I am an investment counsellor and not a casino owner.

Adding Zeros

The lessons from a low-profile second-generation stockbroker who adds zeros
after his clients wealth, not put them through a zero-sum game

I am amazed when people get excited that a big institutional investor is
buying some stock in a big way. I have seen it in bond markets too. The
dealer will come in and say, Citi is buying, implying that if Citi is a
buyer, there has to be something to it. Nobody will say who the seller is.
Obviously, you cannot buy unless there is a seller. If stocks are worth
buying and everyone thinks so, then why is somebody selling, when all
research analysts think that it is good to buy? We always hear one side of
the story.

We never get to know the other side at all. Maybe it is the domestic trader
who keeps buying and warehousing when the prices are low and, as demand
picks up, he dumps it on an institutional buyer who, in turn, will dump it
on the retail buyer at some point. And the retail buyer, once having bought,
gets stuck. He either becomes a long-term investor or makes a quick exit
(profit or loss borne by him). So, stock markets are a zero-sum game. At
different points in time, different hands hold the parcel. Change in market
prices (which are a function of demand, supply and expectations) increase or
decrease the value of holdings. If you are a short-term trader, you actually
experience the pain or gain. If you are a long-term investor, you only see
changes in your asset value. Of course, you can also get your annual
dividends.

I always wonder at human frailty, when it comes to stock markets. There are
occasions when everyone agrees that, at some point, the markets are very
expensive. How many actually sell? Or how many actually go short on the
market at this stage? Surely, no one does this consistently. At some level,
you sell your shares. Do you again buy them when the market comes off? I
always wonder. No list of names of the worlds rich ever includes any
stock-trader. Warren Buffet has probably never sold much and what his fund
owns are significant chunks of many companies. Bill Gates owes his wealth to
one stockof the company he founded. This leads me to think that
stock-traders are not all that productive in what they do. They are part of
the make-believe world that the media creates for pulling in an audience.
Serious wealth has been perhaps made only by investors who keep hanging on
to their shares and not churn them like a mutual fund manager.

In this context, I recall meeting a stockbroker in Mangalore. He is carrying
on his fathers business and has a loyal clientele. He would advise people to
invest regularly (before systematic investment plan became a buzzword). He
would come out with an annual investment list of around 20 large-cap stocks,
dividing the money equally. He would not churn the portfolio at all, unless
there was a compelling reason to sell any stock. He would do an annual
review and, sometimes, he would add one or two stocks. He preferred to stick
to established names, with high emphasis on management quality and return on
equity. He had kept tabs on what the portfolio did. It generated a
compounded annual return of over 30% over 20 years, excluding dividends. His
churn was less than 5% of the portfolio, over 20 years! This return was
almost twice what the Sensex delivered in the same timeframe.

I quite liked the way he went about his business. Many of his clients were
second-generation clients! He never strayed from his approach. He also
refused to offer his clients any platform for trading in derivatives. His
view was very simple. I am an investment counsellor and not a casino owner.
He also eschewed the small-cap and mid-cap stocks. He said that he did not
have the resources to do homework on them. He did not want me to identify
him, unlike the top brokers who are always seeking to be on television. I
dedicate this column to this low-profile gentleman at Mangalore and wish him
the very best.