Kolaveri & Investing

Kolaveri di, the Tamil song was released digitally on November 16 and became a raging success online with more than 10 million downloads. The country danced to its tunes as the craze spread like wild fire. The song became an outstanding hit for its simplicity, rustic, slang power & contemporary style.

Javed Akhtar calls it an insult to sensibilities and fundamentally weak with substandard singing and ordinary tunes. Yet its popularity spread at hysterical proportions as with rock bands, face book and other fads. Its popularity spread as people do not lose out on what their friends and acquaintances might have gained. So if Kolavari gets a few million hits, be sure that the same hysteria will propel it even greater fame. The fad soon fizzles out when the newness and mystic around it is lost with time.

This Kolaveri phenomenon shows up in the investing world in the form of IPO and hot tips. Word of mouth is a powerful influence. That’s when we see an IPO is subscribed 80 times and when the listing happens, the newness & mystic fades. Soon reality bites as we seek adventure in newer ideas and move on. The scrip then loses its initial high on listing and like Kolaveri, the zeal and enthusiasm dies out. Only that with stocks, it leaves your purse lighter. This has been a great example and should serve like a speed break when we spot on ‘marvellous’ ideas and ‘hot tips’ from friends or brokers.

Recent IPOs of Reliance Power or Punjab and Sind Bank or the deceiving elements of sectoral funds prove this. The reliance IPO was oversubscribed by 77 times at an issue price of Rs 269 (after adjusting the bonus of 5:3) in Feb 2008. There was a mad hysteria around private sector power producers and their great prospects in a power starved country. There was a huge build up and entire country expected to make a fortune by subscribing to it. Virality was induced by word of mouth as people rushed not wanting to lose out what they expected others to gain. This explains why the IPO was subscribed by 77 times. It is trading currently at 85 losing all the money for investors. There was also the case of IPO of Punjab and Sind bank which subscribed 80 times driven by the theme -last PSU Bank to go public. Again the grand expectations built on a simple and easy to understand logic actually made one feel like having an egg on the face. It was issued at about Rs 120 and is now quoting at 68. These are a few examples of how mass hysteria can come in way of logical investment reasoning. During the period preceding dot com bust, the IT sector Funds mobilized huge amounts of deposits riding on mass hysteria that IT was the solution to world hunger. In the aftermath of 2002 meltdown, almost all sectoral funds lost money for investors and closed.

In a Diaspora of people with shared beliefs (of say 'stocks hold the future' ), certain ideas (Power deficit country, or last PSU Bank to list) can cause emotional excesses or create anxieties. They start acting on these (such as subscribing to an IPO or buying into sectoral funds with no research or reason) and soon the magnitude (interest in an asset class measured by how may subscribe) gets out of control. This explains why a dud IPO or a dud fund receives overwhelming interest to a theme and how they assume geometric proportion like getting oversubscribed by 80 times. As with any Fad, investors in such hot tips or IPOs and theme funds, lose out.

No economy in the world has ever grown at a scorching pace continuously. Studying economy moderates our view, that a growth of 4% after inflation is only the realistic estimates in long term. Certain markets or stocks can return higher than the average economy, but will fall back soon to a mean. Hence if there is great run up then it is typically followed by periods of reduced growth or slowdown. Economists call this regression. Investing in a stock that has given scorching gains is fraught with risks as there is no question whether you would lose money, it is only when. As a corollary, great companies that have lagged the markets severely can be expected to gain to at-least to an average mean. I discussed this in the previous post.

It is hard to predict which stock or song will be the next Kolavari as in this case even super star Rajini admits he couldn't predict Kolaveri Di's success. Not to mention Team Kolaveri still wonders why it became such a rage.

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Making out Uncertainity from Risk

I recently met with the Vice President of a retail broking firm. A clan I dislike as I have no interest in the subject. My impression of a retail broker is about nosey dealers wanting to ever increase their brokerages and conning people into trading. I probed to see if there are any new ideas for an investor. I was impressed by his discipline ‘program of investing’. He is someone who has built a portfolio by adhering to a simple ‘2 step method’.

