Incorporating Geopolitical Analysis into your Investment Process

Speaker: Matt Gertken, Vice President, Geopolitical Strategy, BCA Research Inc.

Moderator: Ananth Narayan, Associate Professor, Finance, S.P. Jain Institute of Management and Research

Written by: Vivek Rathi, CFA

Matt Gertken spoke in details about geopolitical situation globally. He delved in to history, explaining how move to the right in 1990’s created inequality and the resultant backlash in UK & USA. Then, he went to explain the poll arithmetic and how pundits generally get it wrong but the polls aren’t that bad.

He also explained, why politicians react the way they do, as they are driven by constraints and not by preferences.  According to him, a recession makes it significantly challenging for an incumbent president to win back the mandate. In fact, structural reform may lead to set back for ruling dispensation but will be beneficial for the economy in long run.

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On the future outlook, the key take away were: Fed is expected to hike interest rates, there will be patches of corrections stock Market, don’t expect trade wars to be resolved any time soon, Oil prices will rise and China may try to stimulate economy without success, developing markets will continue to perform better & due to rising trade dispute, consumer oriented economy like India are expected to outperform. Also, India is slowly de-leveraging which is a positive sign. The cleaning up of banks, formalization of taxation and markets is credit positive for India.

On the US China trade war, though, the recent correction in US markets would have prompted Trump to soften position on trade dispute but the US is more insular economy, thus less depended on trade. In contrast, China is slowly becoming insular but is still vulnerable.

  • VR


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Hedging – Indian stock market context

Contributed by: Meera Siva, CFA

PR Sundar is not a conventional speaker and a standard blog will not do. At the CFA Society Chennai Chapter’s speaker event on January 4, 2019 (GRT Grand Hotel), he spoke on option strategies. While the topic tends to be often Greek, he simplified with analogies, examples and peppered it with a lively humour and stats (did you know that the South Korea’s index is the most traded index option contract in the world?) which kept the packed crowd (44, with a few coming from out of town to attend) completely engaged. Sample this. He asked what a hedge was; then searched Google; it showed pictures of plants – hedges which act as fences to protect.

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As a TV celebrity trader who is well covered in the print media and a strong social media following, PR Sundar needs no introduction. In a segment where professionals get wiped out, he is clocking gains year after year. A maths teacher in his early years and coming from a rural background, he is self-taught; his knowledge and success are thanks to his passion and poise.

The trader

As strategies must gel with the nature of the person implementing it, he took nearly a third of his 100-minute talk to share his background. It helped the listeners evaluate if a strategy would be suitable for them or not.
For example, he explained how he had little or no knowledge of the stock market and briefly subscribed to IPOs as a low risk strategy (pre Harshad Mehta days). And got back to the market quite by chance and how his value system has been built. He noted that people (through the example of his class-mate) do not take risks when they have the ability (capital, stable cashflow) but want to do it when they don’t (no income and limited savings).

Why sell options?

Sundar views selling options akin to selling insurance. There is a lot of mainstream media narrative that buying options is low risk and high reward while selling options has unlimited risk. He, however, uses option selling to enhance returns of a buy-and-hold investor’s portfolio. “Holding gives price-value to an investor while options give time-value gains”, says Sundar.

To illustrate, he shared returns of an investor’s portfolio of about INR 6.5 crores since late October 2018. Capital appreciation of the portfolio was about INR 65 lakhs in 2 months. On a hedged portfolio of INR 4.2 crores, option return was INR 73 lakhs in the same period.

The strategy is to have an underlying and selling options backed by it. The reason it works is that stock prices do not change in either direction very fast and stays around the same levels. So, selling options gives cashflow. For instance, if a stock trades at INR 900, you can sell call options for INR 1,000. If the stock does not move, call option sale gave you some return. If it moves by less than INR 100 before the option expired, there is call sale plus capital appreciation. If it crosses INR 1,000, you can deliver the stocks when the option is called; there is call sale gain plus the INR 100 from stock price increase.
For many stocks, there is no issue of liquidity. But if the volumes are low, it is best to use an index as a proxy (NIFTY or sector NIFTY).

