Session by Eric Sim, CFA – 2nd Financial Talent Summit, Delhi 2019

Building your Online Presence and Brand


Speaker : Eric Sim, CFA- Founder, Institute of Life

Moderator : Jitendra Chawla, CFA- Director, CFA Society India

Written By : Shivani Chopra,CFA

The 2nd Financial Talent Summit held in Delhi on 27th April, 2019 was a day full of learning and fun. CFA Society India in association with CFA Institute organised it to cover broad themes related to personal branding, building and shaping career in fast moving business environment in financial services industry . The first speaker of the day -Eric Sim, CFA – founder of Institute of Life conducted a session on “Building your online presence and Brand”. He presented ideas to use social media as a tool kit to quickly advance in career and standout among peers. Below are the key takeaways-

  • Eric began by sharing his life story- From a teenager who failed in subjects like maths and english to making it to the top management of an investment bank. He is currently teaching in many business schools and has set up his own company- Institute of Life.
  • Eric quickly got to the main theme of his presentation. He said, whether you are selling a company’s product /service or selling yourself as a brand to seek a job or business opportunity, there are “Seven Steps of Selling” that can be used -(1) Identify target (2) Build Rapport and Trust (3) Identify needs & Problems (4) Present Solutions (5)Overcome Objections (6)Execute (7)Follow-up. When we begin our job search, we should identify the target as the potential HR hiring manager. Step #2 is the most important-we should try to build rapport with team members of that HR Hiring manager or other employees working in the firm we wish to join
  • Benefits of a Personal Brand – (1) Attract talent (2) Attract clients (3) Attract employers (4) Charge a premium (5) Develop yourself. If you are not developing your personal brand, you may be attracting employers but may not be able to achieve Step #4 – charge premium and get an attractive pay package. After all, it’s Apple’s iconic brand strategy through which the company is able to price its products at a premium. Remember to introspect and see yourself clearly to develop an online personal professional brand.
  • 3 qualities of a personal brand- (1) Trustworthy (2) Competent (3) Interesting-It’s good to be both trustworthy & competent but being competent without being trustworthy is dangerous. Also, if you are not interesting, points 1 and 2- trust and competence do not matter.

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Social Media Strategy to jumpstart professional transformation-

The talk delved deeper on how to exactly create a personal brand using social media especially LinkedIn (where Eric has 2.5 million followers!)

  1. Use of LinkedIn –If we google our name with the current designation, the first web link that appears will be our LinkedIn profile. Therefore, while we can make use of other social media tools such as Twitter, FB, etc., we must make LinkedIn as our primary platform. For every job, hundreds of applicants apply and hence it’s important that our LinkedIn profile is done up well. He also recommends keeping the same professional picture across the social media.
  2. Be a TV Show- In other words, ”Be conscious of what you post”. Here, Eric’s message was that one should produce a TV show rather than giving an appearance of oneself as a TV commercial. 9 out of 10 should be posts which can add value to the reader (TV Show) and 1 can be generic or promoting yourself (TV commercial). For eg,  if you want to post about your visit to Delhi, you may want to inform about the best places to take clients out in Delhi rather than just posting a random update or picture
  3. What to Post- Again, the focus should be to add value to readers. Tell stories in your posts as people are attracted to stories. Share inspiring stories which are worthy of reaching broader audience. If you want to post about the food you just ate, consider going behind the scenes-talking to the chef and taking pictures of the kitchen. To get a firm grip on your content strategy, try using LinkedIn 2019 Editorial calendar. It’s also okay to reveal failures.
  4. How to Post- In the post social media world, adults have an attention span of only 8 seconds. We must start the posts strongly. Capture readers’ attention with an interesting first sentence. That first sentence will get the reader to read the second sentence and so on. The below example was shared-

“We are going to die, and that makes us the lucky ones. Most people are never going to die because they are never going to be born” – Richard Dawkins

  1. How to take photos- The human brain is attracted to visuals more than text, so post interesting and thoughtful photos. Eric is very creative and impressed the audience with his photography skills. Try shooting from a low or a high angle to give your connections a different perspective.
  2. Infographics- Infographics also add a lot of visual appeal. UBS has fantastic infographic features.
  3. Expand your network- Networking is the key- Go offline to connect online. The speaker gave an idea of printing “LinkedIn QR code” on business cards. This way people will scan the code and connect with you in a jiffy
  4. Be Authentic – Eric not only has a solid follower base, they are extremely loyal as well. Being original and authentic goes a long way. Accumulate good karma by helping people first before you expect anything in return. Refrain from using misleading titles such as market leader, etc.
  5. Extreme Time Management-Being highly organised is an important habit of highly successful people. Develop discipline in day to day activities. Writing down everything is a rewarding routine to follow.

The presentation was followed by a few questions from the attendees. On being asked about how his humble background affected him in his professional arena, Eric’s response was that initially he was not very open about his background and failures but with time he realized that people relate with you better if you share your story with them. He rose from being a failure to being rich and successful and people see him as a role model.