Step 1: He only buys when a Good company is sighted with bad news. State Bank of India has suffered in stock declines due to the bad news of higher provisions, 99% drop of profits, high interest rates slowing growth & expectation of high nonperforming assets, deregulation of savings account interests which will increase cost of capital . The negative news caused SBI share prices severe decline of 45% in a year. Or take the example of Maruti which has corrected by 25% in the wake of bad news: strike at Manesar plant, higher raw material costs and lower profits. The bad news never last long. And things eventually get better for great companies with
sound management and economy.

Step 2: Do Not Buy, if you still linger doubts, after having spotted a sound business with bad news and depressed prices. On the contrary when you want to sell after the prices have risen
sharply and your greed stops you from selling, sell at-least half. This step helps control our emotions of greed or fear for better investing success.

Bad news creates an environment of uncertainty. Most of the times, there is no risk. Like with SBI, the question to ask then is what has changed in the business other than the price? We must be able to differentiate between uncertainty and risk. Markets hate uncertainty and the typical reaction is by beating down the prices. Remember how Satyam was battered within days from Rs 400 to Rs 30. That would go down in history as one of the highest uncertainty caused due to corporate fraud. But what we forgot is that this is a business with customers and services delivered in real economy terms. The response to such uncertainty is normally much more magnified than the uncertainty itself.

Risk is even more difficult to see or know. The entire industry of Travel Agency disappeared with the advent of Information Technology,. It was slow but brutal and not recognizable. Remember Encyclopedia Britannica ? Some companies disappear because they do not either stay relevant or do not leverage new generation methods of conducting business.

Investors like predictability that blue chips offer. This explains why Bluechips quote at a premium over midcaps and why investors pay higher premium for them. Investors pay less for small stocks due to unpredictable earnings and create bargains in the process for value investors. Although these mid caps underperform in the short run, they go on to earn better returns in the long-term.

Discipline of a ‘method’ to invest or sell helps inhibit emotional reactions stung by panic or greed. Keeping a time frame of say 5 or 10 years while investing in a MutualFund, or having an objective for pension or children’s higher education allows you to mentally align with the time horizon. When the sensex tanks, if Iran gets bombed or Greece defaults, you will then consider it an opportunity to buy more units at lesser cost. Because you have a lot of time left for your goal redemption. The discipline will make you look at it as if the discount sale has begun. As opposed, if you were to invest in SIP MF for the sake of making returns, you will see yourself selling investments at a loss when crisis strikes and panic sets off.

Kingfisher Airlines is in big trouble. The stock of the Company which was once near 400 mark is now at 17. The Auditors of the company recently wondered if it would go bankrupt. Now would you call this Risk or Uncertainty? I will be delighted to hear your views on this.

Wishing you the very best.

Naresh
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Festival Feelings

Our own experiences and understanding of Businesses is that its future can never be predicted. How else do you justify the extra adrenalin bullishness 3 years ago when Yahoo was offered $50 Billion and the then CEO Carol Bartz refused the offer expecting growth to propel into dizzier zones? And how is that today Yahoo may not even get $ 10 Billion offer? Would we have expected Dhirubhai Ambani, an uneducated Indian to create an industrial behemoth called Reliance Industries? Or would we have expected that his Wharton educated sons would pull these companies apart? Businesses are subject to unpredictable changes. From it then stems the truth why Benjamin Graham advocated investments at all times regularly, no matter what the season said. That is why extreme bullishness is a recipe for failure in capital market. And that is why we hear CEOs just say that something remarkable is about to happen... they do not know what exactly it is.

A thought that has been intriguing me is If a stock is valuable, why is someone selling? The one, who sees future earnings go up, buys. By the same reason the seller believes the future earnings are going down, all at the same time. Perception and computation of future earnings is what makes one buy or sell. Its the perception and Not the real earnings. Simply stated, when we speculate the risk is with us, when we postpone the buy decision, the risk is with someone else. Today we find many postponing investments, speculating a major event is likely to happen and cause correction to the markets. Like the CEO who does not know what the event is, but expects something world changing is around the corner. The average exposure of Indians to stock market is muted while in the USA it is about 35%. Hence the chances of Indian economy collapsing are limited. We can't say the same about stock prices however.

