The Only Game In Town by Mohamed A El-Erian - Some thoughts

A very interesting read for people who are struggling to understand the state of global economy and the actions of central banks.  I have been perplexed by the actions of the central banks where global asset classes debt and equity both seem to be doing well simultaneously whereas growth in industry is lagging. 

The books chronicles in a way the actions of the central banks since the 2008 crisis. it is weird that the central banks are today governed by the volatility in the wall street rather than the main street. It is more like the tail wagging the dog with a few percentage points correction in wall street …statement of taper or rising interest rate is replaced with “patience “ and "will do whatever it takes”.  Also, the world is greatly intertwined and that makes it difficult to contain issues - Grexit or Graccident or likely to lead to turmoil in global financial markets. 

Also equally worrying is that the justification of increasing global / FII flows to justify valuations of emerging markets. Brian rightfully classifies this money as “tourist “ money and the money can witness flight very quickly- something which was witnessed during the recent taper talks by Fed. While, the emerging markets are the only island of growth - but this growth itself has been very patchy and investor confidence  is much higher than industrialist confidence. Industry is yet to meaningfully invest in capacity creation.  Also, bad economic news is followed by more stimulus from central bankers and higher asset prices as bankers resort to curbing volatility. A reminder of early 2008 when cut in rates was cheered by the markets.  Also, the 1974 Boxing match between Ali and Foreman is a must watch - How Ali changed his style to tire out Foreman and get a knock out. 

Some interesting quotes:

On Negative policy interest rates:   “ no history book to turn to".  “ it was like learning to drive backwards.” 

  

Why economies stall because of trust: 

Imagine a customer ordering a big Mac meal at her local McDonalds drive -through. She is directed to 2 windows after placing the order- one to pay for the meal (payment) and the other to get the food (settlement).  it is just a few yards between the two. Yet aware of the recent bankruptcy in which clients at another fast food joint had been stranded in between these 2 windows - having paid for but not recd the meals - she request instantaneous settlement at the time of payment. but the system isn’t built for such simultaneous payments for settlement. it assumes a certain amount of trust.

During periods of large capital flows induced by a combination of sluggish advanced economics, robust risk appetites and highly stimulative central bank policies, emerging markets serve as a destination for a huge pool of crossover funds - or tourist dollars. … At the fist signs of instability, they essentially tend to rush to the airport……

ON growing inequality :  “….on one hand the stunning contrast between sluggishness on Main street , and on the other the notable post-crisis recovery on Wall street , as well as the continued historic surge  in corporate profits record share of GDP.”

Main street is “ how come you are bailing them out and not bailing me out?”

ON corporates not investing:    “…it has been less an issue of the wallet ( or ability) to spend and more a question of will ( desire).

It is about not letting the urgent always crowd out the important…

  

Book review : The Outsiders - By William Thorndike

Eight Unconventional CEOs and Their radically rational Blueprint for Success

( #1 on Warren Buffets recommended reading list in Annual shareholder letter 2012) 

The Outsiders is a very Interesting read and a must recommendation for Analysts researching corporates  and for CEOs or promoters who actively take decision of Capital allocation. each of these CEOS deliver 20%+ CAGR return for investor for periods exceeding 15 years. 

The book chronicles 8 CEOs who were ready to swim against the tide and follow what was RIGHT and shun the POPULAR . Four of the Eight Companies belonged to the Media sector - A sector which has been more popular in India for wealth destruction.   All of them had strong disdain for herd behavior - something which is easy to say but hard to follow.  The CEOs showed unanimity in taking right capital allocation decisions , avoided smoothening of quarterly financials and used right metrics of cash flow and IRR to evaluate themselves as against reported earnings.   Cash flow focus seems to be low among Indian media companies and largely focus is on earnings. Also these CEOs avoided paying taxes and used the right/best instruments to reduce tax incidence - something i believe Indian Media companies are adept at.  

Some quotes i liked from the book: 

2 basic  approaches to buy back - "Straw" -  Open Market  Buy back spread across a few qtrs with a max cap price - generally used to signal under valuation.  ( HT Media did this some time back) 

Other is “Suction hose”  - Bolder approach  Buy backs  done often via tender offers within very short periods of time.   ( Jagran Prakashan recently did this) 

Singleton - If everyone doing them, there must be something wrong with them. 

Kapnick of Capital Dynamics -  initiated 3 special dividends totaling about 50% of the company and because of the size - they were deemed as return of capital - thus being tax efficient as against regular dividends.  

Most CEOs grade themselves on size and growth …very few really focus on shareholder returns.  

Chabraja ( General Dynamics CEO after Kapnick)-  What drove me was the realization that the stock was trading at a significant premium to our historic norm: 23 times next year projected earnings versus an historic average of 16 times. so what do you do with a high - price stock? Use it to acquire a premium asset in a related field at a lower multiple and benefit from the arbitrage.   — Most Indian CEOs/ Promoters perennially believe their stock is under priced and are rarely able to do such transactions.  

