The Truth About Investing- Howard Marks, CFA, Co-Chairman, Oaktree Capital

Contributed by: Shravan Kumar Sreenivasula,CFA


It was a pure pleasure to watch Howard Marks of Oaktree Capital speak in an event hosted by CFA Society India and ValueQuest Capital. I have read and followed most of his memos in the recent times and the concepts he was explaining were not new. But to listen from the horse’s mouth has its own impact.

Most importantly, on the current state of markets with regards to the investment cycle, he suggested that the US equity markets might be in the 7th innings (of the 9 innings) baseball game. For the Indian audience, it is approximately the fourth day of the five day test match. There have been no mishaps for a long time and the economic data points have largely been good. It has not yet reached the euphoric stage, as people are not yet giving ideas to him at the social gatherings.

Having said that, he proposed that predicting the movement of the markets is a futile exercise. Well, no one in the world knows where the markets would be at a given point in time. The better things to focus on are the businesses and the valuation one pays. It is important to structure the portfolio to tide over the headwinds.

While he mentioned that it is important to predict the cycles, it may be costly to get on and off the investment cycles in India as the trajectory is upwards. This is unlike some of the developed world markets like Japan where predicting cycles and investing at low prices & exiting at high prices may prove worthwhile.

The most difficult and important think is to tell the client that we do not have answers to the known unknowables (like where the markets will be next year). We might lose him to the competitor who might give him/her a perfectly logical answer whose probability of happening is low. Once the client experiences the impracticality of the prediction, he/she could come back.

The defining lesson for me was quoting Albert Einstein’s observation: “Not everything that counts can be counted and not everything that can be counted counts.” This is particularly important while thinking about risk in the portfolio – the money that can be lost.


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He busted the myth that one could pay any price for a good company. He reminisced his first assignment at First National City Bank in 1968 where he invested heavily in “Nifty Fifty” stocks – America’s best and fastest growing companies paying high PE ratio (of 80-90x). The hard lesson of paying the right price was learnt over the next decade as valuations corrected significantly.

On choosing bond market to utilise his skill set, he mentioned that he was a conservative investor and hence bond market offered him the right fitment. For equities one has to be a dreamer.

In a lighter vein, for a debt market stalwart in Howard Marks, I expected more debt market participants. 495/500 people (thats 99%) who attended the session were from the equity markets. A phenomenal experience! Looking forward for his second book soon.


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P2P Lending – The new and rising asset class


Contributed by: Jyoti Soni, CFA

The Delhi chapter of the Indian Association of Investment Professionals (IAIP) organised a speaker event titled, ‘P2P Lending – The new & rising asset class’ on 25th February 2017.

Peer-to-Peer lending is a very new concept in India. We have seen a presence of unorganised market for P2P in India for a very long time but this concept never came in an organized and regulated way before. The audience present at the event were already sounding too curious to know about this asset class. How does it work? How is it different from our banking system and old aged lending system? To address all these questions, we had an eminent speaker, Mr. Vinay Mathew-Founder & COO of

This slideshow requires JavaScript. is India’s leading P2P lending platform. Vinay started the session by highlighting the importance of structured data today. Data is the foundation for all online businesses. Structured and unparalleled data about individuals and companies is available on the internet through various social media and e-commerce sites. It can be used to understand an individual’s behaviour and likely social demands. Along with data structuring, a rapid increase in mobile users, mobile applications, digital or online payment systems has together given a boost to e-commerce and online platforms.

The basic premise in P2P lending is to break down the incumbency of an investor and a borrower. An investor can add a new asset class to his portfolio with high risk-adjusted returns. In a growing economy with high aspirations of the people, lending phenomenon tends to grow multiple times in future. Hence, the demands of the borrowers either remain unserved or underserved by the banking system. Banking institutions are highly regulated and have a high cost of capital. Hence, they cannot fulfil the loan requirements of a large number of people. Thanks to Peer-to-Peer lending platforms, today we have an alternative lending source.

The platform works by first verifying the details about the lenders and the borrowers. In the second step, a credit rating is assigned to the borrowers and lender’s money gets deposited in an escrow account. After this, fractionalization of loans is done among borrowers and lenders.