Some strategies
Martingale Strategy: Consider a stock at INR 1,100. Call options @ INR 1,200 may be priced at INR 10 and you can sell these. If prices shot up fast, to INR 1,200, you can offset it by buying 1,200 calls. They may be priced at INR 15 now. To fund this, sell options at 1,250. These may be priced at say INR 7.5, so you may have to sell twice as many as the 1,200 calls. You can keep repeating this strategy of doubling. You will not have the underlying to deliver as you go on this route and must manage your margin. The good thing is that the underlying’s price is increasing, giving you some cushion.

Collar strategies: A collar strategy involves selling calls at a higher price and buying puts at a price lower than current price of underlying. This limits the risk and return in a range (or collar), for no cost. In this, if the number of calls you sell is double that of the puts, there is a gain. Here again, if the market runs up, you can do the Martingale strategy to extend your runway.

Ratio spread: The idea of this strategy is to keep the upside (by taking some risk) while limiting the downside. If the market has support at say 10,000 levels, you can buy puts for 10,800 and sell double the quantity of 10,000 puts. The prices of these two may offset each other. If the market goes up, you capture the upside. If it does down, there would be losses and other strategies must be used to manage the situation (as the original assumption of support at 10,000 levels did not pan out).

There are many other strategies beyond this. For example, there are methods to deal with binary events such as the Parliament elections.

The talk gave a glimpse of how calls and puts, buying and selling, numbers and price, can be used based on the market view. Not just that, you must closely follow the action and tactically adjust your position based on the market movement – or changing the dance to the tune of the market, as Sundar says.


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Session by Mr. Thomas Russo- 2nd Value Investing Pioneers Summit ,Delhi 2018

Contributed By : Ashwini Damani, CFA

Lessons from Global Value Equity Investing


At the second Value Investing Pioneers Summit, Mr Thomas (Tom) Russo gave a talk on ‘Lessons from Global Value Equity Investing’. Given below is a summary of the talk.

  • Tom Russo believes one can earn added alpha by deferring taxation, as any taxes not paid and deferred compound and add to overall returns. For deferring taxation, we need to invest in Long Term Ideas where we can minimize churn and hold for substantial period of time.
  • Tom Russo is a big advocate of Investing in Multi National Corporation (MNCs) as because of their global nature, these companies have more opportunities to reinvest their free cash flows . He himself holds a lot of MNC’s in his portfolio. This reduces the need to churn the portfolio and look for new opportunities as he can keep holding on to the same businesses as they grow by investing their cash flows in markets which offer growth opportunities.
  • The following factors as per him, make Global MNC’s very good investment candidates :
  1. Capacity to reinvest free cash flows in various opportunities and countries. Very rare companies exist that can reinvest right amount of cash flows.
  2. Global Population Growth allows them natural growth
  3. Consumer Disposable Income growth also provides better ability to capture wallet share
  4. Globally Adept Management, which are multilingual and multicultural: He mentioned that just like an Indian does not know names of any good Baseball Player, similarly Americans don’t know names of any Cricket Player. Very few people in the world speak more than 3 languages and yet there are some remarkable MNC’s that transcend borders and cultures and are able to operate in many countries.
  5. There are rare companies that reinvest the ‘right’ amount. Most managements usually underinvest as they are worried about the impact on their earnings in short term and the resultant effect on stock prices and the value of their stock options.
  • Capacity to SufferHe further emphasized that he prefers to invest in Family Controlled companies. Family Controlled companies can say no to what wall street demands of them. They can thrash short term in pursuit of long term, give a long rope and lend support to management for the long term, thereby aligning interests and minimizing agency costs. Family controlled businesses normally have better vision.
  1. For eg Berkshire Hathaway can afford to suffer by not succumbing to near term returns. Warren Buffett holds large cash reserves for long times and prefers to wait for big opportunities. This allow him to use these reserves to buy businesses at throwaway prices, because he is the only person available with cash
  2. Nestle has a 35 year Planning Horizon
  3. Sab Miller and Heineken prefer to wait for right time to invest. They don’t fear public backlash and don’t fear PL hit for short time
  • Tom Russo looks for investment in business which have a lot of “White Space” – businesses which have a large underserved market which gives them repeated opportunities to reinvest large amounts of capital, such as :
  • Global Payment Space 
  1. Global Commerce continues to grow
  2. 85% Global Commerce is still in Cash
  3. He prefers MasterCard as a very good vehicle to play this space
  • Luxury Branded Jewellery
  • Global Jewellery Category has been growing consistently
  • Within that, the luxury branded jewellery is gaining even more market share
  • A very good alternate is to play this theme through Swatch and BRK
  • Premium Spirits
  1. 1.5 Billion Cases of Spirits consumed per year in China
  2. The entire Western Premium Spirits market is just 4 million
  3. So there is a huge runway and market opportunity available
  4. He holds 10% of his portfolio in Pernod Ricard, Diageo and Brown Forman
  • Sub Saharan African Beer
  1. 400 million barrels of Beer is consumed per year in Sub Saharan Region
  2. Whereas rest of the market sells only 100 million barrels of bottled, branded and refrigerated beer.
  3. Best way to play this theme is to invest through Heineken, Anheuser-Busch Inbev
  4. These businesses have a huge growth opportunity as there is a large unserved market.
  5. They also have pricing power and demand in-elasticity as consumers of a beer brand like Heineken are usually loyal to it and do not like to change
  • Global Whiskey Market
  1. Global Spirits demand is showing healthy growth worldwide
  2. The premium category continues to outgrow main spirits market
  3. This offers price growth and price inelastic growth.