Characteristics of Cable business as explained by Malone :  Highly predictable, utility like revenues , favorable tax characteristics , and the fact that it is growing like a weed. 

"…. it is better to pay interest than taxes” . Malone showed strong disdain fro taxes. 

Edifice complex :  There is an apparent inverse correlation between the construction of elaborate new headquarter buildings and investor returns.    ( In India it is more synonymous with buying private jets ) 

  

He believed that the best strategy for a cable company was to use all available tools to minimize reported earnings and taxes, and fund internal growth and acquisitions with pretax cash flows. 

Disdain for consultants : Graham - CEO of Washington post :    Ironically , in the 1980s , the management consulting firm McKinsey advised the company to halt its buy back program.  Donald graham reckons this high priced McKinsey wisdom cost POST shareholders hundreds of millions of dollars of value , calling it the “most expensive consulting assignment ever. 

Buffet Letter 2014 - My notes : "You see a cockroach in your kitchen; as the days go by, you meet his relatives"

On relationship with Munger and More importantly the respect:

In 56 years, however, we’ve never had an argument. When we differ, Charlie usually ends the conversation by saying: “Warren, think it over and you’ll agree with me because you’re smart and I’m right.”

  

On Buying Good business: 

Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.

Most of the time - the quick buck buck is made on people on buying momentum or crappy stocks based on tips, news or noise. But what people forget is lot of money is eventually lost in these bad companies.  Notes to Self - BUY ONLY GOOD COMPANIES. 

On Acquisition with Stock : 

The intrinsic value of the shares you give in an acquisition must not be greater than the intrinsic value of the business you receive.

Money flows from the gullible to the fraudster. And with stocks, unlike chain letters, the sums hijacked can be staggering. At both BPL and Berkshire, we have never invested in companies that are hell-bent on issuing shares. That behavior is one of the surest indicators of a promotion-minded management, weak accounting, a stock that is overpriced and – all too often – outright dishonesty

Many promoters believe Equity is free and prefer Acquisition with Stock rather than Cash. Beware of such companies either they stock is not worth much or the mgmt has little respect for their own stock. Either ways a bad decision.   

On Business Synergies : 

Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is --- zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.

Charlie Munger  on Limiting your Investments to a few quality :

In particular, Buffett’s decision to limit his activities to a few kinds and to maximize his attention to them, and to keep doing so for 50 years, was a lollapalooza. Buffett succeeded for the same reason Roger Federer became good at tennis.

Buffett was, in effect, using the winning method of the famous basketball coach, John Wooden, who won most regularly after he had learned to assign virtually all playing time to his seven best players. That way, opponents always faced his best players, instead of his second best. And, with the extra playing time, the best players improved more than was normal.

Other Quotes - which i liked: 

If horses had controlled investment decisions, there would have been no auto industry.

But Charlie told me long ago to never underestimate the man who overestimates himself.

In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives. 

That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

Market forecasters will fill your ear but will never fill your wallet.

http://www.berkshirehathaway.com/letters/2014ltr.pdf

Buffet Letters 2013 - My Notes “A bull market is like sex. It feels best just before it ends.”

Buffet Letters 2013 - My Notes

 “A bull market is like sex. It feels best just before it ends.”

Buffet recently made two big investments in Capex intensive business - Railroads and energy utility ....and his rationale is below. 

"Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy. It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects. It is meanwhile in our self interest to conduct our operations in a way that earns the approval of our regulators and the people they represent."

The above is of utmost importance for the government and politicians in india to understand ..to bring back a healthy environment of investment.  Multiple industries like Telecom, Mining, Utilities are in a mess because of scams and overhang of Regulatory changes at times Retrospective in nature.  Basically - the government has had little or NO respect for CAPITAL PROVIDERS - be it TATAs or BIRLA or VODAFONE or NOKIA.  While, corporates have also been at fault...but to regina trust this time the initiative has to come for the govt.

Also Buffet valuation advise for the financial community - Dont look at EBITDA for interest coverage or Valuations....especially so in Capex intensive business. Something i cannot agree more wrt to Telecom Spectrum were the Cost of Spectrum present & future hide below the EBITDA. 

"Our definition of coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly-used measure we view as seriously flawed.)

When Wall Streeters tout EBITDA as a valuation guide, button your wallet."

Quotes/Gems I liked 

At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business; it’s better to have a partial interest in the Hope diamond than to own all of a rhinestone.

Woody Allen stated the general idea when he said: “The advantage of being bi-sexual is that it doubles your chances for a date on Saturday night.” Similarly, our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for our endless gusher of cash.

Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,” spells trouble in any business, but in none more so than insurance.

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

Warren Buffet Letter to Shareholders 2013

Narayan murthy is back - everybody needs a hero

I am a big fan of family run business ... When the values of the company are owned by the promoters ....  Somehow the promoters are best placed to ensure maximum ownership.  BUT it is very important that when business moves to the next generation ... The generation is equally capable to lead. 

