3:09 pm - Tuesday October 24, 2017

The Toughest Lesson in Long Term Investing – Mr. Punit Jain

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Dear Investor,

The Importance of Equity in India - By Punit Jain

Mr. Punit Jain CEO & Founder JainMatrix Investments, Bangalore

I often ask myself why people find it so difficult to invest for the long term in the stock market. There are so many trading and demat account holders in India. But so few who are successful investors. My thoughts on this:

The Trading versus investing approaches

These two approaches are so different that perhaps the first step for a novice new investor is to try to understand both these concepts and decide which approach he should start with.

  1. Trading is the purchase (or sale) of a stock to take advantage of a short term rise (or fall) of the price to make a profit. The ‘short term’ referred to here ranges from a few minutes to a few weeks.
  • Inherent in this approach is the need to ‘track your trade continuously’ and to ‘understand price, volume patterns’, a subject well understood by a Technical Analyst.
  • The lure of a quick buck attracts a lot of people to trading. The flip side is that there is a big learning curve, and my guess is that 5% of traders make large profits (with learning, luck, experience and the right attitude) while 95% walk away with varying degrees of losses.
  • My conviction is that Trading is a zero sum game. So for a particular stock, Profits (by winners) = Losses (by losers) + commissions + taxes.
  1. Investing is the purchase of part ownership of a business, to have a share in the success of this firm, reflected in terms of revenue and profits (at the corporate level) and dividends and share price appreciation (at the shareholder level). It is generally made for the medium to long term.
  • Inherent in this approach is the need to find a company to invest in that is in a growing sector/ industry. It must have good management, that is transparent about their initiatives, financials and challenges. It must be Undervalued (cheap at the time of buying).
  • This subject is well understood by a Fundamental Analyst. (Disclosure: JainMatrix Investments is focused on Fundamental Analysis for stocks).
  • Investing typically needs the investor to allocate his money for at least 6 months, but more likely 2 years or longer. Thus investors need to have patience and this much time on hand.
  • My conviction is that Investing returns from a good portfolio give an exponential gain over time. See Fig 1. The graph illustrates how exponential growth (green) surpasses both linear (red) and cubic (blue) growth.

The Toughest Lesson in Long Term Investing - Mr. Punit Jain

  • In Investing, when there is a success, all shareholders win and profit. Its not a zero sum game. Its actually a meritocracy where the best performing listed corporates spawn the best rewarded shareholders.
  • In the long run, on average Indian equities (and Indices) have given 12-14% returns per year.
  1. My personal conviction is that a novice must enter the market as an investor and learn his lessons over a few quarters before trying his hand at trading. He soon realizes the power of a few clicks of the computer and can take responsibility for his losses (and enjoy the gains). In reality trading attracts novices and he may be burnt very quickly by a few bad experiences.

The Herding Instinct and Contrarian Thinking

Once a person has decided to be an investor, the next big lesson is to learn ‘the Investing Instincts’. And the biggest of them is to resist the Herding instinct.

People collect or herd together in their decisions. They follow the larger group and blindly copy their decisions. But investing in the fundamentals of a company involves understanding the business of a company and taking rational decisions.

  • Perhaps the buy decision was on the basis of 2-3 corporate events / initiatives that are likely to play out over 2-3 years. So the investor needs to watch for these events, and once completed successfully, review the investment, and perhaps exit with his profits.
  • Perhaps the sector, the management and the brand are identified as so good that the company will weather all storms over say, the next 5 years and continue to win and perform financially.

The challenge to such fundamentals based investment decisions are events within these time spans that cause large share price movements. It could be a Modi government win that causes a 30% upside in the overall market and your investments appreciate 50% (a good problem to have). Or it could be a 10% fall in the market that may cause the firm’s share price to fall 20%.

The opposite of the Herding behavior is Contrarian thinking. The Calm investor has to only make 5-6 big Buy or Sell decisions every year.

  • The Modi government win and subsequent 50% upside can be an exit opportunity if a targeted appreciation is achieved. Or it can be ignored if the view is that the upside is higher as the event / initiative is not complete yet, and still to play out. In addition we have an environment of improving market outlook, and still far from bubble territory.
  • The 10% fall can be seen by investors as another opportunity to enter the market at lower levels. By those fully invested, this fall can be completely ignored. In the investing world, ‘What goes down has to come back up again’ applies more often than the more popular converse.

Take the current fall in markets. It seems to me that the Sensex move from 20,300 on 7th Feb 2014 to 28,800 on 28th Nov has been a 42% gain over 9 months almost without a break. All big gains are interspersed with small corrections (and the converse). The fall has been anticipated many times over the last 2-3 months. Nobody can predict it accurately. But it is almost a consensus now in the market that there will be a fall.

