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Foundations

Do Not Undervalue Luck

Too many people attribute their success to their own skill. At some point, when everyone is working their asses off, you begin to wonder if success has quite as much to do with talent, effort and skill, as it does with being in the right place at the right time.

People like Samir Arora of Helios have done incredibly well in the markets. However his tone in this piece named "Do not invest in Indian equities" at outlook has me wondering. The note is arrogant and sarcastic (both aren’t bad qualities by the way), telling us ignorant retail folk that:

  • Look, I invested
  • You didn’t
  • I made money
  • Now you keep on not investing, okay?

Which, you have to admit, at Nifty 6000, is true (point #3 at least).

Lucky in choosing when to invest

He extols the fact that if you see movies, a PVR investment is up 3 times since 2008.

Life isn’t just about making and investing money; it’s important to enjoy life’s little pleasures. So go watch a movie at the multiplex and munch some popcorn while you’re there. Meanwhile, we’ll buy shares in PVR (up 3 times in four years).

Wait, wait, Mr. Arora. Let’s back that up another three years, and go to their IPO in 2006,when they issued shares at a price of Rs. 225. If you were lucky enough to have been alloted shares, of course, since the issue was oversubscribed 11 times – showing that retail interest in stocks was up the frikking wazoo, and right up that alley you’re currently standing in, Mr. Arora. In that frenzy, PVR listed at Rs. 266 on opening day, an 18% premium. So if you didn’t get shares in the IPO you could have tanked up at 266.

And then repented at leisure, because:

image  

You could have watched endless movies between 2006 and now, but the PVR stock has been a dud for most of this time. Now, when you might be seeing a tiny uptick that just about brings it back to even, you find Mr. Arora gloating.

And then, get this: If you put your Rs. 225 in a fixed deposit giving you 6% per year (post tax), you would have made Rs. 338 by now; the PVR stock adds up to just Rs. 276 (including the Rs. 12 or so in dividends).

If you bought in the IPO you were plain unlucky. And it’s not just retail – even FIIs and institutions have cut their exposure to this stock, from a total of 49% holding in 2006 to 22% in 2012.  In fact, from 2008 till now, retail (as in non-institutional) holding in PVR is up substantially.

The problem isn’t whether retail holds this stock or not. It’s the timing of the purchase. If you got in at the depths of 2008, you were most likely darn lucky.

Hide the Unlucky

Assuming the lack of luck, means that every loss that you make is attributable to sheer lack of talent. Lack, perhaps in identifying Arshiya, where the stock has dropped from 130 to 39 in just January 2013, and where Mr. Arora has a significant stake.

There are countless examples of duds. While you could have watched movies in PVR, you could have used a mobile phone as well. And more people are using mobile phones today, compared to 2008, than watching movies. Yet, nearly every mobile company has been a dud. The mobile infrastructure players too – like GTL infra – are down substantially. India has a shortage of power, no? Power companies are on life support in the stock markets. More people are flying airplanes than ever? The stocks aren’t exactly flying anywhere.

We’re still making money

Sure, you could say that net-net, we’re still making money. Yes, net-net is the point. But whatever little strategy you have, it involves a substantial amount of guess work. You can only guess what the future looks like, based on some figures that someone has given you. Those figures may be wrong.The assumptions may be wrong.

When they are, you can attribute those to luck.

When those assumptions work out, it’s the same lady that’s doing it: luck.

We could avoid the hubris of attributing our success to skill, when what we do is quite as much about luck as it is about skill.

I’ve been incredibly lucky. Luckier than my dad who lived in a village and walked a long distance to school, and made his way up the ladder the hard way. Lucky to have had the opportunity to study and go to college, when millions don’t. Lucky to have a government fee structure of Rs. 2,000 per semester in the college I went to. Lucky to have graduated in 1996 in the heart of India’s IT revolution, giving me a great start. Lucky to be in India’s great growth story through the 00s. Lucky to be able to write this in a kinda-sorta-free country.

