February 16, 2010

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 :)


Anonymous said...

dear rohit,
i have entered graphite india at rs 41/- and holding still as dcf fair value is about 130/-. i was thinking about certain critical mass investing to make me rich.like, as my salary is rs one lakh per month , a profit of one crore booked would really change my life.
i am thinking about quantum of profit to be earned to be life changer,so invest accordingly.hope i am getting u to my crude but definitive line of thinking.the amount of profit rather than percentage , that actually makes difference in my life should be my aim.
also, if balmer is a good company still trading 40% below intrinsic value, why not increase exposure there.
bandwagon guy

Lucky said...

"Investing has to be done based on what we know now, not what may happen or wish will happen."

Some day, you will be quoted for this. So I take this opportunity to be the first fan :-)

I tend to agree with you. And not without reason.

Phil Fisher wrote: "Finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear."

So I guess, I will have to stop waiting for the probable yet elusive crash and do some hard work. Looks like there are no more free lunches anymore...

Ravi said...

Hi Rohit,
Great post as always. I like the honesty with which you admit some of the stuff. I have long position on Mangalam as I mentioned in one of the comments before. There are certain spaces in commodity that interst me like the mining where the competitive advantage is the license. I would like to hear more about the mistakes you did before and things that you overlooked before which had turned the other way round. That would be a great learning for people like us. Sometimes we come unhurt even after making some mistakes due to Mr Market enthusiasm but sometime we get punished. I am looking to understand more on the traps that we fall into while making investing decisions like we may have confirmation bias and discount some of the facts as not a problem but they turn out to be a problem or we may lose patience with sitting on big cash and want to do something which may force us to buy mediocore investments. Thanks for this yeomen service of yours to educate small investors like us.

Rohit Chauhan said...

Hi bandwagon
you raise an important concern ..which most of us have ..including me.how to reach a certain level of absolute wealth if the starting point is small. there is no one answer and i will try to tackle this in a post ..but i would suggest you not to invest with that objective ..it may mess up your decision making and make you take undue risk. take a conservative and rational approach ..and over time you will build wealth ..ofcourse if you want to make a crore in a short time ..i am the wrong guy ..as i dont have an idea on how to do that

on balmer ..yes it is cheap ..but i limit my positions to a certain size irrespective of how attractive the idea is ..thats my way to controlling risk and protecting myself from my own ignorance


Rohit Chauhan said...

Hi lucky
you comment is good for my ego :) ..but unlikely to happen ..for that one has to be famous and rich and i am not either ..but i am still dreaming ..thats free

on waiting for the crash ..yes its better to keep working at it and if the crash come ..then you are more prepared


Rohit Chauhan said...

Hi ravi
i dont have an issue admiting as i am not selling anything ..but just wait ..once i launch some paid services ..i will be smartest guy around who can do no wrong !! i will turn into a genius overnight :)

my list of mistakes is quite long ..i have written about it in a series of posts earlier and i am constantly adding to it.

my mistakes have been more of ommision than commision. i have not been agressive enough in the past ..i should listen to my own analysis more :)

Anonymous said...

Hi Rohit - Nice post!
I agree with you on "waiting for another crash". I waited until Sep/Oct, 09 and then change my way of looking at companies for investing - reduced MOS to 40% and slightly optimistic view on companies in general. Then I was able to see some companies available at decent discount.

I have one greedy question for you: Can you please share the name of the companies you have analyzed recently (not IV) and found them not having sufficient MOS?

Best Regards

anurag said...

Dear Sir,

This is the first time Iam posting comments on this site,because usually I post only at Rc.funds.

If you remember when you conducted a blog poll,I wrote to you that Retail investors get bullish above 5200 levels:))

and in one of your previous post I tol you abt the 12% golden rule of shorting,lets see that.

1)Index corrected from 5200 after dewali,and again bounced from 4580.

5200 12% = 640 points.

5200-640=4560.and the low of Nifty was 4580.

2)Recently it corrected from 5300.

5300 12%= 660

5300-660=4660.and the low of this correction was 4667.

I know you do not believe much into the TA but there are still few TA rules,and market follws them

Anurag Awasthi

Rohit Chauhan said...

Hi stuti
i have been analysing companies like precision wires, gujarat ambuja, JSPL etc


Rohit Chauhan said...

Hi anurag
welcome to this blog ..i guess you must be feeling lonely commenting on the other blog :)

what you say about TA maybe true ..i dont deny that ..its just that i am not into it. doesnt fit my temprament and hence have rarely discussed about TA

anurag said...

Dear Sir,

I thank you for the welcome mesg,for this site.

Now coming to the above post,on dollar movement.few questions comes to my mind.

1)I fail to understand that you are printing your curreny 24/7.But in time of distress the Gold comes down and dollar goes up:))?

2)How the dissent voices on Dollar as reserve currecy died down?

3)Even when most India's debt is internal,and infact it is currently net lender to IMF,the rating of India and Iceland is same?

4)Why Dow gets jittery,whenever someone mentions abt Audit of Fed?

5)Why Manmohan Singh Ji was pressurised to give statement on dollar when India bought gold from IMF?

Many of us do not know that height of Nikkei was 39000,Dubai index was 6000,and Shangai index was 6000.Look where they are trading at the moment.

The Stock Markets and physics do not go hand in hand,'When they pump liquidity we become Emerging Markets and when they pump out liquidity we become Submerging markets':))

Thanks and Regards
Anurag Awasthi