Very successful investors!

Who are the people who have these qualities and have used them to make a fortune?
• Benjamin Grahm- the father of Value Investing and author of excellent books on investing like-The Intelligent Investor.
• Warren Buffett- the richest person in the world ,proprietor of M/s Berekshire Hathaway, prodigy of Benjamin Grahm and he has made his fortune through growth+ value investing.
• Peter Lynch- the legendary fund manager who did not have a single negative return year during his illustrious career and has written excellent books on investing like One Up On Wall Street.
• Philip Fischer- proponent of growth investing & has written excellent books on investing like Common Stocks, Uncommon Profits.
• Chandrakant Sampat- legendary investor and only person in India-I know -who was able to predict the imminent collapse of the I.T. bubble in 1999 ( you might say that is so because I know very few people and I would agree with that). Again along with me, one of the few people that saw the dangerous levels of equity markets in 2008.
• Ram Deo Agarwal- the founding M.D. of Motilal Oswal Securities & legendary investor.
• Moti Ram Oswal- the founding M.D. of Motilal Oswal Securities & legendary investor.
• Rakesh Jhunjhunwala – who was one of the few people to see the imminent bull market in P.S.U.’s stocks in India as early as 2000 and that after the collapse of the I.C.E. ( information technology, communication & entertainment )bull run.

Excellent returns from equities in next few years- now is the time to invest & make a fortune!

What qualities should an investor have for success ?
Reasonable level of intelligence.

Sound principles of operation and not allow emotions to corrode them.

Above all and the most important, firmness of character. It is this firmness of character which enables a operson to buy at the peak of panic in a bear market. And to sell at irrationally high prices at extremes of bull markets.
This is so because it is the decisions of the investor which affect his performance.

You are neither right nor wrong because the crowd agrees with you. You are right because your fact and figures are correct. This quality gives an investor to have faith and confidence in his decisions and ignorer what the crowd is doing. As always happens the general crowd of investors will be buying shares at the peak of bull market and selling at troughs of bear market.
As Emerson had said, it is easy in the world to live after the world’s opinion, it is easy in solitude to live after our own but a the great man is one who in the midst of a crowd keeps with perfect sweetness his independence of solitude.He who keeps his cool when all around him are losing their heads and above all blaming it on him, he will be man enough to make a fortune in equity markets.
He who can be comfortable without being part of the crowd. This gives an investor the ability to be even minded
Zig when others are zagging and zag when others are zigging. In continuation of what has been written above, an essential quality than an investor must have is to able to sell at bull market highs when everybody is buying i.e. Zig when others are zagging and buy at bear market lows i.e. zag when others are zigging.

A Tribute To Masters

My sincere acknowledgement to the following investment legends whose writings have decided & shaped my career. I take liberty to borrow their thoughts, so that their knowledge and wisdom may benefit a lot more people.


 Benjamin Grahm
 Warren Buffett
 Peter Lynch
 Philip Fischer
Let me start with a joke, which shows the importance of having the correct knowledge. Once - in late P.M. Indira Gandhi’s time- Mr. Zail Singh & Mr. Buta Singh were to go to America. So Mrs. I.G. decided to give them a crash course in English. After a few days , she decided to conduct a surprise test interview to check their progress. First she called in Mr. Buta Singh & asked him, what word is formed using the alphabet given below?
M
Mr. Buta Singh gave the correct answer. When he came out, Mr. Zail Singh eagerly asked him what he had been asked, as we all do when we appear for an interview. Next was called in Mr. Zail Singh.
Mrs. I.G. ,being the shrewd lady that she was, asked what word is formed using the alphabet given below?
W

Mr. Zail Singh Had been partying a lot and neglecting his studies –like most of us in India do, when we are to travel abroad. He scratched his head. Thought a lot. And at a loss for an answer, he replied, ‘lakde to buta di Ma hai, per a puthi kyo piyi hai? ( looks like Buta’s mother but why is she lying upside down).

MULTI BAGGERS
Using the principles of value investing, some of the multi baggers in my portfolio have been (year of purchase 2000-2003) ( This term Multi Bagger will be elaborated later) :

Company Purchase Mkt. price as 52 week high
Name Price on 31.12.07 (Rs.) (Rs.)

Hindustan Zinc Rs 15 75 1200
Gail Rs 60 430 650
ONGC Rs 330 1800 2600
Kochi Refnry Rs 35 310 450
GE Shipping Rs 50 320 560

Later we will discuss how to identify such multi baggers.

