Monthly Archives: August 2014

Random thoughts

Hey everyone,

thank you all for your wonderful comments and appreciation tweets, mails and posts. I was not due to write another update till September 2014 but given the long holidays and some bit of reading up I did plunge into another update.

the markets are poised at an interesting juncture in so far as divergent views are concerned.

one school of thought argues in favor of geopolitical uncertainties at its apex, impact of India’s WTO stand off and a no longer cheap market. You can add to the thought of an inevitable interest rate hike in USA. In an interesting article titled end of illusions, Amansa capital wrote on the market possibly running out of patience and awaiting a more concrete action than hope from mr modi’s government.

the other school of thought examines the following facts:

a) even in this so called bull run, the market, contrary to illusion, is up only 25 percent odd from 2008 peaks in sensex terms and is down some 10 odd percent in terms of mid cap peaks in the same period;

b) other than for Russia, Indian markets are rallying below emerging markets;

c) there is more disbelief than belief;

d) not even one IPO has come in the last few months;

e) the bets of market gurus have seen their best picks tumble. Event examples include delta corp, prakash industries, bhushan steel. The media sector, an overweight with many smart investors has in fact rallied the least. The cement cos, are more or less moving at a snail pace while the rally in some railway stocks that were believed to be huge beneficiaries of mr modi’s purported rail budget have corrected a lot. The same also holds true for real estate,infra and some capital good stocks too.

so where is the market?

my own past experience on market shows that the smartest of people are usually wrong in predicting market directions. Markets are governed by an element of risk and an element of uncertainty. Risk is a willing act and without it returns can never exist. In a risk, the bet is on an outcome and some degree of control remains. Such as in terms of expected time for outcome, expected win or loss and some expected variables.

uncertainity on the other hand is completely beyond control.  We can assume we know it but evidence suggests to the contrary. Think of all the dooms day or boom predictions. We read them with lots of interest as in their inherent nature there is something radical. Those who make predictions draw attention as they stand out from the crowds. You can always look at a person in a bright yellow or flaming red shirt but in deciding if he is looking good or bad, your judgement will need to examine that person in different colors and styles. The human mind is trained to look for changes. Even within. New haircut, new clothes, new look are much sought. Hence new views too.

it is very rare for media to make a compilation of the no of people who get the market prediction wrong. The focus is always on one mr bright who made a radical departure and got it right, little do we think, in terms of the law of probability, the role of randomness, the spin of chance in a pool size of millions of predictions.

i for one have noticed that u like their ability to predict market moves, savvy investors do far better at stock picking, the vision of a co and it’s growth potential, of its financials, of managements and their credibility, of competitive advantage etc are more logical to trap. Some of the savvy investors also read a lot and make notes from history to guide them from making mistakes.

a lot of money is in fact made by avoiding mistakes than by skills of stock picking. Avoiding mistakes can mean euphoric waves to a comparative wealth study of companies or sectors. 

I for one have no skill in knowing where markets are going. Behavioral science suggests that markets are yet to touch their potential but a more seasoned analysis exposes risks of shallowness of our markets with excessive fii dependence and some ego political and economic considerations of USA and other markets that impact fii behavior. 

I do realize my own skills get better at stock picking. I may not time the markets to a desire but given that businesses usually compound growth, the path of accumulation always holds good light. 

In the past few months, I have personally sensed a rather over confident class of minority investors. That’s good news and bad. Good as it means the majority has not yet invested and thus the markets are immune from excesses. Bad as in those who have and now brag about it are getting complacent to believing that just by reading a few blogs including this one or by sitting with am excel sheet and fast forwarding quarterly results into annualized profits and applying some growth targets they can be safe about many stocks that rewarded them hitherto. 

The price of failure is far more than the road to success. None of the market darlings look cheap. 

Much as we talk of Buffett and pretend to be disciplined, we are far from it as part of normal human behavior. None of the talkers of always invest in good companies buy such companies dissected from value. While it is true that an investment made in Asian paints for ex at any point of time would have given you great returns, one or few examples don’t make a law. One contradiction demolishes a theory for accuracy and the markets are flooded with multiple examples.

i see a wrong trend these days of buying pile up stocks. I am mindful of saying this realizing some of my own core stocks are now expensive. I may have the leisure of owing them from cheap levels but then I have the advantage of a risk pay off on my side. Many new investors may not. 

There is money to be made for sure. It will need more labor more hard work to discover the undiscovered stories. To screen them for their financials, their credibility and their potential. The fact that many cos are not researched by the prominent research houses either for their market caps being minuscule or low or for managements that are not with their eyes on stock tickers and thus not in the flash call a con call mode will make the effort even more complex.

the lure to buy a bad performer looking at its relative underperformance and hopes of catch up or looking at past record of highs and assuming with markets at new highs these will rise from the Phoenix would need discipline. 

The third risk would be to find a co and buy it and see its stock rise faster than anticipated with a small holding in your hands given the illiquid or less liquid nature of the stock. The deliberation then to wait for a price correction or the fear that it may run up even more and to grab it even after a rise will play a tussle.

i remain in my attempt to find a balance path. One of the ways to do that is to make a pool of like minded friends. It’s not necessary for them to agree as in their disagreement lies caution. 

