Owner: Value investing india URL:http://valueinvestorindia.blogspot.com/ Join Date: Mon, 22 Oct 2007 15:21:57 -0500 Rating:0 Site Description: An online diary of my investment philosophy based on the teachings of warren buffett, Ben graham, Phil fisher and other value investors. I will be posting my thoughts and analysis of various companies and industries. In addition i would be posting on pote Site statistics:Click here
The frustation with Value investing 2007-10-23 13:38:00 I received the following comment from amit and can completely empathize with his frustation. Instead of replying via a comment, I thought of posting it as my reply is rather long winded. My reply is after amit’s comment.Hello Rohit,In 2005 i passed from my engineering course and joined a software MNC.As there was too much hype about stock markets i too got lured into it and had my Demat account.Confused why i am writing this story,please read on.The next part was to do some investing and for that i wanted to earn big and fast.My first trade was buying Reliance pre split at 830/- a share.Many said it was overvalued and i wont gain from split.I had other thoughts,i have always had a fascination for reliance and i thought i was perfectly right.In fact i was and today that 830/- has zoomed to 5000/-.The next thing i heard was value investing.And i hate the day i heard about this whole value investing funda.I started to read blogs of value investors and plz dont take otherwise they are so Read more:Value
How to look at the market swings - Time horizon 2007-10-21 15:14:00 I have been re-thinking my time horizon
for investments for some time and have made some changes to it. The corresponding impact on my investment decisions and how I look at the market swings has been dramatic. My earlier time horizon was on an average 2-3 years. However I have now increased my time horizon to 10 years for my SIP component. The active portfolio component still has a horizon of 2-3 years.I cannot understate the impact of extending or changing time horizon has on how one looks at market volatility, current events, investment ideas etc. Let me illustrate10 year or more horizon – If you are in you 20’s, 30’s or even 40’s this time horizon makes sense. For a time horizon of 10 years, short term market movements have no importance. Over a 10 year horizon, if you are looking at index funds or well managed mutual funds, a small amount of overvaluation does not matter. These overvaluations would even out as long as one has not bought extensively during the peak. At the
Banking 2007-10-16 17:58:00 I have written earlier on banksOn valuation approach of banksMore thoughts on valuation of banksVarious factors to evaluate banksMargin of safety and BanksI recently posted on a Financial services company ‘sundaram Finance’ which has a business model similar to banks.I have been analysing banks as a group, trying to understand their business models better. I found the following articles useful to understand the working of a bankAsset liability management function of banksVarious factors in evaluating banksNPA and various factors in understanding Bank NPA’sA few additional thoughts on the business model of banks- The traditional lending business of banks is now becoming a smaller portion of the business. The ‘other income’ portion which comes from various activities such as distribution of financial products, cash management etc is now becoming more important as this income is not sensitive to interest rate changes and requires less capital- The % of other in
How to make 6.4 lacs by investing 1000 per month 2007-10-13 10:33:00 Is’nt the above title like a typical get rich quick scheme ? Frankly there is no magic in the above. The approach is very simple. The NSE or BSE index on an average has returned around 16-17% per annum for the last 10-15 years. So if one can invest via SIP (systematic investment plan) around 1000 Rs per month, it should amount to around 6.4 lacs after 10 years. This is with the assumption that the gain is evenly distributed ( @ 1.4 % per month) across the entire 120 month time period.Ofcourse reality is not that convinient. However volatility generally helps in improving the overall returns in an SIP plan. So if one can maintain the discipline of investing 1000 per month irrespective of how the market is doing in the short term, it will work out in the long run.Let me give a few scenarios (investing 1000/ month) Anyone can follow this approach by regularly investing in an ETF or an index fund for the long term and come out well. Even better if you can find a mutual fund which can bea
