Markets never deter to surprise us. JFM was the gloomiest and most beautiful quarter for Value Investors. This was a real market-panic never before seen in life, which amazed even veterans. The market was a buyer's market where one could have got anything at any asking-price. Cash was the real king. Then too many issues spooked the market - players felt that march quarter results would be worst than December quarter, credit lines had halted altogether, elections results were not supposed to be anything good and chances of hung Parliament were high. But markets have tendency to surprise us far more than we can assume.
--
What did we do, when nothing was clear?
Once, a wise man asked a rich person - how did you get so rich? The person replied – I always keep a million here or there! And JFM was the time to use all the ammunition, while sticking to our system which said, be conservative, never over bet, don’t leverage too much.
In February, when things when really scary, we couldn’t have predicted how things were going to work out. But the message from the veteran value investors was – BUY. So investments were made in
(1) Cash rich companies, with no dependence on external credit, with zero debt status.
(2) Companies doing buybacks, with insiders buying and making use of the fire-sale market prices.
(3) Companies giving great dividend yield – in some cases as high as 10% assured, which was far superior to locking the money in the fixed deposit in the bank, post tax!
(4) Govt owned companies (In God, and Govt, we can trust in such times!).
We did not had any clue when growth would be back. But we were willing to wait for 1-2-3 yrs, when good companies, with good managements, paid us 8-12% tax free parking fees (dividends) for next 2-3 years.
Many investors, including Mutual fund houses, in the expectations of future downturn, were not willing to buy in JFM. The mistakes of 2008 were again repeated – “investors” who were unwilling to sell in Jan08, the same “investors” were unwilling to buy now!!
--
Value Investing
Value investing offers a very conservative system of investing, as given by Ben Graham. It offers to invest in
• Very cheap securities – something selling at 50cents to a dollar
• Look for worst case – and try to get dividends for waiting.
• Buy companies which are not-too-big, where we have competitive ground-level-knowledge advantage, and less research is available from the street.
• Buying from punters, traders, not so knowledgeable investors,
• Buying from Financial Institutions (FIs) who cant hold smaller companies because of size,
• Buy from FIs, who have to forcibly get out of the market during falls, to beat the index daily – incentive caused bias.
• We are not required to be in the markets always. As Buffett says – wait for the fat pitch and strike when you want. We can sit comfortably on cash. Bernard Baruch, another great investor wrote in the book “My Own Story” that you must give rest to your soldiers!
• Our portfolios are non-indexed – and we are willing to unearth relatively unknown/ unloved/ under-owned names.
The overall result is a function of not only buying the right companies, but also managing the allocations. A good set of companies, with wrong allocation, will do no justice to the buying process. Allocation need to be managed within different companies, and between equity and cash.
PROTECTION OF CAPITAL to us means that our invested businesses shouldn’t go belly-up, or shouldn’t be under stress or dependent on the mercy of markets for capital. It shouldn’t happen that owners dilute the company at the cost of minority shareholder, because they went too aggressive when the markets were euphoric. For Ex - Unitech strained under debt, diluted the equity from 160c shares to 238c shares - at price between 38-85 bucks. This is good for company and promoters, but it dilutes the minority guys. Good for companies – as they got lifeline; Good for promoters – as they can still issue themselves warrants, or stock at lower price in a rising market and still enhance their stakes going forward. But minority shareholders lose their equity stake in the deal!!
For us protection means - good intelligent managements, which can add value without the mercy of external capital markets, and who are – most importantly fair to the minority shareholders. We want to grow the capital, but not at the risk of having “fun and excitement” from the markets and its corrupt deeds.
--
Present Situation
Presently, Nifty is selling around 3.5x - not very cheap, but neither too expensive historically. The markets look expensive on PE basis selling at trailing 20-21x . However, so were they in 2002, when earnings collapsed and PE multiple remained high. When the earnings came back to the assets, the PE started looking cheap again!!
