December 30, 2011

What's on my mind - Dec 2011

I want to close the year by discussing a few things which are on my mind and do not warrant individual posts for each topic.
Buy or hold for a crash
The market has dropped by 22% in the case of large caps and more than 30% in case of mid caps or small caps. That’s painful to say the least and has driven a lot of investors (should we call them that?) out of the market.
The most common view (including of some smart fellow investors I personally know) is that we have a lot of pain to follow in the coming quarters and hence it would be smart to wait for the prices to correct further, before diving in.
I agree with everyone that power, infrastructure, real estate and as a result banking are in for rough times over the next few quarters. Where I diverge from almost everyone is that, prices in some cases reflect the pessimism and more. As a result, the valuations are quite attractive and as it not possible to predict stock prices (at least in my case), I would rather buy based on what I think I know (cheap valuations) than what I would like to guess (prices in the short to medium term)
This is a risky stand to take and I am standing completely away from the crowd. I can’t think of any analyst or newspaper (not that I care about them) that is encouraging the investors to get into the market. On the contrary, almost everyone is exercising caution.
My reason for deploying my capital on a consistent basis is that the short to medium term may be bad, but the economy should recover in the next 1-2 years and as a result some of the companies which are hated now, should do fine.
I may end looking like a complete moron or a hero in a year’s time.  I am hoping for my sake, that I am at best early and not wrong.
The story stocks
I come to the next point – my allergy with story stocks. If you have been around, you will remember that IT companies were the story stocks of early 2000, infra and real state in 2006-07 and consumption or consumer stocks since 2009.
I find it quite amusing when others expound the virtues of the current favorites. The typical argument is that the Indian middle class is growing, so it will buy more of X and hence the future of these companies is bright. I don’t disagree with this thesis at all.
What I find amusing is that this is hardly new. This has been the case for the last 15 years and it is only now that the market has taken a fancy to this concept and bid the valuations up. I have a mind block due to the fact that the market generally tends to overdo a good thing. In its enthusiasm for IT or infrastructure stocks, the valuations went way up and when the mood turned, the results were not pretty.
Just in case you are thinking that this is a case of sour grapes in my case ,I would like to add that I started my professional career with a consumption company (asian paints) and my initial investments were all such companies (pidilite, asian paints, GSK consumer, P&G etc) as they were much easier for me to understand .
One another point – If you think these companies and the stocks will continue to do well, then how can the rest of the industry (power, infrastructure, banking etc) continue to do badly as implied by the current valuations. If the current dichotomy were to continue for 5 or more years, we may have a very weird economic outcome in the country.
I personally like a lot these ‘consumption’ companies, but not the valuations.
What mutual funds to buy?
I recently received the following comment (slightly edited) on mutual funds.
One thing i need to ask about your mutual fund portfolio is diversification..i am commenting about 5 funds u have selected ( may be possible that u don’t have any positions in them now )
1. Are all your funds are large caps and multicaps..why?
2. Don’t u believe in core and satellite approach which many magazines, papers are advocating these days
3. you are an aggressive investor and your mutual portfolio doesn’t reflect that?
4. u have invested in growth style funds only..not in any value fund why? don’t u think diversification in investment style is also necessary
The above comment raises good questions and as it was not possible to do justice via a comment, I have decided to take it up in this post
First a disclosure – I do not hold any mutual funds now. It is true that I have held mutual funds in the past (for almost 8-9yrs) as I elaborated in this post. I also elaborated on why I followed this strategy inspite of investing in stocks (see here).
In addition to the reasons in the post, I have always had this question in my mind – Are my return due to luck or skill? One needs to look at performance over a long period of time to be sure that the results are mainly due to stock picking skills and not a fluke. After picking stocks for 10+ years and outperforming most of the mutual funds I held during this period, I am inclined to believe that it must be due to skill and hopefully not luck (though one can never be sure).
My mutual fund selection process has never been based on market cap, investment style or any core/ satellite approach. You can find my approach in selecting equity funds here.
Frankly, I find the entire market cap, value versus growth or any other approach of selecting mutual funds downright self serving on part of financial advisors, mutual fund companies and personal finance magazines. How will they make money if they give you a simple, though equally effective plan ?
I have never quite understood the market cap or sector approach to fund selection till date. It is like asking Sachin tendulkar to score a hundred while playing only 3 balls in each over. Why would you want to invest in a fund where you restrict the manager in his or her stock picks? I would rather go with a diversified fund where an intelligent manager can picks attractive stocks with no restrictions.
I would personally prefer to invest regularly in index funds or widely diversified equity funds with a long term track record . My suggestion may appear as odd and opposite of what almost everyone has to say. I would rather keep investing in mutual funds simple and focused on the basics and not get carried away with all the fancy marketing which is used to sell garbage to investors.
On the last point of being an aggressive investor? I actually consider myself quite risk averse (to the point of being chicken) and am constantly obsessing with the downside of my stock picks. The upside on the other hand usually takes care of itself.


