H1 CY12 - Bright Spots

The business conditions haven't changed much in last few months. The signs of slowdown are now visible in some sectors, and now the Govt-bodies are also conceding to it. Biggies of the corporate sector have made multiple pleas to the Govt to push the reforms. Hopefully things will move.

Human minds works with a negative bias. The default mode of mind is to ignore the good things, and accentuate the bad things. This worked well in hunter-gather environment - but now, this trait is wired into our brains forever. Even without any external threat, mind makes its stories and produces unnecessary anxieties. Rick Hanson (Buddha's Brain) tells this as being in unnecessary flight/fight mode and unhealthy for our body.

Looking at the brighter side is equally important trait, which leads us towards development, growth, and entrepreneurship. Dr Martin Seligman – the positive psychology, and learned-optimism pioneer – says that we usually forget that nothing in this universe is permanent or prevailing condition. Things change for good. And its important to keep a tab on such changing and uplifting scenarios.

In past few months, few sectors have shown good movements.
• Power – Govt is trying to do its bit, and industry is not letting off Govt. Power prices in most of the states were increased last yr, and are again looking to be hiked this year. A recent Crisil report suggests that there is a big lag between rise in income levels and real power prices – i.e. consumers are willing to pay higher prices to get regular supply of power. Moreover, fall in coal prices internationally is good for Indian power producers.
• Cement production and prices are up in last few months, despite slowdown reports on infrastructure front.
• Consumables are doing well.
• NBFCs, catering to home-loans and auto finance are showing good growth.
• Overall, India, even within BRIC, isn't looking as bad as reported – Read this

(((Do you see any more? Send me the bright shoots which you can find around.)))

Markets are reasonably priced – in last several months, many things have gone from reasonably priced towards higher valuations. We are adding to our old positions, and are allocated comfortably.

Landmark

I attended this course recently - usually referred to as 'The Forum' globally – It was started in US in 90s. Its either loved or hated, due to its structuring and flow. The coaches rip apart the blind-spots and past foundations of the participants, and helps one see the past baggages, which aren't any good for creating the future which one desires. I recommend this, if it is available in your country – go and check it out.

H2 CY11 - Déjà vu

The fall in the market feels like 2008 - its ‘everyday low prices’ time again.

2011
The year went well - markets fell and “Sanborn” grew.

Our “Sanborn” - the fertilizer company, containing nearly quater of our assets, did very well. The thesis worked out quite fast - just over last 2 years. I expected it to add up cash profits of around 50-60 Rs/share on our cost of around Rs 200/share (which was nearly the investment/cash value of the company, thus protecting the downside risks).

The chemical compound which they make - shot up rapidly in 2010-2011 period and company reaped something like 100 bucks of cash profit per share per year!

Our cash position was large at the beginning of the year - Additional windfall came from liquidation of "sanborn", which further added to liqiuidity in the falling markets.


Agri Company
I invested into a company facing a rumoured loss and a liquidity crunch. It was a market-loved company with marquee PE funds as major investors + a reputed CA firm.

They are agri-traders and some agri-trades went haywire for them. The promotors had overleveraged their personal balance sheet, by pledging their personal stakes. With fall in stock, lenders became jittery, and in rush to get out of the stock at any price, further depressed the prices to a lucrative levels. I invested into it as price was quarter of book, company had liquidity problem which they were working on, the hard assets were good, and stock had sellers overhang. The upside expected was much higher than the downside risks.

However, with the fall in markets in Oct-nov period, good compounders had become more lucrative + company couldnt raise liquidity as mentioned by the management + business deteriorated as import of raw material became expensive & industry margins were squeezed + company started making delays in salary payment + there were reports of employees jumping off the ship.

Considering all this, I decided to exit the trade and switch over to somethings else.



Present condition

There is lot of uncertainty regarding future projects in the country - large capex is slow/stalled. But still the country is expected to grow at 6-7%, and within that some companies will do 20%+. Business conditions arnt as bad as perceptions - read Kamath interviews here and here and here(one of the better people to track).

We are comfortably positioned in the makets, holding back some 20-25% as cash. Our companies are facing general sectoral headwinds, with a few facing temporary-solvable-distress situations - hence low equity prices. Many have fallen close to all time low levels.

Our job is to find the right company and pay the RIGHT price. This time, unlike 2008, good companies, doing well, havnt fallen to good prices. There is no liquidity driven crises like 2008 - yet. The general disenchantment about the government’s pace of action may lead to a slow grind for the equity prices for year or two. I hope our cash holdings will give a good opportunity to buy more as markets fall down. Net net, i consider the present fall as once in a decade opportunity, coming up for the second time :) and we are happy to see "everyday low prices".


John Malone / Mohnish Pabrai / Chuck Feeney
Mohnish Pabrai visited Prof Bakshi’s classes at MDI Gurgaon recently. It was enlightening to talk to him and interesting to know how he is thinking about his allocation strategy over past few years.

I found another interesting person in “Cable Cowboy” - John Malone. Malone came up as a “disguised” fund manager, operating in media/cable industry. He used all the financial alchemy (dual voting stocks, stock swaps, zero tax structures, hiding earnings under high depreciation, leverage, etc) to create massive shareholders value over 3 decades. Recommended read.

The best find of the year was existence of a unknown guy named CHUCK FEENEY. He was the owner of Duty Free Shops and made business from zilch to multi billion dollar value. But thats just a small part. The best part - he kept his hedonism low and gave away his wealth - everything - for education and medicine. A real gem to emulate. Do read him in his bio.

One common thread which comes across most of such guys is - they are all extraordinarily long term thinkers, not paying attention to short term profits, running ulta-frugal operations, not wasting anything, concerned about building assets, and operating in taxfree structures. Conventional wisdom doesnt understand this - but as Buffett said, conventional wisdom is more on conventions than on wisdom.