Investing mantra

Shun pride - accumulate regret - use a benchmark - have astrategy - think relatively and focus on your long-term goal.

Patience...

“Once we act, we forfeit the option of waiting until new information comes along. As a result, not acting has value. The more uncertain the outcome, the greater may be the value of procrastination.” - Peter Bernstein

Patience is a key element of success. – Bill gates


The outcome we are waiting for: The Markets to Tank (Correct or Consolidate are mere euphemisms)

Till when one we should wait: Well before the markets open opportunities of investing in stocks you like as low as 0.5-0.75x.

The higher the markets go from these levels (13,600) – the greater will be the fall, the greater the value of procrastination. And yes while you might be saying that there is no bad news around , why should the markets tank.- the fact is it is somebody who has to one day say that the KING is NUDE, and it could be a kid.

So collect all your cash, so that when others are panicking you are gathering your favorite picks.

And Yes WAIT!!! WAIT!!!! WAIT!!! WAIT!!!

Markets- Dizzying Heights

People like crowds. The bigger the crowd, the more people show up. Small crowd, hardly anybody shows up. -Gallagher

The same is so true for the stock markets….when they are going up and everybody wants to play the game. Many of them are their just because everybody else is their…because being invested in the markets is the in thing. When everybody is buying multi-baggers, why should one stay away and all concepts of risk are thrown out in the dustbin.

The way to make good money in a Bull market-

“Avoid making bad investments – dump 90% of the stock ideas in the bin without even reading them.  
The current state of the Equity markets can be summarized by:
There are moments when everything goes well; don't be frightened, it won't last. -Jules Renard

Trading at 20 times trailing earnings – the markets scare me but I have not been here long enough to know a lot about it but I know one thing better be scared than lose. They are good ideas still…but I know they will be better ideas once there is  no crowd.

The Ben Bernake Dillemma

“most economists use statistics like drunks use lampposts: for support more than for light”
-Churchill


The challenge before Bernake is to make a decision to pause/stop the fed rate hike this FOMC meeting or not. While, in the last meeting the central banker suggested that forward is likely to be a slave of data (statistics). The rising inflation (11 year high) reported substantiates a rate hike. However, the growing unemployment (bad data) and slump in Housing shows that another rate hike can push to recession as equity markets are jittery coupled with geopolitical uncertainty and rising energy prices.

Come what may it is going to be trouble some for the America’s.

What needs to be watched is that whether Bernake uses the statistics as a lamp post for support or light.  While in the past we saw all assets price increasing commodities, real estate and equity – a further rise in Fed rate will shake the equity markets and the real estate. I therefore, do not see a rate hike but the inflation data going forward is going to be worrisome. Get ready for some challenging times ahead……

Real estate - Southwards?

Its always a treat to read Deepak Parekh's review of housing scenario.

A very well written Chairman's statement from the HDFC's annual report.

Excerpts:
The siren of caution in the real estate market is now ringing loud and clear.Tom Barrack, arguably the world's greatest real estate investor, likens the current real estate market to a game of polo. "I feel totally safe playing Polo on a field full of pros, but when amateurs are all over the field, someone can get killed.
They have more guts than brains and charge after every ball and don't know when to hold back." It is the same with the current Indian real estate market, even in India we need to licence projects and rate developers. If there is no clearing  off the turf, the amateurs are going to get trampled, taking seasoned horsemen down with  them.
Should the housing market in Mumbai look like a classic case of  `irrational exuberance', how then does one explain the same in Delhi, Bangalore, Pune and many more such cities? Home prices have spiralled in the last fifteen  months. House price vertigo is more than a local or national condition – it is  a worldwide phenomenon. Southwards is where prices must go.

quote

No amount of (apparent) statistical evidence will make a statement invulnerable to common sense

Rising interest costs

Maintaining moderate inflation is a little like trying to stay moderately pregnant.

• Anonymous

With the G- Sec yield breaking the psychological 8% mark on the back of an unexpected increase in inflation at 5.24%,   the Equity markets respected the same and corrected by 4%.  Corporate India is likely to feel the heat and Market participants have to tone down their profitability expectations.

While the FM, Chidambaram may be vocal of taming inflation, it is unlikely that he will be able to contain the rising Input (commodities) and energy costs.  

The real estate game...

Buy land, they’re not making it anymore.

• Mark Twain

Land/real estate adjusted for inflation has just given a 0.5% return in the last century in the US markets. Also, the maximum return/increase in real estate prices was observed during the Post 2nd world war era when there was a genuine spurt in demand for housing by the War-returned soldiers. So, if you are investing in real estate at the wrong timing, you may fail to see any appreciation at all for all your life.

