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13 Apr

Loss Aversion…

It is a human tendency to avoid a loss as much as possible. A loss of Rs. 1000 gives much more pain than the amount of joy derived after gaining Rs.1000. Humans have a bias against loss and this has been proved in many behavioral studies. Loss aversion must be inbuilt in humans as in ancient times, being careless in hunting or an injury or getting excluded from the group could lead a human to die as the world was harsh. Therefore people who were cautious survived and investors today are their descendants. So evolution has made them such that they fear loss more than they like to gain.

Few day-to-day examples – People are hesitant to sell a favorite old car or a piano even if it is not of much use to them now. If they are forced to sell it, they ask for a high price as they feel they are giving away something valuable and cannot bear to see it go.

Doesn’t everyone get tempted by offers such as ‘Buy 2, Get 1 Free’ even though they might not need three! People want to take up the offer as they do not want to lose the one that is given free. Everyone is apprehensive about taking up a new role in the company that they work in or changing a job as they are in a comfortable place and do not want to risk it. Caution is good but being so cautious that investors don’t take up any risks or challenges will not help them achieve their goals or ambitions.

How does Loss Aversion affect personal finance?

  1. Many investors do not sell loss-making investments hoping against hope that someday they might be profitable. This delay leads to further loss due to the erosion of the capital value.
  2. On the other hand, investors tend to sell off stocks whose prices are rising. investors feel that if they do not sell them, prices might fall and they will end up making losses.
  3. Many investors stay away from falling markets as they cannot digest losses. When the markets come back to their true valuations, high-quality stocks & Mutual Funds would bounce back. People would have lost the chance to buy attractive stocks at low prices.
  4. People invest maximum amount in safe, low-interest investment products that provide no great returns nor are able to beat inflation.

Source: www.tflguide.com by Hemant Beniwal

Asset Multiplier Comments:

  • Holding on to loss-making investments hoping that they will turn around or averaging an investment with shaky fundamentals is a definitive way that results in capital erosion.
  • Even the most seasoned investors demonstrate loss-averse behavior, the only way to avoid the trap is to cut our losses as early as possible and ensure our capital is preserved.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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27 Dec

#Truth about investing 102-Efficiency and behavior

This is taken from a presentation by Howard Marks Co-Founder of Oaktree Capital. This is the second in the series of articles. Mr Marks makes concise and incisive comments about the art of investing that can help amateur and professional investors alike.                                                      

Most investors behave pro-cyclically, to their own detriment.

In a rising market, even fundamentally weak companies look great technically. Fear of Missing Out (FOMO) kicks in, making people more optimistic and causing them to purchase at market highs. When the inverse is true, their pessimism grows, encouraging them to sell at cyclical lows. As a result, the retail investor is left with equities with high purchase prices but poor fundamentals.

Cyclical ups and downs don’t go on forever. But at the extremes, most investors act as if they will.

At market extremes, emotions- fear and greed are at their highest levels. People buy at market highs and sell at market lows. When people start believing in trends rather than market cycles, that’s when behavioral mistakes occur. It is usually best to ignore the current market and stick to the fundamentals at sky high emotions.

It’s important to practice “contrarian” behavior and do the opposite of what others do at the extremes.

Market does not trade at extreme ends for a long time. When there is a widespread notion that there is no risk, investors believe it is safe to engage in dangerous behaviour. Acting contrary to the market during phases of soaring emotions might provide us with optimum entry and exit points. As a result, we must sell when others are greedy and purchase when they are fearful.

While not all markets are efficient – and none are 100% efficient – the concept of market efficiency must not be ignored. In the search for market inefficiencies, it helps to get to a market early, before it becomes understood, popular and respectable.

Humans are predisposed to identify patterns and exploit them; however, these patterns and trends are already priced in by the markets. Higher the efficiency of the market the faster are the patterns and trends priced in. In established markets, however, efficiency diminishes the frequency and scale of opportunities to overcome the consensus and identify mispricing or inefficiencies. The sooner you invest in an inefficient market, the easier it is to profit as markets become more efficient. If the other investors are few, inexperienced, or prejudiced, you will have the first mover advantage; as Warren Buffet correctly stated, “First comes the inventor, then the imitator, and last the fool.”

