My Buddy called Compounding

Compounding…

…is my happy space.

When I’m having a difficult market day,…

…I open my calculator…

…and start…

…compounding.

My friend clears all doubts in a flash.

It’s easy to compound on the calc.

In German they’d say “Pippifax”.

The younger tribe in the English-speaking world would say easy peasy…

…(lemon squeasy).

Let me run you through it.

Let’s say you wish to calculate an end amount after 25 years of compounding @ 9 % per annum.

Let z be the initial amount (invested).

The calculation is z * 1.09 ^25.

That’s it.

You don’t have to punch in 25 lines. It’s 1 line.

What if you went wrong on the 18th line?

So 1 line, ok? That’s all.

What’s ^ ?

This symbol stands for “to the power of”.

On your calculator, look for the y to power of x key, and then…

…punch in z * 1.09 (now press y to the power of x)[and then punch in 25].

What does such an exercise do for me?

Meaning, why does this exercise ooze endorphins?

Let’s say I’m investing in sound companies, with zero or very little debt, diligent and shareholder-friendly managements, and into a versatile product profile, looking like existing long into the future, basically meaning that I’m sound on fundamentals.

Let’s say that the stock is down owing to some TDH (TomDicK&Harry) reason, since that’s all it’s taking for a stock to plunge since the beginning of 2018.

I have no control over why this stock is falling.

Because of my small entry quantum strategy, I invest more as this fundamentally sound stock falls.

However, nth re-entry demands some reassurance, and that is given en-masse by the accompanying compounding exercise.

At the back of my mind I know that my money is safe, since fundamentals are crystal clear. At the front-end, Mr. Compounding’s reassurance allows me to pull the trigger.

Let’s run through a one-shot compounding exercise.

How much would a million invested be worth in thirty years, @ 11% per annum compounded.

That’s 1 * 1.11^30 = almost 23 million, that’s a 2300% return in 30 years, or 75%+ per annum non-compounded!

Now let’s say that my stock selection is above average. Let’s assume it is good enough to make 15% per annum compounded, over 30 years.

What’s the million worth now?

1 * 1.15^30 = about 66 million, whoahhh, a 6600% return in 30 years, or 220% per annum non-compounded.

Let’s say I’m really good, perhaps not in the RJ or the WB category, but let’s assume I’m in my own category, calling it the UN category. Let’s further assume that my investment strategy is good enough to yield 20% per annum compounded.

Ya. What’s happened to the million?

1 * 1.20^30 = about 237 million…!! 23700% in 30 years, or 790% per annum non-compounded…

…is out of most ballparks!!!

How can something like this be possible?

It’s called “The Power of Compounding”…,

…most famously so by Mr. Warren Buffett himself.

Try it out!

Pickle your surplus into investment with fundamentally sound strategy.

Sit tight.

Lo, and behold.

🙂

Busy Times

Market falls are busy times. 

No, we’re not busy whining. 

We’re busy buying.

Are we not afraid?

That the crack might deepen?

That it might go down to zero?

No.

We’re not afraid of this scenario. 

Meaning?

Meaning that even though such a scenario cannot be ruled out…

Huh!?

Yeah, it can’t be ruled out. With trade wars and back to back black swans waiting to strike, theoretically, the bottom is zero.

And you’re not afraid?

No.

Why?

Because I buy into fundamentally sound businesses…

…zero debt…

…great 5 year numbers…

…sometimes, great ten year numbers…

…and I buy with considerable margin of safety.

Still, one is normally always afraid, right?

Wrong. A small entry quantum strategy kicks out all remnant fear.

How?

This strategy leaves me liquid. Let it go down to zero. I’ll still have liquidity to buy.

And that which you’re buying…

…is sound, yes. If I buy something sound, it will yield returns. It’s like agriculture. Crops grow in good soil. They don’t grow well in bad soil. I make sure that I choose excellent soil.

How does one do that?

Due diligence. Period.

With all the scams and frauds going on…

Well, I look long and hard for shareholder-friendly managements. Representable salaries, willingness to share, largesse, debt-averseness, intelligence, business savvy, the list goes on.

What if you land up with a fraud management?

Solid research will make you avoid scamsters. I search the internet thoroughly for any kind of smoke. Crooks leave a trail, and one is able to catch their online trail pretty easily. 

Alone online?

Second recourse are annual reports. They reveal a lot. I don’t invest in a company without having a thorough look into its annual reports. I look at CSR, the director’s report, skin in the game, balance sheets, profit and loss statements, cash-flow, special items, what have you.

What if you still land up with a fraud?

After I know I’ve landed up with a fraud management, I would look to exit at the next market high. 

What if your holding is wiped out till then?

If it’s wiped out, I have many other holdings to lean on, and don’t forget the liquidity that is yet to flow into honest managements.

So you’re not afraid of the loss?

There is some risk one has to take. Here, it is the risk of being wrong. The good thing is, once I know that I’m wrong, I won’t double up on my wrong call. I’ll get busy elsewhere and look to exit from my wrong call with as little damage as possible, perhaps even in profit.

Profit?

You forget, I like to buy with margin of safety, and you’d be surprised at what people are willing to pay at market highs. 

I see, well then, happy investing!

Thanks! 🙂

What to do with a racing mind? 

Harness it. 

Or, it’ll get you. 

How? 

It won’t stop racing till it finds something of interest. 

Then, it’ll hook on… 

… without caring too much… 

… whether that something’s good or bad.

At that stage, you might not be able to control your mind. 

Control it when it’s controllable. 

Before it’s latched on. 

Before the flow has started. 

Define for yourself the area of flow. 

Actively make your mind connect. 

Regulate your flow. 

Enjoy the harnessed potential of your mind. 

Let’s observe a practical example in motion. 

I’ve actively latched on my mind, among other things, to the stock market. 

The market has many aspects.

I need to take into account most of these, if not all, while picking a stock. 

Sure. 

However, some aspects stand out for me. 

To these aspects I latch on my mind very thoroughly. 

I like it to get a feel for honesty. 

While I’m screening a stock, my racing mind either picks honesty or it doesn’t. 

If it hasn’t smelt and felt honesty after two days of studying the stock, I just let the stock go. 

Some are big on numbers. Some are big on charts. Sure, I look at both. Honesty delivers the final decision for me, though, as in, the crucial blow. 

Instead of resorting to all kinds of nonsense, the racing mind can be taught to become one’s greatest asset. 

It Boils Down to Good Governance 

India’s at the Olympics and all. 

We’ve had near misses. 

Sure. 

Athletes qualified fair and square. 

Not a word against India’s squad. 

They’re really trying very hard. One of our gymnasts has even risked her life by vaulting a successful Produnova. Rio-presence is achievement-based, not nepotism-based. It’s tough. It’s incorruptibly monitored. Footfall is highest ever. Indians have made the international cut in many events, like never before. Finishes are all decent. A few finishes are very, very decent, missing the podium by decimals. Our athletes deserve some podium finishes. 

However, what are 80 Indian officials doing in Rio, accompanying a squad of 119? Only a few of these 80 are allowed arena access. The rest are what? Long live the exchequer? We build up the exchequer by paying our taxes. We’d like to see its contents used judiciously. 

Let’s cast a glance at how our officials are conducting themselves at Rio. Actually, we’ll leave it at the official warning they’ve just received to behave themselves. SHAME SHAME. 

Is this good governance? 

NO. 

Do our officials deserve a podium finish?  

No. 

We’ll have to spend where it counts, on facilities, proper diets and trained physios. We’ll have to save on useless paraphernalia. Red-tape be damned. We’ll have to embrace good governance. We do want podium finishes, don’t we?

