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The Outstanding books Devina Mehra and Shankar Sharma recommend for old investors and new


First Global started with Rs. 10,000 some 30 years ago.

Shankar Sharma and Devina Mehra, with no family wealth, made this tiny capital into large, multi country businesses.

How?

Through Learning. Came the Earning.

Here are some books that you may enjoy whether you are just starting on your investment journey or are already further along the way.

We have split them into 5 categories

I. Books On Our Own Biases, Blind Spots And Fallacies In Thinking

Before you can conquer the world, you have to conquer your own mind and more importantly, understand it! As a starting point we would recommend these few books starting with 'Thinking Fast and Slow' by the Nobel laureate Daniel Kahneman.

It is a pretty comprehensive look at how your own thinking can mislead you. How the automatic, fast, intuitive, 'natural' thinking that you rely on for most things in life - the one that feels right may be actually completely wrong in objective terms; the many biases like Endowment Bias (when you value something more highly simply because you own it), Recency Bias (when you think what is the norm now was always the case, or what is hitting the headlines is the most important thing in the world), Loss Aversion (which makes it difficult for you to book losses because it causes too much pain), Anchoring Bias and many more - all of which can derail not just your regular life all but also to your investing and trading career.

There are many other gems like how all of us need an understanding of probability to help us remove the illusion that we can do better than all those who have gone before us. Actually, this book is chock-a-block with ideas such that unlike many others, it cannot be really summarised in a para or two. This one is worth reading while making notes and highlights!

The caveat of course is that just because you understand what investing biases are, does not mean that you will be able to eliminate them from your thinking.

'The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us' by Christopher Chabris & Daniel talks of the illusions of our mind: about how our minds are finite resources and hence from our attention to our memories we perform far below what we think we do.

It deals with some of the reasons why human beings make bad witnesses to how confidence is no proxy for competence. A very useful book to make you aware of several illusions you carry as you go about the world.

Even if elimination of these illusions is not possible, the awareness that these exist, changes the lens through which you see the world

'Misbehaving: The Makings of Behavioral Economics' by Richard Thaler also illustrates with many examples how we human beings are not as rational as what we think we are and how changes which should not make a difference to a rational person do make a difference in the real world.

To give an example, how making organ donation automatic while allowing an opt out results in a totally different outcome from what asking people to sign up from organ donation does. There are many such examples.

It is a fascinating story of how human beings can be easily molded to do things or make choices that objectively speaking may not totally make sense.

‘The Halo Effect’ by Phil Rosenzweig talks of a number of characteristics that we attribute to successful companies and corporate leaders (great strategy, customer focus, outstanding human resource practices etc) are all mostly due to the halo that is cast by the current performance of these companies.

The corollary to that is that once performance goes down, suddenly the same strategies and leaders start to look not so good after all.

This is the reason why many ‘how to’ books on corporate success (if you do this, this and this, you will achieve success) like 'In Search of Excellence', 'Good to Great' etc talked of outcomes and prescriptions, which did not hold out in the real world. The companies mentioned in these, more often than not, underperformed in both operations and stock market in the coming periods

II. The Nitty-Gritties Of Investing

This is the distinctly unsexy stuff but if you want to make a serious effort in investing or trading, you need to have the building blocks.

If you have already done a structured course in finance like CFA or MBA or MSc Finance you may be familiar with much of this, otherwise it is worthwhile to spend your time and effort on some books like ‘Damodaran on Valuation’ by Aswath Damodaran and ‘Valuation: Measuring and Managing the Value of Companies’ by Tom Copeland to give you an idea on how to go about analysing the financials of a company and making an attempt to value it.

If you are a beginner in this field, basic books on accounting and finance may also be required but you definitely need to have this tool box in order to make sense of your investments.

III. Stories Of Great Investors And Traders

These you have to read from the point of view of not getting a final how-to prescription, but understanding the many different approaches there are to heaven.

Ideally, you should read about many different strategies and tactics before you can evolve your own strategy. Do this widely: from reading ‘Berkshire Hathaway Letters to Shareholders’ to ‘The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution’ by Gregory Zuckerman, which is about Jim Simons and the totally different approach of taking millions of bets with a small edge and a lot of computing power.

Then there are books like ‘Market Wizards’, ‘The New Market Wizards’, ‘The New Money Masters’ etc that have interviews of (or analysis of the strategies of) many well known traders and investors.