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  • Tom also gave examples of companies who lacked the “capacity to suffer” or took short term decisions to please wall street and destroyed shareholder value.
  • At the end, Tom talked about how as a portfolio manager or investor who is looking to outperform over long term, should also have the capacity to suffer in the short term for long term benefit of the portfolio and investors. As an example, he explained how the portfolio of his partnership – Semper Vic Partners – depreciated by 2% in year 1999, when the DJIA was up by 27% due to the rally in tech stocks.  Due to the capacity to suffer that one bad year, the portfolio outperformed substantially for next five years.
  • The learnings from Tom Russo’s session can be summarised in this quote from noted poet Khalil Gibran –
    “Out of suffering have emerged the strongest souls; the most massive characters are seared with scars”
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Session by Mr. Samir Arora- 2nd Value Investing Pioneers Summit ,Delhi 2018

Contributed By : Jatin Khemani, CFA

What they don’t teach you anywhere?

At 2nd Value Investing Pioneers Summit, Mr. Samir Arora, Founder of Helios Capital Management Pte Ltd. gave a talk on “What they don’t teach you anywhere?”

The underlying theme or message of his talk was that – there are no rules and everything must be doubted and challenged.


Samir went on to dispel some of the common beliefs/assertions that most value investors have. He said that as there are no rules, these should also be challenged.

  • We (should) buy stocks where we have high conviction.
    • Conviction on rejected stocks is more as we know with more clarity what is bad than what is good.
    • What we buy, we track/watch closely. if the conviction was high, one would tend not to do that.
    • Research focus should be on eliminating bad, not in choosing what is good.
  • Our favorite holding period (should be) is forever
    • Most investors take this statement of Warren Buffett as gospel truth without fully understanding what he actually said.
    • “When we own a portfolio of outstanding business with outstanding managements, our favorite holding period is forever.” – is what Buffett said in Berkshire letter to shareholders 1988. The conditions of ‘outstanding business’ and ‘outstanding managements’ have to be met for stocks to qualify as ‘forever’ bets.
    • While Buffett’s favorite holding period is forever, it is not the only option but favorite amongst many.
  • We (should) own stocks for the long term.
    • Our biggest advantage as an investor is we can walk away anytime unlike a promoter, so why should we hold stocks for long term? As an investor, we need to revisit our thesis on a regular basis and hold only if company continues to deliver. Example: We are holding HDFC bank for more than 20 years but yet don’t call it long term stock because the day anything goes wrong we can move out.
  • An investor should act as though he had a lifetime decision card with just twenty punches on it.