Bear Markets. WHAT IS INVESTING ?

Investing Is Laying Out Money Now To Get More Money Back In The Future. Value Investing Has Been Explained Earlier.

Investing Relies On The Price Paid Being Less Than The Value Of The Purchase.

In A Bear Market…., Which Is The Ideal Time To Invest, People See That The Good Companies Are Selling For Silly Low Prices.
But Just Like A Person Who Sees Rs. 100/- Lying On Road Thinks That It Can Not Be A Genuine Rs. 100/- Note, Otherwise Somebody Would Have Picked It Already. Hence Ignores It. The Same Approach People Apply In A Bear Market When they do not buy shares of companies selling cheap.

In A Bear Market Its Easier For A Person To Admit That He Has Committed A Murder Or Has Stolen Something Than To Agree That He Owns Shares of a co..
While investing in equity of cos. One has to have an investment time frame of approximately more than five years.
If one requires the money in future say after 1 year or before 5 years, then it is better that one does not invest in equities.
Because after you have invested, equity markets may fall sharply and as you might require the money after a short period of time, you might be forced to sell at a loss. This is what happens in practice.

Warren Buffett - What is his role as a shareholder? And equity market losses.What qualities are required to be successful like warren Buffett?

What does owning a share of a company mean?
Owning a share of a company means that literally one owns a share of that co. – is its shareholder.
If a co. has say 100 shares and one owns 10 shares of this co. then he is 10% owner of this co..
To invest for the long term as a part owner of the co. is very important to make huge profits by investing in equity of cos..( See previous blog growth of cos. )


What does to invest for the long term mean ?While investing in equity of cos. One has to have an investment time frame of approximately more than five years.
If you require the money in future say after 1 year or before 5 years, then it is better that you don’t invest in equities.
Because after you have invested, equity markets may fall sharply and as you might require the money after a short period of time, you might be forced to sell at a loss. This is what happens in practice.

What qualities should an investor for success in equity investing like Warren Buffett, Peter Lynch, Philip Fischer?Reasonable level of intelligence.

Sound principles of operation and not allow emotions to corrode them.

Above all and most important, firmness of character.
This is so because it is the decisions of the investor which affect his performance.
p.s.- these ideas are the ones used my the above mentioned investment legends.

Inflation ! a contributor to boom and bust cycles.

• Inflation !
  Inflation in India at 11% is at 13 year high. But this is normal with crude prices at $135 / barrel. And the global economy having had very excellent 4 years of growth from 2003 to 2007. But now the party seems to be coming to an end. ( read my earlier blog- Cinderella story!). As all previous bubbles in history, there is fundamental genuine demand to increase demand first and consequently lead to increase in prices – unprecedented boom in China , India & other emerging economies in this case leading to exponential increase in crude prices. The huge application potential of information technology leading to I.T. bubble of 2000. But then the upward movement seems to become an act of faith & is expected to go on forever. This is makes people greedy- someone somewhere has made huge money out of this boom and now everybody wants to do so. A crowd is built up, all willing to invest in the ever rising asset at overvalued prices, leading to irrational (very high) prices. But as has been rightly said if something can not go on forever then it won’t. What goes up must come down. All this huge global growth has been possible because of the low interest regime in all global economies till a few months back. Vice versa of this too has to apply. That is what is causing the present slowdown in global economy- the global increase in interest rates. A chain is as strong as its weakest link. And in business the weakest link is debt. And it is this weakest link that is breaking. And this is leading to the collapse of real estate market in U.S.A. & consequent collapse of financial sector. And now crude oil is definitely in bubble territory. People investing in crude oil futures in particular and commodities in particular better be wary.
  
  Emotions in human nature in general & equity markets in particular.
  Emotions 23 times stronger than logic.
  
  EMOTIONS-Fear, greed, hope, despair.
  
  Fear 3 times stronger than greed. That is why in equity markets, we see bigger down swings than up swings. In recent past Indian stock indices have stopped trading because of having hit a lower circuit filter. But this has not so far happened on the upmove of the indices.

Joke of the day: what makes a man think of candlelight dinner. A power

failure.

How to convert 25 paisa into Rs 23 crores!

