October 17, 2009

Changing Gears

The period from Oct 2008 – Mar 2008 was a no brainer period – as long you could suppress the sinking feeling of watching your holdings drop everyday. As I had gone through a similar phase (though longer, but equally mind numbing) in 2001-2003, I was better prepared emotionally to deal with it. I had promised myself in 2003, that I will ignore the doomsday predictions and invest a meaningful amount of money when and if the crash came.

As they say, be careful what you wish for. I got my wish in 2008 and more. So during this period it was a matter of picking a decent company and investing in it. The valuations did not matter much as almost everything was dirt cheap, as long as one could be sure that the company would survive the likely recession and prosper in the future. This period did not last too long and we have been on an upswing since April 2009.

The situation is now completely different. I have never seen a market where almost every company, especially mid-caps and microcaps are doing well too. During the previous bull market in 2007, there were pockets of undervaluation as the markets were focused on the hot sectors – realty and infrastructure at that time. So one could find undervalued IT or midcap companies easily.

Sudden corrections

That situation has now changed completely. The correction in undervaluation for several companies is startling. I have seen companies like Hawkins cooker, VST and countless more correctly suddenly by 40-50% or more in a matter of days. This is more pronounced in case of companies which have reported good results in the previous quarter.

The upside is that most of us are sitting on pretty decent gains for the year, far more than we expected at the beginning of the year. The downside is that the number of attractive opportunities are shrinking by the day.

Modified approach

I have been running filters and have done an initial analysis on some 200 odd companies and can hardly find anything which would send my pulse racing. There are a few decent opportunities out there and one could invest a moderate amount of capital in it, but nothing in which I could commit something meaningful and be confident about it. One option could be to do nothing and wait till something really attractive comes up. The other alternative, which I may end up following, is to buy the entire set of moderately attractive ideas in equal proportions. The end result would that each one of these ideas may not do well, but the group as a whole should give me above average returns.

I plan to publish a few of these ideas in the coming weeks, provided they do not run up in the meantime. However, as I promised in my previous post, the top 1-2 ideas are reserved for those who have already contributed or plan to do so in the near future.

An update on donations

I have received a commitment of around 15000 Rs (rupee equivalent) from around 13 readers. Needless to say, that I am very pleased with the results and would like to thank them (which I have already done personally).

A Happy Diwali

Finally a happy Diwali to all the Indian readers and may all of us have a prosperous year ahead.


 

14 comments:

Anonymous said...

dear rohit
i have donated to cry as advised
reciept will take 7 working days.cani send a physical copy or a email copy
and ,is it one contibution for one idea
anyway, i feel very proud of u.
how has ur dear better half reacted
HAPPY DEEPAVALI

Rohit Chauhan said...

Hi anon
send me an email of the payment confirmation. that should work.

thanks for the donation.
happy diwali to you and your family

regards
rohit

Value Investing said...

Happy diwali!!

Here is article from livemint.com

http://www.livemint.com/2009/10/16211115/Asmina-Shah-penning-a-future.html

Rohit Chauhan said...

Hi
great article. hopefully we would be able to make some difference

happy diwali to you too

rgds
rohit

Vic said...

Hi Rohit,

Your approach seems appropriate in current market scenario.

Also nice to know the success of your charity idea.

Thanks,

Vikas

jagan said...

Hi Rohit,

Thanks for showing me a novel way of donating for a cause. Let me take your hand and share my pride.I've attached the Acknowledgement page of CRY site to your email ID. As and when I receive original receipt I'll send it to you.

Regards
Jahangeer
Doha

Hari said...

Hi Rohit,

I wanted to thank you a lot for all your post. I find this blog delightful to read. I also would like to contribute to the cry,but not for your stock pick advice but for as an avid blog reader I would like to be a part of this useful initiative.
But I am in the USA and have not worked out how to pay online.But I also plan to contribute some money.

