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

Is the investment in your house an Asset or a Liability?

Let us debate if you consider the investments made in buying your flat as an asset or is it a liability? I am not expecting consensus on this as a Home is a very emotional subject. But emotion generally degrades Financial Wisdom. There is a stark difference in investing in real-estate and investing in a house. I had invested in a house in 2002 and today if I look at the returns it generated, it might have doubled or a little more. If I analyse a bit further, I need to take into account the interest paid to the bank over the last many years, the society maintenance paid to maintain the complex, my own house maintenance, property taxes etc.

The asset has only lost more money than having made any returns. An asset that generates returns is what an asset is. Now I know of other friends who live in a better and bigger house. So I have decided to buy a new home that costs 3 times more. How do I make it happen now? Well I am going to look out for a better pay job, I should get at least a 50% Hike. I have got a Job. So what has happened? I have increased my Income to meet with higher expenditure, out flows and EMIs. What have I exactly done? Have I invested in an asset? Is it going to generate more income for me or is it going to deplete the Income from my new Job for which I am going to work harder? I realise now that I am stuck in a Rat race. We are in a race, a race of which most of us are a part of. More money is definitely not the solution to Money Problems. The solution is to consciously reduce expenditure, avoid investing in liability because that causes more expenditure like interest payments, maintenance etc., and instead invest in assets which generate income. That’s the secret of the turning wealthier.

Many investors with a strong equity portfolio in early 2008 remained spectators when the portfolio took a hit due to the events that unfolded during the year. They had then exited at lows. The portfolios eroded by almost 60-80 percent. As the markets turned the tide and rallied, many of these investors did not buy any stocks with the belief that the rally will be a short-lived one. The rally, however, was not a short-lived one and is still going strong nearly a year after it began.

The US Fed's decision to keep the interest rates low for an extended period indicates that the higher liquidity will probably extend the rally by a few more months. In that case, what should investors do? How should they get back into the stock markets to start earning returns? Let me know your thoughts.


Best Regards,
Naresh

Road to the Future

The road to the future was contemplated to be written in the back drop of the major investments our government is planning to incur to spearhead a one of its kind project in the world. The minister for Roads & Highways has set a huge task, a task to put India in the fore front of International Road Infrastructure. A project that can transform the way we live and travel. The Program plans to create 50,000 Km of highways across the country in the next 5 years.

I would like to share what it means in terms of change. The entire industry that gains from this is gearing to meet business. It entails a spending of 100,000 crores every year. And the entire gamut if industry like the cement, project concreters, real estate developers, entertainment, food & hospitality are all having a stake in this project. The economic potential is for all, jobs, entrepreneurs, direct & indirect employment and for investors like us. As I discussed in the previous post, there is an imminent consumerism wave breaking out with per capita income exceeding USD 1000.

I am excited about the times ahead. Knowledge about it, is what we need to invest wisely. The US economy has seen such unprecedented growth in the 1860 and many entrepreneurs who stood those waves have made it.

We are going to witness in the next few years a similar growth and let us not miss this opportunity. There are a dozen of companies listed in the exchanges which are going to make it Big in this wave. Let us have Patience and develop Knowledge, two skills required to create wealth. If there is one show stopper, that could be the mounting levels of debt which is currently at 80% of GDP. Unfortunately the current budget has done little to address fiscal deficit, which is widening with every passing year.

Every investor in the market fears a correction. The years 2009 has seen a sharp rise in stock prices, and a correction this year should be expected. I know of wise investors who are holding on to their cash. I am in cash majorly and invested in 20% and I have set my eyes on some valuable companies that are not available cheap as of now. But if you can find some wonderful long term opportunities trading at attractive valuations even in a volatile market like this, nothing should stop you to go ahead. Keep your War Chest filled with cash and very soon we are going to have the opportunities come our way.

Happy Investing.

