Reduce monthly expenses – Long live cash economy!

Last Sunday, I and Ruchi were having discussion on finance (hmm…hmm…). She wanted a credit card because a sweet girl from a bank was soft-selling it. Well I wanted to meet that sweet girl, but that could be another story altogether. Coming back to the point, Ms. Sweety tried to persuade Ruchi  by telling her that she will have 10% discount on the stuff she purchases and also that the card is free for the  life-time. I am a very emphatic individual and lent my ears to Ruchi’s full flow of convincing arguments.

Ruchi’s Point of View: - Need a credit card as it offers 5-10% on the purchases and the card is free

Rathin’s response: - You already own a debit card which you can use. Despite the discounts, you will end up spending much more than the budget decided. I tried reasoning it out that one will spend more to buy the products which were not needed in the first place.

That set me thinking – how can one reduce spending on unnecessary items.  Solution will be to go back to the roots – Spend in cash. The reader will think that I am crazy to propagate cash economy in the jet and plastic era!

Either debit card or a credit card - If the amount straightaway goes through a bank transfer one doesn’t bother too much. Just take an example – If I have Rs.30000/- in my account and I see a UCB shirt worth 1500/-, I won’t think twice and immediately swipe my card. On other hand, if I withdraw Rs. 5000/- for my personal monthly expenses every month like pocket money and then see this shirt, chances are that I will surely think twice or more.

Try this once.

For reducing your monthly expenditure, withdraw Rs.10000/- (you can choose your limit – but try to keep it to the bare minimum for expenses on fuel, grocery, internet, power, telephone, child education, restaurants etc.) and only spend within this amount. Forget that you have an ATM / debit card (rather just keep it away from you in a safe). You can’t withdraw more than the initially withdrawn amount. So that will make you evaluate your purchases before you pay for it finally. I believe, if you follow this regularly, you will have a better control over the expenses. You will score brownie points if you can save something from the withdrawn amount and put it in the piggy bank like the old times when we were kids.

I gave this pitch to Ruchi. She might implement it in the next financial year. You may also do so…Worth a try! However, I am not going to follow my own advice, as I am in the splurging mode!

Specialist Restaurants IPO - Whats so special on the menu?

We, Generation-next urbanites are always eager to hang out and looking out for various occasions to dine out – be it pubs, theme and upscale restaurants to satisfy our tasting buds. In midst of that we now have a company running fine dine restaurants –Mainland China, Machan, Oh! Calcutta…So just like in US which had TACO Bells, Dunkin Donuts, McDonalds etc. we too now have the companies operating restaurants.

The restaurant business is pretty simple to understand and is usually cash flow positive. This was the primary reason of evaluating whether to invest in Specialty Restaurants owning these above brands of Mainland China, Machan, and Oh! Calcutta. The company currently runs 69 restaurants and 13 confectionary stores across 22 cities in India. Mainland China, its biggest brand, accounts for 60.3% of its revenues, followed by Oh! Calcutta at 12.3%.

The company is planning to raise Rs.182 crores
•FY 11 Sales – Rs. 173 crores
•Operating Profit –Rs.38 crores (OPM of 22%)
•NPM - 9%
•Debt / equity -0.28x
•ROE – 17%
•Zero dividend

Looking at above why won’t I invest:
PE is ~40x – Given the company is only growing 40% CAGR since 5 years, it doesn’t give any significant bargain. Also, the ROE is just 17%. There are other companies available on exchanges which has +20% ROE, consistent dividend payers but still available at the cheaper rates. Also, the company said it wants to focus more Company Owned Company operated stores (COCO) instead of franshise operations. This won’t be helpful for the company as it has to divert money in expensive real estate in metros and Tier 1 cities. So 40% growth in the long-run looks somewhat far-fetched.
Yes, one may miss out on listing gains (don’t know if there will be any) but one has to know the difference between investment and speculation. So parting with the quote of Ben Graham - "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

As usual, Guinea Pigs, pl do your own research

Traits of a good investor

•Is truthful to himself and knows his limitations
•Is able to say that I don’t know this. So he won’t invest in these regardless it might offer bountiful opportunities
•Is a good reader
•Is humble in success
•Is disciplined – follows his investing process regardless of the outcome
•Is always eager to learn new techniques of investments and tries to replicate good ones in his own investment strategies
•Is mostly frugal – spends wisely
•Is realistic in achieving the targeted returns
•Is a good capital allocator
•Understands businesses, competition well

Will try to find more and put it across…

Macro Picture - Should We spend time on it?

