Investments in a Bearish Market

A few years back when I started investing in stocks the only knowledge that I relied upon was my gut feeling. If I have heard the name of the company and if it was something good that the company achieved I invested a small amount in the stocks of that company.

This was the time when the market crashed , Lehman Brothers collapsed and I saw my portfolio in red. But I still felt that the companies that I invested in was good and I bought a few more shares hoping that if it goes up my losses will average out. In investment term we can say I was following a contrary strategy.

Deep in 2008 and early 2009 I continued to invest. By mid 2009 I ran out of money and sat down hoping that the markets will rise.

The markets did rise and soon I was seeing my portfolio was turning Green. It was just a matter of time I saw super profits on all my stocks. I started selling my stocks and I was so happy that I have more than doubled my money in capital gains. But then something happened and I felt sad. The markets went up further in late 2010 and early 2011. I could have potentially become a millionaire if I had just held on to my shares.

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Well the above is a personal experience and not a story. Nearly 80% of the individual investors have little or no clue how to invest, when to invest and where to invest. That is why they invest in portfolios like Mutual Funds which diversify the risk. But many people end up buying similar kinds of MFs thinking they are diversifying but in reality the MFs may not have a very different portfolio.

Now lets advance from the stories of the past and look into the future. If you have say some money to invest which is the best investment and how much cash to have?

1>
a> What type of an investor are you ?
20 days - An investor who has a lot of time to study investments and study day to day closing prices.
50 days - well at least keeps track of market and reads the newspapers or the internet for a few hours once a week
100 days - A 100 day investor really can tell only if it is bear or bull and has very little idea of when to enter or exit. Maybe checks his demat account once a month and reads the newspaper for the finance column if it appears in the headlines
200 days - Well a 200 day investor has no idea of finance and has only a little bit of money to invest.
b> What is your Risk appetite . You can use Age as a surrogate.
Age 20-30 -> Equity exposure 80 %
Age 30-40 -> Equity exposure 60%
Age 40-50 -> Equity exposure 40%
Age 50-60 -> Equity exposure 20%


2> Once you identify what kind of an investor you are , keep aside as much cash as you need from your savings for that many days.
For example a 100 day investor should keep aside 100 days requirement of cash ( his house rents, approximate bills, Bank EMIs etc)

3> Now lets assume you have got 100,000 to invest. Well for starters lets invest in something that is really safe and sound.
Find your Risk Appetite say you are aged 30-40 years invest 40% in safe bets
i> Public Provident Funds
ii> Infrastructure bonds
ii> rest in Gold , Silver and other precious metals
etc. I won't say land/house as that has got several other associated dependencies.

4> Now lets come to the interesting part - equities. Well there is a decision to be made. How much to invest in MFs and how much to invest in pure stocks. Well that again depends on what type of an investor you are.
A 100 day or 200 day investor would do best to choose Mutual Funds. The best way to invest would be in SIPs
Whereas a careful investor like a 20day or 50 day investor can try to balance between stocks and MFs.

5> Now the all important question. What MFs to invest in ? Forget all the names and go to a good website and check which are the top Mutual Funds now. Decide on a minimum budget per MF and choose 4 to 5 MFs . You will see that equity diversified MFs give the best returns anytime , so forget the rest and invest in these. There is no point in looking at debt or other types of MFs. Debts are safe and you can safely buy National Saving Certificates( if those are still around) without going into MFs. Avoid ULIPs altogether.

Invest in monthly SIPs , not because the returns are calculated as higher in some websites with low confidence levels , but because SIPs will allow you to play with limited amount of money for longer period of time.
Make sure you check these things
- The portfolio of companies ( otherwise you may end up investing in identical portfolios just different names)
- Some basic check on the financial institutions who invested.

6> Now lets try to find out what are the best stocks to buy. There can be many methods to do a tech analysis , but do a gut feel analysis .
- Is the company a robust company or not ,say increasing profits every year. Is the business a growing industry or a consolidating one ?
- Is the company a good company or not , say clear of regulatory or ethical issues
- How much debt the company has compared to equity

Just with a few good names that has the potential to survive a recession buy stocks


7> How to reduce risk by diversification
- Try to buy stocks from a few different industries that are stable in nature. There is no point in trying to buy stocks from every industry just to diversify. The correlation advantages stops beyond a point.


8> Well so far so good but one important question is when to sell
First find out about the Nifty 50 . Then see if the stock is outperforming the Nifty or at least performing with it when the market revives. If the stock lags behind and drops even as Nifty rises that means it was a bad investment , sell it just to cover losses. For all other stocks that are with the Nifty just keep a weekly watch.
As soon as Nifty Top 50 crosses or overshoots there will be a correction and it will come down.
Sell 25% of the stocks
If Nifty continues to come down sell 50% , otherwise hold.
If Nifty comes down further threatening to wipe out profits sell the remaining 25%.
If however Nifty recovers sell within 6 months or 1 year to invest on other growing stocks.