Ashwini Damani said...

Would request you to analyse the financials of Andhra Pradesh Paper Mills.
International Paper had purchased stake in the company at around INR 500/share almost a year back.
Right now it is trading at less than 150 Rs.
Appears oversold to me, and a value buy.

Ashwini Damani

Anonymous said...

Hi Rohit,

I know that Balmer Lawrie is a long term holding for you. is it possible for you to throw some light on the assets of the company i.e land , buildings , other etc. Do you think looking at the assets , the company is undervalued at current prices?? Regards,

Vic said...

Hi Rohit,

Good to see your "What's on my mind" post after long time..:-)

Good timing i.e. the year end..:-)


Anonymous said...

dear rohit,
a lengthy self appraisal at the end of a very unforgiving year, ur blog has always been very educative.
also, i enjooy it even more, since i want to play one dayers and test matches both, with the same set of players u have and achieve bigger returns.
it has worked wonderfully in the bottomline, as almost every stock had unsual 30% 40% short upswings unjustified by fundamentals
thanx for everything
god bless

Anuj Joshi said...

Dear Rohit,
Wishing you a very happy new year

Cheers :)

Lucky said...

Happy New Year :-)

Low on cash, high on equities - that might not be a fancy idea today, but I hope (and pray) that it works out well.

Story stocks will make stories and histories out of investors :-)

On mutual funds, I have stopped trusting anybody and do my own homework:

Happy New Year again...

Rohit Chauhan said...

Hi ashwini
have never looked at the company will do so.


Rohit Chauhan said...

Hi gian
the logisitics business alone is worth more than the market cap. in addition you get the excess cash and other business for free

the dividend is good @ 5%+ and growing and will be maintained

its just that it is not a flashy stock which one can boast about


Rohit Chauhan said...

Hi vic
problem was my mind was blank for quite some time :)


Rohit Chauhan said...

Hi anon
thanks for the comment

Hi anuj
wish you a very happy new year too


Rohit Chauhan said...

Hi lucky
a very happy new year to you too


Mansukh. M said...

Happy New Year Rohit.. Have you looked at BHARAT BIJLEE LTD and KARNATAKA BANK. Valuations seem attractive at current levels. Your views would be appreciable..

Anonymous said...

Hi Rohit,

Wish you a very Happy New Year 2012
I am a regular at your blog and really admire the simplicity with which you analyse everything. Have learned a lot from your posts.


sagar said...

Hi Rohit

i noticed your comment on balmer lawrie for you mean balmer lawrie is quoting for less than book value ?

ajinkyad said...

thanks for answering my questions on MFs..still i have 2 doubts:-

1. if u don't look at mandate of fund, its investing style and just look at the long term performance, then it would be a big risk having same type of funds in a portfolio because all the funds will not perform all the time,so inorder to have a solidity to portfolio, dont u think its factor which is worth considering?
2. you also like index investing, agreed..but dont you think that its a US concept? because if you look at our MF market many funds have constantly beaten the benchmark by quite a wide margin..though i agree that its quite logical and safe to park my money in index fund or ETF but if i am losing 8-10% of returns by not investing in diversified MFs..whats is ur opinion?

Anonymous said...

one more question regarding balmer lawrie:
How can I find out how much real estate and other assets the company own and how much they are worth? I want to know how many offices/buidlings/factories/plants they own and their carried value on balance sheet. Thanks