Main Pillars of P2P lending:

Retail Lenders: The funds lent by a retail investor is allocated amongst several borrowers rather than a single borrower. In this way, the lender can diversify his credit risk and achieve a high risk-adjusted return.

Retail or SME Borrower: A borrower can get the loan quickly without any documentation hassle and at a better cost than any of traditional bank.

Data from different sources: Data about borrowers is gathered from different sources like E-KYC, CIBIL, Bank data, Mobile data, ITR data, social data and psychometric data to evaluate the credit risk of a borrower.

Technology: Faster, transparent, convenient, tech-enabled processes and auto lending reduce the cost of borrowings and quickly process the loan disbursement.

Conclusively, the P2P lending seems to be a win- win situation for both the parties (lender and borrower). It has been prevailing in developed nations like US, UK and China for many years now. However, in India, it is till at a very formative stage. IAIP Delhi chapter wishes all the very best to the team at and is grateful for sharing this knowledge with us.


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Is Hummingbird Making the World More Polarized?

Contributed by: Hiren Chandaria

Today, the world is more polarized than probably any other period after the Second World War. We are left with three kinds of people in the world today, those ‘for’, those ‘against’ and those who don’t care.

It is extremely difficult to find the fourth type – those who are confused or admit that they don’t know. Hardly anyone says “I know that I know nothing” – Socratic paradox. I believe the reason is not that people are intentionally trying to have a know- it- all attitude.

To explain my point of view, let me give you a small example. A small kid believes that only his religion is right and there is only one God and that God is of his religion. He is surrounded by people who are preaching the same thing to him. Not even once has he got an opportunity to envisage a healthy debate questioning his beliefs. Do you think the kid will question his own beliefs?

Today, we are bombarded with information over the internet. What we read /search/ watch is saved in the Google algorithm. The next article we are likely to see will be a logical extension of what we watch and have bias towards it.

If you watch a few videos on president Trump as a savior of America – the algorithm will bombard you with many more videos on the same theme. Again, today, the media is very biased -the kind of news channel you watch will help determine the political bias. The algorithm again saves the source of information and keeps strengthening your bias. Let me call this a “Confirmation spiral”.

You may be wondering what does all this have to do with Hummingbird. Google Hummingbird is a search algorithm used by Google. Unlike traditional search engines that focus only on word match, Hummingbird also judges context—thereby judging the intent of a person carrying out a search, to determine what they are trying to find out. This concept is called semantic search.

Because of our dependency on the internet and this confirmation spiral, we have built strong opinions about the world, like the kid in the example who lacked exposure.

This reminds me of a historical speech by president George Bush after 9/11 stating that “Either you are with us or against us” in the war against terrorism, leaving no scope for neutrality.

The moment we get influenced by confirmation spiral, we unconsciously start building walls or echo chambers around us. We start feeling more comfortable socializing with people who agree to our views. A simple exercise that we can do to find if we are trapped in the confirmation spiral would be to check the tweets we like, check the views of those whom we respect, check our Facebook posts etc.

The idea of this article is not to blame anyone. At no point, I intend to belittle the excellent work Google is doing and making life easier for you, me and everybody. But this article intends to make us aware that we may be biased in our opinion. The opposing view may have many merits and should be heard – if not respected –  for its perspective.

Like in behavioral finance, the mere realization of a bias can help mellow down our hardliner views, build respect for others’ opinion and result in healthier debate. This realization may help us to avoid hatred, if not war. So, let’s not get trapped in the confirmation spiral and not be extra judgmental.


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Listening to Numbers: Quantitative Investment Strategies in India

Contributed by: Mandar Chapekar,CFA


CFA Society, India, Pune Chapter hosted a session on “Listening to Numbers: Quantitative Investment Strategies in India “by Aniruddha Meher on 18th February 2017.

Aniruddha heads Quant Team at Multi-Act Trade & Investment Pvt. Ltd. He has been working in the field of Quantitative Investments for last 12 Years. He covers Indian and Global Equities using Quantitative Techniques and oversees the research of selected currencies and commodities. His area of expertise includes Global Asset Allocation using various indices. Aniruddha has done Masters in Statistics from Pune University

The Crux of the Topic was the importance of having a system, review some simple ways of stock selection, and most importantly, understands how the quant way of investment can help one’s portfolio.