No wonder then that I heard Sonam Kapoor call Stocks as gambling and that she invests in real estate. What assures there is no bubble in real estate? I had the opportunity to hear an IIM Professor of Macro Ecnomics and I asked him whether real estate bubbles can be identified and prevented, and whether they have broader macroeconomics methods to know if housing bubble is building. He said that the Rental Demand should indicate and ideally move up along with the increase in real estate prices. If the real estate prices move up as an exception and rentals continue to be subdued, then that is an indication of a bubble forming. But you can never predict with certainty when it would burst. That explains how we become insightful and wiser after the event.

Let me conclude my narrating yet again an interesting thought coming back to stocks. It was in a travel that I was sitting beside a Chief Information Officer of an IT company. My favorite way to break ice is to talk about stock market and almost instantly I remember cutting ice and conversations grow. I was keen to learn from his experiences as I consider peer group learning invaluable. It is unbiased, nobody needs to leave an impression and can be open without feeling threatened. He was relating to how he learnt a few tips from his uncle. He was a horse racing enthusiast. In horse racing, the big money is on betting which horse will come first. The risk return ratio is skewed against us. The uncle would constantly bet on lower stakes with lower risk return, but over multiple races, he used make a decent sum. If we were to extend the same theme to stock markets, I would agree that it is possible to seek investments with limited upside while limiting downside considerably. With pragmatic expectation, it’s a science if not art, that one can practice to earn a decent return. Investors loose less money by overpaying good quality businesses than by purchasing low quality businesses at times favorable to them.

Here's wishing you all and your families a very happy Diwali. May this festival of lights bring in peace, joy and good luck for all of us.
Naresh

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The Prediction Game

Its an interesting thought that you actually work only for 8 months in a year. The balance 4 months you work for the government, so it lets you earn for the first 8 months. I am talking about the taxes of 33% on your total income. That's how it literally translates. I am perfectly fine paying money as taxes but we need to have a different perspective when we look at it. Imagine the physical and mental stress we undergo for 4 months in a year and that's when you realize what a mighty fine the government imposes. It suddenly will make you remember the severity of life. 4 months of work time, 4 months of mental and agonizing moments you had to put up with at work. It could also mean missed 4 months of enjoyable time with parents and your loved ones, 4 months of holidaying etc. etc. Money by itself has little value. When you associate it with time value, it starts making sense. There are many things we could have missed out on, or looked forward to in the 'time' that lapsed. Money is not real. Money is what we make of it. I would like to unravel a mystery that I discovered recently. I was playing Monopoly, a board game with my son. If you have not played it yet, it is sought of a game where you can use game money to buy , sell, barter etc. like in real world. You start by have an imaginary amount of money and then you are complelled to take decisions (to buy, rent etc.) as the dice roll. I was eager to buy houses and estate so as to earn rent and multiply money. My son was busy buying parks and parking lots. I was trying to guide him on value of investing in real estate and security of rental income and how this could add on to his wealth. I was intrigued when the 8 year old told me he likes to buy parks so we could go out and spend time together. He bought parking lot so I could park easily in the busy street. He had no complex thoughts and valued the time we could spend together and how he could make my driving a better experience. This gave me a different perspective to life and investing. More money does not mean more happiness. Money is like a shoe, if it is bigger than your fit, you can stumble. If it is too tight, it hurts you. The right fit is a conscious decision and varies from every individual.

The investing brain fools us into thinking we have far more mastery about the future and are aware of it. It makes us believe we have a intuitive power to know something special about a stock. Thats why every analyst on business Channel necessarily has an opinion on which side markets will sway, what industries and sectors will do well next year. Why can't we say we don't have an opinion? Is it difficult to understand that we can't be right more than 50% of the times? When SKS Microfinance came up with an IPO it had 36 anchor investors at the upper-end of the price band at Rs 985 per share. It was inclusive of legendary investors like George Soros and Infosys founder NR Narayana Murthy. During the IPO, an analyst report quoted like this " SKS's core strength lies in effective risk management, governance, advanced technology, wide product portfolio, diversified sources of capital, strong pan-India distribution network, and lowest cost of credit to the poorest to, unlocking tremendous latent demand". There was none who could recognize the risk of government (ir-) regulations.

The company's shares were listed at 1040 and currently trades at 212 and Investors lost three-fourth of their investments in one year. since listing, the Andhra Pradesh government introduced a law to ban unfair debt collection practices, which impacted its loan recoveries and resulted in the company posting losses. Now this was totally unexpected. It is perfectly normal for every fund manager and investor to have not foreseen. Investing is an art for the moderate who is neither an optimist nor a pessimist. Investing should look boring and dull and that's when it delivers.

