Multibagger Stocks India

SWeT Effect™

2012-02-24T15:58:00.003-08:00

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.

Cheap or Expensive

2012-02-17T16:34:00.000-08:00

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

The Long and Short of 2012

2012-01-27T13:41:00.000-08:00

Hello Happy Souls

By short I don't mean shorting stock, I imply buying stocks for short term.

For the long term, 3+ years:

- Titan Industries

- Wim Plast, no nonsense silent work horse management with decent brand image

- Page Industries

- Cravatex - I cant advertise and promote enough shamelessly, even though Batra's should be doing it instead of me

- Cera Sanitaryware

- Globus Spirits - repeat order business, govt. enforced oligopoly in Delhi, Haryana with 20-30% market share

- J&K Bank

Following can be considered for short term trading 3 - 9 months:

- Infinite Computer Solutions - 27 Rs consolidated EPS and 4-5 Rs dividend expected, no debt by end of year

- Falcon Tyres, lots of debt but expansion coming

- Eclerx

- Technofab Engineering

By the way my luck has been sucking all this week, so please do your own diligence have already spilled milk on carpet and burnt food beyond recognition.

Moat of Buffett's Colourful Coterie explained

2012-01-21T12:10:00.000-08:00

In the past I have tried to understand rationale and logic of Buffett's acquisition, both public and privately held companies. While there are abundant books on Buffett, none of them analyse all the privately held entities, most of this information is scattered or not well organised. I collated information on a handful of companies under Berkshire's flank and posted here.

When Buffett makes a bet on IBM, it makes news. However, for individual investors it makes immense sense to understand what Buffett was doing when he had less money. All the companies Berkshire has acquired in the past, which are privately held and not written about are great in their own right and people don't realise it. Fortunately there is a new book "MOATS : The Competitive Advantages of 70 Buffett and Munger Businesses" by Bud Labitan, author and a value investor, and his associates which nicely stacks up 70 of Buffett's businesses. It unravels MOATS as conceived and applied by Buffett during his lifetime.

I communicated with Dr. Maulik Suthar of Gujarat, India who contributed in this book and Bud Labitan of Northwest Indiana, US to get some insight into MOATS book writing project. Please find Q&A with Bud Labitan and Dr. Maulik Suthar ending with a few questions from myself:

Maulik: What motivated you to write this book?

Bud Labitan: Maulik, I was in Omaha last May, and I attended Bob Miles Value Investor Conference, the book author’s event, and the 2011 Berkshire Hathaway annual Meeting. At the Value Investor Conference, I met with Bob Miles and Pat Dorsey. Everyone had a great time sharing stories and learning from the guest speakers. And, as you may know Pat Dorsey was formerly Morningstar's Director of Stock Analysis who wrote about moats of different companies that they would review. As I looked around Mammel Hall and the impressive new building of the University of Nebraska at Omaha - College of Business Administration, it occurred to me that no person had tried to study and document the competitive advantages of Berkshire Hathaway's businesses.

Maulik: Why did you focus on these 70 Berkshire Hathaway businesses?

Bud Labitan: It occured to me that the general public does not realize how great these businesses are. I took the names of the businesses listed on Berkshire Hathaway’s website... the link to major subsidiaries. Then I added a few of their largest stock investments... The chapters in MOATS are arranged alphabetically. My intent was to study the economic moats, learn more about them, and see which ones are growing and which ones are shrinking. I figured that this would help make me a better manager and a better investor... A part of me wanted to get Warren and Charlie's attention, and get a job working for Berkshire Hathaway. After Todd Combs and Ted Weschler were hired to help with investments, I figured that my chances might be better on the operations/competition side of the business... As a big fan of the Chicago Bears American football team, I tend to think in terms of Offense, Defense, and Special Teams... and, if you don't get picked for the Offense or Defense, sometimes you can make a name for yourself like Devin Hester running the ball back on Special Teams.

Maulik: So, MOATS is like one big application and cover letter? How did you start and organize this project, and how did you motivate the researchers to get involved?

Bud Labitan: Sort of... The project may or may not yield dual benefits. Either way, writing and editing MOATS has been a great learning experience. While much of my research was already compiled from notes and previous book projects, I needed to test my ideas about economic moats against someone else... sort of like checks and balances... I started to feel like the size of this project might be too big. So, I needed to simplify the process, stick to 2 main questions, and have research contributors to bounce ideas with. This testing of ideas yielded additional information that is new and valuable. It resulted in a bigger book of 358 pages, but I think it is a better book... The research contributors who contacted me took a chance that they might become part of a book with lasting value. I promised them that their name would appear along side mine on the chapter or chapters that they worked on.

Maulik: ...and finding the researchers and editors?

Bud Labitan: I posted an offer on the web, and I wrote to Professors at the University of Nebraska at Omaha's College of Business Administration. I posed the 2 questions this way: (1.) Name the business' competitive advantages and (2.) Are the advantages sustainable for the next 10 years? Cost Advantages and/or Differentiation(Brand)Advantages?

Maulik: Did you get many volunteers?

Bud Labitan: At first I would get one or two a week. Then, I got lucky with some of the summer MBA students of Professor Phani Tej Adidam, Ph.D. who is the Chair of their Department of Marketing and Management. Tej Adidam was willing to give some extra credit points for participants. And, as you know, if your grade is somewhere between a B+ and an A-, the extra points help. Professor Adidam's MBA students of 2011 have contributed valuable ideas to many of these chapters. Also, Richard Konrad, CFA, of Value Architects Asset Management was quite helpful with the financial and insurance businesses.

And, of course you, Dr. Maulik Suthar of Gujarat. You and Scott Thompson, MBA of Minneapolis, Minnesota were also enthusiastic supporters and a big help in discussing topics back and forth. We also have a few enthusiastic international volunteers like Beryl Chavez Li and Stephen Chan, students at the University of Manchester, UK.

Bud Labitan: I learned that some of these Buffett and Munger investments for Berkshire Hathaway have double and triple moats.

Maulik: Before we go into that, could you explain a moat for our readers?

Bud Labitan: Sure, Moats are barriers. They are competitive advantages. One of the oldest moats surrounded the ancient Egyptian settlement of Buhen, on the West bank of the Nile River. And, during the medieval period, the kings of Europe would build wide and deep trenches filled with water around their castles. These moats were built as single or double protective barriers against invading armies. In business, we think of moats as economic barriers to invading

competition.

Maulik: and the double and triple moats?

Bud Labitan: Take a look the Coca-Cola Company. One moat is the efficiency reflected in the amount of FCF generated for every sale. Since Coca-Cola has a combination of a special brand advantage, large scale cost of production advantage, and a global network distribution advantage, we could say that it has three moats around its economic castle. Charlie Munger also said that "The muscle power of Wal-Mart and Costco has increased dramatically.” Some of their

housing related businesses have had to make cuts during the recession, but they are now adding to their moats by buying up worthy competitors.

Maulik: Do you think the macro economy is going to grow any time soon?

Bud Labitan: I am not sure. However, I can tell you that these 70 businesses are fundamentally strong, and they will prosper better than many when the general economy resumes reasonable growth.

Maulik: Is there a common theme to their competitive advantages or moats?

Bud Labitan: Generally speaking, they either have a cost advantage or something special. In academia, they use the fancy word differentiation. In my writing of Moats, I wanted this book to be understandable by high school students. So, I tried to eliminate big words and fancy terms. At first, it was funny how some of the student contributors would say that a business was strong because of financial backing from Buffett and Munger and Berkshire. I would say something like "yes, you are partly right. However, these businesses were building up a moat or two before Buffett and Munger invested in them." This is how I got some of them to focus on cost, special, or a bit of both.

Maulik: Are moats invented or acquired?

Bud Labitan: That is a good question. In these 70 businesses, somewhere in their history, a founder or manager built an advantage into their business model. Then, as they grew, some would acquire competitors and enhance their business model by learning as they grew. The one that comes to mind is Clayton Homes. Clayton Homes right now has diminished sales because of the general macro housing market. However, in the last down cycle before this one, they acquired

competitors and they have innovated better building processes into their product. So, when the economic cycle moves up again, Clayton will be an even stronger competitor.

I think the answer to your question is all of the above. Moats are invented, expanded, contracted, and acquired with bolt-on acquisitions. Moats must be maintained. And, in some industries like the newspaper businesses, moats are contracting because of media substitutes like cable TV and internet websites. In the Washington Post chapter, you will see how WPO is adapting to these changes while growing in educational services.

Maulik: I read that Berkshire Hathaway recently bought 64 million shares of IBM at a cost of $10.7 billion. What is the story on IBM and technology?