By the end, everyone had got the plan to implement the social media strategy and Eric left them with a call to action – “THINK BIG, START SMALL AND ACT NOW”.

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Making Sense of Investing – Session By Mr. Rajashekar Iyer

Contributed By : Sidhant Daga

The Kolkata Chapter of the CFA society hosted Mr. Rajashekar Iyer on the 5th of April, 2019.Mr. Rajashekar Iyer, has been recently featured as one of the super-investors in the book titled “Masterclass with Super Investors” where he has discussed about his journey in the stock markets


  • Explaining on how equity class performs as an asset class, Mr. Iyer mentioned that over the past 30 years,if you take different 10 year periods, you’ll get average returns as measured by the index of ~ 13.5%(before dividends and taxes)
  • If one takes a 10 year period and makes around 14-15% CAGR, one will make a 2-3x of his initial investment at the end of the period, and over 30 years it will be ~ 30-40x of your initial investment.
  • Mr. Iyer mentioned about  how only a small amount of savings went into the equities till 1990, it went up a little in the Harshad Mehta boom period, it came down and has again risen, but is still overall low.
  • The three components which make the equity return are : Market,Stock Selection and Market Timing.
  • One can make higher returns by proper stock selection and better market timing.

Mr. Iyer shared  historical data for the market return profile (BSE Sensex) for the last 30 years.


  • One can do defensive investing by buying and holding a well diversified portfolio of leading stocks bought at regular intervals. One can also invest in index ETFs.Defensive investing helps a defensive investor to achieve overall market returns, but extreme discipline is required to carry out the same.
  • Mr. Iyer explained how cash calls are sometimes more imp than stock selection as in good times even bad companies rise and how cash calls help in generating higher returns.
  •  The speaker gave an example of how one must hold on to a stock till its rising and upward pyramid his trades once his trade gets in favor. He told of how he entered MRF and sold it early with only 100% returns ,  if he would have held on, he could have earned much more.
  • The speaker stressed on how one must be in the markets most of the time but not all of the time. Cash calls are imp. to enhance returns. Historically one had to only do 5 cash calls in the last 27 years. Markets are bullish most of the times.
  • Mr. Iyer showed how one could have earned a return of ~ 43% if one would have timed his cash calls correctly and had remained invested only in the bull runs since 1988.


  • In every bull run, the leaders are different. For eg. – In 1998-2000 it were the IT stocks that made money, in 2003-2008 it was infra and power that made money. Identifying the leaders is imp. to generate high returns.
  • One must not sell a stock just after  one’s investment thesis has played out, but still hold it till the stock price is rising to generate maximum returns from that particular stock. One must keep trailing the SL as the price of the stock moves higher.
  • The 3 triggers which cause bull markets to end are- over valuations, economic slowdowns and increasing interest rates. Any one of the 3 can trigger the start of a bear market.
  • Stock selection is far more imp. at the top of the markets than at market bottoms.
  • Proper stock picking requires immense amount of time and discipline.
  • Extra returns via proper stock picking creates a huge difference in the long run. An ‘x’ amount of investment would be 56x with a 14% cagr after 30 years , whereas, it would be 237 x with a 20% cagr and 2620x with a 30% cagr in the same time period.

Mr. Iyer showed the astonishing variance between top performing stocks and worst performing stocks-


Above data is based on market cap in 2014, returns are from 20th March 2014 – present.

  • Position sizing is very imp.
  • Mr. Iyer mentioned how patience is very important, one must only follow a style which suits them, one must buy or sell only based on own conviction and not on borrowed conviction
  • The speaker told one should try finding patterns in past multibaggers and use it to find probable multibaggers of the future.
  • Sometimes under researched companies outperform over researched companies.
  • One should pick a business with good economics, good ROEs, increasing sales, scalable business model, good quality management.
  • One should judge a management by looking at management’s strategic thinking approach, execution capabilities and integrity.
  • One must spend enormous amount of time in improving their investment skills.



Q1) What is your criteria to select companies?

A1) I look at past performance, if it’s good , then why? , is the good performance sustainable? For example, Relaxo has increased its sales multiple times in the past few years, they have not diluted their equity, margins and realisation per unit has improved due to better product mix.It seems it is likely to continue. The suppliers of the co. gave positive reviews, there is scalability in the business.Thus we can see the past performance is good and seems to be sustainable.

Q2) How do you identify inflexion points in a co.?

A2) Sometimes it’s via accident. One can sometimes observe inflexion points by correlating current affairs with companies which are going to benefit from the same , for eg. I did in a photographic film co. after Govt. announced it is mandatory for everyone to have a photo id.

Q3)How much time do you invest in selecting a co.?

A3)It’s around 1-2 weeks. The faster you reject bad companies the more time you get to spend on good companies.

Q4) Do you do further research after completing your initial research?