I remain bullish. Not on markets. But on individual and emerging scrips. 

While I may get the timings wrong if markets fall, I will get good returns if my thinking is in check.

past examples of buying in stocks like cera, Kajaria, tech mahindra, poly Medicure, ajanta pharma, nbcc, hindustan composites, Tata dvr, fiem etc to name an illustrative few suggests this is an easier journey to negotiate. 

In this spirit of things, I have managed to narrow down some 25 odd companies. These are now being screened for the right parameters. Names include:

hester biosciences (repeat)

Ifgl refractories- refractories are dependent on steel and the outlook seems to be in a cyclical upturn. The stocks of orient refractories (owned) and Vesuvius have shown similar traction. 

ipca labs- an excellent management that seems to be in a self imposed discipline of its ratlam us export alert, quite unlike some other pharma goof ups and is being graded at par. I’m reasonably sure the co will emerge stronger in the next few months.

aban- the co is doing the right things on its debt front which is the reason for its recent revival. The promoters recently raised 750 crs by a Qip and the results seem on track for this once darling of the market to resolve its debt issues and remain the cash cow it once was. The stock can be a steady riser unless their is some screw up.

Jk tyres- a good play on natural rubber prices, valuation, focus on replacement markets and new OEM.

Kitex (repeat as already owned)

oriental carbon (repeat)

premco global (repeat)

Symphony (repeat)

Bajaj finance (repeat)

The words repeat imply previously added too. Ifgl ref was up a massive 10 pct today as I write. But has steam.

I have chosen a mixed bag of bigger mid caps like bajaj and ipca, mid sized like symphony and kitex and small size like ifgl or premco. There are obviously more names that are not included here as the credibility check on the, is underway and some of them have rallied post great or better results. Will update some of those later.

Happy investing. Your emails are most welcome with suggestions, thoughts, interactions. My usual caveat: I am a passionate investor not a professional advisor. Stock investing is subject to risk.no spell checks done. Errors may persist in some matter. 

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Chugging along

Hey friends and well wishers,

 

as another month draws to a conclusion, I find myself back in the ring ready to write another monthly review of my views on markets and stocks. In a sense, I am somewhat blank with the markets now in good stream and thankfully the discovery and re-rating on several mid caps and large cap stocks.

 

Many of my friends or readers seem more than a little surprised with the market moves in the last several months. Of course they are delighted at the returns that they made but equally concerned about whether they should sell and take profits home.  Some are simply holding not because they want to sell but because they want to remain invested and cannot find alternative investing ideas. This actually constitutes a paradoxical thinking where I say I should cut food as I am or need to be on a diet but at the same time wonder what dessert I can have for dinner.

 

i also do not understand the anxiety or worry, as each may have his own. In a recent book that I was reading I came across the historical examples of differences between relative and absolute facts. 

 

Relatively our markets have have done well. We see portfolios, nifty, sensex etc rising and thus get somewhat in a sense of disbelief that this will be. Too good to be true is being assumed, even in a situation of the lowest equity allocation is history by the indian public. 

 

In absolute terms however a different picture emerges. Our markets have in fact not done as well as is assumed. In July itself, barring Russia, we were the worst performing Asian market. Russia perhaps beat us in the last runner in the race due to a rather grim political and socio economical situation, quite contrasted with the situation in india.

 

let us try and go with a simple economic fact. If we take stock as a product or good, demand has to be more than supply to cause up word price movements. Demand could come from fiis, diis, LIC, HNI’s or retail. It can also come from promoters themselves buying their own stocks. The later though increases demand side mathematics is actually a welcome sign as usually managements buy into their stocks on value and knowing better than anybody else why the value is at a discount or is mispriced relative to any external buyer. It is for this precise reason that they need to followstrict  disclosures.

 

the fiis, while have been extremely local to our country, remain at a disadvantage to domestic investors. The disadvantage emanates from the fact that the fii usually has a larger kitty of money and to make an impact on its portfolio needs to buy enough to make a mark. This concept f enough makes it rather centric on larger cap companies or mid cap cos with adequate free float. Now if a co has an available free float and is mopped up, usually the reverse also applies. That is the fii to off load needs a similar stimulus. In a market characterized by several thousands of listed companies, with most indulging in either cyclical, low margin, no moat businesses or in hands of managements that lack teeth, the choice to own is not as wide as is perceived to be by the sheer no of names of listed companies. In some reports, I have ready effectively some 200/300 companies in all categories constitute a basket to pick from.

 

let us assume that of these 200/300 cos many do not have sellers due to promoter holdings or non willing ness of sellers. That means while a co is good and should be added to an investment portfolio, it gets disqualified as a buy by the sheer liquidity in the counter unless someone offers a premium for a block. 