Aniruddha, in his presentation tried to address the 3 main questions about Quantitative Investments viz. Why, What and How. While discussing Why Quantitative Investments, Aniruddha narrated a short story about why System is Must to carry out any given task efficiently and effectively.

Further he mentioned that there are about 200 Active Funds in India. Out of those, approx. half underperform the comparable index and Winners keep on changing every year. Hence it becomes difficult for investor to identify the outperforming fund. Quantitative Investment Strategy helps Investor to identify Probable Winners.

Aniruddha explained about what kind of Quantitative Investment Strategies one can employ. He described three types of categories Viz. I) Value ii) Momentum iii) Proprietary

He illustrated Dividend Yield Strategy which is Value Stratgy.  He mentioned that for any kind of strategy one needs define Market Capitalization viz. Large Cap, Mid Cap and Small Cap and classify investable universe in these buckets for easy comparability. Once Market cap is defined then the specific strategy can be employed on these different categories.  In case of Dividend yield strategy, we can rank the stocks in descending order of dividend yield and then select first 15 stocks to form portfolio with equal weight given to each stock. This process need to be followed on yearly basis with annual rebalancing of stocks.

Further he provided list of parameters on which one can test the performance of this strategy. The parameters are viz. i) Compounded Annual Growth Rate ii)Sharpe ratio iii)Standard Deviation iv)Maximum Decline v) Highest Draw down vi) Beta vii) Outperformance. He further illustrated how Dividend Yield Strategy on Large cap stocks has outperformed Sensex Returns in last 7 out of 10 Years. He further provided examples of Value Strategies such as Price to Sales, Price to Cash Flow , Price to Earnings , Price to Book etc.

Aniruddha touched base upon Momentum strategies wherein he briefly explained various Momentum Strategies such as Earning Momentum, Sales Momentum, Price Momentum etc.

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In proprietary Strategies, Aniruddha explained about how one can include Quality element by introducing few statistical scores like Piotroski F-score (indicates year on year improvement in financials of the Company)  Beneish M-Score (indicates  possibility of manipulation of financial data)  , Altman’s Z score (indicates probability of Bankruptcy) in  Quantitative Investment Strategies . He also referred to using Joel Greenblatt’s magic formulae for selection of Quality stocks in Quantitative Investment Strategies.

At the End of Presentation, Aniruddha displayed results of few India Large Cap and Mid-Cap Strategies over last 10 years. Overall it was a very insightful session with focus on Quantitative Investment Strategies that can be used for constructing Investment Portfolios.


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Role of Technology in Financial Markets

Contributed by: Harshita Kothari


The Kolkata chapter of IAIP organised a speaker event titled “Role of Technology in Financial Markets” on February 18, 2017.

The event started with the introduction of the speaker Mr. Vivek Bajaj, director at Kredent Ventures and his rich educational background from IIM Indore. He began his presentation with the focus on how technology is changing the way we trade. A nanosecond is a 1000th of a second and for a timing difference of a few nanoseconds trading firms globally are ready to pay millions of dollars to their vendors.

At Kredent Ventures, fifty traders have been replaced by an algorithm-based system of trading and the system itself generates around 5 % of the Multi-Commodity Exchange (MCX) turnover. Mr. Bajaj said that algorithms need to be updated every six months as it tears out and the same set is copied by everyone else in the markets. He predicts challenging days for the analyst community and says it is a high time that people sharpen their skill sets or become redundant in front of algorithm-based systems.

He also discussed the use of stock recommendation aggregators who aggregate all the data from social networks and give the observer an idea of what the crowd is thinking. Some of these tools along with the algorithm sans human interface is all it takes to command the global trading stage for next few decades.

The importance of risk management in algorithmic trading was also highlighted. Mr. Bajaj shared that in his system he doesn’t go beyond a few percentage points of market wide position limits in any stock and his positions get squared off automatically once trigger levels are reached. In the last section, he discussed his stock market app Stockedge and its features.

