05.25.09
Golden Monday, Rahul Baba ‘Jai Ho’ & the Matty-Gilly-Jumbo tango…
Enjoying myself at the sight of discomfort of others. Not a nice thing to do I know. But it’s been fun nevertheless watching bears squirm on TV after the events of last week. Election results truly were a Black Swan event for all those who were caught short as the markets froze after hitting 2 circuits - ending up more than 17% on Monday with the ‘mighty’ sum of 300cr traded in about 45 seconds before exchanges had enough!
For a change Indian voters have given a strong mandate(relative to electoral results of the past 2 decades) and there are significant opportunities for UPA government to redress all the wrongs of the past 5 years of inaction. With a more confident Rahul Gandhi now steering the Congress party the space occupied by regional parties might well compress in the future - particularly in the Hindi heartland which have been held hostage by divisive politics of religion and caste for the past 2 decades. Hopefully BJP too will finally and firmly reinvent itself into the Vajpayee era pro-development party while keeping it’s strong Hindu identity intact. There is enough political space for a right of centre national party with Hindu leanings that keeps in check a left of centre Congress party. Especially since the Congress has in the past shown its tendency to appease minorities for the sake of holding on to power. But there is no place for the politics of hatred and Taliban like narrow mindedness that zealous pro-BJP fringe outfits have demonstrated in places like Orissa, UP and now Karnataka.
In sports the IPL II season wound down finally last week and 3 ageless warriors held center stage for the umpteenth time. Hayden showed that he still thrives in big world stage competitions by scoring the most runs this season. Adam Gilchrist showed Delhi(which I thought was the best team) in the semifinals that he’s still the most destructive batsman in the world on big match days. And our own Anil Kumble demonstrated throughout the season and in the final what a inspiring captain can do to revive a team’s fortunes . Maybe in hindsight India could well have done even better if Anil and not Sourav Gangully had taken over after the Sachin Tendulkar & post match-fixing fiasco era of captaincy.
04.02.09
My first bear…
I’m still struggling to learn the intricacies of the ferocious bear that we seemed to be trapped in with pretty much the whole globe. Bad habits that I picked up (despite all my caution) during the past 4 years of the greatest bull market our stock markets had seen are not easy to discard. Now in hindsight I find myself quite some way from becoming a proper value investor. The mental discipline required to focus solely on intrinsic value was relaxed and lesser investments considered as the bull run matured. This bear run is already 14 months long and the price destruction is already the worst in our stock market history. Economic revival does seem at least 6-9 months away but maybe some sectors have already bottomed. The way Auto, cement and commodity stocks have rebounded in the last 5 months would suggest that the worst may be over for them. But any sustainable strong earnings growth is at least 2-3 quarters away for most good companies I track. So now lies ahead the tricky part of buying into them at the right levels in these volatile times.
Things are quite interesting as far as reactions to the bear goes amongst people I know. Some newcomers are now discovering the art of shorting markets at these low levels. Others who have built up images of being experienced hands pretend that they have been short all along. Just like they pretended to have bought early into multibaggers in the bull run. Typically experienced hands reveal little about what they are doing, though they always seem to be the ones asking your opinion about individual stocks. I’ve learnt very little from these so called old hands in the bull run and as expected have not learnt much in the downturn either. Maybe that is the way to keep one’s edge in the markets – leech off others and pretend to have not made any mistakes. In any case too much input is probably one of the reasons I chased all those not so resilient smallcaps in the first place. I should simply focus on improving my investment process and cut out all the remaining clutter.
09.22.07
A bumpy ride so far…
There hasn’t been much time to blog in the past 8 months. Been very busy trying to adapt to the volatile stock market conditions this year. There already has been two 10%+ corrections that have lasted 5-8 weeks each. And despite that the valuations at 16348 are close to all time highs @22.4 times trailing earnings for the sensex. Well actually those figures are an optical illusion. If we strip out the forex gains for the past quarter and ignore the IT, Auto, commodity (i.e steel, aluminium) and oil sector(ex-Reliance Industries) the valuations are well above those reached last May. Now even commodity stocks like RIL quote @ 20x one yr forward which is well above valuations that global oil exploration majors trade at.
The macro conditions too have deteriorated over the past 6 months. Globally the sub-prime mess is threatening the stability of the whole financial system and the US Fed is being forced to aggressively cut rates. While that move has led to a ST upside in emerging markets it remains to be seen if they can really decouple if US goes into recession. Many of the Asian economies are still heavily dependent on exports to US which comprise up to 60% of GDP growth for some of them.
In India the RBI’s drastic moves on the interest rate front at the beginning of the yr have started to hurt growth now. I was very apprehensive then about such aggressive action(0.75% move in 3 months) at the fag end of a growth cycle. To me it reflected a lack of insight into our GDP growth trajectory. The rate hikes should have perhaps come much earlier in late 2005 and into 2006 when the whole real estate bubble happened due to unusually low rates. The auto sector growth is now down for the 1st quarter and the slowdown is fast spreading into other sectors including consumer durables. The slowdown in growth of commercial vehicles will soon have a trickle down effect in the manufacturing sector too. Hopefully now with inflation at a 5 year low RBI will bite the bullet and cut down rates to revive growth. Encouragingly FDI flows have been much larger than portfolio inflows this year. This despite the govt. dragging it’s feet on opening up new sectors like retail and insurance to FDI.
