‘Best time to buy stocks is when you don't feel like buying'

I don't believe in investing in initial public offerings. Tell me why are there no IPOs in bad markets? Why do
they come only in good markets? That's because in good markets people are willing to pay any price for
anything.

PARAG PARIKH, CHAIRMAN, PARAG PARIKH FINANCIAL ADVISORY SERVICES

Srividhya Sivakumar

Stock market investing is not just about number crunching and balance sheet analysis. It involves a bit of
mind game too. In an interview with Business Line, Mr Parag Parikh, Chairman, Parag Parikh Financial
Advisory Services, shares interesting insights on behavioural finance and how investors can use it to make
investment decisions. Excerpts:

How does behavioural finance explain the market and its movements?

We all learn that stock markets are efficient and people make rational decisions to maximise their profits.
Now, behavioural finance is exactly the opposite. It says that markets are not efficient, especially in the short
run. Suppose you find Rs 5 coin on the road when you are walking. Now, why do you think no one saw it,
despite so many walking on the road? In the same way, markets are not efficient. Now take the case of
people making rational decisions. If this were true, how would you explain people giving money to charities,
or spending on parties to celebrate birthdays?

These are not rational acts because money is going out, but people still do it out of their hearts. More often
than not, we make decisions from our hearts and not mind. That humans make irrational decisions at every
point of time is also the reason why markets are so interesting and have a full industry following it.

How do you integrate behavioural finance into the services you offer?

My idea is to educate investors, to make them know that there are no short-cuts in the markets. The way
markets are going up, banks are lending margin money and some of the mutual fund houses are advising
investors, it all gives the wrong impression that one can make money in the market by simply buying and
selling stocks. These are wrong notions. We cannot sow a seed today and expect it to become a tree
tomorrow. It has to go through various stages and seasons to become one.
What we do is adopt a slow and steady approach. Our clients believe in our philosophy of value investing;
we don't take money from people just because they are ready to give it us.

So why are you then entering the mutual fund business now?

The minimum entry amount for our PMS business is Rs 5 lakh. By entering the mutual funds space, we can
cater to the small investor. He is the person who needs it the most. MF is a very good vehicle to meet their
needs.

Here again, we will be different and will not concentrate on amassing AUM. We will concentrate on
performance alone, using value-investing and behavioural finance. This is what we did in 2008. When the
markets crashed, we went to our clients and told them to give us money!

You have to buy when others are selling and sell when others are buying. This is the basic concept of
buying a value.

But unfortunately in the stock markets, investors find a stock less risky if everybody is buying and the stock
prices are going up. And they find it more risky, when nobody is buying and the stock prices are down.
That's the challenge we have to work with.

How do you use behavioural finance to invest?

We don't have a brilliant team, no one with capabilities to point out exactly how the markets will move! What
we instead do is identify a good business, with a credible management and with a good moat around its
business, strong network and less debt. We only buy such businesses and at the time they are available at a
discount in the market. And when is that? When there is excessive fear in the market. We buy at that time
and stay away from the market after that.

With so many companies tapping the primary markets, what is your view on IPOs as an investment vehicle?

I don't believe in investing in initial public offerings. Tell me why are there no IPOs in bad markets? Why do
they come only in good markets?

That's because in good markets people are willing to pay any price for anything. The management agrees to
sell their shares during good times because they know they will get a much better value for their shares.

And why don't companies come out with IPOs during bear markets? Well, because promoters feel that their
share price should be valued higher than the rest of the market.

Why do you think retail interest took so much time to pick up?

Interest is how you see it. With the market picking up, we will certainly see retail activity picking up, as greed
will then set in. Markets feed on greed and fear. Interestingly, when the markets offer opportunities for
investments, there is immense fear in the market. That is also why only few are successful in the stock
markets. We all want instant gratification.

What is your view on the market now? Do you think they are expensive?

See, here again we are following the insanity that the society has created. Now, Sensex has only 30 stocks,
while Nifty has 50. Is that the market? No, as there are over 7,000 listed stocks! We are looking at the wrong
barometer.

Moreover, how do companies get into these indices? By virtue of their market capitalisations alone. They are
all big companies but not necessarily good companies. The market of more than 7,000 stocks outside of it is
where the value is. Besides, mutual funds and institutions play with the Nifty all the time, there is no value
per se there. A look at the open interest on Nifty will tell you that most institutions are into it already.
So what should retail investors do?

For retail investors, I would say the best time to buy stocks is when they don't feel like buying. And that
brings me to the question - who is a retail investor?

An investor isn't someone who invests everyday. He is someone who invests once in probably two years, or
whenever there's an opportunity. The rest are all punters. What advice can you give to punters?

Invest early and retire happy

Naval Bir Kumar

“Investing is laying out money today to receive more money tomorrow,” is the mantra Warren Buffet gives to
investors. And he knows what he's talking about.

