H2 CY20 - Status Quo

 Status Quo - Cos doing well. Nothing much to add. 

-- The End -- 

H1 CY20

Foodcos are doing bumper in the worst environment when everything was stalled. Some are compounding in nature, some are event based themes. (A article written sometime back, for curious minds - link)
Holdco was converted, as discount between holdco and underlying asset filled up + financial institutions face another major risk now - anarchy.  

General
Most of industries are in bad shape, RE is dead (and hopefully black money buried should sink - if not by value, by time-value), banks r disingenuous and deceptive in numbers (a small blip has wiped out profits and assets for over smart bankers), and their main customer base - middle class doesn't/wont have jobs or purchasing power and industry doesn't need capital with over capacity and shrinking volumes. Market valuations are disconnected from the ground.  

Whether investors will be hit by inflation, or deflation or currency debasement or nationalization of assets or anarchy, is unknown - the situation is precarious. And many equity or debt assets may be useless. 

The only thing which may somewhat work is some compounding equity, some Gold or alt-currencies, and some agricultural land for self-use. 

--The End -- 

H2 CY19 - Water Water Everywhere, Not a Drop to Drink!

Businesses cant do well when the house is on fire. It is stupid to have a million dollar in bank, when kids/girls are not safe.

--
Holdings are doing well despite present ongoing scenario - they are the basic ESSENTIALS, and should glide through well - but businesses cant grow in environment of social unrest. Recession proof FMCG is facing major heat now and should be visible in this quarter.

I dont find opportunities in this market*. Buying at 60c and selling at 90c is not the game I wish to play. And dollar-compounding businesses are either less or are expensive. Most businesses are either facing

• Demand destruction 
• Balance sheet destruction, esp the loved banks and tiger-riding NBFC cowboys, 
• Size of debt on balance sheet is not remunerative to take a bet, 
• Business returns are not great
• Businesses facing bureaucratic onslaught (Against the on-going narratives - the costs of doing biz has gone up).

--
I am fearful of the ongoing environment, and not sanguine about future of many industries, chiefly due to tech change or trade wars. And so is felt by private investors and businessmen. As I mentioned in my last note, follow the money - follow the people who have made money - who r not rent seekers or tv boys - follow the people who r investing their capital, who sink and swim with their personal capital, who have skin in the game. Rest all talk is cheap.

--
* Good work exists when less is done, and for oneself! Found that Quarantino talks about making only 10 movies in his lifetime - just like Buffett's punchcard. Will follow this, unless something worth doing comes on the table. 

-- The End

H1 CY19 - The bars are empty!

Credits - https://travel.jumia.com/

Recently, Rakesh Jhunjhunwala succinctly described the mood of the current economy when he said - Nifty is touching all time high, but all the pubs are empty! 

Mass plant shutdowns (in auto sector), auto dealers shutting down their shops, FMCG slowdown, pharma facing adulteration issues, NBFCs rockstars asking for "first 10% loss should be borne by the Govt" - its gloomy. The govt, seems to be interested in raising taxes upwards. The industry concalls do not give any idea why this degrowth is happening or when the things will rebound. 

In this gloom and doom, I think food sector is the only oasis. Q4Fy19 results also points out that only the food segments did well - when even FMCG was getting butchered. 

Overall, blood-on-streets season continues, THINK and do whatever best u can!

--
Last year, around september, when NBFC crises began to emerge, many people had multiple issues with MFI/SFBs. Common narrative was - ".. but what if xyz happens". Thats the nature of narrative. Most of narrators dont have skin in the game - and wont ever have, as they are not trained for decision making in stressful times. And its not their own money - so, safety aka no-volatility-of-stock-prices is desired.  During such times, the best thing for a person knowledgeable about a industry, is to buy more and more. Same happened in Sugar sector last year, when there was zero visibility - and now suddenly the story seems to have become tad optimistic.