Some of these books are old but even so they will give you pointers and if you to read about what happened to some of those people subsequently you will realise that at times success in the markets does not hold for ever. Nor does a strategy work for ever - which is an equally important lesson to learn

IV. Autobiographies And Biographies Of Business People And Of Businesses

There is virtually an ocean of these. Since investing is mostly about investing in securities of corporations it is important to understand how businesses are built and run.

There is no formula to this but you will often find that the one line story or impression you have of a business is very different from how it was actually built up step by step

For example, when reading 'The Everything Store: Jeff Bezos and the Age of Amazon' by Brad Stone, you realise that while the whole impression is of a great leader Jeff Bezos and a linear growth rate for Amazon, the reality was very different. What actually happened was this: at every step of the way, Amazon took dozens of bets, lost a great deal of money in many of them and maybe one or two of them at every stage paid off.

Similarly Nike appears like a great success story from the word go but when you read 'Shoe Dog: A Memoir by the Creator of Nike' by Phil Knight, you realise that this was a company that was started in the sixties and took a very long time to even come to the take off stage and also contrary to the general impression, it was not a very marketing-oriented company in the beginning and for a long time thereafter.

There are some very interesting lives that business people have led and the stories can make for a fun filled ride. A couple that we can recommend are Richard Branson's 'Losing My Virginity', which proceeds at breakneck speed and Subhash Chandra's 'The Z Factor', which is as candid an account as you can get of what it means to run a business in India

V. Books On Technicals / Derivatives / Trading Techniques

This category may not be relevant for everyone but if you do plan to trade rather than invest or trade derivatives, please ensure that you read multiple books about your chosen methods/techniques.

Indeed, textbooks are probably what you should start with to understand the instruments properly. Else, don't venture here at all.

From the desk of 

Devina Mehra & Shankar Sharma

Trusted Financial Advisors to some of the world's largest Funds, Institutions & Family Offices, for 30 years

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side, super quick!

Or WhatsApp us on +91 99206 71949

Chat soon!

https://firstglobalsec.com

(A version of this article first appeared on the CNBC TV18 site)

 

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Our August '20 Performance:
So how did we do?
Well...umm..err...

We F......n did it.
Again.


Look we understand.

Our tone might look like we are preening.

But look again: why on earth should we not, considering that we have had another very, very solid month?

Our philosophy is a bit different from the usual that you will hear: Be mild. Be modest. Be understated.

We kinda made peace with the fact that we might be many things but not quite the ones above.

You know why?

Because if you are not going to share your happiness with your friends ( we're all friends, right?) in your happiest times, who are you going to share it with?

So let's start the sharing. 


Global Funds' Performance: August '20

The Global Freedom Fund SPC - Global Tactical Strategies SP (GFF-GTS) was up 7.6%.

Our Global Portfolio product, the GMAAP was up 7.3%

Vs MSCI World that was up only 6.0%

Global Funds Performance: Calendar 2020 Year to Date

GFF-GTS (US Dollar terms): +30.4%

GMAAP (US Dollar terms): +31.2%

Vs

MSCI World: +2.7%
S&P500: +7.4%

AND we achieved the higher returns with lower volatility too - something we are are even more proud of!

Annualised volatility was 19-26% for our products in this turbulent year versus 29.2% for the MSCI World and 37.3% for the S&P 500!

India PMS Performance: August '20

The Pure Equity India Super 50 (IS50) was up 8.0%

While the Nifty was up 2.8%
NSE 500 was up 3.7%

The Asset Allocation India Multi Asset Allocation Portfolio (IMAAP)  was up 2.7% (this, quite frankly, is remarkable, given the IMAAP's very low volatility Profile)

And CRISIL Moderate Hybrid Index was up 2.2% (this is our Benchmark for the IMAAP)

India PMS Performance: Calendar 2020 Year to Date

The IS50 is up 28.5%

Vs

NIFTY 50 that is down 6.4%

NIFTY 500 that is down 5.1%

The IMAAP is up 15.3%

Vs

CRISIL Moderate Hybrid Index that's  up 5.0%

Once again we have done even better on a volatility adjusted basis!

The annualized volatility for IS 50 was 20.9% as against 34.6%  for the NSE 500 and nearly 37% for the Nifty. The volatility for the IMAAP was a mere 8.8% against 30% for the CRISIL Moderate Hybrid Index.

Returns÷Stress

You see, it does come down to the basics: what are the returns divided by stress ( volatility=stress).

Anybody can make money  buying a few stocks and then, riding their luck.