Analysis - Sundaram Finance 2007-10-06 17:29:00 AboutSF(sundaram finance) is an NBFC promoted by the same group which controls companies such sundaram clayton etc. The company is the business of hire purchase and leasing in the automotive sector. In addition the company has subsidiaries for housing finance, asset management, Infotech, insurance etc.FinancialsThe company reported a consolidated revenue of 1100 crs with a growth of around 25%. The company has had decent topline and bottom line growth in double digits for the last 5-6 years. The ROE has improved around 10% to almost 15% now. The company also has extremely low NPA of around 0.5% and CAR ratio in excess of 12%.The company has AAA ratings and has been able to get funding from banks and other institution at competitive rates.PositivesThe company is a well managed conservative company. It has show good growth in the last 5 years, with a decent ROE and low NPA. In addition the company has a strong brand name in its segment and a good distribution and marketing infrastructur Read more:Analysis
The Reliance effect 2007-10-01 16:12:00 update : Oct 09well, the euphoria has increased even more since i posted, which was just a few days back. Reliance
and a few other stocks like L&T are the new dotcoms of 2007. I am getting a sense of deja-vu ..can see a replay of 2000 here, alteast the initial part. Soon we will have people justifying the current run-up saying how it is 'different' this time. Personally, in this bi-polar market i can see quite a few undervalued stocks and would prefer to concentrate on them than get pulled into this frenzy.The S&P CNX nifty (NSE index) has risen by around 13.2 % in the last one month with the main move happening after the fed rate cut on 18th. The funny thing is that all reliance stocks have shot up since then.The following is the increase in the price of these stocks in the last one monthRIL – reliance industries – 20.5%Reliance energy – 75%RNRL – 115%Reliance communication – 13.1%Reliance Chemotex – 147%RPL – 41%So I guess anything with the name reliance is in Read more:effect
Sell half and play with the profit ? 2007-09-27 15:59:00 Scenario: I bought a stock for Rs 50. My intrinsic value estimate was Rs 100. The stock quickly doubled and then some more. It quotes at Rs 125 now. What should I do?The most common response I read and have also heard from friends is this – Sell half your holding and recover your investment. What you leave behind is your profit
. Let it be in the market as can afford to play around with it.I have myself engaged in the above logic. However I find this logic completely faulty. My ‘investment’ now is not Rs 50. It is Rs 125. That is the money I have now with me. I can sell the stock completely and choose to invest the money in another security or maybe just buy a Flat screen TV or whatever I fancy :)The above is a case of anchoring bias. We tend to anchor our thinking to the purchase price of the stock. The purchase price is history. The current price is what mattersLets take another caseI buy a stock for Rs 50. My intrinsic value estimate is Rs 100. The stock drops to 40. I investig
Gujarat gas – Recent review 2007-09-23 17:34:00 I invested in Gujarat
gas back in 2003 and exited my position by 2006. I recently read the following post on ranjit’s blog. As Gujarat gas is one of his top 5 holdings, I decided to re-look at the company to see what I am missing out as I had exited my position sometime back and did not feel that the company is under-valued.I found the following positives- Gujarat gas now sources almost 95% of its gas requirements at market prices now and has been able to maintain the operating margins. In 2003, a substantial portion of gas was procured at subsidized rates and hence there was a risk of margin reduction. The company has been able to manage the transition very well.- There has been a substantial reduction in the transmission income. The company has managed this well by expanding the other lines of revenue- There is substantial expansion in progress at Vapi and Jaghadia. Vapi will contribute to revenue in 2007- Gas volumes, no. of retail customers and bulk customers are all increasing a Read more:Recent
, review
Feeling smart …like the duck 2007-09-21 13:50:00 In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond. - Warren bufett - Letter to Berkshire Hathaway shareholders, 1997.I generally check my portfolio performance once a month and with a runaway stock market (YTD +18% ) , it is diffcult to do badly. So I felt smart - like the duck :) . You have to just throw darts on a stock list to make money these days. Lets see what happens after the music stops ! So are you feeling like the duck?