Bud Labitan: For me, this investment reflects Buffett and Munger's continuous learning philosophy and flexible mindset. Charlie Munger has often says "Opportunity comes to the prepared mind.” Warren Buffett has read the IBM annual report every year for 50 years. That is one heck of a preparation period!

In 2011, he got a different slant on it. He said, “I read it through a different lens… just like I did with the railroads… I don't think there's any company that's—that I can think of, big company, that's done a better job of laying out where they're going to go and then having gone there.”

Maulik: Was there a moat at IBM or did they just recently invent one in the past few years.

Bud Labitan: Maulik that is another good question. I think there were several factors at work here. First, even with its periods of ups and downs, IBM as a team had built up a well respected brand in IT services around the world. Next, guys like Lour Gerstner and Sam Palmisano led IBM to be less reliant on big hardware, and more towards services. The IBM mix is operations under five segments: Global Technology Services (GTS), Global Business Services (GBS), Software, Systems and Technology, and Global Financing. I think this mix of factors as well as managerial focus on building shareholder intrinsic value per share... the moat became apparent in Warren Buffett's mind. At some point, these factors came to play in his mind: “Understandable first-class businesses, with enduring competitive advantages, accompanied by able and trustworthy managers, available at a bargain price.”

Maulik: Bud, this reminds me of your other book Decision Framing. Do you think it is intentional or intuitive?

Bud Labitan: Hum... it may not really matter (intentional or intuitive)... if we prepare our minds with continuous learning, like Charlie Munger suggests... and we pin our decisions on the four filters of 1. Understandable first-class businesses, with 2. enduring competitive advantages, accompanied by 3. able and trustworthy managers, and 4. available at a bargain price... I think our goal is to experience such moments of understanding.

Amit Arora : Which businesses (two or three) do you feel strongly about on the long side - out of the seventy written about in the book and reasons for the same ?

Bud Labitan: Personally, of the publicly traded Berkshire Hathaway holdings covered in the Moats book, I like IBM, JNJ, and KFT. Although I am disappointed that Kraft's management feels that they need to split into 2 companies. After all, Berkshire Hathaway seems to do fine with over 75 companies under one umbrella.

With this I would like to thank Dr Maulik and Bud for their contribution to field of investing and for their time. For more detail visit http://www.frips.com - you can access five chapter sample and also an audio version from selected chapters.

Enjoy

Samrat Pharmachem - A Microcap in Commodity Industry

2012-01-02T12:51:00.000-08:00

At the start I would like to insist that I am neither recommending a buy nor sell for this microcap, nor am I invested in it as yet. I would briefly mention this commodity stock for your later research.

Fortunes turn about-face as the change of weather on shore side with commodities. I have never believed in any metal including Gold, its utility to me is only in times of war, to carry something precious in pockets when a country is ravaged. Despite out performance of this metal in past decade the odds are completely stacked against this non-thinking, nor productive asset, last two hundred year of results stand up for even TIPS and vouch the superiority of equities.

Just one of the many possibilities of finding more Gold
http://youtu.be/Mv8vERKNViY

Essentially there is no shortage of material in Universe

http://news.bbc.co.uk/2/hi/3492919.stm

A commodity nevertheless, backed by able men has distinct advantage over bare metal. Hence the openness to invest in commodity miners and manufacturers. A microcap such as this, or Sandur Manganese, SELAN etc are infinitely superior investments to investing in rarest of rarest metals like Platinum, Rhodium etc. I firmly believe there will be no money left to make in coming decades in any commodity, only technology will be the saviour. Majority of resources including metals, iron, crude oil etc. will all be over in any case by the end of the century at humble 1-2% growth rate assumption. Iodine is a 15,000 tonne industry globally out of which 2.5 - 3% of Global output is contributed by Samrat Pharmachem. Recent out performance is a consequence of global turnaround. Other players that produce Iodine and its derivatives in India are:


G. Amphray Laboratories, Calibre Chemicals Pvt Limited, Salvi Chemical Industries, Vishal Laboratories, Champa Purie-Chem Industries, Shree Bhavani Iodates, Adani Pharmachem Pvt Limited, Canton Laboratories Pvt Limited, Micron Laboratories, Prachi Pharmaceuticals Pvt Limited, Omkar Speciality Chemicals Pvt Limited, Samrat Remedies Limited, Triveni Chemicals and IRIS Pharmachem - quite a few one would say.

Global Leaders in this domain include:

Ajay-SQM Deepwater Chemical Inc IodiTech Troy Corporation Cosayach - Chile Atacama - Chile Ise Chemicals - Japan Godo Shigen Sangyo - Japan


World reserves exceed 15 million tonnes, i.e 1000 years worth of supply, hence there is no shortfall. In addition to above reserves, Iodine can be extracted from sea weeds which contain 0.05 PPM or at current sea weed stockpile 34 million tonnes. Recent demand of Iodine was propelled by LCD display and X-Ray contrast media. Like any cyclical stock, this will reward or misbehave with your money, hinges on how correctly cycle is timed.

Cigar butt - Microsec Financial Services @ 26 Rs

2011-11-28T15:13:00.000-08:00

I am sure you can do your own analysis. While the whole market is cheap with abundant opportunities, a section of investing community invests only in net-net stocks, hence I wanted to bring this to your light.

- At 26-27 Rs Microsec Financial Services offers safety of capital. Has over 200 intelligent employees with over 20%+ of them Chartered Accountants.
- Zero Debt
- Offers Loans against shares
- and Broking + Investment Banking Services, which have now dried up
- Intrinsic Value of Holdings, 120 per share, market value around 80-85 Rs per share
- Dividend paying
- Promoters increasing stake
- IPO'ed at 118 Rs few months back

Disclosure: Since I like to glide in more adventurous terrains, not invested.

What Next

2011-11-25T23:15:00.000-08:00

Markets have dropped 28% or so from their highs in just 3 years. Verily a compression of tides into faster intensity. Conventionally such falls recur after 5+ years. I feel the waves would be even faster and more severe on either side.

Where do we look for answers ? Some sage counsel of an octogenarian ? "I have shoes older than people who write these articles" a wise old analyst said of high flying money managers who 'got' what IT was all about in 1990s. While correct, it can lull one into complacency. Just because one has been in a field for 10 years does not make one better as every possible solution. Some young person with very bright consciousness can have breathtaking answers to existing problems - we never thought about. Inverse is just as true, the man who has not read history is like a baby in the world. You have to find your own answers as per your style.

I am reminded of another quote, "Make money on Wall Street and bury it on Main Street", a view that share prices are volatile and a bubble while home/business is tangible. Those of us who have not or did not bury it on main street, we'd better have bought stocks businesslike.

FIIs are in panic mode, I've noticed it time and again in complex projects or equity markets - known pains take precedence over unknown pleasures, its how our mind works. Pain of investment in US growing at 2% rather than unknown emerging economies. These reasons are not only historical but also hysterical. FIIs seeking safety/known pain of dollar denominated investments.

We should feel lucky to be in this once in a lifetime bull market in India (I can imagine if it does not feel that way today :) when investors are feeling being sandpapered to death). I suggest you mark down your portfolio another 30% from today's prices and then continue to buy. This is the buy and hold view. I am sure the investment managers will not be taking salaries home which look like telephone numbers this year nor the liquidity in the system challenge double martini.
How soon and end to this will come, it cannot be said for certain, 2012 looks miserable ahead for Europe and companies that are India focused will distinguish themselves. A similar experience in United States during high inflation and interest rate era resulted in stock market flat from 1966 to 1982, Zero upside after 16 years of faithful buy-and-hold and re-investment of dividend. Try telling it to someone who shudders holding stocks for 2-3 year ! or a newbie who expects 10% returns per month. A man would not expect to be half as good as a trained circus clown or salesman, but come investing he wants to be successful right away in stock market.

Current bear can last more than a year, while this is no attempt to predict but this mindset may avoid a suicide if we are well prepared. India's demographics are so well placed for economic boom and Monkeys err only one, of Delhi has already been slapped on their wrist, sorry, cheek to turn the wheel

I don't feel gold, real estate or any other asset class with match equity returns over next 3-5 years in India. Not sure how dollar depreciation, oil price, Italian bankruptcy, mood in EU affects growth of wheat in India and need for tractor or shoes for their feet in India.

While the monkeys have let us down, we should take it for granted that they will continue to.

Govt. cannot solve our problems, we can take care of this ourselves, this is the new age thinking, we don't have to depend on government to represent us, we can form the bonds ourselves, be it economic with the West or people to people with Pakistan. The problem that we have to overcome with Govt. is that its still the biggest outlaw and mafia, taking our taxes with impunity sans accountability, but hey that is not my battle.

Information overload would do us no good, one makes more money by printing information than following it. In this age of up-to-the-minute information companies are only as good as their last three months performance.