That's great cocktail party talk ( or let's say,  Zoom cocktail party talk).

But that's not Investing.

The key lies in crafting a global portfolio that, under even the most trying circumstances, achieves the normally unachievable: deliver pretty acceptable returns with more than acceptable peace-of-mind.

That's really what we keep refining every single day.

Global Performance Analysis

The Weak Dollar Trade continues

In August, we had massive winners like Overstock, Apple, Square, China, Japan, Silver, etc.

But The Key also lay in our April- May identification of the weak Dollar Trade.

That Trade led to a lot of things getting clearer as this year has progressed.

At the time of writing this note, the Euro is nudging 1.20.

We saw this coming and built positions in European indices.

We have a reasonable, 15-16% exposure to Chinese stocks.

Are we worried?


Of course. We are good old-fashioned worry-warts.

But...

We also bought a natural hedge, in the shape of the Hong Kong Stock Exchange.

You guys probably know that we are partial to the stock exchange business. We own quite a few across the world.

But the HKEX is also a natural hedge against any further US-China tensions: Chinese companies are and will continue flocking to this Exchange.

Imagine what that does to this stock's fortunes.

Gold, Silver, Oil: The Trend is on The Mend

All these positions continue unchanged and will continue till the time we detect any end to this Trend.

And do finally remember:

These results were delivered with a very diversified portfolio, with around 40-50+ positions, across the world.

India Performance Analysis


Our India numbers were... well... bloody good! (Sorry, this is a repeat from the July letter).

On a wide, wide basket of stocks. (Kind of a repeat of the July letter).

None of this "small list of high conviction" bs, for us. (Again, this is a straight lift from our July letter)

August delivered us very good winners in the form of Essel Propack, Alkyl Amines, Aarti Drugs, Chemicals, Metal Producers etc
We played the Payments Trade in India via SBI Cards.
And this is because we own several payment companies globally.

Now you begin to see how our combined Global and Indian footprint keeps helping every single one of our investors: they mesh like Yin and Yang. Or whatever meshes this well.

The Trade That Changed

Back in May and June, when the whole world (in India, that is) was talking about sticking to "safety" (in the shape of large banks, FMCG, consumer plays, etcetera), our models sensed that the big, big money was going to be made in the Mid Cap space. 

We are nothing if not Hare-ish.

We cut our positions in Hindustan Lever, Asian Paints, etc.

We built positions in the next line up of really good names in the mid cap space.

And they worked out quite satisfactorily.

We understand that you are itching to know where we think the market is going.

Truth be told: "It will be volatile" 😉.

Sorry. Just feeling a bit kiddish.

Frankly, and seriously, we remain optimistic about the stocks we own.

And that's what matters, doesn't it?

And of course the proof of the pudding is in the eating: our India PMS is far, far ahead of the competition. 

Take a look at the comparative Performance (till July, 2020, which we will update once we have August numbers for everybody else)

And our Human+ Machine delivers these Returns with the lowest possible risk.

We do not run "High conviction" risk.

We do not run "Storification" risk.

We do not run "High concentration" risk.

And yet we deliver.

Or maybe, that's why we deliver.

That is the beauty of our proprietary Human+Machine investment model.
 

For those who aren't invested with us, but want in, just drop us a line on https://bit.ly/2V0RxAx and we will get in touch quicker than a Bumrah yorker

By the way, you can also WhatsApp us on +91 99206 71949 

Chat soon!

From Your Friends at First Global

Trusted Financial Advisors to some of the world's largest Funds, Institutions & Family Offices, for 30 years

https://firstglobalsec.com

 

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"I handed over my cheque in March, but they never invested for 3-4 weeks.”
The Investing Journey of a Senior Fortune 500 Executive: A Fascinating Read

We got this recently from a client of ours, who is a senior executive in a Fortune 500 company and is based in Stuttgart, Germany.

His investment journey may appear familiar to you.

(Do read till the end, because something is interesting there!) 

One of chasing "multi-baggers," dashed hopes from Mutual Funds and bad advice from so-called "Investment Experts."

Here are glimpses of what he writes:

"I then handed over my cheque in March.

To my surprise, they never invested for 3-4 weeks, and it is only in hindsight I understood that they already read the market situation and the consequences that Corona will bring to global markets. 

This meant I never made any losses when the market crashed in March and they went 100 fully invested from 1st April.

Since then, I can only see my portfolio only in green!"