Read more:Feeling
Hidden value – Kirloskar oil engines – Report card 2007-09-17 19:44:00 I posted on Kirloskar oil engines
in oct 2006. I had noted that the company has investment holding in other group companies and JV’s of around Rs 95/ share. My own intrinsic value calculations were in the range of 320-350 Rs/ share. So how did the stock fare?My personal history with the stock is below. I started investing in the June-july time frame and had an average cost of around 182 Rs/share. I sold at an average price of around 315/ share resulting in an annualized gain of around 75%. So was it a smart pick ? more of that later. First I bought in june at an average price of around Rs 182/ share and price shot to around 300 by Nov time frame. Had I liquidated then, my annualized gain would be around 125%. Is this hindsight bias? I don’t think so. Let me explain – My approach has generally been buy and hold. The original thesis for this stock was that the company was selling below intrinsic value due to investment holdings and once it approached intrinsic value, I would sell i Read more:Hidden
Book notes – Way of the Turtle - Final post 2007-09-15 14:50:00 Final post on my notes with my comments in italics Earlier posts on the same book here,here, here and hereThe thirteenth chapter discusses how robust systems can be developed. Systems which work in varying market situations are robust. The author gives an example from biological systems. He refers to the concept of simplicity and diversity. Simpler organisms are most resilient than complex ones which are adapted to specific environments. Also nature develops diverse organisms so that the ecosystem is shielded from the effects of a radical change in the environment. So systems or approaches built on these two concepts are more robust.An investor following a simple and diverse approach will be more successful than others. For example, a value investor (simple approach) following a graham style approach, aribtrage and DCF based approach (diversity) can be fairly successful in varying market circumstances.The fourteenth chapter discusses about the role of ego in investing. The simple rules Read more:Final
Negative review - Way of the Turtle 2007-09-13 11:31:00 I received the following comment from senthil. He pointed out to a negative review
on the book (see link in the comment) – Way of the turtle on which I have been posting for the past few days.I found some review comments to be valid. However at the same time the reviewer has choosen to highlight only the negatives and not comment on the positives of the book. I think most of the books have a mix of both. I would say good books are the ones where the positives outwiegh the negatives. Ofcourse there are books which take a germ of an idea and use 250 pages to beat it to death. On the other hand there are very few books or classics which are worth reading multiple times. ‘Security analysis’ and ‘The intelligent investor’ by Benjamin graham, Common stock and uncommon profits by Phil fisher are a few which come to my mind.The book (inspite of the title) is not a ‘how to’ book for trading. If, like me, you do not know much about trading, this book will at best give you a basic f Read more:Negative
Book notes – Way of the Turtle - IV 2007-09-11 18:15:00 My notes on the previous chapters of the book here, here and here.The ninth chapter discusses about the building blocks of trading such as breakouts, moving averages, volatility channels, time based exits and simple look backs in detail. The next chapter follows with a detailed discussion on various systems such as the ATR channel breakout, Bollinger breakout and Donchian trend etc. This chapter also gives the performance data for all these systems based on the historical data. For ex: donchian trend has a 10 year return of 30% p.a with a max drawdown of 38.7%.The important point in this chapter is the author’s emphasis on backtesting. Backtesting means that every system should be evaluated with respect historical data for returns and maximum drawdown. Backtesting may not help predict the future or ensure that the system will always work, but it would help to determine which system could be profitable in the future and what conditions are needed for the success of the system.My comm
Book notes – Way of the Turtle - III 2007-09-09 11:03:00 The sixth chapter discussed various trading concepts such as support and resistance. These concepts are discussed in detail in this chapter with examples.The seventh chapter is crucial to help answer the question: How can you know if a system or a manager is a good one. I would suggest reading this chapter in detail and understanding it and applying it when selecting or evaluating a trading system. A lot of trading systems refer only to the returns and choose to ignore risk. The chapter refers to four types of risk.Drawdown – String of losses than can reduce capital in the trading account. It is the maximum loss the trader / manager or trading strategy incurred at any point of time.Low returns – period of small gain where the trader cannot make enough money to make a livingPrice shock – sudden price change which can wipe out a traderSystem death – Change in market dynamics that causes a previously profitable system to start losing money.The chapter discusses each type of risk i
Book notes – Way of the Turtle - II 2007-09-07 14:27:00 I have been reading the book – Way of the turtle for the past few days and have found it to be a good book. It is a book on trading. I posted my notes on the first two chapters earlier.Notes on 3rd, 4th and 5th chapters follow –The third chapter refers to the risk of ruin. This is risk a trader faces that several of his trades will go against him and he could lose his entire capital. The way to manage this risk is via Money management. This involves putting the position in small chunks called as units which are sized based on the type of the market, volatility measure of the market etc (please refer to the book for more details). The third chapter refers to four key points- Trade with an edge: Find a trading strategy which can produce positive returns over the long run as it has a positive expectation (see an earlier post on edge, kelly’s formulae etc here)- Manage risk: Control risk via money management discussed earlier- Be consistent: execute plan consistently to achieve the p
Book notes – Way of the Turtle - I 2007-09-04 11:14:00 I referred in my previous post about a book on trading – Way of the turtle which I have been reading for the past few days. Now why should a guy who displays a mental block against trading, read a book on the topic? The short answer is to challenge my own biases against trading.I can definitely say that this is a good book and anyone wanting to learn about trading or wanting to evaluate a trading system (in a book or being sold by someone) should read this book. What follows over this and the next few posts is my own summary (not review) of the book with my own thoughts and comments (which I cannot resist putting :) )The book is written by curtis faith who was one of the turtles (traders) recruited by richard dennis and william eckhardt as a part of an experiment that trading can be taught. The author was one of the original recruits (and probably one of the most successful) who made more than 30 million for Richard.The book describes the difference between an investor and a trader.
