gloomy and sombre here in London, and the day passes generally in various shades of grey. To tickle your imagination and brighten up the day a bit, here it is - the third and final instalment of my trilogy on money - Themes, Rules & Styles. Just in case, you accidentally reached this page looking to reconcile your exotic sexual fetishes with your personality, sorry, you have come to the wrong trilogy. The one you're looking for is called "Fifty Shades of Grey" (I haven't read it but I am guessing it must be set in London or at least the author is British - who else could imagine that grey has so many shades!). The reference to "shades of grey" in the blog title is only because I was told by a friend that this would improve its placement in Google search results. I am also told any reference to it will attract more women to read my blog thus achieving a better balanced male-female readership ratio.

    Why is personality important to your investment style?

    The focus of this, the third part of the money trilogy, is to put forward a few different investment styles and help you to identify which one is suitable for you. Now, those of you who have ever sat down with a financial adviser or planner would have no doubt at some stage been presented with an "attitude to risk" questionnaire. After you have duly completed the questionnaire, the adviser would claim to have ascertained your risk profile and then proceed to recommend you a few investment choices suitable for your risk profile. While different individuals obviously have different risk appetite, I am unconvinced that most individuals are correctly able to elucidate their attitude to risk using a simplistic questionnaire. Furthermore, even if the approach to risk is correctly identified, two different individuals may perceive the same investment as having different levels of risk. Take gold for example - for some, it is the quintessential store of value, whilst for others it is a volatile commodity whose price fluctuates wildly in response to speculative financial market activity. Another common tool used by financial planners is based on life stage, which generally involves determining a target retirement date and then developing a plan to build a substantial pot to service you post retirement - the upshot of this is generally that you need to start saving more and earlier. Various planners have developed standardised portfolios for various stages of life - the overriding implication being that "all" individuals in the same age bracket should have the same approach to investing. NO!!! Human beings are different, the way we think of risk is different, our approach to life is different, and therefore how we invest our money ought to be one consistent with all other aspects of our life.

    So, if the conventional methods of investment selection are not appropriate, that begs the question - "what is the right approach?" Before answering the question, I'll answer another simplistic, yet fundamental, question - "what is the purpose of investing?" I'll propose a universal answer to this question - a good investment style must achieve two objectives - the secondary purpose being to protect and expand our wealth, and the primary purpose to make us happy. This explanation, I believe, is fundamental in developing investment styles suitable for different individuals. Managing our financial affairs is, after all, an integral component of our life much like work and family. The secret to happy life is in making sure our vital life choices are consistent with our personality. Working in a job or having a life partner not consistent with your approach to life is likely to leave you dissatisfied and at loggerheads with life. Same goes for financial affairs - building your wealth will only make you happy if you do so in a manner consistent with your personality. So, next time a financial adviser gives you a risk questionnaire, ask them for a personality test instead- just the look on their face will make asking the question totally worth it!

    The different shades, hues and colours of personality

    It is well-understood that human personalities come in various shades and colours (let's not limit ourselves to grey). There are a number of different theories that abound regarding personality types. The various theories, while differing in construct, agree on the principle that human beings can be grouped together into a few personality types. It, therefore, seems natural to suggest that each personality type would also have a corresponding investment style. Given the multitude of investment techniques out there, it is in fact surprising that a personality based approach to investing isn't one that is commonly used (at least, not to my knowledge). A framework such as this involves making an honest assessment regarding your personality, and then selecting an investment style that is consistent with your personality. This, as I argued above, would ensure that your investments not only build your wealth, but, more importantly, also make you happy.

    As I have promised in each part of this money trilogy, I will make what I say actionable. So, here goes, a framework for mapping your personality and investment style. If you read my blog, you know that I am a fairly observational sort of guy. So, I won't ask you to answer various arcane questions to ascertain your personality type. Instead, the framework I provide here is based on determining your personality type by observing your everyday behaviour and actions - analysing your personality really ought to be that simple - we should be able to do it ourselves. Specifically, I base my segmentation on the following basic characteristics - 1) Lifestyle 2) Friends circle 3) Work/ professional 4) Holiday/ hotel selection process 5) Social media activity 6) Information/ news/ world view. Based on these readily observable behavioural patterns, I develop four different personality types and a corresponding investment style that is consistent with each. There should be an element of natural selection here - so in all likelihood, the way you are managing your investments will already be a reflection of your personality. In case you identify a mismatch, take that as a call to action to review how you are managing your financial affairs.