A4) Yes. For example, In Relaxo I contacted the suppliers. I also contacted a shareholder who has been holding a stake in the company for the past 10 years.

Q5)Has there been instances where you had a positive view for a company but it changed to negative?

A5) Yes. I regret of not buying Havells based on negative comments of one of my friend. One must form judgement only by himself and not get influenced by someone else’s judgement.

Q6) How to build a position in a stock?

A6) One should do upward pyramiding and must have immense discipline with respect to stop loss.

Q7) Your views on career in a sell side or a buy side?

A7) Sell side is more of a tracking job as a certain sector or industry is allotted, one gets a fixed pay and sell side also helps in  understanding a proper analysis framework. In  buyside, the risk is higher as one has to choose what to research and what not to and where to invest.

Q8) How to overcome Behavioral issues?

A8)One must have processes to overcome these issues. For example have a gameplan before entering a stock as to what will be my stop loss, what is the % of my capital I’m willing to invest and lose in a particular share.

Q9)Where do you see the Sensex by 2025?

A9) At Least 100% up from now.

Q10) Should one follow contra investing?

A10) One should not contra invest just for the sake of it, being against the trend without a proper evidence is a pretty bad idea. If one has facts on one’s side, then only one should enter contra bets.

Q11)What are the red flags one must see before investing into a company?

A11) One must avoid companies with low ROE, promoter integrity issues and  companies where there is a lot of lending to sister companies.

Q12) Do you invest in PSUs?

A12) Generally no as I don’t know about the quality of the management.


  • Anatomy of Bear Markets
  • Winning on Wall Street
  • How to Make Money in Stocks: A Winning System in Good Times and Bad


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Masterclass with Super Investors – Book Review

Contributed by: Jagpreet Bhatia, VA Capital

In the category of practical investment management books, I found it to be one of the best reference guides, especially so in the Indian context. The book is written in the original OID (Outstanding Investor Digest – the most sought after investment journal published in the USA, bringing forth in-depth conversations with the best investment managers) format, where the Portfolio Managers are cross-questioned on their investment themes and stock ideas. The book gives a 360-degree view of multiple managers, all of which are following very different strategies – to help novice learners understand that there are multiple ways of practicing the art of Value Investing. The managers talk about their broad philosophy and current themes that they are observing in recent Indian business landscape, and drill it down to how they select individual stocks, decide on entry/exit prices, and most importantly, take decisions on portfolio allocations.

The book consists of a wide variety of investors and their idiosyncratic styles. Some started with zero capital, whereas some had prior family wealth; some are very diversified, whereas some are concentrated. Similarly, some are pure Grahaminian (balance sheet numbers oriented analysis), whereas some are qualitative (understanding business as a full business acquirer would do) in their analysis. Moreover, some like to interact with management and influence management to take minority shareholders friendly actions, whereas others like to act as passive investors.

Masterclass with Super Investors front - small size

Such a variety of processes not only helps a learner to hone their own skill set, it can also help one think about how one can create a business around investment management or how one can maximize the potential of building wealth for oneself and others.

The reader will also get to notice multitudes of shades of personalities amongst these Super Investors – ranging from business-minded thinkers, to dealmakers, to aggressive takeover artists, to mathematical wizards, to networkers, to turnaround artists, to win-win solution finders, etc. A reader will notice that a wide variety of thinking tools can be built in one’s repository of available methods to perform in securities markets.

These super investors were also very open to discuss their own emotional states of mind during difficult periods in the markets. Some explained how difficult it is to sell during uptimes, as it appears foolish to the novices and retail investors – how immense mental fortitude is needed to stand by the decisions of sale, apparently appearing stupid during the upswings. Equally important is the stamina to hold on to a business during free falls and decisions to hold over, over decades. They discuss the art of balancing emotions between activity and patience. How managers, working with public capital, have to develop a strong skin, and stand by the emotional storms and client’s heat during the falling prices. One can vicariously understand the pains born by the Super Investors during the bear markets. As a know-nothing novice investor, one can observe by getting into the shoes of these investors and empathize with them on the brutality of the markets and its effects on their personal life.

These super investors had also been very generous and open to sharing their mistakes made over the last few decades. Mistakes like wrong thinking on themes, wrong promoter selection, too much activity, not allocating adequate amounts of capital to single bets, poor allocations, giving too much weight to market noise, etc are visible in interactions with these managers.

Such investor’s background also highlights that continuous learning is more important than expensive conventional schooling! Few managers are completely self-taught in concepts like a business, accounting, entrepreneurship, social networking, etc. They show that to survive in the markets, curiosity, questioning pre-formed existing beliefs and self-education are some of the most important skills. It gives lots of confidence to autodidactic self-learners.

The authors have done good work of giving financial data and charts wherever a security is discussed by these investors. It provides a more in-depth understanding of the thinking process of investors. The accompanying charts show the art of buying process, averaging up process, averaging down process, lengths of holding periods. Moreover, it also explains how decisions were made during stock drawdowns (fall in stock prices from the tops) and finally the selling process or taper downs (sell downs made over a long period of time).