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  • Warren Buffet: 1980-2006
      • 2,140 quarter-stock observations from publicly available information
      • 30% of stocks sold within six months
      • Median Holding period: One year
      • Approximately 20% of stocks held for more than two years.
  • Buy companies with good management
    • When will you know the management is good?
    • How will you separate the Halo effect?

      “Show me a company that delivers high performance and I can always find something positive to say about the person in charge.”
    • You will know good management only if stock price increases. Perception of management changes based on the stock performance. Before stock price increase ; nobody knows is it a good management or not.

Example: Samir gave a great example of Cisco. In May 2000, Fortune magazine ran a story on Cisco in which John Chambers was portrayed as the world’s best CEO (after the stock’s superlative performance of more than 50x over the last 6 years). Exactly a year later, after the stock had crashed by more than 80%, the same Fortune magazine ran a story titled “Cisco fractures its Own Fairy Tale”

  • Diversification is a protection against ignorance, it makes little sense for those who know what they are doing.
    • We don’t know we are ignorant till something unexpected happens
    • If concentrated funds do better, what if you buy 3 such funds? Do you still do better? Overall we own 40-50 stocks of three concentrated funds but our portfolio is diversified.
    • Your stocks in a diversified portfolio are always part of some guy’s concentrated portfolio
  • Before investing in an idea based on some facts and analysis, ask “who doesn’t know that”?
    • While investors know a lot of information, not everybody acts in the same way.
    • It is possible to have an insight basis well known facts and act on it even though the same information may be available to everyone else
    • Example: In case of HDFC Bank everyone knows everything about the company. As an investor we need to focus on big picture & size of opportunity as tiny incremental information may not add any value.
  • To make money in a company, you must know it better than anyone else
    • If that is the case then only a single person can make money in any stock.
    • It is not necessary to know more than everyone else. What is important is how we act and behave basis whatever information we have.
  • Good people should not buy sin business
  • If good people would not buy, then bad people will buy and make money to become stronger (pun intended).

So what should they teach you?

  • Keep it simple
  • Believe in equity investing (50% job is done)
    • Book Suggestions:
      • Triumph of the Optimists – by Elroy Dimson/Paul Marsh/Mike Staunton
      • Wealth, War and Wisdom – by Barton Biggs
    • These books show that over long period equity beat all the asset classes.
  • Have a diversified portfolio. Reject Concentration.
  • Try to get more knowledge, not more information.
  • Money Saved is better than money earned. How one performs during negative months matter a lot to the performance. Example: Nestle, HUL etc.
  • Bottom-up strategy works best in sectors/themes with strong tailwinds.
  • Look first for reasons to reject, not for the reasons to buy. Rejection has far more conviction than buying.
  • Investing isn’t complicated – buy businesses quoting less than they are worth. How do you know the worth? Well, that’s really complicated..!

Link to complete presentation by Samir Arora

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Market Cycles & Investment Lessons from History


Contributor: Sumit Duseja,CFA (Co-Founder of Truemind Capital Services)

What we have learned from history is that people don’t learn from history. And that is the reason why a majority of investors do not earn good returns from their investments over the long term. Those who make superb returns on their investments are good students of market history and have learned the lessons quite well and stick to it.

There is no denying that equity markets go through a cycle. Broadly we can call it a cycle of Greed & Fear. These cycles have happened many times in the past and will continue to happen in the future.


Stock markets are a reflection of collective human emotions. Like we experience phases of joy and sorrow in our lives, similarly, equity markets also experience emotional upheavals due to collective actions based on perceptions of human beings.

Do note that the euphoric scenario in the cycle of Greed & Fear comes with the point of maximum financial risk. On the contrary, despondency in the cycle presents the point of maximum financial opportunity. To depict the same in terms of returns, let’s see the tables below:

In a course towards market peaks in the last 20 years, following are the Sensex returns whenever it has crossed 25x PE multiple.


Sensex crossed 25x PE three times in the last 20 years and the average CAGR over the next 5 years period is paltry 2.54%.

