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"Do Not Over Leverage At Any Point In Time"

Monday, March 04, 2013

The equity markets are confusing at the very minimum and deciphering the same is a Herculean task. So, to know how to look at the fluctuations in the equities segment and make sense of these movements, Kishor P Ostwal, CMD, CNI Research spoke with Manik Kumar Malakar about how he goes about manoeuvring in the markets. A man who strictly feels that sentiment has no place in the markets and that fundamentals rule, this Chartered Accountant shares some interesting insights about the bull versus bear battle.

A little background about your company and yourself?
CNI Research Ltd is a publicly traded research firm in Indian equities. It generally covers small cap and mid cap stocks, though sometimes it covers large cap stocks too. We are partnering with Bloomberg, Dow Jones, Reuters, Standard and Poor and ISI Emerging markets, to name a few, as content providers and research reports providers on Indian equities. I am a Fellow Chartered Accountant (FCA) and the CMD of the company.   
At what point had you given a thought to making a career in the stock / financial markets?
I qualified as CA in 1989 and was in practice till 1995. I handled tax work of many of the TATA group companies. I had been working in the merchant banking division since 1990.  Having experienced  seeing the bull runs of Harshad Mehta and Ketan Parekh, in  2002, for the first time I conceived the idea of forming a research firm as I found that many retail investors are deprived of getting correct and professional unbiased guidance on equity markets    
How do you pick your trades? Do you use technical analysis, or do you employ fundamental data?
I use only fundamentals and not technicals.  You must know that the person who makes or prepares charts is also a human being and therefore open to suggestions or manipulations. Fundamentals cannot be changed. They will remain the same whether the stock performs or not at the given point in time.  
How would you describe your methodology?
My methodology is a bottom-up approach. I eliminate from coverage over owned stocks and over priced stocks, howsoever lucrative they may look: e.g. TTK Prestige and VIP were my finds at Rs. 90 and Rs. 34, but at current prices I am negative on both these stocks.
What appeals to you about trading? Short or long side?
A Trader has no sentiments and no appeal that matters. You need to define you are trader for 6 hours, 6 months or 6 years. I am a trader, but for six years plus. The reason is very simple. The bull market Vs bear market ratio is generally 12-13 years to 20-21 years. The Bull Run seen in 1992 and 2000 were not bull runs. These were bear rallies and in my opinion bear rallies always are faster and more powerful than bull markets.
What differentiates you from other traders?
Other traders try to time the market. Also they are focused and concentrate only on equity for the purpose of deciding the bull market vs bear markets. In my opinion the bull market is decided by the bullishness in the commodity and the mother of all commodities is Oil.

So Oil decides where we are heading. In 2003 I think the bear market ended where Oil and Gold bottomed out. Since then we have not seen Gold and Oil prices breaching the 2003 bottom. In 2006, 2008, and 2010 we have seen deep corrections and traders called it a bear market, but for me these were corrections offering good value buying.     
What gives you that edge?
The Indian market tried to copy many things from western markets but the inbuilt supports are still missing e.g. globally we have physical settlement in derivatives and in India it is missing; giving control of the market in few powerful hands. My edge over others is that I understand the weaknesses very well and initiate trading based on delivery and avoid falling prey to F&O volatility, which has become most unique per se in India.
Is there any applicable lesson to investing?
Yes. You need to play carefully in derivatives as the system is fully exposed to the cash settlement mechanism. In cash settlement, you have to settle the difference on the settlement day in cash and cannot insist for delivery even if you have the bank balance. Also one has to follow bottom up approach in investing with full due diligence on the stock as well as promoters.
How much of what you do is a gut feeling?
There is no room for gut feeling in the stock market. Please note that stock market has now become an industry for investors and a gambling den for traders.  I used the word gambling because speculation is healthy, whereas gambling is pure gambling.
Do you try to anticipate or follow market trends?
 Yes, I try to anticipate market trends and have a pretty good strike rate of 80% plus. My basis of trend changers are not news flows. It starts from the build up in derivatives and ends with the exposure of the majority traders. Most of the time stock prices correct on good news because strong hands use your buying as an exit option.   
When you put money on a trade and it goes against you, how do you decide when you’re wrong?  What do you do next?
Short term traders have to reverse their positions. In case of fundamentals either it is bad and irreversible or it is a short term correction.  In the former case we close our positions even in losses and forget the trade. In case of the latter, so long as the basic valuations hold, we stick to the stock idea. Generally we avoid averaging in falling markets. We advise averaging when stocks are rising.
Any positions you ever lost sleep over?
No. The reason is that we do not have leveraged positions. Even if we go wrong in 40% cases, we will still remain afloat. Yes there were few years when we always saw negative returns, but surely not so much to lose sleep. 
What would make you wary about a trade?
The reversal of governmental or company policies, that could affect my stocks.
Do you have a scenario about how the current bull/ bear market will end? Where do you see the Sensex in 2015?
We are still in the bull market that started in 2003 and in my opinion it should continue at least 2016. I am really not sure what will happen after 2016. My assessment is based on commodity cycles. I see Gold testing the 333 USD and Oil 200 USD in next 3 to 4 years. My Sensex target for 2015 - 2016 is 41000 and in my opinion the Sensex growth of 25 to 30% could be a real pleasant phase for the Indian capital market.
Of the tens of thousands of trades that you have done, which was your best trade?
Sandur Manganese. I picked it up at Rs. 70 and sold at Rs. 1340 in the span of just 9 months.
What was the story there?
 A complete dark horse.
Your success mantra?
Traders can win even in this volatile market if they follow a few simple rules.
1) Do not over leverage at any point in time.
2) Trade only to the extent of 25% of your net worth.
3) Bet all trades evenly.

Mark my words: every person operating in the stock market has some powerful source of information. But giving extra attention to any information and trading in an over leveraged manner kills you. Else a 60% strike rate is possible for everyone.      
Any final words?
Depend heavily on research - the area ignored by the investing community.

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