Praxeology – The Multi-Act Equity Research Blog

Investor analyzing indian equity market valuation

India Equity Market Valuations: The Need to Exercise Prudence

| Global Equity, India Equity | No Comments

This article was originally published on ValueWalk “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” – Warren…

Investors performing valuations for High Quality Business

Equity Market Valuations: We Haven’t Been Here Before

| Global Equity | No Comments

This article first appeared on Advisor Perspectives  “…. valuing the market has nothing to do with where it’s going to go next week or next month or next year, a…

Invest in High Quality Stocks in Indian Markets

High Quality Stocks in Indian Markets

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This article first appeared on Value Walk. “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but…

Investor analyzing indian equity market valuation

India Equity Market Valuations: The Need to Exercise Prudence

By | Global Equity, India Equity | No Comments

This article was originally published on ValueWalk

“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” – Warren Buffett 1

While the long expected earnings recovery has continued to push its realization date further out, equity markets have continued to march upwards. As indices have moved up while earnings have largely failed to keep pace, valuations, to the extent that one bases them on the current earnings power of the business, have increasingly extended themselves in the overvalued zone. The willingness of market participants to pay significantly more for the same stream of earnings is also reflected in exuberant behavior in primary markets.

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Notes:

  1. 1986, Chairman’s letter, Berkshire Hathaway.
Investors performing valuations for High Quality Business

Equity Market Valuations: We Haven’t Been Here Before

By | Global Equity | No Comments

This article first appeared on Advisor Perspectives

 “…. valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts.” – Warren Buffett

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Invest in High Quality Stocks in Indian Markets

High Quality Stocks in Indian Markets

By | India Equity | No Comments

This article first appeared on Value Walk.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.” – Warren E. Buffett

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Best Investment Quotes by Famous Investors

7 of the most Inspirational Investment Quotes

By | Investment Insights | No Comments

There are gurus and there are finance gurus. Most people approach the markets like a maze or a puzzle expecting to be confused and overwhelmed losing their way in the many alleyways and avenues in the investing world. There are some who are more enlightened when it comes to navigating finance with fresh approaches and successful strategies that serve as guides for others. We’ve put together what we consider to be some of the best investment quotes from these experts! Read More

Indian Investors should invest globally

Investing Globally: Why Indian Investors Should Consider Global Allocations

By | India Macro, Investment Insights | No Comments

When discussing portfolio construction with Indian investors, one question that frequently comes up is whether it makes sense for an Indian investor to invest outside of India. Indian equity markets have compounded capital at high double digit rates over the past thirty plus years and with the Indian economy expected to grow at the fastest pace of the large economies globally, investors continue to expect great returns from the Indian equity markets. Why then invest outside India? Read More

Calm investor making investment decisions

Staying Calm and Keeping Behavioral Biases Aside while Investing

By | Behavioral Finance, Investment Insights | No Comments

“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.”

 – Seth Klarman.

When Warren Buffett famously stated that investing was simple but not easy, he meant that the rules we ought to use in order to make good investment decisions are easy to learn but actually adhering to them is difficult. Disregarding rules while investing cannot be attributed to open rebellion but can be ascribed to the basic human survival instincts that have been ingrained in us since time immemorial. Certain traits favored in the process of Natural Selection and helped our ancestors survive in the jungle actually do not help in the market.
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why invest in gold

Why Indian Families Must Invest in Gold and Gold Mining Shares

By | Gold, India Equity | No Comments

Gold has been in use as a form of currency or a high value commodity for at least three millennia. Records show that India has had an intense relationship with this glittering metal for almost as long. The picture of an Indian bride is incomplete without her being weighted down by masses of gold jewellery and tales of palaces being inlaid with gold leaf abound.

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traditional market conditioning approach

Traditional Market Conditioning: Why We Need to Break Away from It and How

By | Behavioral Finance, Global Equity | No Comments

It is important to remember that all investments are subject to a certain amount of risk. ‘Risk” can simply be defined as the probability of losing whole or part of the sum invested. This probability must be considered before investing. Various tools may be employed to identify investment-worthy stocks such as fundamental analysis, price-to-earnings ratio, technical and quantitative analysis. Fund managers may combine two or more systems to determine the strength of investment.

By and large, traditional investment strategies are based on a fixed percentage mix of stocks, bonds, and cash for varying risk tolerances. It is often the money manager’s job to select the best investment options based on various theories that can be based on the long-term average performance of investment assets. For example, a moderate risk investor is likely to keep fully invested in 60 percent stock and 40 percent bond allocation without taking into consideration the risk. Institutions and fund managers may follow a relative investment approach, which in our opinion, has fundamental flaws as it focuses on short-term horizons and fails to incorporate emerging trends.

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Companies and their Moats: Network Effects

By | Investment Insights | No Comments

When Warren Buffett stated “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he was talking about companies with wide economic moats. The term Economic moat, famously coined by Warren Buffett, refers to the sustainable competitive advantages that immunize a business from competitors – similar to a moat protecting a castle. Mr. Buffett’s investing strategy is to invest in companies with strong economic moats as they are likely to remain successful over a long period of time.

Different types of Economic Moats offer different competitive advantages. Of all the competitive advantages a company can have, network effect is the rarest that is produced but once it occurs, it is likely to last for a long time.

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Evidence based investing for S&P 500 companies

Rational Market or Irrational Exuberance?

By | Behavioral Finance, Global Equity | No Comments

Since June 2015, we have been voicing our concern on market valuations on mid and small cap space. Irrespective of events like Brexit, demonetization or outcome of US elections, market momentum in mid and small cap space has been undeterred.

Since May 2014 with the outcome of Indian elections and NDA government coming in majority, we believe market has rallied on a complete hope based story where the gap between valuations and fundamentals has widened significantly. Focus has shifted from strong conventional businesses to emerging and turnaround stories where we believe the premiums paid are very high.

It is usually in a market like this when behavioural biases overpower an investor’s cognitive decision making ability where greed takes a precedence to rational thinking.

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Mis-defining Investment Quality

(Mis)Defining Quality: Counting When It Cannot be Counted

By | Behavioral Finance, Global Equity, Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

 “Ben felt that what I do now makes sense for my situation. It still has its founding in Graham, but it does have more of a qualitative dimension to it because, for one thing, we manage such large sums of money that you can’t go around and find these relatively small value-price discrepancies anymore. Instead, we have to place larger bets, and that involves looking at more criteria, not all of them quantitative. Ben would say that what I do now makes sense, but he would say that it’s much harder for most people to do.” – Warren Buffett 1 responding on apparent divergence from Graham, emphasis ours.

 “The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage.” –Charlie Munger

“Not everything that counts can be counted, and not everything that can be counted counts.” – William Bruce Cameron 2

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Notes:

  1. Joe Carlen, The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham, 244.
  2. The quote is frequently attributed to Albert Einstein. However, it is likely an incorrect attribution. Read more here.
Fiat Currency Collapse

Fiat Currency Collapse: Is History Repeating Itself?- Infographic

By | Global Macro, Gold | No Comments

This infographic traces the origin of the money system depicting early coins that were used in various eras ultimately leading to the introduction of paper money, known as “fiat” currency. Fiat currency, though declared by a government to be legal tender is not backed by a valuable commodity. Because of this very fact, fiat currency has repeatedly collapsed down through the ages. Are we headed for another collapse? If so, do you know how to invest in a fiat currency environment? This infographic takes you through the journey.

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Fiat Currency Collapse

Evolution of Money & Drawbacks of the Fiat Currency System

By | Global Macro, Gold | No Comments

“Will you lend me your mare to ride a mile?

No, she is lame leaping over a stile.

Alack! And I must go to the fair!

I’ll give you good money for lending your mare.

– Oh, oh! Say you so?

Money will make the mare to go.”

The old nursery rhyme still holds true today. Money still makes the mare go. The story of money goes even further back. In fact, the tradition of money goes back around 3000 years, before which a barter system was probably used.

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Cash Flows Don’t Lie (Or Do They?): Part II

By | Global Equity, Investment Insights | No Comments

While cash flows have been used as a guide to indicate the health of a company, just looking at cash flows is not enough. Multi-Act experts conduct an analysis of 3 companies,in the auto parts retailing industry, a highly favoured segment amongst investors and analysts. You’ll see why investing in auto part retailers may not be wise under certain circumstances. As we analyze 3 companies in the following areas, discover fundamental traits that should make investors skeptical:

  • Profitability: Margin Cycle
  • Cash Flow Generation: Working Capital
  • Cash Flow Utilization: Capital Allocation

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Airliners: Assumptions Flying High

By | Corporate Governance | No Comments

Anyone reading a company’s financial reports should be aware of the assumptions and estimates used by the preparer of the report because it can lead to a distorted picture of a company’s performance

In this article, Multi-Act experts analyze the financial reports of a major airline company and uncover key assumptions in calculating yearly pension cost. In this case, higher assumption of expected return can lead to lower pension expenses and higher earnings. Assumption relaxation in revenue recognition was observed by another major airliner thus boosting revenues and earnings in their reporting period.