As a rough guide, 

• I have learnt that PRIVATE INVESTORS (putting their own money to work AND having no other commercial product to sell to investors) act and think like smart businessmen. 
• They put in their own money behind their opinions. (Just let this thought sink in, as there is no other bigger accolade than this!)
• They are not answerable to anyone, except themselves. This looks mundane, but relieving your brainpower by NOT answering to everyone's common over-heard narratives/emotional swings/greed/fear/drama, is a superpower. In super emotive markets, weeding off emotionally-moody and weak is the best thing to do.  
• They dont worry about price fluctuations - and they think about stocks like businesses to be acquired, to be run, over decades. This viewpoint itself makes buying during volatility easier. 
• Willingness to put in one's money, leads to through research, which leads to conviction, concentration and patience
• They are temperamentally most stable people - not looking for small adventures/engagements/entertainment or small wins to feel good. This also reflects in the fact that they can bet big when the opportunity arises, as they can buy for years, without worrying for a quick exit.  
• They are conservative - after all its their own money. Longevity and survival is important than winning annual marketing games. 
• There is lack of involvement into other entertaining options like futures/options or smart quick money making deals. 
• They understand power of focus. They understand not getting involved into other commercial businesses.

I have learnt that being along with 2-3 self-made private investors, is better than following 10k people. 
Find them. Copy them. 

-- End --

H2 CY18 - Planted

The Game

You can't judge another investor's actions without understanding the game they're playing. There's so much underneath it... position sizing, capital flows, portfolio construction, timeframe, objectives, risk management, composition, etc... investing/trading is idiosyncratic.- @EdBorgato

True. 

We are not in the game of minimizing volatility as many institutions are. Institutions, running billions of retail money, want to retain that capital. So their objective is minimize volatility and give comfort of not-showing-any-contraction to the retail investors guys. Finally, retail gets exactly what they want.

We want to maximize returns, using volatility, still being in cheapest unloved, under researched areas of markets.  Chaos is welcome part of process, not some unexpected hindrance. Volatility is like speed breakers on the way... a car slowing at speed breakers doesn't mean the car is faulty. Best advantage to us is that 99% people view volatility and uncertainty as indigestible, and hence get off the car at wrong time.

Know the game you want to play. 

Planted

Our companies r doing well. Growing by 20-25%. The growth may not be visible, but it is working, under the hood.

Investing isn’t about PE ratios, ROEs, balance sheet analysis, company analysis … its being able to sit and take decision when everyone is losing their heads and blabbering same narrative, when the brain is freezing, prices are contracting, there is no visibility or certainity, and hopelessness all around and no new information is in sight – and still remain focused on workings of the underlying businesses in such turmoils. Our everyday OPERATIONAL HUSTLE is TO TIRE OUT THE MARKETS, not get tired out by the markets. Its not feeling down or wreaked or deprived due to falling prices. This is real face of investing.  

Some random general observations

• Many swashbucklers of yesteryear have fallen due to governance problems - punj, ranbaxy, sun, thapars, gaurs. Major and interesting shifts are happening in Indian corporates. Shows that only conservative, non adventurous and debt free may survive in long run. Check, Billions to Bust - link.
• Many beloved stocks are down to 2014/15 or earlier levels - Yes! No return for last 4+ years in many beloved high quality names - Tata motors, kajaria, kaya, greenply, greenlam, NBCC, vst tiller, symphony, db corp, HT, jagaran, navneet, bajaj auto, eicher, MPS, poly medi, eveready, poddar housing, bse, lupin, amara raja, gateway, emami, mayur uniquoters, sun pharma, cera, hero motors, crisil, acceleya, eclerx, dhanuka, lupin, cipla, Dr Reddy, ajanta .. list is endless. All of them were beloved stocks at some point of time. Many of them had poor capital allocation or having no growth (and hence management not going for capex) leading to PE contraction, or just repaying debt or dividends. 
• Observing that "Start-ups" dont make money or are not in the business of ever making money*. Its just playing musical chair business. 
• Finding that even listed companies from new economy, optically showing high RoE, but are in fact, unable to bear cost of equity capital of the investors (unless investors go ahead and play musical chairs). Ex- check the capital invested in Matrimony.com , and see RoE generated on real cost of equity invested. As going concern, RoEs are not lucrative. Its tough to start a business from scratch, (tougher to bootstrap), and generate honourable RoE. 