Assumptions and beliefs 2007-09-01 19:56:00 I read somewhere that all of us have a set of underlying assumptions based on which we create a model of the world. This model involves all aspects of life, but I will restrict myself of investing.I am aware of a few assumptions on which my investing style or philosophy is based. These assumptions are not universal truths or applicable to others. Its just that I have developed these assumptions over a period of time. Some may be valid and some not. I constantly test these assumptions against my performance and try to discard those that work against my long term performance.So here goes my list1. Value investing is an extremely productive approach to investing for my circumstance. I have a regular job, a family and can devote only a limited time to investing. So for me value investing and an as an extension, buy and hold makes sense.2. Trading is time consuming, too stressful and not a game in which I can or want to excel. In addition, I have a mental block against trading (which must q Read more:beliefs
Ashok Leyland 2007-08-27 11:12:00 AboutAshok
leyland is a 7500 Cr company in the automobile industry. It is the no.2 manufacturer of commercial vehicles in india. It has a 28% market share in commerical vehicle and is no.1 in the bus segment. It has a current capacity of around 80000 vehicles which would be expanded to 100000 vehicles in the next 1-2 years. The company has 6 plants at Ennore, hosur, Alwar and Bhandar and is putting a new plant in Uttaranchal.The company has the following product segment – Buses, trucks, defence, spares, services and now the company is entering into design and other OEM services.FinancialsThe company has doing well inline with the commerical vehicle industry. The turnaround in the sector performance has happened from 2002 and the industry has seen good growth since then. ALL (ashok leyland Ltd) has seen its revenue increase by 23% per annum since then and profits increase by 25%+. The company has become more efficient as its return on capital has increased from 15% to 25%+. The net m Read more:Leyland
My Brief Notes on the Auto industry 2007-08-22 11:51:00 The Auto industry
consists of the following products segment and key companies4 Wheelers (cars, UV etc) – Maruti, Hyundai, Tata motors, Ford etc. This is a fast growing sector of the market with the most action. Rising incomes and easier credit has resulted in growth in the industry. India is also developing into a Hub for exports especially for small and compact cars. This sub-sector is characterised by high competition and aggressive marketing. The key player is maruti with around 51% market share. The last 3-4 years have seen growths in excess of 15-20%. In addition competition is increasing in this segment with aggressive growth plans from Maruti, Tata motors and other foreign majors such as Toyota, GM, Hyundai etc. I have been looking at some of the companies in this sector and there are some good ideas. I will be posting on a few later.2 wheelers (scooters, Bikes etc) – This has been a growth sector for the last decade. The annual volume is almost 8 Mn units making india one Read more:Brief
, Notes
The Subprime mess and opportunity 2007-08-19 09:54:00 Only when the tide goes out do you discover who's been swimming naked - warren buffettIt is diffcult to avoid reading on the subprime mess in the US. I have an oversimplified explaination – 'Losses being incurred by individual and institutions for overpaying for financial assets like CDO, MBS (mortage backed security) and other debt due to greed (for higher yields), ignorance (not knowing what was behind these assets) and overconfidence (too much faith on models)'. So what we are seeing is repricing (or correct pricing ?) of these assets.Well for a much better understanding on what is happening and what may happen in the months to follow , read this article on fortune.In a nutshell the opinion is that this bubble will take some time to unwind, there could be volatility in the markets due to that and there could be steep losses for some.I think india is not going to be affected much directly. However we could see second order effects. With a liquidity crunch, it is quite possible t Read more:Subprime