But the catch is the changing of constituents of Nifty. Exchanges move out the companies not doing well, with the companies which do well. Hence a inbuilt bias to see the eps-of-nifty high. For example – from 27 march 2009, Axis bank replaced Zee Entertainment. The idea is to keep healthier and flavor of the season in the index. Indeed, the exchanges are biased to see the growth in their own indices, which eventually overtime pushes up the EPS!!
The problems surrounding markets are not yet complete (but when are they?) Few companies - esp. real estate, has just been salvaged by new capital infusions. Few large companies are still sitting tight on debt and raising money. Interest rates have gone totally unpredictable, with the fear of inflation & increasing fiscal deficit– although the cheer leaders of the Govt dont accept that. The commodity prices can still shoot up again. The disinvestment program may face hurdles from employees of PSUs or other stakeholders. Threat of poor monsoon is also hanging on our head. World economy is still in woods. And more over, markets pendulum has swing too much to the other extreme, a bit too much too soon!!
On the positive side, presently, India is supposed to be a shinning star in dark global skies. World Bank recently showed bullishness by upgrading India's growth projections. (And smart people around say those World Bank projections are conservative!) Many industries are doing well, except for export units or those who have taken high debt in euphoric periods. With young and increasing population, the story of India's "demographic dividend" remains. The requirement for infrastructure (and capital) is huge in the country, and we haven’t even touched the tip of the iceberg yet. With world economy in doldrums, we think, India can be an oasis for return-thirsty investors!! But this has also started to reflect in the premiums of stock prices!!
The initiative of Govt to rope in people like Nandan Nilekani for Unique-ID project is commendable and shows the direction of change. This will give big boost to people living in rural areas and will help in sorting out complex problems like fertilizer subsidy or employment guarantee schemes.
The abolition of entry loads in mutual fund industry is another great feat achieved recently – good thing for the common investors of the country. Earlier the investors were “sold” the products which paid “advisors” or banks the highest commissions! Financial advisors used to churn and churn and churn, and bleed the investors – making them gain nothing out of their investments. Now at least, a common lay investor will know what he is buying and paying for!! Mahesh Vyas (of CMIE) recently wrote a wonderful article – Error of 2.25% commission - in Financial Express – which can be read from here
Re-election of the same political party for the second time in Parliament is definitely a positive for the country. They don’t have to waste time to rethink the old policies and can move forward quickly.
June quarter results have started flowing, and surprisingly they are looking good on face. A good reason for that is low commodity inventory accumulated by companies during JFM quarter. Also, another reason could be "re-stocking" the inventories, which were depleted in the last quarter. Banks are showing good credit growth, and loans off take has started picking up. Direct Taxes for the quarter look up and positive. However, I think next quarter would be a better guide of the industry conditions when low-cost inventories and restocking would be gone.
Soros’ Theory of Reflexivity has got a part to explain why companies showed good results and hence higher valuations. The new liquidity (QIBs) gave a lifeline to over-leveraged companies – especially real estate, which has helped them lower the pain of debt. The high stock prices of these companies - now fetching good value/share to the capital-raising-companies in turn, help improving the fundamentals - Only it needs to be seen is for how long will this party continue.
So far, so good for the businesses and real economy. However, valuations look a bit stretched, which is evident from crazy things happening in the market –
• Many companies are selling at or very close to all time high prices, historic high PEs and PBs.
• New companies are lining in the markets to raise capital
• Business houses have started talking about their grandiose plans to expand again. Acquisitions are back in action and animal spirits are high again.
• Fake trades are back on exchanges – read this article
• Small caps are seeing highlighted interest again
• Grey markets in Gujarat are active again
With such a bullish sentiment, it seems that words like "Fear", "Satyam", "Pyramid Saimira" are long forgotten again. Things are back to square-one - back to 2007 again!!
Friday, July 24, 2009
H1 CY09 - Surprise Party!!