Now, all that seems so simple may not really be so simple. But once you are on profit in a bearish market the next step will be to do a Tech Analysis . That will be fodder for another Post.

Strategic Principle : Key to turning Strategy to Action

I was reading a wonderful HBR article by Orit Gadiesh and James Gilbert on Transforming Corner Office Strategy into Frontline Action. The authors start off by explaining the difference between a mission statement and the strategic principle.
The Key differences are

• A mission statement informs about a company culture whereas a strategic principle guides a company's strategy


• Mission statement is aspirational in nature but a strategic principle is action oriented


• The mission statement is to inspire frontline workers. The strategic principle is to enable them to act quickly by helping them to make consistent choices.

We know that mission statements are important. Strategic principles are also equally important , more so because of the high levels of uncertainty in any industry today. Some of the reasons of this uncertainty are

- decentralization

- unforseen rapid growth

- technological changes by innovation including disruptive ones

- turmoil in the institutions with high churn rates

What is Strategic Principle then ?

Well it is a short simple statement that is easy to remember and understand , which guides a company's allocation of scare resources to achieve sustainable competitive advantage. A good strategic principle should be able to

• Force trade offs between competing resources


• Can be used to test the soundness of a particular strategic action


• Set boundaries within which employees are free to experiment

The authors have given some excellent examples like GE, Walmart etc. I thought it would be good to include some examples of taglines. Taglines may be different from strategic principles but they reflect the company strategy to the external world. Tagline sets the expectations while strategic principle enables the frontline to meet the expectations. I think there should be a sync between the two.

Accenture - High performance. Delivered.

Infosys - Powered by intellect , driven by values

Wipro - Applying thought

Phillips - Sense and Simplicity

Tata Motors - More cars per car

CitiBank - The Citi never sleeps

Bank of India - Relationship beyond Banking

While all these taglines are pretty nice they do not necessarily qualify the criteria set by the authors. A proper survey of frontline employees and the past performance of the companies can throw light on this.

Apart from this I also think there is a subtle difference in the way customers perceive the company. A fundamental difference is about the type of customers B2B or B2C. B2B customers are much more aware and typically look beyond taglines into the actual performance of the company whether it can live up to its expectations. Whereas in B2C customers might be more attracted but they may not really be able to correlate the actions of the frontline with the tagline.

The Art of Negotiation (Thomas Killman instrument)

There are two key factors to consider and weigh up when developing your negotiation strategy.

Level of Assertiveness - that is, how assertive we are going to be in negotiating the outcome; this is the level to which we are going to be task driven in achieving what we will later refer to as “our opening position” or our optimal negotiated outcome; and secondly

Level of cooperativeness - that is, how relationship focused we are in negotiating the outcome – this is the level to which we are going to focus on our, or possibly company’s relationship with person with whom we are negotiating.

Creating a High Performance Organization : Grameen Bank - A book Review

The book talks about the ideas of economics and how it has contributed greatly to society, but how it fails as a social science. The theories talk about the wealth of nations and draws up theories of credit policies.

Since credit creates economic power and hence social power, the institution that is responsible for deciding who should and should not get credit , when one should get credit, who should get how much and on what terms, become extremely important from the social point of view”. According to the author credit is a great socio-economic weapon. If this realization was there, credit would have been a human right.

Then the author talks about the concept of self employment, something that is missing in the core concepts of economics. Human Beings are not born to serve under someone else. The economic framework designed on employment thus was quite faulty and favored a class of people. The social aspect brings in the family and the interrelationships, especially in third world countries.

Name of Book -> Banker to the Poor- The Story of Grameen Bank

Author -> Muhammad Yunus with Alan Jolis

Publisher -> Penguin Books

Review -> Click Here to Download

What is Core Competency ?

'Core Competency' is one of the most misused words in the Information Technology domain and maybe in other domains too. This short note attempts to explain what it is actually. For a more detailed note one must read the HBR article by C K Prahlad and Gary Hamel ' The core competence of the corporation'.