Real estate in India is too see a radical change in the next few decades. While, the demographic dividend and the young population is likely to play on the demand side, the supply side is equally buoyant helped by  SEZs planned and Malls percolating to the tier-2 and tier 3 cities. With the integration of economies (rural & urban), development of infrastructure (Highways reducing time to commute) and increasing digitalization, demand led growth in the metros is likely to be low as compared to that in the non-metro cities. The initial leg of growth in real estate has been fuelled by the IT boom with IT hubs like Bangalore, Hyderabad, Pune and Gurgaon. Further growth is likely to be centered in areas of Manufacturing and Consumption. Cities like Nashik, Indore, Vizag, Ludhiana, Lucknow and Nagpur are likely to do well in the near future.

The buoyancy in the Indian real estate is also likely to come out of setting up of real estate Mutual funds which may be in place in the next 12-24 months. The Real estate related financial instruments are to create an artificial demand (investment relate demand).  

Rational to irrational to Rational OR............... Irrational to Rational to Irrational

The Sensex touched the high of 12,700 and soon after seen a sudden drop of 30% to show levels of 8,800.  While, with the recent decline happening everybody unanimously agree that the highs of 12,000+ were unjustifiable and the markets had to correct. But what are the levels that are currently justifiable by the markets is the broad question. Are we currently rational or irrational?

Well, while the two-day 1,000 point run-up might make to show that the recent 8,800 levels correction is highly unjustified and hence, the markets rebounded I beg to differ. The current situation in the Indian markets is of extreme fear where it is either one side up or one side mood depend upon the momentum fuelled by global stock markets performance.

What do I think?

1. Current market status remains a function of liquidity and not of fundamentals.


2. Markets need to be at 8,000-9,000 levels to accommodate for the rising concerns of American economy performance, rising fed rates, a steady rise in the domestic interest rates and the burden of high oil prices.


3. Long term story continues to be positive irrespective of US economy slow down with OIL prices the only possible party-spoiler.


4. Current interest rates have moved up in line with increase demand for credit and upside pressure to slowly decline.


5. Irrationality in the markets is likely to come on the negative side rather than the positive side currently. Indian retail investors feel trapped with most of the Mutual funds raising money at the peak Sensex levels and deploying them.  For confidence to back in the markets may take at least 6-9 months.


6. Sectors unaffected by rising interest rates and oil prices and focused on the Indian consumer likely to do well in the near future. I particularly like the Telecom, FMCG, IT  and Retail sectors

“Stock markets only tells you when you will be right, the strength of your analysis tells you whether you will be right” –WB

This time the stock markets are going to take time to say that you are right as compared to the recent past where whatever you picked up turned into Gold.

While many of us might think that a 305 correction might have brought rationality into the market …I do not think so. While the current levels are comfortable status quo for eth Indian markets …but is not with respect to global developments.  So, while we have seen irrationality on the upper side, it is likely that we will see irrationality on the lower side as well….were the brave will pick up their stock only to sell them in an irrational upside rally in the next 2 years.


A recap of my comments at the 10k level: (title 10K and more posted earlier)

Every person who has been bearish on the Indian markets seems to have been proved wrong with the earlier Sensex targets becoming current “strong support” levels. Well I do not blame anybody as I had earlier mentioned its part of their business - be it analysts, fund managers.The Nifty is currently trading at 18 times trailing earnings as compared to 14 times about 12 months before.  Generally a steep rise in EPS is marginally cushioned by a decline in earnings multiple, ensuring a moderate rise in indices. However, currently we see that the while the EPS has risen far above the normal trend line so has the P/E multiples, which is clearly signal of a lot of optimism built in the current share prices, even with interest rates slowly being pushed.Going by Past indices correction it is very clear that the higher the rise, the harder will be the fall. While the probability of a Harsh Mehta, Ketan Parekh kind of event is rare as the multiples aren’t at alarmingly high levels. However, I probably feel an internal political calamity could cause harm. Anyways returns from the current levels are  not going to be great.So better be sure of what you are invested into and be ready to hold it for long periods.

The Bullish Indian market and the aftermath...

The Indian Sensex (Index) has risen by more than 2.5 times in the last 2 years from 5,000 levels to 12,500+. However the last few days have seen a very steep correction with the market correcting by more than 25%. To witness a lower circuit (selling freeze) on the Index is rare.