 

A retail investor suffers no such block. He is free to buy a good co cheap and does not have to worry on its demand supply or market capitalization in the initiation of investment stage, if a company does well, the stock gets covered in top gainers by market cap or absolute or relative returns and that usually triggers an interest of bigger buyers to meet the managements, seek blocks or QIP or similar. Conceptually this means higher demand inevitably sets in and triggers a price move.

 

In the last several days, there have been very few companies that saw supply from promoters. The noticeable exceptions could be a few companies in the private sector like a bharti infratel or companies in PSU’s where the govt is obligated to sell to meet disinvestment targets. I have not been a fan of owning psu stocks for other reasons that I learnt from some wise men. 

 

The supply in stocks has not come from fii’s as one they may not own many mid cap or small cap cos to generate enough interest to sell and do always keep moping up more and more in companies where the fii limits are opened. The fiis as a basket also have very recently upgraded india to buy or neutral and re adjusted some of their allocations to india by increasing weightage. In such a situation, it seems rather difficult to apprehend that they will sell unless cardinal issues crop up either nationally or internationally. The later is a bet with no known factors and thus more of a game of chance than skill. With no control on its probability or timing, it’s best to leave the same out. The former is a situation characterized by a new govt which is taking a slow but visible path to improving several indecisions. The bigger role is being played by the overall improving investment sentiment of corporates themselves. 

 

The retail has hardly anything to sell. 

 

With the demand and supply situation so placed, it appears that the markets are now placed to a path of discovery. Discoveries are not necessarily a function of PE in stocks but also a change of investment climate and of course of macro positions. We have a situation of fdi being allowed in defense. Today there was an announcement of fdi in railways and rail infrastructure. The govt is keen to allow fm Channels to carry news, some high ticket inquiries into psu banks etc are underway. Another set of discovery happens when confidence changes. Just before mr modi’s govt came to power there was so much talk on where the dollar would be with predictions or rs at 45 to 55. The irony of such guesses made many a few to skip buying IT companies until a TCS or infosys turned and gave better indications of order intake. Suddenly the sector reacted upwards. The same trend was seen in automobiles with rather positive management commentaries despite no change in interest rates. Tvs motors, Eicher motors, hero or even Tata motors were examples. 

 

Discovery is also made when you find a company that is low key. Lying low due to its size, media shy promoters, working hard, increasing cash flows, improving margins and expanding capacities. The first reward a promoter gets is dividend and there are companies that make a new mark on dividend announcements with fruits ranging from their first dividend to enhanced dividend payouts. Much of this comes from increased cash flows and not capitalizing of some entry or extra ordinary cash from asset sales. In such companies demand for shares remains low due to inability of people to react to their low key mature, lack of analyst coverage and shy managements not driven by a desire to be on cnbc with an eye on the ticker. Such companies also see moderate supply as many investors like momentum rather than being seated in patient corridors. Usually an investor likes to make quick gains in lesser time than being told of the possibility of far bigger gains but in a slower take off process. 

 

In identifying such ideas, one needs to also look at the size of opportunity before the company. The credentials such as education or experience of managements and sometimes a give away is the presence of a a few good customers with stricter quality norms as that endorses technological excellence of the product of the co and thus an inbuilt moat.

 

my focus currently is on identification of such companies. To identify them, buy them and hold them till the discovery of the companies reaches a level of high coverage, glamour, over zealous analysts and the kind of statistics cnbc’s web site shows by suggesting no of buy calls vs sell calls, that too of the very domestic public that is so underinvested.

 

the effort has given some clear winners. La opala, Relaxo, atul auto, Astra poly, bharat forge, Krbl, Wimplast, bata, Hindustan composites, next media, kitex, Hester bio, cera ceramics, Kajaria, ajanta pharma, auro pharma etc etc to name a few. 

I am continuing to read on many such companies. It gives me happiness to learn that my efforts have not only financially rewarded but also own over many friends and even fans who out of their sheer love and admiration keep me going. It has also brought into limelight some disbelievers. Some rather insane thinkers who ask me if I own the stock that I write here. If I know that something is good and is going up year after year why would I close my eyes to its ownership? Even otherwise if I assume I don’t have the capital to own it, the point is many scrips have done between 2x to 10 plus x in this time and how did it matter? My advise to those who fall in this camp is enjoy life. Take it easy. 

 

I also hear stories of how can I person own 40 odd companies? I am me. Every investor is different and should do what he knows best and works for him. If I can do better than the markets or other returns, how does it matter? This is like saying a guy reaches his destination first by traveling to the airport in one car, then taking a flight and then another car or taxi. How can he reach? Returns are a function of absolute facts or relative gains and not one view vs the other. 

 

I have identified some new ideas but this time decided on sharing the same only with those who were true learners, well wishers, students, critiques with opposing but constructive views, knowledge builders or sharers and of course with believers. 

 

Do wrote in your views/comments/ grudges everything except fast food take over orders. And enjoy investing as a passion as much as I do. I would respond to as many emails as I can or posts and thank you as always for the encouragement. 

 

My final standard disclosure: I am not an investment consultant or a person writing a blog to entice investments. Please consult far more qualified consultants. The views expressed in the entire blog are personal. 

 

Cheers.

 

 

 

 

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