One looks up to one’s peers. If they’re corrupt, out of shape and / or out of whack, even the best athlete suffers a psychological downer. Our officials will need to trim down and get their acts together. All of them will need to behave like exemplary ambassadors of the country. They will need to give their wards that psychological boost. Coaches will themselves need to be in shape, to set good examples. Podium finishes will then be around the corner. 

Cut to stock-selection. 

The biggest and first thing to look for is good governance. 

Just cut all the nonsense out of the way, first up, because where you find good governance, you won’t find nonsense. 

It all boils down to good governance. 

What is an Antifragile approach to Equity?

Taleb’s term “antifragile” is here to stay.

If my understanding is correct, an asset class that shows more upside than downside upon the onset of shock in this age of shocks – is termed as antifragile.

So what’s going to happen to us Equity people?

Is Equity a fragile asset class?

Let’s turn above question upon its head.

What about our approach?

Yes, our approach can make Equity antifragile for us.

We don’t need to pack our bags and switch to another asset class.

We just approach Equity in an antifragile fashion. Period.

Well, aren’t we already? Margin of safety and all that.

Sure. We’ll just refine what we’ve already got, add a bit of stuff, and come out with the antifragile strategy.

So, quality.

Management.

Applicability to the times.

Scalability.

Value.

Fundamentals.

Blah blah blah.

You’ve done all your research.

You’ve found a plum stock.

You’re getting margin of safety.

Lovely.

What’s missing?

Entry.

Right.

You don’t enter with a bang.

You enter at various times, again and again, in small quanta.

What are these times?

You enter in the aftermath of shocks.

There will be many shocks.

This is the age of shocks.

You enter when the stock is at its antifragile-most. For that time period. It is showing maximal upside. Minimal downside. Fundamentals are plum. Shock’s beaten it down. You enter, slightly. Put yourself in a position to enter many, many times, over many years, upon shock after shock. This automatically means that entry quantum is small. This also means you’re doing an SIP where the S stands for your own system (with the I being for investment and the P for plan).

Now let’s fine-fine-tune.

Don’t put more than 0.5% of your networth into any one stock, ever. Adjust this figure for yourself. Then adjust entry quantum for yourself.

Don’t enter into more than 20-30 stocks. Again, adjust to comfort level.

Remain doable.

If you’re full up, and something comes along which you need to enter at all costs, discard a stock you’re liking the least.

Have your focus-diversified portfolio (FDP) going on the side, apart from Equity.

Congratulations, you just made Equity antifragile for yourself.

🙂

A Secret Ingredient for Equity-People

Racking your brain about how to make Equity work?

Don’t.

Two words work here. 

Be passive. 

Learn to sit. 

Let’s say you’ve gotten all your basics right.

Company is great. Management is sound. Multiple is low. Debt is nil. Model looks promising. Yield is note-worthy. Technicals allow entry, blah blah blah…

Then what?

Yeah, be still. Learn to sit. 

What are the prequisites for sitting?

You need to not need the stash you’ve put in, at least for a long while. 

You also need to get your investment out of your primary focus. 

For that, your day needs to be full…of other main-frame activities. 

Make Equity a bonus for yourself, not a main-course. That’s how it’ll work for you. That’s the secret ingredient. 

How to… … is stated above.

Why to? Aha.

For it to work, fine, but why the sleeping partner approach?

Human capital needs time to show results. 

That’s why you’re in Equity, right, for human capital? The rest is ordinary stuff, but human capital is irreplaceable. Human capital works around inflation. One doesn’t need to say anything more. 

You’ve got your work all cut out.

Get going, what are you waiting for? 

Due Diligence Snapshot – IL&FS Investment Managers Ltd. (IIML) – Jan 14 2013

Price – Rs. 23.85 per share ; Market Cap – 499 Cr (small-cap, fell from being a mid-cap); Equity – 41.76 Cr; Face Value – Rs. 2.00; Pledging – Nil; Promoters – IL&FS; Key Persons – Dr. Archana Hingorani (CEO), Mr. Shahzad Dalal (vice-chairman) & Mr. Mark Silgardo (chief managing partner) – all three have vast experience in Finance; Field – Private Equity Fund managers in India (oldest), many joint venture partnerships; Average Volume – around 1 L+ per day on NSE.

Earnings Per Share (on a trailing 12 month basis) – 3.55

Price to Earnings Ratio (thus, also trailing) – 6.7 (no point comparing this to an industry average, since IIML has a unique business model)

Debt : Equity Ratio – 0.35 (five-year average is 0.1); Current Ratio – 1.05

Dividend Yield – 4.7% (!)

Price to Book Value Ratio – 2.1; Price to Cashflow – 5.1; Price to Sales – 2.2

Profit After Tax Margin – 32.85% (!); Return on Networth – 35.24% (!)

Share-holding Pattern of IL&FS Investment Managers – Promoters (50.3%), Public (39.2%), Institutions (4.9%), Non-Institutional Corporate Bodies (5.5%). [The exact shareholding pattern of IL&FS itself is as follows – LIC 25.94%, ORIX Corporation Japan 23.59%, Abu Dhabi Investment Authority 11.35%, HDFC 10.74%, CBI 8.53%, SBI 7.14%, IL&FS Employees Welfare Trust 10.92%, Others 1.79%].

Technicals – IIML peaked in Jan ’08 at about Rs. 59.50 (adjusted for split), bottomed in October of the same year at Rs. 13.60, then peaked twice, at Rs. 56.44 (Sep ’09) and Rs. 54.50 (Aug ’10) respectively, in quick succession, with a relatively small drop in between these two interim high pivots. By December ’11, the scrip had fallen to a low pivot of Rs. 23.30 upon the general opinion that the company wasn’t coming out with new product-offerings anytime soon. A counter rally then drove the scrip to Rs. 32, which is also its 52-week high. During the end of December ’12, the scrip made it’s 52-week low of Rs. 23. People seem to have woken up to the fact that a 52-week low has been made, and the scrip has risen about 4 odd percentage points since then, upon heavier volume.

Comments – Company’s product profile and portfolio is impressive. No new capital is required for business expansion. Income is made from fund management fees and profit-sharing above designated profit cut-offs. Lots of redemptions are due in ’15, and the company needs to get new funds in under management by then. If those redemptions are done under profits, it will increase company profits too. Parag Parikh discusses IIML as a “heads I win (possibly a lot), tails I lose (but not much)” kind of investment opportunity. His investment call came during the mayhem of ’09. The scrip is 42%+ above his recommended price currently. What a fantastic call given by Mr. Parikh. Well done, Sir! Professor Sanjay Bakshi feels that IIML has a unique business model, where business can keep on expanding with hardly any input required. He feels, “that at a price, the stock of this company would be akin to acquiring a free lottery ticket”. I opine that the price referred to is the current market price. Before and after Mr. Parikh’s call, the company has continued to deliver spectacular returns. The company’s management is savvy and experienced. They made profitable exit calls in ’07, and fresh investments were made in ’08 and ’09, during big sell-offs. Thus, the management got the timing right. That’s big. I have no doubt that they’ll get new funds in under management after ’15, alone on the basis of their track record. Yeah, there’s still deep value at current market price. Not as deep as during ’08, or ’09, but deep enough.

Buy? – Fundamentals are too good to be ignored. They speak for themselves, and I’m not going to use any more time commenting on the fundamentals. Technicals show that volumes are up over the last 3 weeks. People seem to be lapping the scrip up at this 52-week low, and the buying pressure has made it rise around 4% over the last 3 weeks. If one has decided to buy, one could buy now, preferably under Rs. 24. The scrip seems to be coming out of the lower part of the base built recently. There is support around Rs. 23 levels, so downside could be limited under normal market conditions.