    To make things a bit more interesting, as a bonus, I have also mapped each personality type to a character from the classic murder mystery board game - Cluedo! If, like me, your childhood involved playing multiple rounds of Cluedo, you undoubtedly have a favourite character that you always chose to be. Hey, that was an important part of the game! If you think about the character you chose, and the character chosen by those who you remember playing the game with, you'll broadly connect the choice of character to their personalities. For example, I played the game a lot with my gang of cousins - and sure enough, we had one for whom the most vital part of the game was getting to be the talkative Miss Scarlet; luckily, we also had Reverend Green who ensured we played the game in a generally orderly manner. I had a favourite character too, but I ain't telling you that - if this framework works, you should be able to guess who I am! Just as a bit of background for those who haven't played Cluedo, the game involves six characters (each representing a player), all of whom are murder suspects - the players move round the board to various rooms, and through a process of guessing and elimination have to identify the murderer, crime scene and murder weapon. I have assigned one Cluedo character each to two of the personality types, and two Cluedo characters each to the other two - this is also representative of the number of people belonging to each personality type i.e. I consider personality types to which I have associated two Cluedo characters to be more common.

    It is always important to be aware of the caveats when investing your money. Therefore, for each personality and investment style I have also included a red herring - these are the traps you would do well to be aware of and avoid falling into.

    #1 Stable Cautionary

    Your Cluedo Character: Mrs. White

    The colour white denotes peace, quiet and simplicity. Mrs. White is depicted as a traditional, unassuming, middle-aged character with a plain jane appearance and perhaps a reserved demeanour.

    Personality profile: Cautious by nature, you believe in leading a simple and stable life, and live well within your means. You value certainty and are likely to be perturbed by any unexpected changes. You interact primarily with your close family members and perhaps a few close friends you are likely to have known since childhood. These are the only people you trust, and rely on them for advice on where to go for holiday and restaurants, and are likely to visit the same place over and over again. You are generally suspicious of the motives of anyone you don't know well. You have chosen not be on Facebook and any other social media platforms - you are not interested in what's happening with other people's lives and are generally paranoid about who might get access to your personal information there. In personal life, you probably married the first person you dated and are now well-settled with kids. You believe jobs are for life and are likely to stick to your first job. Similarly, your political and social views remain stable and uninfluenced by popular fads. Safe, pragmatic and reliable.

    Investment Style: Your financial plan for life is to earn money through secure employment, so the role of your investments is simply to keep your earnings safe. Your simple lifestyle allows you to save a relatively higher percentage of your earnings, so you can make do with a lower return. You are averse to borrowing, so you will postpone buying a house until such time that you have saved enough money to buy one with limited or no leverage. The vast majority of your savings ought to be in bank deposits and other fixed return investments. In order to improve your returns, you could look at longer term time deposits that would offer a higher interest than your savings account. It is best for you to avoid equities and other investments with volatile market prices, as any fluctuations are likely to cause you worry.

    Red herrings: Do not get lulled into a false sense of security, which is a trap that could prove the undoing of people in your category. Bank deposits, as we have seen during the crisis, are not risk free, as banks can fail. So don't just chase the highest interest rate - for example, many UK depositors suffered from having their cash with lesser known Icelandic-banks that did offer a moderately higher interest rate, but then didn't survive the crisis. Know the level of government guarantee that applies to your deposits, and try to spread your savings across a few banks.

    #2 Mainstream Conventionalist

    Your Cluedo Character: Reverend Green/ Mrs. Peacock

    Blue and green are basic colours that blend into the scene and setting. Reverend Green and Mrs. Peacock are depicted as the prim and proper characters, suitably attired with a dignified appearance designed to be presentable without being overarching.

    Personality profile: You are a person who likes to follow accepted societal conventions and keeps up as society evolves. Consciously or unconsciously, like most people in the world, you are concerned about your social status and are constantly vying to "keep up with the Joneses". You want to make sure you belong wherever you are. Your social circle comprises people you would normally be expected to socialise with - people you went to school or college with, colleagues from work and perhaps your neighbours. You signed up to Facebook and LinkedIn so as not be left out - you keep a close watch on your news feed to ensure you know what everyone else is up to, and make sure to like and comment on something if a hundred others have, but would rarely want to be the only person to do so. Your choice of holidays and restaurants is based on what is popular in your group or those around you. If looking online, you would get on to a popular website such as tripadvisor or lonelyplanet and go straight to the reviews - you go by the popular mass opinion. Same is true with your political and social views - they are derived from and reflect what is popular on the mainstream channels at the time. In your professional life, you are ambitious yet patient - you obtained a degree from a reputed university and want to steadily climb up the career leader. Moderate, balanced and progressive.