There is some skill involved

When opportunity knocks, you gotta open the darn door, not just sit around. So yeah, the people who work hard succeed because they take the luck and make it work for them. That is not unimportant. It’s par for the course. Gotta work hard. Or smart. Or something like that. Don’t take away the wrong meaning that if it’s luck anyway, let me sit and do yoga while I wait for luck to drop money into my bank account.

Focus, then, on getting lucky

This is what one does in much of life anyway. But I digress.

But the true point is: take chances. Calculated, or whatever, but take those chances. If you don’t bet, you can’t win. For the entrepreneur, it’s about creating and following many leads, chasing many investors, hitting different markets; you never know what will succeed. For the investor, it’s about taking bets when you’re reasonably confident and not waiting forever.

It’s also about admitting mistakes (and attribute them to luck if it makes you feel better) and moving on. After all, if it were skill, then you’d never get out of a stock. And that only helps sell Warren Buffett books.

  • amar says:

    Mr Shenoy:
    There is nothing called `luck’ here. Equity investing is pure science. Which formula you apply for valuation will determine your luck. Do you value the stock by TTM or forward EPS? If the latter, you would have felt lucky to get an allotment of PVR. If the former, you would not have applied for the IPO.
    Second, smart investors do bottom fishing. They jump in when the stock undergoes correction. IPOs generally are rushed through during a bull phase, hence as a rule expensively priced. The intelligent investor keeps the stock on his radar and makes his catch when such expensive stocks undergo a selloff due to overall market sentiment or on profit booking.
    May be you should take up your old job of incubating tech companies.
    Amar

    • fubar says:

      You sure haven’t heard the adage: A stock which loses 95% is a stock that lost 90% and then halved. What is that ‘pick up in a correction’ you are talking about?

      • amar says:

        see the chart provided by Mr Shenoy. If u had picked up PVR at Rs 50 plus level around 2008-09 when every one was selling. and not now when it is above IPO level! But if u had jumped in when it was above IPO level thinking it is going to go up, you would be blaming ur bad luck!…..

    • I wish I could highlight this comment with “Hubris” 🙂
      “Forward EPS” is a figment of someone’s imagination. Bottom fishers have seen more people still sitting at the bottom as compared to the guys that made it back. And then, this research business might need a little more work because I have never done the job of “incubating tech companies”.

      • amar says:

        the most common rule repeated often: buy when everyone is selling and sell when everyone is buying! ur article says PVR IPO oversubscribed 11 times! everyone wanted to get lucky i guess!

  • fubar says:

    Good piece Deepak. Luck is the most underrated or at least under-acknowledged factor in life.

  • DJ says:

    There was a recent comment by some dude named Mauboussin that luck plays a more important role as one becomes more skillful. In other words, when you have a lot of skillful people, luck is the bigger differentiator. I like his paradox of skill concept:
    http://articles.economictimes.indiatimes.com/2013-01-11/news/36280117_1_luck-legg-mason-capital-management-randomness
    Also, was reminded of a recent commencement speech by Michael Lewis talking about the importance of luck.

  • Murty says:

    I totally agree with you Deepak, and I do not mind if Stock Investing in Science. Like the Shepard in THE ALCHEMIST, who travelled as far as Egypt, only to realize his treasure is in his backyard, Luck is something beyond science. Or is it science too? Not sure.
    Though , I quote a few examples::
    On Q3 results of infosys, many of these scietific analysts were quoting it may gow down below the then price of 2258…. Actually I bought it at 2300, and it is 2800 the next day, which means I made 500 a piece, while others who followed the herd, are still fuming!
    They still say TCS and WIPRO are TECHNICALLY STRONG! Technicals my foot!
    It is sheer luck that I heard(How many of others heard this I do not know) that LIC increased its Infosys share by 3000 Cr. and I followed the news.
    While LIC made Rs.450Cr. in a single shot, I made in proportion to my investment.
    WIPRO….. ????? TCS…….??? They may be technically strong, and in the long run they might be good, but we are not discussing anything technical…. we are discussing about LUCK!

