Buffett said – when I see a fat man, I don’t know whether he is 300 pounds or 350 pounds, but surely, I can see, he is a very fat man. Our markets are like Buffett’s fat man presently – fat & blooming, but we don’t know how far it can bloom! We are concerned both about the valuations & the possible impact of problems in EU & China, though we don’t know exactly how long the music will continue.
Presently, the situation is very different from fy08 – during that period, all the engines were firing at full throttle – internal consumption was high, and exports were good. Presently, internally we are good, but exports have slowed or diverted back to India. Moreover, a reverse – imports inflows is becoming prominent. We already know the noises made by L&Ts & BHELs regarding Chinese invasion. As the world economy slows, China may be forced to divert goods to high-consuming economies like India, which may again effect the margins of our domestic industry.
India may attract more foreign flows – but only top few companies in market can accommodate greater-fool-capital. If money has to flow, it will flow more towards PE side, than the markets-side. Hence it could be beneficial for unlisted smaller companies, not for the markets!
Last few activities
In last few periods, the returns have been good, but it would be incorrect to focus on this blooming & benevolent period. What matters is how the portfolio was positioned in JFM09 – which decided how much will we earn. Buffett said that if things are bought very very cheaply, upside will take care of itself. I guess that’s had been the case.
Our activity in the first half was very limited due to the reasons stated above. As we move ahead, I would want to reduce it further to Buffett’s proverbial 20-punches-in-a-lifetime scenario, whereby we buy good managements selling at the rate of junk and ride on it for 3-4years. Thanks to another addition to my Guru list – Li Lu, who had been doing this well, and now has got Munger’s stamp!! See this link
We exited completely our rice company– the piggy-bank (described in the earlier posts). In our holding period, the value of the company rose, and the price-to-value gap was also filled up – its profits went up from around Rs 55cr to 125c in last 2 years!! This is the major theme on which we are focused. We want to buy 50 cents to dollar, and let the dollar grow, and wait for the next bull run.
When the earnings start rising, the perception (multiple) also rises, giving multifold results. For ex - a company growing by 25% will go like – 100 125 156 etc.
If it can be bought at 50% discount – at 50, and sold at 50% premium at end of 2 yrs, our capital goes to 234, making it 4x returns!
The only downside to this entire deal is that its painfully slow (one got to wait for few years or seemingly longer 365xNdays!!) and its very very very boring (not entertaining)!
As Munger puts it – real money isn’t in buying and selling pieces of paper – it’s in holding patiently!!!
If (1) biz grows in value (2) biz is bought at prices less than value- it will compound our money very very fast
Moreover, one saves on frictional costs like taxes and brokerages by holding for longer periods. With the change in Tax structure next yr with DTC (Direct Tax Code) coming, we will still do well, as holding long term gives us advantage of leverage.
New Buys
We bought only one new opportunity, which was very identical to Sanborn (made by Buffett during his partnership days). This is a Govt owned company, essential & must have product, with high demand, and tight supply (absence of its products in the markets have resulted in riots!!) and had been able to move from highly-leveraged-financial-restructuring-case to cash rich company over last one decade. It’s on its way to become cash bargain very soon, which is
(Value of cash on books – all liabilities) > Market Cap
In a way, you get operating businesses producing 500 odd crores per annum for free!! My thinking is that chances of goof-ups from corporate governance point of view are close to zilch (it’s a Govt co) & downside is highly protected (due to cash & free cash flows) – hence we loaded our trucks at good price – very similarly to Buffett’s proportion in Sanborn.
Why was market ignoring this? – Its like a 100$ bill lying on the street – till anybody picks up, all think it’s fake! Markets are anchored to its historical status of being highly indebted a decade ago. Also markets are anchored to its stock-price which remained around a level for past 4-5yrs. What markets ignored is that steam was building up in the pressure cooker, and it’s got to be released someday! With superb cash generation, they paid down all the debt, and build up cash rich balance sheet.
The TATA Gesture
So called professional investors and their clients are mostly worried about how the stock price is moving. That’s the reflection of their thinking process. They underestimate the value we should assign to longevity of businesses – a flavor of the season company, with bad economies and unfaithful management, will sooner than latter be more harmful to minority investors. A conservative, back footed, and righteous managers, even in mediocre business, will always serve us great.