The Growth Of Profits & Its Rate Of Growth Is The Key To Make Profits By Investing . This is the magic used by all great investors from Wareen Buffet- world's richest person, Peter Lynch, Philip Fischer. You too can do so. How? Please read on.....
In A Growing Business Compounding Comes In. Compounding Is Just Like Magic. Its Magic Is That 25 Paisa Compounded At 100% P.A . over Thirty Years Becomes ( Take A Guess)- A Whopping Rs 23 Crores! But In Real World 100% Compounding Is Not Possible..
l But The Moot Point Is That In Equity, The Investor Has The Growth Of The Business On His Side To Ensure That Even A 10-15% Compounded Profit Growth Of His Business Would Increase The Share Price Of His Company Which In Turn Would Give Him A Decent Return Over A Period Of Time Above 5 Years. See Data Below To Understand The Profound Impact Of Compounding

COMPOUNDING AND ITS VARIATION WITH RATE OF INTEREST AND TIME PERIOD INVOLVED : ( COMPOUNDING P.A.)
RS 1 LAKH @5.5% AFTER 5YEARS=RS1.3LAKH AND AFTER 10YEARS=RS1.71LAKH
RS 1 LAKH@10 % AFTER 5 YEARS =RS 1.61 LAKH AND AFTER 10YEARS=RS 2.59 LAKH

RS 1 LAKH @15%AFTER5 RS2.01LAKH AND AFTER 10 YEARS =RS4.05 LAKH

AMT AT END OF 5 YRS@15 % COMPOUNDING =1.53 AMOUNT AT END OF 5 YRS@5.5 % COMPOUNDING

AMT AT END OF 10 YRS@15 % COMPOUNDING = 2.37AMOUNT AT END OF 10 YRS@5.5 % COMPONDG

THIS ILLUSTRATES THE MAGIC OF COMPONDG. AT HIGHER RATES FOR LONGER PERIOD .

IS THERE ANY DATA TO INDICATE THAT IT PAYS TO INVEST IN EQUITIES ?

SENSEX IN 1979= 118 ( WOULD YOU BELEIVE THIS FIGURE!)

SENSEX IN 1999=5005, COMPOUNDED R.O.R.=20.6%

SENSEX IN 2007 =21000,COMPOUNDED R.O.R=28 %

Crude prices at record highs!

Crude prices at record highs!
What a difference a couple of years can make. In ‘Rip Wan Winkle’, the change that occurred in decades takes now just a few years. It is hard to believe that crude oil was selling at $10/ barrel in 2000- just 8 years back. The same is now $132 / barrel and rising fast( And to add salt to injury, the slowing global economies have to remember that the cost of production of one barrel of crude oil in Arab countries is $1 ). It seems like Armageddon. But this has happened before also. In the previous big oil shock of 1970’s after the Arab – Israel conflict, the Arab countries turned the crude oil tap off, angry as the they where over the role of western countries and US in particular for their support to Israel (Could history be repeating itself- first time as tragedy and second time as farce- and the Arab countries have again turned off the crude oil tap , angry as they must be over the on going war in Iraq & Afganistan ?). The previous high of crude oil was $ 33/ barrel in 1990’s. Then it fell to a low of $10/ barrel in 2000. A fall of more than 70% from its peak!
Where every body is talking of crude oil at $200/ barrel in a few months, I am willing to stick my neck out and predict that in about a few months to a year, crude should be around $40-$50/barrel.
Why? Firstly, the world economy is already slowing, with the world’s biggest economy
( it might not remain so for long in future & eventually has to be over taken by China )- USA is on verge of recession. Secondly, the central banks of some of the growth engines of global economy China & India are raising their bank rates thus slowing the economic growth & dampening crude oil demand. Thirdly, the record high prices are bound to bring massive additional supply to market. And the commodities prices seem to be in a bubble stage. Fourthly, high prices are bound to reduce consumer consumption and give a boost to alternative technologies to oil guzzling automobiles like hybrid cars are already a commercial reality. Last but not the least, policy makers all around the globe are in a panic, & when they start to panic markets stop to panic. Hmmm, let us see what happens. As someone rightly said, may you live in interesting times. And we certainly are doing so.

The importance of Grisham’s law- BAD MONEY PUSHES OUT GOOD MONEY!