"First Global management took the onus and explained to me the importance of diversification across assets and markets – be it equity, gold, gilt and international stocks…"

"I now wonder how uneducated I was to ignore other asset classes like bonds, golds, commodities ETF…."

"I am impressed with the risk management. With the right approach, they know when to enter but also when to exist emotionlessly."

"Most important is that they do the asset allocation across geographies and asset class."

Here's the unedited story straight from his mouth!

Dear Friends,

Guten Tag from Germany! I am a senior executive working for a Fortune 500 company! 

I would like to share my experiences and my wealth creation journey in short. I do this with the intention that others can benefit and if possible, avoid my mistakes and failures and create wealth for themselves, family and for society (eventually).

Phase 1: 

Stock markets have always excited me since I started to work since 2004. I wanted to emulate my grandfather, who was fortunate and smart enough to have invested in IPO of HDFC Bank, RIL, HUL etc. and generated wealth for the larger family! 

Of course, he was a CA, and he knew what he was doing! On the other hand, I studied engineering, and what I learned was that in order to make wealth, I need to hold on stocks for ages, and the compounding machine would work and create magic. I just chose this aspect from my grandfather and ignored other vital factors. 

Now the question is, what did I make after 15 years of investments and holding stocks forever? Unfortunately, the stocks I picked and held were wealth destroyers – to name a few GMR Infra, DLF, Jain Irrigation, Amtek Auto, Bhushan Steel, Prakash Ind, Satyam ... the list is endless. 

I was indeed able to hold stocks but definitely, I failed to choose the right ones and destroyed my capital, which is sin number 1 to survive in market. (I read newspapers, websites and even took recommendation from few analyst by paying a fee but nothing worked)

Phase 2:

 I then started to invest in the mutual fund via SIP based on the recommendation from Financial Advisor, accepting the fact that I will never be able to pick a multi-bagger, and the desire was now only to make 10-12% per year. 

I accepted the portfolio construct, which was fully equity biased and posted COVID the portfolio sunk in line with the market. I just accepted it as my fate or bad luck. 

It was now impossible for me to speak about this with my wife and father!! It looked like I was never made for the stock market, and it indeed was gambling ‘reminded me of the sour grapes and fox story’..

Phase 3: 

Call it luck or destiny, I had viewed some videos of Mr. Shankar Sharma and Mrs. Devina Mehra, and I can only say that what they spoke made 100% sense and they came across very authentic people and institution. 

I decided to reach out to them via LinkedIn, and the process worked seamlessly and quickly. Mrs. Mehra herself clarified many of my questions, senior people from India got in touch to help me onboard and further handhold, including clarification of taxation issues. Wow!

I then handed over my cheque in March.

To my surprise, they never invested for 3-4 weeks, and it is only in hindsight. I understood that they already read the market situation and the consequences that Corona will bring to global markets. 

This meant I never made any losses when the market crashed in March and they went 100 fully invested from 1st April. 

Since then, I can only see my portfolio only in green! I am not sure what I would have done if the portfolio tanked. 

When I was wondering what and how I need to invest, the First Global management took the onus. It explained to me the importance of diversification across assets and markets – be it equity, gold, gilt and international stocks… They baked the perfect Pizza, which my Financial Advisor failed for Mutual Fund investments.

Phew, I would have never have been able to do this in my lifetime! I now only have to see my money grow for my retirement and kids’ education. 

Markets up and down and individual stock movements no longer bother me ….not only that, I wonder how uneducated I was to ignore other asset classes like bonds, golds, commodities ETF….

Summary my conviction!

Truly, First Global is ‘Hare-ish’.  What I like and what makes them stand out

They know what to invest and when to invest! I have seen them exiting and buying stocks without so-called glorifying companies. 

I am impressed with the risk management. With the right approach, they know when to enter but also when to exist emotionlessly with right stop losses. E.g., how they sold out of consumers when herd moved to buy them.

Most important is that they do the asset allocation across geographies and asset class, and this is something I learned, and I am convinced is critical for sustained wealth creation.

We all know data is the new oil and have seen how the fortune of Reliance has changed. I can only say that again, First Global is probably a few of those who make unbiased decisions using their man-women and machine model. Data keeps us sane!

Finally, the whole team consists of gems of individuals who have worked with the company for more than a decade. I spoke to a few of them and asked how long they worked and have they made good living etc. Employees said they were treated well, and this is very important for me as investors that culture breeds the right attitude.