What is coming off in investment these days?
•Europe crisis looming ahead - Greeks on verge of default.
•Interest rates still high due to inflation

Where are we heading towards? What will happen to our investments? Why are we worrying about the macro factors?

I wouldn’t have but it is necessary to take the holistic view to check if everything is alright in the global markets especially after reading Jim Rogers. But one must not completely look at the macro picture. If the economy is not doing well, then majority of the companies will not do well. This is the time where the good companies are available cheap and you can start investing in them. Yes, everything won’t be hunky-dory and it will require tremendous amount of patience to get adequate returns. But as Warren Buffet said, time is a good friend of good businesses while it is a foe for bad businesses.

Happy investing!

How to value company with negative cash flows:

First of all why would you like to select the company having negative cash flows consistently (here I am assuming consistently means for duration of 3-5 years). It’s better to ignore them.

However, we can segregate them in 2 categories:

The newly established companies like Linked in, which does not have positive cash flows

The perennial loss making company like MTNL which has negative cash flows due to high fixed cost and are unable to recover them

Valuation will differ depending on the above types:

For the first type of company, ideally DCF should be used, but it is difficult to look in the future. Another thing which can be done is you estimate eps for next few years and multiply it by PE (general estimate), and then you discount the price by the discounting rate (a hurdle rate).

Other option is just valuing the company on tangible assets

2nd type of company:

No point of valuing it :) I wouldn’t. However if you want, you can value it on basis of liquidation value

It requires tremendous patience to get the correct appraisal from the market for these companies

Investors club? Do we need it?

Of late in my office, we have started investors club. Investors club is a group of people who meet every fortnight and speak about a stock picks i.e. why would you invest in this company. This is really great as it helps us in knowing best stocks which will yield better returns for the long term.

However, when there were expectations setting, one of the common trends which were observed; that most attendees were clueless about investing in stocks and directly wanted to invest in the stock markets. Consequently, first session was kept on the basics of various market instruments where individuals can invest. However, just because it was investment club, members still wanted to invest directly in the markets. Some wanted tips without putting in efforts.

I can understand that there is definitely a thrill of directly investing in markets, but there has to be learning process involved.

During the session, I suggested two books: The Warren Buffet Way and One up on the Wall Street as a starting point of understanding stocks and companies. After this session, one and half months have passed and in the next session when asked who has read the book – no one replied yes. None of them has even bought the books, let alone reading them. If this is the case, then how in the hell are they going to read the annual reports which is a most-read document for investing in stocks? Ideally one has to spend 5-6 hours in a week to analyze the stock.

In a nutshell, they want to earn high returns without dedicating themselves for the grinding work. Well, one can still generate benchmark returns, but one has to accept that he can’t devote time on this and there are other experts who can do that for him. Here comes the mutual fund advantage, where the person who doesn’t want to devote much time on research. So he has to be truthful with himself and assess his priorities before diving directly in the stock markets. Yes, this will be unexciting but it frees him to do other stuff which interests him. Also, it provides him the discipline to invest regularly in all market cycles which will ultimately result in creation of wealth over the long term.

Also, one thing which was missed in expectation setting session was that how much one saves of his total income. If the person is not able to save even 10% of this total income, then it is meaningless to speak about investing in front of him. What is he going to invest if he is spending every penny? Is there even a point to explaining him about investing and wasting one’s time…

These are solely authors’ views.

Volatility Woes

It was the best of the times, and it was the worst of the time! Volatility in the current choppy markets signifies both worst and best of times. With all the proponents of MPT (Modern portfolio theory with the Betas and Alphas) who really abhor the term citing it as "Risk" will advocate us to stay away from the markets. However, like all value investors, believe volatility helps people who help themselves. Long term investors who have done their homework well will find some discounts, albeit not with higher margin of safety, but high enough to start building their starter positions.

There are very few stocks which are available at good discounts. One of this is Balmer Lawrie &Co. which has one of the best balance sheets among the Indian corporates, offering a 4% dividend yield, and has EBITDA of Rs.110 cr at Mcap of Rs. 900 cr without any debt and cash of Rs. 250 cr. You will find this kind of value buys in market turmoil, but getting these at the current market levels will help to build a strong portfolio of companies.

Disclaimer: Guinea Pigs should try to do their own analysis to make an informed decision. I have a postion in this stock

Inflation woes

Since I am inspired by all contrarian thinkers, I wanted to check out if there is any contrary thing moving inside my head (well only then I can be called as contrarian investor :).