Saturday, January 10, 2009
2008 and present state of business
2008 had been an interesting year. It was an year when excesses were eliminated, senses were restored and easy money went out of window. People realized that 50% returns were an exception, an aberrations, not a norm. Greed changed to fear, and fear to panic. Tulips (aka stocks) were no longer desired thing. And valuations fell from "super growth for next 10 year " models to under-book, under-working capital, and under-cash in many cases!
Many think that lowering of market prices was bad. I think asset prices have gone down, but the value isn't got destroyed as much, at least in "real" businesses. FALL IN THE ASSET PRICES IS NOT EQUAL TO DESTRUCTION OF VALUE. Value isnt destroyed by psychotic nature of Mr Market - its realization gets delayed, not destroyed. For a smart business owner, its a good time to buy businesses. As some say that a best time to start a business is the low years - similarly, the best time to own a business is also a year when the asset prices fall down. For an intelligent buyer, distress is the time for sowing!
Logically, destruction of value takes place when managers act stupidly. For example - one of the worst decision in Indian businesses in 2008 was implementation of CSR -TAX by the Gujarat government on several PSUs. The govt demanded around 30% of PBT to be contributed by PSUs (Gujarat Mineral Development Corporation (GMDC), Gujarat Narmada Valley Fertiliser and Chemical Limited (GNFC), Gujarat Industries Power Corporation Limited (GIPCL), Gujarat State Fertiliser and Chemical Limited (GSFC), Gujarat Alkalies and Chemicals Limited (GACL) and Gujarat State Petronet Limited (GSPL)) towards aiding social-purposes of the state. Link. The ideal way would had been fair distribution of money towards all equity owners - in form of dividends. The govt, by mandating 30% CSR, set a bad precedent for other states and tarnished its image as a investor friendly state.
Sometimes, such bad instances can create good value opportunities. For ex - Satyam (pre Raju's confession) had fallen down on the satyam-maytas merger attempt. When the management went back and aborted the deal, the price jumped back.
We see distress as an important source of opportunities. We like to classify problems at three levels -
Many think that lowering of market prices was bad. I think asset prices have gone down, but the value isn't got destroyed as much, at least in "real" businesses. FALL IN THE ASSET PRICES IS NOT EQUAL TO DESTRUCTION OF VALUE. Value isnt destroyed by psychotic nature of Mr Market - its realization gets delayed, not destroyed. For a smart business owner, its a good time to buy businesses. As some say that a best time to start a business is the low years - similarly, the best time to own a business is also a year when the asset prices fall down. For an intelligent buyer, distress is the time for sowing!
Logically, destruction of value takes place when managers act stupidly. For example - one of the worst decision in Indian businesses in 2008 was implementation of CSR -TAX by the Gujarat government on several PSUs. The govt demanded around 30% of PBT to be contributed by PSUs (Gujarat Mineral Development Corporation (GMDC), Gujarat Narmada Valley Fertiliser and Chemical Limited (GNFC), Gujarat Industries Power Corporation Limited (GIPCL), Gujarat State Fertiliser and Chemical Limited (GSFC), Gujarat Alkalies and Chemicals Limited (GACL) and Gujarat State Petronet Limited (GSPL)) towards aiding social-purposes of the state. Link. The ideal way would had been fair distribution of money towards all equity owners - in form of dividends. The govt, by mandating 30% CSR, set a bad precedent for other states and tarnished its image as a investor friendly state.
Sometimes, such bad instances can create good value opportunities. For ex - Satyam (pre Raju's confession) had fallen down on the satyam-maytas merger attempt. When the management went back and aborted the deal, the price jumped back.
We see distress as an important source of opportunities. We like to classify problems at three levels -
- Economy/country in distress - for example - US after subprime, or entire market crash
- Industry in distress - for example - textiles in india presently.