The story of SKS plays out every day in our lives, in different hues. That’s the way our brains have been wired. The only way one can win the prediction game is by refusing to play it.

Happy Investing,

Naresh

http://blog.learninvest.in/

The Prediction Game

Its an interesting thought that you actually work only for 8 months in a year. The balance 4 months you work for the government, so it lets you earn for the first 8 months. I am talking about the taxes of 33% on your total income. That's how it literally translates. I am perfectly fine paying money as taxes but we need to have a different perspective when we look at it. Imagine the physical and mental stress we undergo for 4 months in a year and that's when you realize what a mighty fine the government imposes. It suddenly will make you remember the severity of life. 4 months of work time, 4 months of mental and agonizing moments you had to put up with at work. It could also mean missed 4 months of enjoyable time with parents and your loved ones, 4 months of holidaying etc. etc. Money by itself has little value. When you associate it with time value, it starts making sense. There are many things we could have missed out on, or looked forward to in the 'time' that lapsed. Money is not real. Money is what we make of it. I would like to unravel a mystery that I discovered recently. I was playing Monopoly, a board game with my son. If you have not played it yet, it is sought of a game where you can use game money to buy , sell, barter etc. like in real world. You start by have an imaginary amount of money and then you are complelled to take decisions (to buy, rent etc.) as the dice roll. I was eager to buy houses and estate so as to earn rent and multiply money. My son was busy buying parks and parking lots. I was trying to guide him on value of investing in real estate and security of rental income and how this could add on to his wealth. I was intrigued when the 8 year old told me he likes to buy parks so we could go out and spend time together. He bought parking lot so I could park easily in the busy street. He had no complex thoughts and valued the time we could spend together and how he could make my driving a better experience. This gave me a different perspective to life and investing. More money does not mean more happiness. Money is like a shoe, if it is bigger than your fit, you can stumble. If it is too tight, it hurts you. The right fit is a conscious decision and varies from every individual.

The investing brain fools us into thinking we have far more mastery about the future and are aware of it. It makes us believe we have a intuitive power to know something special about a stock. Thats why every analyst on business Channel necessarily has an opinion on which side markets will sway, what industries and sectors will do well next year. Why can't we say we don't have an opinion? Is it difficult to understand that we can't be right more than 50% of the times? When SKS Microfinance came up with an IPO it had 36 anchor investors at the upper-end of the price band at Rs 985 per share. It was inclusive of legendary investors like George Soros and Infosys founder NR Narayana Murthy. During the IPO, an analyst report quoted like this " SKS's core strength lies in effective risk management, governance, advanced technology, wide product portfolio, diversified sources of capital, strong pan-India distribution network, and lowest cost of credit to the poorest to, unlocking tremendous latent demand". There was none who could recognize the risk of government (ir-) regulations.

The company's shares were listed at 1040 and currently trades at 212 and Investors lost three-fourth of their investments in one year. since listing, the Andhra Pradesh government introduced a law to ban unfair debt collection practices, which impacted its loan recoveries and resulted in the company posting losses. Now this was totally unexpected. It is perfectly normal for every fund manager and investor to have not foreseen. Investing is an art for the moderate who is neither an optimist nor a pessimist. Investing should look boring and dull and that's when it delivers.

The story of SKS plays out every day in our lives, in different hues. That’s the way our brains have been wired. The only way one can win the prediction game is by refusing to play it.

Happy Investing,

Naresh

http://blog.learninvest.in/

The Orchard Street - Discipline

We invest based on immediate recent memory. If the market has been range bound last 6 months, we would expect the same in near future. If in the last fortnight, it has gone down, we predict further fall. We read a pattern in the market where nothing of that nature ever exists. Many investors turn bullish after as little as a few weeks of bullish trends and good returns in the stock markets. What we seek to see as pattern in trends or prices are just random variations. What happened recently will determine what we think is likely to happen in future. If a child has failed once, we believe he will fail again. Blame it on the mental wiring. This limits our investing capability.