Recommended

Read - Masterclass with Super investors

Watch - Investing is hard

--The end.

*Definition of making money - In one conversation, a friend hitting a start-up  musical chair jackpot, thought he "made some money" - without realizing that his process is non-repeatable, and he is developing no repeatable skills, and he cant do same work in next 50 years of his life! Moreover, easy money killed the purpose of life!

Making money = attaining and growing skill time after time + repeatable process + having some purpose + having fun doing that in next 50-60 years! Anything, not adhering to this, is just not making money!

H1 CY18: Developments around a Brand

BRAND is manifestation of corporate thinking.

It requires (1) vision - long term thinking AND (2) day-to-day execution to achieve that thinking. Relentlessly!

BRAND is not just a logo, tag or symbol or advertisements. Its trust with customer, trust with business partners, availability of product (which means, company needs to have financial strength to procure and manufacture and distribute), honor with the bankers and hustle 24x7x365 for decades. 

One can clearly observe across leaders in different industries that there is CONSISTENCY OF CONDUCT - which means - If the management is excelling in one practice, it wont be corrupt in other practices. One cant expect management to "fool" around with investors, when they are dealing - exceedingly well - with farmers, distributors, bankers, government and other partners.  

AND the ULTIMATE JUDGES ARE THE COMPETITORS - Its difficult to GAIN RESPECT OF COMPETITORS again and again. ChamanLal guys gave plenty of time on THEIR own concall to appreciate the KRBL management.  

And NIELSON has been rating IndiaGate as top/dominant/progressing brand every year. For many years!

There are 3-4 main pain points in investment community against KRBL - 

1) Allegations by news article - Yes! They are "allegations" using unproved narrative when there is no charge against company and case is subjudice - lets not flow in downward spiral with just the allegations. The channel didnt mention about sub-judice nature of the case, or evidences involved. The best persuasive stock to be added to the story was to link the narrative with a BIG NUCLEAR-BOMB WORD - "augu****"  - narrative was made to stick in the minds of the readers. The channel doesn't have any downside and the story may be a planted one. 

Historically, had there been identical cases against other reputed corporates? The answer is Yes!! - 
ITC was raked in by ED in 1995 - there were direct allegations against the company, directors and US partners. The case dragged on for years, but DIDNT affect the operations of the company. If history is any guide....

DABUR's director assets were seized recently by ED. 

Net net, my take on event is - keep thinking and revising the thesis, with additional information. 

2) Poor crisis management - I expected mgmt to handle it well, with written disclosures to the exchange. But usually, corporates find themselves as deer-in-the-headlight during such situations. Remember, Uber's cases and responses in India?

3) Auditors - were on track to be replaced last year and it was discussed in AGM. I hope they will be replaced this year. With so much floodlights on the management, expect good work ahead!!

4) Pabrai deal fallout - Pabrai was hard working enough to do his through due diligence, despite a non-resident and gutsy enough to PUT IN BIG MONEY ON THE TABLE. However, ED thing was a black swan - YET unproved/subjudice. Let the case play its course in the courts before handing over a guilty verdict to the management. We know what happened to ITC's operations from the history!

5) No Sales growth - It is the EASIEST industry to show sales growth at the expense of profits - its not difficult to generate volumes and sales. However, if one listens to the concalls, the focus is on perpetuity, premierization, and growth of profits. PERIOD. 

With the guidance of 12-15% volume growth + new varieties of regional rice + new health products, the company's vision is clear to move towards creating HEALTH PLATFORM. With that in mind, the company has (1) moved to increased branded portfolio (2) high priced, new varieties of rice (3) new and high value products like Chia/Flax/Qunioa/Sprouted rice etc which dont require aging, are FMCG in-nature. The work put in by the company to launch new products and conduct events/shows over past 6 months are commendable - all of which is available on social media. The changes in advertisement/product placement are evident (change in advertisements from social value, towards health benefits can be seen on packs/ads).