While, many factors have been used to explain this rise in the Index, I have a few other reasons for this rise in the indices apart from the Chidambaram game:

The rising Media Reporting
In the past few months there has been a general rise in Business/ stock market reporting in the Media. While CNBC was earlier one of the only channels of late we had a number of channels like CNBC Awaaz,  NDTV profit, Zee business  etc. also the Leading English dailies have increased the proportion of business reporting from just one page earlier. The New launch DNA has a complete business supplement with its daily and Hindustan times is to come out with a new business paper. Programs like Saas, Bahu and Sensex speak about the hype of stock market themselves.

Trading is just a click away
While, previously before the demat of shares was a tedious task involving a lot of paper work and transfer of certificates, which kept it away from the reach of common man and too difficult a process for the young graduates/just-joined-job youth. However, with the launch of a number of e-portals of the likes of Icicidirect, kotakstreet, India bulls, Share khan etc. it has taken investing to each and everybody. The latest advertisement of one click IPO investing is a proof of the ease. While, the ease of investing is positive, it lures a lot of people who would have otherwise not invested and who do not understand “What a share is?”.
The ubiquitous mobile has made the stock market quotes not confined to the Bloomberg or the Television screen but brought it into the hands of the investors. Airtel (Bharti) had recently launched Portfolio Tracker on the mobile, in association with BSE.

It is pouring Mutual funds
The recent Bull run has seen a record of sorts in both new MF schemes launch and money raised. This has been easy due to the great results posted by the mutual fund schemes due to the vertical rise in Indices. However, all money invested come with a disclaimer that “Past performance does not guarantee future Results”.

Reliance Mutual Fund recently created a record of sort by mobilizing 5,700 crores. This beat the earlier record of Rest. 4,472 crore raised by UTI Equity, formerly UTI MasterGain during the 1992 stock market boom. Prior to Reliance SBI MF’s blue chip fund had collected 2,800 Crores.

Most of the MFs have been at a loss to garner such huge collections, at high index levels were forced to invest a) regulation does not allow them to hold cash for long b) they are themselves not sure where are the markets headed, and they rather invest and later blame the index levels in case they fall c) no MF manager got thrown out for investing in the bluest of blue chips, in spite of earning low returns and therefore all the money garnered was deployed in the indices resulting in further propping of stock levels.

Every investor looks for Absolute profits, it does not matter if the MF outperformed or underperformed the Index. While, MF managers were keen enough to ask investors to tone down   their expectations of returns, nobody stopped from raising more cash (as it is part of their performance bonus). Lack of proper alignment of incentives can cause a lot of irrational behavior.

Investment strategists have run out of ideas…..
Also, recently most of the MF houses have been in close competition in vying for the Numero Uno position in terms of funds under investment. There have been at least 2-3 new schemes launched by each of the fund houses. The proposed investment strategies for investment of theses schemes have been anything from Lifestyle, Rural, Blue Chip, Contra, Infrastructure, Services, Commodities, Special situations and Media & Entertainment.    


Retail Brokerage on the rise……
With stock market Euphoria  cometh the interest in Brokerage firms. The Indian capital markets are seeing enhanced interest in participating not only in the stock boom but the business of brokerage which is known to benefit the most during periods of Euphoria. While, India Bulls, Indiainfoline, & Emkay share & stock brokers have recently tapped the Indian markets for capital, there are a few others in like Multi-commodity exchange and Steel city securities.
Some of the brokerages have also seen private equity interest with private equity firms picking up stakes in SSKI and Motilal Oswal. While these are definite signs of the rising euphoria nobody captures this phenomenon better than Adam Smith in his book “The Money game” which I have quoted in my earlier blog.  

The Analyst race…
The Euphoria in the markets has been followed by mushrooming of brokerage houses, analysts and investment advisors with names ranging from ABC to xyz advisors. The new analysts with experience of 2days-2 years are falling head over heels in making obscene projections and obscene targets, with the only way to get heard on the street being different. The behavior of the big brokerages also has been similar. Off late have seen research reports with DCF projection for 20 years, Terminal growth rates of 6-8% and P/E multiples of 50’s and 100’s.  
A case in point is the retail industry where the metrics for valuation of Enterprise value per square foot has surpassed the financials, with no comparison how much money the square feet makes. The land banks of the real estate companies are another weird case. I am yet to see a report where  the blue chips like SBI, BHEL, Indian Oil  and BPCL will be valued for their land banks and not for their business, but I am sure somebody is thinking about it.

The Chidambaram Game

The Indian Sensex (Index) has risen by more than 2.5 times in the last 2 years from 5,000 levels to 12,500+. However the last few days have seen a very steep correction with the market correcting by more than 25%. To witness a lower circuit (selling freeze) on the Index is rare.