  • SMART Trader says:

    Excellent article. Thanks
    Being in the right place at the right time is important.For that you need to have the right connections to get the correct inside information. Those who made it REALLY BIG with fundamental investing in India made it in the early 90s and had access to either company information or DII investment information
    Most of the biggies made their decisions not by reading Economic Times or Dalal Street Journal like you and me but they were front running DII. Most of these people made big money when markets were controlled by UTI and LIC. Now these guys are playing safe by investing big and joining the respective boards.
    Regarding luck, what you have written is correct. I started putting multiple applications for IPO. Infosys was firm allotment and I had 800 shares allotted to me in different names. I sold everything when it tripled. I could have stayed with it. Quarter century of investment efforts could not beat it.
    I lost Rupees one lakh in Fairgrowth Financial services promoter quota. Kotak Mahindra shares issued at Rs 10 was quoting Rs 1400/- then. FairGrowth was quoting 2000 unofficially. Then came The Harshad Mehta scam and my hard earned money went down the drain.To add insult to injury I had to appear before CBI and other agencies for owning these shares.
    Now totally focused on trading Nifty Futures, 3 Minute chart where skill weighs a little more.
    SMART Trader.

  • Jason Braganza says:

    Amen Deepak! And I wish you hadn’t linked to his post. He does not deserve my attention.

  • arp says:

    His fund Helios Strategic lost 66% in 2008, made 67% in 2009 and 11% in 2010. So, if you invested $1M in his fund in 2008, at the end of 2010 your portfolio would be $630K.
    If you first lose 66% and then make 67% you still lose 43%. That is how multiplication works.
    Picking up Dec 2008 to say that their stocks performed 2.5 times etc does not present a fair picture.
    I remember Mr Arora talking about short opportunities abound in 2008. Apparently his fund was not short and most likely they were as much confused as most of us were. Probably the were caught unawares in 2008 and managed to “average down” without blowing their accounts in 2009. Isn’t it called survivorship bias?
    I am not sure if his funds are sufficiently outperformed their peers or their benchmarks over a period of say 5 years or say 8 years. If one is using 2-3X leverage, and trading long and short, then I would expect them to outperform the markets by atleast 1.5X the markets in the long run.

  • arp says:

    If the fund’s performance is spectacular there is not need for the fund manager to go on TV keep giving interviews etc. The funds performance speaks for itself and the investor money chases the fund manager.
    On the contrary if you are performing average one needs to go on TV and in media to stay relevant. Here the fund manager keeps chasing investor money for 2/20.

  • Anil Kumar Tulsiram says:

    Excellent Deepak, I fully agree with you
    Sometime back I read a wonderful article by Michael Mauboussin on the same topic which I interpret to mean we need to have long term invest horizon (> 5 years) and invest in places where there is lot of inefficiency [stocks not followed by analyst and disliked by FIIs]. Here is the extract “ The reason it’s so hard to beat the market is because everybody is really good at it. Everybody works really hard at it. Everyone is working with basically the same information. So it makes things pretty efficient for the most part. And so I don’t think it’s all luck, but I think it’s closer to that luck side of the spectrum. As a consequence, by the way, it means you really do have to think about longer time periods to be able to assess a strategy or assess a particular manager, because it’s only over time that the skill will shine through. In the very short term, it tends to be very noisy and very lucky.”

  • shailendra says:

    Good one deepak.This post is going to get lot of attention , a lot of people are going to get hurt:)

    • Thanks Shailendra 🙂 I’m sure some people are not happy but I’ve heard Samir Arora is a really cool guy in real life and doesn’t have hangups about people refuting him.

      • arp says:

        He is definitely an achiever in both academic and professional worlds. No doubt about it. The article, I assume, was written with a jest and sarcasm, but Outlook should have done a better job of editing. Picking Dec 2008 as the base to boast how their stock picks outperformed is sheer stupidity and insult to their readers.
        In the higher echelons of finance it is not purely skill, or luck, it is also who you know that matters. If you remember he was banned by SEBI for insider trading and a few other violations.
        I find it disappointing to see a man of his caliber on TV day-in-day-out peddle his views on the market and at the same time not want to disclose his fund performance.
        The Indian business media is juvenile as well. If they claim Mr Arora is an investing genius they need to publish his track record. We all know Warren Buffet, George Soros, Jim Simmons are great investors / traders because their performance is public and tracked. In the case of Mr Arora no information is forth-coming.

