The Good, the Bad & the Ugly

Over a dinner party last weekend, a friend of mine argued that the only way to invest in Indian equities is buying for long term. When I asked, define “long term”, he was clueless.  Many Indian investors have burned their hands in trading equities and derivatives. Now a new born idea of SIP (Systematic Investment Planning) is creating huge wealth for Financial Institutions and Financial Advisors instead of retail investors. It sounds unrealistic when we review current quarterly mutual fund review, where more than 50% of equity funds underperformed Benchmark Index in last 3 years.

UGLY Phase – Sensex plunges 700 points in a single day on US woes. This was the biggest loss in more than 2 years; IT stocks plunged amid the rupee falling to over two-year low against the US Dollar. Indian IT Industry secures more than 80% of revenue from North American and European markets. World stocks as measured by MSCI fell more than 2.4% to a new year low, making for a 10% year-to-date loss. Reserve Bank of India as raised rates last week for the 12th time in 18 months and warned fighting high inflation remained its top priority.

As George Soros once mentioned “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

Pi Square FUNDTECH Ratio:

At Pi Square we advise retail investors to follow a simple 80:20 rule mixing fundamental valuations with Technical outlook. Invest 80% of your portfolio in Equities only when markets are above 50 WMA (Week moving average) with 20% of assets in long-term debt. Convert your portfolio in 80% debt and 20% equity once market closes below 50 WMA. 50 Week moving average will deduct human emotions and market psychology out of the play. As one can review all major falls (at least 3%) in equity markets have occurred below 50WMA (8 out of 10).

In May 2008 (Point 1) Nifty closed above 50 WMA proving a wide window of opportunity to long term investors. From May 2008 NIFTY never closed a week below 50WMA till January 2011 (Point 3). For Equity portfolio, look for companies with growing revenues above industry average with improving profit margins and lower Debt-Equity ratio. In this period a growing company like Tata Motors provided more than 300% return in less than 2 years to retail investors. In May 2010 (Point 2) market witnessed a huge support and provided another strong entry point. Since April 2011 (Point 4) markets have not closed above 50 WMA – providing a huge relief to our clients keeping 80% of their portfolios in debt instrument and less than 20% in equities. 

One-word solution for the long term capital appreciation is “Patience”. Pi Square research has been recommending retail investors to hold more than 70% of their portfolio in debt instruments since May 2011 and keeping less than 30% of their portfolio in equities (looking for companies with strong growth and quality financial statements). We recommend companies with low debt-equity ratio and ROCE (Return on Capital Employed) above 15 in this market.  Pi Square research recommended Tata Coffee in February 2011 with more than 50% upside target; Investors locked 60% gains in less than few months.

“Let the storm pass by, as people who venture with their boats in the storm are not brave but are crazy”


Leave a comment

Your email address will not be published. Required fields are marked *

Vishrut Pathak – Partner

Vishrut Pathak is an MBA from St. John’s University, with specialisation in International Finance and has a PGD from New York university in Financial Statement Analysis. He was Vice President at HNW Inc. for 6 years where he worked with leading institutional clients like Lord Abbett Merrill Lynch, CitiBank and Morgan Stanley. Prior to HNW Inc, he worked as a senior analyst for a growing Buyout firm in New York in hospitality industry (IT Hospitality Inc.). After working for 10 years with various financial firms in New York, he founded “Pi Square Investments” in Jan 2011. He has over 20 years of Investment Management and corporate finance experience and also Mentors at EDII (Entrepreneurship Development Institute of India) under CrAdLE platform.