Investors need to pay close attention to assumptions and estimates that may be used by the preparer of any report. The examples of these airline companies give a clear picture of how assumptions can be used to project companies in better light.

“Figures often beguile me…particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: ‘There are three kinds of lies: lies, damned lies, and statistics.” – Mark Twain

Had Mark Twain seen the financial statements of various companies, he would have exclaimed- “Lies, damned lies, statistics and accounting”.

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Sustainable Competitive Advantages

PERSPECTIVES: Consumer Preference – An Analytical Framework

By | Investment Insights | No Comments
Sustainable Competitive Advantages: Consumer Preference
By Baijnath Ramraika, CFA and Prashant Trivedi, CFA with assistance from Ms. Siddhi Gujar
August 2, 2016

This article first appeared on Advisor Perspectives.

In this article:

Understanding how to analyze a moat is critical to evaluating the value of any business, and subsequently an important factor in knowing whether you should invest in a particular business. In this article, we explain why we believe terms like “brand moats” or “intangible assets-based moats” are misleading and will set up investors for behavioral errors.

It’s not enough to call a moat by its right name. We delve further to see whether this moat is a sustainable competitive advantage. Discover the two elements that need to be present and form the primary components of an analytical framework to identifying a consumer preference moat, along with ancillary factors such as pricing power and product differentiation. You’ll understand our rule of limit to the pricing power of the incumbent through examples of companies like Parle-G.  You’ll learn why investing in emerging markets and specifically consumer companies needs to be treated with caution.

To help you understand our framework better, we take you through a step-by-step analysis of Colgate

“Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me.” – Warren Buffett (emphasis ours)

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Reviewing Raghuram Rajan’s Real Monetary Policy

By | India Equity, India Macro | No Comments

In this article:

Raghuram Rajan’s monetary policies have received both praise and flak. On one hand, they have been praised as stabilizing forces in a tumultuous global economy awash with central bankers’ reduced interest rates. On the other hand, critics have denounced Raghuram Rajan’s policy changes as being detrimental to growth. This article assesses the impacts of Raghuram Rajan’s policies on the economy and the ‘real’ effects of the global banking crisis. You’ll read insights on how these inflation targeting policies have safeguarded the Indian economy. Read this Raghuram Rajan monetary policy review to find out if Raghuram Rajan’s successor should continue them, or implement new policies. Read More

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Mutual Fund Investing: Simple but Not Easy?

By | India Equity, Investment Insights | No Comments

Dalbar, a Boston based analytics group has been studying the US markets for over 20 years and they have been publishing reports which compare the performance of an average Mutual Fund investor as compared to the Market Indices. Important point to note here is that the performance calculated was for the investor in the Mutual Fund and not the Mutual Fund itself which is more readily available.

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Playing Hopscotch with the Revenue Recognition Principle: A Case Study

By | Company Insights, Corporate Governance | No Comments

In This Article:

Can investors be hoodwinked by a company’s revenue and profit figures? Multi-Act experts discuss how a global consumer technology company changed the revenue recognition; misleading investors to believe that they have had massive growth in revenues and profits over the past decade. This revenue recognition case study explains how they achieved this over four periods of revenue recognition methods and its implications for analysts. You’ll learn why it’s impossible for analysts to show reliable trends;  resulting in a precarious situation for investors. Read More

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U.S. Regulated Utilities: Non-Cyclical or Cyclical?

By | Company Insights, Global Equity Perspective | No Comments

In This Article:

As some of the best-performing stocks, many consider U.S. Utilities stocks a safe haven paying steady dividends with moderate risk. Assured return close to 11% shows why investors are attracted to this sector making them a bright choice in bear and bull markets. However, there is a caveat: Whenever rates rise, the value of these may drop. With the Central Bank’s repressive rate policy, we believe investors should show caution when making investments in U.S. Utilities equities.

This article discusses how U.S. interest rates seem to have given rise to a cyclical trend within the Utilities sector. Read what has been driving the sector’s current valuation growth.  
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Global Macro View

By | Global Macro | No Comments

In this Article:

Listen in on a conversation between Multi-Act experts and their advisory clients. Find answers to questions such as:

  • What can we expect with fluctuating interest rates, particularly U.S. interest rates, which have a large impact of flow of funds globally?
  • Where is the U.S. dollar going as it appreciates against other currencies? How is the Rupee placed?
  • What is China’s impact on the global economy and how is it likely to all pan out?

Get expert insights into these questions and more in this transcript of a conference-call hosted on 19th February, 2016 with our Advisory Clients.

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Chinese E-Commerce Co: Real Growth or just Creative Accounting?

By | Company Insights, Corporate Governance, Global Equity | No Comments

Ever made an investment decision based on market hype? Multi-Act experts review a Chinese e-commerce company headed by a celebrated personality that appears to be outdoing its competitors. While the company seems to be a victor; a careful quality of earnings analysis by our team reveals some creative accounting practices that investors should not ignore. Analysis includes the company’s:

  • Adjusted Non GAAP EBITDA and Net Income
  • Capital Allocation
  • Low Tax Rate Sustainability
  • USD Denominated Debt

Questions arise about the said company’s profit margins, cash-flows and valuation. Read how this can impact investor decisions.

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bigger

Economies of Scale: An Analytical Framework for Assessment of A Firm’s Competitive Advantage

By | Global Equity, Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

“The moat in a business like our auto insurance business at GEICO is low cost. I mean people have to buy auto insurance, so everybody’s going to have one auto insurance policy per car basically, or per driver. And…I can’t sell them twenty…but they have to buy one. Read More

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Showing The Door

By | India Macro | No Comments

A key factor when investing in quality stocks is the sustainability of a company’s competitive advantage. In their article, Entry and Exit Barriers, the authors Baijnath Ramraika and Prashant Trivedi suggest that while most investors look at entry barriers as a proxy for the ability of a business to persist with its supernormal returns, the presence or absence of exit barriers is a key factor as well and may at times serve to nullify the impact of entry barriers. Read More

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Growth Vs Value Cycle

By | Global Equity | No Comments

Investment decisions need to be based on rational analysis and void of behavioral bias. However, markets often act without clinical analysis and prefer different type of assets in different phases. One such example is emerging across the growth stocks and value stocks, where the favor or disfavor for a particular class changes over the course of a market cycle. Read More

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The 6 Sources of a Firms Competitive Advantage

By | Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

As we have discussed previously, sustainable competitive advantages (SCAs) are a key characteristic of high-quality businesses. While SCAs are good indicators of business quality, not all competitive advantages are created equal.  The strength of the competitive advantage and the risks that the business needs to protect itself against are largely dictated by the type of competitive advantage that the business possesses. Read More

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Race Towards Higher Yield

By | India Macro | No Comments

Multi-Act believes that comparison of returns is meaningful only on a risk-adjusted basis. Since quantifying risk is extremely complex, market participants resort to loose generalizations in their perception of risk, viz. Mutual Funds that invest in Debt Instruments are safe. Financial intermediaries that are evaluated solely based on returns while overlooking the associated risks face an incentive to buy assets complying with a generally accepted benchmark but could be risky on core fundamental parameters.  Read More

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Strike Gold

By | Gold, Investment Insights | No Comments

The recent decline in the price of gold has led many market participants to question the investment value of the yellow metal. Much has been spoken and written about the relatively poor return to be earned from gold. We think investing is NOT an exercise in bragging rights about which asset class has higher returns in the past and are therefore assumed to hold in the future. Read More

GDP Growth rate and Equity returns

The GDP Growth Rate Myth

By | Global Macro | No Comments

This article originally appeared on Advisor Perspectives.