Source: Howard Marks- Truth About investing.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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15 Mar

Three-box framework for SUV-focus in EV space – M&M

Update on the Indian Equity Market:
On Monday, Nifty closed in the red at 14,930 (-0.7%), recovering from the day’s low due to a rebound in the metals and technology stocks. JSWSTEEL (+2.4%), TECHM (2.4%), and TATASTEEL (+2.3%) led the index gainers while DIVISLAB (-2.9%), BAJAJFINSV (-2.7%), and GAIL (-2.6%) led the laggards. Among the sectoral indices, METAL (+1.0%), IT (+0.6%), and PSU BANK (+0.2%) were the only gainers while MEDIA (-1.4%), PHARMA (-1.3%), and FINANCIAL SERVICES (-1.2%) led the laggards.

Mahindra & Mahindra (M&M) recently reorganized its EV (Electric Vehicle) strategy by setting up 2 new verticals, one for last-mile mobility, and the other for EV tech center. Mr. Rajesh Jejurikar, ED- Auto and Farm Sectors, M&M explained the rationale behind this strategy on CNBC TV-18 on 12th March 2021. Here are the excerpts of the interview:

  • To undertake a comprehensive look at the future, M&M has deployed a three-box framework. This framework suggests different businesses need different kind of attention and focus depending on company strategy and goals. Box 1 is the one that has the ability to scale up/Box 2 and 3 are more mid-long-term focus and need more technology and know-how.
  • According to M&M, Last mile mobility is a box 1 business, which has a ready customer market today and they have to drive growth and penetration. Their box 2 business is the SUV focus IC-derived electric vehicles, and box 3 is EV which is preparing M&M’s strategy for the longer term.
  • They have created a strong talent pool with good products at Mahindra Electric, which will help them in the future as well.
  • They want to be SUV-focused in EV space as well. Currently, there are no plans of manufacturing EVs in shared mobility space (Sedans and hatchbacks).
  • They believe the EV market penetration to be much higher by 2025-30, hence the need for a comprehensive SUV EV portfolio. They hope to have an electric variant for all price points they operate in.
  • The level of readiness should be for 50-80% conversion in FY2025-30. The extent of conversion is very hard to predict at this stage so they are not setting any targets per se.
  • They will launch eKUV100 and eXUV300 between CY21-CY22.
  • The last-mile mobility segment is at an inflection point and the pace of sales should pick up significantly. The goods carrier segment is completely ready and a committed sales team and channel will help drive sales for this segment. The PV (Passenger Vehicle) was also ready but the slowdown due to Covid-19 has hampered the sales and M&M expects sales to pick up in 2HCY21.
  • For last-mile mobility, export is a huge opportunity. M&M is already getting leads for alliances and partnerships in different markets across the world. Some of their key customers in the B2B segment are planning to take M&M products in their global ecosystem. While these deals will take some time to fructify, the initial response has been good.
  • When M&M canceled their JV with Ford, the rationale was the money saved from JV will be put into the EV business. Rs 30,000 mn has been set aside for creating a strong EV portfolio.

Asset Multiplier Comments

  • With the Covid-19 outbreak, the personal mobility demand has increased. Though Gen Z and millennials would prefer EVs for personal mobility, the success of EVs would largely depend on increasing penetration and availability of the infrastructure, which is currently lacking.
  • M&M has been stressing on reducing investments in non-profitable subsidiaries and focusing on the core business. This three-box framework for EV vertical is a step in the right direction.

Consensus Estimate: (Source: market screener and tickr websites)

  • The closing price of M&M was ₹ 846/- as of 15-March-2021. It traded at 31x/ 21x/ 18x the consensus earnings estimate of ₹ 27.4/ 41.1/ 46.8 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 959 implies a PE multiple of 20x on FY23E EPS of ₹ 46.8/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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