Disclaimer and Disclosure – Opinions given here are mine only, unless otherwise explicitly stated . You are free to build your own view on the stock. I hold a miniscule stake in IIML. Data / material used has been compiled from motilaloswal.com, moneycontrol.com, equitymaster.com, valuepickr.com, safalniveshak.com and from the company websites of IIML & IL&FS. Technicals have been gauged using Advanced GET 9.1 EoD Dashboard Edition. I bear no responsibility for any resulting loss, should you choose to invest in IIML.

Stock-Picking for Dummies – Welcome to the Triangle of Safety

Growth is not uniform – it is hap-hazard.

We need to accept this anomaly. It is a signature of the times we live in.

Growth happens in spurts, at unexpected times, in unexpected sectors.

What our economic studies do is that they pinpoint a large area where growth is happening. That’s all.

Inside that area – you got it – growth is hap-hazard.

To take advantage of growth, one can do many things. One such activity is to pick stocks.

For some, stock-picking is a science. For others. it is an art. Another part of the stock-picking population believes that it is a combination of both. There are people who write PhD theses on the subject, or even reference manuals. One can delve into the subject, and take it to the nth-level. On the other hand, one can (safely) approach the subject casually, using just one indicator (for example the price to earnings ratio [PE]) to pick stocks. Question is, how do we approach this topic in a safe cum lucrative manner in today’s times, especially when we are newbies, or dummies?

Before we plunge into the stock-picking formula for dummies that I’m just about to delineate, let me clarify that it’s absolutely normal to be a dummy at some stage and some field in life. There is nothing humiliating about it. Albert Einstein wasn’t at his Nobel-winning best in his early schooldays. It is rumoured that he lost a large chunk of his 1921 Nobel Prize money in the crash of ’29. Abraham Lincoln had huge problems getting elected, and lost several elections before finally becoming president of the US. Did Bill Gates complete college? Did Sachin Tendulkar finish school? Weren’t some of Steve Jobs’ other launches total losses? What about Sir Issac Newton? Didn’t I read somewhere that he lost really big in the markets, and subsequently prohibited anyone from mentioning the markets in his presence? On a personal note, I flunked a Physical Chemistry exam in college, and if you read some of my initial posts at Traderji.com, when I’d just entered the markets, you would realize what a dummy I was at investing. At that stage, I even thought that the National Stock Exchange was in Delhi!

Thing is, people – we don’t have to remain dummies. The human brain is the most sophisticated super-computer known to mankind. All of us are easily able to rise above the dummy stage in topics of our choice.

Enough said. If you’ve identified yourself as a dummy stock-picker, read on. Even if you are not a dummy stock-picker, please still read on. Words can be very powerful. You don’t know which word, phrase or sentence might trigger off what kind of catharsis inside of you. So please, read on.

We are going to take three vital pieces of information about a stock, and are going to imagine that these three pieces of information form a triangle. We are going to call this triangle the triangle of safety. At all given times, we want to remain inside this triangle. When we are inside the triangle, we can consider ourselves (relatively) safe. The moment we find ourselves outside the triangle, we are going to try and get back in. If we can’t, then the picked stock needs to go. Once it exits our portfolio, we look for another stock that functions from within the triangle of safety.

The first vital stat that we are going to work with is – you guessed it – the ubiquitous price to earnings ratio, or the PE ratio. If we’re buying into a stock, the PE ratio needs to be well under the sector average. Period. Let’s say that we’ve bought into a stock, and after a while the price increases, or the earnings decrease. Both these events will cause the PE ratio to rise, perhaps to a level where it is then above sector average. We are now positioned outside of our triangle of safety with regards to the stock. We’re happy with a price rise, because that gives us a profit. What we won’t be happy with is an earnings decrease. Earnings now need to increase to lower the PE ratio to well below sector average, and back into the triangle. If this doesn’t happen for a few quarters, we get rid of the stock, because it is delaying its entry back into our safety zone. We are not comfortable outside of our safety zone for too long, and we thus boot the stock out of our portfolio.

The second vital stat that we are going to work with is the debt to equity ratio (DER). We want to pick stocks that are poised to take maximum advantage of growth, whenever it happens. If a company’s debt is manageable, then interest payouts don’t wipe off a chunk of the profits, and the same profits can get directly translated into earnings per share. We want to pick companies that are able to keep their total debt at a manageable level, so that whenever growth occurs, the company is able to benefit from it fully. We would like the DER to be smaller than 1.0. Personally, I like to pick stocks where it is smaller than 0.5. In the bargain, I do lose out on some outperformers, since they have a higher DER than the level I maximally want to see in a stock. You can decide for yourself whether you want to function closer to 0.5 or to 1.0. Sometimes, we pick a stock, and all goes well for a while, and then suddenly the management decides to borrow big. The DER shoots up to outside of our triangle of safety. What is the management saying? By when are they going to repay their debt? Is it a matter of 4 to 6 quarters? Can you wait outside your safety zone for that long? If you can, then you need to see the DER most definitely decreasing after the stipulated period. If it doesn’t, for example because the company’s gone in for a debt-restructuring, then we can no longer bear to exist outside our triangle of safety any more, and we boot the stock out of our portfolio. If, on the other hand, the management stays true to its word, and manages to reduce the DER to below 1.0 (or 0.5) within the stipulated period, simultaneously pushing us back into our safety zone, well, then, we remain invested in the stock, provided that our two other vital stats are inside the triangle too.

The third vital stat that we are going to work with is the dividend yield (DY). We want to pick companies that pay out a dividend yield that is more than 2% per annum. Willingness to share substantial profits with the shareholder – that is a trait we want to see in the management we’re buying into. Let’s say we’ve picked a stock, and that in the first year the management pays out 3% per annum as dividend. In the second year, we are surprised to see no dividends coming our way, and the financial year ends with the stock yielding a paltry 0.5% as dividend. Well, then, we give the stock another year to get its DY back to 2% plus. If it does, putting us back into our triangle of safety, we stay invested, provided the other two vital stats are also positioned inside our safety zone. If the DY is not getting back to above 2%, we need to seriously have a look as to why the management is sharing less profits with the shareholders. If we don’t see excessive value being created for the shareholder in lieu of the missing dividend payout, we need to exit the stock, because we are getting uncomfortable outside our safety zone.

When we go about picking a stock for the long term as newbies, we want to buy into managements that are benevolent and shareholder-friendly, and perhaps a little risk-averse / conservative too. Managements that like to play on their own money practise this conservatism we are looking for. Let’s say that the company we are invested in hits a heavy growth phase. If there’s no debt to service, then it’ll grow much more than if there is debt to service. Do you see what’s happening here? Our vital stat number 2 is automatically making us buy into risk-averse managements heading companies that are poised to take maximum advantage of growth, whenever it occurs. We are also automatically buying into managements with largesse. Our third vital stat is ensuring that. This stat insinuates, that if the management creates extra value, a proportional extra value will be shared with the shareholder. That is exactly the kind of management we want – benevolent and shareholder-friendly. Our first vital stat ensures that we pick up the company at a time when others are ignoring the value at hand. Discovery has not happened yet, and when it does, the share price shall zoom. We are getting in well before discovery happens, because we buy when the PE is well below sector average.