Slow down, relax, stop watching share prices, think in months/years not days, weeks, switch off CNBC, I have for last two years. Day to day trend does not matter except for a trader, balance sheet hardly changes that fast and knowledge becomes chatter. Go out and buy some truffles lying on the floor for your funky self. It can take months or years for not-so-smart money to realize the value. If the Sensex does come down to 12000, we can revisit the investment list and I am bullish on same usual cheap suspects. Meanwhile, do something great and dazzling that no one has done before to show that Gods creativity principle exists in you.

In quest for the stars

2011-09-24T17:43:00.000-07:00

The enjoyable adventure in pursuit for future multibaggers takes us to distant territories. SAST disclosures on stock exchanges' website, promoter holding, spin offs, mergers, newspapers, magazines, blogs, industry experts, discussion forums or shops and wholesalers. I feel that over the next few years online marketplace can lend itself to a worthy source of information. I recently went thorough a book by a marketing expert for the online world - Everything I Know about Marketing I Learned From Google AMAZON

If you have not been sipping much on marketing lately you will be impressed with sheer novelty of ideas. Buffett who remarks, "Half of our advertising revenues go waste, but I don't know which half", may have to take back his words. Author has some information shared on website googleylessons.com and affords the opportunity to go quite deep into this domain through links in the book. Emphasis is on social media to promote products.

A few standout stories are:

- Threadless is an online marketplace with 1.6 million+ followers on twitter. Its a crowdsourcing (someone calls this outsourcing on steroids) phenomenon where community designs T shirts, gets paid and promotes them. I call it a great story and brand. http://www.threadless.com http://twitter.com/#!/THREADLESS

- Obama online and offline campaign was very well crafted and one of the main reasons of his success to US Presidency, worth reading about it. He used twitter, SMS, social media to the hilt and it referred to you as if its one on one conversation.

- Dell's story is quite revealing. DELL had 100 employees tweeting on behalf of the company and after few years they became ROI positive with this online channel alone and customer service is no match to other media.

I feel a lot of consumer brand companies are in the dark not online in India but overseas and should be embarrassed with themselves and their lack of sophistication. I found Whirlpool and Marico Industries to be decent with social media in my couple of days of looking around Search Engine Marketing companies and their clients, other leading companies that call themselves consumer brands or superbrands should hang their head in shame, they are literally sleeping.

- In a couple of other books I read recently by Malcolm Gladwell ( Tipping Point; Outliers) story of Hush Puppies reached tipping point miraculously from 30,000 annual sales in 1993, by the time Wolverine, the owner company wanted to shut down the brand, something happened it to tip. In 1995 it sold 450,000 pairs and the next year four times that. All this despite zero promotion. Something happened that led this shoe to be sold in every mall of America, that is called social epedemic.

- Crime patterns, virus all have a dramatic moment when they can tip through a number of small incremental actions. Neighborhoods where 20% colored people live generally tip and all white folks move out.

- 1987 was fax machine tipping point where it made sense for everyone to have fax machine

- Paul Rever's ride, famous historical example of American freedom was most famous example of work of mouth epidemic

- Typical airline accident involves seven or more consecutive errors. Why Korean planes crashed most in 1990s is worth studying, nothing to do with quality of planes or servicing.

- Study the year of birth of all software czars Microsoft, Sun, Apple founders and a pattern emerges, which proves that not everything is done through hard work. Environment has to be conducive.

Cravatex June 2011 results

2011-08-18T15:29:00.000-07:00

I don't forsee Cravatex to be limited to just FILA in future, even though thats a "big enough" opportunity.

Also, company has spent 3.8 Crores on Advertisements in 2011 vs 1.7 Crores in 2010, again doing all it can.

Operating and Net profit margins grow more than topline. Even though that is not evident. While the standalone sales have grown around 100% the bottomline has grown even more than 100% from operating business. For getting actual bottomline from operating business you have to substract 1 Crore from 2011 and 2010 quarters which accrues by virtue of rental income.

FILA size in India is very small with just 15 EBO vs 900 for Adidas. That does not justify full front page advertisement.

However, FILA is #2 in Market Share in Korea after Nike. Adidas has been trailing it at #3 position for the past 5 years, that proves what focus can do.

Globally they are 1/20th the size of Nike and Adidas.

Wholly owned subsidiary: Its out of the blue and a positive development. Who can expect a company with 3 crore quarterly revenues and 1 crore quarterly employee overhead to break even in first quarter. Therefore, consolidated net profits are down for now. Its a long term development.

Positives: Fila Korea is reviving business and with Acushnet takeover, will provide company more strength. Their focus is Korea where they have captured #2 spot and their focus is to revive business in US, recently tied up with 13 billion $ Kohls Corp for the US market. India should benefit soon with increased focus and wider range of offerings. Cross selling of FILA products in proline stores. Value of property (??) and rental 4.5 crores per annum to provide cushion. Even Korea has 10 times more FILA stores than India with 7 crore population.

Concerns: Business still in nascent stage, franchise model still not established. Working capital requirement is high. Rentals may touch 7 crores next year from 5.5 crores this year on Proline Fitness stores.

Heads I don't lose much, tales I win.

Disclosure: Invested

Investing Mistake

2011-08-16T01:42:00.000-07:00

I wrote briefly here on investing mistakes:

If we could see people's mental body, it would be a hilarious experience. Someone would have giant hands with more athletic personality, someone with less will power will appear pale, another person with can appear to possess a tiny stomach but a enormous head.

Worst part of all is the late diagnosis of such problems until its hopefully not too late. We are all experiencing one form or other disease if not physical then partly mental and one could say definitely some spiritual.

One of the lessons I want to nail down pertains to exiting a stock. Most season players will offer you explanations like:

- When original premise of buying stock has proven wrong
- When you need money for yet another security which is more attractive
- Fundamentals of the company have deteriorated.

What confounds me is HOLD rating on a stock. What is HOLD in the name of bull ! its a BUY or SELL.

Those same people will make the following statement, time and again.

"Those invested at cheaper rates may continue to hold the stock but do not make new entry at this price".

Lynch makes it crystal clear when he writes, "If you are not going to buy more of a certain security, you should be selling it".

Therefore every single day/quarter the stock has to be evaluated for a BUY or SELL against available opportunities, there is no HOLD. I know I have strong opinions and other techniques may work but this works for me.

Two Stocks in my dream duality of Maya

2011-08-12T13:10:00.000-07:00

Just a quick post. If I were forced to limit my holding to just two stocks and I were compelled to keep up with my peer performance for next 12-24 months, though not value stocks by conventional yardsticks, those two stocks would be:

a) Cravatex @ 400 (Already a four bagger in last 9 months since I entered, refer here)

b) Page Industries @ 2500 (I've made mistakes last year in trading in and out of it)

The results will not be disappointing. I feel very strongly about both companies and they can be 5 baggers from here again in less than 1800 days (5 years). In case of Cravatex upside will be even more strong if and when funds show some mercy on creeping crawlies like us. I see no reason Cravatex should not command 1000 Crore market cap in a few years (96 crores today). Page is discovered but will continue to compound.

I know there are always some gnarly issues vexing an investor, promoter selling, loss making subsidiary, undergarments by Fruit of the Loom, Hanes, DKNY in India - Nike and Reebok wiping out minnows like FILA and oh my ! the list is endless. That is exactly where you come in and I walk out, I will leave it to you to solve those questions!

What I do know is even B grade company like Relaxo will be around 1000 Crores in sales and market cap, I spoke many years back about it overtaking Bata in revenues, Money is limited, ideas too many, bet hard !

PS: Cravatex has not announced any news for Acushnet's golf brands yet. If they do get these brands, it would be time to back up the truck. When I visited sports stores across the region I found them dominating their categories. I now have the numbers for market shares of those two superlative brands, Titleist golf balls have 69% market share in United States and Footjoy shoes have 57% market share in United States.

How To Trade In Stocks - Jesse Livermore

2011-08-07T15:41:00.000-07:00

In this concise book Livermore draws upon his natural ability as a speculator and boy plunger and bares open his genius Livermore Market Key to success.

It is no easier to become the best trader than it is become successful surgeon. Mind has to lend itself to pliability and humility - for market is always right, pride and chutzpah is better left locked up in the basement.

A successful trader has his almanac speaking to him back loudly, while he can't predict what will happen, he listens to the screen unassumingly, always respectful of market madness. People continue to make the same mistakes as they make in the past.

He strongly advises to keep away from all insider information and "inside tips" will break a man. He urges to to be decisive, for success rides on the hour of decision. If one continues to exercise patience until the facts are general knowledge, the opportunity would have past us by, its imperative to make a decision with in sufficient information.

The fine line is thin between an experienced trader and a long term investor, as a successful trader evolves to hold stocks for long term multi year upwards moves aka trends rather than play on daily moves. Recommended reading.