It is important to take care of employees as they take care of our wealth!

From the desk of Shankar Sharma and Devina Mehra 

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link, and we will be right by your side, super quick!

By the way, you can also WhatsApp us on +91 99206 71949 

Chat soon!

From Your Friends at First Global

Trusted Financial Advisors to some of the world's largest Funds, Institutions & Family Offices, for 30 years

https://firstglobalsec.com

 

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Bond investment decisions are supposed to be made on a Investment-grade versus Non-investment/ High yield bond binary. Right?

Not quite!

We explain why.

As we delved deeper into this and did more granular analysis, we discovered that all rating categories within High Yield bonds are not created equal.

This is what we found: Higher-quality high-yield bonds are likely better bets for long-term investors than those that are rated lower or even ETFs that track the broad high-yield market.

In fact, in risk-adjusted terms, the highest rated High-yield bonds (Ba or BB rated) provided better returns than both the investment grade bonds as well as the lower rated junk bonds.

Let's now dive deep into this! 

It's easy to get into trouble in the junk-bond market, where credit quality and liquidity can deteriorate quickly.

 But the interesting finding is that higher-quality high-yield bonds are likely better bets for long-term investors than exchange-traded funds that track the broad high-yield market, and not just because they carry less risk. These bonds are more likely to be undervalued than their lower-rated counterparts. 

This is due to mispricing that can arise from two inefficiencies in this market: yield-chasing and forced selling. Here's a closer look at why these inefficiencies exist and how to profit from them.

 

Credit Risk Doesn't Always Pay

Over the long term, there should be a positive relationship between credit risk and returns. Investors expect to be compensated for bearing credit risk. Otherwise, no one would take it. Understanding this, lower-rated bond issuers tend to offer higher yields to attract investors.

As shown in Exhibit 1, there was a positive relationship between credit risk and returns from the highest-rated corporate bonds (AAA) through the highest-quality level of junk bond (Ba), from July 1983 through January 2020. Each step down the credit rating ladder came with a comparable or slightly better return. This is the relationship between risk and reward that would normally be expected

However, within the confines of the junk-bond market, this relationship gets turned topsy-turvy. Here, returns declined with each step down the credit rating ladder. The underperformance of the lowest-rated debt is persistent, as shown in Exhibit 2.

The Sharpe Ratio (i.e risk adjusted returns) for Baa and Ba rated bonds is significantly higher than that for both investment-grade bonds and lower rated junk bonds.

 

This is hard to reconcile with classic financial theory, which assumes risk and expected returns should always move together.  Next, instead of just looking at point-in-time numbers, we also considered the total return and reward/risk ratio for the above mentioned bond indices on a 5-year rolling basis (see charts below) to generate a more accurate assessment.

Source: Bloomberg, author's calculations. Data as of 13th July, 2020.

From Figure 1, it can observed that on a 5-year rolling total return basis, the highest quality junk bonds i.e. BB/Ba rated bonds (red) have outperformed all other lower rated junk bond categories except during post-crisis rebounds when the beaten down categories like CCCs or Caa rated bonds have provided a higher annualized total return. 

  Our analysis shows that BB or Ba rated bonds have historically outperformed the broader US high yield market almost 70% of the time on the 5-year rolling total return metric!   However, rolling returns display only one side of the coin. A rational investor would ideally look at the reward (i.e. return) relative to risk (i.e. volatility).  Figure 2 highlights the fact that BB or Ba rated non-investment grade bonds (red) have consistently provided the highest reward/risk ratio on a 5-year rolling basis compared to all other lower rated junk bonds and even higher than BBB rated investment grade bonds!

Our analysis shows that BB or Ba rated bonds have historically outperformed the broader US high yield market 96% of the time on the 5-year rolling reward/risk ratio metric!
 

This surprising relationship isn't the result of inaccurate credit ratings. This is borne out by the fact that lower-rated bonds had progressively higher default rates and credit losses than higher-rated bonds (1).

It's possible that investors understood the lowest-rated bonds' credit risk and thought they were getting sufficient compensation, but they just had a long string of back luck where realized credit losses exceeded their expectations. However, aggressive yield-chasing is the more likely culprit.

Lower-rated bonds tend to offer higher yields than those with higher ratings. This may be because they are trading at a deep discount to par value, offer a high coupon rate, or some combination of the two. 

This can make them attractive to income-oriented investors, who prioritize current income over capital gains (and therefore the possibility of capital losses), sometimes to the detriment of total returns.