An article published in a renowned daily suggested that equity market returns follow nominal GDP growth rates. The author appropriated, “The reason for this is simple. Equities over time grow in line with the growth of underlying businesses. As businesses comprise the economy, the nominal growth of the economy (real growth plus inflation) is a good proxy for the average growth in businesses. The Indian economy has grown at a remarkably constant nominal growth of 15% p.a. No wonder that the Sensex CAGR of 17.1% is close to 15% nominal GDP growth.” (Emphasis mine) Read More

Indian FMCG Market Analysis

Indian Market Analysis: Consumption Vs. Extraction

By | India Equity, India Macro | No Comments

We do understand that Investing being game of odds, market participants would prefer to pay a premium for ‘certainty’ in earnings, growth etc. But the same question also then logically extends to expensive valuations. One has to be mindful of the fact that as much as the behavioral biases of the market might lead us to think otherwise, prospective returns essentially are a function of arithmetic calculations and not any story built around an investing idea/theme. Read More

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Numerical Analysis: Gold Vs Sensex

By | Global Equity Perspective | No Comments

Which investment is better, gold or equity? This is an eternal debate since the time stocks were being sold informally under shades of trees. The question has not lost its relevance even today, when market experts advance the case of equity investments especially where the results seem impressive. Let us first understand the characteristics of the two “players” – gold and equities. Read More

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Post-Election: Insiders Vote Out

By | India Equity, India Macro | No Comments

India’s corporate sector and its leaders were very impressed as the current government took reigns at the centre on the back of reforms it had set out to achieve. However, a review of the current scenario suggests that things haven’t changed much on the ground. Essentially, the rise in share prices of a majority of companies in the last year have been driven more by valuation re-rating than actual improvement in earnings. Likewise, there is an interesting set of data that is emerging in terms of the shareholding pattern across companies. Read More

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Farm Sector: Ploughing the Books

By | Company Insights, Corporate Governance, Global Equity | No Comments

Given that the fundamentals in the agricultural sector appear stable and the sharp rise in the use of renewable fuels across the world, market participants seem to be positively biased towards stocks that are part of the “agricultural story”. But, as always, at Multi-Act, we believe that following the herd and placing bets on stocks that enjoy a pro-cyclical review is futile if one does not also cast an eagle’s eye at the quality of the company’s financials. Read More

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Why Most Quantitative Investing and Trading Systems Fail

By | Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

“Invert, Always Invert.” – Carl Gustav Jacob Jacobi, German Mathematician

“Hundreds of studies have shown that wherever we have sufficient information to build a model, it will perform better than most people.” – Daniel Kahneman (as you read this statement, don’t forget to consider the implication of the word “sufficient”)

“Roger Federer plays tennis using Wilson racquets. I use Wilson racquets. Does that make me Roger Federer?” – Paraphrasing a friend of ours. Read More

US bull market analysis

Are We in a Bull Market? Danger, Will Robinson, Danger!

By | Global Equity | No Comments

This article originally appeared on Advisor Perspectives.

The low-yield environment manufactured by central banks has encouraged and precipitated yield-seeking speculation. Investors and speculators alike have taken up a near-religious conviction in the demi-god status of central bankers. Will these central bankers continue to enjoy their god like status indefinitely or will they disappoint their followers? Read More

high-on-high-yeild

A Specialty Canadian Pharma Company: High on High Yield

By | Company Insights, Corporate Governance, Global Equity | No Comments

Lately, a lot of market participants are becoming skeptical about zero interest rate policies. This is particularly reflected in retail investors’ tendency of reaching for high yield (HY ETF inflows/popularity) and the incentive to the CEO community for related buybacks/acquisitions to boost reported performance during their tenure. Read More

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Stan Druckenmiller’s “Horrific Sense” Of Deja Vu: “I Know It’s Tempting To Invest, But This Will End Very Badly”

By | Global Equity Perspective, What We Are Reading | No Comments

Multi-Act shares a very similar point of view as expressed by Stan Drukenmiller in this interview with Zero Hedge. Investors indeed do need to be cautious about several factors stated by him in this discussion including the role of Central Bank policies on liquidity that tend to have a very strong effect on the markets. Read More

watering-plant

We Are Happy To Score Centuries With Just Ones And Twos And Not Necessarily With Sixers

By | Investment Insights | No Comments

Prashant K Trivedi, Chairman of Multi-Act Trade & Investments Ltd., talks about his investment philosophy, especially for family office investors with long term patient capital, and how he constructs his portfolio. His investment philosophy of giving appropriate weightage to quality, valuation and price momentum has helped him offer capital preservation and good returns to the investors. Read More

Bounded rationality investment decision making

Bounded Rationality, Unbounded Confidence

By | Behavioral Finance, Investment Insights | No Comments

This article originally appeared on advisor perspectives.

“The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required.” – Models of Man, Herbert A. Simon

“Boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information.” – Oliver E. Williamson citing Herbert A. Simon Read More

the-Warren-Buffett-Way

The Warren Buffett Way: High Quality Stocks in Emerging Markets

By | Investment Insights | No Comments

This article originally appeared on advisor perspectives.

“Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner.” – Warren E. Buffett

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren E. Buffett Read More

Valuation of US equities

U.S. Equities: Overvalued or Undervalued?

By | Global Equity | No Comments

This article originally appeared on Advisor Perspectives.

“Be fearful when others are greedy, and greedy when others are fearful.” -Warren Buffett

“…. valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts.” Warren Buffett Read More

Analysis of S&P 500 companies

Profit Margins, A Bottoms-up Analysis of S&P 500

By | Global Equity, Investment Insights | No Comments
  • Profit margins as measured by Corporate Profits divided by Gross National Product are way over norm.
  • We show that profit margins for the S&P500 Index derived as Total Net Profits divided by Total Sales of all non-financial components of the index are way over mean as well.
  • We look at profit margins of various sectors and find that high profit margins aren’t limited to service businesses only. Read More
high-quality

High Quality Stocks in Developed Markets

By | Global Equity, Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

‘Quality’ is becoming widely accepted as an anomaly and is now being designated by many researchers as a fifth factor explaining investment returns along with the four widely accepted factors: beta, size, momentum, and value. This development is in sync with our long-held belief that quality is a distinct investment style.
In this article the authors, Baijnath Ramraika (CFA) and Prashant Trivedi (CFA), present a framework for superior risk-adjusted returns from high quality stocks. Read More

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Why are the MNCs still putting their money in India?

By | India Equity, India Macro | No Comments

Caught in the middle of political uncertainty, market volatility and fickle FII flows, investors in the Indian stock market could take their cues from the investment behavior of multi-national corporations (MNCs). More than two dozen MNCs operating in the country have ignored all political and the economic instability issues to increase the size of their domestic investments. This, more than any rhetoric, indicates a high degree of confidence in the India growth story.

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Full cost accounting for mining companies

Mining: Magic of Full Cost Accounting

By | Corporate Governance, Global Equity | No Comments

While commonly used quantitative measures or financial ratios serve as a good benchmark for investing in businesses, one should also be aware of the underlying assumptions used to draft such numbers. These benchmarks may sometimes paint a completely different picture under different norms. This may not only affect the accrual based numbers but also cash flows and lead one to erroneously see a business as being way better in terms of profitability and/or creditworthiness than it is.

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Investing in Indian rural market

The Rural Story: Of Moats & Fundamentals

By | Investment Insights | No Comments

The Indian rural market is on a roll. With a size pegged at almost USD 425bn and a per capita consumption that now exceeds the urban market, rural India is the new growth area for companies from sectors as diverse as telecom, vehicle manufacturing, agriculture service and product providers, financial services, consumer durable and FMCG companies. Better monsoons and the National Rural Employment Guarantee Act (NREGA) has shored up the disposable incomes in agri-based non-urban India translating into more non-food spend.

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Banking on PSU Discounts

By | Case Studies | No Comments

Mutli-Sheep

“Investing against the tide” sounds a whole lot cooler than it really is. For when we make a decision that leaves us standing out, our first thought is to look around and wonder why? After all you wouldn’t want to be the black sheep! Unless, of course, you are confident of your investment and it’s backed by something beyond momentum (or in this case herd mentality). We strongly believe that despite contradictory market movements, a sufficient price correction to the public sector banks has now been made, and jumping in at what we believe are discounted rates (being at the lower end of our valuation range) is the way to go. This suggestion does not come at the back of merely a valuation, but after analysing and more importantly rationalising the past and present market conditions.

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Investor analyzing indian equity market valuation

India Equity Market Valuations: The Need to Exercise Prudence

By | Global Equity, India Equity | No Comments

This article was originally published on ValueWalk

“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” – Warren Buffett 2

While the long expected earnings recovery has continued to push its realization date further out, equity markets have continued to march upwards. As indices have moved up while earnings have largely failed to keep pace, valuations, to the extent that one bases them on the current earnings power of the business, have increasingly extended themselves in the overvalued zone. The willingness of market participants to pay significantly more for the same stream of earnings is also reflected in exuberant behavior in primary markets.