    Investment style: You have a steady and growing income stream from your profession, you do not overspend, so are able to continually add to your savings pot. As you want to achieve a lifestyle similar to everyone else throughout your life, you need an investment return in line with the overall market - you are happy so long as you are doing equally well (or equally badly!) as everyone else. Hence, your investment style needs to be designed to replicate the overall market portfolio (or achieving the market beta as the financial advisers might say). If you're in this bracket, one of the "stage of life" tracking styles would actually work for you. So, you always have a few months of your income in your bank account to provide liquidity. The remainder goes into a portfolio of mainstream equities and bonds, weighted towards equities in your younger years, and then gradually rebalancing to bonds as you approach retirement. As you are trying to replicate a market return, and are less concerned about exercising your own opinions, investing through mutual funds and unit trusts is an efficient mechanism. You are also likely to be wary of costs, so consider ETFs (Exchange Traded Funds) that track the market index passively with lower expense ratios than actively managed funds. In terms of stock categories, select blue chip value stocks with well-established cashflow streams. Dividend generating investments such as property REITS are also likely to appeal to you. Of course, you are eager to get on to the property ladder, so you would typically buy a house once you have been working for a few years with a mortgage at moderate leverage. As you have kids and your friends move into bigger houses, you are also likely to want to upgrade once or twice in life - so keep that in mind for your financial plan.

    Red herrings: You like to follow trends, which is good, just be careful not to be the last one on the boat i.e. don't buy into equities when the rest of your friends start talking about how much money they have made last year. Your forte is that you are good at staying close to the pulse, so make sure you are aware and invest when the others are getting in, not when they are about to get out!

    #3 Commanding Enthusiast

    Your Cluedo Character: Colonel Mustard/ Miss Scarlet

    Red and yellow are bright colours that stand out. Col. Mustard and Miss Scarlet are portrayed as the flashy and flamboyant characters in the game - the brash military man and the attractive social butterfly. They have a presence and persona not to be missed.

    Personality profile: Confident and gregarious, you are a true busy body who leads an active life. At social gatherings, you are the person that everyone knows. You like attention and have an unending desire to stand out. You want to be the trend-setter, but only if it keeps you popular. While you may like to be the Joneses that everyone else is trying to keep up with, in reality you are doing your best to also keep up with everyone else. For this reason, you may end up overspending. You are constantly seeking out new communication channels - Facebook, Twitter, Whatsapp - you are always on! In fact, your active social life has readily extended itself to online social media where you actively partake in conversations and often initiate new ones - you want people to know what you are doing and join in. Your extensive and diverse network means you are able to cross-feed ideas, and would often introduce your group to new holiday destinations and restaurants. You are also the one who would know about this new travel website. In your personal life, you had many relationships and flings before eventually settling down with your current partner, who may or may not be the last one! Same goes for your work life - you change jobs as soon as a new more promising opportunity comes along. You have an opinion on everything and actively voice it - you are aware of all the world events that are in the news, but unlike the mainstream conventionalists, you will at times question the popularly accepted view, and then quickly change sides if it becomes too controversial. Energetic, dynamic and resourceful.

    Investment style: Your desire to progress and outperform means you have taken a few risks and perhaps chosen a career with a more volatile income stream, and therefore you are more comfortable with the idea of a more volatile investment return. Unlike mainstream conventionalists, you are unlikely to be happy with just tracking the market - you want to be the leader and outperform the market, or at least have the hope of doing so. Hence, your investment style must be geared towards generating an above market return (or, as the financial advisers would say, you want to invest in alpha strategies).Thus, you could consider a portfolio with a higher weighting towards stocks, which over the long term should deliver a higher return (in return for higher intermittent volatility). You can further improve the risk-return profile of your portfolio by also including international stocks and small proportion of alternative investments such as commodities, currency, private equity. Of course, investing is more than just that for you - you also derive pleasure by talking about this great stock you have picked at the next party you go to. You like to be in control - so manage your own stock portfolio - mutual funds and unit trusts are not for you. Growth stocks with strong potential are more likely to appeal to you. Your desire to have a bigger house means that you have probably employed higher leverage, which will serve you well in a rising property market. If things go your way, instead of paying down the entire mortgage, you may consider maintaining some leverage to enhance the return of your investment portfolio.

    Red herrings: Do not overstretch yourselves, while leverage per se isn't bad, try and have a backup plan and bring down your leverage to more manageable levels in the good times - that will serve you well on the rainy day. Also, make sure to diversify your portfolio as much as you can - you have the energy levels to manage a diverse portfolio - use that energy!

    #4 Eccentric Visionary

    Your Cluedo Character: Professor Plum

    Purple is a non-standard, unusual and off-beat colour. Professor Plum is depicted as the unconventional character - intellectual, whimsical and perhaps slightly pompous.

