Value investor india

Facing despair

July 31, 2013

4 Min read

I was planning to continue on the previous post – ‘Failure to sell’ , but decided to write on a different topic as I have been receiving quite a few emails – full of despair and frustration.

A lot of young investors, who came of age in the early 2000s, entered the workforce when the economy was booming. If you passed out from a half decent college, you could get a decent job with a good starting salary.

As the economy was growing at 8%+, it was common for employees to be given 15% salary hikes (people quit in disgust if the raise was less than that) and the high performers got promoted every other year. In addition, flush with cash, some of the same people invested in the stock market or real estate and saw their net worth double in a few years.

You did not have to work too hard to do well

We are not entitled to be rich

I am going to ruffle a few feathers, but let me still say it – We had a dream run from 2003-2008 and now it is over. The days of 20% salary hikes and 30% stock returns are gone (at least for now) for the masses.

If you are really good at your job or in investing, you may get above average raises or returns, but that is not going to be the norm for everyone

If you entered the workforce in 80s or 90s, you may have seen tough times yourself (or maybe your family did). The reason why the current slowdown feels horrible is because our expectations are high now. Don’t get me wrong – I am equally angry with the government for running the economy to the ground.

Keep grinding

I faced a similar market from 2000-2003, when the market dropped by around 50% over a three year period. At the market bottom in April 2003, capital goods companies like BHEL, Blue star were selling at 5 times earnings. The current market darlings like Asian paints (15 times PE), Marico (around 5-7 times PE) and other consumption stocks were selling a very low PEs too.

At the risk of getting philosophical, I can think of the following things to do this time around

– Assess your risk tolerance: If you have trouble sleeping in the night after seeing your portfolio drop by 10-15% , you should reduce your level of equity holdings. My thumb rule – will I be able to sleep well if my portfolio dropped by 40%+ ?

– Clean out the trash: Now is a good time to clear up junk from the portfolio. A bear market and 40% loss on weaker ideas concentrates your mind. One should evaluate each position closely, sell the weaker ones and redeploy the cash in the better ideas.

– Have faith: There is no data or logical argument which can make you hold on to your stocks or add money to it. You need to trust that the markets will recover in time and so will your portfolio.

It is easy for people to say that they want to think independently and stand apart from the crowd. Now that that we have a blood on the streets and no end in sight, you will know whether you can truly do that.

At the risk of looking foolish, I plan to keep adding to my positions.

Edit : I have a day job to support my family. I will not starve even if my portfolio goes to 0. I would not do the same thing if I was living off my savings.

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Failure to sell

By Rohit Chauhan

In Uncategorized

July 21, 2013

4 Min read

12 comments

Bear markets are a good time to reflect !

In a bull market, any pick – good or bad, goes up and everyone feels like a genius. However at times like now, where any kind of mistake is brutally punished, it is easier to uncover flaws in one’s investing process.

So, I have been thinking about my investing process and have realized that one part of my process is exceedingly weak – The selling process

Why should one worry about the process ? If you are interested in understanding it in more detail – read this noteon ‘process versus outcome’. In a nut shell, if you get the investing process right, the outcome (investment returns) will take care of itself. It is the equivalent of getting your batting technique right, if you want to be a good batsmen and get high scores consistently.

Over applying buy and hold

As most of you are aware, I am heavily influenced by warren buffett and his investment philosophy. My introduction to investing was through his ‘shareholder letters’ and as a result, I have taken his teachings to the heart.

One of the key tenets of buffett’s philosophy is buy and hold, where one looks for companies with sustainable competitive advantage and buys them at a reasonable price. Once you make the purchase, buffett advises the investor to hold for long periods of time (provided the business maintains its competitive position)

The above is a very sensible approach and would work for majority of the investors. At the same time, the key point in the ‘Buy and hold’ philosophy is to buy a high quality company where the intrinsic value is growing and let time do its magic (via compounding).

The unsaid bit is that it is often dangerous to apply this approach to other type of companies such as cyclical or deep value plays. I have done that in the past, leading to poor results

A differentiated approach
It has become slowly dawned on me (I am slow learner J), that one needs a more nuanced approach to sell, depending on the nature of the investment. In the rest of this post and the next, I will try to categorize the various types and look at the sell approach one needs to adopt for each of them – This is ofcourse a work in progress and by no means any kind of rule set for me.

Cyclicals – As the name suggest, this group includes companies which are heavily impacted by the state of the economy. This group would include metals, cement, auto and capital goods type of companies. The defining feature of these companies is the high profit levels at the top of the economic cycle and the steep drop in the same(leading to losses sometimes) when the economy goes into the reverse.

Such companies look cheap when the economy is doing well and expensive when things are bad, such as now. If you were to buy and hold such companies over the course of the entire economic cycle (from bottom to top to bottom), the overall returns would be very average. The key in such type of investments is to be able to buy when the company is at or near the bottom of the cycle (difficult to identify usually) and sell as the business recovers – without waiting for the cycle to top.

There is a perfect example for this type of an investment – Ashok Leyland.

I wrote about the company herein 2008 and kept buying it as the stock crashed during the lehman crisis. My average cost basis was around 11 / share (post split). I was out of the stock by mid 2010. You can see the price action below

The timing was perfect and as much I would like to think that it was my brilliance, it is usually due to plain dumb luck.

The commercial vehicle business turned in 2010 and has been going downhill since then. The stock price has followed suit

If I had held the stock from 2008-2013, I would have made around 12% per annum , which is not bad but nothing to crow about too.

