Saturday, August 28, 2010

Little Book of Big Ideas - Economics

From Aristotle to Amartya Sen, each of the mini essays presents a series of enthusiastic and illuminating insight on people who contributed significantly to the advancement of their fields. Two page entries explain concisely what they did and why it was vital. The essays also include an inset stating when and where the individuals were born and died, and a one-sentence summary of what they accomplished, and often include a second inset defining relevant vocabulary. Moore also sets the scientists within the context of their times.  

Ideas of top 50 economists are discussed; grouped in schools of thought that have fundamentally affected the way we live. I found it way too broad for investing success.  I felt the none of the authors could fully grasp protean dynamic of  inter related and ever changeful world. Nobel prizes were doled out for amateur ideas like Input Output model, inane I feel. How can anybody get a Nobel prize for a brainlessly simple ideas. I guess I am comparing these dudes to wrong class of people. I feel none of the 50 economists of last few hundred years come respectably close to some outstanding thinkers like Einstein, George Soros. A lot of them are unable to think abstract and in metaphysical terms like Yogananda, Vivekananda, Sri Yukteswar, Sri Aurobindo, who are now deemed mystic and religious personalities.

Thursday, August 26, 2010

Chasing Bubbles

I read about Louis Navellier and a book by him few months back called "Little Book that makes you Rich"

Most of his picks are 2-3 baggers or less. Only a few would be 5 baggers. Guy is quite well read, wise or not another story. He quotes that one of fallacies is to sell too soon. Hes Writing financial newsletters since 1980. Many of them paid, thats how he made money.Chap is self made and manages over 5 billion $

According to independent source his newsletter turned money 48 times in 22 years, one of the top percentile long term record esp. if you included those 10 dud years in dow jones, where msft, ge, xom lost 50% market cap and dow stayed flat.

What we need to learn from him is, lack of emotions and no love for stock. Eg. he sold out from Ebay in 2005, after 2-3 bagger ride between 2003-2005 and it collapsed by 60% in 2006 based on numbers. He sold out from Enron before collapse, he exited Cisco and Sun Microsystems in Dec 2000, he enjoyed several years of ride in Apple Computers. He write that, people fall in love with stocks that make them big money. Analyzing things from a subjective piont of view allows us to color situations with our own opinions, views, hopes and dreams and to be influenced by others. There is way too much info floating around of subjective nature.

He quotes interesting examples of quant coache Billy Beane, in NBA /basketball that forever changed game and other teams like Red Sox and Yankees had to hire a quant, that make mocker of those who believe "that you have to have an eye for talent".

Similar story comes up in operation theatre where doctor had too many variables to worry about so a formula was needed during cardiac arrest.

There are about eight parameters which are on which he measures companies. Earning Revision by Wall St Analysts is first amon. A wall st analyst wants to be an All-Star analyst put out annually by Institutional Investor magazine. Analysts does not want being fired like anyone else, so estimate is close but slightly lower to avoid stock from falling. They err on lower side to be conservative in self-preservation. Since 2001 burst analysts estimates are far less accurate now due to less information in possession, thanks to SEC's FD regulation. So they are reluctant to raise estimates. SOX also had impact. Analyst has to be wildly enthusiastic to raise estimate of next earnings. guess high, stock drops and you lose job, guess low and stock goes up or you get it wrong but who cares, there lies the rub ! another reason is once things begin to catch fire and sales and earning move at a fast clip, they tend to do so for a while. usually more earnings revision are on the way after the first one.

Other parameters are positive earnings surprises, increased sales growth, expanding operating margins, strong cash flow, earnings growth, positive earnings momentum - and last high ROE. Hes made 100s of million for himsif not billions of $, I believe someone worth learning a lesson or two from.

For example: Here is his ratings on Apple Computers

He is a pure Quants guy.

Those you want to chase will-o-wisp of Microfinance bewitching beauties in India need to be hard calculating not emotional.