There have been significant changes in my portfolio in the past 8 months. For the first time in four years there is now no exposure to IT. The amazing rise of the rupee this year(more than 10%) have knocked the sails out of IT stocks pegging valuations down to 5 yr lows. My exposure to auto-ancillaries is trimmed now after the rate hikes and initial signs of auto sector slowdown in April. I’ve focussed more on companies with leadership, branding and pricing power while exiting commodity type businesses. So there is no place for cyclical sectors like hotels and cement where demand-supply mismatch is no longer as strong as in the last 2-3 years. Now I have some exposure to the fast growing entertainment sector(multiplexes) where valuations are more realistic after the correction over past 18 months.
After all this cleaning up I’ve ended up with a more concentrated allocation in each sector I’ve positive on. Accordingly the no. of stocks in my portfolio have gone down to 27 from 32 back in January 2007. Interestingly now I have a more modest exposure to small caps where there has been a marked change in performance(both business and stock price) in the last 4-5 months. This is not due to any change in my approach but just that some of my small caps have now become large mid caps in the past 2-3 years. Maybe it’s about time for me to try unearth some more small niche stories.
01.11.07
The Year of the Pig beckons…
A new year has begun. A lot of things have changed in my world since I last posted. My portfolio is more focussed and I’ve re-balanced it a bit(not done completely yet) in the last 3 months to reflect current valuations/business performance. I’m reasonably happy with my returns over the last 6 months, having more than recovered from the big crash in May and June. Smaller companies that comprise the bulk of my investments have somewhat lagged the market indices during this period. But luckily for me financial services and IT suddenly became mkt leading sectors again, helping offset the smallcap underperformance.
However it must be said that now @13650+ our mkt wide valuations are getting stretched again. People are getting too optimistic about the sustainability of current growth rates and not factoring in the effects of a cyclical downside in the global economy. Also interest rates have gone up 0.5% in the last 4 months and might trend up another 0.5% in the next 12 months. Present interest rates are now in fact within touching distance of 6 year highs(11.5% now vs peak of 12% in 2000). Since credit growth @25% is still probably higher than what RBI wants(15-20%) rates might stay up there for a while now to rein in growth.
Well all these macro worries notwithstanding the structural part of the Indian economic growth story seems intact for now. Manufacturing sector continues it’s amazing revival(now into it’s 4th consecutive year of robust growth) rebounding after a 7-8 yr slump since the mid 1990’s. So far the big players haven’t rushed in to announce extravagant plans yet. Hopefully they have learnt their lessons from the crazy post liberalization capex binge & subsequent bust.
Result season started in earnest today with two of my top overweights(& favourite companies) Infosys and HDFC Bank reporting q3 results. Not much change as far as business performance goes for these two jewels of our corporate sector. Infy reported results inline with guidance despite the Rs appreciating 3.8% during the quarter. They improved productivity and managed to negotiate better billing rates. Their dependence on US also reduced to an extent with European business growing more strongly. HDFC Bank clocked a 19 sucessive quarter of 30%+ growth in bottomline. It did this despite RBI curbing branch expansion for last 12 months ! This quarter they made up for lost time – adding 48 branches and 120 odd ATM’s. NII was up 38% and NIM’s steady at 4%. With the 1.5% increase in PLR in December the next few quarters should see these margins maintained. Both these co’s are expensive I guess by most normal valuation parameters and they have been that way for most of the current 4 yr bull run. Luckily I figured out early enough that adjusted for growth(and it’s sustainence) they were absolute steals for a LT investor.
09.20.06
The follies of Economic Forcasting
I’ve been came across this nice article America’s ‘Hollywood economy‘ written by Paul B Farrell in Marketwatch about the inaccuracies of economic forecasting.[Link thru The Big Picture] He writes about how investors have a natural tendency to be bulls or bears and so perceive incoming information with that bias. Paul says that “all investors are trapped in their cocoon of illusions, where economic predictions and market forecasts have far more power than any created by Hollywood’s best illusionists … and they’re far more elusive until it’s too late“. He goes on to state that William Sherden’s findings summarized in “The Fortune Sellers: The Big Business of Buying and Selling Predictions are still relevant today. I’m quite surprised at how familiar some of those 10 main points Sherden arrives at are. In very simple layman words:
- Economic forecasts are not much better than guesswork
- Economists are rarely right about transition points in economic cycles
- Long term forecasts are particularly inaccurate
- Forecasters, ideologies used for forecasts are inconsistent across all aspects of economic forecasts
- Consensus forecasts do not improve accuracy
- Forecasters are affected too by their bullish/bearish bias
- More data/sophistication does not improve forecasts since the world economy is rapidly evolving
- Forecasting has actually deteriorated in recent decades
Paul concludes that it’s useless trying to time the markets based on macroeconomic forecasts and that one should just focus on attaining a well diversified portfolio that’ll work in any given scenario. Well I’ve given up getting all worked up about global macroeconomic cycles some time back. Finally figured out that most of the people who achieved above market returns in the long run focussed their attention primarily on company specific trends. A nice quote by Peter Drucker which is cited in the article sums up the futility of the current debate on the state of the US economy best.
“Anybody who tells you that he understands the American economy ought to be sent to teach modern dance.” – Peter Drucker