Such a hidden wealth of knowledge regarding investment thinking wouldn’t have been accessible to the learners, in such an engaging bare-all conversational format, without the efforts and patience of the authors. The authors fruit of work – finding these hidden investors, reaching out to them, persistently following to engage them, traveling all over the country to reach them – is finally shaped into a very interesting and thrilling book. To any learner, this acts as a go-to the Bible on India’s finest investment minds.

Overall, looking at these investors journey over last three decades, it gives us immense confidence, that with time, patience, curiosity and continuous learning, building massive wealth is not out of reach for an inquisitive learner.

Readers can order the book online at – It is available in hardcover only – no kindle edition.

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Masterclass with Superinvestors


Contributed by: Udai Cheema

I had pre-booked my copy and my excitement was justified as I found the contents of the book so enlightening that it took me just two days to blaze through the book.

Before I pick it up again to re-read and write a detailed book review for all of you, I would like to share my experience and learnings from the event organized by CFA society India at New Delhi on 25th Jan 2019 for the two wonderful authors of this book, Saurabh Basrar & Vishal Mittal.

Having read the book, my curiosity to meet the authors was understandable. Also, the thought of getting to know what according to them were the key elements that made these Super-Investor really ‘SUPER’ drew me to the event and boy was I in for a treat!

My journey began on the Shatabdi Express that leaves from Chandigarh in the afternoon for New Delhi. The best part about taking this wonderful train is that one can get a lot done on the way and that’s exactly what I did. I took this opportunity to pen down all the questions that were on my mind ever since I had read the book. Seeking answers I landed in New Delhi and took the ever so convenient airport express to the Hotel IBIS at Aerocity where this event was being held.

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I chanced upon a great opportunity to interact with the authors for a few minutes prior to the start of the event. The details about how they started their investment journey were quite inspiring and the openness with which they shared their experiences and learnings was truly humbling.

They have been investing in the markets since the early 2000s and started Altais Investment Advisors in 2007. In December 2018, they published the book Masterclass with Super-Investors which has been quite a seller from what I gather from the investor community across India. It is a collection of some nicely compiled interviews with some of the ‘Super’/ ‘Highly successful’ investors in India who have created a huge amount of wealth for themselves over the last two to three decades.

Here are some of the key learnings and highlights from the event:

1. Every new investor comes to the market thinking on the lines of value investing and with a dream of getting rich the easy/quicker way but the markets tend to teach the newbies some painful lessons about reality.

  •  Bottom line: Active investing isn’t nearly as easy as it looks.

2. Some mind-boggling questions that make the task difficult include;

  • Is your idea a good idea?
  • How much capital to allocate?
  • What if it didn’t do anything for the time you held it?
  • What if it delivered but you had already sold by then?

and so on…….

3. The most important thing for an investor is to understand ‘his own temperament and goals’. This insight into one’s own behaviour is essential for stock market success.

  • In essence, one cannot become Warren Buffet or Rakesh Jhunjhunwala because they possess certain temperament and style of investing which is unique to them. The stock picks can be copied but not the knowledge and the temperament, this alone leads to a wide variation in the returns obtained by these super-investors and the ‘coattail’ investors.
  • Rather than trying to copy someone else’s investment strategy, try to backtest and solidify on the strategies which have worked for you in the market.
  • Independence of thought, Discipline, Courage and Delayed gratification ( for both, consumption and return on investment) are some of the keys to becoming a level headed investor.

4. Many investors jump onto the bandwagon during the market peaks but unfortunately, they are driven out of the markets in the first down cycle. In order to avoid that one needs to figure out a few things before deciding to plunge into full time investing.

  • Do you even have a temperament for active investing? If not then go the low churn, long term investing way.
  • What is your financial situation in terms of the size of your savings, alternate cash flow streams?
  • Are you willing to commit a substantial amount of your net worth to equities? The base with which you begin can make a lot of difference to your performance.
  • What do you want from the market? Is it simply another source of income or you wish to make serious wealth from the markets.
  • How much effort and time are you willing to commit to investing?  Markets, in general, have given 12-13% CAGR over time, so if you are happy with that return then there is no point going full time into investing. Simply buying an Index fund for the long term will do the trick. Rather a better way to look at it in terms of ‘Return of Time Invested’.

5. Develop your own investment framework like some of the Super-investors have devised for looking at companies. For example;

  • Ramdeo Aggarwal: QGLP framework i.e Quality of management, Growth visibility, Longevity of business, Price and valuation.
  • Anil Goel: KCPLTD framework i.e Knowledge, Conviction, Patience, Luck and Timely Deployment of funds.
  • Hiren Ved: GARP framework i.e Growth At Reasonable Price.
  • Vijay Kedia: SMILE framework i.e Small in size, Medium in experience, Large in aspirations, Extra large in market potential.

