CategoryGeneral thoughts

Jan 2008 – Sub prime crisis in full swing, Rupee looked likely to appreciate (due to dollar weakness) , US on the edge of recession due to housing market collapse and high oil prices etc. IT companies were at an all time low

For ex: Infosys was selling between 1300-1400

May 2008 – Not much has changed in terms of fundamentals except that rupee has depreciated by 5-6 % (??!!) driving up inflation. The US economy has not gone into recession (yet !). Oil is now 125 USD+ and the future outlook seems to be as cloudy as ever (when is it ever completely clear ?)

So ….infosys is now selling at 2000+ (it jumped by 8% in US today). Other IT companies have increased by 50%+ too.

I will not try to explain why this is happening. My logic is as good as anyone’s guess. You will soon find enough articles trying to explain the unexplainable or the irrational. Why even icici direct is now recommending NIIT tech 🙂 …they have a target price of 180+ in the next six months. I think I will sell everything I have, and just buy this company for a sure 20% 🙂

Anyway, I am currently analyzing BEL (bharat electronics limited) and SRF and will be posting on them soon.

Stock tips – I do not believe in giving or receiving it. My approach is to analyse a stock and post the facts and my opinions. I would leave it to the reader to accept or reject my analysis. It is upto the reader to take a decision to buy or avoid the stock. I don’t even recommend stocks to my friends and family. If they make money based on my tip its because they were smart to take my advise. If they lose, I am to be blamed for the stupid tip. So either way it’s a no win proposition for me.

Price targets – I don’t believe in them. It is difficult enough to analyse a company and arrive at the intrinsic value. I think it close to impossible to predict when the market would close the valuation gap. So price targets are basically guesses and my guess is as good as anyone else. I am personally not selling a research report and don’t need to satisfy anyone’s need for a predicition. So better not to predict the unpredictable

Market, interest rate, and other short term prediction – No different than trying to predict stock prices. Only more difficult if not impossible

Analysis of gold, real estate, option etc – I do not have sufficient skills to do justice to these topics. Maybe options in the future, but I doubt gold and real estate.

Reviews or sales pitch – This blog is more of a personal interest. The ads you see are contextual ads from yahoo or from a few sponsors.

Net Net , this blog is an expression of my personal passion – investing and all things about it. I have no interest in selling anything and if I do manage to make some money from sponsorship – well that will hopefully pay for my coffee 🙂

Simpleton and hotshot investor are close friends. Simpleton is a small time businessman …doesn’t understand stock market much. But he knows cash is king. Hotshot is all into investing. Reads blogs like this, talks of DCF, PE, options, subprime and all that.

So one day Hotshot comes to meet simpleton and both get talking of business and stocks and all that.

Hotshot – how’s business?

Simpleton – ok …not too good though. You know that store I have. Used to do very well, but now with that new mall, business is not so good. Too much competition

Hotshot (all puffed) – So why don’t you sell it and put the money in stock market ? You know I made 5 times my money in the market in the last 3 years!!

Now this gets simpleton thinking ..here I am working hard and barely making 20% return every year and this cool dude is able to make so much money.

Simpleton – you study all this stock and business…you analyse all these big companies. How much should I sell my business for ?

Hotshot (opening his sleek laptop) – You know, I have analysed so many companies. I have this complicated spreadsheet. Just give me the numbers and I will tell you

Simpleton – let me see. Last year, I had sales of around 5,00,000 per month and I made around 50,000 per month after all expenses. I keep around 7,00,000 of inventory and I give some credit also. So I have a debt of around 3,00,000 per month. As of now I am having around 7,00,000 cash also in safe. Store is my own, so I don’t have to pay rent.

Hotshot – those are last year’s numbers. How much did you make year before that and last 5 years. I need all those numbers for my spreadsheet.

Simpleton – Around the same. I told you ..too much competition. But you know, I have some loyal customers, so last 5 years I have been making roughly the same. Maybe 3-4 % increase every year.