Wednesday, August 25, 2010

Margin of Safety - by Seth Klarman

Read first half of Margin of Safety book by Seth Klarman, a seasoned value investor and fund manager for Baupost Group. The book was written in 1990 but is valuable for all seasons and decades.

'Yield Pigs' as they have been derisively called, mutual funds, pension funds, have been served slop of insured mortgages since the 1980s. Bankers are quick to turn out exotic instruments at seductive prospect of fees/commission.

Rationality applied to buying electronics, household whiteware is absent when it comes to investing, money earned in years is invested in minutes.

Investors must try to understand the institutional investment
mentality for two reasons. First, institutions dominate financial market
trading; investors who are ignorant of institutional
behavior are likely to be periodically trampled. Second, ample
investment opportunities may exist in the securities that are
excluded from consideration by most institutional investors.
Picking through the crumbs left by the investment elephants
can be rewarding.
Investing without understanding the behavior of institutional
investors is like driving in a foreign land without a map. You
may eventually get where you are going, but the trip will certainly
take longer, and you risk getting lost along the way.

Emphasis on the junior claims against a company is a greater-fool argument, wherein
one takes comfort from the potentially foolish actions of others rather than from the wisdom of one's own.

They accepted claims of a low default rate, and they used cash flow,
as measured by EBITDA, as the principal determinant of underlying
value. They even argued that a well-diversified portfolio
of junk bonds was safe.
As this market collapsed in 1990, junk bonds were transformed
into the financial equivalent of roach motels; investors
could get in, but they couldn't get out.

A pile of junk is junk no matter how you stack it !

We may confidently expect that there will be new investment
fads in the future. They too will expand beyond the rational
limitations of the innovation. As surely as this will happen, it is
equally certain that no bells will toll to announce the excess.
Investors who study the junk-bond debacle may be able to identify
these new fads for what they are and avoid them.

Yield Pigs have been served dirt of CBOs (Collateralised Bond Obligations, bundling of junk bonds) in 1980s which failed in 1990 very much like CDOs in early 2000s (Collateralised Debt Obligations, bundling of sub prime mortgages) which failed in 2008. Funny eh !

The way capitalism has been unleashed, each man is for himself on financial Titanics sinking ever so frequently. "What we learn from history is that we don't learn from history".

Two investment fads in India spring to mind, after Power industry in 2009, that is Microfinance and Education sector.

Tuesday, August 24, 2010

Update on positions & why such a ridiculous poultry stock ?

Hi All,

I wanted to update on the previous positions.

At this point I am bullish only on Relaxo and Simran Farms for long positions in terms of stocks listed on this blog. If you are willing to holding 5+ years you can buy TTK Prestige and Page Industries (owner of Jockey brand for South Asia) although they are wee bit expensive but they are almost certain to return 5 bags in 5 years.

There were many other stocks that I bought and sold and still like somewhat that have not been mentioned on this blog:

- Cera Sanitaryware
- Mayur Uniquoters
- Patels Airtemp
- Dhanuka Agritech
- Wimplast
- Vinati Organics
- VST Tillers

At the moment I own none of above but I had them last year and if current stocks turn expensive I will look for them again.

My inclination is now for ultra micro cap stocks, between 5-25 crore. There are other stocks that I do not mention because they are high risk kind and I do not want others to suffer losses.

Public sector banks hold immense value, though many have doubled in price but not intrinsic value, in past 3 months. Over next 10 years PSU Banks will outperform 95%+ of all listed stocks on BSE (approx 6000). Their collective return would be north of 20-25% per annum. Inspite of knowing all that, I am not betting on them just yet. Because heart yearns for that little extra return.

Why Simran Farms ?

This seems like a junk stock. Not far back it was a penny stock too !

Mind you Symphony too was penny stock (2Rs) couple years back and in 2009 it was for 20 Rs.

Simran Farms is so lousy (in perception not reality) that you have to read it to believe it !

Admin of the forum has criticized it and also closed the topic on Simran Farms :)

That is when you know there is absolute disbelief.