Brand is a cumulative affect of last 2 decades of efforts - No one else is moving in that direction, as there is no money+vision in the industry. Industry players are facing defaults from iran and banks are enforcing criminal proceedings against NPA accounts. 

The supply chain is unreplicable - HUL, marico, cargil, etc tried and failed. Its looks simple, but not easy!! Plus the supply chain from India to mid-east is unique to them- long presence of IG as high priced brand + cheap sourcing advantage of high valued items like Qunioa from India, where marketing/supply-chain/brand is the biggest pain point for  the farmers. Totally un-replicable!

15% vols, 10% pricing growth and new businesses - I expect a moonshot. The business should do well. 

----Not an investment advise---- 

H2 CY17 - The Fallibles

Poorer companies r getting jacked up/raising as much money as desired from poor retail guys - most dont exhibit sustainable earnings or major change in operations. Ironically, many good large cap companies havnt moved an inch in last 3 years, mostly due to no growth or degrowth. Professional investors r somewhat cautious and doesnt seem to be playing with leverage yet.

One can find young crowd from tier III/IV towns travelling in local metro, and trading on their new 4G mobile connection with slick apps - on one hand, its indicates consumption being accessible to everyone, great market potential unleashing in India, and potential of many new investors ready to on-board financial markets; on other hand, current excesses in the markets. All said and done, India is a must market to be in now. 

The FMCG player is working well. In classical Munger's coke way (Practical thought about practical thought), they are far far ahead of competition. The super cash flows are giving them enough ammunition to experiment with products and advertisements/promotions. Product wise, not only the core business is growing fast (developing new segments, capturing unorganized, and assailing organised market share), new additional products are way ahead than any other imitator yet. Also, the flow of advertisement is a case study in itself - its changed rapidly from Pavlovian conditioning to emotive to operant conditioning now. The new segments being churned out of traditional products are exemplary. 

Credit industry too is growing fast and is expected to grow by 30-35% over next 3-5yrs (as mentioned in most industry concalls). There would be clear shift from unorganised to organised players in the industry, as new private sector banks increase reach, product portfolio and ticket size. The unorganized market and unbanked population, even in Tier I towns like Delhi/Bombay is huge. The consumption, in this segment, is quite observable by travelling in local metro/buses and finding ever-growing flux of people from smaller towns. There has been a drastic change in just last 5 years - one can easily observe that the average age of travelers in local metro has gone down towards mid-twenties, travelling around either for higher education or for jobs. 

In my view, there can be some market-contraction. However, if one pulls out of mkts, it can pose a timing-risk against growing businesses. Few played the game of mkt-timing since last 1.5 years - only to repent. Few jumped back with deprival super-reaction and FOMO. Predicting mkt-timing is difficult, as many companies are sitting unleveraged, or have over capacity, or due to reflexivity in the markets (prices creates business environment - poor balance sheets start looking healthy if they are able to raise money at high prices and move forward)

Businesses which are working well and growing fast, with visible runway, may deal well with mkt-contraction - eventually, price is slave of the future earnings. No growth/degrowth/shady companies can face headwinds or some time corrections. Possibility of new long term capital gains taxes, rumored to be introduced, is worrisome. 

In such times of euphoria, lets not forget how fallible we can be, like Bruce Berkowitz Fairholme/Eddie Lampert and their SEARS. And Bill Ackman/Sequoia and their Valeant. 

H1 CY17: Do Beautiful Business

This letter got delayed as I was travelling a bit.

I chanced upon an impromptu meeting with Pabrai. He was very generous with his time and thoughts. Got to see very closely the way he thinks about investments - the underlying question every time while discussing investment ideas was - how much growth can be expected in 5 years and what are its components? 