    Personality profile: Independent and unrestrained, you set your own agenda in life. You are deeply intellectual and always thinking a few steps ahead, and may appear to operate on a plane quite different to others. You constantly seek out people - but unlike the commanding enthusiast, you are less concerned about enjoying their present company, being rather more pre-occupied with the future relationship potential. Thus, your friend's circle comprises an eclectic mix of people and you often can't explain how you got to know your friends - you just met them somewhere or through someone and then hit it off. You research things extensively and make up your own mind on most things. When you are making a holiday plan you will analyse various options in detail and once you find something that appeals, you will go ahead with it no matter how many people on tripadvisor have trashed it - they must not have been your type! You partake in conversations, whether in person or on social media, when you have something interesting to say or something appeals to your fancy. When expressing your views, you are hardly ever concerned about the popular acceptability of your opinion - you thrive on providing an alternative viewpoint. In personal life, not the sort who had multiple casual flings, but a few deep and meaningful relationships. You seek out careers that satisfy your intellectual curiosity and when it ceases to be, you happily move on to something completely different. Intellectual, free-spirited and adventurous.

    Investment style: As you are jumping from one career to another, you have a highly variable income stream and savings pattern. Conventional investment plans that require investing on a regular schedule are hardly suitable for you. What works in your favour is that you are likely to have an investment horizon much longer than others - in fact you are attracted by and like to analyse the long term potential of any investment opportunity. So, your investment portfolio comprises a mix of a few exotic investments - property development, venture finance, and special projects of various kinds. Stock types suitable for your portfolio are the ones where you identify a special situation such as a corporate restructuring or technological breakthrough. As your core investment strategy is designed to provide primarily long term capital appreciation, you would do well to set aside a portion of your portfolio in liquid and income-generating assets. These provide you the safety cushion as you pursue your other more "interesting" projects. Your decision to buy a house is generally impacted by all the other uncertainties in your life, but when you do, it may be advisable to keep leverage low so as not to compromise upon your flexibility.

    Red herrings: You are quick to get excited by the long term potential of things, but do not get carried away by your ideas. Always take a reality check, and cut your losses if you find things are not going well. Combining your foresight with a practicality check will stand you in good stead.

    So, what colour is your money?

    Hopefully, you have found my exposition on basing your investment decisions on your personality interesting. That is how investing ought to be - interesting! Yes, managing your money and financial affairs is a serious matter, but money alone doesn't make you happy. As I said, your investment style should not only protect or expand your wealth, it should also make you happy. In the framework that I have provided, there are four personality and investment style combinations - 1) Stable Cautionary 2) Mainstream Conventionalist 3) Commanding Enthusiast 4) Eccentric Visionary. One is not better than the other. It is about finding the one you fit into. When your investment style is in sync with your personality, you'll have fun managing your finances. So, was there a colour that you identified with? And if you had a favourite Cluedo character, did it fit with your personality description? I would love to know which Cluedo character you identify with, so do drop me an email, tweet or comment. If you're doing so and have been reading my blog regularly, please do also tell me your guess as to which Cluedo character you think I am!

    With that I conclude the third and final part of the money trilogy. In the first part, I demonstrated that you didn't have to be an expert to invest successfully. In the second part, I argued that you didn't need to be exceptionally smart or intelligent either. Hopefully, in this third part I have been able to show that investing is for YOU! It's been a long road researching and writing these 12,500 words on the subject of money. I had fun writing, hope it has been worth your while reading. The Random Talk blog will now move on to some other random things in life. Thank you for your ongoing support and interest in my blog.

    Money Money Money - It's a rich man's world

    Money Money Money - Themes, Rules & Styles

    Happy Investing!

    Dec 09 11:10 AM | Link | Comment!
  • Money Money Money (Part II): Rules - The Essential Principles Of Investing

    From the Random Talk blog: http://vish4life.wordpress.com/

    This blog post is the second of a 3-part money trilogy:

    Part 1 - Themes: How to build an investment portfolio based on major themes of the moment to make it "trendy" (pun intended)

    Part 2 - Rules: Some basic tenets to test your investment ideas and make them work

    Part 3 - Styles: Selecting an investment style consistent with your personality

    Let me start by saying a big thank you to the readers of my blog for your overwhelmingly positive feedback and comments you have sent me on the first part of this money trilogy - I am glad that so many of you have taken kindly to the idea of theme-based investing. Apologies, I decided to delay the second part of this trilogy to allow the Twitter IPO to complete enabling me to draw some fascinating insights for the purpose of this blog - some of the price action, as I argue below, turns a lot of conventional market theories on their heads. Those of you who follow me on the social networks would have also noted that my long held prognosis of a 50% plus pop on day 1 of trading in Twitter came true. I had also put out a day 1 closing price target of $50/ share, which turned out to be the intraday high, and we closed five bucks shy off that. I have also been arguing that the stock could come under selling pressure in the coming days as the IPO frenzy abates as does the status symbol value of owning Twitter stock, now that every man and his dog can buy it, and sell it - a far cry from its days of being much the prize investment that Al Gore tried (unsuccessfully) to court by treating the founders to "copious amounts of tequila", and one Ashton Kutcher allegedly had a bikini-clad Demi Moore as a prop during a poolside overture to get a piece of the pie! However, I do stick to my long term call that $TWTR would, in time, join the 100 billion dollar club (market cap).