According to the authors, there are five components to look at while analysing a company;

  • Growth
  • Return on Capital
  • Free cash flow
  • Capital Allocation
  • Valuation

All five parameters have to be on the rise in order to make a multi-bagger.

  • Growth without ROE and cash flow will be short-lived.
  • High ROE and cash flows might help sustain high P/Es but won’t give high returns.
  • Good capital allocation will determine the sustainability of growth and valuations.

6.  FOCUS is key to successful investing. Rather than becoming a jack of all trades, an investor should try to master a style of investing and stick with it.

  • All the super-investors profiled in the book practice different styles of investing. They all are unique but one thing that they share in common is an extreme focus on their time tested methodologies and continue to refine them rather than trying everything that’s out there.
  • Understanding one’s investments is of the utmost importance, otherwise, decision paralysis is likely when the going gets tough.
  • Focus on the stock you wish to buy and wait for it to get cheap. Don’t rush to buy an alternative just because the one you like is expensive at the moment.

7. Develop good habits such as reading, maintaining an investment journal, being thorough with your analysis and reflecting on your past stock picks to figure out what has worked for you, what hasn’t and why.

8. To be right in turnarounds and cyclicals needs special insight. Considering the probability of success is low, one should stay clear until you have a good understanding of how to play them.

9. Risk Management is important. One needs to assess risk from all the angles which include market risk, portfolio risk and stock risk.

  • All super-investors have developed their own risk management strategies and every investor must strive to do the same.

10. Understand that intrinsic value is a moving concept. If the management executes and the business is in an up cycle, one should not be afraid to average up in a good quality growth story.

11. All the super-investors made their big money in a few stocks which shows the importance of capital allocation in a portfolio. It’s not about how many stocks you get right rather it’s about how much money you make when you got it right.

12. When to sell?

  • Fixed notion of intrinsic value, tendency to capture profits in a bull market and the psychological trauma of a prolonged bear market can lead an investor to book profits early.
  • Some of the reasons for late selling could be not timing the commodity cycle accurately, falling in love with your stocks even if the fundamentals are dwindling.
  • So one must develop some structure around selling, a strategy of sorts. An investor needs to see a market cycle or two to realise the importance of this as some things need to be experienced in order to imbibe their true essence. Simply reading in a book can’t replicate the experience of a 50% drawdown at a portfolio level. You need to experience it to believe it.
  • Stock price going way beyond fundamentals or deterioration of fundamentals can be some of the criteria that an investor can use to build an effective sell strategy.
  • Forgo the delusion that you can find the top or the bottom of a stock. Hence, either you will have to sell on the way up or on the way down. If it’s on the way up then it can be done slowly with each incremental rise but if your strategy is to sell on the way down then it has to be relentless once the threshold is breached.

13. Make the ‘study of the market cycles your top priority‘. Sooner you understand the power of the market cycles, faster you will realise that markets are supreme and some of the return you are making in a bull market is more due to luck than skill.

  • An uptick in the market cycle can make ugly ducklings look like swans and a downturn in the market cycle tends to throw the baby with the bath water.
  • A broader sense of where we stand in the market cycle is crucial. This might help an investor safeguard his portfolio to some extent for an eventual down cycle and maybe come into some cash in the portfolio which can be deployed in the bear market. The reason for highlighting a few words here is that doing so can be challenging and needs experience but one should try.
  • Going through a few market cycles is imperative in the making of a seasoned investor.

14.  Reflecting on past decisions and their outcomes have been a crucial factor in the success of all these super-investors.

15. If you have not been successful so far, don’t give up. It only takes one market cycle for someone to be successful. The problem starts when investors start becoming arrogant after making some money and stop differentiating between luck and skill.

16. Don’t regret. Markets are a place of regrets. If the stock goes down, you regret why you bought it. If the stock goes up, you regret why you didn’t buy more. If you sell early you regret, if you sell late you regret. So your peace of mind is in your hands, if you wish to regret then market gives you plenty of reasons to do so.

17. Believe in continuous learning.

  • Learn to differentiate between facts and opinions. Keep in mind that there will be varied opinions about the same facts and that’s what makes the markets so dynamic.
  • Have strong opinions held weakly. Allow yourself to change your strongly held opinions if facts change.

18. Take responsibility for your mistakes. There is no point blaming the markets or anybody else for your losses or failure of diligence.

19. An investor has to be an eternal optimist. You cant bet on the bright future of your companies if you are not optimistic about the future itself.

  • According to most of the super-investors, whatever wealth has been created by equities in India in the last twenty years will be dwarfed by what will be created in the next twenty years. – That’s optimism for you.

20. Respect the entrepreneurs. We as investors should never forget that we are simply riding on the shoulders of these super-humans who build great companies from the ground up. It is extremely difficult to scale up companies and they deserve all the credit for giving it a shot.