 On the contrary whenever Sensex PE fell below 14x multiple, the point to point returns in subsequent years have been terrific.


Equity markets generally go through intermittent (small) corrections and big secular corrections. The intermittent corrections are up to 20% which occurs while the markets go through a longer trajectory from trough to peak. From the peak a major secular correction of 50-60% occurs once in a decade. These corrections happened multiple times in the past and will continue to happen in future. The timing and the extent of such corrections is difficult to ascertain but there are telltale signs during the extremes of the market.

We usually observe the following behavior during market peaks:

  1. Retail participation is huge. People with very less knowledge about stocks and most risk-averse FD investors start putting money in equity markets.
  2. Newspaper headlines scream with euphoria about new peaks achieved by markets
  3. There is utter rejection/ridicule of thought or statement that markets can decline by more than 20%
  4. Majority of the stocks start trading at the valuations much above their historical averages

 However, those consumed by greed always have reasons to ignore on the premise that “this time it’s different”. Unfortunately, these words prove to be the most dangerous words in investments every time.

During market bottoms most common behavior to witness:

  1. Retail participation dips significantly. Rather, they start taking out money fearing a further fall.
  2. Newspaper headlines sounds of gloom and doom scenario
  3. There is a loss of hope and complete rejection of the idea that situation can improve from here and markets can bounce back with handsome returns in the medium to long-term
  4. Majority of the stocks start trading at the valuations much below their historical averages

Again, the investors consumed by fear believe that the world is going to end and this time it’s different than the previous bottoms.

In hindsight, everyone saw the financial crisis coming in 2007. In reality, it was only a fringe view. The next correction will be the same (they all work like that). However, the reasons are different every time.

“Stock markets cycles don’t repeat but they rhyme”

Our memories of financial history seem to extend about a decade back. It also erases many important lessons. Here are some lessons that we learn from market history which helps us prevent major losses and maintain sanity at market extremes to use it to our advantage:

  • Do not get mislead by the term – this time it’s different. Never forget that “mean reversion” happens over medium to long term.
  • Do not buy something which is priced much higher than it’s worth. Finding true worth of any business/asset class is not an easy exercise. You can invest in the best business and still lose your money.. Price you pay versus the value you get makes a lot of difference in investment returns.
  • Markets can continue to remain irrational (expensive or cheap) for a very long time. Be patient. Expensive doesn’t mean that market will fall tomorrow and cheap doesn’t mean that market will start moving up tomorrow.
  • Never predict or try to time the market on day to day basis. But this doesn’t mean that you buy at any price. The price, compared to the intrinsic value, at which one buys, determines the potential risk and returns.
  • Caution yourself against the herd mentality. Investing in popular themes/assets etc. won’t generate good long-term returns. Do not get mislead by past returns.
  • Selling is important too. Market peaks provide a good opportunity to reduce allocation to ridiculously expensive assets. If you avoid loses during a market downfall, you can make significant returns in a market upswing, provided you have courage to buy when everyone else has given up hope.

Based on the lessons learned, one should develop an investment philosophy which guides you during different market scenarios. If you do not have an investment philosophy in place, you end up buying at the top and selling at the bottom like all other people.

The most significant tenet of investment philosophy followed by many successful investors is “margin of safety”. Many wised-up investors understand that they cannot predict the future. So, the best one can do is to invest at prices lower than what something is conservatively worth, thus providing a margin of safety. Lower the price from the worth of an asset, higher is the margin of safety (lower downside) and greater are the potential future returns.

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Person of the year 2018

Navneet Munot

Contributed By:

Navneet Munot,CFA (Chairman, CFA Society India)
CIO – SBI Mutual Fund

December 24, 2018

Like every year, there were several contenders.
I thought of Fortnite, the gaming sensation, but it pales in front of Chinese checkers between Trump and Jinping. McCain and Bush’s demise reminded us of Vietnam, Iraq and the cold war. On the centenary of armistice, a new war of this century may have just begun. Trade conflict is a small part of a larger battle.
America’s ‘Tariff man’ should better know that his tantrums can trample Mexico or Canada but it’s difficult to Trump China. Remember, China and India accounted for over half of global GDP two centuries ago. It is not the West’s sunset time yet, but the clock is reversing. US hegemony is challenged as China gradually regains its polar position.
Yes, China has a great wall of debt, but its will to dominate is taller. Arrest a CFO, impose tariffs, block investments or play military games, nothing would cut the Middle Kingdom’s ambitions. The boundaries of artificial intelligence and natural wisdom will be tested. Stan Lee’s words of advice for both: with great power, comes great responsibility.
Kim crossed the border to break bread with Trump in Singapore, and nibbled on noodles with Moon Jae-in. North Korea stole the limelight briefly, but Middle-East remains the biggest geopolitical flashpoint. Khashoggi’s murder tainted The Crown of MBS. The Game of Thrones between Saudis and Iran is taking a toll on Yemen. ISIS’ horror is back in Syria and Iraq. The US moving its embassy to Sacred Jerusalem led to bloody Games in Gaza. Markets, don’t ignore Crude realities.
Harry and Markle United and the Kingdom celebrated. Britain’s Great divorce with EU may not go smoothly. After creating a ‘brief history of time’ on earth, Stephen Hawking moved ‘beyond the horizon’.
EU didn’t allow an extended budget for an Italian opera. Time will tell how the tale ends. Italian markets lost favor with investors, but Juventus FC rose with Ronaldo. Merkel-Macron turned less popular but deserve kudos as the flagbearers of liberalism and plurality.
Russians had a “ball” of a time. FIFA threw surprises like a Russian Roulette. Mbappe led La Football en Marche! A French revolution on Putin land! A star is born – Croatia’s Modric (Lady Gaga can wait). Abenomics’ arrows missed its targets, but Naomi Osaka’s racket got Japan its first grand slam.
Messi’s country is a messy affair for investors. Their darling one year (remember 100-year bond), but discredited and discarded next year. Bolsonaro’s win brought the bulls back to Brazil. Markets, economy, politics or football, Brazilian Samba is always spicy.
Imran got captaincy when the Pak economy is on a weak wicket. The award for greatest comeback goes to Malaysia’s Mahathir Mohamad. In politics, age is no bar. Turkey or South Africa, Brazil or Malaysia, Emerging markets had interesting tales. Relatively attractive valuations may make EMs outperform DMs in coming years.
Bears finally banged the invincible gang of FAANG. Warren Buffett bit the Apple, but Microsoft excelled ahead to become the most valuable company. Paul Allen, the ‘Idea Man’, left for the clouds. Musk’s Falcon reached sky, but lost ground as Tesla’s chairman. Public tweets aren’t enough to take your company private. Google was grilled, Zuck Faced challenges from regulatory books. Political backlash can hack the ambitions of Big tech.
Central banks can declare victory on the 10th anniversary of the global financial crisis. Make no mistake, the global economy has more leverage than ever. A flattening US yield curve is less worrisome than the fattening US federal debt. Powell’s Fed is well advised to think beyond Trump’s tweets and Wall Street’s twists. Despite central banks shrinking their balance sheets, sovereign bonds bloomed in large parts. Bitcoin owners bit the dust. Tighter money bursts bubbles, there are already ripples in junk bond and CLO markets.
Higher crude led to a loss of forex reserves in India. New RBI Governor would rebuild the loss of reserves of goodwill between RBI and the Government. OMOs to infuse liquidity should be supplemented with measured Open Mouth Operations. NBFCs can borrow from Dr. Schuller – ‘Tough times never last, tough people do’. While food inflation should see an uptick next year, India turning from a food deficit to a surplus country is ample food for thought. Policymakers -think beyond farm loan waivers and MSP.
ILFS Shock, Nirav Scam, Sham Rating, Shoddy audit, Shallow board, these Stray but Sorry instances with elite corruption cases globally remind us of Buffett’s quote – “you find out who is swimming naked when the tide goes out”. The silver lining is that these events sow the seeds of structural reforms. Look at the successes of the insolvency regulation.