    Lady in Red

    Talking about IPOs, let me briefly digress into another news story that caught my fancy this past week - this was about fashion retailer Michael Kors ($KORS) becoming the latest member of the coveted S&P 500 index, two years after its IPO, which ironically was not as fashionable as Twitter's IPO! The story reminded me about a few events. It was the summer of 2012, and my wonderful sister (by far the smarter one out of us two siblings) was just completing her Masters from an elite B-school in the US and had invited (or ordered) me to attend her convocation. As part of my brotherly duties at her convocation, I offered to buy her a gift of her choice, any gift. Her response was prompt - she wanted a watch, not just any watch, a Michael Kors watch - it was a practical, yet stylish gift - that's my sister for you! That would have been that, except that as I spent the next few days on her campus, and got talking to few of her friends, it soon dawned on me that a Michael Kors gift - watch, handbag, or jewellery - was on the wish list of almost every girl - especially the trendier looking ones. Curiously, noone wanted Coach - which, with my limited understanding of women's fashion in America, I had considered to be the most popular brand in the affordable luxury segment at the time. A few days later, back in London, I was on a bus with my wife, on our way back from one of her customary shopping trips to the west end, when an extremely attractive young lady got on to the bus - looking rather chic in a stylish red dress, and just as she sat down on the seat opposite us, I spotted the distinctive MK signage on her handbag. Emboldened by my recent trip to the US, where it is completely acceptable, even polite, to strike a conversation with a stranger on public transport, I passed her a compliment making sure to mention the handbag. Much to my relief, she responded with an American-ish openness - it turned out that she had just acquired the bag from the recently opened London store of Michael Kors. She went on talk about how a lot of women in Europe tended to settle for nothing less than a Louis Vuitton or Birkin bag, but (pointing to her newest accessory) she finds this just as trendy at a much more practical price point. My wife did give me a piece of her mind when we got back home, but that was a small price to pay for a bit of invaluable market research. These two independent observations, one in the US, one in London, spurred me to explore Michael Kors further - amongst others, I found that Michael Kors had just become the most searched fashion brand online, and the @michaelkors handle had one of the highest Klout scores on Twitter (now, you could see a Twitter connection coming, didn't you?). Michael Kors was leading a trend shift in affordable luxury in the US, and was also taking the trend to Europe. The reason for narrating this story is to illustrate an example of what I meant when I said in Part 1 of this trilogy that winning investment ideas are often found by observing trends around you. $KORS stock has risen four-fold in the past two years. Coach ($COH), by the way, is down a third!

    Hypotheses, Empirics & Laws

    The main focus of this, the second part of the money trilogy is Rules - here I try to develop a framework of a few "truisms" that govern modern markets, and derive from them some practical rules to traverse the vagaries of the market successfully. Now, since I am writing a money trilogy, it is too tempting to not use this opportunity to propose my own theory of what drives markets - everyone agrees that noone actually knows the answer to that, and yet some people get given a Nobel prize for proposing an explanation. So, this is my one shot at the Nobel! It is generally accepted convention that any serious Nobel aspirant demonstrate that they have researched the existing body of knowledge and their work is an advancement on that. So, I hereby declare that I have duly studied the works of two of the most recent Nobel laureates - Messrs Fama and Shiller. I also note that one of these men describes his work as a "hypothesis" on efficient markets, and the other provides "empirical research" on the inefficiency thereof. This, I believe to be an acknowledgement that the field of finance and economics has yet to find the intrinsic "laws" defining its structure - a stark contrast from physics, for instance, where the defining theories have been cast in the form of laws, mostly attributable to one Isaac Newton. Finally, it is also societal convention that the theory carry the last name of the proponent. So, below, I present what we shall call "Gupta's Laws of Modern Market Motion" or the "M3 laws". Just in case any members of the Nobel award committee happen to read this, I wish to stress the point that I am putting forward laws - the intrinsic defining principles - not just hypotheses or empirical evidence; hence, these must be taken with at least as much seriousness as someone proposing a law based on the chance falling of an apple on one's head.

    Gupta's Laws of Modern Market Motion

    **** Gupta's 1st Law - Non-uniformity ****

    Statement of Law: Financial markets are non-uniform, as participants have differing levels of access to different markets. The collective interpretation of those that have access to a given market at a given time determines the level of prices in that market.

    Corollary 1a: It is entirely plausible, and indeed is to be expected, that the price of a security in one market will be different from the price of the same security in another market provided that not all participants have the same level of access to both markets.