It is one thing to go about gathering knowledge for oneself and its another to share it with others. The Super-investors along with Vishal and Saurabh have done the latter with their book ‘Masterclass with Super-investors’. This seminar provided a great opportunity to know the people behind this mammoth effort.

Having read the book myself, I would highly recommend it to anybody who wishes to make a success out of themselves in the markets as the wisdom shared by the Super-Investors is priceless and the way Saurabh and Vishal have compiled these interviews is nothing short of fantastic.

A special shout out to Jitendra Chawla and his team at CFA Society India for organising such informative events.

Important Disclaimer: The contents of this article must not be construed as direct quotes from any of the speakers. The ideas/opinions mentioned here should not be taken as investment advice of any sort as they are for educational and informational purposes only. This article has been compiled exclusively from the author’s notes penned down at the event and contains significant emphasis and paraphrasing on the part of the author. The following content must be read keeping this in mind at all times.



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50 years of Z-Score…

Written by: Chetan Shah, CFA, Secretary CFA Society India and Partner 3 Jewels Investing

One of the scoring systems for predicting bankruptcy of a manufacturing company, Z-Score has not only survived for 50 years but has been thriving. On the Bloomberg terminals there are around 10,000 daily visits! So, what makes this model so popular? In Dr. Edward I. Altman’s words firstly, it is simple to explain. Secondly, it is still accurate in predicting bankruptcy and defaults fairly in advance. Thirdly, it is available for free. No royalties from market participants or other users!

Z-Score measures ratios like liquidity, solvency, profitability, capitalization and viability of non-finance / manufacturing companies and combines them to give the overall number. Depending on where this total is the companies are categorized into “Safe”, “Grey” and “Distress” zones. Kindly, refer to the equation below.

where WC = Working Capital, TA = Total Assets, RE = Retained Earnings, MCap = Market value of Equity

Companies with Z scores greater than 2.99 are in “Safe” zone, Score between 1.8 and 2.99 in “Grey” zone and those below 1.8 in “Distress” zone.

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In the initial stages, Altman Z-score was found to be 72% accurate in predicting bankruptcy two years preceding the event including Type 2 errors (classifying the company as bankrupt even when it’s not going to be in future) of 6%. However, the professor modestly says that the model may not be as relevant today as it was earlier. This is on account of credit risk migration, increase in Type 2 errors, greater use of leverage, impact of high yield bonds, global competition, more and larger bankruptcies, near extinction of AAA firms. During 2016 there were only two AAA rated firms in the US, and they were Microsoft and Johnson & Johnson.

Some variants of this model were created later like the one for private firms and another for the non-finance industrial firms in Emerging Markets (called Z-Score Prime in 1995 for Latin America and 2010 for China). However, little published research is available for countries like India. Likewise, we still lack proper models for predicting probability of default or loss on debt of banking & finance companies or those of sovereigns.

Both the Z-Score and the bond equivalent ratings of the companies keep changing over the period. What was surprising is that the ratings provided by the rating agencies were higher than could have been provided by the simple Z-Scores. Take the example of GM’s (General Motors) paper during global financial crisis during 2008. Its bonds were rated “B-“ two years before its default rating even when its Z-Score was below 1.8 or in the “distress zone”. Though the company emerged stronger through bankruptcy process and had maintained rating of “B” between 2010 and 2014 its Z-score had been below 1.80.

The high yield market has grown to $1.67trillion (tn) in the US and $2.8tn globally. Of this 15-20% of the bond are newly issued CCC bonds, which are very close to default, yet the market is thriving. This has been possible as investors are compensated for assuming higher risks. Hence there is a trade-off between default rates and recovery rates. Depending on the stage of the economic cycle, the recovery rates can vary from 40 cents on a dollar to 25 cents. On an average 20 companies with size of $1bn and above file for bankruptcy protection in the US. In good times (from bankruptcy professional’s point of view) 70-80 companies file for the same.

So, is the benign credit cycle over? Based on default rates, default forecasts, recovery rates, yields, YTM & OAS spreads between high yield markets and treasury notes, liquidity, length of credit cycle, Dr. Altman says “No”.  What worries him though is surge in the size of debt both in absolute terms and as a percent of GDP and across sectors like non-financial corporations, government and households. Besides these the other big risk is politics on global trades.


PS: For the presentation please click on 50 Years of Z-Score




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Market Outlook – Feb 2019

By: Navneet Munot, CFA, CIO, SBI Funds Management Pvt Ltd and Chairman, CFA Society India, IAIP

Union budget for FY 2019-20 was staged against the backdrop of compulsions of pre-election spending but a challenging revenue situation, primarily emanating from the shortfall in GST collection. Deflation in food prices and mounting agriculture debt have highlighted the accentuating farm distress. Further, the thrust on infrastructure spending over the last few years (particularly on road, railways, housing, urban development) had just started to bear some result. The capacity utilization for some of the sectors had started to improve and it appeared that private sector was mulling capex on the expectation of continued order inflow from the government and growth improvement in the economy. These developments further complicated the difficult choice between fiscal rectitude and a pause to enable the process of stimulating the economy.