A trade-war is brewing as Walmart bagged Flipkart to take on Amazon’s Future carts. Indians are consuming data and flying like never before, but Telcos and airlines are transmitting losses. Whether India’s growth creating enough jobs is a hot debate, it is not creating enough profits is cold reality. Corporates are Clipping excess debt while households are SIPping equities. Better days are surely ahead.
I thought of Atal Bihari Vajpayee, the lotus of his poems, politics and performance will bloom forever. Rahul’s Congress made progress in India’s heartland. Modi unveiled the world’s tallest statue, the height of his popularity will be measured next year. Collegium, 377 rainbows, Aadhar or Sabrimala, the supreme newsmaker this year was the Supreme Court.

“Crazy Rich Asians” missed the big fat Indian weddings. Their next movie could have Beyoncé singing – ‘Halo’ India.

“Rise of Women power” was my Person of the Year 2010 – their force is only growing stronger. MeToo is empowering women to say Na-Na to any Amar, Akbar or Anthony. Beware, Bill, Brett, Batali, a Brigade is behind your fantasy Bride.

Europe scorched in the sun, California went ablaze, Delhi suffocated with smoke. Cape Town almost ran out of water while Indonesia and God’s own country (Kerala) were drowning in it. Hurricanes in the US didn’t wash away Trump’s fire against
the Paris agreement. Beyond A.I. or political unrest, climate crisis is the most urgent risk staring at us. Investors, pay attention.

A rising trend with celebrities, CEOs and hedge fund managers is veganism and meditation. Interestingly, it was the perseverance and power of monk-turned-coach Ake’s meditation that kept 12 Thai teens trapped in a cave going for nine days.

The global discourse seems to be turning polar and parochial. But we also witnessed “protection”-ism of another sort, the whole world came together to rescue the Thai teens. Rescuers flew from all over, crafted a miraculous plan and took unimaginable risks to save thirteen strangers. Chinese divers worked with Americans and Japanese and so did divers from Britain with equipment from Ireland. This rescue reminds us that the heart of the entire world beats as one for a noble purpose.

It is a glimpse of hope in today’s world, much like the glimpses of hope offered by advocates and activists of Climate change action, MeToo, BlackLivesMatter etc. These heroes are “Avengers” of real life.
Thai cave Rescuers are my person of the year 2018. They emanate hope that the most convoluted challenges facing us can also be solved by the power of human cooperation. A standing ovation.

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Volatility-Contingent Strategies and Their Implications for Market Stability

The Bengaluru Chapter of CFA Society India hosted Professor Larry Harris, CFA for a session on the “Volatility-Contingent Strategies and Their Implications for Market Stability”. Professor Harris holds the Fred V. Keenan Chair in Finance at the USC Marshall School of Business and has served as SEC Chief Economist from 2002-2004. Further, the session was moderated by Dr. S G Badrinath, the Canara Bank Chair in Banking and Finance and Chair of the Centre for Capital Markets and Risk Management at IIM Bangalore. It was a remarkable learning opportunity for the Members and Candidates in Bengaluru.

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Prof. Harris started the session by introducing the concept of Volatility budget and discussed several Volatility contingent strategies. After the crisis until recently, the volatility has dropped, and the asset prices have been rising. Implied volatility has been higher than the realised volatility.

This is the time when Investors scale up the portfolio volatility based on their volatility expectations. In the process, market participants take aggressive positions for scaling up the portfolio volatility and seek higher return prospects. Different market players use different strategies. Selling straddles, strangles, VIX products and rolling down the VIX future are some of the most cited ones.

Increasing the portfolio volatility to the target volatility levels for maintaining the carry, increases the gamma of the portfolio. Higher levels of gamma amplify the impact of corrections and the triggers big crashes.

He further added that markets do not fall when there are more sellers but when there are impatient sellers. Temptations are high when the yields are low. This is also the time when volatility usually rises and leads to market falls.

Finally, the audience took the note that we are in a world where a low-yield, low-volatility environment has drawn various market participants into essentially similar short volatility-contingent strategies with a common nonlinear risk factor. The impact of the extraordinary growth in the bets on volatility and bets modulated by volatility since the Global Financial Crisis is yet to be seen in full.


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