Passive v/s Active investing 2007-08-16 10:19:00 There is an interesting post by prem sagar on passive v/s active interesting. In response to the post deepak has posted a response on his blogIf I have understand it correctly, prem’s position is that one should calculate the delta returns one would get by investing actively and compare it with other sources of income such as a job and decide if it is worth the effort. For ex: an extra 3-4 % return on a portfolio of 10 lacs could mean 30-40 K extra money. Not enough to make active investing worth your while.In contrast deepak’s position is that if the returns are around 50% then the delta would be 3-4 lacs (for a 10 lac portfolio). With these kind of returns, active investing can be looked at seriously.I have thought long and hard on this above issue. My take is as followsI think prem’s position is perfectly valid for a new investor. I really doubt if it is possible to earn 50% annual returns for a long period of time (atleast 5 years or more) by spending 1-2 hours per day on the Read more:Passive
, Active
My notes on power sector - II 2007-08-14 17:19:00 My notes on the power
/capital goods and other suppliersCapital goods suppliers This sector
is dominated by BHEL and ABB followed by several smaller players and Chinese manufacturers. BHEL accounts for almost 65% of capacity and market share. This sector has seen good growth in the last 3-4 years and should see continuing growth for the next couple of years. ABB has a smaller product range mainly for the power sector and industry automation. However it is more profitable company than BHEL and doing extremely well for the past few years.The companies in this sector are characterized by high return on capital and good competitive advantages. The key competitive advantage is due to Scale, technology and an existing customer base. The companies in this sector are now investing in R&D and also targeting export markets as they increase in size.This sector should see more competition due to the high demand from Chinese manufacturers, domestic OEM players and foreign players.The market recogniz
My notes on power sector - I 2007-08-10 12:20:00 My notes on the powersector
belowThe power sector can be divided into the following sub-sectors a. Generation – This sector has companies such as NTPC, REL, tata power and state generation unitsb. Transmission and distribution – Mostly owned by SEB except in a few places such as delhi where it has been privatisedc. Capital good suppliers such as BHEL, ABB, L&T etcd. Other suppliers like power cable companies, fuel suppliers etc.Detailed analysis of the sector is provided in the business analysis spreadsheet. I have a new version (Business analysis_working_aug 2007) recently.A brief analysis of each sub-sector followsGeneration Generation is dominated by companies such as NTPC and State generation utilities. A few private sector players such as REL and Tata power also are important players in the sector.This sector is characterised by fixed return on capital of around 12-14%. The tariff’s are adjusted in such a way that the company has a fixed return on capital. In addition g
Reading up on capital goods industry 2007-08-08 18:06:00 I am currently reading and analysing the capitalgoods
, power and projects industry
as a whole. The reason for studying them together is that several companies in the above sectors overlap or are suppliers to the companies in the other sector. For ex: BHEL (capital goods) is a supplier to the Power industry (ex: NTPC).I will post a detailed analysis later. However a few points stand out- The capital goods and projects (such as L&T, ABB etc) industry is firing on all cylinders. They are growing a high rates, have high big order books and a high return on capital.- The market is valuing these companies at 40-50 times earnings. Somehow everyone has forgotten that the above industries are cylical (remember 1999-2002?) and the cycle can turn downwards too. In that event, the stocks can get whacked badly.- Competition is increasing as india is becoming a major source of demand globally. Increased competition is never good for profits and valuation
Read more:Reading
A Few good books 2007-08-05 11:21:00 I am planning to read the following books in the coming months- Way of the turtle (great book on trading)- EINSTEIN : His life and universe (biography)- The dhando investor – reread (book by mohnish pabrai)- Security analysis – reread ( value investor’s bible)- Micheal porter’s – competitive advantage update 9-Aug- more than you know (on investing and mental models)- Black swan - great book by nicholas taleb - a must readFor the past few years, time is more of a constraint than money (in terms of books :) ) for me. So I typically work out the topics where I think I need to learn more. I then find well rated books on that topic and go through it. I do this typically once a year and am able to read 10-12 books every year. I purposely limit my self to not more than 15 books as that would take away time from reading annual reports.I am looking for good books on the following topics- Options and derivates- Accounting- Accounting standard – US GAAP and Indian GAAP- ProbabilityAn