Well, most of us believe that inflation is which makes your rock investment look like a pinch of salt. Yes of course, we have to look at the real returns. 2 months before I purchased a flat TV from LG for Rs.6000/-. 10 years before, the same TV with all the funny technologies like Fuzzy logic, QFT (qudra point focus) etc made strong waves in Indian electronic sector. The cost was somewhere around Rs. 21,000. So its not inflation but deflation in this market. But over the years new technologies are invented. At present we have HDTV /flat paneled TV in which cost atleast Rs. 30,000/-.

What I mean to say, its not inflation which are causing problems but our increased desire for luxury and comfort. What's in the TV. It is the same idiot box which was 10 years ago, and it is going to show same stupid sops. Will Tulsi / Parvati cry more on HDTV's? No...But yes then we want to see tears more clearly.

Great blogs and sites to follow for investing

valueinvestorindia.blogspot.com
www.fwallstreet.com
www.lmcm.com/differentiated_thinking/tlf_archive.aspx
www.capitalideasonline.com



will create a comprehensive list some time later....

Advertising Investments

I am currently going across various websites to collect the PE/VC investment deals, When analyzing these deals it is quite surprising to see that IT boom is not over as yet. It is still in disguise of Advertising boom. May be I am reacting too much and have no doubt that Google is excellent innovation based company but it is primarily a Advertising company.

So when the deals were analyzed, one might say that all these social networking websites are getting another round of funding. I was just wondering is there a real need to invest this hard earned capital in "Social Networking" / dating websites which earns majority of revenues from Advertisements?

So I am just trying to understand the difference between 2 social networking dating websites including their competitive advantages except the ad-spaces, inventories and other so-called efficiencies. There has to be some limit in senseless investments. This shows people have now become too greedy to explore various avenues and going in for some short term quick gains.

There are several social economic businesses lying around where there is still paucity of funds. I am not saying to invest in businesses with bad economics but essentially investments are required in healthcare and other tangible businesses which add significant value to the society.

the whims and fancies of a sell side analyst

who is the sell side analyst
what motivates them to publish reports
why is there a target price, and how is the period determined
why do they want to tell about the stock to the general public, if they have really good pics then they should be just telling their clients and not the whole world

do i want to become a sell side analyst who has freedom to pick up the stocks that he likes or is he just working for another broker who wants a report (with beautiful graphs and just some information so that the clients would fall in love of the stock, and buy the stocks, and then he will earn the brokerage (brokerages are hardly money management businesses, and if they have PMS. it is just restricted to HNI' and have different analysts (often a buy side) or a private client group analysts but then didn't graham worked for a brokerage firm, but i feel he was given a leeway for selecting his own stocks and bonds, and then suggesting the clients to take the decision,

does he need to write so many reports (if the client really wanted to read those he would be doing his own investing and making his own calls, then why does he needs the analyst to help him out. best thing for him to give funds to Mutual funds and PMS's then...i still cant figure out why are so many reports of economics, GDP, Industry report that stretch to so many pages (mostly greater than 40-200 pages). As a retail investor do i time to look at these reports. For the brokerages research is always a cost center, mostly an advertising gimmick.

So my question is do we really need so lengthy reports (which the individual investor seldom reads) for making a right investment decisions? and going one step further do we really need a sell side analyst who prepares the reports and increases the brokerage cost for the individual investor. We really need Discount Brokers in India to escape these high costs then!!

Lynch guide to Indian Stocks-2

Coming back from my Earlier post regarding "Lynch's guide to Indian Stocks", I have missed something that Mr. Lynch always told that just because stock has gained in price does not mean that the stock is expensive and is not a reason of not investing, and vice-versa. He advised to look into Walmart stock (WMT), where the stock has generated promising returns for its shareholders y/y consistently.

I had assumed that after PE fund invest in the company, they reap major benefits than the shareholders who have participated in an IPO. I have been proven wrong by this scenario.

Take an example of Bharti Airtel Ltd.
-Warburg Pincus had invested $292M in 1999 for ~19% stake, and exiting from the investment in 2005 at $1616M, making cool profit of 5.5 times in the span of 5-6 years, which is damn good

-Now enter the retail long-term shareholders at Rs.45 via IPO at P/BV of ~2 (the company was not making profit during that time). If the investor had tremendous faith in the fundamentals and had stick around with the company for another 6 years (same as the PE fellow), then the CMP of ~534 as on Oct08, when the markets crashed to the new lows, the stock would have generated staggering return of 12 times-more than Warburg Pincus returns.

Of course this is a hind sight bias, but I have to admit my original these is incorrect and Mr. Lynch is 100% right for this part.

