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Ranking Indian sectors

Mukul Pal  |  Mumbai 

Recently, I met more advisors and money managers at one place than ever. And, strangely, a part of this cluster voiced lack of reverence for Warren Buffett. This was in Toronto. I was there for a conference, and even a mention of Buffett evoked "I am not a fan" response. When I hear money managers saying that he did poorly on the Bank of America deal, on one side I see some criticism of what the sage is doing and, on the other, I see an era of sideways market and increasing market knowledge that challenges the 'old school of thought' leaders.

It's all psychology at one level because Buffet never admitted being God. It's the market participants who bestowed him that status. It was also not his fault that he was a 11-year-old, growing up in his father's brokerage company at the end of the great depression, which was incidentally also the best time in a century to buy and hold. Irrespective of Warren's timing, there is one thing we should give him credit for: He practices what he preaches. He learnt his lessons well and understood that contrarianism works. And, this is why we at Orpheus stand by him for his contrarian ability. At a certain stage, contrarianism should become intuitive, especially if you have an ability to hold on to your investments for decades. Few can do this today.

At a certain stage, if you can identify an extreme underperformer and have the courage to accumulate it, you don't need anything else. Sooner or later, that outlier would turn in your favour. This should happen most of the time. An investor will have to assume certain risks, as these can never be eliminated; they can just be minimised. Warren summarises contrarian investing well. The only problem is identifying extremes needs experience, objectivity and patience. A simple investor lacks all the key three skills; hence, he generally misses such opportunities.

This is why Buffett's contrarian thinking is rare, more of an art than a system. Above that, it's hard to practice. Buffett’s quotes, "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." This is hard to practice.

By ranking performance and using a jiseki performance cycle, an investor can compensate for experience and patience. The system tells you when to act. And, coming to look at how different is Buffett's contrarianism from extreme reversion, find an extreme, and if it's a positive extreme, sell it; if it's a negative extreme, buy it and be prepared to hold it without getting biased. Extreme reversion is nothing but statistical and objective contrarianism. But then, acting on the simplest things is hardest.

Let's take the current market. We have so much fear that VIX has spiked to a panic extreme (ATMA chart of the week - We are already into the Yale Hirsch positive seasonal cycle, we have Benner 2011 low-time window and we have tons of negative news which tells us that sentiment is really negative. We are already 12 months in the Sensex bear market starting November 2010. Commodities have been in a primary bear market for at least six-nine months and multi-month momentum is already oversold. What better time to look at extremities?

The Orpheus performance ranking is an objective system that ranks assets based on their performance. We took 33 Indian indices and ranked these among their global peers. Around 67 per cent of the group should sub-mean performance, 27 per cent of the group showed worst performance (sub 20 per cent) and only 12 per cent was in the top percentile (more than 80 per cent). The worst 20 per cent were sectors where one has to look for accumulation (BSE Real, power, oil, IPO, PSUs and capital goods) and the above 80 per cent were sectors where investors should allocate out of (BSE Auto, health care, FMCG and consumer durables).

The author is CMT and co-founder, Orpheus CAPITALS, a global alternative research firm

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First Published: Tue, November 15 2011. 00:46 IST