Against this backdrop, the government had eventually sided with marginal glide path on fiscal consolidation. Fiscal slippage in 2018-19 was limited to 10bps and revised deficit estimate is pegged at 3.4% of GDP. As per the revised FY19 numbers, the fiscal slippage gets primarily explained by the higher expenditure (Rs. 200 billion of allocation towards income support for small and marginal farmers).

The shortfall in GST, telecom receipts, non-financial PSU’s dividend is expected to be offset by higher direct taxes. Prima-facie, it appears that government also aims to utilize the undistributed compensation cess fund in FY19 and ask for Rs. 200-300 billion of interim dividend from the RBI.

Fiscal deficit for FY20 has been kept at 3.4% of GDP and thus frayed from the Fiscal Responsibility and Budgetary Management (FRBM) Framework which mandates the government to reduce the fiscal deficit by at least 0.1% of GDP every year till the deficit reaches 3% of GDP. In any case, another FRBM target of reducing central government debt to 40% of GDP by FY25 could also be challenging as the recapitalization of public sector banks and increasing issuances of government guaranteed/serviced debt are adding to the debt burden.

Tax assumptions for FY-20 (14.8% growth and 12.1% as percentage of GDP) are a bit on the optimistic side but not completely out of line if one assumes better enforcement of GST compliance post the general election. Dividend from RBI has been scaled up. In the current year, RBI has built its balance-sheet with G-sec as opposed to foreign securities and has stayed in Net Repo mode through most part of the year. Both the factors will ensure higher interest income. Disinvestment targets have been scaled up marginally (by Rs. 100 billion). It can be achieved if some of the long pending strategic asset sale were to materialize. A large part of the expenditure side (salaries, pensions, defense, and interest payment) is sticky. Hence, it is imperative that tax-to-GDP ratio increase substantially to enable higher spending on social and physical infrastructure.

Some relief could come to the fiscal if a windfall gain is obtained from RBI’s excess capital being transferred to the government. A committee with a 3-month timeframe (Jan-Mar) has been set up to evaluate this issue. The base case we expect at this stage is that the committee may direct the central bank to suspend the build-up of contingency fund for several years and transfer the entire surplus to the government each year (just as done during the year FY14-FY16).

As expected, the budget kept its focus on rural, small and medium enterprises and middle-class households. While this is an interim budget and the actual realization of the visions (such as the changes in direct taxes in favour of the middle-class) will have to wait till the roll-out of the full budget post the general election, it does set a narrative. Some of the rural oriented schemes such as PM Kissan Samman Nidhi and Mega pension scheme are expected to be rolled out in FY19 itself and have seen the provision in FY19 revised estimates figure. The scale of the programs was at the lower end of market expectations (market feared a fiscal stimulus to the tune of Rs. 2-3 trillion) enabling the government to stay close to fiscal targets. These measures entail an income stimulus of ~0.5% of GDP primarily for the low-income strata but if the government were to go stricter on tax compliance (both income tax and GST), a parallel amount could be ploughed back from relatively higher income class.

The earlier years of the current government were focused on addressing the bottle-necks of growth. Consequently, we saw the taxation reforms, banking sector reform, real-estate reforms, e-auction of natural resources, reduced time-lines in obtaining the business clearances, bringing the parallel economy into the mainstream, a drive towards implementation of Aadhar and financial inclusion. These reforms yielded visible gains in terms of formalization, digitization, financial inclusion and lower inflation. Yet, for a variety of reasons, the reforms are yet to translate into a higher income gains. The rising inequality and the unique nature of a large un-organized sector in the Indian economy make it imperative for a government to not only worry about the overall growth and reforms but the distributional aspects of growth i.e. a more equitable growth.

So far, India has already seen its own version of Universal Basic Income with the implementation of MGNREGA, free LPG, Free LED, Free Toilet, Free debit and credit card, Free health Insurance, cheaper housing, various interest subventions, benefits for girl child and so forth. Guaranteed income for small and marginal farmers and pension for workers in unorganized sector have got added today. Robust social security net is a must for leveraging demographic dividend and creating a sustainable, equitable growth to preserve our democratic and liberal society. JAM trinity (Financial inclusion, Aadhar and mobility) should be made best use of to prevent leakages in such schemes. Effective execution will be the key.

The gross borrowing target for FY20 had been scaled up to Rs. 7.1 trillion, even as the net borrowing was kept unchanged at Rs. 4.2 trillion (net of buy-backs). Further, the borrowing for FY19 has also been revised up by Rs. 360 billion to Rs. 5.7 trillion (borrowing calendar penciled Rs. 5.35 trillion). Consequently, 10-year bond yield jumped up by 15bps post the budget release. The bond market is faced with a mix of push and pull factors. While the extremely muted headline inflation, stable external account dynamics, dovish bias in key global central banks and continued OMOs by RBI augur well for the Indian debt market, the high gross market borrowing and the large emphasis on off-budget borrowing requirement would prevent a material rally in the yields. With the fiscal stimulus being limited, we continue to build in the probability of a rate cut by RBI in February.