Naresh

What has budget to do with investing

I was recently talking to an investor who said he is waiting for the budgets to enter markets. Previously he was waiting for the RBI Monetary policy to be announced to enter the markets. I am sure he would have been waiting for some other event to have occurred for investing. This is a sure shot case of doubting what you are doing or simply having no clarity. As many fund managers say, they are investing in a 100 Companies to diversify risk. Diversification is done by people who are not sure of what they are doing. The answer to this is business perspective investing as the Great Warren does. Budgets or otherwise, investments are made when you find the right kind of businesses that generate cash and increases earnings year and offer superior Return on Equity. These are those companies that are run by very sound management, more so they are business where they have a very unique value to offer or stickiness. Such companies rarely come under pricing pressure because of competition or economic vagaries, except in the very short sense. Finding such companies only need common sense. Wise investors invest when the prospects of the business seems the bleakest. There are short term setbacks that can not affect the underlying business model or services it offers.

Since the market is mostly full with speculators, they offer premium in analysing present results. If the company in question had bad results, the markets beat them down even if the company has history of doing well and rewarding high earnings. The market then believes the future is bad which not the case is. To the intelligent investor, these provide the rare and great opportunity to invest with a long term perspective. This sounds astoundingly simple, the trouble is for the ones who monitor the sensex on a regular basis. Instead monitor the quarterly results of the company in question. How many of us do that? Unfortunately there is no formal education available in business perspective investing. But think about it.


The great Graham believed markets comprised of 2 components. One is long term investment oriented, which means over a period of time markets will price the stocks based on its business earnings. The other component is like a casino; investors gamble based on the short term fluctuation of prices based on news and events. They speculate based on the impact daily information would have on the price movement of the stock. The long-term investment nature of the market will surely and always hike up the prices of company’s stock, if it is the right business adding to the company’s net worth and demonstrated continuous growth in its EPS.

I wish you a very eventful and happy week ahead.

Naresh Pisharody

cpnaresh@gmail.com

http://investin.blogspot.com/

Is it a right time to invest?

The markets have turned volatile and have corrected a bit, this is something that we always expected. The question now is, is that all or should I wait for more corrections before I invest. It is impossible to time the market. As someone who has been investing for many years now would realise, it is nerve wrecking to follow the index on a daily basis. I had given it up many years ago after my initial brush with trading. A trader’s life is full of highs and lows and is more like an addiction. There investment life is also relatively shorter. Thankfully I had given up this limited career long ago and entered the beautiful world of investing like a true and intelligent investor. It is about investing in a company as if you are buying its business story. If you investing in say an infrastructure company, you are doing so since you believe in the infrastructure prospects of the business. You do so because you believe there is a lot more of roads and bridges that need to be built and your company can profit from it. This is called Business perspective investing. This is relatively relaxing experience though it needs a lot of mental discipline and understanding. For such an investor, the interim losses are not a cause for worry but would be an opportunity to invest further. We follow the company financials regularly and see if the earnings and other parameters grow regularly. Look at earnings as the return from an investment made in the company.

For a long terms investor, it would make sense to invest regularly irrespective of the way index moves. Invest regularly and similar amounts. Subject to of course valuations of the price and the company identification parameters. Not everything is reflected in balance sheet. We need to deepen our contacts and get a insider view of companies. It will pay well to look for low PE companies that conform to select criteria and hold them for a period of 2 to 3 years. The next decade will see multi baggers from sectors like infrastructure and capital goods. There are also value picks emerging in education sectors. The markets have corrected quite a bit and more of this I am expecting as more bad news emerge. The European crisis is already being spoken about. Next would be Japan and US which are in deep red. Lets us prepare for action by investing in small amounts and continuing to do it as the market gets into more buying zone as I would like to call it. Beware of the real estate mafia still as a lot of illegal and launder money is lying there. I would avoid companies where customers buy purely based on price and have nothing else to offer like say a brand, or an innovation, a secret formula or IP. Recently I was looking at a company and was amazed to see the kind of innovative products they offer. Infact they do not restrict their manufacturing to any specific sector but specialise in innovation and making products that simplify our lives in multiple ways. They make products from automotive supplies to stationery to electronics to healthcare. These are the kind of companies I look to invest in as they have as warren calls them Consumer Monopoly. They have the power to price their products and also retain their earnings. But then it makes sense only to buy it at the right price. One parameter I look at it is the earnings yield.