    Corollary 1b: When the level of access to a market changes, such that new participants are allowed or denied participation in the given market, for the same level of current and future information available, the collective interpretation of that information changes, and will have an impact on the level of prices.

    Evidence & Everyday Applications: IPOs are a great example of Gupta's 1st law in action, as when a company moves from trading in the private to public market, the set of participants who have access to investing in it also changes. This explains why certain securities jump in price on listing (public markets view it more favourably) or certain IPOs fail to perform (public markets view it less favourably). Of course, modern marketplaces are complex and, at a given time, there may be several markets in which a security may be traded directly or indirectly. So, in relation to the Twitter IPO, there are multiple markets worth analysing: 1) The pre-IPO venture capital market 2) The institutional IPO market that had access to buy Twitter at the IPO price 3) The grey market run by various spreadbetting platforms representing, not thousands, yet a critical mass of hundreds of investors who took a position on $TWTR price prior to the IPO. 4) Listed vehicles such as $GSVC and $SVVC that have in the past several months traded as proxy investment in $TWTR 5) Various structured securities issued by banks/ brokerages linked to $TWTR price 6) the actual public exchange where $TWTR is now traded. All these markets were trading the same underlying security whose value is predicated largely on a vision for the future (resulting in information equity), and yet the marked variation in price development is explained by the different levels of market access and how the different investor segments had a different collective interpretation of the same available information; and indeed, tried to guess the collective interpretation of those operating in another segment of the market. Prior to the IPO, the last available pricing benchmark for Twitter's price was the private venture capital market which had valued it at c. $20/share in February 2013 (in the subsequent months, the whole social media sector underwent a massive re-rating, which should have translated into a significant increase in valuation of Twitter). Of particular interest is the price disparity between the institutional IPO market and the pre-IPO grey market. It is, and was, well-know that the IPO process was going to be super-exclusive, and in the end only about 100-odd chosen accounts were given an allocation at the $26/share IPO price. Others (non-US citizens), who believed the post-IPO pop story, had the ability to buy in the grey market, where trading commenced more than a month before the actual IPO at an implied price of $20/share, which remarkably also turned out to be the first official IPO price guidance a few weeks later. However, by that time, the grey market had reached critical mass, and the price had ratcheted up quickly. I am given to believe that the average purchase price for anyone who acquired a meaningful stake in the grey market was $35-40/share, higher than the IPO price of $26/share, but lower than the day 1listing price on the public market of $45/share. Equally interesting, the listed vehicles (the best publicly traded Twitter proxy available to US investors), $GSVC and $SVVC got bid up in the run-up to the Twitter IPO, trading at an implied $TWTR valuation of $45-50/share immediately before the IPO pricing, but then crashed as soon as $TWTR became available to these investors. Finally, I am told that various structured notes linked to $TWTR price had a strike price of $35/share. So, as these multiple markets were trading the same underlying security at the same time at a different price, it clearly shows that markets are non-uniform and the difference in price was on account of different levels of market access and the differing collective interpretation of the available information at the time. Q.E.D.!

    **** Gupta's 2nd Law - Conservation of History ****

    Statement of Law: The collective expectation of participants in a market for historical events to repeat is inversely proportional to the length of time that has elapsed since the occurrence of the event

    Corollary 2a: The memory of a recent related event will lead to price discontinuity (jump) as the participants first prepare for a repeat of the event, and then re-adjust their expectations when the event fails to re-occur

    Corollary 2b: The memory of a distant related event will have a diminishing influence on market prices as participants apply an ever-decreasing probability of recurrence ultimately resulting in over/under-valuation and manifesting in asset price bubbles and crashes [As this corollary explains the occurrence of bubbles, I propose that it be referred to as the "bubble corollary"]