Somehow Infosys was always promoted as a professionally managed / run company and as per an understanding ...none of the children of the founders will work in the company ...perhaps so that their is no eyebrows raised and talent alone determines success.  However - I believe it had no meaning if it was decided that the CEO post will be in succession for the founder - CAPABLE or not.  Definitely Shibulal  found the task challenging and is not cut out for it.  BUT this structure is no less superior to a family run business.  So why the rule of KIDS not working in INFY anyways???

From my experience in looking at equity markets have definitely found family run business like - Jagran Prakashan, DB corp, Havells , TTK prestige, Page industries , ZEE entertainment , Dish tv have done well.  However, one may argue that when companies are small they are family run and once u are big ...one needs to give way to professionals and family should step aside.  BUT is this a good thing ??? Mixed opinion.

Employee / companies needs heros and they are more likely to come from the founding members or promoter family ....as they have earned years of respect in building the brand/ company.  While - Bharti Airtel and WIPRO are finding means to give space to the promoter kids ...It is actually not a bad thing. So is the return of Narayan murthy and his son at INFY. 

While- I have read people raising eyebrows that what happened to the professionalism and the rules laid down by the promoters.  Well Rules are to be broken and most of the times rules lose significance with time .

The Street is going to watch Narayan murthy and his kid closely and the onus is on them to perform. BUT I think they have already won as INFY has got it's hero back.... Time to get to work ...and yes " under promise and over deliver ".

( may be the promise is high this time already ... But I am betting on my hero ) 

Fed official - “Devaluing a currency is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess.”

Infosys q4 results - does it need tuition on Art of managing expectations ?

Infosys from being the most predictable company has now taken the pole position in being the most unpredictable. 2 qtrs of 20% movements ... What transpired?

How can a company /mgmt which is unable to communicate clearly to investors about business outlook and performance - be doing the right things with its clients in a service industry?

OR

Should one argue that the company has been consistent and it was the analysts cum investor community which fell into the Trap of Greed and fear. While last time I vocally went in support of analysts saying that they are victims of mgmt guidance - Did they become over exuberant - looking at only the silver lining ...when the picture painted was ominous?

While - analysts and company both messed it up royally - this is the time for shrewd investors to bet against momentum.

Recently was very positively surprised by ZEEL mgmt to correct - analyst expectations - something INFY can learn from. ZEEL while has had a weak past of CG ...atleast the promoters are Cognizant of the permanent impact on surprising the street negatively and the need of managing expectations.

Personally - I prefer companies like Infosys - were they give opportunity for the level headed to swim against the tide and avoid the noise .... Creating opportunities for smart investors. They add FUN to An analyst life and in situations created by INFY only experience of understanding market participants behaviour matter.

Also - had the current leadership not been founders of the company - should they not be FIRED.

MY Earlier note -

Infosys q3 results - something is definitely wrong...very very wrong.

Infosys q3 results were greeted by e Big Bang by the street with the stock surging close to 17% ... That's a record for any NIFTY stock. But this movement raises many many questions ... How can a company which is covered by maximum analysts ...more than 70 in last count ...get it so wrong and be so significantly surprised. This raises questions more on the companies ability and intent ... Less on the analysts intellect. I being an analyst and have spent considerable time in analysing analyst behaviour can appreciate why the analysts got it wrong .... SIMPLE : company recent performance has been poor. After years of consistently beating its own guidance ... The company had faltered in the last few quarters. Past track record of INFY had been consistently meeting or beating its own guidance and common analyst practise was to forecast 2-5% above company guidance. This was in complete sync with Narayan murthy business maxim - to retain trust of investors, it is better to under promise and over deliver.

Infosys started a culture of giving out qtrly guidance ... Because NRM felt that investors should be aware of as much as data as the company was aware of. Also, NRM clear belief - when in doubt, disclose. So what transpired in this quarter was a miracle - Infosys after having unable to meet the guidance in the last few quarters had faced a lot of investor wrath... As investors believed that the company had lost its touch. Also, this believe was further supported by the mgmt who ... Kept guiding for inability to meet numbers again during the quarter. This led to MUTED expectations and lower multiples. However, the results were totally different.... Results were strong on all counts.. High volume growth and rate increase.

So why did the mgmt give a wrong impression of business condition/performance ?
Did this action create value for share holders or destroyed value ?

With the disclosure of being an analyst - I strongly argue the case for An analyst not being at fault ...as it is always better to be conservative and one should rarely make forecasts against mgmt guidance. In this case ... Had it been any other company ... doubts would have been raised if the company did this deliberately for the interests of few. People would have studied if - any esops were given recently of a low strike price.

While - I maintain my TRUST in believing in the value system of INFOSYS ... I believe their are valid questions of what went wrong with investor communication.