The next event market looks forward is the budget. There is pressure on government to pull the plug on easy money and remove stimulus over time. Easy money will have to stop soon as the debt burden across all governments by dolling out such subsidies will become insurmountable. These will be action packed days and we are going to see prolonged times before a convincing recovery. Time to invest. And Investors seeking Knowledge will reap huge profits.

With Best regards,

cpnaresh@gmail.com

The New Decade heralds

The term dead cat bounce is derived from the idea that even a dead cat will bounce if it falls from a great height. This phrase has been used in Stock Markets to describe a downward move followed by a significant price increase. The price fails to continue upward and instead falls again downwards, and exceeds the prior low. A very secretive investor whom I met recently used this phrase to describe the current recovery of the stock markets. He was speaking about an impending correction which many pundits believe is in the offing. Like all great investors believe, it is not wise to time the market and wait. At the same time it may be worthwhile to study independent companies with in a sector and research thoroughly before investing. It would be advisable to invest gradually in small proportions over 4 to 6 months to take advantage of cost averaging. Infrastructure as many know is an area where the government is spending. Infrastructure bottlenecks, have long been a drag on Asia's third-largest economy, knocking an estimated 2 percentage points off its growth. The country requires $500 billion investments in infrastructure till 2012. The bulk of the government spending, 85 per cent to be precise is in power, water and urban infrastructure. Companies that operate in this area are very well poised to return value to investors.

Most stock investors do not get better than average results and are in a way not entitled to it as they base their investments on hot tips and general news in the media. They are not being provided by a specialist who charges for his service. I know a lot of people have the anxiety of waiting for a correction, specially the ones who are sitting on cash. Market tests the patience and as Warren Buffet termed it, markets can be irrational longer than man can remain solvent. That summarizes everything aptly. For a long term fundamental investor, stock indices are incidental and stock prices can be best ignored. As Warren states it, the period for holding a good company is lifelong. There is a lot of meaning in this which needs to be elaborated. The human mind is wired in a manner that we react to the market sentiments. The brain is fused to buy high and sell low. An intelligent investor is the one who can get out of this psyche. If your horizon is 20 years, the most practical thing would be to invest in well researched company every month automatically. For a life long holding, the best choice would be to buy into total stock market index funds. What keeps people from succeeding in the markets is the attention that they pay to what market is doing currently. We have to exercise our right to ignore the markets and the value of our shares on a continual basis to succeed.

This decade is significant. At the turn of last decade, India per capita income crossed USD 500 and we saw the way economy and markets moved in the last decade. At the turn of this decade. India has crossed another significant mark, per capita income of USD 1000 and there is going to be a new wave of consumption and consumerism. Many companies are focusing on the emerging trends to ensure they don't miss this wave. For us as intelligent investors, it is of paramount importance to identify those growth areas and be invested.

Wishing you a very happy Makara Sankranthi.
Naresh
cpnaresh@gmail.com

Opportunities in Uncertain times

The closure of the Tata Steel's Corus Steel Plants in UK will result in loss of 1700 jobs. This is only an indication of the kind of economic crisis that the economies of the world are still grappling with. The Steel major, second largest steelmaker in Europe has faced a situation of low demand and off-take after many mills around the world had closed unable to even pay the power bills. The employment figures that the US Markets vastly rely on were also not encouraging. I recently listened to a CEO of a large US corporation expecting this recession to last a very long time and called it a L shaped recovery. L indicates the going down and staying there for a long-time. This is opposed to many stock and business analyst who come on TV and speak reassuringly of the recovery and asking gullible investors to fall prey to their excessive greed. They are doing a job. It is the job of every intelligent investor to measure the reality through his eyes. All that is required is common sense and not a fancy degree on economics to understand the glaring reality. Dubai is an example of showcasing story of greed and returns. The real-estate had heated too fast ahead of genuine demand.