Another point you need to take away from all this is the automation of our stop-loss. When we are outside our safety zone, our eyes are peeled. We are looking for signs that will confirm to us that we are poised to re-enter our triangle of safety. If these signs are not coming for a time-frame that is not bearable, we sell the stock. If we’ve sold at a loss, then this is an automatic stop-loss mechanism. Also, please note, that no matter how much profit we are making in a stock – if the stock still manages to stay within our triangle of safety, we don’t sell it. Thus, our system allows us to even capture multibaggers – safely. One more thing – we don’t need to bother with targets here either. If our heavily in-the-money stock doesn’t come back into our safety zone within our stipulated and bearable time-frame, we book full profits in that stock.

PHEW!

There we have it – the triangle of safety – a connection of the dots between our troika PE…DER…DY.

As you move beyond the dummy stage, you can discard this simplistic formula, and use something that suits your level of evolution in the field.

Till then, your triangle of safety will keep you safe. You might even make good money.

PE details are available in financial newspapers. DER and DY can be found on all leading equity websites, for all stocks that are listed.

Here’s wishing you peaceful and lucrative investing in 2013 and always!

Be safe! Money will follow! 🙂

So, … … , When’s Judgement Day?

The “fiscal cliff” thingie has come and gone…

Gone?

People, nothing’s gone.

If something is ailing, it needs to heal, right?

What is required for healing?

Remedial medicine, and time.

Let’s say we take the medicine out of the equation.

Now, what’s left is time.

Would the ailing entity heal, given lots of time, but no medicine?

If disease is not so widespread, and can be expunged over time, then yes, there would be healing, provided all disease-instigating factors are abstained from.

Hey, what exactly are we talking about?

It is no secret that most first-world economies are ailing.

Specifically, the US economy was supposed to be injected with healing measures, which were to take effect from the 1st of Jan., ’13. Financial healing would have meant austerity and a more subdued lifestyle. None of that seems to be happening now. The healing process has been deferred to another time in the future, or so it seems.

You see, people, no one wants austerity. The consumption story must go on…

So now, since the medicine’s been taken out of the equation, is there going to be any healing?

No. Disease-instigating lifestyles are still being followed. Savings are low. Debt with the objective of consumption is still high. How can there be any healing?

Under the circumstances, there can’t.

So, what’re we building up to?

We’re all clear about the fact that consumption makes the world go round. What is the hub of the world’s consumption story? The US. That part of the world which does save, and where there is real growth, well, that part rushes to be a part of the consumption story. It produces cheaply, to sell where there’s consumption, and it sells there expensively. Yeah, like this, healthy economies get dragged into an equation with ailing economies. Soon, the entanglement is so deep, that there’s no turning back for the healthy economy. It catches part of the ailment from the diseased economy. Slowly, non-performing assets of banks in such healthy economies start to grow. The disease is spreading.

Hold on, stay with me, we’re not there yet. Yeah, what are we building up to?

Healthy economies take time to get fully diseased. Here, savings are big, domestic manufacturing is on the rise, and there a healthy demographic dividend too. Buffers galore, the immune system of a healthy economy tries to fight the contagion for the longest time. As entanglement increases, though, buffers deplete, and health staggers. Non-performing assets of banks grow to disturbing levels.

That’s what we are looking out for, when we are invested in a healthy economy which has just started to ail. Needless to say, we pulled out our funds from all ailing economies long back. Our funds are definitely not going back to economies which refuse to take medicine, i.e. which don’t want to be healed. Now, the million dollar question is …

… what’s to be done with our funds in a healthy economy which has just started to become diseased due to unavoidable contagion?

Nothing for now. Watch your investments grow. Eventually, since no one is doing enough to stop the damage and the spread, big-time ailment signs will invariably appear in the currently “healthy” economy, signs that appeared a while back in currently ailing economies. Savings will be disappearing, manufacturing will start to go down, and bad-debt will increase. Define your own threshold level, and go into cash once this is crossed. You might not need to take such a step for many years in a row. Then again, you might need to take such a step sooner than you think, because the ailing mother-consumer economy is capable of pulling everyone down with it, if and when it collapses. And it just stopped taking its medicine…

Let’s get back to your funds. In the scenario that you’ve gone into cash because you weren’t confident about the economy you were invested in, well, what then?

Option 1 is to look for an emerging economy that gains your confidence, and to invest your funds there.

Not everyone is comfortable investing abroad. What if you want to remain in your own economy, which you have now classified as diseased. There’s good news for you. Even in a diseased economy, there are pockets of health. You need to become a part of such pockets, just after a bust. So, remain in cash after a high and till after a bust. Then, when there’s blood on the streets, put your money into companies with zero-debt, a healthy dividend-payout record and a sound, diligent and honest management. Yeah, at a time like that, Equity is an instrument of choice that, over time, will pull your funds out of the gloom and doom.

You’ve put your funds with honest and diligent human capital. The human capital element alone will fight the circumstances, and will rise above them. Then, you’ve entered at throwaway prices, when there was blood on the streets. Congrats, you’ve just set yourself up for huge profit-multiples in the future. And, the companies you’ve put your money with, well, every now and then, they shower a dividend upon you. This is your option 2. Just to share with you, this is my option of choice. I like being near my funds. This way, I can observe them more closely, and manage them properly. I suffer from a case of out of sight, out of mind, as far as funds are concerned. Besides, when funds are overseas, time-differences turn one’s life upside down. This is just a personal choice. You need to take your own decision.

At times like this, bonds are not an option, because many companies can cease to exist in the mayhem, taking your investment principal out with them.

Bullion will give a return as long as there is uncertainty and chaos. Let there be prolonged stability, and you’ll see bullion tanking. Yeah, bullion could be option 3 at such a time. You’ll need to pull out when you see signs of prolonged stability approaching, though.

One can use a bust to pick up cheap real-estate in prime localities. Option 4.

You see, you’ve got options as long as you’re sitting on cash. Thus, first, learn to sit on cash.

Before that, learn to come into cash when you see widespread signs of disease.

Best part is, widespread disease will be accompanied by a big boom before the bust, so you’ll have time to go into cash, and will be ready to pick up quality bargains.

You don’t really care when judgement day is, because your investment strategy has already prepared you for it. You know what to do, and are not afraid. If and when it does come, you are going to take full advantage of it.

Bring it on.

Anatomy of a Multibagger

Wouldn’t we all like to rake it in?

A multibagger does just that for you. Over a longish period, its growth defies normalcy.

In the stock markets, a 1000-bagger over 10 years – happens. Don’t be surprised if you currently find more than 20 such stocks in your own native markets.

Furthermore, our goal is to be a part of the story as it unfolds.

Before we can invest in a multibagger, we need to identify it before it breaks loose.

What are we looking for?

Primarily, a dynamic management with integrity. We are looking for signs of honesty while researching a company. Honest people don’t like to impose on others. Look for a manageable debt-equity ratio. Transparency in accounting and disclosure counts big. You don’t want to see any wheelin’-dealin’ or Ponzi behavior. If I’d been in the markets in the early ’80s and I’d heard that Mr. Azim Premji drove a Fiat or an 800, and flew economy class, I’d have picked up a large stake in Wipro. 10k in Wipro in ’79 multiplied to 3 billion by ’04. That can only happen when the management is shareholder-friendly and keeps on creating value for those invested. Wipro coupled physical value-creation with market value-creation. It kept announcing bonus after bonus after bonus. God bless Mr. Premji, he made many common people millionaires, or perhaps even billionaires.

A good management will have a clean balance-sheet. That’s the number two item.

The company you’ re looking at will need to have a scalable business model.

It will need to produce something that has the ability to catch the imagination of the world for a decade or more.

