Friday, February 24, 2012

SWeT Effect™

I had cooked up a term little while ago for a stock whose price performance does not correlate at all with broader market indices as Quantum Stock™  usually a micro or small cap. While this world does not quite suffer from paucity of acronyms, I thought of contributing some to the field of neologism, just because I can.

Time for definition:

SWeT Effect™ represents a business group dynamic where in due to lack of corporate governance or strong family ties one notices Stealth Wealth Transfer from relatively wealthier entity to less wealthy in its many forms, Preference Shares, Loans, Property Purchase, Outsource part of business etc.  Just as heat transfers from hot region to cold, the group companies under same management, sometimes, if not always, experience drainage of wealth. While investors at large would moan and groan, rather than spending energies on things we cannot change, an investor needs to get away from such an organisation diverting its wealth.

SWeT also acts as a homophone of Sweat which repels others individuals (with well tuned olfactory system) from the one experiencing Sweat. In short SWeT or Sweat are both repulsive. However, there is another opportunity available, which is to side with party/cold entity receiving bread crumbs or leftovers. This can offer some speculative profits.

A few examples that come to mind are Indiabulls Real Estate investing in StoreOne, or Navin Fluorine loaning in Mafatlal group companies.

Friday, February 17, 2012

Cheap or Expensive

I am sinfully invested in my personal capacity in equities since I fortunately have source of income other than stock market as yet. 

It is amusing to notice biases that affect others but harder to detect that pervade within us. Neither too proud of my own mistakes or biases, nor dwelling on them, it would be worth sharing a few anecdotes. 

An analyst long on Hawkins Cooker expects that promise of heavenly bliss would launch PE from 25 current to 45. For all I know it might well go, Gillette is at 70+ PE ratio, it wont be heavenly though. Another one proving the stickiness nature of business expounded that 8 whistles of TTK prestige cooker are not same as that of Hawkins cooker. It has been about 10 years and Hawkins Cookers has not grown its Sales numbers even once by 25%. 
That kind of analysis into bells of Cookers is like too microscopic a study, trying to extrapolate meaning out of everything not likely to yield results. Fortunately, until now my broad line of thinking saved me in the past 15 months, that if Hawkins does not think beyond cookers - 82% of their revenues - and extend its brand to other products, then it will deceive innocents into lures of consumer business while under the garb, its a non-repeat use engineering business likely to disappoint  like a cyclical and croak like a monsoon frog. A cooker lasts 30 years.

The problem of Hawkins Cooker or Gillette India, Dabur etc is the focus on not-losing-money, makes complete sense for those who have too much to lose, it could be best accomplished by TIPS.

You may find RS Software sub par investment due to client concentration risk or average quality of management. I went through last 10 years of results and annual reports of RS Software. I feel their expansion in Asia will bear fruits  - already 10% of revenues accrue from this geography from 0% in 2008 - and focus on Payment Card domain has made them stronger. Debt has been retired in the past 5 years leaving balance sheet squeaky clean. Only 6-7 other players in India match the size and depth in this domain.

Its consolidated PE ratio is 2. Debt is nil. Dividends are likely to increase providing a floor of 45 or so to the price. What remains is concentration risk, which we don't have to assume by allocating 1-1.5% max of portfolio. Other cost is opportunity lost, which is decreasing with rise in general market. This fine business boat of 40%+ ROE does not burden the oarsman. 6-7 PE ratio may come without divine  intervention leaving you with some happiness if not eternal joy to walk away with a 3 bagger !  

Mind you thats a big achievement, TTK Prestige with its scorching growth is NOT likely to become a 3 bagger now for atleat 4+ years ! i.e. 12000 by 2016.

Discussing Stocks: Its great to discuss about stocks and seek others' valuable experience and knowledge and I email my fellow investors for their opinion but I reflect and decide on my own. Arguments for their own sake become a forum for spleen-venting. There is diminishing utility of discussion as the years roll by. Its amazing what can be accomplished by sitting alone for years and thinking in right direction  in a room, some men found God - a topic not easily understood by faculties of reasoning mind - let alone discussed, and others discovered theory of relativity in closed doors.

Economy: While the experts cannot agree themselves on future of the world, our best bet with limited time is to stick to good businesses. As voiced by a wise man, investment in terrible industry is as rewarding as struggling in quicksand. 

Compounding: "Marrying for money is a bad idea under all circumstances, but madness if you are already rich". It can be construed in various ways - today I would adapt it as "Knowledge that long term compounding will make you rich any way, why risk un-nessarily over enthusiastically for a few percentage points". 1 Lac Rs invested per annum for 30 years compounds to 16 Crores at 20% compounding and 139 Crores at 30% compounding. Blessed are those who invest in equities so long as they diversify adequately.

Be Rich and Stay So