The importance of Grisham’s law

Grisham’s law states that bad money pushes out good money. What in hell does this mean? In a bull market, greed is all prevalent & logic, common sense and rationality are hard to find. People are buying what is worth Rs 10 for Rs 20 thinking that there will come a bigger fool who will buy these already overvalued assets for even higher price. For some time, this does happen as the asset prices reach bubble level ( US & other global mkt. housing market’s phenomenal rise ). People who make their investment decision based on what an asset is worth find that the prices have risen to an irrational level. Hence they sell out. This is the good money ( why good money? because these investors will again invest when the bubble bursts, ASSETT PRICES FALL TO REALISTIC / UNDER VALUE LEVELS) and hence help stabilize the fall in asset prices). And hence the bad money ( why bad money? Because they further take the asset prices to even higher irrational levels and any small investor who now buys, loses his shirt when the asset prices collapse on bursting of bubble- I.T collapse in 2000) of irrational investors drives out the good money.

Impact of interest rates on assett prices

Macro economic factors affecting equity / other asset prices


Interest rates- are the most important Macro economic factor affecting asset prices. Even a one basis point change in interest rates affects equity prices. An increase in interest rates causes a decrease in asset prices and a decrease in interest has an opposite effect. This can be understood by the ongoing sub prime crisis in U.S.. The decreasing interest rates in U.S. in the Greenspan years from 2000 to 2003 ( for which now he is drawing a lot of flak ) when Fed interest hit a low of 1% fuelled an unsustainable boom in housing market in U.S. & housing & other asset classes globally. Then as the economy in U.S. as well the global economy came out of the slump caused by the dot com bubble burst of 2000 from 2003 onwards, Fed interest rates were increased to a high of 5.25% in 2007. This delt a death blow to the housing bubble in U.S., U.K. & other developed countries. A similar impact was on equities as well, especially the emerging market among them the so called BRIC countries. Suppose the interest rate is 5 % & a co. X has a share price of Rs 100 & an EPS of Rs. 5. then an owner of this share is getting a 5% return, the same as the debt investor- as just like water, returns tend to keep level . Suppose now the interest rates double ( in our case in the U.S. economy they increased over 5 times as stated above). Now since a debt investor is getting a 10% return, the equity investor return should match over time. This can happen in two ways- first, the share prices falls by 50% to Rs 50 or the EPS doubles to Rs 10. The first scenario is what happens in case of most cos. as it is very difficult to increase earnings in an increasing interest rate scenario. Hence the sub prime crisis & falling equity prices.

Q.E.D.
Pl. refer to earlier blog Cinderalla story.
To be continued.

Falling exports-Re rise is not to be blamed!

Falling exports-Re rise is not to be blamed!
By. Er Rohit Pandita

One Chinese Yuan is equal to Rs. 5.68. If appreciating rupee is the cause for recent decline in India’s export growth- except the negative impact on I.T. software exports sector- ( as the so called economic experts are saying), then by that measure Chinese Yuan being 5.68 times stronger then rupee, Chinese exports should have collapsed. But that is not the case as shown by following figures : Merchandise exports ( 2007, $ billion)-China 969,India 126. Textile exports to U.S.A. ( $ billion)-China20,India 4.

This data indicates there is no negative impact of China having a far far stronger currency than India, on its exports. It is remarkable that even at 1$=Rs39.5, we have a far far favorable exchange ratio than China but still we are far far behind China not only in exports but most other competitive economic parameters also, as the following data shows :Electricity production (billion KW,2002) China 1641, India 597. F.D.I ($billion,2004) China 61, India 5.5.Tourist arrival (million,2003) China 33, India 2.4.Foreign exchange reserves ($,ending 2007 ) China 1.612 trillion, India 276 billion. Medals in Olympics (2004) China 120 gold, India 1 bronze.
One figure to note very seriously from this data is that China’s forex reserves of $1.6 trillion = India’s G.D.P. (2007)!

So how does China do this ?
a) Infrastructure development = rapid economic growth is the key to China’s stupendous economic success.
In Jan., 2007 , Industrial & Commerce Bank of China (I.C.B.C. ) came out with the largest ever I.P.O. of $ 22 billion ( Rs 88,000 Crores !). Post listing , I.C.B.C. market capitalization is double the market capitalization of entire Indian banking. The success of such mega I.P.O.’’s at Honk Kong stock exchanges is the reason for the premier stock exchange of New York being unhappy with the policies( read success) of Honk Kong stock exchange . But that topic is for another time . And in year 2002, Chinese banking industry was in trouble with estimated 30-40% assets as N.P.A.’s!
China is a major equity market in the world. The market capitalization of Shanghai & Shenzhen exchanges is close to $6 trillion ( Indian equity market valuation -$1.6 trillion ).
Whereas we cannot stop patting our back for having built the Delhi Metro
( at an astronomical cost of Rs 175 Crore /km i.e. Rs 10,500 for 60 odd kms. – to put this in perspective -enough to purchase 10 full bodied Boeing 747 aero planes !) , China was the first country in the world to commercially operate M.A.G.L.E.V- Magnetically levitated train.
On the contrary, the rupee appreciation is good for some sectors as well as the ‘aam admi’ as the imports become cheaper –main benefit being cheaper crude oil prices. ( India being net importer of crude oil).Remember in 1993, $1=Rs15-17. Cheaper gold. Cheaper international travel.( Imagine paying for a round trip airfare to Australia Rs 1400 only with $1= Re 1 ) . Less brain drain. In fact as per rumor mills, only section losing out on Re appreciation are the people who have money stashed away abroad in Swiss banks. And no prizes for guessing who these people are- the politici….