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Notes:

  1. 1986, Chairman’s letter, Berkshire Hathaway.
  2. 1986, Chairman’s letter, Berkshire Hathaway.
Investors performing valuations for High Quality Business

Equity Market Valuations: We Haven’t Been Here Before

By | Global Equity | No Comments

This article first appeared on Advisor Perspectives

 “…. valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts.” – Warren Buffett

Read More

Invest in High Quality Stocks in Indian Markets

High Quality Stocks in Indian Markets

By | India Equity | No Comments

This article first appeared on Value Walk.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.” – Warren E. Buffett

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Best Investment Quotes by Famous Investors

7 of the most Inspirational Investment Quotes

By | Investment Insights | No Comments

There are gurus and there are finance gurus. Most people approach the markets like a maze or a puzzle expecting to be confused and overwhelmed losing their way in the many alleyways and avenues in the investing world. There are some who are more enlightened when it comes to navigating finance with fresh approaches and successful strategies that serve as guides for others. We’ve put together what we consider to be some of the best investment quotes from these experts! Read More

Indian Investors should invest globally

Investing Globally: Why Indian Investors Should Consider Global Allocations

By | India Macro, Investment Insights | No Comments

When discussing portfolio construction with Indian investors, one question that frequently comes up is whether it makes sense for an Indian investor to invest outside of India. Indian equity markets have compounded capital at high double digit rates over the past thirty plus years and with the Indian economy expected to grow at the fastest pace of the large economies globally, investors continue to expect great returns from the Indian equity markets. Why then invest outside India? Read More

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Staying Calm and Keeping Behavioral Biases Aside while Investing

By | Behavioral Finance, Investment Insights | No Comments

“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.”

 – Seth Klarman.

When Warren Buffett famously stated that investing was simple but not easy, he meant that the rules we ought to use in order to make good investment decisions are easy to learn but actually adhering to them is difficult. Disregarding rules while investing cannot be attributed to open rebellion but can be ascribed to the basic human survival instincts that have been ingrained in us since time immemorial. Certain traits favored in the process of Natural Selection and helped our ancestors survive in the jungle actually do not help in the market.
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Why Indian Families Must Invest in Gold and Gold Mining Shares

By | Gold, India Equity | No Comments

Gold has been in use as a form of currency or a high value commodity for at least three millennia. Records show that India has had an intense relationship with this glittering metal for almost as long. The picture of an Indian bride is incomplete without her being weighted down by masses of gold jewellery and tales of palaces being inlaid with gold leaf abound.

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Traditional Market Conditioning: Why We Need to Break Away from It and How

By | Behavioral Finance, Global Equity | No Comments

It is important to remember that all investments are subject to a certain amount of risk. ‘Risk” can simply be defined as the probability of losing whole or part of the sum invested. This probability must be considered before investing. Various tools may be employed to identify investment-worthy stocks such as fundamental analysis, price-to-earnings ratio, technical and quantitative analysis. Fund managers may combine two or more systems to determine the strength of investment.

By and large, traditional investment strategies are based on a fixed percentage mix of stocks, bonds, and cash for varying risk tolerances. It is often the money manager’s job to select the best investment options based on various theories that can be based on the long-term average performance of investment assets. For example, a moderate risk investor is likely to keep fully invested in 60 percent stock and 40 percent bond allocation without taking into consideration the risk. Institutions and fund managers may follow a relative investment approach, which in our opinion, has fundamental flaws as it focuses on short-term horizons and fails to incorporate emerging trends.

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Companies and their Moats: Network Effects

By | Investment Insights | No Comments

When Warren Buffett stated “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he was talking about companies with wide economic moats. The term Economic moat, famously coined by Warren Buffett, refers to the sustainable competitive advantages that immunize a business from competitors – similar to a moat protecting a castle. Mr. Buffett’s investing strategy is to invest in companies with strong economic moats as they are likely to remain successful over a long period of time.

Different types of Economic Moats offer different competitive advantages. Of all the competitive advantages a company can have, network effect is the rarest that is produced but once it occurs, it is likely to last for a long time.

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Evidence based investing for S&P 500 companies

Rational Market or Irrational Exuberance?

By | Behavioral Finance, Global Equity | No Comments

Since June 2015, we have been voicing our concern on market valuations on mid and small cap space. Irrespective of events like Brexit, demonetization or outcome of US elections, market momentum in mid and small cap space has been undeterred.

Since May 2014 with the outcome of Indian elections and NDA government coming in majority, we believe market has rallied on a complete hope based story where the gap between valuations and fundamentals has widened significantly. Focus has shifted from strong conventional businesses to emerging and turnaround stories where we believe the premiums paid are very high.

It is usually in a market like this when behavioural biases overpower an investor’s cognitive decision making ability where greed takes a precedence to rational thinking.

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Mis-defining Investment Quality

(Mis)Defining Quality: Counting When It Cannot be Counted

By | Behavioral Finance, Global Equity, Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

 “Ben felt that what I do now makes sense for my situation. It still has its founding in Graham, but it does have more of a qualitative dimension to it because, for one thing, we manage such large sums of money that you can’t go around and find these relatively small value-price discrepancies anymore. Instead, we have to place larger bets, and that involves looking at more criteria, not all of them quantitative. Ben would say that what I do now makes sense, but he would say that it’s much harder for most people to do.” – Warren Buffett 3 responding on apparent divergence from Graham, emphasis ours.

 “The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage.” –Charlie Munger

“Not everything that counts can be counted, and not everything that can be counted counts.” – William Bruce Cameron 4

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Notes:

  1. Joe Carlen, The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham, 244.
  2. The quote is frequently attributed to Albert Einstein. However, it is likely an incorrect attribution. Read more here.
  3. Joe Carlen, The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham, 244.
  4. The quote is frequently attributed to Albert Einstein. However, it is likely an incorrect attribution. Read more here.
Fiat Currency Collapse

Fiat Currency Collapse: Is History Repeating Itself?- Infographic

By | Global Macro, Gold | No Comments

This infographic traces the origin of the money system depicting early coins that were used in various eras ultimately leading to the introduction of paper money, known as “fiat” currency. Fiat currency, though declared by a government to be legal tender is not backed by a valuable commodity. Because of this very fact, fiat currency has repeatedly collapsed down through the ages. Are we headed for another collapse? If so, do you know how to invest in a fiat currency environment? This infographic takes you through the journey.

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Fiat Currency Collapse

Evolution of Money & Drawbacks of the Fiat Currency System

By | Global Macro, Gold | No Comments

“Will you lend me your mare to ride a mile?

No, she is lame leaping over a stile.

Alack! And I must go to the fair!

I’ll give you good money for lending your mare.

– Oh, oh! Say you so?

Money will make the mare to go.”

The old nursery rhyme still holds true today. Money still makes the mare go. The story of money goes even further back. In fact, the tradition of money goes back around 3000 years, before which a barter system was probably used.

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Cash Flows Don’t Lie (Or Do They?): Part II

By | Global Equity, Investment Insights | No Comments

While cash flows have been used as a guide to indicate the health of a company, just looking at cash flows is not enough. Multi-Act experts conduct an analysis of 3 companies,in the auto parts retailing industry, a highly favoured segment amongst investors and analysts. You’ll see why investing in auto part retailers may not be wise under certain circumstances. As we analyze 3 companies in the following areas, discover fundamental traits that should make investors skeptical:

  • Profitability: Margin Cycle
  • Cash Flow Generation: Working Capital
  • Cash Flow Utilization: Capital Allocation

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Airliners: Assumptions Flying High

By | Corporate Governance | No Comments

Anyone reading a company’s financial reports should be aware of the assumptions and estimates used by the preparer of the report because it can lead to a distorted picture of a company’s performance

In this article, Multi-Act experts analyze the financial reports of a major airline company and uncover key assumptions in calculating yearly pension cost. In this case, higher assumption of expected return can lead to lower pension expenses and higher earnings. Assumption relaxation in revenue recognition was observed by another major airliner thus boosting revenues and earnings in their reporting period.

Investors need to pay close attention to assumptions and estimates that may be used by the preparer of any report. The examples of these airline companies give a clear picture of how assumptions can be used to project companies in better light.

“Figures often beguile me…particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: ‘There are three kinds of lies: lies, damned lies, and statistics.” – Mark Twain

Had Mark Twain seen the financial statements of various companies, he would have exclaimed- “Lies, damned lies, statistics and accounting”.