The main objective of an organization is to develop some competitive advantages. This is because competitive advantages actually leads to better sales and higher profits. But to develop a competitive advantage managers must first understand the industry in which the company is operating. Say for example if the company is a FMCG (Fast moving consumer goods company) then managers can drill down to some factors that are essential to survive and grow in that industry. For example for FMCG industry in India some of the factors are
- Strong distribution or channels
- An efficient Sales force
- Economies of scale
- Quality of product
- Media advertising etc . There can be many more. But which one of these are absolutely critical and essential for success ? These are called Key Success Factors . The Key Success Factors , if handled properly provide competitive advantage to the firm. But that is not enough. Some of these advantages are easy to duplicate or substitute. If a company is able to communicate to the customer about its superiority then customers are actually able to see the value position.

For example a company developed a soap that is of high quality( Quality being a Key success factor in that industry). But other companies can copy quality. Where is the advantage then? Well , this company is able to communicate to its customers about the excellent quality and consumers actually perceive this soap to be of better. This perception is difficult to copy and this is called Sustainable Competitive Advantage. There can be different ways to achieve Sustainable competitive advantage but the value must be communicated to customer in different ways.
- Better Product
- Assets of the Company
- Capabilities of the Company
- The market itself can create barriers
- Synergy etc.

Hold on ! What is Synergy ?
Well different firms and different business units of a firm collaborate together to make a product or provide a service. We can say Synergy is achieved when the ultimate product or the outcome of the service is better than the sum of the individual parts.
For example consider Airtel and MChek. If the alliance has strength then Airtel will be able to offer its huge customer base a very useful mobile payment service. On the other hand MChek , a new company will be able to access potential a few million customers of Airtel. This is synergy. Provided separately users could have still gone ahead and installed mchek. But penetration would be more difficult that way.
Similarly Synergy can be obtained within a firm for different business units.

So we now see the link between Key Success Factors. How Key Success factors if implemented and communicated properly to customers can provide the company with Sustainable Competitive Advantages. We can also see that Competitive Advantages can be enhanced by Synergy.

Now lets see what are the assets or capabilities that lead to synergy. As we can guess assets are easier to share if there is a feasible way to share it. Capabilities are more difficult to share. For example the same distribution warehouses can be used to distribute product items. Similarly the salesman's selling expertise can be used to sell two different products if he has the expertise on both. So we can say that the distribution framework of warehouses and the salesman's capabilities are something that provides advantages to both product lines. Hence this is a core asset or a core capability.

This asset and capability that can be shared by multiple units of a firm or different businesses in an alliance is called the core competency.

Prahlad and Hamel suggested a tree structure where the core competency is the root. The branches are the major products or services. The leaves and flowers are the end features or smaller products.

This is why many companies , for example Infosys/Wipro etc major services companies developed a framework or knowledge base of skills that can be used across the domains, verticals, business units, clients etc. While the movement of engineers may be easy the difficult part is to map it to Synergy and finally Sustainable Competitive Advantage.

The top down approach for a mature company would be
- Determine the Key Success factors in the business ( well try to stick to a few important ones - use research methods like factor analysis , conjoint analysis etc to drill down to few factors)
- Find out what are the competitive advantages that have developed or can be developed. Note , Key Success Factor to Competitive Advantage is a many to many mapping. Many factors can lead to single competitive advantage. Similarly one factor can contribute to different types of advantages.
- Determine whether the competitive advantage is sustainable or not ( Be honest in this evaluation. Please note while skills in a particular programming language may be a Key Success factor , it doesn't provide any sustainable competitive advantage. All companies have such programmers. Companies sometimes use patents to show value to customers. Well if patents are collecting dust its not sustainable competitive advantage. The strength of a patent or its level of implementation, reference in other implementations or patents is what give sustainable advantage.)
- Once the factors for sustainable competitive advantage is determined all that is left is to see which internal strengths lead to that advantage. For example a set of different factors like experience , domain knowledge, skills in programming languages etc can emerge. While it is not necessary but companies can actually try to figure out those competencies ( assets and capabilities) that provide synergy. If a company can identify these core competencies at a business unit level for large companies and maybe at company level for smaller ones that will help them to nurture further growth. This time it will be a conscious decision.

For a smaller company, maybe in the inception of its life cycle, just trying to survive it may not make sense to have a top down approach. Rather they can identify core competencies at base level , then at firm level easily with a bottom-up approach.

The last but not the least is the development of core competencies. Well the core is the smallest part and what's outside the core is still important. I feel companies should focus on Key Success Factors which will lead to Competitive advantages and competencies. rather than trying to develop the core develop natural competencies and let the core develop itself. This would be a conscious development and a controlled one, but not a force fit.

Level 5 Leadership : From Good to Great

Level 5 Leadership, from Good to Great is a wonderful book by Jim Collins. It talks about good companies that went on to become great by virtue of their leaders.
It is not the objective to evaluate how good the book does in finding Level 5 Leaders. There are some points that Jim Collins did not give examples of Good Companies with similar results that never reached the greatness , and the leadership was the only difference from the great companies. Studies like this are hardly conclusive , but the spirit of the book is in the theme. One can aspire to be a Level 5 leader , immaterial of whether he's the CEO of an organization or not. Perhaps one day a great organization will be created.
So how is this hierarchy defined ?