The investor needs to stay calm and take advantage of it.

Punit Jain is the Founder of Bangalore based firm, JainMatrix Investments that offers Equity Research and Portfolio Advisory Services.

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Having worked in the IT industry for more than three decades and being part of large multinational organizations in India and North America has given me a good understanding of positives and negatives of east and the west and how to be successful while participating in a globally distributed software development process from India. Let me start with background of my experience to set the context. My initial 15 years were spent on being an individual contributor rolein India and US. During fifteenth year of my professional life, I returned to India to find that most companies would not hire a principal level programmer and I unwillingly decided to become a manager. I don’t regret the decision I made in the winter of 1998 to take on the role of a second line manager at a large multinational organization that had setup its shore center in India and was in growth mode. I was tasked with the activity of growing a 5 member team in size, visibility, quality of work that they do, value adds that they bring to the global product. My understanding of both cultures and relevant experience and having good teams helped me bring in more projects and grow the teams. Some of the teams became so self-reliant and competent; we could get the complete ownership of development onto India. We no longer were managing projects; we ran software products from India! My next role was even more challenging. It was the role of a Vice President of development and Lab head in a Swedish multinational organization that wanted to move some new and some existing projects to India. Being number one employee of the development lab and heading an unbranded company, I had an unenviable job of getting the good talent quickly with limited budget. I could retrain some support staff on product verification and validation and get started with initial set of projects. The journey began by moving some outsourced work in-house. Then on, a lot happened in quick succession enabling me to add a large number of teams to support development and testing of all products from India. An important tip to the budding leaders is that the first line managers that they hire should be technically competent for the role and be ready to get their hands dirty with coding, designing and code review activities. I never hired pure people managers for the simple reason that the manager’s job in a product company is to manage product and not just people. The India lab grew to have more than half of the worldwide development team. Then this entity wasacquired by another US giant; I then took on a bigger role of managingglobal teams from India. Being part of large global organizations has given me enough experience and insight onmanaging globally distributed teams from India which I would like to share here in these columns. 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While setting up a new team in a new location, care should be taken to study the skills that are abundant at that location and create teams that will add value to the organization. A new team should be a welcome addition to the organization; it should not be in existence just for cost cutting measures elsewhere. In the initial months it is important to have many face to face meetings with sponsoring team, and needs to have training sessions to ramp up the new team to full time equivalents. All distributed teams should work as one large virtual team and the feeling of “us and them” should not be allowed to creep in. All the teams including cross functional teams should participate in decision making process. No team should feel that they are an outsourced wing. Oneness is of utmost importance. Having teams in various time zones around world has its own advantages in providing 24x7 world wide support much more effectively, in resolving escalated issues round the clock by well-connected teams that can pass on the defect baton in a fail proof manner. But time difference between teams has its own share of issues in terms of having team meetings at convenient time. One solution that has worked in teams I have worked is to rotate the team meeting timings in such a way that inconvenience also comes in rotation and no team is affected all the time.Additionally plan not to have all members of the team in the meeting all the time especially if the meeting happens at middle of the night. Recording minutes of the meeting is of course very important. Enable facilities to call from home to reduce inconvenience. Performance measurement in the initial years needs to be done within a geography as each team will be at various levels on a maturity ladder and thus cannot be compared with same yardstick. As the teams mature in GDSD, a need to carry out a common performance appraisal across worldwide teams will arise. This has to be carried out carefully and maintaining parity and transparency is very crucial for the success. Setting goals at the top of the pyramid and cascaded down is an essential first step in the process. Everyone in the organization needs to know very clearly what their role is and how they are measured with respect to their goals. Staff should be involved in goal setting exercise for them to proactively work towards achieving their goals. The goals set should make the staff stretch to achieve them. Easy goals will make everyone feel that they have overachieved, when in reality they could just be average. There are many other areas not discussed in this article because of paucity of space that are important in making a globally distributed software development from India a success. I will cover them in future articles. About the author: Sreehari Narasipur a seasoned Software Technologist, Consultant and Mentor with 30+years of experience in building large engineering teams. He has had long tenure at Xerox, Oracle, Telelogic, IBM Labs. He is currently a co-founder of RightCloudz Technologies that simplifies cloud decision making for small, medium and large enterprises. He can be reached at Sreehari.Narasipur@gmail.com

Building a globally distributed software organization from India – Mr. Sreehari Narasipur

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