While, many factors have been used to explain this rise in the Index, one of them is the :

The Chidambaram FACTOR

While the election of the Congress led Government was followed by the May 17th . 2004 black Monday crash, the markets recovered soon after. The recovery in the markets soon followed with the realization that ManMohan Singh is to become the PM, the man behind the liberalization in 1991 and Chidambaram’s the man who delivered the Dream budget in 1997.
Chidambaram as the finance Minister is looked upon as a Markets friendly FM, who has been very active in coming to the rescue of stock markets every time they corrected or drifted downwards be it for clarification regarding CBDT (taxes on FII), Securities transaction tax (STT), or doling out statements about who is buying and who is not.

History of Chidambaram’s comment on the Sensex (Source: bechalis.blogspot.com)

Finance Minister P. Chidambaram at commenting on various milestones (in both directions) of Sensex.[December 2004] Sensex at 6000 : "I don't react. As long as the Sensex is driven by the fundamentals of the economy, I am very happy."
[July 2005] Sensex at 7000 : “If the Sensex crosses 8000, then I think that I would be concerned."[September 2005] Sensex at 8000: "We are looking at the price-earnings (PE) ratio (of Sensex and Nifty). At this level, they look comfortable."
[December 2005] Sensex at 9000 : "I expect the Sensex to rise with investor and business confidence rising. However, SEBI and I watch the movement carefully to see if there is any manipulation...... My impression is that mutual funds are quite active in the markets, meaning thereby that small investors are putting their money in the mutual funds.
[March 2006] Sensex down by 216: "It's a correction. It's nothing."
[May 15, 2006] Sensex down by 463 : "I will put it as a correction provoked by reasons which are quite understandable. All metal prices are down and there is some impact of cement prices... and increase in US Fed rate. All markets are doing the same."
[May 18 2006] Sensex down by 600, and on its way to register a fall of 826 : "Everyday movement in the stock markets does not require a comment."


The same FM had commented a few years earlier that “He was more concerned with what happens in Khan Market (in Delhi) than in the Bombay stock market”  meaning that the concerns of ordinary Indians were more important than the rumblings in  Dalal Street.


The latest comment by Chidambaram “saying every market swing didn’t deserve a comment?” is a proof his regular intervention to keep the market sentiments high. There is a growing confidence among the investors that the BIG Boss, market savvy  Chidambaram will not let the markets tank, leading to the euphoria.

Before the Euphoria which finally led to the stock market crash in 2000, the then Fed chairman Alan Greenspan also was viewed as a savior of the stock market. Greenspan had made public his fears that a drop in the markets could impair the real economy which was interpreted as that the FED is in favor of the stock market buoyancy and would protect it from tanking. Alan Greenspan also stood true to his words by rescuing the Stock markets from the  Russian debt crisis in 1998, bailing out LTCM ( Hedge fund debacle) and  the Y2K crisis which led to the 2000 Euphoria.  (Irrational exuberance. Robert Shiller)

It was expected, only nobody knew when

We are all at a wonderful party, and by the rules of the game we know at some point in time the Black horsemen will burst through the great terrace doors to cut down the revelers; those who leave early may be saved, but the music and wines are so seductive that we do not want to leave, but we do ask, “What time is it? What time is it?” Only none of the clock have any hands.

               The Money game, Adam Smith.

“Mr. Market is there to serve you, not to guide you…and it will be disastrous if you fall under his influence” – WB


The markets in India finally crack/correct/slide/fall. Whatever you may say.


I think this will bring in some research and level headedness among investors. While everybody was concerned, nobody wanted to miss the bus. One did not like to be scoffed by friends who were moving happily for so many days.

So, do not be Fooled by randomness.

How the Markets work?

 
Once upon a time in a village a man appeared who announced to the villagers that he would buy monkeys for Rs. 10. The villagers seeing  that there were many monkeys went out in the forest and started catching them. The man bought thousands at 10 and as supply started to diminish and villagers started to stop their effort he announced that now he  would buy at 20 rupees.This renewed the efforts of the villagers and they started catching moneys again. Soon the supply diminished even further and people started going back to their farms. The offer rate increased to 25 and the supply  of monkeys became so that it was an effort to even see a monkey let alone catch it.The man now announced that he would buy monkeys at 50! However, since he had to go to the city on some business his assistant would now buy on  behalf of the man.  
 
In the absence of the man, the assistant told the villagers, "Look at all these monkeys in the big cage that the man has  collected. I will sell them to you at 35 and when the man comes back you can sell it to him for 50."
 
The villagers queued up with all their saving to buy the monkeys. 
 
 
 
 
 
Phir na woh aadmi mila na us ka assistant........... Sirf bandar hee bandar.....