Expensive

2011-07-22T01:39:00.000-07:00

Unless one is buying Quantum Stocks with several times (read 3 - 10 times) higher intrinsic worth which are unlikely to see much downside or value stocks (I know growth and 40 year forward survival expectation is part of value equation too). I would begin to dump or have already started selling all holdings with high-expectations for future because let me tell you with an example.

Example:

I agree that future prospects are bright for a company like Jubilant Foodworks growing at a nice clip. However, stock price is slave of earnings and we (or at least I do not feel the need due to abundance of alternatives, rather over abundance of stocks on BSE) need not pay premium just because an organisation is expected to grow @10-15% for next 30 years and a stock ranks as a single decision idea.

Why:

Because stock prices should be ultimately discounted value of their future cash flows, I feel certain stocks are over valued as they will *never* (say next 15 years) earn as much as other simple ideas. In reality the stock prices are discounted hopes of future mental expectations. I'll stick my neck out and and would try to make a prediction:

Jubilant Foodworks although not in comparable business as a Bank but this one at CMP 875 will not ever (say until 2025, trust me that is a very long time in Equity Markets) will not be able to match EPS of Jammu and Kashmir Bank until 2025 (CMP 860, Div Yield 3%). i.e by 2025 (too far a timezone, a lot of things can go wrong) I believe growth rate of J&K Bank would be as good or superior to Jubilant Foodworks and its EPS would be far higher, but market does not feel that way.

I heard a respected stock market investor Ramesh Damani speak about Dabur being fairly valued as part of his portfolio. Personally, God forbid, unless I am struck by blindness or paralysis and unable to pursue the search, why should I buy a 15-20% grower @ 40PE just because its expected to survive my grandchildren's generation. Too heavy a price to pay for higher certainty. With benefit of hindsight check the returns of Axis Bank vs HDFC Bank between 2000 and 2011.

A handpicked portfolio of choicest small caps should provide far superior returns as they have over past 100 years.

I am all for growth, greed and returns at a faster rate but refuse to ride the 40PE bandwagon.

An Idea

Market leading companies in brand new industries tend to do very well at least for few years or a decade. Stumbled upon GOGO/ Aircell, an innovative company leading a sector, experiencing exponential growth. Check it out www.aircell.com. Provides wifi, smartphones on Aircrafts.

Was granted exclusive air-to-ground broadband frequency license in FCC auction in 2006. Buffett's Netjets is also one of their clients. Not listed on stock market. Hey, if you are a PE player you can always try.

Leave room for positive surprises !

Matter of Choice ( Astral Poly Technik vs Technofab Engineering)

2011-07-17T15:56:00.000-07:00

One is in a convenient position when a choice has to be made amongst two fine alternatives. I am in a similar bind between two such alternatives from infra space. Although in theory the companies are not comparable as one is into services and another into primarily manufacturing.

But they both carry an Infrastructure label, and I know that from experience that it is an area that will continue to be a painful for investors for coming decades simply due to the roller coaster nature of crowd psychology.

Astral Poly Technik vs Technofab Engineering.

Both are nice mid / small (depends on your context) cap companies. It becomes a matter of choice since I don't want to buy both of them. With that line of thought I would end up with 100 stocks.

Technofab Engineering has a relatively more polished workforce, it ranks way higher. However, in Indian context EPC companies are generally cash flow negative.

I'd liken Astral Poly to a "value migration" leader in Indian context from metal pipes to CPVC and plastic pipes, remember cellphones in 2002 ?

One aspect that did put me off regarding Astral was Lubrizol tie up with Ajay Group (http://www.ajaycorp.com/cpvc-pipes.html) and Ashirwad Group (http://www.ashirvad.com). Vaguely recall having read Buffett talk about mountain of riches for a single company that controls a single pipeline in a state/region, antithetical view is misery for all companies if there are four overlapping pipelines in same region.

There are other companies too in CPVC overseas which are as strong and big as Lubrizol which have not yet entered India as yet in any major way except through distributorship. If the scale of opportunity was not that big (tens of thousands of crores) I would have dismissed Astral Poly right away. So a 40% grower at 5 PE or 12 PE ?

More thoughts...

The compound is hard to make, is the secret sauce and proprietary, therefore no other compounder is able to match the price point, as yet not even Reliance is thinking of it although they have other polymer businesses, therefore Chinese cannot be a threat.

In 10-20 Years we will see very little or no GI pipe, the sand is shifting

As per my research Lubrizol has 50%+ market share not just in India but globally in CPVC segment, Chinese imports do not match in price point as per management ( need to be checked from market sources ). Astral is educating over 30,000 plumbers per year, its their mind they have to get into, not in minds of end users.

Value Investing with the Masters - by Kirk Kazanjian & Interview with America's top Traders - by Jack D. Schwager

2011-07-09T09:21:00.000-07:00

Value Investing with the Masters

Comprises twenty interviews with market beating fund managers. I found this book quite humdrum. A few underline worthy statements, though they come up in other books as well.

- 90% of gains in equities are made in 2% of the time duration, stay the course and keep plugging

- Stocks that fall down have to be rubber balls not eggs !

- Depreciation policy of British and Copenhagen airports writes them off at 100 vs 20 years, valuation measurement should vary, and airport after all is an airport !

- Stock picking is like farming, seeds (money) have to be sown, not all seeds grow, suitable climate (sentiments) matters, seasons change but not as regularly as in farming and can last years.

- Graham later in his interview with congress replied in response to valuation of company as, future earnings of the company and to an extent current assets. Fan boys who keep pressing for current assets metric miss out on opportunities. Same way Buffett aficionados presume its sinful to invest in technology, just because technology is not in Buffett's circle of competence.

Market Wizards

Read a couple of chapters, excellent insights into minds of successful traders. Found this way more impressive. Some juice from the ripened fruit:

- With all due respect to Buffett's statement, trading / investing is not about investing in great companies with durable moats but about profiting from inefficiently priced stocks. One could invest in great business yet make ordinary returns.

- From a psychiatrist who helped suicidal patients and later athletes and fund managers - it is very difficult to win an Olympic Gold medal or be the best fund manager, the distinctive trait of winner is that they decide and take a resolve that they would win

- Don't think of making money, first worry about not losing money

- Any investment approach that is heavily reliant on accurate forecasting for several years ahead or involves the purchase of high-expectation stocks is inherently risky.

- more to read..

A Random Walk Down Wall Street - Burton Malkiel

2011-06-10T19:17:00.000-07:00

Highly recommended reading of first three chapters, Firm Foundations and Castles in the air, Madness of the Crowds, Stock Valuations from Sixties through Nineties. Can save you a lot of money in life.

While a value investor may never subscribe to dart throwing monkey business or indexing approach in latter half of the book, above chapters are, in my opinion, well packed.

While you may have come across mania and fixation of crowds such as Tulip Mania in Holland, Florida real estate craze wherein 1/3rd of population turned to real estate profession, South sea bubble, Conglomerate boom, Nifty Fifty madness, Biotech, Internet, Real Estate, you'd hope that at least similar mania would no rerun. Real estate is a recurring theme. You'd believe that a decade long depression after Tulip idée fixe that caused severe damage to Dutch economy, fact that people would exchange their house, factory, farm in exchange for a single flower and subsequent aftermath would not erase from the memory of world. Not quite so. Our memories are really short lived more so as a crowd. As Gustave Le Bon noted that in crowds it stupidity and not mother wit that is accumulated. China fell for the same trap with Lycoris Plant as recent as 1980s.Value of a small plant went as high as 300 years annual salary, of course there had to be a wake up when half the city grew Lycoris. They seem to be drunk on a cocktail made from Lethe. (http://en.wikipedia.org/wiki/Lethe)

You'll be amazed to know of a fact in next statement. Given that United States economy has always been bigger than Japanese, at least in 20th century. In terms of acreage USA is 26 times the size of Japan. Population wise its been twice the size. In 1990 value of real estate in Tokyo alone exceeded that of whole United States or about 20% of global wealth. Japan could have sold Tokyo in exchange of all United States. 27 year Nikkie graph below illustrates that every market including dalal-street can lay an egg and financial laws of gravity know no boundaries of race or region.