One way to escape falling into this mental trap trap, is to have a discipline. It has been proven time and again that you do not need great financial IQ to succeed as much as discipline. Sheer discipline has helped this friend to do better than the average markets. He has bought about 30 so stocks, mostly the ones you would see as part of the Nifty50. This ensures basic fundamentals are taken care of, as such no elaborate research is being done by my friend who is an in-active investor and keeps a 9to6 regular hectic job. Every month after he pays off his bills, he decides to invest the balance surplus salary. What is interesting is how he allocates his money and on what stocks. His formula is very simple. Amongst the 30 odd companies he holds, he checks around the 1st of every month to see which stock has grown by 25% from his investment in it. Quite unlike I would prefer, he goes ahead and allocates money into the very stock that has hit this threshold of 25% appreciation. In the orchard of fruit trees, the ones that grow fast and well, get more water and manure. he calls it 'watering the plants'. Very simple, easy to track and no sophisticated tools to manage. Yet very powerful. I would not recommend this for all, this suits him as he has less time for research but prefers to invest himself.

What is material in the market, is some form of discipline. Like watering the plants. I was shocked to learn that this very well known financial wizard invests only in Index ETF. This baffled me and gave a new perspective to my knowledge and learning. When there are so many established themes of investing like value, special situation, contra, growth, dividend that fund managers have been using for many many years, why would a pro not benefits from them? And merely invest in the index? When I discussed it with him, he called it a Zero Sum game. He does not handle any fund now and is engaged in sharing his experiences & knowledge.

We invest in a world where there is constant race to identify multi baggers and disproportional wealth creating ideas. We base our prediction either by extrapolating some one Else's past experiences of multi bagger or specific stories of huge wealth creation. In this Pro's perspective, those real experiences of making huge returns are just black swan and happens with out any foresight. They are never planned. But if you ask that successful investor, he would say he knew it all along. This is called hindsight bias. We go back in history and justify how well we read the future even when this is not true. This is a trick the brain plays and limits our investment capability.

There is great news for investors who have patience. Today there is excess fear around stocks of banks, capital goods, cement, real estate etc.These have been beaten in the markets and are now attractively valued with low P/E. If India can grow at 7% for the next 3 years, which seems possible, we must seek out these opportunities. While there is significant margin of safety, one can not predict if this is the bottom or there is more to the downside. As we say, it is impossible to time the bottom of the market.

As Benjamin Franklin said “If a man empties his purse into his head, no man can take it away from him. An investment in knowledge always pays the best interest.
Best Regards,
Naresh

an AGM, a few tit bits & great learnings

Hope & Ideas inspire men to achieve great milestones. With the recent release of Harry potter's final version of the movie, my thoughts hover around the story of its author JK Rowling. It started as a great idea on a delayed train from Manchester to London. JK Rowling came up with the idea of a boy who discovers he is a wizard. But it would be 7 years before the idea became a huge business worth millions of dollars. Woven in fiction and mystical sets, this is an inspirational story for every entrepreneur. Her life took a nose-dive, fighting poverty and depression, she lived in a mice-infested flat in Edinburgh and struggled to raise her baby daughter on a charity check. Great business are born in times of adversities and out of great but simple ideas. As simple as the story of stories.

Closer home we have several such inspirational rags to riches stories of Indian Businesses. There is something special about them and it became apparent to me only after I met an elderly shareholder during the 3M AGM. We were discussing the business prospects of 3M after the AGM when I met up with his senior gentleman. I was as usual bullish about a few innovative ideas and giving my pep talks on the pet subject. The unassuming elder intervened to tell me his experiences of MNC consumer companies he had invested in. He was sharing how cold and depressing his investments were in the MNC consumer story. He went on to say how his investment in Gillette never paid off any decent returns after he held them for like 5 years. He compared how having invested in an Indian company with deep Indian understanding would have paid off like Adani or Ambani or Biyani. What he went on to say was even more reveling.He said while the MNC executives work out off comfortable plush offices, their Indian counterparts actually toil it out to succeed in this very unique Indian markets. To succeed in our country, requires unique skills you understand only as an Indian. You need to grease palms of bureaucrats & ministers, require skills to work with carpenters & labourers, clear check posts, making adjustments all the time. Working around things, rather than working through is a unique recipe for Indian businesses. This, in his sense was key to identifying great businesses that will succeed. While I personally have least regard for Ambani businesses, and I hold them primarily responsible for such deep rooted corruption in Indian business, one can't ignore what this gentleman said. As an investor, I have never been glued to this filter, the filter of Indian workarounds. Great learning.