Bill Gates : It's all in the name

I was just going through the shareholdings of some companies. And guess what did I find when I saw the share holding pattern of Allianz securities. To see for yourself click here.

Well in the FII list I figured the name of none other than Bill and Melina Gates foundation. While at first I was surprised at to what was the foundation started by Bill Gates,  which is dedicated to bringing innovations in health and learning to the global community, doing investing in his company. However, a little closer look made me realize that “it  was all in the name” . While Bill gates foundation is “Bill and Melinda Gates foundation”, the one listed in here was Bill Gates and Melina foundation. (Without a “d” in Melinda).

Now I am not sure if the website spelt it wrong and it is actually bill gates invested in here or it is somebody masquerading as Bill Gates.

Anyways just found it interesting.

  

More quotes

Some thoughts and quotes from recently read books:

“Mr. Market is there to serve you, not to guide you…and it will be disastrous if you fall under his influence” – WB

When investors lose sight of fundamentals and base their decisions on price signals and super contagious emotions,…..it is trouble because the tails of unrealistic expectations can come to wag the strategic dog”

“Stock markets only tells you when you will be right, the strength of your analysis tells you whether you will be right” -WB

Change : John Maynard Keynes

John Maynard Keynes famously said, "If the facts change, I change my mind, sir. What would you do, sir?"
 
The above quote is so apt for markets and stock calls. While it is admirable to be patient and sit tight but nothing like the virtues of flexibility and willingness to accommodate information and adapt views.

Well as it goes: “Put all your eggs in one basket and view the basket closely” but be ready to change some eggs in the basket when the “Facts” change.

Listing of Brokerage IPO's

The Indian market is seeing a number of IPOs, in every possible industry segment you could think of. However, what amazes me is the recent run up in Brokaerage firms offerings. Three companies Multi commodity exchange, Emkay share and stock brokers Limited and Steel City Securities Limited.

I am reminded of a few lines from Adam smith: The money game which I produce Verbatim:

….But if a room full of people called a sales organization can go public (many have), and another office of people called an ad agency can go public, there is really no end to the concept. A number of brokerage firms are hungrily waiting for the day when they can go public, i.e. not only sell everybody else’s stocks but their own ,too. (Before they do , you will hear that the tremendous capital needs of Wall street can only be met by outside financing, that the present commission rates simply do not cover the expansion that has to be made, and that half the members of the New york stock exchange are going broke. Then one offbeat firm will go public, followed by a stampede, so that the members of the NYSE, instead of having one or two million dollars’ worth of other people’s companies and a share in their own, can have one or two million dollars’ worth of their own. As Lincoln Steffens said,” I have seen the future , and it works.”

Eventually there is no reason why doctor and lawyers should not go public too; …but at some point of time a smart lawyer is going to see…they could sell the stock at twenty times earnings. …( In good markets, there is always a hungry underwriter. In bad markets, everybody is hungry and all the energies go into demanding that commissions be raised.)

Once the lawyers make it safely public, you can look forward to brain surgeons, Incorporated, which will be sold by brokers as “the most direct way of participating in the broadening growth of medical care, of federal aid programs, of the increased attention to the nation’s health and of the growing trend to such schizophrenia.”
-Adam Smith The Money Game (Page 88-89)

Ficci Frames

I recently attended the FICCI- Frames 2006 conference of the Indian Media and Entertainment Industry conducted by FICCI. The conference is essentially an annual event for the Industry,  the biggest of its kind in Asia and  I was amazed to see the attendance of more than 1500 people and above all the high level of enthusiasm, interest and novation.

The tone of the conference was overly positive and optimistic. It was creativity (Animation, Gaming) and technology (DBTV, IPTV, Mobisodes, Digitalization) that was what picked attention and focus.

Quick ideas/thoughts  from the 3 day event:

IP (Internet protocol)+IP (intellectual property) is the winning equation

Mobile: to be used voice also. The sixth sense, the extended limb blah blah. Mobile to mean a lot many things for lot many people – MP3, video recorder, camera, gaming console , PDA , Mini TV.  

Gaming and Animation: The next big thing. Not necessarily outsourcing of animation but our own proprietary content(IP).

E-content, Mobile content is in:  Nazara technologies, Mauj telecom, makemytrip.com contest2win.com, exchange4media.com or yatra online is in. Key to success superior execution ability, history of failure (and having learnt from them) and revenue model in place with ability to charge clients. Do not expect the Indian consumer as of now to pay for online content.  

Print is out: A business for passion not necessarily earning money.  High print costs and extreme competition from other media of advertising to keep scope of growth limited.