This is one place I find some useful information. I have had the courage to hold onto my stocks but I did not buy more of stocks that I already hold in large quantities. Ex of some tocks are REC,Opto Circuits,GSK Consumer health care and Tata Elxsi. I should have bought more of the stocks. But I missed the oppurtunity and a sitting on a very tiny gain of 20%.
I hope I have learnt a valuable lesson like you and I am waiting for the next crash. In my 4 years of investing errors of omission (omitted multi baggers) far outnumber errors of commission.(stocks that have declined after buying). This has dejected me a lot.


This is a Special blog .

Thanks,
Hari

Rohit Chauhan said...

Hi vikas
the credit for moving this direction goes to my wife who has been pushing me on doing something meaningful other making money. ofcourse it would be a major win win situation if people donate and also benefit indirectly.

regards
rohit

Rohit Chauhan said...

Hi jagan
appreciate your sentiment. i have not recieved the email on the payment confirmation..can you send it again to rohitc99@indiatimes.com ? that should be fine ..you dont have to send the reciept to me

rgds
rohit

Rohit Chauhan said...

Hi hari
thanks for the offer to donate. appreciate your sentiment.

good to know you find the blog useful.

on being dejected, dont be. the beauty of the stock market is that it will also give multiple opportunities during a lifetime, so the key is to be prepared for it. in a way, not being too aggressive during a bear market is not bad ...lets you manage your risk and you have been able to save your capital to fight another day

rgds
rohit

jagan said...

Hi Rohit,

I resent the mail to you, but I received a failure notice from Yahoo. I have not received any reply mail from CRY either.

Regards

Sujith Marar said...

Hello Rohit ,

The post is good .But I have adding some comments based on this remark

"I have seen companies like Hawkins cooker, VST and countless more correctly suddenly by 40-50% or more in a matter of days. This is more pronounced in case of companies which have reported good results in the previous quarter."

If you look at VST industries , is is nothing new , but those patient value investors will get it . The first spike in stock price is due to rise in dividend per share this year , which has been raised and then "quartely earnings" .and and therafter investors might have been attracted by its its dividend track record and good dividend yield and at the same time its good earnings and "good cash flow from operations" for a couple of years back . Same thing for "hawkins cooker" . Since Hawkins was celebrating 50 years , they paid good dividend which was rise of 100% from last year .I am not sure whether hawkins will repeat this year . If you look at the business model of Hawkins , they are more focussed just like "Gujarat Gas" etc " These companies consistently pay dividends and capital appreciation will come sooner or later .VST industries still gives dividend yield of above 6% in today's market which is far better than other companies (include Sensex companies). I was initially scared whether VST will perform .My calculation based on earnings , cash flow provide me some confidence in putting money though Iam new to this .I stayed with VST Industries for two years based on VST 's "cash flow from operations" as I learnt from Peter Lynch about "Philip Morris" in "Beat the Wall street " as " cigarettes work in both good and bad times ..Both the companies will not give huge capital appreciation immediately , but will give on a longer term and st the same time steady dividends will lead to cpital appreciation later in the long term .For me , the assumption on the price rise in VST industires and hawkins Cooker resembles " Buffet buy on Gillette" during 1980s whether the capital apprciaton came after a long stay holding in Gillette" after more than 6 years .

Rohit Chauhan said...

Hi jagan
you can email me on rohitc99@indiatimes.com

regards
rohit

Rohit Chauhan said...

Hi sujith
VST is not really comparable to a philip morris. It is a much smaller firm and does not have the market power in its market as compared to philip morris (not comparing their size).
In addition, cigarette companies in the 80s were not under attack as they are now. also smoking is not considered as acceptable as it was then.

the net impact of all this that VST may not see as much topline growth as a philip morris and also faces much higher competition from ITC or godfrey. VST has good cash flow and the management will return the cash via dividend, but i dont expect it grow more than low single digits in the lon run.

the above does not mean, one will not make decent returns ..but one cannot expect great returns.

i agree with your comment on hawkins and it is a good company. My only reason for not creating a position now is that i need to make up mind on the valuation ..maybe a 10% drop will change my mind :)

regards
rohit