If you read Peter Lynch's One up on Wall St or Beating the Street, he empirically proves through a long historic timeline and examples, as why to choose low tech over high tech.

- No MBA, Engineer, CA worth his salt is willing to enter poultry industry and work with hen excreta for sure. What does it mean ? It means figure amongst ciphers. Or an equivalent proverb in hindi "aandhon mein kaana raja"
- Compare that with other high tech industries, where one cannot predict future of small cap players
- Poultry industry has huge potential
- Size of opportunity is gi - normous 50,000 crores INR+
- Small unorganised players are being wiped out by bigger players as it is no longer economically feasible to run a standalone poultry farm, integration is as necessity for survival. Thus, even if market size were stagnant top five players will thrive ! That phenomenon happened in US carpet industry in 1980s. It is also happening in other industries like jewellery, where market size is not increasing but smarter players are growing rapidly - shift from unorganised to organised.
- Poultry industry has all the goodness charm of loatheful industries which keeps MIT engineers and innovation in Taiwan at bay but its size is increasing by 10-15% per annum !
- A dumb industry does not attract new players, look at number of new players in mobile handsets !
- Scalability is not an issue, it can be implemented swiftly without Capex. Poultry integrators expand by contracting farmers with spare land and labour, this is nothing different from McDonalds franchise but without brand
- Simran Farms' young guns, new blood with fire in belly, who joined since 2005 have proved to some extent and will continue to transform company
- Simfa Labs (Vetline), a division of Simran Farms commands good brand recall and is represented in industry forums

As RJ emphatically drives through, when outperformance happens, it is viewed with doubt and disbelief. Only when Simran Farms will earn 30-40 Rs EPS and stock will cross 200 mark next year will the institutions wake up to its potential.

I very much prefer potato chips to computer chips as an investor if not as a citizen in society.

True, bird flu can strike which can result in stock price reduced to half but hey, even Berkshire Hathaways' stock price halved too couple of times. An overwhelming majority of stocks price halve in correction. In last century Dow Jonex index has corrected 13 times by more than 30% and 39 times more than 10%. As Buffett says, "If you don't have the stomach to see value of your holdings in half, stocks are not right asset class for you".

PS: Its my opinion, which may or may not work. Only time will tell who is on the right side. If Simran Farms does turn out to be multibagger as I believe, all credit goes to Peter Lynch.

Thursday, August 12, 2010

Book Update - George Soros - Crash of 2008

Read a book last week by Soros, Crash of 2008. His style has become more plain, his past books I read were quite lean on philosophy.

Main argument put forth by Soros is that textbook theories that rest on demand and supply model, equilibrium theory, market fundamentalism are not only incorrect but completely wrong. 

Soros explains parallels between Heisenbergs uncertainity principle and social sciences. I can relate to boom bust theory and reflexivity theory that he has been an advocate of. Think of this statement, "Price of a residential property is not independent of willingness of lending authority". As willingness is affected, underlying value is also affected. In human matters precise calculations cannot be made, its two way feedback mechanism between cognitive and manipulative function. Stock market prices do not only reflect the underlying fundamentals of company and economy, but also affect underlying fundamentals. 

This book reminds one of Alan Greenspan's statement who admitted that his policies were principal cause of housing bubble. His assumption that "markets are self regulating" was wrong. Second assumption, that "corporations can take of their own survival" also proved wrong. 

Financial engineering has gone out of hand, too much money is paid to investment managers for sloshing money to and fro, without any value addition, some thoughs I too concur with Soros'. 