Then I also met those who were waiting (for the perfect bride). Waiting for the perfect correction. You can rarely start at the bottom of the markets. Every good investments performs badly for some of the times. Intelligent investors stick around until the bad turns around to good. As the Nobel Laureate & Behavioral Psychologist Daniel Kahneman said, the most natural way to think about a decision is not always the best way to make the Decision. Very thought provoking in investing paradigm.

Happy learning & investing.
Naresh

Big idea for the small ones

I am really excited with the concept of 'anticipated growth' of certain types of businesses that operate with special economics. Imagine if our parents had invested in one such. We would have inherited a fortune. This gave me a though that I must open an account for my son. A DMAT in the name of a 7 year old. All I would need is a PAN card. I have been recommending this thought to a lot of my friends. The obvious question is how is it different from ours? The mind is very clever, it will differentiate this for the long-term and refuse to get anxious with short term volatility. This idea of a long term holding coupled by researching stocks with a 20 year growth anticipation will work to build a fortune. This is easier said than done. How do we identify such stocks that will display earnings growth into the future? What are the businesses of the next decades? Tomorrows TITAN and Nestle would be small mid caps today. Stocks have a price but businesses have a value. prices fluctuate but value of a business grows over time. They need long runway to grow into a blue chip.

A business that grows very fast for a long period of time can some times offer no benefit to share holders if it requires constant Financing to grow. If the business requires huge equity financing to support growth, then the larger number of shares outstanding will reduce the earnings per share for existing stockholders. There is no benefit from this anticipated growth. When the growth aniticipated is higher than cost of capital required to grow, Blue chips emerge. Like BHEL, Titan industries, Axis Bank all of which took time to grow but went to create wealth in order of more than 10 times in a decade.

These are conceptual ideas that have the power to multiply and foster wealth. These are rarely advised by the broker or wealth manager as there is no profit to be made for them. As with the quaint exchange traded Niftybees, this is like investing in the NSE index itself. Available from benchmark, Niftybees has returned 8.06 % over one year which is similar to the index returns at low cost. In advanced markets, fund managers find it very difficult to beat the returns from index or the broader market itself. This is because as markets mature, opportunity windows become shorter. It makes for an easy yet diligent job to get into an SIP of an Index itself. Again this is a simple idea that no broker can profit from and hence never recommended. Do you have any such ideas?

last week we learn something very interesting from the story that developed at Padmanabha temple in Trivandrum. For those of you who are not cued into it, a lot of treasure was discovered in the cellars sree Padmanabha swamy temple in Trivandrum. The treasure is valued at more than 100,000 crore, roughly the size of total business of a large PSU bank in a year. The treasure consisted of a lot of gems and gold jewelery. The royal famly of the erstwhile princely state of Travancore had left behind these with the Deity. They talk of a symbolic practice of the royal families dusting sands off their feet when they emerge from the shrine after worship. Meant to convey that wealth of lord Padmanabha should remain with lord and the family will not misappropriate. This is a great lesson for today's politicians who have amassed a lot of wealth belonging to the tax payers and government coffers. Greed knows no limit. There is another great lesson from this for the financially inclined. The magic of compounding. The fascinating effect of compounding gathers up momentum over longer periods of time and becomes an avalanche of wealth. The 100,000 crores accrued as the prices of gold kept inching up over the years. Time as they say, is the best healer. There was this company that came out with an issue in 1983 at Rs 100. An investment of Rs 100 per share at Rs 10,000 is worth about Rs 100 crores. Magic of Compounding. Any guesses?

Happy Investing!
Naresh

Infrequent bets Big bets

I am fascinated observing research houses publishing regular reports on what stocks to buy. There are equity houses who also publish weekly and daily tips. Then there are what they call picks of the day, of month and year. There is no dearth of information on what stocks to buy. Some are subscription services and many are freely distributed. If you are a subscriber of a equity research, and they publish a recommendation once a week, you will have 52 in a year. Is it possible for an individual investor to track that many companies ? How does one go about investing in them? The jury is out. But I guess 8 to 10 can be handled. I mean you can really study and track businesses of a maximum of a handful of companies. Research and broking companies provide recommendations tempting us trade more frequently while maximizing their commissions.