b) Emphasis on F.D.I.
: As the data above shows ,F.D.I. into China is 11 time the F.D.I. coming into India. It is better to allow foreign capital coming in to build assets rather than the money coming in as F.I.I. inflows. F.I.I.’s can always take their money out of Indian equity markets –that is the reason why Indian equity markets fall drastically with F.I.I. selling- but it is very difficult to do so if foreign money has been used to build assets like power plant, manufacturing units etc.

c) Focus on agriculture and increasing output
China produces 400 million tones of food grain from just 100 million hectares whereas India produces 108 million tones of food grain from its 146 million hectares. China rice and wheat productivity (kg per hectare) 6233 and 4155, respectively. India 3034 and 2688 respectively.


d) China –Global Impact
“China’s huge appetite for natural resources has led it t cultivate deeper relationship in Africa, Central Asia and Latin America. Last yea, it hosted a summit in Beijing attended at least by 45 African Head of states. The Shanghai Co-operation Organization founded with Russia & other Central Asian countries has become a crucial instrument of China’s energy security policy. The Chinese education Ministry approximates that there will be 100 million people worldwide learning Chinese as foreign language by 2010. Two decades ago Chinese universities attracted about 8000 overseas students : by 2008 that number would have leapt exponentially to 1,20,000”-source Rishabh Bhandari. It is also expected to emerge as the No1 tourist destination in the world with the beginning of Beijing 2008 Olympics proving to be the shot in arm for Chinese tourism.

Hence poor infrastructure and inept policies might be blamed for India’s lower growth and progress vis-à-vis China & the recent decline in exports but not the appreciation in rupee. This is the lesson, one hopes our P.M. has learnt well from his recent visit to China. The inept - one step forward and two backward –policies of Indian Central and State governments explains thought the Centre and state (govt. of J&K) are about to complete their tenures in power, the situation on ground in terms of roads, electricity etc. is as bad as ever. The situation is laughable if it were not tragic.
pandita.errohit@gmail.com

Cinderella story-indian equity market story

Cinderella story



In the South East Asian crisis of 1997-98, when the so called tiger economies of Malaysia, Thailand, and Indonesia meet financial trouble, they fell from grace. They were shunned by the international investment community as pariahs. India self congratulated itself from escaping unscarred from this crisis. But India was never part of the high growth story of these countries. It was like when guests to a party fell sick because of overeating and a person uninvited to a party is saying, see how strong I am. I have not fallen sick, unmindful of the fact that he was never part of this party. But in the present global equity boom, India is a lead player as part of the B.R.I.C. countries (Brazil, India, Russia, and India). And as in the Cinderella story , when the party ends and everything beautiful and shining turns into rats and pumpkins, similarly Indian equity will have to fall drastically AND THEY HAVE, if there is a collapse of global equity markets. Danger signal are there –U.S. sub prime crisis, crude at $100/bareel, over speculation all across the asset classes, declining commercial vehicle & two wheeler sales in India, stagnant four wheeler sales –ignoring new model launches. I.P.O.’s are massively oversubscribed of cos. which do not have any running- leave aside profitable –operations! No body in his wildest dreams would have thought a few years before that Sensex would cross 20,000 !- not even the biggest fan of India But that is why Einstein had rightly said that imagination is more powerful than knowledge. Even after huge gains and massive wealth creation, people were not willing to call it a day and book their profits and sell overvalued equities till the crash of Jan2008. Like a drunk intent on finishing the bottle irrespective of the consequences. As the Oracle of Omaha –Warren Buffett- the third richest person in the world- says, be fearful when others are greedy and greedy only when others are fearful.

pandita.errohit@gmail.com