Simran Farms - 30th June 2010 Qtr results

Dear Friends,
To log an update on analysis on Q1 for Simran Farms:
- Revenues are below my expectations but not that bad,  both bottom and topline grew by 50%+ without debt
- Operating profits are just 7% of sales, compared to 25-30% for Venky's and Srinivasa Hatcheries
- Operation efficiencies have not yet kicked in, and probably won't for the next 4-6 quarters.
If you analyse how operational efficiencies makes investors rich, take a peek into TTK Prestige's five year annual accounts. While the sales have only doubled during said period, net profits vaulted by seven and a half times.
- Company is in fight mode with other big established players (Saguna an unlisted player I respect) besides above two, thus undercutting its services to contract farmers to expand on market share for broiler breeding
- I was hoping for an EPS of 40 Rs by March 2011 which looks like a tall order for now.
- All said and done, 21 year old company that has not changed its line of business even once, never tomtomed its performance, is on track to become midcap.
I will continue to hold my full position in hope of four digit number within three years. Those who want to be aggressive in getting in and out on Simran Farms need to watch for maize futures here, maize and soya account for 80% of input cost. Steep rise may affect margins of whole poultry industry.
I am not hoping for a fancy PE ratio for a commodity stock, anything in single digits would be hunky dory, say 8 or 9. My hope is for operational efficiency and margin expansion which is taking wee bit longer until Simran gets a foothold. I continue to believe that one day (within three years) Simran Farms will earn a net profit of 10% on Sales margins i.e. 50 Crores profit on sales of 500+ crore, (EPS 125) and for that company is so far on track.

Friday, August 6, 2010

Strong Growth Predicted for Livestock Sectors in India

The article below touts quite emphatically that growth of industry is a given. While it is very easy to forecast the growth of an industry, but its not as trivial to spot winners in an industry. I can safely put money on Venky's, Simran and Srinivasa Hatcheries. First and the last are related to each other, Venky's was an excellent pick for 2009, already up 14 times since the nadir of '09.

I am bullish on other stocks too but do not want to touch existing positions until they mature.

Beef and poultry production will increase by 29 per cent and 41 per cent, respectively, to 2013/14 and there is strong demand for dairy products, according to a new report.

With the monsoon forecast to be only slightly below average, we expect crop production in 2010/11 to increase significantly owing to higher yields, according to a new report, India Agribusiness Report Q4 2010, from Companies and Markets. 

Over the five-year forecast period, production across all agricultural sub-sectors will be positive, spurred by increased demand, foreign direct investment. Dairy and livestock will also benefit from improved technology adoption, which could set a strong example and produce a model for other sub-sectors to follow. 

Sugar production growth to 2013/14 will be 105 per cent. Growth will be dictated by increasing domestic per capita consumption. However, this growth is also a function of base effects. 

Beef and poultry production will both increase – by 29 per cent and 41 per cent, respectively – to 2013/14 due to increased demand from higher incomes and prevalence of western style restaurants. 

Because of marketing schemes targeted at the general population and generally greater demand for high-value dairy products such as yoghurt and cottage cheese, the report forecasts butter and milk production to grow by 38 per cent and 26 per cent, respectively, to 2013/14. 

2010 real GDP growth will be 7.8 per cent and is predicted to average eight per cent from now until 2014. 

Consumer price inflation will reach 16.6 per cent year-on-year in May 2010, up from 5.7 per cent in May 2009. 

With the monsoon registering only slightly below average up to 7 July, the sectors deeply affected by the previous year's drought (rice, sugar, grains) should increase production considerably year-on-year in 2009/10. However, we note that these are generally due to base effects and when harvest yields are compared internationally, India's agricultural production still has room to improve. 

Indian agriculture will benefit greatly from increased multinational investment and technological improvements in various sectors. In dairy, large firms Reliance, DCM, Bharti and ITC have all entered the market, while in coffee, Segafredo Zanetti, News CafĂ© and Starbucks are finally gaining a foothold in a market experiencing moderate but consistent growth. The dairy and livestock sectors should get a significant boost in the form of information holding micro-chips and other technological advances. 

Strong economic growth will lead to increased incomes among India's vast population. This, combined with a youthful population and increasing urbanisation, means Indian demand for sugar and meat products. Producers should certainly benefit from this, but the government will also be keeping a keen eye on production levels in order to ensure what they consider manageable prices in order to control food price inflation

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