The Indian business scene is somewhat different. The Indian economy in stark contrast to the west is not heavily debt driven. The savings rate is one of the best in the world and we have a very strong regulator of banking system, the RBI. The immediate forecast may be a little tumultuous and bumpy but that should not sway away the intelligent investor. He welcomes and embraces such opportunities. People in the know of things actually admit the financial crisis in the west and know of a few large banks that are on the verge of collapse. These will trigger the meltdown of financial markets all over the world bringing great opportunities to invest in companies that comes a begging.

Meanwhile we have heard of more fraud coming out at Satyam and the new management of Mahindra expressed their intent of putting back the company on fast rails within the next 6 months. I am sure that this new management will put them into a place they as a company deserve. Whenever such information of fraud comes out, the markets offer its trademark response - off beating down the shares. Remember when Raju admitted to the fraud initially, how analyst came on TV and assured the share would reach zero or be de-listed. I was very sure that none of this would happen. There was this company with customers and revenue flows. What had happened was one of the biggest frauds in Corporate India, no doubt. But with Market again not able to distinguish Risk from Uncertainty grace it its best treatment. I know of a few Intelligent Investors who had invested knowing the truth that the value of any business is its customers and invested at highly discounted levels.

Such opportunities of uncertainty will prevail at all times offering opportunities to invest and create wealth. Recently the telecoms stocks came under the hammer with a ravaging tariff war. While valuations will change with an imminent change in tariffs, markets generally over react.

The Government of India has recently announced the fresh round of divestment in all PSU’s and divest up to at least 10%. The Government wants to raise around Rs. 60,000 cr and thereby boosting the capital markets and will ease the pressure on our fiscal deficient economy. These funds will be used use in development and infra projects.

Should we invest into such stocks now?
Post elections I had picked stocks like SBI, NMDC and few more due to this reason.
I foresaw the disinvestment happening but now however they have rallied too much for delight. Let bygones be bygones. Market throws up surprises always.


A few more topics of interest to think would be Gold and the Energy & Power sector.

Do all these happenings mean anything to investors like us?
I would like all of us think and look forward to your valuable comments.

The Market is tired

Another year is drawing to a close. It is time to rest a bit and so is it for the indexes. They have been running tirelessly for long. There are a few facets that will lend itself to the behavior of the index. It is the year end for many FIIs that have book closures and will close their positions, January RBI policy announcements are expected to tighten liquidity to rein in inflation, many IPOs are sucking up liquidity from secondary markets. The markets are oversold and running out of steam. This is seen in the leading stocks from their valuations. It is difficult to predict exactly when, but there is good certainty that the markets will correct. This will provide an opportunity for all of us to buy assets at a good discount to their value. So be in cash and hold on to Gold.

I've been getting a lot of people asking me when I'll sell my gold...

First; I have to tell you it is much, much too early to focus on this. This is a time when very few people have gold, many more countries will move their reserves from dollar to Gold and you will see this happening soon. The dollar will loose its old charm as the pressure mounts on US’s foreign creditors to look at other avenues.

To be a successful investor, you must think independently. But I'm only human, so it feels great to find a stock you believe is an excellent company with a first-class management, recommend it to your readers, remind everyone when it gets cheap, defend it against numerous critics... and then watch it deliver disproportional returns. As Buffett doesn't buy unless an investment fits into the four filters he used for decades.

• An understandable, first-class business

• A sustainable competitive advantage

• An able and trustworthy management

• A bargain price

I am right now studying a company in renewable energy. They have had recent setbacks due to inappropriate management decisions in the past. True value buys emerge during special market conditions, bad business decisions, extraordinary industry happenings and extreme pessimism. But if you go by the filters, you will be able to separate the wheat from the chaff. I am reminded of the story of Sudip Dutta who moved to Mumbai in 1988 from small town of Durgapur after his father passed away and he could not support the family. He started working as a packing assistant earning Rs. 15 per day and twenty years later, today he is the largest aluminium foil maker with business over Rs 500 crores. India is full of such entrepreneurial spirit and Indians can take on the world.

Things that you'd think are impossible could be happening with regularity in the next decade or so. Let us just sit back and watch, and wait. As they say, patience rewards the intelligent investor.