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Sustainable Competitive Advantages

PERSPECTIVES: Consumer Preference – An Analytical Framework

By | Investment Insights | No Comments
Sustainable Competitive Advantages: Consumer Preference
By Baijnath Ramraika, CFA and Prashant Trivedi, CFA with assistance from Ms. Siddhi Gujar
August 2, 2016

This article first appeared on Advisor Perspectives.

In this article:

Understanding how to analyze a moat is critical to evaluating the value of any business, and subsequently an important factor in knowing whether you should invest in a particular business. In this article, we explain why we believe terms like “brand moats” or “intangible assets-based moats” are misleading and will set up investors for behavioral errors.

It’s not enough to call a moat by its right name. We delve further to see whether this moat is a sustainable competitive advantage. Discover the two elements that need to be present and form the primary components of an analytical framework to identifying a consumer preference moat, along with ancillary factors such as pricing power and product differentiation. You’ll understand our rule of limit to the pricing power of the incumbent through examples of companies like Parle-G.  You’ll learn why investing in emerging markets and specifically consumer companies needs to be treated with caution.

To help you understand our framework better, we take you through a step-by-step analysis of Colgate

“Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me.” – Warren Buffett (emphasis ours)

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Reviewing Raghuram Rajan’s Real Monetary Policy

By | India Equity, India Macro | No Comments

In this article:

Raghuram Rajan’s monetary policies have received both praise and flak. On one hand, they have been praised as stabilizing forces in a tumultuous global economy awash with central bankers’ reduced interest rates. On the other hand, critics have denounced Raghuram Rajan’s policy changes as being detrimental to growth. This article assesses the impacts of Raghuram Rajan’s policies on the economy and the ‘real’ effects of the global banking crisis. You’ll read insights on how these inflation targeting policies have safeguarded the Indian economy. Read this Raghuram Rajan monetary policy review to find out if Raghuram Rajan’s successor should continue them, or implement new policies. Read More

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Mutual Fund Investing: Simple but Not Easy?

By | India Equity, Investment Insights | No Comments

Dalbar, a Boston based analytics group has been studying the US markets for over 20 years and they have been publishing reports which compare the performance of an average Mutual Fund investor as compared to the Market Indices. Important point to note here is that the performance calculated was for the investor in the Mutual Fund and not the Mutual Fund itself which is more readily available.

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Playing Hopscotch with the Revenue Recognition Principle: A Case Study

By | Company Insights, Corporate Governance | No Comments

In This Article:

Can investors be hoodwinked by a company’s revenue and profit figures? Multi-Act experts discuss how a global consumer technology company changed the revenue recognition; misleading investors to believe that they have had massive growth in revenues and profits over the past decade. This revenue recognition case study explains how they achieved this over four periods of revenue recognition methods and its implications for analysts. You’ll learn why it’s impossible for analysts to show reliable trends;  resulting in a precarious situation for investors. Read More

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U.S. Regulated Utilities: Non-Cyclical or Cyclical?

By | Company Insights, Global Equity Perspective | No Comments

In This Article:

As some of the best-performing stocks, many consider U.S. Utilities stocks a safe haven paying steady dividends with moderate risk. Assured return close to 11% shows why investors are attracted to this sector making them a bright choice in bear and bull markets. However, there is a caveat: Whenever rates rise, the value of these may drop. With the Central Bank’s repressive rate policy, we believe investors should show caution when making investments in U.S. Utilities equities.

This article discusses how U.S. interest rates seem to have given rise to a cyclical trend within the Utilities sector. Read what has been driving the sector’s current valuation growth.  
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Global Macro View

By | Global Macro | No Comments

In this Article:

Listen in on a conversation between Multi-Act experts and their advisory clients. Find answers to questions such as:

  • What can we expect with fluctuating interest rates, particularly U.S. interest rates, which have a large impact of flow of funds globally?
  • Where is the U.S. dollar going as it appreciates against other currencies? How is the Rupee placed?
  • What is China’s impact on the global economy and how is it likely to all pan out?

Get expert insights into these questions and more in this transcript of a conference-call hosted on 19th February, 2016 with our Advisory Clients.

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Chinese E-Commerce Co: Real Growth or just Creative Accounting?

By | Company Insights, Corporate Governance, Global Equity | No Comments

Ever made an investment decision based on market hype? Multi-Act experts review a Chinese e-commerce company headed by a celebrated personality that appears to be outdoing its competitors. While the company seems to be a victor; a careful quality of earnings analysis by our team reveals some creative accounting practices that investors should not ignore. Analysis includes the company’s:

  • Adjusted Non GAAP EBITDA and Net Income
  • Capital Allocation
  • Low Tax Rate Sustainability
  • USD Denominated Debt

Questions arise about the said company’s profit margins, cash-flows and valuation. Read how this can impact investor decisions.

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Economies of Scale: An Analytical Framework for Assessment of A Firm’s Competitive Advantage

By | Global Equity, Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

“The moat in a business like our auto insurance business at GEICO is low cost. I mean people have to buy auto insurance, so everybody’s going to have one auto insurance policy per car basically, or per driver. And…I can’t sell them twenty…but they have to buy one. Read More

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Showing The Door

By | India Macro | No Comments

A key factor when investing in quality stocks is the sustainability of a company’s competitive advantage. In their article, Entry and Exit Barriers, the authors Baijnath Ramraika and Prashant Trivedi suggest that while most investors look at entry barriers as a proxy for the ability of a business to persist with its supernormal returns, the presence or absence of exit barriers is a key factor as well and may at times serve to nullify the impact of entry barriers. Read More

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Growth Vs Value Cycle

By | Global Equity | No Comments

Investment decisions need to be based on rational analysis and void of behavioral bias. However, markets often act without clinical analysis and prefer different type of assets in different phases. One such example is emerging across the growth stocks and value stocks, where the favor or disfavor for a particular class changes over the course of a market cycle. Read More

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The 6 Sources of a Firms Competitive Advantage

By | Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

As we have discussed previously, sustainable competitive advantages (SCAs) are a key characteristic of high-quality businesses. While SCAs are good indicators of business quality, not all competitive advantages are created equal.  The strength of the competitive advantage and the risks that the business needs to protect itself against are largely dictated by the type of competitive advantage that the business possesses. Read More

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Race Towards Higher Yield

By | India Macro | No Comments

Multi-Act believes that comparison of returns is meaningful only on a risk-adjusted basis. Since quantifying risk is extremely complex, market participants resort to loose generalizations in their perception of risk, viz. Mutual Funds that invest in Debt Instruments are safe. Financial intermediaries that are evaluated solely based on returns while overlooking the associated risks face an incentive to buy assets complying with a generally accepted benchmark but could be risky on core fundamental parameters.  Read More

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Strike Gold

By | Gold, Investment Insights | No Comments

The recent decline in the price of gold has led many market participants to question the investment value of the yellow metal. Much has been spoken and written about the relatively poor return to be earned from gold. We think investing is NOT an exercise in bragging rights about which asset class has higher returns in the past and are therefore assumed to hold in the future. Read More

GDP Growth rate and Equity returns

The GDP Growth Rate Myth

By | Global Macro | No Comments

This article originally appeared on Advisor Perspectives.

An article published in a renowned daily suggested that equity market returns follow nominal GDP growth rates. The author appropriated, “The reason for this is simple. Equities over time grow in line with the growth of underlying businesses. As businesses comprise the economy, the nominal growth of the economy (real growth plus inflation) is a good proxy for the average growth in businesses. The Indian economy has grown at a remarkably constant nominal growth of 15% p.a. No wonder that the Sensex CAGR of 17.1% is close to 15% nominal GDP growth.” (Emphasis mine) Read More

Indian FMCG Market Analysis

Indian Market Analysis: Consumption Vs. Extraction

By | India Equity, India Macro | No Comments

We do understand that Investing being game of odds, market participants would prefer to pay a premium for ‘certainty’ in earnings, growth etc. But the same question also then logically extends to expensive valuations. One has to be mindful of the fact that as much as the behavioral biases of the market might lead us to think otherwise, prospective returns essentially are a function of arithmetic calculations and not any story built around an investing idea/theme. Read More

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Numerical Analysis: Gold Vs Sensex

By | Global Equity Perspective | No Comments

Which investment is better, gold or equity? This is an eternal debate since the time stocks were being sold informally under shades of trees. The question has not lost its relevance even today, when market experts advance the case of equity investments especially where the results seem impressive. Let us first understand the characteristics of the two “players” – gold and equities. Read More

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Post-Election: Insiders Vote Out