The company you’re looking at will need to come from the micro-cap or the small-cap segment. A market-cap of 1B is not as likely to appreciate to 1000B as a market-cap of 25M is to 25B.

Then, one needs to get in at a price that is low enough to give oneself half a chance of getting such an appreciation multiple.

Needless to say, the low price must invariably be coupled to huge inherent value which the market is not seeing yet, but which you are able to correctly see.

After that, one needs the courage and conviction to act upon what one is seeing and has recognized.

One needs to have learnt how to sit, otherwise one will nip the multibagger in the bud. Two articles on this blog have already been dedicated to “sitting”. Patience is paramount.

The money that goes in needs to be a small amount. It’s magnitude shouldn’t affect your normal functioning.

Once a story has started unfolding, please remember one thing. If a stock has caught the imagination of the public, it can continue to quote at extended valuation multiples for a long time. As long as there is buying pressure, don’t exit. One needs to recognize buying pressure. That’s why, one needs to learn charting basics.

Phew, am I forgetting something here? Please feel welcome to comment and add factors to the above list.

Here’s wishing that you are able to latch on to many multibaggers in your investing career.

🙂

Learning to Sit (Part II)

Can you sit?

I mean, can you really sit?

Maximum money is made by sitting, not by wiggling about.

I didn’t say that, but people far, far greater did.

To name just two who did say so, I’m sure you’ve heard of Jesse Livermore and Warren Buffett.

Fact remains – if you’re a long-term investor, you have to be able to sit.

One can’t sit for very long if one isn’t comfortable.

So, logic dictates – make yourself comfortable first.

Get rid of all extra background noise that disturbs you.

Keep consolidating – till you are comfortable to a point of not wanting to move from where you are.

You’ve gotten rid of investments you don’t understand.

Then, you’ve also dumped those investments that you do understand, but which don’t interest you.

Your rapport with your family is healthy.

You eat and sleep well.

You enjoy your life.

Then, the investments that you’re gonna sit on – are their volumes influencing the normal flow of your life?

If yes, it’ll be hard to stay focused somewhere down the line, because some fragment of your life will invariably be disturbed positively or negatively due to the voluminous investment in question.

Can you digest the volume such that its level does not interfere with your daily life?

What is your capacity for volume digestion?

Some have very large digestive capacities, like RJ. Such people can sleep comfortably on gigantic invested volumes for a very long time.

Others don’t digest volume at all, and can’t sleep over volume, like that day-trader who lives down the road. When the market closes, his invested volume is nil. Otherwise, the rest of his day is ruined.

Identify your volume threshold.

Invest below it. Then, you’ll be able to sit on your investment.

Any investment must have a rationale. Is your investment rationale sound? You’ll only be able to sit long-term on an investment made with sound rationale.

Therefore, take your time. Do solid research. Your research is pivotal for your investment. It doesn’t have to be so technical or so fundamental as to psyche a lay-person. It doesn’t have to deal with nitty-gritty. It doesn’t have to look for wheels within wheels.

In my opinion, market research needs to be broad-minded, and done with common-sense. Researching a company is an art. One doesn’t need to go ballistic with numbers, mathematics, projections, charts etc. One needs to formulate the long-term picture in one’s mind, based on key ratios, charting basics, knowledge of cycles, quality of management etc., and of course (based on) the million dollar question – is one looking at a multibagger? You can fill in the blanks here, for yourself.

Then, don’t enter with too big a bang. That’s my formula. Enter small. You can always top up later, if your conviction about your investment has grown. That’ll allow you to sit if your investment goes wrong in the initial stages. If you’ve entered too big and things go awry, you won’t be able to sleep, and then the first thing you’ll do is exit. So, enter small.

See, you can average down if you’re an expert, but for the longest time and till you get the hang of things, do not average down.

Why am I saying this?

Averaging down can make you even more jumpy if the stock in question goes down further. Your chances of sitting on your investment become even lesser.

Now for the flip-side. Sitting on a profit? Are you booking? Yes? No?

Depends. On you. On your outlook.

I mean, are you going to nip a multibagger in the bud?

I think you got the point.

So, till when do you sit?

Till you’re comfortable. Till you can sleep and eat well. Till you have a happy family life. Again, define you own “tills”.

The rest, as they say, is (your own investing) History.

A Critical Look at Debt on the Balance-Sheet

Borrowed money needs to be paid back.

Pray where is a company going to pay it back from?

From current reserves and /or earnings, of course.

Unless you do a Suzlon and restructure your 2 billion dollar debt.

When I hear the word “restructure”, I feel like puking.

By the way, one can even do a “Mallya”, and expect the government to pay off chunks of one’s almost 1.5 billion dollar debt.

By now, I’m really throwing up.

I mean, first, some people borrow. Then comes a spending frenzy. Then these people don’t want to pay back what they borrowed. Oh, sorry, some don’t even want to pay the interest back, let alone the principal.

Frankly, I don’t wish to invest in companies run by people who delay paying back their debt through maneuvering and manipulation.

I detest manipulation. Prefer it straight-forward.

You guessed it – I’m a debt-averse human-being. What pleases me most in a company is a debt-free balance-sheet. It is challenging to find debt-free companies that are able to grow freely and fast, and when one runs into such a company, it’s like a home-run. After that one waits for the right price, but that’s another story.

Most companies borrow. They wish to grow, and funds are not there, while opportunity is.

Fine. Borrow.

Then, show me that you want to pay back. On time. ( = integrity ).

Show me that you haven’t lost your marbles while borrowing, and have borrowed an amount which by no means risks the existence of your company. ( = balance ).

Furthermore, show me that you are creating value with the borrowed amount. ( = shareholder-friendliness ).

Show me, that after payment of interest on borrowings, you can still generate a reasonable earning per share. ( = diligence ).

That would make me want to invest in your company, despite your debt.

Oh, one more thing, I would only stay invested long-term in your company, if I see you decreasing your debt-burden year upon year. ( = like-mindedness, i.e. debt-aversion ).

Also, if any new debt taken on doesn’t fit the above criteria, I would look to exit. ( = over-confidence because of earlier successes ).

Once invested, keep rechecking the story every few months. Times are bad. If you don’t look, it is likely that a CEO will pull a stunt right under your nose. Yes, it’s totally possible that your investment doesn’t meet your criteria anymore, and that you are still invested. Don’t let that happen.

At least with regards to debt, have an exact check-list. If a company doesn’t meet your standards regarding debt, discard the company. During times of high interest-rates, large debt on the balance-sheet is like a raging fire which refuses to be stilled, and which can well terminate the existence of a company.

Your success as a long-term investor depends much on how you react to debt.

Here’s wishing you wary and successful investing!

Cheers!   🙂

Due Diligence Snapshot + Technical Cross-Section — Ador Fontech Limited — Nov 27 2012

Price – Rs. 81.30 per share

Earnings Per Share projected on the basis of quarter ended Sep 30 2012 – Rs. 12.62

Price to Earnings Ratio (thus, also projected) – 6.44

Price to Book Value Ratio – the stock is selling at approximately 2 x book value currently

Debt : Equity Ratio – Nil

Current Ratio – 2.73

Profit After Tax Margin – 12.51%

Return on Networth – 32.54 %

Pledged Shares %age – Nil

Face Value – Rs. 2.00

Dividend Payout – 50% -150% of face-value.

Average Daily Volumes – around 5 – 6 k / day on BSE.

Product – Reclamation of alloys, fusion surfacing (preventive welding), spraying and environmental solutions.