Radio, Multiplexes: Need to specialize, Differentiate and engage consumers.
Both radio and multiplexes have little or no brand preference among consumers, very commodity kind of play. Need to get out from the frame of mind to mean everything for everybody. All Radios cannot play Hindi/Pop music.
Also, All multiplexes cannot just keep showing whatever movies are released. Case in point is Sathyam cinemas in Chennai showing digital cinema whereas the best multiplex in Mumbai still laggards.


Television: Need to get ready for time shifting and space shifting
Television in the future will not necessarily be watched as per the Broadcasters wish but with IPTV and TiVO kind of applications to give choice to the consumer. Concept of prime time viewing may die down. Television may not necessarily watched on Television sets they will be watched on all other screens like Mobiles, computers, Ipods etc. Interactive Tv is not going to be limited to SMSing. Intel and Microsoft TV where the frontrunners in showcasing their Time shifting solutions.  

ADAM SMITH THE MONEY GAME

Few interesting excerpts from the book:

We are all at a wonderful party, and by the rules of the game we know at some point in time the Black horsemen will burst through the great terrace doors to cut down the revelers; those who leave early may be saved, but the music and wines are so seductive that we do not want to leave, but we do ask, “What time is it? What time is it?” Only none of the clock have any hands.

The irony is that this is the money game and money is the way we keep score. But the real object of the game is not money; it is playing of the game itself. For the true players, you could take all the trophies away and substitute plastic heads or Whale’s teeth; as long as there is a way to keep score, they will play.

If you do not know who you are, this is an expensive place to find out.

You can have no preconceived ideas. There are fundamentals in the market place, but the unexplored area is the emotional one. All the charts and breadth indicators and technicals are the statisticians attempt to describe an emotional state.  

Herding Behavior: Failing Conventionally

Failing conventionally is the route to go. As a group, Lemmings may have a rotten image, but no individual Lemming has ever received a bad press.
                                   -Cialdini

Reputation is at stake…underperformance is easily measured, instantaneously available, and highly visible. The ease with which a fund manager can imagine getting sacked for this crime inclines him towards decisions that can be most easily defended after the fact. As ever, failing conventionally is the way to go.


The greater the ambiguity – as with technology stocks, for instance- the greater the likelihood that social influence will dictate behavior. Instead of focusing on what businesses will do in the years ahead, many prestigious money managers now focus on what they expect other money managers to do in the days ahead.

Besides, the market may actually be right; it is efficient. Perhaps other people know something I don’t?
               - Excerpts from the book “The Real Warren Buffet: Managing Capital, Leading People”


Money has been pouring into Indian stock markets and the Indian indices have been touching new levels every fortnight. While money is being raised from Japan (with real negative to zero interest rates) and petro dollars flowing in from the middle-east, money managers are finding it difficult to invest. Also the domestic retail money is flowing in the stock markets, with new offerings from Mutual funds garnering huge interest. The domestic investment in equity is relatively low at 2-3% of savings, living a lot of scope of domestic liquidity even if FII flows dry out or channeled into cheaper emerging markets.

What needs to be highlighted in the Indian context is the lack of investble listed paper, which is pushing the prices of the good paper to record levels. The recent sops in the Indian budget to MF industry might have enhanced the investment opportunity but it is still not sufficient.

What needs to be done is to provide avenues to absorb the excess liquidity into India is:

1. More paper- some big ticket IPOs :Airlines (Deccan, Kingfisher, Spicejet – they will all be needing funds to expand), Telecom – ( Hutchison, Idea etc)


2. Partial or complete Disinvestments –  BSNL, LIC etc


3. FDI or FII limits enhancement. – Banking, retail, Construction, real estate…


4. Increase liquidity in Corporate Debt market & Government securities.

Till then, it is the Private Equity investors who will rule- having more breadth for investing. Where as the Mutual fund managers will exhibit Lemmings like behavior and continue to invest in the Large caps and companies of repute ignoring valuations – as nobody will reprimand you for investing in Tata’s, Birla’s, Bharti’s, Infosys , SBI etc for Perhaps the Markets-may-actually-be-right.  

So it is highly unlikely that Money mangers are now going to sit on cash , as he may be reprimanded for - missing the Bus or not having the Visionary insight of “how the Indian demography is changing”. However, the blame of low returns or negative returns could easily be attributed – “everybody is losing money” or “the markets are moving down”.

Quotes

In god we trust, everybody else brings data to the table.                    -N R Murthy, Infosys

Meeting the deadlines is not good enough, beating the deadlines is my expectation.
                              - Dhirubhai Ambani, Reliance

I worry when times are good.            – Anand Mahindra, M&M

Ultimately, everyone in the world is going to die, but we must die last.
– Anil Agarwal, Vedanta resources

Adventure capitalist: Jim Rogers

Just finished reading Adventure Capitalist by Jim Rogers. Well I picked up the book expecting some tips/fundae on Investing and stuff but it turned out to be more of a travelogue.

