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!!!

Lynch's guide to Indian Stocks

Can we have Peter Lynch's sort of growth companies in India?

Peter lynch the legendary investor is often renowned for picking up stocks which had great scalable model, most preferably retailers like WMT, NKE, Service Corporation and etc. This was in the time when there were dearth of VC and PE's; the companies directly approached the stock markets and expanded. Those who grew conservatively taking into conderation the managerial depth, proper cost control, strengthening margins and cautious growth wihout taking debt load did give multibaggers to him. Not all of them were multibaggers; some collapsed and some gave superlative returns.

As a lay investor, I was searching for some good stock pics in simple to understand industries. We have very few companies in retail like Pantaloon Retail, Shoppers Stop, Vishal Retail, Koutons. For me theie debt levels are really too high, and in the midst of the economic slowdown they are not managed to post positive same-store growth. In that case, where the organized retail is expected to grow double-digits for the next few years, this is giving negative signals.

Another advantage Mr. Lynch had was absence of financial instruments and so-called "structured deals" which hid the true accounts of the companies. I am not taking anything away from him. He is one of the best stock pickers history has ever known.

Next post...I will continue on this giving the facts of the returns made by the investor the company directly entering the primary markets vs. company funded initially by PE/VC and then going for primary markets.

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.

Sen-crash

I now know the secret of Warren Buffet wins. Keeping patience in this market is really a key to investing. The difference between the analyst (so called) and the investor is that the investor believes in this market as an opportunity to buy and remains calm even when the markets still fall.

What I really need to do is to learn self-control. Even though Warren Buffet says that, when you buy, please see that markets are turned off for ten years, but here I am checking the prices every twenty minutes….

God…I need to maintain my composure…

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……

Flashback-Date

Oops I did it again! I ejected, she started to laugh. I just wanted that to happen. Now it seemed that it shall be a really enjoyable evening today.

“Hey, its already 8 O clock, and we are still here, chalo take a seat”, I commanded like a army husband but she agreed dutifully.

Just the touch of her cold hand on my shoulder sent me shivers down the spine. I started to get exited….Is this the day I have waited for, which I thought always ever since she left me….I just pondered.

I kicked the machine and it started without throwing a tantrum.

“I thought, you still drive a SUNNY!

“Hmm..well, I actually sold it off”, I said dismally ”anyways it wasn’t giving any great milage”

“Smart decision”. It looked like she beamed by this sentence. “But, you could have bought ACTIVA …I think you told me that it’s the best vehicle around!

“ You still remember that talk”.

“Of course, why should I forget all the things?”

“But, you forgot me” I broke the ice, giving way for complete silence

There seemed to be only one sound we could listen-wind passing by feverishly

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"