Hotshot (shaking his head) – not good, not good. No growth ..bad ..very bad. Why don’t you invest this cash some in high growth business

Simpleton – You know, I have not done any other business and I have been managing this store for last 15 years. So I don’t think I will be good at it. Actually, 5 years back I opened a chicken farm and lost all the money …you know bird flu !! . So whatever profit I make, I keep it as cash.

Hotshot (shaking his head even more now, lets out a sigh) – then you have to sell your business for 7,00,000. At best 10,00,000. See no growth, means no future

Simpleton (completely surprised) – what are you saying ? I have cash of 7,00,000. I have inventory, this store and all this good will !!

Hotshot (shutting down his laptop) – All that doesn’t matter. No growth …means no growth. If you cannot grow ..your business is worthless !! don’t believe me .. I will show big companies selling for peanuts because they cannot grow. I am not saying that …the stock market which has millions of intelligent people are saying that !

Simpleton cannot believe what hotshot is saying. How can it be true ? why should he sell his business for the cash he has in the safe ? If he sold his inventory and the store, he would make more money. But then he thinks ..the stock market must be smarter than him !!

Jan 9th – Mar 17th – Returns = -27% and counting.

There is quite a bit of panic and fear in the markets now. It is amazing what difference 3-4 months can make.

It is easy to get preachy, especially if you don’t have skin in the game. But I am not in that position. My own portfolio shot up like a rocket from september and has come down since then. I have seen worse bear markets in the past where the index just kept sliding down for 2-3 years. Will it happen again now? There are enough forecasters and gurus out there forecasting. I don’t want to add to that noise further.

This is what I am doing .

1. Don’t panic – seriously!!
2. Stop watching the market, your portfolio and CNBC – I am half serious about this. This will only induce more panic
3. Don’t anchor – If you were watching a stock for sometime and it has dropped by 20 – 30% from the peak price, it does not mean that it is cheap. There is no point anchoring on the past price. The stock is cheap only if the current price is at a discount to its intrinsic value. So I would not rush out and start buying blindly just because the market has dropped
4. If you have been analysing and watching stocks for some time, a few stocks maybe dropping below the buy targets. It may be time to start buying. Will the stocks go down further …that’s possible. But if you think the stock is undervalued, I would ignore these fluctuations.

The above suggestions are valid if you have followed a long term investing strategy (where long term is more 1 year) and have not been a trader/ momentum player. For traders/ momentum players I have no suggestion as that is a different game, which I have no clue about.

Beyond this I don’t think there is much to do. Ofcourse I am assuming there is no leverage involved and you can psychologically handle the losses.

As I have said earlier and this becomes more and more evident as time goes by – It is close to impossible to predict the market. So I think no one can say whether the market will go up and start dropping again or resume its rise again. What we can do is to be rational about our investment approach and keep a margin of safety

Scenario: I bought a stock for Rs 50. My intrinsic value estimate was Rs 100. The stock quickly doubled and then some more. It quotes at Rs 125 now. What should I do?

The most common response I read and have also heard from friends is this – Sell half your holding and recover your investment. What you leave behind is your profit. Let it be in the market as can afford to play around with it.

I have myself engaged in the above logic. However I find this logic completely faulty. My ‘investment’ now is not Rs 50. It is Rs 125. That is the money I have now with me. I can sell the stock completely and choose to invest the money in another security or maybe just buy a Flat screen TV or whatever I fancy 🙂

The above is a case of anchoring bias. We tend to anchor our thinking to the purchase price of the stock. The purchase price is history. The current price is what matters

Lets take another case

I buy a stock for Rs 50. My intrinsic value estimate is Rs 100. The stock drops to 40. I investigate and realise that I have made an error and the intrinsic value is actually 35 only. What should I do?

