April 18, 2008

Change of Wind

US is in recession, Rupee is going to appreciate, wage cost is increasing, IT industry is doomed over,gone ..ok I am exaggerating. This was roughly the view just 1 month back.

I was running a few filters around that time and a lot of IT midcaps came up in the list. Some of these companies were 500 Crs+ companies selling at 2-3 times PE and 3-4 year lows. I listed a few ideas
here. Since then there has been a complete change in the outlook.

The initial runup in the stocks seemed to be a correction of over-reaction in the prices. However as soon as Infosys and other results started coming out, there seems to be panic buying happening. Stocks like NIIT tech have gone up from 90 to 135, patni from 200 to around 280. So most of the IT midcaps have seen a 30-40% runup.

So whats the point, you may ask. Well I have always had a dilemma. Once I figure out that a sector or stock is undervalued, how fast should I react in building up a position ?

Based on this episode with IT midcaps, a big position,quickly would make sense. However that is a retrospective approach based on after the fact. Most of my picks go into a coma for quite some time and I typically analyse the stock further in detail for months together and build my position over the course of a few months. This approach helps as I am able to average down my cost, get a better understanding and build a decent position.

However this approach fails me in sudden runups. However in view of my overall time constraints and my need to do a detailed analysis, I prefer to take my time and build my positions. I would rather lose a few quick gains than compromise on my approach and repent later for the sloppy analysis.

In case you are wondering, I did build a position in NIIT tech and Patni computers around the major lows. This was however pure luck. It is quite possible that the opinion may change again and the prices may drop back again and i may get an opportunity to add to these positions or build new ones. Unfortunately I have no abilities to predict the future and do not follow an approach based on one. The downside to the run-up is that these stocks are no longer compelling no-brainers at current prices.

As an aside, I am seeing articles popping up saying capital goods and real estate sectors are overpriced and IT seems to be undervalued. Now you tell me !!


VISHNU said...

Hi Rohit,

This is true. However Value Investing is a hobby for me. So I read atleast one company's Annual Report daily with Some Simple analysis.

When the time comes , I can build large position without any thought.

Even Buffet I believe built large position (8 Billion ?) in Junk Bonds (Straight value investing from Ben Graham method) and he even said that Price jumped too fast in 12-15 months.

We can learn a lot from the Master.. (Excerpts from the 2005 BRK Shareholder meeting notes are given below)

Best way to behave is like "oversexed man in a harem" when the price drops. (Thanks Buffet !! for the quotes)


The junk bond market is another good example of how quickly things can change. Here’s a chart of the peak yields of selected junk issues, their subsequent trough yields, and the number of months from peak to trough:

Issuer Months

Williams (14 Months)
Dynegy (14 Months)
Qwest (14 Months)
Crown Cork & Seal (17 Months)
Nortel (13 Months)
CMS (13 Months)
ABB (13 Months)
Lucent (13 Months)

Rohit Chauhan said...

Hi vishnu

unfortunately i am much slower in terms of analysis and reading ..at best 1 AR per week.

I think the biggest point in which i differ from the master (other than that he is brilliant and a genius) is that he already knows the companies and other investment ideas. so he is able to jump in when the price is right.

in my case, my circle of competence is tiny. so even if the price drops, unless i have an indepth understanding already, i takes time for me to figure out the company.

fortunately in investing knowledge is cumulative. once you understand a company, you can just add it to your body of knowledge. if the price drops in the future for that company, the analysis is faster and it is easier to build a larger position


ankur said...

Hi Rohit,

Great blog! I read your blog regularly and find it very useful.
What are ur views about Lupin? To me it looks very cheap.

Rohit Chauhan said...

Hi ankur
i have not looked at the company in detail.it seems to growing a lot ..if the growth is sustainable then the company looks good. however as i said, i have not looked at the company in detail and hence not sure of future prospects.


sumant said...

This is the my first time here and I am surprised and happy that someone in India is thinking value investing, I got hooked when I read the book "Buffet" by roger lowenstein and "the "intelligent investor" and have now ordered "security analysis".
The problem is, I find that the info required for security analysis isn't available easily and where it is available, it may not be accurate, for eg. ICICIdirect says the B/V of IFCI is 0.25 and moneycontrol says it is 15.22

I am aware that accounting standards in India and what they are and even the companies themselves probably give false data.

Any comments?

Rohit Chauhan said...

Hi sumant

you will be surprised to know that india too has its share of great value investors. i can think of some names - chandrakant sampat, chetan parikh, prof bakshi (his blog is linked in the blog links) etc. a lot can be learned from them

I have had a similar journey into valueinvesting too ..however my first book on buffett was 'The warren buffett way'

for data look at finance.livemint.com. their data is good. however personally i try to verify the numbers with the Annual report from the company too. icici no.s are wrong quite a few times. especially around bonus, stock splits etc.

I dont think the numbers put out by companies is false. there are AS standard which companies follow. there may be some manipulation, but it is not pervasive ..not of the order of Enron ..yet !