    Evidence & Everyday Applications: Gupta's 2nd law implies that expected market price action is conditioned by historical events, and market participants (erroneously) apply the highest weight to the most recent relevant event. No wonder then, that in the run up to the Twitter IPO, reams of newsprint were devoted to how Facebook's share price tanked after its IPO - so much was the hysteria, that it may actually explain why Twitter eventually priced the IPO so much lower than where it first traded. There was no reason why the $FB IPO should have been used as the benchmark for expectations. There had been several internet IPOs before that which delivered a significant day 1 pop - LinkedIn (109%), Yandex (55%), Google (18%) - in fact, Facebook was the only notable exception. Yet, the disproportionate focus on $FB's IPO flop show can only be explained by the fact that it was the most recent example. Of course, it was wishful thinking to expect that $TWTR would crash below IPO price once trading commenced, which explains the 76% jump, as the expectation of a repeat failed to materialise. Of course, Twitter now takes over as the most recent example, which has encouraged many analysts to argue that now is the best time for any and every internet company to IPO - nothing can be further from the truth, as even though we are in a part of the economic cycle supportive of IPOs, but few other companies have quite the unique business model as Twitter does. It would be fallacious to use a utility like Twitter as the benchmark for the IPO prospects of other internet companies. Yet, there is every chance we are headed in a direction where too many companies with unproven business models become listed, first leading to a valuation spiral (I do not agree with those who claim that we are already in bubble territory), and then the inevitable crash circa the 1990s tech boom-bust. It is also important that when there is an asset price bubble, it is not that the price of everything has become ludicrous - the price of "game-changers" like Amazon ($AMZN) and Ebay ($EBAY) during the 1990s tech bubble surely looks like a bargain compared to where they trade today - they were still good investments during the tech bubble - when we say, there was a bubble in tech stocks, it is important to remember that we are referring to all the other chaff that also got bid up. I agree with the possibility, even the inevitability, of the valuation of internet and social media stocks reaching bubble territory; but, that does not necessarily mean that "game-changing" market leaders like $TWTR and $FB are part of the bubble - the bubble, in fact, would be in companies and investors unwittingly trying to ride the $TWTR/ $FB wave elsewhere. It is the rooting of expectations for the next market movement to the most recent event, which leads to valuation spirals and the boom-bust cycle. Q.E.D.!

    **** Gupta's 3rd Law - Action-Reaction ****

    Statement of Law: For every action (new information entering the market), there is a reaction (change in price), not necessary equal in magnitude or direction to the long term impact of the action

    Corollary 3a: Markets are temporally efficient in absorbing information, and market prices respond immediately to any new information becoming available [note that this corollary provides confirmation for Fama's efficient market hypothesis, I therefore propose that it be referred to as the "Fama-Gupta corollary"]

    Corollary 3b: Markets over-react to information, and with the passage of time, this over-reaction will correct itself [note that this corollary corresponds directly with Shiller's central argument that price changes following earnings surprises are not commensurate with future changes in the level of dividends, I therefore propose that it be referred to as the "Shiller-Gupta corollary"]

    Evidence & Everyday Applications: Gupta's 3rd law explains how market prices respond to new information entering the market, and in effect provides reconciliation to the apparent contradiction of the Fama and Shiller views of the market. The law provides that, as argued by Fama, any new information gets reflected in the market price action immediately. However, the law allows for the failure of market participants to interpret the information correctly, thus accommodating Shiller's argument of over-reaction. In fact, at the extreme, the law indicates that the price action may actually be in a direction opposite to what the information indicated. This is verified by the price action in the various markets for Twitter stock (refer discussion under 1st law), in response to new information. It is significant to note that even though Twitter was trading at a different implied value in these different markets in the lead up to the IPO, as soon as new information was made available, the price in all markets moved, in a different degree and direction. So, when Twitter released the initial price guidance of $17-20/share (which should have been relevant only for the handful of institutions who had a shot at getting an allocation at the actual IPO price), there was a price adjustment in the other markets. By that stage, the grey market had already undergone the price discovery process and was trading in a $45-50/share range (which was the eventual day 1 trading range on the public market), yet the release of this new information disturbed the equilibrium in that market with the price immediately crashing to $25/share, before undoing the exaggerated correction over the next few days. The listed proxy vehicles, $GSVC and $SVVC, experienced a more muted price drop. Every subsequent revision of the price guidance produced a similar price discontinuity and then retracement back to the level before the news release. $GSVC and $SVVC eventually settled to a level that implied that investors expected the $TWTR holding in their portfolio to be worth $45-50/share. When $TWTR actually commenced trading at $45/share, instead of the price remaining unchanged, their stock prices actually nose-dived - the price reaction was in a direction opposite to what the news action implied. This is, of course, explained by Gupta's 1st law which does provide for market prices being impacted by a change in the level of market access - the investors in $GSVC and $SVVC could suddenly buy $TWTR directly, and as soon as $TWTR started trading they instantaneous exited the market en masse, hence the crash. Markets react instantaneously to new information, and yet the reaction does not have to be commensurate in size or direction implied by the action. In other words, markets are informationally efficient, but not price efficient. Q.E.D.!

    Rules - Stupidity, Humility, Passivity

    Ok, so that completes my theoretical framework for what drives markets. As I mentioned in Part 1 of this trilogy, I am particularly keen to ensure that any financial talk be actionable in nature. So, in the final section of this post, I put forward a few simple rules for you to use as a practical guide in traversing the markets successfully, and happily! In putting forward these practical rules, I draw upon both the theoretical laws I have explained above, and also what I have learned from years of practice.