The price of 50 now has no meaning. The stock has dropped and is still quoting above the intrinsic value. A rational response would be to take a loss and move on. Before I sound any more preachy, let me tell you I have been guilty of the same thought process. I bought SSI at Rs 1900 and rode it right to Rs 100.

Personally, I think the most rational approach is to constantly evaluate the stock price with your conservative estimate of intrinsic value. If the stock sells for more than intrinsic value , sell or else hold. Nothing else matters! not the price paid for the stock or the current level of the market.

I read somewhere that all of us have a set of underlying assumptions based on which we create a model of the world. This model involves all aspects of life, but I will restrict myself of investing.

I am aware of a few assumptions on which my investing style or philosophy is based. These assumptions are not universal truths or applicable to others. Its just that I have developed these assumptions over a period of time. Some may be valid and some not. I constantly test these assumptions against my performance and try to discard those that work against my long term performance.

So here goes my list

1. Value investing is an extremely productive approach to investing for my circumstance. I have a regular job, a family and can devote only a limited time to investing. So for me value investing and an as an extension, buy and hold makes sense.
2. Trading is time consuming, too stressful and not a game in which I can or want to excel. In addition, I have a mental block against trading (which must quite obvious). I am currently reading a great book on trading – Way of the turtle (on which I will post next) to learn more about it. My initial reaction – Trading is not for the faint hearted, is a tougher (especially emotionally) way to make money and definitely not a part time activity.
3. Investment advice especially from analysts and financial website is baised and not worth following. Blogs are a different matter as the bloggers do not have a hidden agenda.
4. It is impossible to predict the markets in the short run. Don’t waste energy on that. Time is better spent in learning other aspects of investing
5. One can get better at investing if one is ready to put the effort into it.
6. Avoid options, derivatives and other avenues such as gold as there are enough opportunities in equities. No point in spreading my self thin. Knowing a little bit of equity, a little bit of commodities and gold will not get me superior returns. Focus on one area and do well in that.
7. Avoid stocks with high PE unless I am very very certain of the business prospects. Avoid stocks above a PE of 20 in most of the circumstances.
8. Avoid IPOs (see my logic here)
9. Investing in not an intrinsic talent usually. There are a few exceptions to it like warren buffett. I can learn to be a better investor.

I am a buy and hold investor. This has been gospel for me in the past. I guess if you follow warren buffett as much as I do, you end up following his philosophy completely. However over the past 1 year I am trying to expand beyond this approach. I would still prefer to buy and hold stocks for which the instrinsic value is increasing rapidly. However I have started looking seriously at a few more approaches such graham type deep value investing, special situations and also looking at how momentum may be combined with value investing . My core philosophy is still value investing, however I am trying to expand the scope.

Only when the tide goes out do you discover who’s been swimming naked – warren buffett

It is diffcult to avoid reading on the subprime mess in the US. I have an oversimplified explaination –
‘Losses being incurred by individual and institutions for overpaying for financial assets like CDO, MBS (mortage backed security) and other debt due to greed (for higher yields), ignorance (not knowing what was behind these assets) and overconfidence (too much faith on models)’. So what we are seeing is repricing (or correct pricing ?) of these assets.

Well for a much better understanding on what is happening and what may happen in the months to follow , read this article on fortune.

In a nutshell the opinion is that this bubble will take some time to unwind, there could be volatility in the markets due to that and there could be steep losses for some.

I think india is not going to be affected much directly. However we could see second order effects. With a liquidity crunch, it is quite possible that the excess liquidity which is driving our stock and real estate markets may dry up. This could cause some volatility and short term drops. How much and when ? …who knows. I think the equity markets are already reacting and there maybe be some anecdotal evidence of the same happening in the real estate market too.

If, like me, you have also been tracking some stocks or have surplus cash to invest , the next few months may provide a few good opportunities. For ex: the auto sector, oil and gas and several mid-cap, microcaps are now selling at much lower prices and could soon be great bragains.

The most common cause of low prices is pessimism. We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer – warren buffett