Investment is a habit that is best cultivated early. It may seem foolish to think of investing when there is a
free flow of money and no illnesses but the sunshine is not for long and once you are over the hill, a meagre
bank balance could mean a not-so-comfortable retirement.

Early start

The habit of starting to invest early also fits in well with the way the human life cycle evolves from singlehood
to marriage, to parenthood, to retirement.

Many other factors make investments imperative. An unhealthy lifestyle, rising inflation, work stress,
luxurious weekend indulgences, steeply rising cost of education, longer life-cycles and rising healthcare —
all collectively contribute towards a logical argument for making regular and timely investments.
You also need to keep in mind that your savings should be able to give you value when they are needed the
most. But for this to happen you should plan well in advance.

Thus investing your savings in long-term instruments is the first step towards secure retirement planning as
it gives you the power of computing and multiplying your principal amount for a safe and happy retirement.

For example, if you start saving at the age of 25 and invest a quarter of your income in long-term investment
instruments every year, you could soon see your principal investment translate into a huge fund.

Approaches to retirement

Assuming a growth of 18 per cent every year, your fund could multiply over 100 times at the time of
retirement.

Making such investments is the safest bet for a person who does not have the time or inclination to learn the
technical jargon of stock fundamental analysis, technical analysis, risk analysis and sector analysis or listen
to endless analyst suggestions.

However, the approaches to long-term savings for retirement vary. All investments have a trade-off between
risk and return, which form two ends of a spectrum made up of investment instruments. And depending on
what part of the spectrum you are comfortable with, there's a range of instruments to choose from.

For those who would rather be conservative and keep their principal intact, debt instruments such as fixed
deposits, government bonds, post office savings and provident fund rate high on the list of must-invest
instruments.

Then there are those whose appetite for high returns spurs them to take higher risks. Equities rate very high
on the list of investments for these people. But these two categories form a very small minority. Most
investors are a combination of the two. They want to keep their principal intact, but also expect high returns.

Pre-mixed!

A number of financial products cater to this growing majority where a pre-determined mix of investment
instruments is given to the customer to invest in.

The mix depends on the age of the person, the amount of risk that he or she wants to take and the time
period for which they wish to remain invested in that particular product. Typically, these products judiciously
divide your investment among various assets classes such as equities, debt funding and money market,
giving the best return available over a long-term investment period.

They invest in equities such as “growth stocks”, “value stocks”, “large caps”, “small caps” or “mid caps” or
debt funds such as “treasury bills” and “bonds”. Liquidity, transaction costs and ease of investment are also
considered before investing in a particular asset class.

Recently launched asset allocation funds aim to bring in more consistency and stability of returns in an
investor's overall risk profile by not only investing in the abovementioned asset classes, but in an additional
asset class — gold.

Such funds include a gold investment in the product mix to provide higher returns in aggressive and
moderate options as gold has emerged as a viable investment option in recent times.

Gold supply has come down globally in the last 10 years from 2,650 tonnes in 2000 to 2,350 tonnes in 2009.
Supply of this precious metal is likely to become scarce as gold availability is further reduced from 3 mg gold
in every kg of ore to 0.5 mg gold in each kg of ore.
Even as the supply dwindles, the demand for gold has increased in industrial, currency reserve and
jewellery business, giving its value an upside.

In the last 15 years, the price of gold has increased from $400 per ounce to $1,250 per ounce. India is one
of the largest gold buyers in the world and its annual demand has increased from 250 tonnes in 2005 to 550
tonnes in the last five years.

Economic growth of over 8 per cent in the coming years will give a further push to gold prices and its
contribution in assets allocation fund will enhance its value proposition in the long term.

If you do plan to invest in an asset allocation fund, keep in mind that the only person who knows what is best
is you. For only you know your risk appetite, your ability to wait for returns and your age. Therefore, the time
to begin investing is now, for a better retirement.

(The author is CEO, IDFC MF)

‘Infrastructure stocks, a good bet'

SANKARAN NAREN, CIO-EQUITY, ICICI PRUDENTIAL MUTUAL FUND

Aarati Krishnan

The market does offer pockets of opportunity such as infrastructure stocks, where money can still be made.
However, investors should not make any sudden shifts in their allocation to equities, cautions Mr Sankaran
Naren, CIO- Equity, ICICI Prudential Mutual Fund, when Business Line spoke to him about the Sensex at
20,000.

The Sensex has hit 20,000 again and there is a lot of scepticism about the markets holding up at these
levels. Normally markets never correct when everyone expects it to! What are your thoughts on this?

In the Indian markets, there are two types of investors — locals and foreigners. Yes, the locals are very
sceptical about the markets and valuations because India is the only market where they invest.