  • Kuldhir says:

    Dear Deepak,
    One more such kind of person is yogesh chabaria. Would like to have your view on his blog.

  • arp says:

    Deepak,
    Mr Arora should discuss the disaster of the Alliance New Millenium Fund which he managed when he was at Alliance Capital.
    The fund opened at Rs 10 (FPO price) in January 2000 and load-entry of 1.75%, and by Nov 2001 (23 months later), its NAV was …. Rs 2.88 !!
    Multi-bagger or Multi-beggar ?
    http://www.hindu.com/businessline/iw/2001/02/18/stories/18d011c1.htm
    http://www.business-standard.com/india/news/alliance-new-millennium/22/17/100128/

  • Sandeep says:

    Mr. Arora was barred by SEBI (see the reports below) but ultimately let off by SAT (are we surprised). After staying low profile for number of years again started appearing on various TV channels in a new avtar (Helios Capital)
    Mumbai, Aug 9, 2003: : The Securities and Exchange Board (Sebi) has debarred star fund manager Samir C Arora, who recently announced his resignation as head of Asian Emerging Markets at Alliance Capital Management (ACM), from the capital market under section 19 of the Sebi Act read with section 11B and 11(4)(b).
    Sebi on Saturday directed Mr Arora not to buy, sell or deal in securities in any manner directly or indirectly on an immediate basis till further orders
    Sebi banned Arora from capital markets for five years, underlining three main charges in its final order that was passed in March this year.
    One, he played a pivotal role in thwarting ACM’s efforts to sell its India operations by resorting to unethical means.
    Two, apart from indulging in price manipulation of certain scrips, he did not make disclosures and sometimes even made wrong ones when some of ACM’s holdings in certain stocks breached limits that required intimating the respective companies.
    Three, Arora disposed off his entire holding in Digital GlobalSoft based on unpublished, price-sensitive information.

    • DJ says:

      Same thing with Shankar Sharma (he was banned by SEBI on price manipulation charges). I don’t know why in India, media and people in general have short memories. A Kalmadi or a Bhanot can be back in the saddle despite earlier transgressions.

  • Murty says:

    I do not unerstand why people are after Sameer Arora. He was not alone then. These people who are whining now should not forget the ANIL AMBANI fiasco with Reliance Power, along with the ECONOMICTIMES and TIMES OF INDIA, which bombarded with a great views and news(Paid, Ofcourse from Bennet and Coleman), who suggested it was gread stock, but see it now? You blame Ambani for that?
    So was many others, who fooled common public.
    The paid news about a small firm KARUTURI GLOBAL NETWORKS, ran about an year in all media, about their Ethiopian Farms etc, now reels at Rs.3 per share…….All great analysts projected it to be a great stock……
    People were making hue and cry about the split of Reliance Industries of DHIRUBHAI AMBANI, while a small associate of AMBANI made news(NOBODY NOTICED THOUGH!) with his penny stock skyrocketing in a single day…..
    Stock Picking is science?
    I still remember post Harshad Mehata that this stock doubled, that stock tripled and cases similar to that, but whenever a prediction goes wrong, the common buzzword amongst these analysts was YOU HAVE TO THINK OF LONG TERM! HOW LONG? NOBODY KNOWS!

  • Krish says:

    These days print and TV media coming out with ‘stock gurus’ articles sympathizing that retail investors have missed the rally and there is still lot of steam left out in the market to make fortunes.
    I am not sure whether retail participation would join the bandwagon or not at later point, the heartening news is that DII equity outflows are growing. This has been a frustrating factor for domestic stock analysts.
    I had taken limited exposure of equity in last Quarter through MF route and am happy with 10% returns and do not nurture to continue long. Thinking of shifting to debt even with predictions of reaching NIFTY/SENSEX to new levels. Frankly after Apple stock crash on NASDAQ in recent times, my faith on equity as superior investment instrument is eroded.

