H1 CY11 - Eat Well

That was KungFu Panda’s way of surviving the depression. And we also like to have the pleasure of gluttony whenever markets are in depression.

Look at the following charts. As you see, valuations have gone totally into depression – even below the 08-09 levels (and these are no small caps – the second one, infact, has a $25bn balance sheet!!)



Valuations have become attractive in many parts of the economy. Some sectors are genuinely facing headwinds – in form of delay in government approvals for projects, hike in interest rates, commodity inflation, etc – and markets are getting too pessimistic about them. Here, valuations have fallen a lot – even to as low as 08 panic-levels.

This is strange, especially when the companies are earning very healthy profits (much better than foggy periods of 08-09), AND they have strengthened the balance sheets, AND they have extra operational capacity with them…. Still markets are giving them a very depressed multiples.

There is surely some delays in projects involved. For example, govt clearances in UMPPs (ultra mega power projects) are facing some hurdles. But certainty of such projects is unquestionable. India needs Infra – things may move like a turtle, but cant be permanently stalled, else it would pull down the overall growth of economy. And this doesn't imply a life of 2 or 3 years (2x-3x cash flow multiple) to such companies, which markets are presently assigning to them.

On the other end of the spectrum, a part of markets has gone crazily expensive. Sectors like FMCG are IN-favour today and investors are over-betting for them. See the chart underneath (EV/ebdita)– no one was willing to buy this company in 2008 and even promoters backed off after announcing delisting offer then. Now, it’s a different story altogether!



Another interesting thing happening here in India, is exit of small retail investors from the market. Regulators disallowed the AMC (asset management companies) to pay incentives to middlemen/financial advisers to sell the mutual funds schemes some 2 yrs back –retail investors were given the power the do penny-pinching negotiations with the middlemen about his commission on sale of MFs (mutual funds). Hence middlemen have got disinterested in pushing MFs schemes to the investors. Combine it with Indians' fetish for gold. This apparently had resulted in lots of money from smaller investors going out of the markets. The fact is with the increase in economic prosperity of Indians, this money would be channelized into the markets sooner or latter.

Our positioning
We were able to convert a large part of our cash holdings into equities in last half – we have gone in from roughly a quarter in equities from last year to less than a quarter in cash position presently. We got into equities at very lucrative valuations - one company was bought from some distressed panicked seller - at a price earning us 7% dividend yield (tax-free) and good growth. We are holding some cash, for opportunistic reasons. Inflation, politics, Greece – anything will give us an opportunity to get things more cheap.

But with valuations getting lucrative, I guess, we would eat more soon.

H2 CY10 - The Turtle is in the shell

The picture describes our stand in the last half year. We sat on the pile of cash, waiting and waiting. There were no major mispricings in the securities, so we decided not to play the relative-fool game. As Buffett says, we dont get paid for activity - we get paid to be right!

Usually the securities are very efficiently priced, and no-brainers dont come very often. Munger says that good investing is all about extreme patience, combined with, extreme decisiveness . He advises to sit on the ass and wait for the things to turn to your level, combined with ability to take quick and big decisions. Most of Berkshire's growth is a product of this philosophy, whereby they were able to take few great decisions and bet heavily when odds were in their favour.

Waiting will have its own consequences, whereby I may commit the mistakes-of-omission, ie missing out at some times! But I think its OK to err on the side of conservatism as long as we dont lose any capital. Overall, i believe, this strategy will produce good results over long periods, although they may not as great as for past few years!

Considering that, I will leave this letter short. We are waiting for the right pitch to come at our prices and we are ready with ammunition.