Japanese have been paying for over two decades

A FILA related news

2011-06-08T03:20:00.000-07:00

I mentioned few months back that FILA are trying to revive their Golf business after over endorsement blunders, at the same time trying to enter kids wear, inner wear

http://www.fila.co.kr/2010/filaintimo/intimo.html

http://www.fila.co.kr/2010/filakids/kids.html

http://www.filasport.co.kr/2010WINTER/

Came across a recent news that FILA Korea have bought along with a PE player a leading Golf company, Acushnet for 1.2 Billion US$, which has an equivalent annual revenues. It is arguably the most profitable golf equipment company in the world. They make the leading brand of golf balls, clubs, gloves, accessories. News here

http://www.southcoasttoday.com/apps/pbcs.dll/article?AID=/20110531/NEBULLETIN/106010351

and

http://online.wsj.com/article/BT-CO-20110520-706961.html

Achushnet (http://www.acushnetcompany.com) owns all these great brands:

https://www.acushnetgolf.com

http://www.titleist.com

http://www.footjoy.com

http://www.pinnaclegolf.com

http://www.vokey.com

http://www.scottycameron.com

http://www.fittingworks.com

http://www.mytpi.com

It is implied that FILA Korea and its partners will run the business. Cravatex may benefit but it is not confirmed. Fila Korea is keen to market the gear in Asia as per the statement by them, "With our extensive knowledge and reach in Asia, we believe that the Acushnet brands have incredible new opportunity for growth in the emerging markets in Asia."

http://www.filagolf.com

Investing Quotes

2011-06-05T18:59:00.000-07:00

“An investment in knowledge always pays the best interest” - Benjamin Franklin

“There is no finer investment for any community than putting milk into babies.” - Winston Churchill

“Models work when they are appropriate for the particular circumstance, but some of the best investment judgments over time have come when people recognized that models derived in other periods were broken or not directly relevant.” - Abbey Joseph Cohen

Great Idea + Great Manager + Great Price = Great Investment Results

Own not the most, but the best.

The definition of a great company is one that will remain great for many, many years.

Focus on return on equity, not on earning per share.

The secret of long-term investment success is benign neglect. Don’t try too hard. Much success can be attributed in inactivity.

An investor’s worst enemy is not the stock market but his own emotions.

The safe way to double your money is to fold it over once and put it in your pocket. -Frank Hubbard

When buying shares, ask yourself, would you buy the whole company?

Every day I get up and look through the Forbes list of the richest people in America. If I'm not there, I go to work. -Robert Orben

If inflation continues to soar, you're going to have to work like a dog just to live like one. -George Gobel

One way to end up with $1 million is to start with $2 million and use technical analysis. ~Ralph Seger

Inflation hasn't ruined everything. A dime can still be used as a screwdriver.

The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. -Jesse Livermore

Do not value money for any more nor any less than its worth; it is a good servant but a bad master.

Intec Capital - 2

2011-06-03T02:51:00.000-07:00

Intec has hired frantically between Jan - March and recruited 30 employees, fresh B school grads or those in early career. Recent pace has slowed down but still strong for a micro cap company. Click on this link and tell me which vacancy do you like most and why as an investor ?

It renders as below as on 3rd of June 2011

Investing Mistakes

2011-06-02T16:11:00.000-07:00

Some statements I find hilarious from stock market investors, hopefuls, greenhorns and sharks aka Investment Professionals alike - no insult intended :) - its a fact

- "Maybe you can invest 3,000 Rs in this stock, all you can lose is little but gains can be manifold"

Do you mean 1% of your portfolio or 0.1% of your portfolio ? that way you may need to buy 100-500 stocks. I don't about you but I don't have billions, so I find investing less than 5% of portfolio meaningless.

- "I bought this stock for a ten bagger, therefore I will be very disappointed if it only becomes a five bagger in next 4-5 years"

Why did you buy any other growth stock or equity instrument growing at 10% or with expectations of a two bagger in five years ? Isn't opportunity cost too high given a certain 4-5 bagger in hand.

- "Industry has very bright future, therefore this company must do well"

Well I have yet to see a stock in India do well in solar energy or alternative fuel, remember XL Telecom or Asian Electronics ? Crowd is almost always late. With a few exceptions like Praj.

- "This stock is high risk high return".

Apparently even university educated "professionals" / "experts" write this statement in research report. Nobody made money by "high risk high return" stocks on consistent basis.

- Not investing soon enough in life.

Even I made that mistake in life by investing later than I could in equity instruments. Long term compounding is a great power.

- Not knowing the basics

Investing without adequate knowledge. Asking others for tips. Nifty that can be bought for a very minimal commission as a benchmark will beat the aggregate of Mutual Funds, your money in a Mutual Fund is financing the salaries and office buildings of fund managers.

- Chasing past performance of Mutual Funds

Can never say enough on the topic. Knowing a bit about how the world works I neither feel safe to part my money to mutual fund nor inserting a coin in a vending machine (always a risk of power failure / fault in delivery) as opposed to dealing with living person; unless you go round the whole building or neighbourhood looking for a vending machine with stuck snack, so it drops twosome for you ;-). You can call me value hunter.

- Ignoring diversification altogether or over diversification.

There is no cant-miss-stock in this Universe, atleast I have not come across it, therefore no stock deserves 100% portfolio allocation. If you area a billionaire or trader and have too much time at disposal, march ahead with 500 stock portfolio. I figure index and a sleepy investor would outperform your hard work.

- Having un realistic expectations

50%+ compounding per annum ? Get real, wake up. It may be possible in some years. Snap out of it.

- Holding too long or too short

Difficult and case specific. Have to be in the game long enough to know how long to hold. But not long after you found something 2X better.

-Too much faith in your stocks

Have you noticed the bias that kicks in in owned stocks ? Look for counter argument at all times, not confirming evidence, what can go awry, worst case scenario.

Financial Affairs :: Intec Capital & Money Matters

2011-05-26T03:08:00.000-07:00

That is the name of both companies I am long on. Intec Capital is building a pretty good team to take on growth in SME sector. They can manage to be a far bigger organisation than the current one, management can do heavy lifting. I do not feel Intec is cheap but best is yet to come out of it. I feel they can also emulate the success of bigger two I mentioned in previous post and Magma Fincorp.

Money Matters Financial Services Ltd - MMFSL : Scam can provide great trading bets. This one dived down from 800 levels to 50 Rs, faster than F16 shot down by scud missile in war zone. I am ready to bet that pilot can escape way before jet hits the ground. When I contemplated buying it last month @ 62 my game plan was to buy 100 X quantity. I bought 1x quantity @ 62 Rs, then 5x @ 53 Rs, plan was to buy 20X @ 30-40 range and 70X @ 20 Rs and below. So I could buy only 5% of my desired quantity as yet.

Its hilarious to see board, auditors, CA, friends and lead manager to QIP boycott MMFSL like plague. The interview provides a perspective on how defeat is an orphan, this is what Nirmal Jain of Indiainfoline has to say.

http://www.moneycontrol.com/news/business/unawaremoney-matters-scam-during-qip-india-infoline_501292-1.html

"

Q: So, you would no longer want to be associated with any kind of business transaction with them?
A: No doubt about it.

"

I must thank Indiainfoline though for arranging 450 Crores in MMFSL's bank accounts. Now they have 750+ Crores cash in bank and can hopefully take a hit of 100-300 Crores fine, if at all imposed that much, by regulators. A few crores bribe may resolve the matter for all we know. I condemn bribe and corruption but as an investor I cannot overlook an opportunity. What market cannot decide is difference between risk and uncertainty. So, I am befriending uncertainty of 700 crores cash and broken bribe model for a 200 Crore market cap with expectations that company will become a leasing and finance entity. I have not met anyone who got their passport within a week or two without paying bribe. And do you think MPs are lenient enough to let the rank and file make lacs and crores without their due cut ? Give me a break.

The ranking by Transparency International speaks volumes about India:

http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results

http://www.transparency.org/content/download/55725/890310

Denmark, Singapore and New Zealand at #1

United States is at #22

And our great nation (Mera Bharat Mahaan) India at #87. Actually I expected India in bottom 10, politicians have left no stone unturned to screw up the nation. Its perchance a bit of luck and lots of private enterprise saving the day.

PS: Please do your diligence in investing in stocks mentioned, I am merely expressing my opinion and not recommending to buy or sell.

Buffett, Speculation and Financial Jungle

2011-05-14T23:31:00.000-07:00

Enjoy this video from NDTV incase you missed out

http://www.ndtv.com/common/videos/embedPlayer.php?id=194516&autoplay=0&pWidth=418&pHeight=385&

Speculation

Recently read Edwin Lefevre's work on Reminisces of a Stock Operator. While a long term sensible investor may loathe at betting the farm, equipment and bottom dollar on new impulses daily, a few lessons are immortal for all seasons. He comes back to the game time and again after absolute bankruptcy, that in itself is a great story. Following is a para from the book:

And right here let me say one thing: After spending many years in Wall Street
and after making and losing millions of dollars I want to tell you this: It never
was my thinking that made the big money for me. It always was my sitting.
Got that? My sitting tight! It is no trick at all to be right on the market.
You always find lots of early bulls in bull markets and early bears in
bear markets. I've known many men who were right at
exactly the right time, and began buying or selling stocks when prices
were at the very level which should show the greatest profit. And their
experience invariably matched mine that is, they made no real money
out of it. Men who can both be right and sit tight
are uncommon. I found it one of the hardest things to learn. But it is
only after a stock operator has firmly grasped this that he can make
big money. It is literally true that millions come easier to a trader
after he knows how to trade than hundreds did in the days of his
ignorance.