The relatively sticky revenue and expenditure status at the center is leading the government to look for off balance sheet sources of funding as meeting the FRBM targets is becoming difficult. The importance of Internal and Extra Budgetary Resources (IEBR) of the Public Sector Undertakings is increasing as the budgetary support is lowered for them. In turn, there has been an increased supply of bonds from the Public Sector entities. And this is reflected in elevated corporate spreads.

From equity market perspective, budget would be seen as a positive event given the continued focus on income enhancing measures. Structural reforms undertaken over the last few years should start yielding returns over a medium term. As the event is behind us, market’s focus will shift back to global cues, political developments and earnings trajectory. Improved earnings prospects with correction in valuation should lead to a double-digit return in equities. However, brace for an extremely high volatility in the near term.



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Executive Panel: India-Economy and Markets 2019

Moderator: Nikunj Dalmia, Managing Editor, ET NOW

Written by: Ishwar Chidambaram, CFA, FRM, CAIA

Delegates at the Ninth India Investment Conference (IIC19) 2019 had access to a distinguished panel. The subject was the outlook for Indian economy and Markets in 2019. The speakers included Navneet Munot, CFA, CIO, SBI Funds Management Pvt. Ltd., Milind Sarwate. Founder and CEO, Increate Value Advisors LLP, Sunil Singhania, CFA, Founder, Abakkus Asset Management, LLP, Ridham Desai, Managing Director, Head of India Research, and Equity Strategist for India at Morgan Stanley, Research Division, and Sajid Chinoy, Economist (Asia), JP Morgan. The moderator was Nikunj Dalmia, Managing Editor, ET Now, who enlivened the discussion by bringing the best out of the panelists.

The discussion began on a lighthearted note, but quickly took on serious tones as the panelists spoke about the year gone by. There was unanimous consensus that 2018 was a bad year for most asset classes (except gold), which have all generated negative returns.

Sunil opined that investors must remain optimistic and as long as India keeps growing the returns will follow. He said that the next two years will be the period when Value stocks outperform. Mutual funds are still in a nascent phase in India and are under-invested in the firms that will be future leaders of the markets. On themes for the next 1 to 3 years, he is bullish on Discretionary Consumption, and Beverages are his favorite sector. He is also bullish on utilities which are expected to return 15% annually.

Milind suggested that the rural sector is leading urban sector in consumption. News flows will reach a crescendo in the election year. On sectors, he is not very bullish on Pharma as it is not a great consumer play. In 2019, he expects the following factors to attract investors to consumer stocks- namely they are defensive, rural consumer demand will peak and digital revolution, which has ensured that the cost of creating a new brand has fallen sharply. He is bullish on firms like HUL, Dabur and smaller FMCG firms and retail plays. He expects proximity to the consumer to be important going forward.

Ridham reminded the audience that markets have long cycles. Legendary investor Howard Marks made only 6 active calls in 50 years! In India’s case, there were shocks to the system like demonetization and GST. In 2018, India witnessed the longest and deepest earnings draw-down in our nation’s history. He is sure there will be another panic in the stock markets, but feels that we are in an up-cycle. Growth will be the source of market returns. Elections are only a short term factor. Specifically, he emphasized the importance of Growth At Reasonable Price (GARP) strategy, saying that it is not good to overpay for growth. He does not prefer the term “Value”, as people often confuse it for “Multiples”. He prefers GARP.

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Sajid feels that crude prices explain India’s growth very well. Right now we are witnessing a positive terms of trade impulse from crude. The monetary conditions index is at a 2-year low. Policy reforms like asset reconstruction, IBC, etc. are starting to bear fruit. He is however apprehensive that monetary, fiscal and regulatory easing combined will push India over the edge, which could prove dangerous in 2019. He is also worried about the increased indebtedness of the Indian states, whose deficit is bloated. The underlying current account deficit has also worsened. He asserted that there is no fiscal space for populism and that some amount of rupee depreciation is a good thing.

Navneet said that with the fall in crude prices, India’s macroeconomic situation is better in 2019. There has been a tight monetary policy in terms of real rates. As GST compliance increases, fiscal situation will improve. Earnings have been below nominal GDP growth since 5-6 years. He expects decent returns over the next year, but markets will be very volatile. He prefers multi-cap funds, and feels that India is a stock picker’s paradise. There are many sectors where the largest companies are mid-caps or small-caps, and therefore have tremendous potential. Companies that are small and agile should trade at a premium versus large and slow companies. Corporates have deleveraged their balance sheets. He prefers Capital Goods, Engineering and Construction.

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