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.
