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.
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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"
