Wednesday, June 24, 2015

Multi-losers Or Multi-baggers:Take Your Pick

Investing has many facets.Terabytes of data,millions of websites,books,esoteric algorithms,secretive formulae devised by Ph.Ds from ivy league colleges and your humble retail investor as well.All wanting to buy at the best valuation.

So many methods.So  much madness.

“Inverse,always inverse.”Reportedly a saying by Charlie Munger,Buffett doppelganger,an acclaimed investor in his own right,who took this from Carl Jacobi,a 19th Century mathematician.

Valuation by inverse is to work backwards through the data on the target firm.It is easy to find firms trading below Book Value(BV) or even below the value of their net assets.Does it make the stock of that firm a good buy?

Is the firm heading towards bankruptcy?what are the vendors saying?Legal issues?Many companies with BV below 1x, viz MTNL,Reliance Infra genuinely have lost their way and taken on so much debt that the income is not enough to even service the interest.

In the same way,stocks trading above 20x BV might not have much headroom left to give the desired returns.Hindunilever,Page Ind,Eicher Motors will really have to achieve dramatic results to sustain the returns given in the past.

There is so much data available on the internet that unlike a professional analyst you need not take the trouble to go and meet the management in person,although it helps if you have the contacts.

The market always surprises.No one in 2008-09 could have forseen the CMP of stocks like DLF,IndiaBulls Real Estate,Lanco Infra etc

Inverse analysis helps to match price to valuation at prevailing market levels.In earlier blogs I have discussed keeping emotion out of investment decision making being one of the toughest things to do.I feel it is more difficult to predict multi – losers rather than multi-baggers.All you can do is:-

i)Avoid investing emotionally
ii)Avoid going with the herd
iii)Act decisively when the opportunity comes

Do not hold on to losers if fundamentals or management makes you uncomfortable

Talk of Sensex scaling 40,000 by 2020 is but talk.What is important is the return that you get at the end of the year.Talk to your Investment Advisor,not just listen to him or her!

Wednesday, June 17, 2015

Monsoons: A Much Needed Blessing

For centuries the trade winds have blown from Africa towards the Indian subcontinent and back twice a year.Since the dawn of civilization they have been the harbingers of good fortune or bad depending on the amount of rain they brought.

No matter where you stand on the Indian plains,after three months of summer,the sight of blue black clouds low in the horizon,the cold wind on your back and the smell of water in the air,cannot be expressed.The sheer joy of it can only be felt!

The sight of farmers staring at the sky,sitting on parched,riven dry earth have been imortalized in countless movies and documentaries.Yet the Indian farmer is still dependent on the monsoon rains.

This year stock market analysts await the rains more eargerly than the farmers or so it seems.Having touched India 4 days behind schedule,the rain gods have showered a surplus of 11% till date.Crucial to see how the whole season pans out before declaring the prediction from private player Skymet as the winner over IMD(Indian Meteorology Dept).

The biggest failure post independence for this country has been the inability to get irrigation technology or in plain speak - water to the individual farmer where and when he wants it.Underground acquifers are running dry across the entire state of Punjab and Haryana,which once led the green revolution.

The way to uplift the farmer has been to offer freebies or the MSP(Minimum Support Price) rather than getting investments flowing into technology.Countries like Israel,Denmark and Netherlands have developed such wonderful methods and the system of drip irrigation,yet none of the development has touched the Indian farmer.

The RBI governor talk of inflation control is doomed unless we can stop the suicides and mass migration to urban areas as the diminishing returns from agriculture destroy an entire clan of people leading to destruction of traditional knowledge and suitable methods to increase production.Add a lack of storage and supply chain issues and I for one do not see food inflation coming down in the near future.The cycles of rise-and-fall are diverging and becoming more pronounced.

Not difficult to change the situation in Sixty odd years but well nigh impossible to change the attitude of people in power,

Till then enjoy the pouring rain as it comes down hard releasing the typical earthy smell,washing down the dust,leaving the few city trees and shrubs gleaming green.....hopefully you will think of the forlorn figures pending down to planting paddy that comes to us as rice from the nearest department store.

Tuesday, June 2, 2015

Guv'nor Goldilocks

The RBI meet 2nd June 2015 introduced us to the 'goldilocks' policy.The Governor may have his compulsions but then so does the economy!

I understand that the RBI needs to hold itself to meet future challenges in terms of weak monsoon,fuel prices,low corporate earnings,rising NPAs.
What is disappointing is the contradiction in cutting rates yet the commentary warned of possible inflation ahead due to sub normal monsoon.Why not wait till July by when we would have known about the rains and then gone ahead and taken a decision for a bigger rate cut?

Is the pressure from the Government greater than thought?

The issues of crude oil prices,monsoons etc have vexed the nation for centuries and it is nothing new,in fact with crude down by 50%,forex situation under control and even inflation at manageable proportions I would have expected a greater stance from the RBI Head to try and kickstart growth.

Is he a 'doom and gloom' guy?Is his paranoia with inflation hurting India and affecting policies that could reignite the economy.I remember in 2011 when India was growing at 8.5% and the rates were hiked,it led to a rapid shrinkage in liquidity and nothing the RBI done has brought down inflation.

Global factors have been mainly responsible.We all known the famous supply side issues in India that make inflation difficult to control.

Keeping all this in mind I would have expected a 50 bps cut in repo rates or some tinkering with the CRR and SLR which remain unchanged.

The Governor sticks to his conservatism and sees challenges looming over the horizon.But when are there no challenges.The situation is much better than the 1980-90 period.

He is not in his own words a 'cheerleader' for the markets.We do not want him to be.We just want him to use the elbow room he has to maneuver the economy to grow higher and moderate inflation.Not kill it...!