- Company in distress - for example - machinery breakdown, major commissioning delays, raw material paucity, etc
Taking call on type1 or type2 oppurtunities require too much of a macro view. For example - "when will US recover?" or "when will real estate sector make a come back in india" are the most difficult prediction to make. When the problem is localised to a company - type3 problem - its can be eliminated by the managerial efforts and we can assign a time line to it. Hence type3 is a fertile ground for seeking opportunities for us. For example - a machinery breakdown or fire in the plant, can be rectified easily by the management. We try to seek out reasons and figure out if the problem is temporary or permanent. If the problem is not of permanent long term errosion of earnings, then a carefully selected portfolio of such oppurtunities, with adequate margin of safety, can produce good results over time. Same has been demonstrated by value investors like Marty Whitman or more so by Mohnish Pabrai over years.
A well run company's market price may deviate from valueline as per short term trends, or due to market behaviour. But in type-3 kind of problems, we can see major deviation of price lines from the long term value line. Our endavour is to be part of such opportunities, and maximize our holdings in such companies.
--
Present state of businesses.
Whats the ground reality?
As per our understanding from readings and talking to many people in the industry, the problem in the industry looks more of a credit non-availability, coupled with fear, leading to slowdown of business. Non-availability of credit is leading to slower import-exports, shipping lines are stalled, banks are afraid that smaller enterprises will become NPAs on their books, steel & cement demand - a subset of infra - and a further subset of capital - is slow, coupled with overcapaicty in pockets. Moreover, due to crash in commodity prices, many players of the industry are sitting on inventory losses.
Still, on positive note, India isnt that affected. India's exports form around 20% of its GDP - internal consumption is high. People are consuming goods, industry may not be growing at rapid pace, but its still producing cash!! We arnt at a stage where companies are over-leveraged and not finding takers of their goods, and hence defaulting large scale on the outstanding debt. Same is the case with most of indian population - who are very very conservatively financed.
All said, we feel that its time that we should - at personal and corporate levels - reduce levereage, and cut down unnecessary discretionary expenses, and save on to liquidity! Infact, our focus is now on goods and services which are most essential in nature, rather than for luxury!
State of markets
Not many value investors across the globe have done well - in terms of producing positive return in the last 12 months. Many famed value investors - Marty Whitman, Mohnish Pabrai, Bill Miller, etc, are down heavily. Assets across categories - value, growth, commodities, real estate - have crashed down. As Buffett says, it was an economic pearl harbor. All said, as someone says, these value guys arnt any more foolish than they were 10-20 years back. Infact, they are more wiser over years after been through many such crises. And at times like these, they are adding capital to their portfolios. Marty Whitman recently commented - "This is the opportunity of a lifetime, The most important securities are being given away.” See Video here.
See the following sample of arctiles-
David Dremen's "Its time to buy"
Warren Buffett's " Buy american, I american"
Marty Whitman's letter
Bill Millers' commentary
Infact, a research done by Michael Mauboussin of Legg Mason showed that Warren Buffett hardly gave any calls on markets, and when he did, its was a time to load the truck! See "Where from here?" by Mauboussin.
On similar note, this "Buffett4 market calls" was complied by Whitney Tilson.
The irony of the markets is that we tend to "feel" markets will go up, when they are going up., and we start "feeling" they will go down when they are doing bad - a natural investor behavioral psychology - hence we neither buy during panics, nor sell during euphorias. Emotions come in the way of our logical judgement and such decisions are bound to be biased/wrong. I feel that overall in life and in markets, one needs to be conservative, not take any esoteric risks, and keep walking(buying) bit-by-bit like sparrows, and one will do very well over years! If we are right in our analysis, markets will give due weights to the value overtime.
Presently, our focus is to be in few industries which are into "most essentials" goods. These goods are like very low cost options to the poor (and others), or food or shelter, etc. Growth is still healthy in such segments and hopefully do well. Moreover, we are trying to position our core-portfolio into companies which are either debt free, cash rich or reducing debt very fast. When the demand cycle turns, such companies which are unleveraged and with excess capacity, would be well positioned to take on the demand head-on.