Financial Jungle

The winning traits of a financial enterprise which works on leverage are hunger and capability of management but conservation in lending. The risk obviously is leveraged balance sheet wherein 5% of NPAs could be dire and 8% could be fatal for the organisation, thus 92% of well calculated honest earnest customers would not bail the business from 8% scoundrels. How a firm lends, collects, incentives to its agents, matches liabilities with assets, securitises, build valuable repository of knowledgebase on an industry strengthens the growth path. I am finding myself like Lynch who bought 100s of financial stocks in his portfolio being equally smitten hook line and sinker by PSUs, Private Bank/s, NBFCs. PSU banks lack management continuity but have niche in rural setting and low cost deposits, and 50% of unbanked India.

Size does not matter

I do realise the multibaggers are easy to make from low PE or low Market Cap stocks, or in less mature organisations but financial sector being "infinitely scalable" (limited only by the size of Universe!) a 10,000 Crore Market Cap stock has an equal chance of being a 50,000 Crore that a 1000 Cr market cap of being a 5000 Cr entity, other things being equal. I am trying to suggest here that a mature business has an equal opportunity unlike a mature FMCG or restaurant company for instance. How many burgers does a billionaire eat ? or how many shampoos, soaps, shoes does he buy ? McDonalds has no chance of being a five bagger anytime soon.

If management bandwidth being equal and NPAs and loan book maturity, cost of funds and growth prospects are similar no preference should be given to smaller cousin nor is smaller fish at a disadvantage. However, if smaller one trades at half the PE or book value then we do need to give a consideration. I like NBFCs for their niche in ignored and overlooked sector despite high cost of funds vis-a-vis banks from big ones like Shriram Transport, City Union Finance with a promise of 20-25% growth to micro ones that trade between 2-4 times PE ratios. More when I buy them.

I read somewhere that a person was so enticed with Buffettology that he vowed to buy 1 and only 1 stock of Coke if it were listed in India. I think one could not be more wrong than him as growth was his measuring rod, since a porfolio of 10 Indian PSU Banks will beat Coke over the next decade very very comfortably.

Stock Market is loony for growth ( Orbit Exports Ltd )

2011-04-25T17:48:00.000-07:00

The crowd psyche has excessive predisposition towards growth, more so if it is accompanied by consistency. Our personal leanings on any scenario that we refuse to appreciate have little to do with investing success. That is why the quote "Don't argue with the tape" or "Market is always right". For example I don't like a 20% growing company at 40+ trailing PE no matter what the organisation or who runs it, no matter how seductive the growth prospects. This mindset has helped me more often than not. I never became a victim to private sector Insurance mania, satellite TV (Dish TV), micro finance etc.

However, market gives two hoots about my opinion. Market will pay heady multiple for growth oriented stocks no matter what the downside. That is dangerous for small cap investor, as some small caps may never recover. Being greedy, I follow the Lynch maxim, Big Stocks small moves, Small Stocks big moves. Big moves can be in either direction !

Some Mistakes

As a micro cap investor you have to be vigilant to avoid big move on the downside, or one could lose 70% or more on paper very quickly. 30% volatility in micro caps is similar to 10% volatility in big cap, don't even think of stop losses.

The mistake I make often is to wait too long for a stock to get cheap, something I may not learn, but this has helped me more than otherwise in toto. I want to share a story on two stocks. One of them that I missed was Spice Mobiles in early 2010 around 20-30 Rs. I wrote briefly about it on theequitydesk.com here when the price was around 50 Rs. At the time Spice Mobiles was a 100 Crore entity in 1 Lac Crore market of handsets. It was not merged and name of company was Spice Mobiles Ltd.Stock went to 150 Rs over next 6 months.

Second mistake was with Orbit Exports, I recognised it at 15 Rs with A class management and a niche with excellent clients in US but did not buy it. Since I keep looking at downside more than upside, with each rise my aversion grows. I think it has steam left but I don't buy if in my world view downside is disturbingly high.

Aim for achievable, Show me the Money

Contrary to what the general perception may be I am not looking for 10 or 20 bagger or 50 bagger, that is pure serendipity. I welcome if they so turn out to be. I am just looking for a simple 5 bagger in 4-5 years, that is not at all bad if you compute the compounding.

A five bagger in five years translates to a 25 bagger in 10 years and 625 bagger in 20 Years with a much higher probablity than investing in blue chips like IDFC Ltd and holding them for my grandchildren. Since nobody can look that far into future of any enterprise it pays to be medium term oriented and straining your mind only with what your regular corrective vision glasses render, over reliance on telescopes can injure investing performance.

As a rule I don't buy hope and hype, dreams of prosperity, bright future prospects or any new and improved industry. I believe in my company showing me the money, here and now.

Disclosure: Not invested in either of two

Warren's why and wherefore

2011-04-23T01:28:00.000-07:00

Several books have been written on this topic, Buffett's acquitisions over the years make for investing study into rationale and motivations. Posting some content aggregated from various sources. I found the statement made in context of National Indemnity "The key is you can’t fire people if they don’t write business, or they’ll write business" and "Tell me how you'd attack that business? You wouldn't want to anyway, as the market's not big enough. " for Larson Juhl very smart. Acme bricks resounds Lynch as well who quoted on heavy stone / quarry industry as moat due to transportation cost.

In recent times Buffett mentions that growth does not matter to him in certain businesses, he can afford to say so by categorising those businesses as lasting steady stream of century lasting annuities. He did not mention so during 50s and 60s. Infact, I remember having read, "I became rich by finding companies with strong growth in earnings". Now that he is in business of acquiring family businesses he is Ok with losing 1 billion $ to acquire business that can earn 100 Million $ in current year (i.e. 10% ROI) and probably 150 million $ a decade from now. That fortunately is not a problem we have to live with as small investors. His wisdom follows:

Buffett's reasons to invest in Harley-Davidson ?

http://www.harley-davidson.com

He answers that any company where one can get customers to tattoo business's name on their body has quite a strong brand. He had to think what is the probability that they will not pay him back and would he want to own the company if they did not, basically that the equity isn’t worth zero. I always think about what I would do if a nuclear bomb went off or if Bernanke ran off with Paris Hilton to South America.

BYD [Buffett’s recent Chinese investment] seems like a speculative or venture capital investment, instead of a “value” investment. Could Buffett explain?

http://www.byd.com

BYD is not some early-stage venture capital company. The founder is around 43 years old. They’re a main manufacturer of rechargeable lithium batteries, from a standing start. Then they became big in cell phone components, with a huge position. They recently entered the auto industry, and from zero, rapidly made the best-selling [Chinese-manufactured] car model in China, against Chinese joint ventures with leading manufacturers. This is not unproven. It’s not speculative. They hired 17,000 engineering graduates at the top of their classes. It’s a remarkable aggregation of talent. Batteries are totally needed in the future of the world.

Could you talk us through your thinking of the acquisition of Larson-Juhl?

http://www.larsonjuhl.com

On December 17, 2001, Berkshire Hathaway announced that it was acquiring Albecca (known as Larson-Juhl), the nation's leading provider of custom picture frames.
Craig Ponzio, the owner of Larson-Juhl called me, told me about his business, its sustainable competitive advantages, its financial characteristics, and the price he wanted. Shortly thereafter, he came to visit me at 9am and by 10:30 we had a deal. I haven't seen him since.

The company has $300 million in revenues, earns $50 million in pre-tax profits, ties up no capital, is growing slowly, and distributes every dime of profit. There are about 18,000 picture framing shops in the United States, mostly very small businesses with a few hundred thousand dollars per year in sales. They can't afford to have much inventory, so they show a catalogue to a customer who chooses the frame. Then, if they call Larson-Juhl before 3pm, 85% of the time the frame will be there the next day. Larson-Juhl and its customers are focused on service, not price.

Larson-Juhl calls on its 18,000 customers an average of five times/year. It has an incredible distribution system. Tell me how you'd attack that business? You wouldn't want to anyway, as the market's not big enough. Larson-Juhl has a HUGE moat. I always ask myself how much it would cost to compete effectively with a business. With businesses like these, nothing's going to go wrong. If you bought 20 of them, 19 of them would work out well.

Craig wanted to sell to me because he didn't want to waste a year doing a deal that might fall through at the end. With us, it's 100% certain that the deal gets done, and he can enjoy life.

