Whats on my mind – Feb 10

I wrote a post in Nov 09 discussing some general topics such as dollar depreciation, auto sector etc. I also promised a monthly post, which I have not done for the last two months. Maybe my mind went blank for the last two months :)

Dollar depreciation
Predicting the demise of the dollar is an industry in itself. I wrote about it in November and think the long term direction for the dollar may be down. However there is a catch in this thinking – down against what?. Currency values are relative. The dollar could go down against the rupee, but appreciate against the Euro (as it is happening now due to the Greece debt crisis).

One has to be careful in making such open ended comments. However as this a personal blog, and no one will hold me accountable for it, I can write what I think :). Heck, others get paid for writing the same crap and are still not accountable for the stuff they write !.

So let’s see where the dollar goes in the next few years. My investing decision are rarely top down and I have not factored the dollar depreciation, central govt budget, the infrastructure boom in india or the mating habits of the kangaroo in my portfolio decisions. I will let the smarter folks do that ..for me the equation will remain the simple ..buy below fair value and sell when the price exceeds it. It has worked in the past and most likely to work in the future.

Stock ideas
A lot of work is going on here, but as of yet there is no output. The key is to keep analyzing companies, understand their economics and estimate the fair value. If the price is not right, then it makes sense to just wait for it to come to you. I don’t think cash has ever burnt a hole in my pocket and sometimes doing nothing is a good choice too.
As of now I am analyzing graphite india. I came close to pulling the trigger on Mangalam cement, but the price suddenly spiked , before I could start my buying.

Quarterly results
I have completed the quarterly result review of all my holdings and published a few here. In general, the results are as expected and as a result my estimate of intrinsic value has remained more or less the same for most of the companies.

In the case of BEL (bharat electronics), I have been surprised by the improvement in the performance. I had a major concern about BEL. The business had become extremely skewed by 2008, where in almost 80% of the profit was booked in the last quarter of the year. This is generally not good as it results in a sales push in the last quarter to meet the numbers and as expected, the accounts receivables started going up.

BEL has since then reduced the skew considerably and has improved its cash flow position. I have increased the fair value of the company by around 15-20%.

Waiting for a crash ?
I think this year will require more effort in generating decent returns. 2008-2009 was a test of guts. If one had the guts or the foresight (depending on how you look at it) to invest a bunch of cash in early 2009, one would have made a great return by now. However the common mistake a lot of investors do is to wait for history to repeat itself. I can bet there are quite a few investors waiting for the next crash to happen.

It may happen, who knows ? I am however not basing my decision on such hopes. Investing has to be done based on what we know now, not what may happen or wish will happen. The best preparation one can do for a crash is to be mentally prepared and have some spare cash lying around.

Working on mental blocks
It have started looking at the various mental blocks I have and am currently working on eliminating them. One mental block I have is an aversion to commodity companies (not banks as some readers think). I am currently reading and analyzing such companies – steel, cement, metals etc in more detail and working out the fair value of such companies.

At the current prices, I don’t find any of them attractive. I have developed a spreadsheet where I analyze and record the fair value of each of these companies and track it with the market price. When the price drops below a certain level, I will start building a position. So it’s a wait and watch mode for most of these companies as of now.

I do not have mental block against options and derivatives. I only have a different opinion of these instruments. These instruments in the hands of a new investor is like a blade in the hands of a monkey – most likely the monkey will hurt himself.

If you are wondering, I belong to the same monkey class and hence other than some small positions, I have yet to go whole hog on these instruments. My plan is to learn more of these instruments, start small and then increase my commitment over time. If this monkey is going to get cut, it’s likely to be a small razor blade and not a 2 feet sword :)