Understanding Investing Risk is More Than Qualitative Assessment

I love to interact with readers when they write a good thought based message. I like their questions, specifically, when they would like to discuss investing related questions. One of TIPBlog’s reader, Jagadees, wanted to know my thoughts on generalized qualitative risk assessment in the context of my buying Reliance Capital shares. Below is his mail message.

I would like to know about your thought process regarding your position in reliance capital (because this position was not discussed in detail as other companies you normally do. the only place i could see about this company is in the post regarding holding companies).

Based on my readings so far, I understand that this company is poised in the good position to tap massive consumer savings with its vast retail distribution &marketing strategy in mutual fund and insurance business. Whatever the new scheme it launches, it does in a big way and currently its mutual fund is top in AUM. It is also a likely candidate to get banking license.


But my concern is quality of the management i.e. ADAG. when i analyzed i found the following things to be very disturbing.

  1. It’s a well known fact that due to the greediness of the management to debut in the SENSEX soon after IPO, it connived with investment bankers and priced steeply. Ultimately, it ripped retail investors.
  2. SEBI barred Anil Ambani and leading official of Reliance Infra and RNRL from investing in secondary market until 2012, besides imposing a charge of Rs 50 crore for settling a probe into alleged unfair market dealings by the two firms.
  3. Recently I read an article on Tekelha about the wheely dealing of Reliance Com in Swan Telecom regarding 2G and really taken aback on the involvement of ADAG
  4. A Reliance health insurance premium has been priced very cheap before 3 years to garner large customers. And suddenly this year they hiked the premium by 400%. In India, until recently there was no health insurance portability and hence it would be a disincentive for clients not to renew. I found this one to be bait system to lure customers.
  5. It’s well known fact that all of ADAG companies are running short of cash flows. Even Reliance Com is looking to restructure its loan it took for 3G from various entities all over the world and finally he got funds from china development bank.

In all the above cases the management tries to cheat investors or customers, regulators, govt etc. My doubt is even if Reliance Capital does well and generates cash by disinvestment of its insurance business & other things; will management share with minority shareholders. Wont they look for other illegal ways to siphon out the money from this entity to other group companies which is sinking with mountains of debts? How can retail investors entrust their money to this management? or am I missing out something?


Jagadees, has great set questions about ADAG. All these concerns points to one issue, which is, management’s past history demonstrates it is not going to share profits with small retail investors. I am with you on your concerns. A simple answer to these concerns is, that’s the risk one takes.


Give me one example where company management thinks about retail investors? Where before making a decision any company will think of small retail investors like you and me. I do not believe there is any! So either you be part of it or avoid it. I choose to be part of it and swim carefully.


Having said that, I think we as retail investors need to understand what risk means to them. It is my view that risk is something that is very subjective. To me, it’s interpretations vary like finger prints. They are never same. I do not interpret risk as a qualitative matrix. That way of interpreting risk is blind. The issues about ADAG mentioned in this message regarding quality of management; is qualitative. It does not tell me anything about risk to me. It does not tell you how it will affect your wallet? Saying, there is risk because of bad quality of management; is meaningless.  That’s why I say, it is blind for decision making.


My interpretation of risk is in conjunction with the price you pay for buying your stocks. Same question, how does it affect my wallet? So, while I agree with these concerns about bad management, I tend to take one step further and understand them in numbers. This translation is, again, subjective. But at least it gives something to measure. Let us take Reliance Capital as an example.

When I pay 400 or less for Reliance Capital, I think my risk-to-returns are reduced considerably over long term. As long as my price is more than zero, risk will always exist. But when I pay more, i.e. 500 or 600 or more, I am increasing my risk-to-returns. And hence, I should not buy at 500+. Now, if I believe Reliance Capital is junk company, I would not even think of buying any shares. But I know for sure, Reliance Capital is not a junk company. But it is neither a good or great company. It is one of many.


Coming to you concerns as listed above…

  • On item number (1) I do not think there is anything wrong with it. Any business owner will do what ADAG did. Get maximum possible price in a given market conditions! If I were business owner, then I would do the same. Retail investors were not forced buy into his IPO. I wrote about it in valuation of new IPO.

  • On item number (2) and number (3) Well, I do not think I expect integrity or ethics from Ambani clans. My personal view is poor guy Anil is getting killed. While almost every major business family is doing these things. e.g. His elder brother is master of such willy nillys. The recent RIL-BP deal is likely to be orchestrated by his cronies in oil ministry. There are many such examples with other industrialists also… NOT that I am a fan of such behavior. Like all retail investors, I certainly despise such business dealings. But Anil Ambani he is not the only one! So I do not take that, exclusively, as a part of decision making.

  • On item number (4) Don’t you see sudden jump in gas prices? Don’t you see sudden jump in food items? Don’t you see jump in real estate prices? All are completely blatant?  Again, why target Reliance Health insurance premium? The point being I try not to mix ethical business practices with my investing goals.