So the key point with cyclicals is this – Buy and hold does not work (usually) and timing is critical for above average returns

To be continued ……………

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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

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Its panic time – time to make some money

By Rohit Chauhan

In Uncategorized

June 30, 2013

3 Min read

13 comments

v\:* {behavior:url(#default#VML);} o\:* {behavior:url(#default#VML);} w\:* {behavior:url(#default#VML);} .shape {behavior:url(#default#VML);} Let’s see what all has gone wrong and may get even worse

– Rupee has depreciated to 60/ dollar and may drop further

– The drop in rupee is causing imports to become more expensive, which is keeping the inflation high.

– High inflation is causing the RBI to keep interest rates high, which in turn is depressing growth rates

– High current account deficit is causing the rupee depreciate and can also result in a balance of payment crisis (similar to 1991)

– The government is running huge fiscal deficit which crowds out private investment. In addition, it does not have the same ammunition as 2008 to counter any slowdown

– Corruption and governance issues remain and there is no will to change it in the future.

Have I missed anything negative? It is actually a surprise that markets have not dropped further. Actually, let me take that back.

The midcap and small cap index has dropped by 15% and 22% respectively and large caps have not dropped as much, because FIIs have been pumping money (which has now started reversing). So we could have another crisis if the FIIs, were to sell even more in response to the falling rupee.

I think most of you know all this and need not be reminded about it.

Panics are always around

Lets look at a graph

This look like the index from 2008 to 2009 …right ?

No, this is the market drop from Feb 2000 to May 2003. The market dropped 38% during this period, with IT stocks dropping even more.

My point is that market drops happen from time to time and is the risk of earning high returns. The mistake most investors commit is to extrapolate recent events into the future. An investor looking at the market in 2003 would have missed one of the biggest rallies from 2003 to 2008.

The converse also holds true – something which has done well in the recent past, can go down too.

The above graph is not of a stock, but of the favorite investment option of Indians – Gold. Very few would have imaged gold dropping by 20% in 6 months.

Panic is a great time to buy

If you have studied history and can keep a cool head, then panics are a great time to buy. The pre-requisite is that one should have done his or her homework in advance, and is ready to act when panic strikes and drives prices down.

Let me show you a recent mini panic in 2011 – In financials. The market became concerned about the asset quality (rightly so) and knocked down prices of companies by almost 30% in a span of 2 months

A person buying during the panic would be up by around 50% since then.

Where is the panic now ?

I think we are in the panic territory in small caps and almost getting there is mid caps. If FIIs start pulling out, we may see a full blown crash across the market including the large caps.

Do I know if that is going to happen ? No I don’t. I do know that prices are getting cheap and it will soon be shopping time. I may even buy gold if it drops another 20% !!!!

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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

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Self torture

By Rohit Chauhan

In Uncategorized

June 16, 2013

4 Min read

10 comments

I wrote about two companies in January – Deccan chronicles and Zylog systems (read here)

In case of deccan chronicles, the stock had dropped more than 90% from its peak and a debt default and other allegations were already in the newspapers.

In case of zylog, my impression from reading the annual reports was summarized as follows

poor operating performance resulting in cash flow problems (in addition to commoditization of the core business)
Cash flow problems resulting in higher debt which was taken to fund the growth
higher debt resulting in promoter pledges to get the funds
Point a. causing the stock to drop, resulting in margin calls and forced sale of the pledged stock.
The forced sale, causing further steep drop in the stock price

As part of the disclosure, I indicated in the post that I had a very small speculative position in the stock and in the comments section provided the following rationale for it

zulfiqar

i am testing a hypothesis that the management will fix cash flow problems and the business is worth more than the current mcap.however it is a speculative position with a large probability of loss. it is also a very tiny, insignificant position

hi anil
i would not call such postions a mistake. i do such things actively – on very tiny amounts these position have a large learning value which is worth more than the money lost. one could get the same by just watching it, but when you put real money, the experience is very very different. it helps one in avoiding such mistakes in the larger serious position.

A new update

On June 14^th, SEBI barred the promoters (read here) from buying or selling any securities in the stock market

The key points in the news article seem to be the following

Sebi had, suo moto, carried out an examination in the scrip of Zylog Systems in view of surveillance alerts regarding variation in price. Sebi during examination of the scrip prima-facie observed that the company provided misleading information to the stock exchanges wherein it stated that its promoters have been buying and increasing their stake while actually the promoters were net sellers and their shareholding declined due to invocation of pledge by financiers. Similar misleading clarification was also given by the promoter of Zylog Systems, Sudarshan, to the media.

Sebi order said that Zylog Systems disclosed incorrect and false information in the quarterly shareholding pattern for the four quarters in the year 2012 to the stock exchanges by overstating the holding of the promoters and understating the quantum of shares pledged by the promoters.

Sebi also observed various instances of non-adherences to accounting standards and listing agreement in the annual report by Zylog Systems.

In addition to the above, the latest results show that the promoters have pledged close to 95% of their holding in the company (up from 75% in the previous quarter)

What next
As I indicated in the earlier post, I created a small tracking position to follow the company and confirm my thesis that the debt/ cash flow problems are temporary and should get solved.

I am not sure if the thesis will turn out to be correct or not, but the SEBI order changes the whole picture. I am fine with poorly performing businesses and will hold the stock for the long term if the management is competent and working on fixing the issues. However, if there are coporate governance issues, then all bets are off.

Although the position was small, a loss always pinches. In this case, I walked into it with open eyes – a case of self torture 🙂

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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

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