This was followed up by discussion on finding solutions to create do-good societal institutions which can run sustainably, with minimal capital inputs. 

He mentioned about Dr V of Aarvind Eye Care - how the doctor created a sustainable charitable and super efficient eye care hospital at low costs. Read Infinite Vision.

We also discussed Dakshna's effort in giving free education, followed by 78-year-young and super energetic Col Ram Sharma of Dakshna travelling with me to study the education model of Baba Aya Singh college, near Amritsar and how it can be cloned. If you haven't seen documentary on college by Ravish of NDTV, please see here - link.

--

The run of last few years should be taken with a pinch of salt - it was a good period in markets where everything has done well. The future will not be all butterflies and sunshine. 

Many sectors in economy are limping, as they should, due to change in technology/other reasons. Unemployment is going to be rule, rather than exception.  If we are not mentally preparing for such a environment, it may come as a shock. Mentally, this calls for disengaging from the game of chasing money beyond one's requirements, but understanding the capitalistic systems well and participating in it intelligently. And building local communities, neighborhood support groups, building local help/bartering/business groups around you. You may like to read - Beautiful Business. 

Do beautiful business. 

H2 CY16 - Demon - Narrative fallacy

Was demonetization good or bad, depends on which category a person belonged.
For organised capitalists, it was a god sent opportunity, as it's leading to consolidation n mkt opportunity. But for poor people, labourers, farmers,  SMEs, mSMEs, it was a devil's created mess.

Surely, GDP will go up and it will be hailed as masterstroke by paid media, but at the cost of heavy agony to the masses. In a country, where 60% population lives under $3 a day, this was a heartless n draconian.

The minds of the youth r seeded with insecurity.  There isn't any new hospitals, schools, social welfare projects that came up in last 2-3yrs, and the household savings - the  security of masses - has also been usurped away from poor, presumably to save SBI n its clients. Sadly, entire exercise hadn't yielded anything as the entire capital has come back to RBI. Next will be cyber hacks n misuse of Aadhaar. 

Someone did review of few years of history - last 5000 yrs - and the history doesn't make future look good. See this.

Placement
As capitalists, considering the economic earthquake, we r positioned well. Food, water, air n credit, all supplied by private sellers, r now the basic requirements of economically imbalanced society run by capitalists. Till it lasts this way.  

H1 CY16 - AlphaGO

Markets are getting too euphoric, with indices turning near to all time highs. This is total contradiction to the ground realities. On ground, industry is still living with hope and possibilities. Banks are in dire-most state and Messihas aka Rajans are evicted - one can understand where the puck is going. 

The wind sector story which started with too many bells and whistles, isn't being supported on ground level. Evacuation of electricity/payment by SEBs is still problem. The focus of investors is shifting towards Solar, where IRRs r lower, but evacuation is not a problem yet, as its size is tiny compared to wind.

Wat concerns me presently is the velocity of rate of change in tech ecosystem, which is disturbing each-and-every industry. Robotics/AI/Drones/synthetic bio/VR/batteries/fintech are changing at a rapid speed. I worry, that this will lead to unemployment, chaos, decrease in earning power of masses, and more inequality, with power shifting in hands of very few people eventually - looks like there will be only 2 classes - cash rich and credit rich. Labour intensive states can lose 'labour-cost-advantage' in age of cheap robots. Already job-creation is a nightmare. This is wat Jeff Weiner, linkedin guy, wrote in recent letter. 

           "Remember that dystopian view of the future in which technology displaces millions of people from their jobs? It's happening. In the last three weeks alone, Foxconn announced it will replace 60,000 factory workers with robots, a former CEO of McDonald’s said given rising wages, the same would happen throughout their franchises, Walmart announced plans to start testing drones in its warehouses, and Elon Musk predicted fully autonomous car technology would arrive within two years."

Considering that, we are looking for industries where rate of change is less/they are helped by the new technologies.  The capital raised is undeployed as valuations of desirables did not come in our range. Will wait.