By | India Equity, India Macro | No Comments

India’s corporate sector and its leaders were very impressed as the current government took reigns at the centre on the back of reforms it had set out to achieve. However, a review of the current scenario suggests that things haven’t changed much on the ground. Essentially, the rise in share prices of a majority of companies in the last year have been driven more by valuation re-rating than actual improvement in earnings. Likewise, there is an interesting set of data that is emerging in terms of the shareholding pattern across companies. Read More

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Farm Sector: Ploughing the Books

By | Company Insights, Corporate Governance, Global Equity | No Comments

Given that the fundamentals in the agricultural sector appear stable and the sharp rise in the use of renewable fuels across the world, market participants seem to be positively biased towards stocks that are part of the “agricultural story”. But, as always, at Multi-Act, we believe that following the herd and placing bets on stocks that enjoy a pro-cyclical review is futile if one does not also cast an eagle’s eye at the quality of the company’s financials. Read More

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Why Most Quantitative Investing and Trading Systems Fail

By | Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

“Invert, Always Invert.” – Carl Gustav Jacob Jacobi, German Mathematician

“Hundreds of studies have shown that wherever we have sufficient information to build a model, it will perform better than most people.” – Daniel Kahneman (as you read this statement, don’t forget to consider the implication of the word “sufficient”)

“Roger Federer plays tennis using Wilson racquets. I use Wilson racquets. Does that make me Roger Federer?” – Paraphrasing a friend of ours. Read More

US bull market analysis

Are We in a Bull Market? Danger, Will Robinson, Danger!

By | Global Equity | No Comments

This article originally appeared on Advisor Perspectives.

The low-yield environment manufactured by central banks has encouraged and precipitated yield-seeking speculation. Investors and speculators alike have taken up a near-religious conviction in the demi-god status of central bankers. Will these central bankers continue to enjoy their god like status indefinitely or will they disappoint their followers? Read More

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A Specialty Canadian Pharma Company: High on High Yield

By | Company Insights, Corporate Governance, Global Equity | No Comments

Lately, a lot of market participants are becoming skeptical about zero interest rate policies. This is particularly reflected in retail investors’ tendency of reaching for high yield (HY ETF inflows/popularity) and the incentive to the CEO community for related buybacks/acquisitions to boost reported performance during their tenure. Read More

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Stan Druckenmiller’s “Horrific Sense” Of Deja Vu: “I Know It’s Tempting To Invest, But This Will End Very Badly”

By | Global Equity Perspective, What We Are Reading | No Comments

Multi-Act shares a very similar point of view as expressed by Stan Drukenmiller in this interview with Zero Hedge. Investors indeed do need to be cautious about several factors stated by him in this discussion including the role of Central Bank policies on liquidity that tend to have a very strong effect on the markets. Read More

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We Are Happy To Score Centuries With Just Ones And Twos And Not Necessarily With Sixers

By | Investment Insights | No Comments

Prashant K Trivedi, Chairman of Multi-Act Trade & Investments Ltd., talks about his investment philosophy, especially for family office investors with long term patient capital, and how he constructs his portfolio. His investment philosophy of giving appropriate weightage to quality, valuation and price momentum has helped him offer capital preservation and good returns to the investors. Read More

Bounded rationality investment decision making

Bounded Rationality, Unbounded Confidence

By | Behavioral Finance, Investment Insights | No Comments

This article originally appeared on advisor perspectives.

“The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required.” – Models of Man, Herbert A. Simon

“Boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information.” – Oliver E. Williamson citing Herbert A. Simon Read More

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The Warren Buffett Way: High Quality Stocks in Emerging Markets

By | Investment Insights | No Comments

This article originally appeared on advisor perspectives.

“Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner.” – Warren E. Buffett

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren E. Buffett Read More

Valuation of US equities

U.S. Equities: Overvalued or Undervalued?

By | Global Equity | No Comments

This article originally appeared on Advisor Perspectives.

“Be fearful when others are greedy, and greedy when others are fearful.” -Warren Buffett

“…. valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts.” Warren Buffett Read More

Analysis of S&P 500 companies

Profit Margins, A Bottoms-up Analysis of S&P 500

By | Global Equity, Investment Insights | No Comments
  • Profit margins as measured by Corporate Profits divided by Gross National Product are way over norm.
  • We show that profit margins for the S&P500 Index derived as Total Net Profits divided by Total Sales of all non-financial components of the index are way over mean as well.
  • We look at profit margins of various sectors and find that high profit margins aren’t limited to service businesses only. Read More
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High Quality Stocks in Developed Markets

By | Global Equity, Investment Insights | No Comments

This article originally appeared on Advisor Perspectives.

‘Quality’ is becoming widely accepted as an anomaly and is now being designated by many researchers as a fifth factor explaining investment returns along with the four widely accepted factors: beta, size, momentum, and value. This development is in sync with our long-held belief that quality is a distinct investment style.
In this article the authors, Baijnath Ramraika (CFA) and Prashant Trivedi (CFA), present a framework for superior risk-adjusted returns from high quality stocks. Read More

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Why are the MNCs still putting their money in India?

By | India Equity, India Macro | No Comments

Caught in the middle of political uncertainty, market volatility and fickle FII flows, investors in the Indian stock market could take their cues from the investment behavior of multi-national corporations (MNCs). More than two dozen MNCs operating in the country have ignored all political and the economic instability issues to increase the size of their domestic investments. This, more than any rhetoric, indicates a high degree of confidence in the India growth story.

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Mining: Magic of Full Cost Accounting

By | Corporate Governance, Global Equity | No Comments

While commonly used quantitative measures or financial ratios serve as a good benchmark for investing in businesses, one should also be aware of the underlying assumptions used to draft such numbers. These benchmarks may sometimes paint a completely different picture under different norms. This may not only affect the accrual based numbers but also cash flows and lead one to erroneously see a business as being way better in terms of profitability and/or creditworthiness than it is.

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Investing in Indian rural market

The Rural Story: Of Moats & Fundamentals

By | Investment Insights | No Comments

The Indian rural market is on a roll. With a size pegged at almost USD 425bn and a per capita consumption that now exceeds the urban market, rural India is the new growth area for companies from sectors as diverse as telecom, vehicle manufacturing, agriculture service and product providers, financial services, consumer durable and FMCG companies. Better monsoons and the National Rural Employment Guarantee Act (NREGA) has shored up the disposable incomes in agri-based non-urban India translating into more non-food spend.

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Banking on PSU Discounts

By | Case Studies | No Comments

Mutli-Sheep

“Investing against the tide” sounds a whole lot cooler than it really is. For when we make a decision that leaves us standing out, our first thought is to look around and wonder why? After all you wouldn’t want to be the black sheep! Unless, of course, you are confident of your investment and it’s backed by something beyond momentum (or in this case herd mentality). We strongly believe that despite contradictory market movements, a sufficient price correction to the public sector banks has now been made, and jumping in at what we believe are discounted rates (being at the lower end of our valuation range) is the way to go. This suggestion does not come at the back of merely a valuation, but after analysing and more importantly rationalising the past and present market conditions.

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Bob Rodriguez – We are Witnessing the Development of a “Perfect Storm”

By | What We Are Reading | No Comments

In this article:

Robert L. Rodriguez, former managing partner at FPA, a Los Angeles-based asset manager who retired after more than 33 years of service, shares his take on:

  • Reversion to the mean
  • Factors driving the flow of mutual fund assets to passive strategies
  • Under-performance of active managers and the potential bubble
  • Destabilizing influences of ETFs and index funds that are brewing the perfect storm
  • Concerns about “smart-beta” products for investors who want a value-oriented portfolio
  • How he is investing his personal assets

Rodriguez’ insights are what every investor should read.

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The Reasonable Formation of Unreasonable Things

By | What We Are Reading | No Comments

In this article:

It is the most devastating trick investors play on themselves. Realizing that the rise and fall of bubbles does not negate the effectiveness of diversified long-term investing is one of the most powerful understandings an investor can have. And one of the hardest things an investor can do is maintain conviction on a long-term strategy when there’s a changing of the guard between one game and the next.

But a lot of the emotions — excitement, greed, fear, and frustration — stem from not knowing what bubbles are or why they’re happening which is what Minsky’s financial instability hypothesis explores.

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Auto Loan Warning by Fitch

By | What We Are Reading | No Comments

In this article:

With slightly higher yields, subprime auto-loan backed securities were grabbed by institutional investors that manage other people’s money.