Even professional money managers aren't immune to overpaying for bonds with shaky fundamentals. 

Lower-quality bonds theoretically offer greater upside potential than their higher-quality counterparts, which could make them appealing to active managers who are trying to beat their benchmarks. However, their collective bets on those securities could push their prices above fair value, leading to disappointing long-term performance (2). Managers may also be overconfident in their ability to identify low-quality issuers with improving fundamentals and discount the risks.

 

A Sweet Spot
While Ba rated corporate bonds aren't enticing enough for many high-yield bond investors, they are deemed too risky for many investment-grade investors. This has not only allowed them to deliver not just higher returns than all other rated corporate bonds, but also better risk-adjusted performance.

It's not realistic to expect Ba bonds to post better returns than the broad high-yield bond market indefinitely. As more investors become aware of the meager compensation the lowest-rated junk bonds have historically offered, they are likely to tilt away from those bonds, which should help create a more rational relationship between risk and return. 

However, as long as many continue to prioritize yield or upside potential over risk-adjusted performance, Ba bonds will likely continue to offer better risk-adjusted performance than the rest of the high-yield bond market.

By the way, you can also WhatsApp us on +91 99206 71949 

Chat soon!

From Your Friends at First Global

Trusted Financial Advisors to some of the world's largest Funds, Institutions & Family Offices, for 30 years

https://firstglobalsec.com

 

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Modesty is a virtue.

Till one day it is not.

And quite frankly, if we were to be falsely modest about our July performance, as well as for our Year to Date Performance, globally, across all products, we would be being extremely unfair to our boys, girls and the computers, that turned in fairly eye-popping stuff this July.

And this year.

Our Team of Humans+ Machines really put up a show. You will see, in a moment

Global Funds Performance: July'20

The Global Freedom Fund SPC - Global Tactical Strategies SP (GFF-GTS) was up 7.9%. 

The GMAAP was up 10.2%

Vs MSCI World that was up only 5.1%

And the S&P500 that was up 5.5%. 

Global Funds Performance: Calendar 2020 Year to Date 

GFF-GTS (US Dollar terms): +21.2%

GMAAP (US Dollar terms): +22.2%

Vs

MSCI World: -3.2%

S&P500: +1.2%

India PMS Performance: July '20 

The Pure Equity India Super 50 (IS50) was up 9.3%

The Asset Allocation India Multi Asset Allocation Portfolio (IMAAP) was up 5.1% (this, quite frankly, is remarkable, given the IMAAP's very low volatility Profile)

While the Nifty was up 7.5%

And NSE 500 was up 6.6%

India PMS Performance: Calendar 2020 Year to Date 

The IS50 is up 19.0%

The IMAAP is up 12.3%

Vs 

NIFTY 50 that is down 9.0% 

NIFTY 500 that is down 8.5%

That means that our equity portfolios are a full 30% ahead of the indexes for the year!

Global Performance Analysis

In the past 3 months, our global products have delivered ~35%. 

This is way ahead of practically any broad index in the world.

So what exactly went on that delivered these numbers?

In one line, it is our Human+ Machine Model.

Some of you may recall that in the month of April, we put on the oil trade. 

That trade has done very nicely since, and continues to do very well.

We have had a reasonable position in gold right through this year.

And we added copper and silver.

Of course, our commodities weighting remains ~ 8%, but all of these well chosen commodities have done extremely well in the past few weeks and months.

The US Dollar Weakness Trade

Our  "Eagle Eye" system  detected a weakening of the US dollar right from April itself, because it scours the world, looking for patterns, correlations, causalities (sometimes, even casualties) in various securities, markets, asset classes.

The US dollar weakness trade kept becoming clearer and clearer as our systems kept picking many, many signals from the entire world, adding to our Weight of Evidence (WOE) Model.

Which is exactly why we increased our positions in commodities (the inverse relationship between the USD and commodity prices was discovered by us, two decades back and was covered on the front page of The Wall Street Journal back then).

And in a cross-section of Emerging Markets.

All these tactical shifts have paid off handsomely last month and this entire year.

You see, that's the entire point of managing money: anybody can go and buy a narrow list of stocks/ single market, and look good for a limited period of time. BUT that also sets you up for a big fall/ underperformance sometime in the future.

The entire trick is to carefully construct a Portfolio of absolutely the best risk: return securities and positions from across the world and across asset classes. That's what our RARO Model does.