Promoters – JB Advani & Company Pvt Ltd (of Advani-Oerlikon fame) + a group of other Sindhi business-people.

Share-holding Pattern – Promoters (35.4%), Public (58.9%), Institutions (2.0%), NICBs (3.7%).

Technicals (see chart below) – This is a very low volume scrip, so there could be slippage. The scrip has corrected from its June 2011 peak of Rs. 150.90 to a pivot of Rs. 73.25 within about one year. This low pivot lies bang in between the 50% and the 61.8% Fibonacci levels of correction on the weekly chart. Currently, the scrip is quoting at Rs. 81.30, just below the Fib. 50% level. Volumes are average, with one high volume peak every 7 odd trading days. The scrip is trading in a broad band between Rs. 73.25 and Rs. 93.90. Perhaps it is trying to establish a base.

Comments – Fundamentals are good, and the company’s corporate governance is considered clean. Market for the company’s niche is considered small, and people view that as a long-term growth concern. Technically, correction has taken place, and thus value shines out fundamentally. Debt is nil. Dividend is excellent. Projected PE is low, though P/BV is a bit high. Cushion is there, and profitability and returns are exemplary. Future investment would be required to keep niche-segment status alive.

Buy? – I like the theme – reclamation and preventive welding. Contrary to what others say, I feel the market is going to grow phenomenally, as earth and rare-earth metals become difficult to source, and need to be reclaimed. Valuations are excellent, governance is great, payouts are great too, and a technical buying level has presented itself. Yes, it’s a long-term buy right now. Remember, this is not a trade we are speaking about, so we are not going to talk in terms of a stop-loss. This is a long-term investment, and we’ve been speaking in terms of margin of safety, which I’m sure you’ve noticed. Also, while buying, one needs to show caution regarding slippage, which is invariably going to occur owing to the low-volume nature of the scrip.

Disclaimer and Disclosure – Opinions given here are mine only. You are free to build your own view on the stock. I have bought a miniscule stake in Ador Fontech today. Data given here has been compiled from motilaloswal.com, moneycontrol.com and equitymaster.com. Technicals have been gauged and shown using Metastock Professional version 9.1 by Equis International.

Due Diligence Snapshot – Mindtree Limited – Nov. 24 2012

Price – Rs. 665.25 per share

Earnings Per Share (projected on the basis of quarter ended Sep 30 ’12) – Rs. 70.61

Price to Earnings Ratio (thus, also projected) – 9.42

Price to Book Value – 2.82 (it’s ok for small to mid-sized IT companies to have a high price to book ratio, because book value doesn’t reflect human capital, and small to mid-sized IT companies are more about human capital than about real-estate, hardware etc. Thus, since the real book value is not going to be available, the given price to book ratio could be treated as an artefact, unless it is unreasonably high, which is not the case here).

Debt : Equity Ratio – 0.03

Current Ratio – 2.10

Profit After Tax Margin – 12.11%

Return on Networth – > 25 %

Pledged Shares %age – Nil

Face Value – Rs. 10.00

Dividend Payout – 25% – 30% of face-value.

Average Daily Volumes – around 1 Lakh per day on NSE.

Product – Product Engineering Services, IT Services, worked on Bluetooth technology, also worked on UID (Aadhaar) project.

Promoters – Mr. Bagchi (set up Six-Sigma services at Wipro) and Mr. Soota (has now retired from Mindtree, ex-Wipro, amongst others, responsible for Wipro’s phenomenal growth). Mr. Natarajan is co-founder and current CEO, and is also ex-Wipro.

Share-holding Pattern – Foreign Promoters (3.5%), Indian Promoters (15.9%), Institutions (33.0%), Non-Institutional Corporate Bodies (30.2%), Public (15.7%).

Technicals – IPO days in March 2007 were big, with the scrip peaking at Rs. 1023.30 very early into its launch. By March ’09, though, Mindtree had bottomed out at Rs. 187.05. It then made a high pivot of Rs. 747.00 in Jan ’10, fell to Rs. 321.00 by August 2011, and is currently on the rise, forming a cup and handle pattern on the weekly chart, with the handle having broken out in Sep ’12 to 770.00 on average volume. This was a false breakout, and the scrip came down, to then move in a band between Rs. 633.80 and Rs. 699.90. Currently, Mindtree is quoting at Rs. 665.25, and Friday (Nov. 23rd, 2012) saw it rise by approximately 1 % on volume that was three times its 50-day moving average and many more times its 10-day moving average.

Comments – I like all the fundamentals. Couldn’t find any scams or frauds related to the company, looked only online though. Debt-equity ratio almost nil, great! Ex-Wipro people are the promoters. CEO is ex-Wipro. Friday’s higher volume has gotten me on alert. If all-round conditions in the markets remain stable, the scrip could break-out to beyond Rs. 770 soon. Glassdoor has “OK’d” work culture at Mindtree, with the same rating that Infosys has received. Salaries are considered on the lower side, though, at Mindtree. Also, some employees feel that company is stagnating. Reasons why Mr. Ashok Soota left the company are unclear to me. On the other hand, corporate governance still seems to be decent at Mindtree.

Buy? – Hmmmm, I like almost everything, except the salary and the stagnation bit. Mr. Soota’s presence would have been a bonus. I can take a “stagnating” company that generates good numbers. The ratios are all good, and profitability is decent. There’s almost no debt on the balance-sheet. No shares have been pledged. Dividend is decent. Excellent return on networth. Company does R&D too. Question is, will the scrip correct another 30 to 40 bucks to the lower end of it’s current band, so that one can pick it up 5 odd % cheaper? Anybody’s guess. One could actually go and pick it up now. Earnings are good, and so is the projected PE, well below the industry average, actually.

Disclaimer and Disclosure – Opinions given here are mine only. You are free to build your own view on the stock. Currently, I don’t hold a position in Mindtree Limited, but am considering long-term entry on the basis of what I have found and liked. Data given here has been compiled from motilaloswal.com, moneycontrol.com and equitymaster.com, and technicals have been gauged using Advanced GET 9.1 EoD Dashboard Edition.

Due Diligence Snapshot – Micro Technologies Limited – November 04 2012

Price as on Nov. 04 2012 – Rs. 44.60 per share

Earnings Per Share (trailing 12 month earnings)- Rs. 37.77

Price / Earnings Ratio – 1.18

Price / Book Value – 0.21

Debt : Equity Ratio – 0.55

Current Ratio – 5.63

Quick Ratio – 4.43

Net Profit Margin – 5.98 %

Face Value – Rs. 10.00

Dividend Payout – 10% – 20% of face-value.

Product – IT-based security products.

Promoter – Dr. P. Sekhar, ” a creative entrepreneur”.

Share-holding Pattern – Promoters (36.2%), Non-Institutional Corporate Bodies (42.1%), Individual Investors (19.0%).

Technicals – Since its January ’08 high of Rs. 192.50, the stock has corrected majorly to Rs. 26.80, recovered a little more than half-way (to Rs. 114.00), corrected again to Rs. 50.40, then recovered again to Rs. 91.40, again corrected to a low of Rs. 38.05, and is now in the process of rising, although institutional volume is not accompanying this rise.

Comments – Fundamentals are strong. They absolutely do not match the sell-off to a low of Rs. 38.05 very recently. Why is there a mismatch between fundamentals and technicals?

Possible Reason – There seems to be employee dissatisfaction doing the rounds, owing to questionable corporate governance. Another case of highly debatable corporate governance seems to come to light. In my opinion, this case seems to affect all shareholders negatively. Primarily, this case affected all FCCB (Foreign Currency Convertible Bond) holders, but then the company’s actions concerning the FCCBs possibly disillusioned a part of the shareholders, who went on to sell the scrip. Increase in selling pressure led to a tanking share-price, and this was negative for all share-holders.