We can afford to be sceptical! The foreign investors don't see growth in their home markets, and thus, find
Indian stocks with their strong growth potential, attractive. Local investors have not invested in the markets
and local institutions have been consistent sellers in this rally.
You must understand that mutual funds sell only if they have an outflow from their retail investors. We don't
operate like hedge funds! In our case, the outflows have been small. However, the industry-wide outflows
must be significant, given the consistent domestic institutional selling in stocks that we have seen over the
past few months.

One clear theme driving this rally has been domestic consumption. The sectors leading it were consumer
durables, to automobiles to FMCGs. What's your take on those stocks now?

I think infrastructure should be the driving theme for India. If you compare China and India, the consumption
part of GDP is lower in China and is higher in India. China has a current account surplus while we run a
deficit. If you see infrastructure bottlenecks, it is in India that we face them to a large extent. That makes a
case for playing the consumer theme in China and the infrastructure theme in India, while the reverse is
happening! I think as we approach the retail consumption season with festival sales and so on, this would be
cyclically the appropriate time for the consumption theme to peak out.

The ICICI Pru Infrastructure Fund has managed a five-year return of 25 per cent, but has underperformed
diversified funds in one year. What's the argument for investing in infrastructure stocks now?

That makes it a good time to invest in the fund. There is a big gap between what has happened on
infrastructure and non-infrastructure stocks. Look at the stocks that represent the infrastructure theme; the
theme has been a substantial underperformer. Whether you take power utilities, capital goods or even
construction stocks they have all underperformed very sharply. If you look at the non-infrastructure space,
whether FMCGs, autos, pharma or technology that is where all the outperformers have come from.

Here, consumer stocks have also moved to a premium over the market while infrastructure stocks have
seen valuations correct significantly. If you had to invest now, this makes infrastructure a good bet.
Valuations in the sector today are much more comfortable than valuations of sectors that have led this rally.
I think Indian infrastructure stocks benefit from the fact that demand potential is so high. In the US, for
instance, power utilities are dividend yield stocks. In Europe, again, such stocks are not growth plays.

Are infrastructure companies delivering the expected earnings growth?

One factor that is acting against short-term earnings for the sector is the fact that we have had a good
monsoon this year. A bad monsoon aids construction activity but a good one leads to a seasonal disruption.
This is reflecting in the quarterly numbers. But it does not in any way alter the outlook for the infrastructure
sector. We think the period from 2011-2014 will see an infrastructure-oriented cycle.

Another factor is that infrastructure spending is now being driven to a large extent by the private sector and
not just by government. If you break it down, power generation capacity is now being driven mainly by the
private sector. If you take roads, you have a fair number of projects happening through BOT route. In ports,
a number of projects are coming in through the public-private partnership route.

The earnings growth for Indian companies over the past two quarters has not been too high, the earnings for
the CNX 500 companies, for instance, has grown only in the single digits. Is that not a risk to the current
valuation of 23 times for the market?

The problem is that market valuations have really climbed and stocks have become more expensive.
Expectations have risen to a very high level and those expectations are barely being met by earnings.

There is also divergence, where some companies are meeting those expectations while others are not. The
problem about valuations is that we cannot today say that Indian markets are cheap. They are expensive
relative to rest of the world. For this valuation to sustain, the results have to be good and the GDP outlook
has to remain good. If you look at where we were six months ago and where we are now, there is risk. On
the positive side, food inflation is not accelerating any more and the monsoons have been good.

What explains the surge in FII inflows in the past month, where over $3 billion of funds has come in within a
month? Is it the upward revision in GDP outlook which has made the difference?
In my view, there has been a growth scare in the Western world and a growth scare in China as well.
Consequently, all the growth-oriented money has come to India. That has, however, resulted in a situation
where the Indian market is no longer cheap. Certain segments such as infrastructure may be cheap, but not
the market as a whole.

A lot of the recent inflows into Indian markets are said to originate from passive Exchange Traded Funds
who are only chasing the index. Do you thus, see the gap between index stocks and other stocks widening?

I am not sure if that is entirely correct. If a good portion of that money was ETF money then why would we
see such a big sectoral deviation in performance? And it is not as if only benchmark stocks have performed.
Even smaller stocks within the consumer theme have performed. The advantage with large caps is that they
are less dependent on how interest rates pan out. Small and mid-caps are vulnerable to interest rate risks,
especially in infrastructure stocks.

We believe interest rates will peak over a six-month period and then one can move from large caps to mid-
cap stocks. You are also approaching the busy season in credit, with activity in the short-term money market
peaking in March each year.

If retail investors have lost out on this rally, what should they do now?

I would suggest three things. Investors should look out for pockets of opportunity such as infrastructure
stocks, which remain attractive. They should invest through systematic investment plans. And they should
not make any sudden shift in their asset allocation towards equities.