But Jim Rogers with his travelogue makes investing a very simple game by talking at very macro level …essentially answering where the country is headed?

Let s see some of the basic questions that will answer which country is headed where?

Median age of Population?
Demographics determine whether the country is heading towards progress or busy feeding his old/tired. Japan is a case in point, where the population is highly skewed to old age, which puts a lot of pressure on the working population. Countries like Ireland and India are to benefit from the young population. USA is to face the same problem with retirement period of baby boomers coming close.

Would like to digress here ………….I am just wondering if the same could be applied to some of the PSUs in India. MTNL is a case in point – relatively old and huge staff mainly being retirement benefits makes it tough for the company. Auto manufacturers in USA (GM) are also suffering from the same. Currently GM is benefiting from the rising interest rates in USA, as it is has maintained the funded status of its retirement benefits.
Corruption and bureaucratic hurdles.
The amount of money/FDI coming into a system/country is inversely proportional; to the levels of corruption and bureaucracy in a country. This in case of Jim Rogers can be measured by the ease of getting a visa and the no of days taken to process.

India scored relatively low in this account with corruption very rampant.

Type of government
By type of government – it does not matter whether the country is a dictatorship or democracy – but by the nature of policies and thinking at the government level. China prospered under the Premier and so did some of the Arabian nations where the Oil barons knew how to use the oil resources. However, countries like Indonesia and Nigeria inspite of rich oil reserves continue to be poorly managed.

Work culture
The Germans restructured themselves twice after being totally devastated by the world wars...each time emerging as a stronger country. The Chinese exist in difficult topography with little to boast about. But they were successful in using their population from a problem to an opportunity of low cost labor. The work ethics of CHINA is what makes it’s growing at 8-10%. Compared to this there are relatively many countries in the Africa endowed with rich deposits of minerals and food stuffs. But the economies are so used to GRANTS from the IMF/world bank that they have stopped working at all.


Well the book is a fascinating reading giving a broad framework to analyzing countries. The frankness with Jim Rogers writes he may get him killed some time – will update you on this Later.

10K and more...

The Sensex today touched the 10k mark, rising by 237 points. While the Sensex continues to rise to newer levels and achieving higher growth, analysts continue to remain BULLISH on the Indian market. Every positive movement in the Sensex is followed by a host of market/investment guru proclaiming – “I told you so”. Some of the more sophisticated analysts talk about the secular performance of the Indian industry and attribute stuff like Stabilizing politics, conducive policies, liberalization, infra boom, Capex cycle, benign interest/ inflation rates and blah blah…..

Every person who has been bearish on the Indian markets seems to have been proved wrong with the earlier Sensex targets becoming current “strong support” levels. Well I do not blame anybody as I had earlier mentioned its part of their business - be it analysts, fund managers.

The Nifty is currently trading at 18 times trailing earnings as compared to 14 times about 12 months before.  Generally a steep rise in EPS is marginally cushioned by a decline in earnings multiple, ensuring a moderate rise in indices. However, currently we see that the while the EPS has risen far above the normal trend line so has the P/E multiples, which is clearly signal of a lot of optimism built in the current share prices, even with interest rates slowly being pushed.

Going by Past indices correction it is very clear that the higher the rise, the harder will be the fall. While the probability of a Harsh Mehta, Ketan Parekh kind of event is rare as the multiples aren’t at alarmingly high levels. However, I probably feel an internal political calamity could cause harm. Anyways returns from the current levels are  not going to be great.

So be better be sure of what you are invested into and be ready to hold it for long periods.

Randomness and survivorship Bias

Situation
Think of a situation where you get an email on the First of Jan saying that the markets are going to up this month and they actually go up in the month. Again on the first of next month you receive a mail saying that this month the markets are going to go down and BINGO you notice they go down. This happens consecutively for 6 months, with a right prediction every time.

Your Analysis is that the person sending you the mail must be a top notch analyst who has figured the movements of the market well. On the next month again you receive a mail saying that the markets are going to go up substantially up this month and also with an accompanying brochure of advertisement to invest a small sum of US$ 100 in his fund so that you can benefit from his analysis. You are tempted to do so and you do so.

Result:
The person was a con and he loots you of the money.

How did it all happen? Why would an analyst of repute do that?