Why did he invest in Anheuser-Busch?

http://www.anheuser-busch.com

In the case of Anheuser- Busch, I bought 100 shares 25 years ago so that I would get the annual reports (you get the annual reports a little quicker if you own the stock in your own name). So, I’ve been reading the company’s annual reports for 25 years. Recently, beer sales have been flat. Wine and spirits are growing, at the expense of beer, and Miller has been rejuvenated to some degree. So, Anheuser-Busch has been experiencing very flat earnings; they’ve had to spend more to maintain share and even do a bit of promotional pricing. They are going through a period that is certainly less fun for them than was the case a few years ago.

It’s been a fascinating industry over the past 50 years. Omaha used to be a brewing town and Storz beer had 50% of the local market, but then the national brands took over.

Anheuser-Busch will have a strong position for a long time. The beer business is not going to grow significantly in the U.S., but worldwide beer is popular in a great many places, and Anheuser-Busch has a very strong position. I would not expect the earnings to do much for some time, but that’s fine with us.

In beer, you don’t see the rise of generic brands, as we’ve seen in so many other categories. But beer consumption per capita is going nowhere.

Americans drink about 64 ounces of liquid per day. 27% of that is soda (11 ounces are Coke products), beer is about 10% and, despite the rise of Starbucks, a fine company, coffee has gone down and down over time.

[CM: There used to be hundreds of brewers. I think the trend toward giant companies [dominating the beer industry] is permanent.]

What was the thinking behind the McLane purchase?

http://www.mclaneco.com/wps/portal

McLane is a wholesaler to convenience stores, quick-serve restaurants, Wal-Mart, movie theaters and so forth.

Wal-Mart, for very good reasons, wants to specialize on what they do extremely well. We were approached by Goldman Sachs to buy the business a week ago. It makes sense for both sides. It was a sideline business for Wal-Mart. Their ownership of McLane resulted in certain people who would be logical customers not to do business with McLane because they didn't want to do business with a competitor. We'll be seeing them soon to explain that they can sleep well at night buying from us.

A representative of Wal-Mart, the CFO, came up to Omaha. In one hour, we had a deal and shook hands, and when you shake hands with Wal-Mart, the deal is done.

It serves presently 36,000 of the 125,000 convenience stores in the United States, and has 58% share among the largest chains. To each store, it sells about $300,000 of products/year. McLane also serves 18,000 quick-serve restaurants, mainly those operated by YUM Brands (Taco Bell, Pizza Hut and KFC).

It's a tough business. You have Hershey and Mars on one side and 7-11 Eleven on the other side, so you have to work hard to earn 1% pretax. [Tilson - If McLane earns 1% pre-tax on $22 billion in sales, that's $220 million, so Buffett may have bought this business for 6.6x pre-tax earnings. I think this is a good price, especially if the business can grow substantially under Berkshire, but not a steal -- the guys at Wal-Mart aren't fools. But I think they let it go for a below-market price to Buffett because their biggest concern is that the business continue to be a reliable supplier to their stores. Such a low-margin business has little room for error, and it could get into trouble (as other similar companies have) under the ownership of a financial buyer that used too much leverage or tried to tinker with its operations.]

    * Source: BRK Annual Meeting 2003 Tilson Notes
    * Time: 2003

How did the Clayton Homes purchase come about?

http://www.claytonhomes.com

Clayton Homes is the class of the manufactured home industry. The deal came about in an unusual way. Every year, a class (about 40 students) from the University of Tennessee comes to Omaha. They visit some sights and then we a have classroom session for a couple of hours. Afterward, they typically give me a football or basketball. Last year, Bill Gates happened to be in town. This year, we had a good session and when they got through, they gave me a book, the autobiography of Jim Clayton, the founder of Clayton Homes. He'd written a nice inscription. I said to the students that I was an admirer of Jim's. I read the book and called Kevin Clayton, Jim's son, and said how much I'd enjoyed his dad's book. I said if they ever decided to do anything [regarding selling the company], we'd be interested and I told him what price I'd be willing to pay. A few phone calls later, we had a deal. That's the way things tend to happen at Berkshire.

The manufactured home industry got in a lot of trouble. They'd gone crazy with credit and when you go crazy with credit, you get into a lot of trouble. Look at Conseco and Oakwood, which went into bankruptcy. The industry lost the ability to securitize receivables and was in the tank. There were 160,000 new manufactured homes this year, but there were 90,000 repossessions, so this hurts demand. For the strong, like Clayton, especially with a backer like Berkshire, it should be a good time in the industry. And it's a big industry -- about 20% of new homes are manufactured. We can put you in one for $30/square foot. Compare the prices -- that's a deal.

Competitors admit that Clayton is the class of the field, but even for Clayton, financing was hard. The lenders had gotten burned. Clayton did a securitization earlier this year, but [to get the deal done, they] had to keep more of the risk on their books

[Later in the meeting, in response to a question, Buffett commented further on Clayton Homes:] In the manufactured housing industry, everyone is losing money, but Clayton is making money. Most of Clayton's houses are sold through 297 outlets that they own. Managers are in a 50/50 profit split with Clayton. This is unlike what was going on in the industry a few years ago, whereby dealers would have a floor plan and the [manufactured housing] company would finance 130% of the purchase price, so the dealer would bring in any warm body. The system was designed for disaster. At Clayton, if a dealer takes in an inadequate down payments, it's his problem and he has to take care of repossessing it. This creates the right incentives.

If you read Jim Clayton's book [First A Dream], he tells about the first home he sold [when working for someone else] and all of the funny business and gaming of the financing. These activities are coming home to roost in a huge way among the manufacturers and those who financed them. There's such a stain that Clayton is only one that can securitize, and without us, not to the extent they wanted. They are a class player and have the right systems in place with the right incentives. We will not securitize -- we will keep it for the portfolio.

You're right [he was speaking to the questioner] that if you see companies with lots of gains on sales, be suspicious.

    * Source: BRK Annual Meeting 2003 Tilson Notes
    * Time: 2003

Reasoning behind the National Indemnity investment?

http://www.nationalindemnity.com

We are very big in insurance and having the wrong incentives in place could be very harmful.

[Buffett had prepared slides and had them put up on the screens in the convention center. Slide 1 showed Berkshire Hathaway’s balance sheet shortly before it bought National Indemnity.]

For 15 minutes each year, Jack Greenwald [the owner of National Indemnity] would get frustrated with something and want to sell his company. I told Charlie that the next time he was in heat, bring him to me. So, we bought it in ’67 for $7 million.

[Slide 2 showed premium volume for National Indemnity from 1980 through 2003. It was $80 million in 1980, rose to $366 million in 1986, then declined nearly every year down to $54 million in 1999, and then spiked up to $595 million in 2003. Buffett highlighted the decline from 1986 to 1999 and asked:]

How many public companies in America would see premiums go down every year for such an extended period?

[Slide 3 showed the number of employees at National Indemnity from 1980-2003. The number rose from 1980-86 and then declined from 1986-99, but much more slowly than premiums declined. Buffett noted:]

We never fired anyone – the decline in headcount was solely due to retirements. The key is you can’t fire people if they don’t write business, or they’ll write business. You must be able to tell them that if they write no business, their job is not in jeopardy.

[Slide 4 showed National Indemnity’s expense ratio from 1980-2003, which was as low as 25.9% in a peak year, and as high as 41% in the worst year, 1999. Buffett noted that:]

Some companies would feel that this is unacceptable. [We don’t.] We can take an expense ratio that’s out of line, but can’t take writing bad business.

[Slide 5 showed the combined ratio at National Indemnity from 1980-2003. The combined ratio exceed 100 during a few bad years for the industry in the early 1980s, which is what led to the hard market that peaked in 1986, but National Indemnity’s combined ratio has been below 100 – e.g., the business has been profitable – in every year for the past 20. Buffett pointed out:]

In 1986, our combined ratio was only 69.3 because we did the most volume ever that year, up to that point [the company has done more volume in the past few years]. We coined money when we wrote a lot of business, and made a little when we didn’t. We’re the only company like this. We’ll have a high expense ratio when business is slow.

National Indemnity was a no-name company when we bought it, and has no copyrights, patents, etc. to distinguish it, but they have a record like no-one else because they had discipline.

You can’t run an auto or steel company this way, but it’s the best way to run an insurance company.

[CM: Nobody else does it, but to me it’s obviously the only way to go. A lot about Berkshire is like this. Being controlling owners is key – it would be hard for a committee to make these kinds of decisions.]

    * Source: BRK Annual Meeting 2004 Tilson Notes
    * Time: 2004

Reasoning behind the HomeServices investment?

http://www.homeservices.com

HomeServices will grow. It owns 15-16 local real estate firms, which retain all of their local identities – akin to the whole Berkshire model. Managers operate them as if they owned them themselves. We have no national identity, unlike Cendant, which operates under a few big names.