Level 1 : Capable individual
At this level people concentrate on skills and good work habits. Values are important and knowledge management is critical for success.
Although all of this may sound very simple but people often forget the values of discipline and diligence and cause harm to the organization.

Level 2 : Team Member
An individual has to be part of a team sooner or later to achieve objectives that cannot be done alone. It is important to be in sync with the team and be an excellent team player. The speed of the team is the best speed of its slowest member.
This also sounds simple but how often do we see business units falter because teams do not share information, cooperate or see the larger gains with respect to their individual objectives. Typical Principal Agent issues hamper the greater goals of the organization.

Level 3 : Manager
At this level a person changes gears and starts managing a team of which he was once a member. The change is not abrupt and most organizations promote people who have already displayed their managerial acumen.
The manager's job is very important and he/she has to guide the team according to the organization objectives. At the same time a manager has to take care of aspirations of the team.
This is a very crucial role and probably the first real scope to exhibit one's real leadership skills. A manager has to know the limits set by the organization objectives, yet has to rise above those to pursue the aspirations of the team.

Level 4 : Leader
Very few managers actually elevate to a leadership position. At this stage the manager becomes a visionary and develops the skills required to motivate and stimulate a unit.
This transformation is not a very obvious one. There are several hierarchical managerial levels and when a person becomes a Vice President or a director or maybe the CEO they like to believe that they have reached Level 4. But the truth is that there is an immense inertia to get objectives and work on objectives like a manager. Well that is important because a Level 4 is encompassing the values of all the previous levels. But beyond that the leader must have the vision to cross the boundaries, redefine the boundaries and motivate others to see the same vision.

Level 5 : Final
The author stresses the point that this is an empirical finding and not an ideological one. But for aspirational persons like me perhaps an ideal position is more interesting. So what is Level 5 ?
A level 5 leader has two great qualities , humility and will. Personal humility lets a person relax and see the point of view of others. Whereas professional will lets a leader stay on course of his vision and objectives, they do not quit easily. The author goes on to explain several scenarios of behavior of a Level 5 leader. One can try to find out by self assessment what will he/she do in the same scenario.

Negotiators Checklist

I was reading a wonderful HBR article by James Sebenius. He talks about the habits of negotiators that often result in a failed negotiation, financial and non financial losses and a lot of frustration.
Generally at the start of a negotiation process negotiators have a few things ready. Out of those the most important thing is the BATNA(Best Alternative To a Negotiated Agreement). Thus it is very important to analyze and deduce the BATNA of the other party. Any negotiation that goes below the BATNA is a no-deal.
Eventually however the process of negotiation can become personal. After all the agreement may be between two companies or governments or organizations but it is humans sitting at the table doing the negotiation.
James Sebenius points out six mistakes that negotiators do
1> Neglecting the other side's problem -> I feel that an important quality that all negotiators should possess is empathy. That will let them understand the other side's problems

2> Let Price Bulldoze Other Interests -> Sebenius calls them "reverse Midas" negotiators. In a strong urge to drive a hard bargain they often fail to notice a potential joint gain. A very important quality at this level is a person's ability of Fairness or Justice. It may seem vague but combined with empathy ability to judge a situation fairly limits the damage of a price based negotiation.

3> Letting Positions Drive out Interests -> A very common situation where the negotiators overlook their interests or issues and take positions based on a common criteria like price. The people at the negotiating table must be flexible and show genuine signs of resolving the issue or meeting the interest.

4> Searching Too Hard to find the Common Ground -> With different people having different interests it is often hard to find common ground. the negotiators must have the ability to engage deeply in dialogue and drill down to the actual interests and concerns. There must be an active effort to find out the exact differences. The next step will be to prioritize the differences.

5> Neglecting BATNA -> This is especially true from the perspective of hard facts. All deals necessarily have some pros and cons and the negotiators should have the the BATNA in front of them to avoid making mistakes. Probably this is the easiest part to prepare before the start of the negotiation process.

6> Failing to correct Skewed vision -> Evaluating the BATNA of the person at the other side of the negotiation table is equally important. Although there may be a certain amount of uncertainty and information asymmetry the negotiators must have the ability to judge.

Thus we see negotiations that are successful and beneficial to both parties are indeed due to the exceptional personal capabilities of the persons at the negotiation table. In short it can be said that effective negotiators should be soft on the people but hard on the target.