Now, almost all indicators of auto lending are flashing red. Negative equity has hit an all-time record. Why is negative equity such a growing phenomenon? Because of the toxic trifecta in the auto industry, now happening. Read on to delve deeper into the insanity of the United States’ auto lending segment.

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Why care about China’s Shadow Banking Crisis?

By | What We Are Reading | No Comments

In this article:

Credit growth is a well-known factor behind bubbles and China’s credit growth in the recent past should be a definite concern. Shadow banking channels (which make traditional reporting obscure) is a further negative. History shows, in many cases, how it ends in the scenario of tightening or loss of confidence among participants walking a tightrope of duration mismatch.

Read on for more insight on shadow banking risks in China.

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Bad News Investor – Buying “Bad” Stocks

By | What We Are Reading | No Comments

In this article:

Bad news investor is a person who invests primarily in stocks of companies that are in news due to bad reasons. But does it make sense? Theoretically it does. You need to be sure as to why your reason for investing in so-called bad stocks is sounder than the reasons of those who are selling.

Cyclical businesses are known to witness regular flows of good and bad news depending on the cycle of their businesses and effects of bad news can be temporary. So what should you do if you hear some bad news about the company whose stock you always wanted to buy? Learn how bad news can actually be good for you here and how to choose what stocks to buy.

Read the original article here

Bad News Investor – Investing on Bad News

 

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Volatility is not the same as Risk

By | What We Are Reading | No Comments

In this article:

Why do people equate volatility with risk? Volatility is NOT the same as risk. Risk is defined as the chance of losing some or all of your investment. The path that the price of the stock takes between when you buy it and when you sell it shouldn’t matter, at least from a financial point of view. In fact, in many cases higher volatility equals LESS risk

The psychological impact of the price changes can convince you to make non-optimal choices with your money. Read this article to find out how volatility and risk are related in an investment scenario and learn how you can minimize investment risk.

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Macro

The Rising LIBOR Pains

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In this article:

Since mid-2015, 3 month USD LIBOR has soared from a low of approximately 22.5 basis points to its current level of 115 basis points.

It is now more than 5 times higher than two years ago. Banks have vacated their previous role of market makers. The demand for corporate debt and in particular junk debt has been enormous, and corporations have obviously sated it by producing more debt than ever before. Such a scenario implies a latent risk, one that keeps growing and is ready to bust.

Rising interest rates and a slowdown in credit growth imply that this precondition is very likely to prevail when the next batch of problems shows up.

Learn the impacts of rising LIBOR in this in-depth analysis of LIBOR.

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Are Global Housing Prices Fairly Valued?

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In this article:

The National Association of Realtors estimates that Chinese investors bought 29,000 American homes for a total of $27bn in the year to March 2016. Foreign buyers focus on a handful of cities: San Francisco, Seattle, New York and Miami. Foreign money has helped propel skyrocketing prices in other places, too. London’s mayor has ordered a study on foreign ownership in the capital after property prices rose by 54% in four years. Central bankers fret about the dangers fickle capital flows pose to financial stability.

Are houses fairly valued across the globe? Learn more about how these changes have impacted House Prices around the world in this interactive chart.

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Macro

The Time Arbitrage Investment Strategy

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In this article:

This article talks about the edge that an investor can have by focusing on the long term when the entire market is obsessed with short term data/events. The underlying value of a business is determined by stream of cash flows that it is going to earn over long time. We at Multi-Act believe that any event that does not structurally impair long term earnings power of a business would provide an opportunity if the market is worried about its short term impact. Read how many have found success through this investment activity.

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Macro

The Consequences of Command and Control Economics

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In this article:

Everyone knows that the law of supply and demand is designed to bring equilibrium in the economy. If it is true for commodities, the same rule should apply to interest rates as well. But like Soviet Russia where the price of sugar has very little to do with supply and demand because it runs on a command-and-control economy, central bankers have been setting the price for the most important commodity in the world: money. How will all this end? Does anyone know?

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Is It a Good Time to Invest in Emerging Markets?

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Are you wondering why you should invest in emerging markets? Here’s something to consider. For long-term investors, a unique opportunity presents itself in emerging market equities because of the rare combination of cheap equity valuations, depressed currencies, and positive momentum in equity prices and economic fundamentals.

Discover how a building-block approach to valuation creates forward-looking returns rather than the idea that it’s too late to invest, and how depressed currencies show a projected real return of 3.9% a year over the next decade. In addition to this, EM stocks are trading cheaply and showing robust 12-month price momentum.

The classical British economist David Ricardo’s advice to investors to “cut short losses” and “let your profits run on” couldn’t be more relevant. While the Trump election was forecast to leave a trail of destruction, this article delves deeper into why it is better to invest in attractively valued emerging market assets even in the midst of fear and uncertainty, which are making a slow exit. 

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Edelweiss Journal: Reflections on Trump’s America; The Challenge of Preserving Capital within the Financial System

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This issue of the journal from Edelweiss Holdings has two brief essays on relevant issues that hold value for any investor today.

Reflections on Trump’s America unveils historic perspective on the patriotic and business-wise President-elect Donald Trump. Within the context of financial markets, his election has received jubilation worthy of the second coming of an industrial revolution. Yet, even as Mr. Trump’s businesslike ideas should be welcomed in a nation that has veered further and further into an economic unknown, this essay shows how there is little reason for the boundless euphoria of anticipated greatness.

The Challenge of Preserving Capital within the Financial System by James Watson is an essay that makes for compelling read. While touching on myths attached to liquidity and the troubling imposition of control on individual financial affairs, this essay makes a point that has been echoed by Multi-Act; when credit implodes – as it must – only HQ stocks will have any sort of bid, as market participants realize that the inherent strength of HQ stocks were obscured with the hype attached to liquidity and credit mis-pricing.

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Macro

Role of Network Effects and Critical Mass as mental models in Business

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Replete with examples, Tren Griffin, a senior director at Microsoft, explores two powerful mental models: Network Effects and Critical Mass. Drawing on years of experience as a businessman for one of the world’s most renowned tech companies, Griffin offers practical expertise with adept and clarity. In this article, Griffin explains how companies can use these two mental models as a protective moat. 

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Macro

Don’t Confuse Cheap with Value

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There are just two ways to behave as an investor,

One requires buying cheap, selling at a profit, and repeating the process. This requires making hundreds, sometimes thousands of smart investment decisions in the course of a career. To make many smart decisions is too hard.

The second way to invest just requires one decision: buy a great business. This way is to adopt a strategy that requires being smart only a few times. Almost no one does this despite the obvious advantages. It requires the right investor base.  This article shows you how.

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Value stocks and Patience – may be the only way to turn around Bleak Returns

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It is a terrible time for investors. With bleak returns seeming to be the norm across the globe in this tumultuous stretch, they are relying on varied valuation metrics in hope of enhancing dividends. This piece discusses the best valuation metrics to gauge whether a stock is “cheap” or “expensive” and also provides an insight into Andrew Lapthorne’s views on why modern-day investors have to be brave to hold on to value stocks and be prepared to lose money for some time.  Read More

Macro

Why India’s Currency Debacle is a Lesson for Westerners

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As Indian citizens struggle with the inevitable teething troubles that the demonetization episode has brought upon them, it is important to know that this shouldn’t seem like a remote threat to Westerners. It establishes a significant point – state-issued paper currency exists only at the acquiescence of the State. One verdict can make it totally worthless. Read on to know why this Indian chapter must be seen as a lesson (read: warning) by the Western civilization and also why the value of gold cannot be debased by government decree. Read More

Macro

What Bridgewater’s Ray Dalio Told The New York Fed

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Ray Dalio, founder, Bridgewater Associates, is a vocal opponent of quantitative easing by central banks. In his speech at the Federal Reserve Bank of New York on October 5 this year, he presented what may seem to be a rather gloomy picture akin to a depression warning.

Learn about long- and short-term debt cycle and read what one of world’s most influential investors has to say about the limits to central banks’ monetary policies.

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Macro

Time to stop dancing: Asset inflation cycle coming to an end?

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Why is it that after ninety-something months of zero or near-zero rates, growth is still sputtering? Why is the corporate sector in an earnings recession? Why is the productivity growth negative? And why do central bankers still insist that no recession is in the forecast?
Read this article to dismiss the myth if in reality the central bankers can control the cycles and public behavior and can act as last anchor of confidence to eternity. Read More

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Australian Real Estate- A Chinese Syndrome?

