Decoding markets one step at a time

"I try to get rid of people who always try to confidently answer questions about which they don't have any real knowledge"- Charlie Munger (Buffet's Devil Advocate) Today's post is a bit different. It is not related to any particular sector or macroeconomic headwinds. We would try to identify the role of human behavior in investing/trading and how efficient market hypothesis does not hold true as long as humans are the participants in trading or investing. This post would cover the following subjects: Explanation of most common Human Biases How stick market experience bull and bear phase Efficient market theory (EMT) and how human behavior negates EMT Examples of assets (majorly equities) exhibiting glaring human biases A short story to start with: Shortly after 1550, the growing affluent class of Holland was introduced to Tulips. Due to their aesthetics, they were well sought by these classes. However demand soon overtook supply and the prices of Tu

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” - Andrew Carnegie, billionaire industrialist The real estate sector has been so important for the country that millions of rupees are earmarked by the government for real estate development. But recently the banks and NBFC's, which are grappling with asset liability mismatch, are unable to provide the funds for real estate and infrastructure projects. While the developers need the funds to pump it into the projects, this is where REIT and InvIT becomes important. In simple terms, these instruments are just like mutual funds which pool in money from investors and invest in real estate/infrastructure projects (in case of REIT/InvIT). These instruments provide the investors with predictable cash flows over the long period of time. The stru

"If we went into the funeral business, people would stop dying." — Martin Shugrue, onetime vice chairman of Pan Am “If a capitalist had been present at Kitty Hawk back in the early 1900s he should’ve shot Orville Wright; he would have saved his progeny money." - Warren Buffet At the behest of Jet Airways going defunct and the previous issues of Kingfisher and money guzzling saga of Air India, I decided to pen down my thoughts on Airline industry in India and what ails them.  Source: ( Link ) If we take a look at the chart, we come to know that the airline traffic has been on consistent rise as per DGCA data. Further Revenue passenger kilometer (RPK) & Available seat kilometer (ASK) rose persistently and hence the load factor improved from 70% to 83%. Source: ( Link ) To understand RPK & ASK, we will take an example. Say an aircraft flies from Delhi to Mumbai which is ~1500 km. The total seats are 100. However the number of passenger

To start with the post and to build some context, let's start with the story. In 1928, an American boxer who went by the name of James J Braddock pulled off a major upset by beating Tuffy Griffiths. He got an instant fame but down the years owing to injuries in his right hand, suffered losses. With his family in poverty, he was resorted to menial jobs during great depression where he worked with his left hand. Eventually his left hand became so strong that he returned to boxing only to pull off another major upset by beating Tommy Loughran. This story is also on the similar context where auto sector pulled of Tuffy Griffiths moment post 2008 sub prime mortgage crisis where it grew phenomenally. Let's have a look at NIFTY auto index from the period May 2018 to present. Source: Link   Now straight away jumping to Great Depression era of James J Braddock in auto sector, we observe that there has been a fall of ~40% in the index. For the folks concerned about

There is a new talk in the town: Bonds that cost investors the money. In short, losing money deliberately. According to the latest Bloomberg report, the bonds with negative yields touched ~USD 13 trillion up from ~USD 8 trillion a year ago. But before we move ahead, we should take a look at what constitutes a negative yields bond. Reference: Link Say, a bond's face value is $400 and the coupon rate is 2.5%. This means that the investor would get $10 every year as an interest. The current yield of the bond ( CY) is 2.5% ($10/$400). Now the bond prices move according to supply and demand in the market.  There is yet another term called Yield to Maturity (YTM). YTM is simply IRR for all the coupons which the investor receives over the period of bond maturity. For eg. if in the above example the maturity period is 5 years, the investor would pay $400 at t0 to buy the bond. He/she would receive $10 each year till t5 and additionally $400 at t5. The IRR of this cashfl