  • Hari says:

    Its easy for anyone to come out and say they made a fortune since 2008 December as that was when the stock markets bottomed out. I think deepak has outlined the importance of timing the markets more than once in this blog.
    Investors in Lupin (4X), GSK Con (4X), ASHOK LEYLAND (10X returns from 8 to 80), ICICI , Rajesh Exports (Rs.20 to 140), KPIT CUMMINS and heck even a less spoken about Andhra Bank have given 3X returns (36 to 108).
    It will be interesting to see Aroras track record year in and year out. If he has been able to consistently able to generate higher returns with lower risk then its an achievement.Just trying to highlight how he made money in a few scrips when he was a portfolio manager who is obligated to invest in equities isn’t something that enthralls me.It will be nice to see how he made money when the index barely moved or was at a loss.
    To have luck on your side its necessary to be constantly monitoring the news flow and be focused for a great opportunity (ex – Orchid chemicals after the bear stern collapse fell to 108 and rose a 100 % withing a month). This is something that most retail investors cant do and they do not have the ability to accept the losers in the portfolio.
    Thanks,
    Hari

  • venky says:

    I read the original article in Outlook and did not come away thinking the same way. Samir was clearly trying to nudge the retail investors to look at investing in the equity markets- his voice has credibility because there is no direct benefit to him if retail investors invest since he is not a broker or a mutual fund manager looking for clients. I have heard him several times on cnbc asking retail to invest in mutual funds in general and not look for tips/ideas.
    I think that outlook choose 2008 end prices to dramatize the returns – this does not mean that Samir or indeed anyone else bought all the stocks on the prices available in Dec 2008. I do not understand why investors keep saying that they have not made any money in the past 5 years- did they put all their money into the market on December 31st, 2007 . If you invest funds regularly you invested some money in Dec 2007 and did not do well on that investment but then you would have made money that you invested in the market in December 2008(say) and December 2009 and December 2011. Again do not take this too literally and get hyper.
    I follow Samir Arora quite closely in his writings and in his interviews and when he was a fund manager at Alliance. He says what he feels like and that is refreshing- unlike many other fund managers who say something and then immediately add “ but on the other hand” type comments. His Arshiya bet clearly does not seem to have worked but one cannot have a 15 year career in the markets without having some duds in the portfolio once in a while.

  • The Truth says:

    Actually what Deepak is saying is it is all DESTINY.
    It is all programmed in your genes/DNA.
    It is only our EGO that makes us feel that it is our skill or decisions that made a profit.
    It is programmed.
    Money is energy that just moves from one pocket to another as per our karmic fruits.
    Yes, u cannot change ur past but u can change a part of ur future by sowing the right karmic seeds.
    Be good and u will get good.
    Love and u will be loved.
    Give and u will get.
    These are simple things and all of us know, but how many can practice.

  • dinanath says:

    It’s luck.I agree. A very large portion. Studying fundamentals is a bit of work. Once I have selected a stock then it’s luck all the way. Timing, price, company future, the macro and micros as the say. Everything.

  • Murty says:

    Why don’t we treat that article by Arora is just a write-up like paid news? The reason is , if you have selected those stocks mentioned in his sarcasm, you would have made some money. But it was cleverly written, without mentioning any dud stocks, also note that he did not mentioned the IT/Banking/ gold stocks, which have done well.
    While he gets his remuneration from Outlook, we waste time on the debate!

  • feltra says:

