H1 CY14 - Clear Views

In the business world, the rearview mirror is always clearer than the windshield - Warren Buffett

In hindsight, it’s clear that the pessimism of july-13 was undue and exaggerated (It looks too easy today, but it could have continued had India not got full majority). Equally true would be the clarity and hope with which many local businessmen are viewing the windshield. With the clear majority at center (government), functioning and policy making, which went in topsy-turvy in last few years, should be a low hanging fruit for the new Government. Hopes are high and with clear majority at center, the runway is clear now. 

Presently, most of the clueless retail investors, who didn’t make money since 2008, are desperately washing off their hands off the stocks! Domestic investment institutions are facing redemptions - and are biggest sellers (and losers) in the markets. Read this interesting article by another fund manager Samir Arora, on money flow into markets. The big gainers in the markets have been FIIs and HNIs, who added when the markets were down, and had been consistent buyers during last one year! With such immense optimism (read this), it is folly of common investors not to participate in the growth now! With such a clear majority, growth-oriented budget and low hanging fruits, environment cannot be more perfect for India to do well in coming years. 

  

Portfolio.

WE are staying put with larger part of the compounding portfolio. With compounding happening, growth visible and low valuations, I think we are at 50cents to a dollar value presently. We have liquidated tiny part, which was of slow moving/headwind-facing companies. Will keep this cash handy for use during short term fluctuations. In case you need to understand about specifics, please feel free to talk. 

Etc...

I was invited to deliver a talk at CFA institute - New Delhi. You may watch the video here or read the text here. 

H2 CY13 - Rollercoaster

In General

Markets had a roller coaster ride in last half. In markets, the retail participation is dipping and equity has become unloved. Cash volumes have dipped to 6 year low. DIIs are also facing huge outflows and redemption pressure, and closures, which is making them sell in the markets every now and then.

July faced credit crunch due to US taper news /china credit crunch. Bureaucracy is still major headwind. Many PE backed companies, with assumingly better corporate insights, which went for aggressive expansions earlier, are now lining up for debt restructuring. Coal and power situation is problematic – this is a great article which shows how India’s economy and power capacity expansion got stalled due to hoarding of national coal assets. Businesses are hanging on hoping for turnaround.  

Few major good developments are - Reliance has started its much awaited expansion work recently + new gas tariff regime should see some boost in gas volumes + govt is keen to allocate 2-3 Ultra mega power projects ASAP, with additional benefits to encourage investor participation. Hopefully this will move the economic needle. There are also M&A starting to happen in infra/power sector, where indian promoters are willing to let-go of the assets to deleverage the balance sheets.   

Overall, I think the dwindling volumes and retail participants altogether ignoring the stocks, is a good sign. Athens and other PIGS were also highly unloved last year when they were assumed to exit Euro –  subsequently they have doubled up.

Portfolio

Portfolio remains same, without any major shakes. We added one major position, with great tailwinds and promoters aggressively looking to enhance value. Overall our companies are doing well, without any strains from debt overhang or capital management issues. One of these business is facing tailwinds as sales have dipped - I will write to you about the major positions in a different note.

The way to understand the financial-numbers of our portfolio companies is to see their progress in terms of (1) how much capital they can generate (2) how well they can allocate that. IF the company isnt allocating capital properly, it will hamper the businesses sooner or latter. And IF the management is building on the book well, compounding well, cannibalizing (buybacking), eventually market cap will have to match it up. The ticker is just a voting machine, sooner or latter to be rectified. The number to view is growth in networth, which Buffett mentions in his returns.  

Markets will beat one’s smartest buying and selling price and there is just no way to predict that. The trick is to monitor the health of the underlyings, and if they are performing well, ignore the markets – or rather use the markets. Buffett often applauds Henry Singleton, one of the smartest capital allocators, who effectively used the down markets to enhance shareholder value. One thing very clear from operations of Singleton/Buffett/Munger is usability of cash from market-unrelated operations, which makes them participate much better in market rides.

Im glad about people who added further capital in markets, when prices were down.  

As shipping tycoon Coco says in The Shipping Man – “When you want to cry,really u should buy! Investors only lose money when they lose patience”... I recommend reading this book to understand asset acquisition and financing.

Et al..

1) Contraction is not a loss. Contractions are part of market. Loss is permanent impairment of capital. For example – if a company has to sell good assets to salvage rest, that's impairment. Volatility isn't a loss!

2) Decisions are taken on at-present valuations basis. Selling things which may be underwater, but facing headwinds, to buy out things which are more cheaper and facing tailwinds, is emotionally painful, but a GOOD decision. Our anchor isn't the cost price, but the value in exchange.  

3) Equity isn't clockwork, it isn't like a regular monthly paychecks or a fixed deposits ringing cash register every year. Its highly erratic, and one got to be and think like a businessman to understand it. Payoffs r erratic but profitable. Jason Zweig has described it very well in Your Money and Your Brain.