  • On item number (5) Bunching all ADAG companies together is, again, a folly w.r.t. investing. ADAG is not a company in itself. It does not trade in equity markets. I only picked Reliance Capital because; I think it passes my equity selection metrics. Cash flow is one of them, but not the only metrics. Now, what price to pay is a different discussion. I had held Reliance Infra for a while, but I removed that one.


I am not justifying ADAG, Reliance Capital’s, or any other business’ practices. I am not qualified to do that. On the other hand, if I start making decision on ethical practices, there would be no company left in India or I will not be able to live my life. Question that I need to answer is, whether I as retail investor will make money by buying shares of this company – and depending upon what price I buy shares, I take that risk. Another example of interpreting risk in empirical numbers is here on expected returns of NIFTY index.

Selling Is Important – Continuing the discussion (II)

In my last post, I discussed about my fair valuation for buying and how it would be likely different than selling value. I tried to make a case that I would like to minimize my cost basis and maximize my sell price. Buying is easy because minimizing cost basis is under my control. Nobody can force me to buy high unless I want to do it, right? However, when it comes to selling I do not have any control. Like everybody else, I would like to sell high, but there has to be somebody willing to pay for it? And hence, it is little bit of subjective.

Furthermore, I identified three companies viz. HDFC Bank, Pidilite, and ABB, as stocks that I would consider as fairly valued for selling. OR likely to be tad over valued. I do not consider them to be extremely overvalued. In this post, I do not intend to discuss (or present an argument) what would I consider over priced or extreme overvaluation. No two people will come up with same conclusion. Continue reading rest of this article…

Selling is Important – Continuing the Discussion (I)

In today’s post, I am continuing my discussion on selling aspects for my long term buy and hold portfolio. To me, buying is always a very easy decision. Easy in a sense that I have few quantitative metrics and qualitative aspect that help me decide whether I should buy a given stock. However, I do not have such fixed metrics that tells me, hey buddy, its time to sell. For me selling is a very subjective process. I touched upon few guidelines that help me make a sell decision.

Discussing and presenting my thoughts on this blogs helps this subjective process. The comments and conversations I have with readers of this blog helps (or influences?) this subjective process. When I say influences, I mean influencing the thought process, and not directly sell a stock because my blog reader says so. Continue reading rest of this article…

Selling an Important Part of Portfolio Management

It has been very close to a year I have been writing on this blog. Almost on all occasions I have discussed about buying and holding my position. I have said multiple times that I tend not to sell my positions. There have been multiple questions about why not book profits? Why not sell profitable positions and invest in other opportunities? Before I discuss on selling any positions, let me clarify, I do not blindly believe that buy and hold is holy grail for long term investing. I have no misconception about “not selling” any positions. In any system (eco-system, car, machines, or even our body), there are multiple elements and each have a role to play. Similarly, in portfolio management process, selling a position is also very important, and hence it cannot be ignored. In my process description, I have captured this part as ‘exit plan’. Continue reading rest of this article…

Portfolio Rebalancing

howTwo readers of this blog left couple of intelligent questions in comment section on some of the articles. Both of these questions relate to what I term as rebalancing the portfolio (or profit booking). I wanted to wait until I posted articles on TIPBlog portfolio update and risk analysis. I wanted to discuss these two questions in the context of TIPBlog portfolio. It will help better understand the re-balancing and profit booking processes.

You may have read earlier post that discusses risk analysis. I made a comment that the portfolio has overexposure on few stocks like ONGC, LNT, etc. I also mentioned that I will not be selling any partial shares to bring down allocation. Many use the term profit booking for partial selling.

Continue reading rest of this article…

Risk Analysis of TIPBlog Portfolio 3Q2009

riskOne of the most neglected aspect do-it-yourself investors is performing a realistic assessment of their portfolios. I have adopted a very disciplined approach to make sure I follow my quarterly regime of reviewing the progress. First step was to check out the status. Second step is to understand risk, and third step is to make changes (or execute or re-balance if necessary).

In earlier post, I presented the progress update of TIPBlog portfolio. The next step is to analyze risk in the context of my personal risk profile parameters. The objective of this risk analysis is to make sure that TIP portfolio is not exposed to any particular event, or company, or any other aspect that will affect portfolio performance.

My portfolio management process has a risk management process in which I try to:

  1. Maintain pre-determined asset class allocation;
  2. Maintain pre-determined diversification, any sector should not exceed 10%;
  3. Any single stock should not exceed 7% of the portfolio; and
  4. Dividends from a single stock should not exceed 5% of total dividend cash flow.

Continue reading rest of this article…

How to Execute Asset Allocation – Yale Fund Example

01319109We all investors try and maintain a diversified asset allocation in our investments. In my discussions with many folks, I have seen that many use different ways of executing this diversification. Many use combination of real estate, equities, gold, etc. In case of equities, quite a few enterprising ones long term portfolio in combination with trading portfolio. Many of us, including me, are aware of different types of asset class and investment vehicles. Unfortunately, for most of us individual investors, we fail to understand how to execute effectively. We really do not know how to engineer our portfolio such that it has optimum asset allocation for our risk profile. We think we allocate little bit of capital to all assets and we should be good to go without any worries.

Continue reading rest of this article…