Emperor's New Clothes...

Emperor's New Clothes...

Come a rally, all the analysts in the market are saying that its a bear rally, some have even gone ahead to say that the worst is over. So I am just pondering over the analysts calls. Most of the analyst have specialized knowledge in particular domain, lets say, a Pharma analyst. He has to do the most important thing of keeping tabs of the pharma companies he is covering, and from this he gazes into a crystal ball to predict the earnings. I can understand if the prediction levels are generalized but basically all the analyst will try to predict each line-item in the financial statements and then come up with the target price using some of the most sophisticated valuation tool-THE DCF. If you aspire to become an analyst some time in the future, you have to learn the DCF modeling, only then you may treat yourself as an analyst. Coming back to my story of predicting earnings, isnt it futile to predict earnings as its a pretty difficult exercise to do.

Graham insisted to choose "precaution" than "prediction". But then who wants to follow simple techniques, rather analyst try to challenge their intellect by predicting the earnings. To make the matter worst, they try to predict changes in the earnings quarter by quarter, and the statistics tells us that analyst forecast is nothing more than throwing darts blindly. Good analysts try to forsee the company in the ways that even the layman will understand. They see the companies growth by building the decision trees; what is the probability that the company will grow earnings at x% or y%. If the odds provide favorable margin of safety, they will recommend the stock despite the growth rates being below the analysts estimates. And to be frank majority of the analysts know that their forecasting abilities are nothing more than throwing some intelligent numbers, but who will say that the emperor is wearing nothing!!!

Market outlook 0809

Market outlook 0809----Post by Parag M Shah (CEO-Icare Services)

World economy and emerging markets in particular have had a spectacular bull run over the past 5-6 years. Moreover it had been a bull run across all of the asset classes – crude, metals, stocks, gold. As with all bull runs industries went from undercapacity, ramping up for growth to overcapacity and fears of recession, scaling down of growth plans. To compound the problem of recession and market downturn are the liquidity concerns looming over the world economy following sub-prime blowout.

Standing a short distance away from the business cycle and taking a broader, wider and longer look, one can see that the fundamental growth in emerging countries, India in particular, have not come to a halt. Salaries and incomes of Indian middle class have risen by a multiple and this will result in robust internal consumption. Long term infrastructure projects (power, ports, roads) are all well financed and those businesses will act as a steadying influence on the market. These projects are mostly financed via equity route and not via debt route which ensures good financial health of the company.

There is more uncertainty, rumors and fear than concrete downturn in the market. The Indian central bank (RBI) has been very proactive, cautious and rational. It has done a fantastic job. When the equity market was gung ho it was cautious, on fear of runaway inflation it clamped down on the liquidity in the market and now when pessimism is at its peak it has started to infuse money into the market. Fear in public mind has been compounded by the relentless media coverage and enlarging each and every news into national disasters. Comparing this downturn with 1929 recession at every chance they can, they have forgotten that unlike 1929, central banks and central governments world over are monitoring the markets and are not shy in trying to interfere where needed. This is not to say that situation is not bad, but we have become used to overreacting – be it being over optimistic or over pessimistic. To give you a perspective, during the 1990-91 recession IBM had laid off over 114000 people and GE during its restructuring phase had laid of over 250000 people. In contrast, if some investment bank announces to lay off 150-1000 people it becomes the central news.

One of the ways preferred by economists of infusing money in a recessionary and risk averse market has been through infrastructure projects. Pessimism will lead to better, sharper focus and tightening of belts. India has over 7 mega power projects under implementation phase. Over 7 major Ports have been commissioned. With time as the infra projects gain momentum the economy will move back into top gear. The projects will ensure consumption of metals, cement etc. IT has always been a cornerstone of Indian growth story. Everyone is afraid of slowdown in IT spending and slow down in the business outsourcing segment as well. The reverse could also hold true. To increase profitability US and European businesses could resort to more business outsourcing. Notwithstanding the doomsayers, India stands on the threshold of steady growth over a period of next 3-4 years. The troubles predicted are the kind of opportunities businesses and businessmen have always been looking forward to.

One only needs to keep ones head when all around them are losing theirs. The venerable Warren Buffett who has over 40 years of experience of economic cycles and upheavals is investing and buying because this is the right time to build businesses, investments, customer loyalty and business relations.

Tryst with equities

My tryst with Equities.

Well, it was like love, I never knew when I fell in love with this subject. It actually started, when I was in 7^th or 8^th standard, there used to be some news on markets & Dollars. I always wanted to know whether Sensex moved up or down to impress my Dad, without ever realizing what did sensex mean. That was my first taste of the financial markets.