In July, we had massive winners like Overstock, Etsy, Square, China, Brazil, Silver, etc.

Emerging Markets delivered excellently for us in July ( again, this came out of the" Weak US Dollar" trade).

Overall, we continue to like every single position that we have right now.

And as everybody knows, the maximum attachment we have to anything, is a like" and that too for "only as long as the data supports it".

Never "love".

Our massive dashboard called the "Eagle Eye" keeps very close surveillance (all wholly legal. Probably), on the goings-on in this world, and keeps feeding the data back to our computers. 

It's a pretty interesting world, we can tell you with great confidence.

And most important: these results were delivered with a very diversified (and hence low volatility, low risk) portfolio, with around 40+ positions, across the world. 

India Performance Analysis

Our India numbers were... well... bloody good!

Again, on a wide basket of stocks.

None of this small, "concentrated" list of “high conviction" bs, for us. 

July delivered us very good winners in the form of Essel Propack, Reliance Industries, IT services, Diagnostic chains, Payment play, Metal producers etc.

Our pharma bets were on fire.

Readers will know that we lagged the market in June and they will know why that happened: because we did not have the beaten down, riskier end of the market: the banks, NBFCs, real estate.

Those had run up in the month of June.

And in our June letter, this is what we had written: 

Quote

It is not that we did not anticipate a rally in beaten down, high beta, riskier plays. 

It was pretty clear and evident from the first week of May when our systems detected a broadening of the market rally globally.

Our systems also detected a rally in small cap stocks across the world.

The question in such situations is: should you do a large scale change in your portfolio to chase temporary Momentum in highly risky stocks in the market?

Logic and common sense will tell you: by all means do a bit.

But do not go the whole hog.

Because when the tide turns, these high beta names will come back and bite you in some of the most hurtful places in your body. 

So we played the rally in India modestly. 

And we are absolutely fine with lagging a market rally in which low quality, debt-laden, high beta names, rally.

These situations happen routinely and normally in markets and frankly we have seen dozens of them in our three decades of investing.

We just ride them out.

Unquote

It is precisely this discipline that helped us deliver these numbers in July.

And of course the proof of the pudding is in the eating: our India PMS is far, far ahead of the competition. 

YTD, we are UP 19% even as the Indian market is DOWN nearly 9%.

There is absolutely nobody else who is within even catching distance of us 

And our Human+ Machine delivers these Returns with the lowest possible risk.

We do not run "High Conviction" risk.

We do not run "Storification" risk.

We do not run "High Concentration" risk.

And yet we deliver. 

Or maybe, that's why we deliver.

That is the beauty of our proprietary Human+Machine investment model.

For those who aren't invested with us, but want in, just drop us a line via this link and we will get in touch quicker than a Bumrah Yorker.

By the way, you can also WhatsApp us on +91 99206 71949 

Chat soon!

From Your Friends at First Global

Trusted Financial Advisors to some of the world's largest Funds, Institutions & Family Offices, for 30 years

https://firstglobalsec.com

 

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We were having a chat with a Family Office Head the other day, who has large sums invested with us, in India and across the world.

At the end of half an hour, spent discussing the entire Investment landscape, he said: "It's clear that you own some amazing companies in your portfolios: Alkyl Amines, Navin Fluorine, Reliance, Muthoot, Thermo Fisher, Shopify, Logitech, LSE, JD, etcetera. How come I have not heard you speak lyrically, poetically,  about even one of them? How come you have been very clinical, neutral, almost detached about these companies, these countries, rather than give me  "stories"  like: how great  these  managements are;  how the businesses have strong moats and will remain great almost forever etc - That's the way every other fund manager I know speaks about their holdings".

Pretty interesting observation, we thought.

Indeed, why are we so clinical about Investing?

The real question you should ask is why do human beings tend to "Storify" their holdings or their views in general?

"Human beings aren't rational animals; we're rationalizing animals who want to appear reasonable to ourselves", said the famous social scientist, Elliot Aronson, author of 'The Social Animal'.

As human beings and in particular, social beings, we use stories to make sense of the world.

Remember a famous election?

That was little or no hard evidence or articulated strategy about how a country's problems of declining capital Investments would be solved. 

It was simply a story, well told, well sold, that captured the imagination. 

Data, facts and logic didn't matter, because most humans are simply incapable of acting on these. 

The world is about tons of data which at times can take random directions. The world is about future probabilities, not certainties...yet the human mind wants a clear cause-effect-future path.

