What’s on my mind – Apr 2010

I wrote a similar post on miscellaneous topics in Feb. I am able to use these posts to ramble on several disconnected topics which in themselves may not warrant a post.

Facor alloys
I recently analyzed this stock here. As luck would have it, Arcelor mittal – the LN mittal company seems to be in talks with the management to acquire a stake in a sister company – Ferro alloys corp (I received a comment on the same recently)

The management of the company controls three companies – Ferro alloys corp, Facor alloys and Facor steel. Ferro alloys corp owns and controls the Chrome mines. Facor alloys, also controlled by the same management has been able to access these mines and is in the business of manufacturing chrome alloys.

Chrome alloys are used in the manufacture of Steel and thus these talks on stake acquisition make sense as they would represent backward integration by acerlor mittal. These talks may or may not be successful, but the market has already responded by increasing the price by 10% for Facor alloys.

The stake accquistion seems plausible and could be a good trigger to exit the position. However I would not base my decision on this criteria alone. One should be convinced that the stock is undervalued and these kinds of events would only unlock the value

Sulzer india
I wrote about sulzer here. I have since then exited the position completely. I was able to get a 45% gain in 6 months. I am definitely pleased with the outcome. However this was sheer luck and nothing more. If I assume that I have the skill to make 90% returns per annum, then I can plan my retirement in the next 2-3 years.

Psychology of investing
I received two comments, which touched upon the issue of how can one manage emotions in the market ? If one has invested a sizable amount of savings in the market how does one handle the market swings ?

I personally think that the intellectual part of investing – learning the basics and the fundamentals of stock analysis etc is not too difficult. Any smart person should be able to cover a decent ground in 2-3 years. The most difficult part is handling the emotional roller coaster of the stock market. That takes a lifetime and sometimes even a lifetime is not enough.

I think some people assume that one is born with the temperament to handle these emotional swings . I do not agree with that. There is definitely some level of temperament involved, however one can train oneself to become better at it.

During my early days of investing, I would get happy and greedy when the market went up and anxious when my stocks dropped. I went through considerable self –doubt too. I was always asking myself – do I really know what I am doing?

However if one focuses on learnings from mistakes, then over time the self doubt reduces. I still feel good when my stocks do well or unhappy when they drop, but I do not base my decisions on how I feel. The only antidote to these emotional swings is to learn continuously and know what you are doing.

At the same time, if you feel anxious and are losing sleep when the market drops by a few percentage point, then it is a clear indication that you have taken on way more risk than you can bear. The reasonable course of action in such a situation is to reduce the amount of money in equities and increase the allocation in debt.

Ask yourself a question now – are you feeling bullish these days? if yes, then you are thinking like all others. The time to be bullish was Jan-Mar 2009. I am not bullish or pessimistic these days, but I am definitely cautious.

Responding to emails
I have been slow in responding to personal emails. If you have written to me and have not heard from me, my apologies. I read all the emails I receive, though my responses are delayed sometimes.
If however you have written to me asking for my opinion on a stock, I would prefer if you did some homework at your end and shared your analysis with me. I would then be able to provide a better response to you.

Overall portfolio plan
I am now adopting a slightly different approach in making sell v/s hold decision. I am now asking this question – If this stock drops by 20-30%, will I add to it or do nothing. If the answer is ‘do nothing, then the stock is a good candidate to sell.

I have exited my position in VST and would be doing so in case of some other stocks as the gap between the price and fair value reduces further. The issue is not if the stock is good or not, but whether there are better ideas in the market. Holding an average idea may not result in a direct loss, but there is always an opportunity loss if the stock does not rise as much.