Things are changing in India at a rapid pace - for good. Several long term changes are happening in the country, which will affect our lives very positively. For example - telecommunication is getting cheaper, teledensity is increasing, KG basin gas finds are good development for energy needs of the country. And we are not too much dependent on the world presently. If indian economy keeps doing well over time, as Rakesh Jhunjhunwala says - the money will come from Timbaktu"
A well run company's market price may deviate from valueline as per short term trends, or due to market behaviour. But in type-3 kind of problems, we can see major deviation of price lines from the long term value line. Our endavour is to be part of such opportunities, and maximize our holdings in such companies.
--
Present state of businesses.
Whats the ground reality?
As per our understanding from readings and talking to many people in the industry, the problem in the industry looks more of a credit non-availability, coupled with fear, leading to slowdown of business. Non-availability of credit is leading to slower import-exports, shipping lines are stalled, banks are afraid that smaller enterprises will become NPAs on their books, steel & cement demand - a subset of infra - and a further subset of capital - is slow, coupled with overcapaicty in pockets. Moreover, due to crash in commodity prices, many players of the industry are sitting on inventory losses.
Still, on positive note, India isnt that affected. India's exports form around 20% of its GDP - internal consumption is high. People are consuming goods, industry may not be growing at rapid pace, but its still producing cash!! We arnt at a stage where companies are over-leveraged and not finding takers of their goods, and hence defaulting large scale on the outstanding debt. Same is the case with most of indian population - who are very very conservatively financed.
All said, we feel that its time that we should - at personal and corporate levels - reduce levereage, and cut down unnecessary discretionary expenses, and save on to liquidity! Infact, our focus is now on goods and services which are most essential in nature, rather than for luxury!
State of markets
Not many value investors across the globe have done well - in terms of producing positive return in the last 12 months. Many famed value investors - Marty Whitman, Mohnish Pabrai, Bill Miller, etc, are down heavily. Assets across categories - value, growth, commodities, real estate - have crashed down. As Buffett says, it was an economic pearl harbor. All said, as someone says, these value guys arnt any more foolish than they were 10-20 years back. Infact, they are more wiser over years after been through many such crises. And at times like these, they are adding capital to their portfolios. Marty Whitman recently commented - "This is the opportunity of a lifetime, The most important securities are being given away.” See Video here.
See the following sample of arctiles-
David Dremen's "Its time to buy"
Warren Buffett's " Buy american, I american"
Marty Whitman's letter
Bill Millers' commentary
Infact, a research done by Michael Mauboussin of Legg Mason showed that Warren Buffett hardly gave any calls on markets, and when he did, its was a time to load the truck! See "Where from here?" by Mauboussin.
On similar note, this "Buffett4 market calls" was complied by Whitney Tilson.
The irony of the markets is that we tend to "feel" markets will go up, when they are going up., and we start "feeling" they will go down when they are doing bad - a natural investor behavioral psychology - hence we neither buy during panics, nor sell during euphorias. Emotions come in the way of our logical judgement and such decisions are bound to be biased/wrong. I feel that overall in life and in markets, one needs to be conservative, not take any esoteric risks, and keep walking(buying) bit-by-bit like sparrows, and one will do very well over years! If we are right in our analysis, markets will give due weights to the value overtime.
Presently, our focus is to be in few industries which are into "most essentials" goods. These goods are like very low cost options to the poor (and others), or food or shelter, etc. Growth is still healthy in such segments and hopefully do well. Moreover, we are trying to position our core-portfolio into companies which are either debt free, cash rich or reducing debt very fast. When the demand cycle turns, such companies which are unleveraged and with excess capacity, would be well positioned to take on the demand head-on.
Things are changing in India at a rapid pace - for good. Several long term changes are happening in the country, which will affect our lives very positively. For example - telecommunication is getting cheaper, teledensity is increasing, KG basin gas finds are good development for energy needs of the country. And we are not too much dependent on the world presently. If indian economy keeps doing well over time, as Rakesh Jhunjhunwala says - the money will come from Timbaktu"
Subscribe to:
Posts (Atom)