Outlook? – You need to decide whether a part of the company’s corporate governance policy is a deal-breaker that overrides the strong fundamentals on paper.

Disclaimer / Disclosure : The opinions given above are mine only. You are free to form your own view on the stock. I don’t hold any position in Micro Technologies Limited. Data given here has been compiled from motilaloswal.com, moneycontrol.com and equitymaster.com, and technicals have been gauged using Advanced GET 9.1 EoD Dashboard Edition.

The Ugly Side of Leverage

Not too long a time ago, in an existence nearby, people saved.

Credit was a four letter word, or a six letter word, or whatever you want to all it, as long as you get my point.

People worked hard, and enjoyed the sweet taste of their labour.

They knew their networth on their fingertips, and there was no question of extending oneself beyond.

People were happy. They had time for their families. Words like sophistication, complicated and what have you had simpler meanings.

At the end of the month, as large a chunk as possible was pickled away.

For what?

Safety. Steady growth. For building a lifetime’s corpus. For the future generation.

Life was straight-forward.

Then came leverage.

At first, leverage was an idea that was looked down upon. People were slow to leave their safety zones.

Then they saw what leverage could do.

It could make possible a lifetime of fun. One could do things which were well out of one’s financial reach currently. Leverage could even buy out billion dollar companies.

All one had to do was to pledge one’s incoming for many, many years. If that didn’t suffice to fulfill one’s fun-desires, one could even pledge the house. The money borrowed would eventually be paid up, along with the compound interest, right? After all, one had a steady job that promised regular income.

What use was a lifetime of sweat if one didn’t get to enjoy oneself? One couldn’t really live it up after retirement, could one? That’s when one would eventually possess enough free funds to do what one was doing now, with the advent of leverage.

The do-now-pay-later philosophy soon took over the world.

Without being able to afford even a meaningful fraction of their expenditure, people began to go beserk.

What people didn’t know, and what they are now finding out the hard way, is that leverage is a double-edged sword. Since people didn’t know this, and since they didn’t bother to read the fine-print of the documents they were signing while leveraging their monthly salary or their home, well, financiers didn’t bother to educate them any further. No hard feelings, it was just business strategy, nothing personal.

Today, we know more. Much much more. Hopefully we have learnt. We are not going to make the same mistakes again.

So, when you buy into a company, look at the leverage on the balance-sheet. A debt : equity ratio of 1 : 1 is healthy. It promises balanced growth. If the ratio is lower, even better. We’ll talk about debt : equity ratios that are below 0.5 some other day.

Most companies do not have a healthy debt : equity ratio. Promoters like to borrow, and borrow big. You as an investor then need to judge. What exactly is the promotor using these funds for? Is he or she using these funds to finance a hi-fi lifestyle, with flashy cars, villas and company jets? Or is the promoter using these funds for the growth of the company, i.e. for the benefit of the shareholders? Use your common-sense. Look into a company’s management before buying into any company.

As regards your own self, reason it out, people. Save. As long as you can avoid taking that loan, do so. Loaned money comes with lots of hidden fees. If I’m not mistaken, now you’ll even need to pay service tax and education cess on a loan, but please correct me if I’m wrong. There’s definitely a loan-activation fee. Then there’s the huge interest, that compounds very fast. Ask someone who has borrowed on his or her credit card. There’s the collateral you’re promising against the loan. That’s your life you’re putting on the line. All for a bit of leveraged fun? How will your children remember you?

Also, when you invest with no leverage on your own balance-sheet, your mind is relaxed. There is no tension, and your investment decisions are solid. Furthermore, if you’re invested without having borrowed, there’s no question of having an investment terminated prematurely because of a loan-repayment date maturing coupled with one’s inability to pay.

How does the following sentence sound?

” Then came leverage, and common-sense disappeared.”

Not good, right?

Dealing With a Bully

I know a way of dealing with a bully – sock the bully a real tight one in the solar plexus. Inside, there’s only air, and that one tight punch is going to burst the balloon and reduce the bully to his real self, i.e. a meek failure.

What if this bully is the government itself?

Let’s just caste a very quick glance at the track-records of the governments of independent India till date.

Education has been a total failure. Whatever meaningful education is being imparted in India is being done so mostly by private institutions, at least till high school level, if not even after that.

Healthcare – another very big failure. The government’s hospitals, just like its schools, are a disgrace.

Left to the government, infrastructure would have been a massive failure too, which it was, till the private sector stepped in.

Let’s not even start speaking about the governmental airline carrier, Air India. Words fail me here.

You want to avoid the police lest they stick you one at a time when you have other problems.

You want to settle any disputes out of court, because the semi-dysfunctional judicial system will, in all probability, stretch the issue over decades, with much ensuing harassment.

I mean, I could go on and on. Point of the matter is, governance in independent India has been an overall and disastrous failure.

We are not a democracy – we are a joke.

Over the last few years, these and more blunders are coming to light. They are being flashed over the papers and on television, nationally and internationally. People are getting to see and know the quality of people that has been governing the country. Citizens are disgusted.

Instead of charting a course of rectification, what does the bully do?

It tries to hide its own failures by passing on the responsibility to private institutions. Governments and governments have robbed common citizens of their basic rights to education, healthcare etc. over decades. Now, when the deprivation has become too glaring, they want private institutions to accomodate the deprived, and that too quasi-free of cost. I’m talking about the current developments in the education sector. Rest assured, other sectors will be affected too, if one goes by the governmental mind-set.

The government is bullying private schools into reserving 25% (number could vary for different states) of their capacities for kids from backward classes. The government says it’s going to pay for this partly, but knowing the value of its words, this money is never going to come. Basically, it wants want private schools to lift this burden and pay for it too. Unbelievable.

The government’s massive failure in the field of education has caused downtrodden classes to finally start asking, “What have you done for us?” and “Where is our education?” and “Why is the quality of the schools built for us by you so pathetic?” and “Where does the education cess go, which you charge along with every monetary transaction in the country?” and again, “Where is our education?”

Now the government gets really cute, and says, “You see those private educational institutions over there, look at them, they are doing so well, they will make your kids rise, we will steam-roll them into admitting your kids, there is your education!”

Laws in India are basically stacked up against private institutions and in favour of the government. One false move here or there, and you could be breaking a law as a private player. Hence, as a private player, you are always in the government’s grip. To function smoothly and not show a loss, you could end up slightly bending a rule or two. The government agrees to look the other way, and lets you function, but then you have to mutually agree to get bullied by it every now and then. Sometimes, the bullying takes on ridiculous levels, like it has for the education sector. My remedy to deal with a bully (given at the top) like the government is not going to work, because I just wouldn’t know how to implement it. I wouldn’t even know what to implement.

And that’s the story, people. India Inc. is heavily burdened by its failure watchdogs. You need to incorporate this fact into any investment strategy that concerns India Inc. Right within its purchase price, any investment in India needs to discount for the governmental failure that will inevitably be patched onto the private institution that you are planning on buying into.

What does that mean for governmental institutions as investments? Frankly, looking at the mess, one can’t even think of buying into these, unless one wants to own companies with Ph.D.s in inefficiency and mismanagement.

Recognizing and Reacting to A-Grade Tomfoolery

Air India and Kingfisher Airlines (KFA) … can you name two things these two have in common?

They’re both loss-making airlines.

Furthermore, there’s lack of will-power to make them profit-making, from the very top.