You are better off doing your own research and tracking companies yourself. There are two aspects to this business of investing. The business perspective which is tracking the financial and growth parameters of a company. The other is tracking just the share prices and not be bothered about fundamentals. The second is like spending an evening in a casino. There is no certainty how bottom you can go. By playing the casino like stock market, you are are succumbing to the emotional aspects and there is no application of analysis or logic. There is a lot of research that is going into how the brain responds to stock tickers, buys, sell, profits and loss. How many get stuck into the stock market muck and finally end up doomed. The report peddling firms exploit this emotional side of the brain. The human brain is wired in a certain manner that while logic tells you to buy low and sell high, you will end up doing just the opposite. This is very natural, blame it on the chemistry and circuitry of the brains. Speculators and traders revel in expectation of making money. Expecting financial gains and actually getting them are experienced by human brains very differently. There is more intense feelings while expecting and less intense while u actually get it. The markets also move up in expectation of some event. But upon realization of the event, it may not move up, instead it would correct. Like Infosys goes up by 15% in a week on expectation of huge growth momentum. But when they announce they have actually grown their profits by say 18%, the stock comes down or may move sideways. This is a classical example of this theory of neuro economics - Jason Zweig explains this in his book which combines research of neuroscience, economics and psychology. He helps us understand what drives investing behavior not only on the theoretical or practical level, but as a basic biological function. I would recommend this book to every investor.

Far removed from all this fury and tornado let off in the brains by speculative expectations, investing is a a boring, slow undramatic experience devoid of any flamboyance. When an Octogenarian veteran investor was asked what was his best lesson over several decades of his investing career, he replied 'patience'. That sums up many a man years of collective learning. Patience is not about waiting endlessly hoping target prices are achieved. Patience is about waiting for an opportunity. Its about waiting for right valuations. Patience is waiting for your great company to make a mistake. And to allow the casino like market to beat down the prices. As we saw very recently how a media company was hammered close to 52 Week lows when news broke that their MD is likely to be probed by CBI in 2G scam. Imagine what would happen if he was really probed and then arrested. Or when AP government went balastic on Micro-finance firms trying to curb them and the markets hammered those stocks. As a legendary investor said, Few Bets & Big Bets.

Happy Investing!
Naresh

How a small investor can beat fund managers

About a year ago, I helped a friend make a portfolio when he wanted to invest a small amount in stocks. It comprised of only 4 stocks. As always we were seeing a lot of head wind arising from global uncertainties, high inflation and RBI efforts to tame it. Most businesses were fairly valued and sitting tight for a correction is easier said than done. As some one said, all problems arise because humans can not sit tight in a room without doing something. We actively seek action. And in that lies the root of all problems. So I set out to identify companies that have a consumer monopoly and continue to generate earnings over long periods of time. Those that are not impacted by economic crisis in a global environment. I am a fan of warren Buffet's teachings. It was very easy to identify them. Those that show continuous growth in EPS, High ROE, over say a 10 year period. These are front indicators to a company that has a moat. A consumer monopoly as Warren calls it. They have a strong brand, or an authority like a toll way. Today with the advent of information highway, getting data is not a challenge. Its about being able to decipher meanings. Its about how to segregate wheat from the chaff. The markets have oscillated in the last 1 year between 15,960 - 21,108. That was technically a huge spread to make returns. But my personal money which is invested with a well known fund manager is yet to make any semblance out of this band. The reason being, it is virtually impossible to predict a top or a bottom. Strong businesses continue to make money irrespective of where stock markets are headed.

