October 12, 2009 TOTIS PORCIS - The Whole Hog (When odds in favour Being Greedy like a Pig) Contributor: Abhir Pandit | [email protected] "It is not how likely an event is to happen that since their allocations could be done differently. Great matters, it is how much is made when it happens investors don't stop with finding mispriced securities; that should be the consideration. How frequently they also know how to take maximum advantage of the the profit is irrelevant, it is the magnitude of the opportunities given the respective risk/reward outcome that matters." situations. This mindset is in built in many successful investors and traders the following example show the Nassim Taleb - Fooled By Randomness point. While thinking about position sizing two very good examples of the same investor are known. In this week's article we try to address the difference between frequency and magnitude in investing and In 1963 after the Salad Oil scandal caused American importance of position sizing. Express stock to decline, Buffett allocated 25% of his assets at that time when he realized that the stock was Since investing is supposed to deal with future it is supremely mispriced. inherently a probabilistic exercise dealing with various possible scenarios and diverging views of the future. So In 1988-89 when Warren Buffett was purchasing Coca- thus we must try to increase the exposure to the being Cola shares he allocated 37% of his portfolio at that time right events and minimize exposure to the being wrong to Coca-Cola stock. events. It is now well documented and a well known phenomenon that humans suffer roughly twice as much Though these examples are of an extremely skilled from losses as they receive pleasure from comparable investor while considering the position sizing of an gains. Thus investors due to their recent experience investment an individual should consider his own turn down positive expectation financial propositions. personality, risk profile and psychology in order to profit What investor confuse is that change in wealth is from the mispriced security. not a function of how often you're right but how much money you make when you are Right to how In a extract from Barton Biggs book "HedgeHogging" much you lose when you are Wrong. In an interview there is passage about a character called Tim with Scott Bessent (former Soros Manager) he said in a (rumoured to be Soros Fund manager Nick Roditi). In recent interview, “George has a terrible batting the extract Biggs says "On his beautiful Chippendale average—it's below 50 percent and possibly even desk sits a small plaque, which says Totis below 30 percent—but when he wins it's a grand Porcis—the whole hog. There is a small porcelain slam. He's like Babe Ruth in that respect.” In a value pig, which reads, “It takes Courage to be a Pig.” I strategy the advantage that an investor has is the gap think Stan Druckenmiller, who coined the phrase, between price and value of the business, thus the more gave him the pig. To get really big long-term Mr. Market acts foolishly the more you can take returns, you have to be a pig and ride your advantage of him So when a value investor makes an winners.” investment and if the market price moves below purchase price the right move is to put more money to work assuming that the fundamentals haven't changed Sources thus increasing one's exposure to the particular Articles by Michael Mauboussin of LMCM HedgeHogging by Barton Biggs mispriced security. Inside the House of Money-Top Hedge Fund Traders On Profiting in the Global Markets by Steven Drobny Very often when portfolio managers are asked about the types of securities in their portfolio but very rarely about their position sizing "As to why this security has been given this much allocation?" Position sizing is very important in determining portfolio returns. Two portfolios with same securities will have different results 1 Are Pension Funds the right products for you Are Pension Funds the right products for you? Kavitha Menon | [email protected] When one thinks of retirement savings, pension funds are a natural option to consider. Not only do they ensure disciplined savings during an individuals working life, but also ensure guaranteed income for life or for a defined period as per policy. What pension funds do is invest money received from investors over a defined period – mostly till retirement - into various assets depending on the product. Several Pension products allow allocation to equity too. Thus the pension funds accumulate a corpus at the end of the premium term. This phase is called accumulation phase. After accumulation comes the distribution phase where the pension fund pays the investor an annuity that can be fixed or variable depending on the scheme features. Investor can take 1/3rd of the accumulated amount as a lump sum; the rest is paid as annuity. Should the investor wish to take the full amount in one lump sum , he will need to pay tax at the highest marginal rate on 2/3rd of the accumulated amount .Annuities can be fixed (guaranteed) or variable. An investor in pension funds would generally prefer annuity payments as it involves zero hassles, no administration and fund management hassles. But there are some facts to consider 1. For most non –guaranteed schemes annuity amount will be a function of performance of the scheme. If your fund performs poorly exit options are very limited for an investor, and exit costs are too high. 2. If you are in a guaranteed annuity product it is likely that your pension fund manager has invested most of your money in debt instruments. This means that it is unlikely that your returns will keep pace with inflation. 3. Life is full of uncertainties. Money in a pension scheme is illiquid. A pensioner may have a sudden medical need, or an unanticipated requirement for funds, but he will be unable to use his pension money as it is locked with the Pension Fund. Liquidity and access to funds as and when required, is completely not there .This is true even during the accumulation stage. 4. Pension funds are more expensive than regular mutual funds or direct investments in equities due to their administration, distribution and fund management charges. 5. When funds are in your control you can take advantage of investment opportunities as and when they come. When they are stuck in a pension scheme, you have no say as to where your funds will be invested. For the undisciplined investor and for those who believe that they cannot manage their money, pension funds are a better choice. This is because there is real risk of spending always ones entire savings or making wrong investment decisions and losing capital. For those who have the discipline to follow a financial plan, a plain vanilla sip in a good mutual fund or regular investing in quality value stocks can help build a decent retirement corpus plus leave an inheritance for future generations. 2 9th October 2009 CMP Rs. 2178.0 Result Update HOLD Q2FY10 Infosys reported a slightly subdued second quarter well within the guidance provided. They remain to be cautiously optimistic about their performance going ahead. Result Highlights: For Q2FY10: ?Revenues for the second quarter of FY10 grew by ~3% YoY to Rs. 55,800 Mn, but showed a sequential growth of 2% ?PAT was Rs. 15,400 Mn for the quarter posting a YoY growth of ~7% Guidance: Quarter ending December 2009: ?Revenues in the range of Rs. 54,290 Mn and Rs. 54,760 Mn. ?EPS is expected to be in the range of Rs. 23.35 and Rs. 23.56 For FY10: ?Revenues in the range of Rs. 219,610 Mn and Rs. 220,550 Mn. ?EPS between Rs. 99.00 and 100.00 An admirable thing about Infosys is their ability to sustain margins well within their average range even in times of downturn. Infosys sees a repeat business of almost 99% every year which leaves plenty of room for growth. Also the pricing scenario has shown a slight improvement, probably momentarily, but which can lead to further margin growth. The currency movement earlier also gave some cushion to the margin & at the same time, freeze on employee addition. From the management concall, it was apparent that pricing pressure has reduced from clients & deals in the pipeline have started to move. The company has shown a volume increase of ~2% & has also seen a lot of deals coming in on account of client/vendor consolidation. The company had reported an estimated addition of 18,000 employees by the end of the FY10 (in Q1FY10), which they have increased by 2000, to 20,000 employees. Most of their recruits would be on the lateral side which, according to the management, will keep them ready for the growth in the business that they are expecting. Infosys wants to strengthen their middle management layer which apparently will facilitate more efficient project execution improving their cycle time per project. One significant opportunity still remains for Infosys, as before, with the $2.8 bn in cash, they are looking for acquisition targets on the basis of three criteria: 1) Geographical - Smaller acquisition which would strengthen their footprint in German/French/Japanese (Non- English) markets 2) Service Offering - Some platform based acquisition which will strengthen their business solutions. 3) Vertical - They want to ensure a faster entry into their desired verticals Although, it would be too harsh to say that Infosys might have missed the bus on some very attractive valuations for their target companies, but nevertheless, if the acquisition is a strategic fit, growth can be extracted out of it.