The problem with a government job is that you can’t kick the government servant out. The government servant thus enjoys complete job-safety and total lack of accountability. That’s been India’s recipe for ineffectivity and loss-making government institutions for decades. In Air India’s case, add to this massive subsidization by the government. Whenever the Maharaja can’t pay his bills, which is like every month, the government of India chips in with tax-payer money. There’s no real policy being pushed through to effectively earn something. Government servants travel free, big-time. If there’s a shortage of seats, honest, real-money paying citizens are off-loaded and left stranded to accommodate the highly evolved souls that rule our country.

Seriously, why do you still travel Air India? Because it’s cheap? Don’t you see through the tomfoolery? Are you blind? They might wake up upon sensing a complete lack of interest amongst travellers. Until that happens, and until they start performing with no ad-hoc cancellations and off-loading, travellers need to give them that wake-up call by using other airlines and by not subscribing to any money-raising gimmicks or IPOs that the company might come out with.

Cut to KFA. What’s wrong with Mr. Mallya? Unpaid pilots, unpaid fuel bills, unpaid taxes, seriously!?!

Vijay Mallya’s story is not about lack of efficiency. It’s about flamboyance. At the cost of his shareholders? Perhaps.

His liquor business is performing well. A little hand-holding through initial turbulence would have seen KFA through. One pays one’s pilots. Period. You don’t just hire scores of great pilots and buy a huge fleet of aircraft, and then stop paying your pilots. Such flamboyance is going to result in a loss-making enterprise for a few years, isn’t that common-sense? In that period, the hand-holding comes into play from the promoter’s other profit-making enterprises, right? Does that seem to have happened here? Unlikely, looking at the current status of KFA’s balance-sheet. Quarterly losses of 100 million USD and growing coupled with a burgeoning debt, Jesus Christ…

The airline industry involves a very precarious vicious-cycle. If you can avoid falling into it from the start, you are through. Prime example is Indigo Airlines.

The first signs of letting up tighten the noose one more notch. Unpaid pilots result in strikes leading to delays and cancellations. A traveller who has been bitten once decides to travel with the competition. Numbers fall. Now, fuel bills can’t be met. More problems, more delays and cancellations. Finally, you can’t pay your taxes. That’s when the tax department steps in. Headlines go ballistic. Huge bad publicity. Twitter battles. What was that? You want the same mollycoddling as Air India? You want government subsidization? Which world do you live in? Not happening!

Money needs to flow into KFA, not loaned money, but clean money, out of the parent-group’s own coffers. Any usage of KFA revenues to fund the parent-group’s activities is a strict no-no. For example, if the Kingfisher Formula 1 team or the group’s IPL Cricket team were even partly funded by KFA revenues, that would be a huge, huge red flag, given the financial condition of KFA. As of now, shareholders need to see some will-power emanating from the top to control the bleeding. The Street can even short the KFA stock down to zero if the promoter’s attitude does not change. Perhaps such an image-beating would be a wake-up call for the promoter.

Watch Out for Bottomless Pits

A shareholder-friendly management?

Forget about it.

Very difficult to find, nowadays.

Gone are the days where you’d see an Azim Premji driving his 800, or a Narayana Murthy travelling economy class.

These legends believed in increasing the shareholder’s pie. And this they did, big time. Ask any Wipro or Infosys shareholder. These legends were very clear about one thing: there was no question of pumping in useless expenditure into their public limited company at the cost of the shareholder.

The norm, btw, is totally opposite. Public limited company managements live it up at the cost of the shareholder. Very few promoters are actually bothered about their shareholders. It is the norm to put medical bills, day to day living / wining / dining / entertainment costs, personal property purchases etc. into the company. Why should the promoter bear such costs when there is the public limited company to put these and such costs into? Logical?

Don’t expect too much from your average promoter. He’s not in the game for you.

Where does all this leave you, by the way?

Firstly, you need to look out for, and avoid bottomless pits. These are companies that bear huge amounts of expenditure emanating from the whims and fancies of the promoter. For example, the total sports sponsorship bill for Kingfisher Airlines is staggering. Then there’s this huge red flag in their balance sheet – the company is in under a mountain of debt. On top of that, this company just reported almost a 100 million USD Q2 loss. Math doesn’t add up for you to be investing in such bottomless pits, does it?

In your search for idealistic and shareholder-friendly managements, you might come up with a handful of names. Next you’ll find that it’s no secret. If there’s an idealistic and shareholder-friendly promoter around, people can see this in his or her deeds and of course in the balance sheet of his or her company. Savvy early investors make a beeline for such companies, with the result that by the time you get there, the concerned share-price is already quite inflated. You’ve identified a good investment, but you are not going to enter at an expensive price. If you do, you’ll not be able to sit on your investment for the long-term. Even slight volatility will shake you out of it.

Instead, you choose to wait for the right price to arrive, and then you enter. Well played.

The deal is, that more than 90% – 95% of managements don’t play it like an Azim Premji, or a Narayana Murthy, or an Anu Aga for that matter. However, shareholder-unfriendly promoters sometimes own companies that are lucrative investments. This can be due to niche, cycles, technology, crowd mentality, whatever. When do you buy into such companies?

As a long-term investor, you wanna be buying such companies at a deep discount to real value. My thumb-rule is a single-digit price to earnings ratio. You can have your own thumb-rule. You might have to wait a long time to get this kind of a price, but that’s what long-term investing is about.

As a trader, you buy into such a company with the momentum. You can buy after a resistance is broken. Or after a high is taken out. Or upon a substantial dip after the first burst of momentum. As a trader, what is far more important for you is to know when to let such a company go. Know the level by heart below which or at which you will exit such a company. In trading, exits are far more important than entries.

The mistake you don’t want to be making is to invest in a bottomless-pit, no matter how cheap the share price is.

As Ponzi as it Gets

Charles Ponzi didn’t dream that he’d become one of the most copied villains in the History of mankind.

Ponzi was a financial villain. His ideology was so simple, that it was brilliant.

Lure the first set of investors with promises of huge returns. Transfer the first few return payouts. Lure more and more investors as the news spreads about the scheme with great returns. Transfer few more return payouts to old investors from the investment principal of new investors. Lure a peak level of investors ultimately. Then vanish with all the collections.

As Ponzi as it gets.

I hardly read the financial newspapers. Technical trading finds news to be more of a burden. Earlier, I used to gauge sentiment from the news. Now, my Twitter-feed is an excellent gauge for sentiment. Also, with time, one starts to gauge sentiment in the technicals. Candlesticks are a great help here.

Yesterday, in a loose moment, I picked up the Economic Times. Normally, it’s not delivered to our house. Yesterday, a supplement of the ET was included in our normal newspaper. Probably a sales gimmick. Anyways, I glanced through it. Was shocked to find that 25 recent Ponzi schemes had been unearthed in India alone.

What is it about us? Can we not understand what greed means?

The sad fact was that all the investors who were trapped were retail small timers.

Education, people, education. Are you financially literate? If not, please don’t enter the markets. No amount of regulation can save you from being duped if you are financially illiterate.

When you’re putting your money on the line for the long term, you’re looking for quality of management. A track record is something you want to see. Average returns are great returns if they promise safety of the principal.

Where there’s promise of huge rewards, there are also proportionate risks. If you really want the thrill of very high returns, all right, fine, go ahead and risk a miniscule percentage of your portfolio size in a risky, high yielding scheme. Tell yourself that the principal might or might not come back, and for heavens sake, don’t bet the farm here.

These financial times are as Ponzi as it gets, people, so TREAD CAREFULLY.