There’s no question that we’ll buy a few – or a lot – of [real estate brokerage] companies over the next 10 years. It’s a great company with great management. Last year, we participated in $50 billion of transactions – but this was only a small percentage of the national total. We’re big in California, Minnesota and Nebraska.

It’s a good business, but very cyclical. It’s very good now. We’ll go through a bad period, but we’ll keep buying. I don’t know how big it will become, but it’s conceivable that as we grow, we’ll add things like buying furniture. When people buy a new house, they need a lot of things.

[In response to another question about whether the internet will threaten the commission structure of real estate brokers like HomeServices, Buffett replied:]

I think commissions in HomeServices are sustainable. Barry Diller is interested in the space via Lending Tree, and the internet is a threat to any business, including real estate brokerage. But when I think about the process of owning a home, the for-sale-by-owner (FSBO) was with us 50 years ago and it is now [but it hasn’t affected commissions]. My guess is that 30 years from now, a very significant percentage of home sales will be done through the brokerage system like today’s, though there are people trying to change it.

[CM: [speaking to Buffett]: You tried to change it dramatically in Omaha, and you fell on your ass. [Chuckling.] You tried to take home listing business from the Omaha World Herald with your little paper and failed.]

    * Source: BRK Annual Meeting 2004 Tilson Notes
    * Time: 2004

We don’t think the way homes are bought and sold will change very much. Some will disagree, but we don’t think the internet will change this. [Buying and selling a home] is the biggest financial decision most people will make] and people will continue to want to have a 1-on-1 relationship with a real estate broker. [It also will be] a local business, so we’ve retained the local identities.

It’s almost certain that we’ll be a lot bigger [in this business] in 5-10 years. It depends on how many acquisitions we make, but we’re a good buyer and owner.

[CM: As to whether we’d prefer to buy brokerages or real estate, obviously we like brokerages better.]

Why did Buffett buy Acme Bricks and Justin Industries ?

http://www.brick.com

http://www.justinboots.com/en/

http://www.nocona.com/

http://www.justinworkboots.com/boots/Justin_Original_Workboots_Splash.html

http://www.chippewaboots.com/

In July 2000, Berkshire Hathaway bought 100 percent of Texasbased Justin Industries for $600 million. The company has two divisions: Justin Brands, which comprises four brands of Western boots, and Acme Building Brands, with companies that make bricks and other building products.

Cowboy boots and bricks. It is one of Berkshires most interesting, and most colorful, acquisitions. And it says a great deal about Warren Buffett.

In many ways, Justin epitomizes all the business strengths that Buffett looks for. Clearly, it is simple and understandable; theres nothing particularly complex about boots or bricks. It represents a remarkably consistent operating history, as a look at the separate companies will show; all have been at the same business for many decades, and most are at least a century old. Finally, and most especially, Buffett recognized favorable longterm prospects, because of one aspect that he highly admires: in what are essentially commodity industries, the products have achieved franchise status.

In July 2000, Berkshire Hathaway bought 100 percent of Texasbased Justin Industries for $600 million. The company has two divisions: Justin Brands, which comprises four brands of Western boots, and Acme Building Brands, with companies that make bricks and other building products.

Justin Brands

The company that is now Justin began in 1879 when H. J. ( Joe) Justin, who was then 20 years old, started making boots for cowboys and ranchers from his small shop in Spanish Fort, Texas, near the Chisholm Trail. When Joe died in 1918, his sons John and Earl took over and in 1925 moved the company to Fort Worth. In 1948, Joes grandson John Jr. bought out his relatives (except Aunt Enid ), and guided the business for the next fifty years.

John Justin Jr. was a legendary figure in Fort Worth. He built an empire of Western boots by acquiring three rival companies, worked out the deal to buy Acme Bricks in 1968, and served a term as Fort Worth mayor. He retired in 1999, but stayed on as chairman emeritus, and that s why, at the age of 83, it was he who welcomed Warren Buffett to town in April 2000.

Justin Boots, known for rugged, long-lasting boots for working cowboys, remains the flagship brand. But Justin Brands includes other names.

Nocona, founded in 1925 by Enid Justin. One of Joe Justins seven children, Enid started working in her fathers company when she was twelve. After her nephews moved the family business from the small town of Nocona, Texas, to Fort Worth in 1925, Enid set up a rival company in the original locale. Against all odds, she built a success. Fierce competitors for years, the two companies were joined under the Justin name in 1981. Enid, who was then 85, reluctantly agreed to the merger because of her declining health.

Chippewa, founded in 1901 as a maker of boots for loggers, today makes sturdy hiking boots and quality outdoor work boots. It was acquired by Justin in 1985.

Tony Lama, which dates back to 1911, when Tony Lama, who had been a cobbler in the U.S. Army, opened a shoerepair and boot-making shop in El Paso. The boots quickly became a favorite of local ranchers and cowboys who valued the good fit and long-lasting quality. In recent years, for many the Tony Lama name has become synonymous with high-end boots handcrafted from exotic leathers such as boa, alligator, turtle, and ostrich, many with prices near $500. In 1990, Tony Lama Jr., chairman and CEO, agreed to merge with archrival Justin.

Two groups of people buy Western-style boots: those who wear them day in and day out, because they cant imagine wearing anything else; and those who wear them as fashion. The first group is the heart of Justins customer base, but the second group, while smaller, does have an impact on sales volume as fashion trends twist and turn.

When big-name designers like Ralph Lauren and Calvin Klein show Western styles in their catalogs, boot sales climb. But fashion is notoriously fickle, and the company struggled in the late 1990s. After a peak in 1994, the sales of Western boots began to decline. In 1999, Justins stock price dipped below $13.

John Justin Jr. retired in April 1999, and John Roach, former head of the Tandy Corp., came in to lead a restructuring. In just over a year, the new management engineered an impressive turnaroundadding new footwear products, consolidating the existing lines to eliminate duplicate designs, and instituting efficiencies in manufacturing and distribution. In April 2000, the streamlined company announced first quarter results: footwear sales rose 17 percent to $41.1 million, and both net earnings and gross margins increased significantly.

Two months later, Berkshire Hathaway announced it had reached an agreement to buy the company, prompting Bear Stearns analyst Gary Schneider to comment, This is good news for employees. Management made all the changes last year. Theyve already taken the tough measures necessary to lower costs.

Today the boot division of Justin has 4,000 vendors and about 35 percent of the Western footwear market; in stores that specialize in Western apparel, some 70 percent of the boots on the shelves are Justin brands. Most prices start at around $100. In the higher price brackets (several hundred dollars and up), Justin has about 65 percent of market share.

Acme Building Brands

The other division of Justin Industries is also a pioneer Texas company that is more than a century old. Founded in 1891 in Milsap, Texas, Acme became a Justin company in 1968, when John Justin Jr. bought it. Today, Acme is the largest and most profitable brick manufacturer in the country.

Because long-distance shipping costs are prohibitive, bricks tend to be a regional product. Acme dominates its region (Texas and five surrounding states) with more than 50 percent of market share. In its six-state area, Acme has 31 production facilities, including 22 brick plants, its own sales offices, and its own fleet of trucks. Builders, contractors, and homeowners can order bricks direct from the company, and they will be delivered on Acme trucks. Acme sells more than one billion bricks a year, each one stamped with the Acme logo, and each one guaranteed for 100 years.

Demand for bricks is tied to housing starts and, therefore, subject to changes in interest rates and in the overall economy. Even a run of bad weather can affect sales. Nonetheless, Acme fared better during the techno-crazed 1990s than the boot companies, and today is still the chief Justin money-maker. In addition to its bricks, Acme Building Brands includes Featherlite Building Products Corporation (concrete masonry) and the American Tile Supply Company, maker of ceramic and marble tiles.

Why was Benjamin Moore acquired ?

http://www.benjaminmoore.com

127 year old reliable business with premium brand aka Mercedes of paint companies. It is not biggest, a 10th largest specialty paint producer.
A video follows with an executive of Benjamin Moore

Barbarians at the Gate & Microcap investing

2011-04-21T02:48:00.000-07:00

This book is not a textbook on investing, written more as a thriller and entertainment novel. Flamboyant, profligate and profane Ross Johnson rips off couple of biggest companies. Based on a true story this novel inspired a movie Madness of leveraged buyouts in 80s makes it evident why capitalism is broken. After a course of this book, any family that nurtures a culture in business would forever banish the thought of selling their business to greedy bidders.

Black Book of Microcap Investing

The following nifty book appears to offer practical counsel through my 2 minute scan of the book. If you are thrifty you can download it from here I have no idea who put the book there nor will I answer whether I downloaded it from there, in other words, publisher can't sue me :) Amazon Link. Enjoy the process.