October 4, 2008

Time to get busy

Almost everyone is of the opinion that we are in for some nasty times especially in the US and other developed countries. India may not get impacted that badly, but could still face some impact.

I don’t agree that the bailout package in the US will fix the underlying issues. The underlying issue is that Banks have made bad investments via Derivatives and mortages. They have lost money on those investments. The only fix is to absorb the losses and build the capital again. In doing so, there will be a reduction in credit and liquidity.

The bailout package will at best allow the banks to sell these assets to someone (in this case the government). However I don’t think the US government will be stupid to buy it at book value. So the bailout package will help in creating liquidity for the toxic assets and get the system moving. However it is not going to reduce the losses and the subsequent pain.

I keep reading expectations of this mess getting resolved by early to mid 2009. I don’t know and I am not holding my breath on it. I personally don’t think the clean up will happen so soon. For history, look at the japanese experience in early 90’s.

Some guesses
So how does it play out for us ?

- Real estate in india could be in for some tough times. I still feel real estate in india was driven by liquidity and speculation in the last 3-4 years. A 30% or higher annual appreciation in real estate is not sustainable.
- Companies with debt, especially foreign borrowings could get hit big time. With the rupee depreciating and credit getting costly I would stay away from such companies (I personally have always avoided companies with high debt). The flip side is that companies with high cash holdings can deploy this cash profitably now (investments, cheap accquisitions or buybacks)
- Companies with a lot of promise, but not backed by results have already got hit and could get hit further. During bear markets, PE (what investors are ready to pay for the future) invariably contracts.
- IT, BPO and other industries could be in for a decent amount of pain. Mid to small cap companies could be at risk if they are dependent on a few clients in the banking sector.
- Double digit salary hikes may not happen for sometime now.
- Value investing will be back in fashion ( why not :) ? ). I am half serious ! A lot of investors who made good money in the last few years and consider the stock market as a short cut to riches, may be in for a rude shock. A slow grinding bear market is eventually more painful than a quick drop.
- This blog will see a 1000% increase in visitors …just joking !! couldn’t resist it.

Whats next ?
As I have said
before, no one can predict that. There were predictions on the sensex touching 25K by the end of the year. Now all the analysts and so called TV gurus have turned bearish.

I am starting to see some amazing bargains now, some new and some in my exisiting holdings. It is starting to feel like 2003 again J ..almost there, but not yet. So its time to get busy in finding great bargains and building the portfolio.


Anonymous said...

Yes Rohit
I also feel that it's time to start thinking a brand new powerful portfolio, conditions are like 2003 time. I read Rakesh JhunJhunwala's interview few days ago, he says mother of bull run is about to start around 2010.

Please keep posting new value ideas.


Vidyanshu said...

I have a modification for the last corollary. The blog will see a jump in visitors who are actual value investors or contrarians :))

I agree about the 2003 comment! Its time to make hay, but wait a bit, be more patient.

Also, pls. give us some of your suggestions on what those value bargains might be...I will share what I think are good pick's


Rohit Chauhan said...

Hi ani
In my case, i am not not thinking of a new portfolio, but rather moving more cash to it. I try to price the market and not time it. So if the valuation become compelling, my equity % goes up and vice versa. So early 2008 was less activity for me ..and i have progressively been ramping up.

vidyanshu - i agree, valuations are not as mouth watering as 2003, but close enough. also in my case i have the advantage of 5 years of additional experience and more confidence. I have started committing more capital and as the market drops it will increase.

I will listing my portfolio soon, 80% of which is mostly stocks already analysed on the blog


Anonymous said...

"So early 2008 was less activity for me ..and i have progressively been ramping up." Rohit, does that mean it's high time for buying? I feel personally that one should start buying from these levels.
Out of curiosity I would like to know what you are doing right now? Buying or still waiting for bottom? as I reckon your avg purchase price for Balmer is 160, and CMP is again at attractive prices for you would you be interested in accumulating Balmer or will buy only when it goes below your original purchase price?

Please throw some light on strategies of Buying in downturns.


Vic said...


Liked your post. As always, there's hardly anything to disagree with.:-)

Please start the RAPID(or I should say SLOW/DETAILED) FIRE 2 so that we can start building our portfolios.



Raghu said...

I second your thought on beginning to build ones portfolio. However, for the short term, I see more downfall. See here http://investnprofit.blogspot.com/

I see it as the beginning of 2002 typically because -

1. FIIs need much more money to save themselves. Bailout cannot help everyone explicitly.

2. Credit crisis has moved to Europe which is bad news for all of us! Recently, Irish government guaranteed top 6 nationalized banks which prompted a huge withdrawal from other banks. Financial sector can get to ruins by policy makers too!

I expect more FII outflows to come.

3. Liquidity would continue to drive markets. But where will it come from? I dont think the current credit crisis is going to end anytime soon. Further, a large percentage of domestic money still needs to be allocated. This might bring some respite. However, the quantum of pull off from FIIs is far greater than domestic capital available for investment.

Rohit Chauhan said...

Hi vic

i am not looking at new stocks in large numbers. several which i have discussed in past are cheaper. i am adding to them. i typically dont hold more than 10-15 shares in my core portfolio.

Hi ani
160 was the original price for me. i have since then added to balmer lawrie since then.
in terms of buying strategy ..i dont have anything specific for downturns ..as i said ..i try to buy below intrisnsic value ..cheaper the better. if the price falls after that ..i dont worry too much if the business is still doing fine