    Deepak ji,
    I hope this message reaches the widest possible section of people – especially newcomers.
    In my life for example, almost everything that has happened for the good was because of either ‘Right place right time” and someone else helping me or pointing me in the right direction. If things had gone the way i ‘planned” them, i wonder where i would have been 🙂
    I think people, successful people -esepcially, pardon me for saying this – those who write on newsgroups, talk on TV, etc – basically people who “talk to a crowd” have a hard time accepting in public that luck played a major part – they have to appear wise and all-knowing!
    It’s also true that skill or rather “work” plays a big part… in fact I believe there is a quote by some great personality to the effect “I believe in luck – the harder i work, the luckier i get” 🙂 and he may not have been talking only about hard work as it appears from first glance. Similarly, the one and only Newton has said “Genius is 1% inspiration, 99% perspiration’.
    After trying to get my hands/teeth whatever into this investing /trading game, I think the real reason why people dont work that hard is a lot of work is really disciplined “grunge” work. Analysing and fitting a company into a slot is extremely exciting when you are starting out, but having to keep doing it co after co, qtly result after qtly result, news snippet after news snippet and when your own folio is going down and all bets are going off – that is really hard – because you are really ALONE in trying to do it and find answers… alone in a sea of like-minded investors/traders etc who also are equally alone with respect to their own folios their own analyses, their own buy/sell decisions.
    I believe if one can conquer that loneliness in keeping the eye on the ball, one can eventually start the trickle of luck in ones direction.
    Thanks for the excellent article. Even though i am replyign only for this one, all your recent articles are great… please keep up the excellent work
    Best Regards,
    -feltra

  • I feel, profiting from equity investments requires both – luck and skill. You need the necessary know how and skills to pick up the right stocks for investing. But however good or extensive your research , there would always be an element of uncertainty which is associated with each investment which is the “luck” factor- that things may not work out as planned.

    • Murty says:

      Sriraksha Ji,
      Finally it counts down to luck and luck only…..
      Last couple of months, the analysts, the investors, the critics….everyone estimated one stock to perform well and that gave VERY CONSISTANT returns, and even on a day of its Quarterly results, which indiacted a 4.6 times of increase in their profits, with all good news of getting approvals from the concerned, with too much good news around, on the day of results, it drops down 4%. After making very postive estimates, the same anlysts are to say that they are CAUTIOUS! These are the same analysts that put targets of 5 to 20% upside…. Now what is science? Is it insider trading?
      The Stock :GLENMARKPHARMA
      Average Price around : Rs500.
      Last traded Price: Rs508.
      Estimates from Analysts: Rs.520. Rs.535, Rs.600……..No time frame.
      But interestingly , Glen Saldahna gave an interview by the evening, which is very in-depth. Do not read the misleading headline, but the OWNER suggested very subtly that the consistency is going to be continued….
      Please read…..
      http://economictimes.indiatimes.com/opinion/interviews/dont-see-30-growth-being-sustainable-going-forward-glenn-saldanha-glenmark-pharma/articleshow/18255147

  • Sachin says:

    Not only Luck but some common sense also helps.
    Just follow good investors (sidecar investment). Buy stocks after warren buffet has bought the stock and sell after he has sold the stock. You will probably buy at higher price and sell at lower price than him but still track record indicates you would have beat benchmark returns. Their can be many such examples in indian context as well like Franklin Templeton, Fidelity or HDFC fund managers. Instead of following free advise on TV from so called stock gurus, retail investor should spent some time on ‘blindly’ following good fund managers buy/sell transactions.
    — Sachin

  • Guruprasad V says:

    Surprisingly the so called Emerging Market Guru “MARK MOBIUS” has been massively under performing Emerging Market Index for massive 20 years. Talking clowns. They talk about Dollar collapse, EU problem, End of world and all the stuff in beautiful English and when you ask for track record, they would bullshit or the record would make you laugh. This is the reality.

    • Sandeep says:

      Their expertise is in “Selling/Marketing” themselves not fund management 🙂
      The funds managed by them are the dumping grounds for them. Whatever country/stock is underperforming in their proprietory portfolio it gets shifted to the “public” funds managed by them.
      Surprise Surprise ! the brighteset brains from the best management colleges all over the world (including IIMs) are not hired to manage Mutual Funds (public money) owned/managed by the biggies (both in India/US) but the proprietory funds.

  • arp says:

    A friend once told an amusing story about Mutual Fund industry in the US. He mentioned that typically a MF company would incubate 10-15 funds (portfolios) with a capital of say $1M to $5M each. These are managed internally and not available to the public.
    Now, out these 15, whichever 2-3 funds start performing for a couple of years are taken public because these 2-3 funds have a performance track record.
    So if you have 10 portfolios, and a couple of them produce 15-20% returns after 2 years, the MF company gets them audited and applies for the necessary regulatory approval for public offering. The public never knows that of 10, only 2 were successful.