    Rule #1: Stupidity

    ++++ Be stupid first, then lucky ++++

    I once attended a speech by a leading global property investor. One of things that stuck with me from that speech was - "Successful people think differently". It must be the case - In order to outperform the market, the successful investor has to think differently from the rest - his views therefore do not comply with the popular opinion. To test my investment ideas, I have, over the years, developed what I call the stupidity test. This is how it works - when you have an investment idea, casually drop that into conversation at a social gathering. If the idea is at odds with the popular opinion, which is generally rooted to the most recent relevant event (as per Gupta's 2nd law of Modern Market Motion), people are generally only too keen describe it as stupid. The more stupid people find your idea, the greater the chances you are on to something. Of course, this doesn't mean you randomly throw out ideas at parties - this works only when your investment idea is borne out of strong conviction and you have a clear investment thesis yourself. Over a period of time, you may also try out the second step of this process, and tell people about how one of your non-mainstream investments had worked, to which you are likely to get the response - "you were just lucky, mate!" I'd take that - the purpose of investing is to make money, not to become popular - ok, granted, if you're Warren Buffet, you can do both!

    ++++ Being average is better than being the smartest +++

    Here's two numbers for you to consider - 95% and 7%. The first, 95%, is a number which a financial adviser once gave me when I asked - "what proportion of people lost money in the equity market?" The second, 7% is the well-documented "average" real return from investing in equities over the last 100 years or so. So, if on average, the markets are generating a return of +7%, how come 95% are losing money? The answer lies in people trying to be smarter than the market and in the process getting trapped by Gupta's 2nd and 3rd laws - conservation of history, and action-reaction. The financial markets are not school where you vied for the top grade, here it is Mr. or Ms. Average that are the winners!

    Rule #2: Humility

    ++++ Could I, not should I +++++

    As Gupta's 1st law suggests, markets are non-uniform, and market access determines the price you pay to acquire an asset. So, when you are analysing an investment opportunity, as important as asking should you invest, is to ask whether you can. And then ask, why you can - if you can just because everyone else can as well, then ask why your thesis is different from the collective thesis of the rest of the market at that time. Again, referring to the Twitter IPO, there was a lot of hype and discussion about whether one should invest in the IPO - this was a futile discussion for everyone other than the 100-odd institutions that got an allocation in the IPO. So, why was the rest of the world debating this? And the institutions that could get an allocation, actually didn't even need to consider whether they should - they just vied to get as much as they could - no wonder, the IPO was 30x oversubscribed!

    ++++If you don't get it, you don't get it++++

    As market participants give undue importance to recent events (Gupta's 2nd law) and react incorrectly to information (Gupta's 3rd law), you might as well not have the information - ignorance is better than knowledge. Also, if you don't understand a particular market, just admit you don't get it and stay away. During the Twitter IPO process, I listened to a lot of analysts trying to fit Twitter into their valuation models - needless to say, if you needed a valuation model to value Twitter, you were in the wrong market - better stick to stocks with mature business models - those are the ones that can be and should be analysed using valuation models. Only play in the field that you know - winning home games is easier than winning away games, isn't it?

    Rule #3: Passivity

    ++++ The tortoise still beats the hare ++++

    This should be obvious, but if you want to make a quick buck, try the casino or lotto. Investing is the process of building your wealth over a period of several years. Unless, you have exclusive access to a market, like the few institutions that were allocated shares in the Twitter IPO, you can't make supernormal returns in the short term. Like the tortoise, you must keep treading patiently and accumulate wealth drop-by-drop. And if you hang in there, a couple of times during your investing life, you may even benefit from the windfall of changing market access or a market discontinuity.

    ++++ Sit tight when the bulls and bears fight ++++

    Gupta's 3rd law (action-reaction) suggests that markets react to every action. But, every time the markets react, you don't have to act. Investments that do well in the long run, are those which you had a strong conviction for, and so act only when your conviction changes. By all means, revisit your convictions from time-to-time, but don't change the conviction every time a new piece of information comes around. A leading British comedian may have summed this aptly during one of his shows at the height of the financial crisis. "What are all those families who have their houses trapped in negative equity supposed to do?" he asked angrily in a voice capturing the uproarious media sensationalism of the time, and then replied in a coy voice "they could just live in them!" That's what you do with your investment portfolio when the markets are not doing well, as they sometimes will - "keep it!"

    Money Money Money

    So, that brings me the end of the second part of my Money trilogy - Rules. In the first part I demonstrated, using a theme-based framework, you didn't have to be an expert to invest successfully. Here, I have shown that you don't have to be exceptionally smart or intelligent - the only qualities you need are - stupidity, humility, and passivity - and hopefully, all of us can find a bit of that inside us. Ok, the alpha folks amongst you may have to try a bit harder, but you're always up for a challenge anyway!

    How did you find this blog post? I would love to hear. In the next and final part of this Money trilogy, Styles, I will talk about the link between personality and investing. Keep reading Random Talk!!!

    Disclosure: I am long TWTR, GSVC, SVVC.

    Nov 12 11:37 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.