THE ONLY THING WHICH MATTERS IS HOW ETHICAL IS THE MGMT/PROMOTORS - will they share the money made with you? Or are they just interested in their own Swiss-holiday homes and yatches? R they involved in doing somethings good socially? The big risk isn’t fall in mkt prices. Its when the promoter doesn’t tell u whats happening inside the co, when he treats the co as his dad's co, when he does under-the-table deals to fill his pockets, when he is more interested in building up wealth only for his great-grand-sons when he is more interested in preserving his wealth by diversifying thru subsidiaries in Netherlands, and Singapore, or riding tigers on Saturday morning or building up plush offices with fountains & palm tress on the mezzanine floors - that’s what is actually killing off the value inside the company!
Recently, I received a mail from a friend about how Ratan TATA behaved post attacks on the Taj, Mumbai – Here is the mail. … (No doubt you would want to partner with this man, for ever!)
A. The Tata Gesture
1. All category of employees including those who had completed even 1 day as casuals were treated on duty during the time the hotel was closed.
2. Relief and assistance to all those who were injured and killed
3. The relief and assistance was extended to all those who died at the railway station, surroundings including the “Pav- Bha ji” vendor and the pan shop owners.
4. During the time the hotel was closed, the salaries were sent by money order.
5. A psychiatric cell was established in collaboration with Tata Institute of Social Sciences to counsel those who needed such help.
6. The thoughts and anxieties going on people’s mind was constantly tracked and where needed psychological help provided.
7. Employee outreach centers were opened where all help, food, water, sanitation, first aid and counseling was provided. 1600 employees were covered by this facility.
8. Every employee was assigned to one mentor and it was that person’s responsibility to act as a “single window” clearance for any help that the person required.
9. Ratan Tata personally visited the families of all the 80 employees who in some manner – either through injury or getting killed – were affected.
10. The dependents of the employees were flown from outside Mumbai to Mumbai and taken care off in terms of ensuring mental assurance and peace. They were all accommodated in Hotel President for 3 weeks.
11. Ratan Tata himself asked the families and dependents – as to what they wanted him to do.
12. In a record time of 20 days, a new trust was created by the Tatas for the purpose of relief of employees.
13. Whatg is unique is that even the other people, the railway employees, the police staff, the pedestrians who had nothing to do with Tatas were covered by compensation. Each one of them was provided subsistence allowance of Rs. 10K per month for all these people for 6 months.
14. A 4 year old granddaughter of a vendor got 4 bullets in her and only one was removed in the Government hospital. She was taken to Bombay hospital and several lacs were spent by the Tatas on her to fully recover her.
15. New hand carts were provided to several vendors who lost their carts.
16. Tata will take responsibility of life education of 46 children of the victims of the terror.
17. This was the most trying period in the life of the organisation. Senior managers including Ratan Tata were visiting funeral to funeral over the 3 days that were most horrible.
18. The settlement for every deceased member ranged from Rs. 36 to 85 lacs [One lakh rupees tranlates to approx 2200 US $ ] in addition to the following benefits:
a. Full last salary for life for the family and dependents;
b. Complete responsibility of education of children and dependents – anywhere in the world.
c. Full Medical facility for the whole family and dependents for rest of their life.
d. All loans and advances were waived off – irrespective of the amount.
e. Counselor for life for each person
Clearly, one who takes care of the employees will always do good to the OPMI (other passive minority investors)
et al - few interesting books read
An exciting book which I recently finished was – THE BRAIN THAT CHANGES ITSELF. In the last few books read on brain*, this was a great addition. It shows that we can nurture our thoughts and give it a direction – learning even at latter stages is possible, if we concentrate and are focused to achieve it. I have read many such exemplary tales of people who re-constructed themselves
* I recommend reading
1. Your money and your brain - Jason Zweig
2. Stumbling on happiness - Daniel Gilbert
3. How the mind works - Steven Pinker (currently reading)
4. The secret life of brain (PBS Video)
5. The brain that changes itself
Second good book was – The Big Short – it’s the case of small group of value-hermits who made profits from CDS fiasco of 2003-2008. It’s remarkable to see that how myopic human nature is to make money in shorter and shorter intervals, and ignores ALL the evidences of eventual demise!!