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People looking to reason out the concerns about the valuation statistics in the Australian real estate market must be awake to one of the most crucial factors – Chinese property buyers. With the lower Australian dollar supporting the demand for Australian housing (especially for foreign investors), the flood of Chinese money gushing into this market is not showing any signs of slowing down. Read all about Australian residential property going under the hammer, the influx of Chinese currency and its implications, and the efforts banks and regulators are taking in this article.

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Why Management is Incentivized to Fabricate Earnings: It’s All About Non-GAAP Bonuses

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In order to make a rational investment decision, it is important to gauge whether a company’s accounting depicts the underlying business economics.  At times, company managements may fabricate the accounting numbers. When the management is compensated based on Non-GAAP numbers, there is an elevated tendency to present an inaccurate profit picture. If one looks beyond the readymade Non-GAAP earnings, S&P 500 is currently trading at a P/E multiple of 24x as against the 18x that is commonly reported.

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Macro

A Very Bearish Stanley Druckenmiller Blows Up at the Fed; Reveals his Biggest “Currency” Position

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Central Banks across the globe have been engaging in QE practices in a bid to spur growth. However, as discussed many times by us these manipulations have led to nothing more than a egregious mispricing of various asset classes and resulted in further malinvestments. Ultimately this will detract from any ‘real’ growth ! Read More

Macro

If You Flaunt While Owing a Lot, it Suggests You Don’t Care: Raghuram Rajan

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In this interview with Business Standard, RBI Governor Raghuram Rajan shares his views on a range of issues. Acknowledging the volatility across global markets he says, “What we really have is a world economy where central banks pump up market prices quite a bit. I don’t think markets really know the true level of their fundamentals; they are trying to find a level.”

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Macro

Meet Stone Lion Capital: Cub of The Bear

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This post focuses on the recent development at Stone Lion Capital Partners L.P., where the firm suspended redemptions in its credit hedge funds post a hurried call by investors to get back their money. The piece traces back to the past events and finds that there may be some link between the hedge fund and Bear Stearns, whose failure unleashed a chain-reaction and ultimately led to the global financial crisis.

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Macro

The Next Thing Might Be Helicopter Money: James Grant

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In an interview with Christoph Gisiger, Wall Street expert James Grant, warns of ever more extreme central bank policies and bets on the comeback of gold. He points out that since the Lehman crisis there has been a growing presence of government in markets in terms of regulation and ‘with respect to the management and the production and the manipulation of money.’

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Macro

Ted Cruz’s Golden Rule

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In this piece, Steve Forbes states that Texas Senator Ted Cruz has raised a relevant point for debate by suggesting that the U.S. monetary system needs to bring back the gold standard. He says, “Senator Cruz’s endorsement will help start a much needed discussion and debate–and, critically, an education in how a gold standard actually operates…” Read More

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Epsilon Theory

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The author of this post draws parallels between poker and investing and states that sometimes players and stock pickers alike “overestimate the edge and odds associated with merely ordinary opportunities once they’ve been forced by circumstances to sit on their hands for a while.” Read More

Macro

Larry Summers and Flat-Earth Economics

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In a recent interview with CNBC’s Squawk Box, when suggested that higher interest rates could possibly be the resolution for global economy, renowned economist Larry Summers retorted that that they were practicing “flat earth economics.” However, it will not be very wise to overlook the massive market distortions that have been building up owing to the incentives provided by negative real interest rate. Read More

Macro

An Abhimanyu Moment for Global Central Banks

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As international markets grapple with the fear of a possible rate hike by the Federal Reserve, this op-ed points out that the underlying anxiety is indicative of the fact that the cheap money has caused more harm. The article reads: “Excessively low interest rates have resulted in misallocation of resources and have significantly added to the debt stock, particularly in emerging markets.” Read More

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Equity Markets and Credit Contraction

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Alasdair Macleod in this piece asserts that the recent decline in equity markets is leading to a contraction of bank credit. He states: “Brokers’ loans to speculating investors are being unwound from record levels…. Then there is the secondary effect, likely to kick in if there are further falls in equity prices, when equities held as loan collateral are liquidated.” Read More

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Growth Traps: In Markets, Sweet Dreams May Turn into Nightmare

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Australia’s big ticket LNG projects seem to be hitting a potential roadblock as worries surrounding their ability to generate returns keep mounting. According to International Energy Agency (IEA), “six Australian liquefied natural gas projects under construction at a cost of $200 billion will struggle to break even because of the oil price slump”. Read More

Macro

Don Boudreaux’s Keynesian Splenetics

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Café Hayek’s author Don Boudreaux believes that John Maynard Keynes was indeed naive to place weightage on government interference, while overlooking the “entrepreneurial aspect of a capitalist reality”. This he says is a potential fallacy, one which negligently believes that “competent supervisory managers” can steer economies away from systemic risks. Read More

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Jim Rogers Exits India

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Jim Rogers, in this interview gives reasons for his decision to exit India. Though we agree with him on some of the points he has made, we respectfully differ on one point: one cannot write-off India completely as India continues to be one of the few economies which has an increasing young population in an aging world economy. Literacy rate and household income is rising, which has ensured a healthy domestic consumption driven economy. Indian households have a good savings rate and thus consumption is not credit driven. Read More

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Frederic Bastiat had it Right—The Vast Unseen Consequences of ZIRP are the True Evil

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In dynamic economies, there are times when an intended action triggers one effect and subsequently leads to a sequence of outcomes. In 1850, Frédéric Bastiat had described the aforementioned phenomenon in his pioneering piece- “What Is Seen and What is Not Seen”. His thoughts are being reflected today in the volatility created by low interest rates and artificially induced liquidity. Read More

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Einhorn Says Fed Policy Is A “Destructive Force That Shouldn’t Exist Outside Of Fiction”

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At Multi-Act we have always been wary and critical of the ability of QE to make any difference to the “Real” Economy as Central Bankers have argued. Instead we have felt that depending on the response of all the various economic agents, the end result could either be a virulent inflation or deflation and if we were really unlucky, and policymakers persist in the error of their ways – BOTH ! Read More

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Stan Druckenmiller’s “Horrific Sense” Of Deja Vu: “I Know It’s Tempting To Invest, But This Will End Very Badly”

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Multi-Act shares a very similar point of view as expressed by Stan Drukenmiller in this interview with Zero Hedge. Investors indeed do need to be cautious about several factors stated by him in this discussion including the role of Central Bank policies on liquidity that tend to have a very strong effect on the markets. Read More

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Equity Markets: Still Not Cheap

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Is the American stock market cheap or expensive? The smart retort is “compared with what”? With cash yielding zero and some bond yields negative, equities may look much more promising than the alternatives. But given that equities can fall a lot when things turn rough, it seems reasonable to ask whether they are cheap or dear relative to their history. Read More

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Do the Lessons of History No Longer Apply?

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The failure to understand the inverse relationship between current prices and future returns is why investors frequently argue that rich equity valuations are “justified” by low interest rates, without understanding that they are really saying that dismal future equity returns are perfectly acceptable.

This article posits that here and now, the market has re-established overvalued, overbought, overbullish conditions that mirror some of the most precarious points in the historical record such as 1929, 1937, 1974, 1987, 2000 and 2007. Read More

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Jaitley again asks for interest rate cuts, needs lessons in basic economics

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Author is clearly emphasising against the commonly believed assumption that interest rate cuts by Central Bank(s) will spur growth or that a rate cut is the pill for all ills whereby the real solution rightly lies in keeping the inflation in control for a meaningful period of time so as to bring down the inflationary expectations of consumers on a sustainable basis which can lead them to spend for growth. Read More

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Monetary Equivalent to Schrödinger’s Cat

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I thought it appropriate in honor of Irwin Schrödinger’s birthday to revisit an exhortation he received from none other than Albert Einstein. Not long before he died (Einstein, not Schrödinger) he sent a letter which contained the following observation:
“You are the only contemporary physicist, besides Laue, who sees that one cannot get around the assumption of reality – if only one is honest. Most of them simply do not see what sort of risky game they are playing with reality – reality as something independent of what is experimentally established.” Read More

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The Chinese BABA

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This article not only delves into the absurdity of BABA, but also, more importantly, the problems of the Chinese economy. Going from $1 trillion to $25 trillion of credit outstanding in 14 years is an amazing number. The assertion of the article that China is the most stupendous bubble known to the pages of history is also absolutely correct. Read More

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What if companies stop buying back stock

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One important point in the charts above is that corporations usually make the same mistake in buying back their own stocks that many investors make: They buy most aggressively late in bull markets when stocks are about to fall. And then they stop buying when prices plunge and their shares are actually cheap. In so doing, in other words, they squander shareholder capital. Read More

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