In other words, the world wants a Story.

This affinity for stories shows up not just in our day to day lives and not just among lay people but also professional investment managers.

The interesting thing is that with greater amounts of data being available, the need to "Storify" has increased even more.

This is because human beings are now deluged with tons of just data  which is essentially unmanageable for them. And which they are completely incapable of analysing in a coherent, unbiased, neutral manner.

It is at this point that the human mind starts taking refuge in building lazy, under-analysed over-simplified opinions.

When a fund manager has long and perfect sounding arguments to justify why this company will go on doing well forever and why this particular management has a magic touch, it is almost always lazy opinions at work, with no room for any other interpretation of the future.

So why is a strategy based on 'storification' and 'high conviction' stocks, hugely risky for the investor?  

Because when

  • A fund manager gives his/ her holdings a rose-tinted future, in which the only thing that is visible is a straight, long road of eternal growth, something that is known as consistent compounding

  • Ignores discordant, inconvenient elements (industry cycle, favorable policy, plain luck)

  • Speaks and writes publicly of their high conviction on there companies

  • When they are that deeply committed to these carefully edited, well-massaged stories,

Then

  • They cannot detach themselves from their attachment, even when the road ahead becomes rocky, ie, when facts change.

Love in investing is dangerous. 

This is exactly what happened with Warren Buffett and his Coca-Cola Holding. He should have sold this stock several years before he actually did. 

The data is brutal.

Coke has been a rabid underperformer since 1993. 

In fact, Buffett should have bought Pepsi Instead of Coke.

From Jan, 1992 to July, 2020

 

Total Return

CAGR

Coke

798%

7.99%

Pepsi

2966%

12.74%

S&P500

1273%

9.61%

Why couldn't he pull the trigger?

Because he had storified this stock and its management massively and publicly. 

In India, you would have heard the talk that you cannot go wrong buying 'blue chips' or consumer stocks with strong brands, moats & cash flows that are predictable for decades?

This Story is seductive. 

And untrue.

Ever heard of Gillette India, ITC and Colgate? 

They used to be part of this list of storied, branded consumer companies.

Till their stories went sour.

And very quietly, they went out of the list of these so-called Compounders.

This is what is called building a Story around the Survivors, or Survivorship Bias.

As Bill Gates said when Steve Jobs died, "Steve and I will always get more credit than we deserve, because otherwise the story gets too complicated.”

Which brings us to the next point. 

Should you dismiss a story only when it is based on no facts at all? Actually the really dangerous stories are the ones that are true in one tiny part, where there is a small bit of truth but that is used to build a whole edifice which is floating in ether - exemplifying oversimplified, lazy opinions.

As Morgan Housel writes "...something that’s true but incomplete might be more dangerous than something that’s wrong, because a little truth is fuel for a lot of overconfidence."
The real world, particularly, in markets, things ARE complicated.

But the human mind cannot handle very complicated narratives.

In investing there are always known unknowns. Fashion changes, health trends (eg) against sugary drinks, new product disruptions, policy. The list is endless.

Things are rarely linear in real life for a large basket of companies. But they will always appear to be linear for company selected with complete hindsight or a selection of the survivors.

And based on these survivors, a vision of the future is painted in which absolutely everything is perfect, and as clear as a covid-period sky.

Reality is that, beyond a point nobody knows anything about anything.

Neither company management, nor fund managers, have any clue about what happens a few months down, let alone years.

All this means that the key to being a good investor is being alert and flexible, rather than being married to a story you have built up in your mind.

And falling in love with it.

One of the central pillars to being a successful investor is to be extremely flexible in one's thinking.

This has been one of our guiding principles of investment at First Global.

We bought Amazon in 2001. And we continue to hold a portion of it even now.

We bought Shopify in 2016. It's up 40x since.

But never ever in that 40x-300x journey, have we ever storifed, glorified Jeff Bezos or Tobias Lutke.

In our framework, they are mere mortals, enjoying a great run.

They can and will stumble. Or business circumstances will change. 

And we won't have Amazon or Shopify then.

That's the First Global Investment Method.

We follow the data. Never the Mortal Human.

And that is why we never talked any stories with that gentleman, the other day.

From the desk of 

Devina Mehra & Shankar Sharma

Trusted Financial Advisors to some of the world's largest Funds, Institutions & Family Offices, for 30 years

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side, super quick!

Or WhatsApp us on +91 99206 71949

Chat soon!

https://firstglobalsec.com

 

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