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To summarize, the world markets have gradually moved to algorithm-based trading and India has also quickly adopted the same. With the evolution of machine learning capabilities and big data, most of the trades are now done by these algorithm traders. While this model is slowly threatening the role of traders and analysts, it is still not fully efficient when it comes to taking subjective or contrarian calls. Furthermore, we are unsure whether such algorithmic trades induce volatility in the markets. Whatever be the case, it is clear that an analyst today needs to have enough knowledge about the technologies related to the investment market.


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Reflections on Central Banks

Contributed by: Ishwar Chidambaram, CFA

Contemporary central banks in the developed economies have triggered a global pandemic of moral hazard and Too Big To Fail problems. Ensconced as the universal lenders of last resort, their modus operandi has been to engage in laissez-faire economics during economic expansions and active intervention during a recession/contraction. Thus they have succeeded in privatizing gains and socializing losses, benefiting the elite 1% on Wall Street at the expense of Main Street.

Nowhere was this more evident than during the Great Recession of 2008-09, when Wall Street banks annihilated $15 Trillion worth of global asset values, and were rewarded with government bailouts and golden parachutes, instead of jail time. Since 2008, the function of many central banks has been to act as cheerleaders for their nations’ stock markets, printing increasingly bewildering amounts of fiat currency, propping up share prices and committing other acts of financial harakiri. Not content with reducing interest rates to zero, many Central Banks in the developed world have resorted to penalizing savers by levying negative interest rates, as is the case in Sweden, Eurozone, Japan, etc. Currently almost half of Eurozone sovereign debt is trading with a negative yield!

Clearly these sordid sagas have highlighted the imperative for greater regulation of the Central Banks. One option could be to set up a global watchdog of Central Banks- along the lines of the Bank of International Settlements (BIS)- whose sole purpose would be oversight of global central banks. The road to hell is often paved with good intentions, however, and any such effort at setting up a global regulator can get stymied by the sheer amount of bureaucracy involved. Alternatively, the case can be made for increased government regulation of central banks. But then monetary policy will cease to be truly independent of the whims and fancies of the government of the day.

Ultimately there is no substitute for self-regulation, and central banks would be better off putting their own house in order. Politics must not interfere with working of the CBs, and governments (especially those in banana republics) must resist the temptation to appoint political stooges to critical positions in Central Banks. A committee of independent experts can be viewed as a means to ensure true monetary policy independence. While the US has the FOMC, India has also shown the way in this regard, with the RBI’s Monetary Policy Committee, responsible for framing monetary policy. This ensures true independence and autonomy of monetary policy.

To be truly free of political pressure, a system of checks and balances ought to be established. But as the saying goes: ‘Caesar’s wife must be above suspicion’, so a committee of external auditors should regularly appraise the independence of the Central Bank. This committee could report its findings to an independent regulatory ombudsman, established specifically for the purpose of ensuring Central Bank autonomy. Of course, every chain is only as strong as its weakest link, so the system suggested above is not entirely fool-proof and further refinements are in order. Cleaning the Augean stables of Central Banks is a Herculean task and not likely to be accomplished overnight. But well begun is half done, and it is important to take the necessary steps in the right direction.


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Networking Event-Pune

Contributed by: Manish Chandak


CFA Society India (formerly known as Indian Association of Investment Professionals – IAIP) organized a Networking Dinner in Pune for CFA Society members, Charter Pendings and Candidates on Friday, Jan 20, 2017. This session was presided over by Ms. Sonia Gandhi – Director of CFA Society India. Apart from other roles, she oversees the Programming and Continuing Education (PCE) Committee.

The objective of this event was to let all participants the new initiatives taken by CFA Society India and how these initiatives will enhance the profile of CFA Society India and benefit its members in the long run. Also, she took this opportunity to explain the goals of various committees set up by CFA Society India. Currently following committees are set up and are in overdrive to fulfil their goals:

Advocacy Committee

Programming and Continuing Education (PCE) Committee

Industry Outreach Committee

Membership Committee

Communication Committee

Technology Committee

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All participants shared their aspirations and candid feedback as a CFA Society member. Ms. Sonia talked passionately and enthusiastically about how she has benefitted by volunteering for CFA Society India in her personal and professional life. She also urged all members and prospective members to actively work as a volunteer for CFA Society India with the promise that this will make a sea change in their life. The event was followed by networking and dinner.



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