My friend went ahead and invested in 3M & 3 other companies. Jut to give a perspective of why these were selected, it was based on pure common sense and by checking for the Warren filters. Lets take the case of 3M. I was attracted first to a product they make called Scoth-Brite & Post it. It was easy to understand their business. Scotch-Brite is a cleaning material such as scrubbers and mops. Post-it is the ubiquitous yellow pasting slips seen in every office & home. 3M makes over 50,000 products. They differentiate from competitors by producing products of innovation. They have labs that research on products to solve very common problem and make life easy. Who would not have used the scoth-brite cleaning scrubber. Use their cloth mop and see how they suck water and make it easy to use. Each product is first of its kind. And their earnings expand as they grow their markets in both unorganized and organized space. Look at the traffic dividers, they are illuminated with 3M reflectors. or anti corrosive paints for cars. Half the world's population today enjoys experiencing at least one of 3M's 50,000 products. This is common sense research of a business which is simple to understand

Coming to warren's filters, they have grown their EPS by 24% CAGR over last 10 years (Rs 9 to Rs 82). Their average ROE is 21%. It Carries no Debt, a rare occurrence. I will agree now that the valuations are very unfavorable. There is no margin of safety. Frankly there wasn't when I had recommended this to my friend. It has returned 67% in last 1 year. I have tried calculating the valuations for these stocks and have always found them expensive. The portfolio of 4 stocks has returned 47% in a year. And they were all very expensive then too. No fund manager in his sense would recommend to invest in these stocks as they lack a margin of safety. All of them had high P/Es. That, to me is a referendum of their sound business. I am now increasing the portfolio by another 2 names. It is easy to beat a professional fund manager. Investing knowledge does not come from dalal street fund managers. Instead they come from our circle of comfort. We can better them by investing in companies , industries we understand well. You have so much going in favour that a fund manager does not have. To start with he is a victim of regulations. He cant hold cash, he cant sell all or buy beyond a certain corpus portion. He cant invest in small companies. As an individual, you are free to have all your money lying in only 4 stocks. You can flee to cash at will. You don’t have to justify high valuation. You need not out do your counterparts on a quarterly basis.

Warren emphasizes strong fundamentals which can be measured by a strong growth in per share earnings (EPS). He likes companies whose return on equity is above average. And those that are conservatively financed with little or no debt. 3M fits into all these filters and more, but is not fairly valued at current price. Markets go up on rumors and correct on results or facts. Lets await good-times. Like another great company, SBI corrected recently on results of higher provision. The fundamental net interest income and profits have only grown. Markets can' differentiate risk from uncertainty. When a company faces uncertainty, markets punish them by beating down their prices. Investors must avoid risk but be-friend uncertainty which provides good buying opportunities. Lets use such times to accumulate great gems. Wealth is made during extreme pessimism but researching & identifying can be done at all times.

Best Wishes,

Naresh

cpnaresh@gmail.com

Disclaimer: I may hold positions in companies and businesses being discussed. However this is not a solicitation to invest in those stocks . The name of companies are discussed only to illustrate ideas, thoughts and learn. Please do not invest with out thorough knowledge. It can cause potentially heart attacks.

Contrarian Piramal- what we can learn

I was reading about Ajay Piramal who cashed out from his pharma company for a never seen before valuation. He sold his company to Abbott for 60 times earnings. Later he sold his diagnostic business to super religare. He is sitting on a huge pile of cash from these 2 deals. He is on the prowl yet again.

Meet the contrarian investor. Contrarian is a state of mind. To move against the general belief. to go against the crowd. And what you gain in the investing world by being contrarian, is very favorable valuations. You get to buy cheap or get to sell expensive. Just as Piramal demonstrated.

In 90s the MNC pharma companies were fed up of the India market and were looking to sell off and get out. There were hordes of them which meant valuations were cheap. Piramal bought them very cheap. All of a sudden in a decade, the MNCs felt there was no other place better that India. All of them wanted a piece of the action and were buying. too many buyers meant higher valuations on limited offers. that's when Piramal decided to strike the biggest ever deal with Abbott. Piramal may not be in a hurry to invest his surplus till he gets the right price. A great contrarian investor he is, he will look for cheap valuations.

I am right now investing in a very small sanitary-ware company. its a small cap available at cheap valuation. It is not tracked by analysts thus available very cheap. They are growing at a good pace and have a very strong balance sheet. I believe it will get to 3X to 4X in as many years. The company sailed through global recession, profitably. It has never given up profit margins for top line growth – speaking volumes about their focused approach and business acumen. There’s not a single year during which they have witnessed a de-growth. its fairly cheap and corrections can make it even more cheaper. i can see you smile as you identify what i am speaking about.

Happy weekend,
Naresh
cpnaresh@gmail.com