After SSC, I shifted to Mumbai; I lived with my maternal grandfather. He owned many Bluechip stocks, mostly of original prices. What he wanted was dividend from that stock. I started questioning him the basic of stocks and its relation with the dividends. He told me that just as you become a proprietor you own 100% shares, and when you own a share it might have different share of business ownership.

During that time, the markets had suddenly shot up and KP had made name of himself. I was growing popular amongst my friends as I boasted the name of Infosys and also prices of K-10 stocks. But then, the dotcom bubble busted (I literally came to know the meaning of “Bubble” in stock terms; my eyes popped out when I saw all how these stocks were dumped and the prices being hammered mercilessly !!). My grandpa lost some of his investment, not of the earlier stocks but all the stocks which he had bought on the Broker’s recommendations (I still remember the scrip’s name-Websity Infosys-The broker promised that this would become the next Infosys, who cared what the company does, whether it’s profitable, and at what price it’s available at?). But who wanted to miss out the bus in IT. Even my grandpa, who was quite conservative and asked questions on reserves and profits, became greedy.

This was the first time when I started to know about equity research. It was my 2^nd year of graduation. I came across the stock, Infosys, which had become so popular in the entire neighborhood. I came to know that great companies are made by great entrepreneurs like Narayanan Murthy and Azim Premji.

I read the book written by Gita Piramal, “Business Maharajas” which helped to understand the mechanics of good management. Also, during this time I came across the book “One up on the Wall Street by Peter Lynch”. At this point, I asked myself whether I can have a career in Equity Research. But I never knew what qualifications did the equity analyst have? What I knew that Peter Lynch had a degree in management, so I decided to pursue the same.

I learnt more about compounding, IRR, NPV and stuff during these days. But most importantly I learnt more about Warren Buffet, his ways of selecting the companies and most importantly basics of investing that, “Value of an asset will determine its return”.

In search of value I undertook a job in a research KPO, but it was a process oriented outfit where I came to know more about sector specific things, and earnings models. I believe even though in equity research there is compulsion in predicting the earnings, it’s always hard to do practically.

Equity analysis is quite challenging field and it’s the markets alone which decides whether you are right or wrong over the period of time. One cannot give reasons of team not performing, systems not working as the person alone is responsible for the results.

(Markets are quite irrational for short term, but in the longer run price always tend to follow value).

It’s the subject where one cannot learn single-handedly. Warren Buffet learnt from Ben Graham (his mentor, I still need to find one like him) by working there. He evolved as an investor over the period of time. He made equity research a career which is a mean to achieve an end i.e. to become the successful investor by finding good undervalued securities. So, my motive is also to become a successful investor by applying the sound equity research process, making mistakes (of course, quite sparingly) and earning decent returns……

By the Power of Greyskull-

Alas! I came back to see my blog after a long hiatus of a year just to see that there are no comments on my write-up though a small paragraph.

Well! Thanks to the buoyant markets and the amazing bull-run, that the people are just not interested in my claim of 9.5% risk free (not tax free) interest rates (that too have decline to 8.5%).

It seems that people have forgotten what the word “gravity”. What goes up must come down is only applicable in physics.

With Reliance Power IPO getting oversubscribed within 7 minutes on the issue opening day. It’s the buzzword at all over the work place, that Reliance will make you wealthy. Sure, it has made people wealthy, but at that time the projects were already in the implementation stages (refinery basically). Today, I cant see any tangible assets on the balance sheets of RNRL or even RPL (Power). AD has lots of power in marketing public issues (Thanks to the training in the undivided RIL wherein he was handling finance).

Are we looking at the earnings picture? Balance sheets/ cash flows…of the company. Well, the technicals have really outsmarted the fundamentals. Who cares???

Lets hear...Mr. Buffets adage...."when the tide goes back.....we will see who is swimming naked"

Investing minus value to debt plus investing

so, is the value investing a "in-thing" in the Indian markets when the so called SENSEX is at frenzy and really touching new highs each day..so what would Oracle of Omaha consider during this " ERA of nerdness". Is it an viable option to forget all value investing in this hyped markets and not to forget our very own "India story". We, the people are so excited to see the sopisticated statistical prophecy of >8.5% growth in the GDP levels. But I am thoroughly dejected when the recent numbers showed a positive growth signs of 9.2% sequential growth. Believe me..its better to eliminate value from investing and start just investing in the so forgotten the risk free debt market which is also able to yield the same returns as the GDP levels..

Any say..please post
Thanks
Rathin