Allahabad Bank 2007-10-29 18:35:00 My notes on Allahabad bankAboutAllahabad bank is one of the oldest banks in India with over 2000 branches. The bank’s branch network is predominant in UP, Bihar and other northern parts of the country. The bank also has 47 specialised branches for various business activities such as Industrial finance, Collection service, Treasury management etc. The Bank is a PSU bankThe bank was a basket case a few years back. I was reading a research report when the bank came out with an IPO in 2002. The bank had NPA of 10.5% which was actually a reduction from 15.1% in 1998. So technically the bank had a zero networth till 2002. The bank has improved its performance since then.FinancialsThe Bank has improved its financials substantially in the last few years. The following Key parameters of the Bank have shown improvements from 2002 to 2007ROE – 11.2 % to 22%CAR – From 10.5% to 13%Net NPA – from 10.5% to 0.9%ROA – From 0.6% to 1.3%Absolute Net NPA – from 1160 Cr to 315 CrCredit deposit
Sundaram Finance Spreadsheet 2007-11-02 11:19:00 I have uploaded the spreadsheet for sundaram finance in valueinvestor india google group.Please use link - http://groups.google.com/group/valueinvestorindia to download the file. Please also see the disclaimer, as I am not recommending this stock. The spreadsheet analysis (correct or wrong) is my personal analysis of the company.You can find the sum of the part analysis of the company under the tab – sum of parts.Please feel free to leave a comment if you find something wrong in the spreadsheet.
Read more:Spreadsheet
Financial institutions and risk 2007-11-07 17:47:00 update: 09-Nov - A great post on the valuation of financial firms and the diffculty of doing so ...see hereI have written on banking earlier. You can find my analysis of allahabad bank here. Most of you must be aware of the subprime crisis. I discussed it briefly here.Banks and financial instutions by their very nature are highly leveraged organizations. So the risk of bankruptcy and losses is higher with banks. Citibank is one of the largest bank in the world and has seen its stock drop by 35% this year. The CEO has just resigned. You can read all about the crisis here.So what does citibank and the subprime crisis have to do with banking in india. Well a lot … Let me digress and tell you a short story.The year is 1996 or maybe 1997. I was starting to invest and saw an article on IFCI (I guess you must have already got the hint or must be thinking ….what a Bozo !). Well, the article said that IFCI is a good opportunity as it was near its 52 week low and had a dividend yield of almo Read more:Financial
A deep value stock 2007-11-06 11:56:00 Prof bakshi had posted a quiz to his students. You can find the answer to his question in the comments section. I have posted on the same company earlier.In addition you may find my response in the comments section too. There are several other answers from others in the comments section such as VST, wyeth, divyashakti granite etc. Some of the ideas sound pretty interesting and I would be looking at them closely.My suggestion – if you are interested in value investing, read prof bakshi’s posts ,articles and interviews. There is a lot you can learn from him.As an aside - i am reading a book : seeking wisdom - from darwin to munger. This book has been recommended by charlie munger himself. I dont remember the exact comment, but it seems he liked the book so much he bought a copy of this book for all his friends and relatives. He also said that if there are more books like this, he could bankrupt gifting them. I am not sure of the authenticity of the comment. But after reading 60 odd p
Real estate valuation - I 2007-11-13 13:50:00 If like me you believe the basic definition that the intrinsic worth of an asset is the sum total of all the cash flows one would receive out of an asset from now onwards, then real estate could be analysed using the same approach as stocks or bonds.Using that logic, we can say that there are two components to the cash flow1. Rent which is equivalent of dividends2. Final sale price of the asset (real estate) which is the same as the sale price one would get from a stock or bondLike stocks, it is easy to get the value of rent (or dividend), but difficult to get the final selling price. In case of real estate the final selling price would depend on the state of real estate market, interest rate, economic activity of that area and location of the real estate. This is similar to stocks where the final selling price depends on a large number of factors, most of which cannot be predicted.Using the same analogy, if it is possible to value a stock roughly, if not with precision, t
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