The story behind all this is that a mathematician sent out an email the first month of Jan to 64 people, in which for 32 he wrote that the markets are going to go up and for 32 to that the markets are going to go down. Depending on how the markets behaved that month and to the set of people he was right he divided the set into two and to one group he sent the email the markets are going up and to the other the markets are going down. At the end of the six months he had given right set of signals for 6 consecutive months to one person whom he sent out the promotional material.

So actually you were just a victim of survivorship as you were the person who survived the random attempts of the mathematician.

Observation:
We are very observant of success around us and gladly dissect the past of successful person and find a trend in terms of personal qualities, hard work and honesty. What we miss out is the thousands and millions of who had similar qualities and who set out in similar ventures of the likes of Narayan Murthy, Bill Gates, Warren Buffet, Dhirubhai Ambani etc. One probable reason is only successful people right biographies and the history remembers only those who lived or were successful.

“Heroes are Heroes because their actions are Heroic in Nature, not because they won or lost.

{Thoughts adapted from Fooled by Randomness by Taleb}

Career advice- Buffet

A question to Warren buffet and his reply …so apt


Q: What is your career advice?
A: If you want to make a lot of money go to Wall Street. More importantly though, do what you would do for free, having passion for what you do is the most important thing. I love what I do; I'm not even that busy. I got a total of five phone calls all day yesterday and one of them was a wrong number. Ms. B from NFM had passion, that's why she was successful. A few months ago I was talking to another MBA student, a very talented man, about 30 years old from a great school with a great resume. I asked him what he wanted to do for his career, and he replied that he wanted to go into a particular field, but thought he should work for McKinsey for a few years first to add to his resume.

To me that's like saving sex for your old age. It makes no sense.

Understanding Depreciation

Depreciation is a charge on the assets of the company to reflect the loss of assets through wear and tear or obsolescence.  While in accounting terms it would simply writing down the value of an asset annually by a fixed percentage generally in line with what the income tax authority’s numbers.
Meaning Depreciate as per Webster:  to lower the price or estimated value of

However, what is relevant depreciation is can be clearly defined by economic depreciation…meaning a charge that will provide for the replacement of assets (and the earning power) in place of the current assets. This is the point where accounting and economics start to show a wide gap. While accounting is in favor of charging the book value of an asset with a regular amount, the actual earnings power or cash flow is never taken into account.

Then, what are the implications for company’s accounts whose market value of assets is far higher than what is carried on books. Well the standard argument would be since the value of an asset is the present value of the cash flows that can be generated by the asset, in case the market value of an asset has increased, it would reflect in the cash flows (earnings) of the company.

Let’s assume to scenarios of High asset value:

Asset value is high
For example: A company with a gold mine.
With gold prices spiraling and touching new highs, the company market value of asset would be far higher than what would be reflected in the books. While the increase in value of the asset would be analyzed and reflect in the earning’s and due weightage is likely to be given by the Analysts over a period of time. The immediate appreciation of such a gain due to holding of high quality, high earning assets in Books is frequently ignored. This is mainly due to the trouble of analysts in revaluing the assets and related entries which at the times the market would not appreciate terming it as very aggressive.

This was seen when the carbon credit story played out in the news. While the Carbon credits gave an incrementally high value to the Fixed Assets of some of the companies, analysts took considerable time in appreciating the same. SRF was a case in point.
The lack of clarity of on Pricing of carbon credits, made certain analysts vary of the projections based on assumption and appreciating the true potential.  (I have no personal opinion on the carbon credits pricing or any view on how it would span out)

However, one learning that I got on observing this was relatively complex ideas remain under researched and analysts relatively take very conservative (to avoid being completely wrong) opinion and there is a possible of unearthing huge value based on thorough analysis.

A thought: “Equity Analysts estimates of calls on stock would be far more worth if there was no active stock price being quoted in the stock markets. Something that clouds over the mind before sitting on any fair value analysis.

Financial statement analysis will not easily help in finding the actual hidden value of assets. At best hidden value in assets may reflect in lower charge of depreciation in relation to income. Analysts and owners have to maintain their conservative approach and seldom right up assets.

What happens if no adjustment to the asset value and depreciation is made?
Reported Earnings for the year will be reported higher due to a low depreciation charge. Hence all earning ratios (P/E, ROE) would look good but Book value ratios would not look attractive.  

Godrej consumer products is a case in point.
The company currently trades 23 times its TTM earnings and 51 times its book Value.  The actual value of the asset is in the Brand (something very true with strong franchises). The company’s depreciation is just 8% of its operating profit.
While I generally look at book value business  ...in this case it was just not possible as the value of the brand is to be added on to the book value.

However, accounting for appreciation or depreciation of assets does not change the cash flows and any valuation done on the cash flow would hold good.