SALE????

The markets are making new lows (almost) everyday. The drop is making players worried and scared. The pessimism with India's growth story, Rupee fall, lack of policy measures, fiscal indiscipline, global problems etc etc are some of the reasons that are being given.

However, there are some who believe All Negativity is Priced In now. They say the markets are cheap now. Why are they saying this?

Simple. Because, Sensex and Nifty have fallen about 25% this year. Most mid & small caps have fallen more. Right?

Mungerism in me shouts Anchoring Bias, Recency Bias, Availability Bias, First Conclusion Bias, Reason Respecting, Representativeness Bias, Envy, Vividity. (The above reason of 25% YTD drop is kinda similar to a story from Akbar- Birbal times. Akbar drew a line and asked everyone to make it shorter without doing anything to that line. Birbal came ahead and drew a bigger line near the original line.)

So, what is actually true? Do we have a 'Sale at a discount' on Indian Wall Street or not?

As on date, Price- Earnings Ratio of BSE- Sensex is 16.5 and Nifty is 16.8. Is that cheap?
Reverse-engineering Gorden constant growth model [P= E*(1+g)/ (k-g)], we get g = 4%.
Using Ben Graham's PE model  [P/E= 8.5 + 2*g], we also get g=4%.

So, at current prices, Mr. Market is predicting BSE-30 and NSE-50 companies to grow at 4% per annum every year till infinity.

Is that a discount?
I think, Yes. For a country growing at more than 6% every year for the past decade and expected to do the same in the foreseeable future, paying for 4% growth till eternity is not costly.
Will the discount increase?
Who knows!!!!

Stock Buyback- Why?

Stock Buyback or repurchase is the process of company repurchasing its shares from the shareholders.
So the question is- Why should a company go for buyback?

Who better to answer than Buffett himself?

" There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated."

Please note the AND condition and not OR i.e both reasons should occur together.

Let's try to apply the logic to a company which recently occupied (for a very short time) the No-1 position in stock market in terms of market cap.

Coal India- There is a buzz going around that Coal India will soon do a buyback.

Criteria A- Presence of Cash- It has more than 50,000 crores of cash. So cash is there for the buyback.

Criteria B- Undervalued?- A commodity player selling at a multiple of 18x on 2011 EPS and 15x on annualised 1H12 EPS is not dirt cheap. Please note the EPS number will reduce by 26% after the Mining Bill. With slowdown hanging over China, commodities and hence the stock can have a big correction (Ironically, drop in stock prices is called correction, but we still hate it!!!). So, stock does not look undervalued to me!

Why Buyback, then? Because the majority shareholder (GOI) is in need of money & he has no other alternate source.

As of now, Coal India's management is against the plan but looking at the way majority shareholder has handled ONGC and IOCL ( & other Oil Marketing Companies); Coal India may have to agree to the plan.

Precisely the reason why PSUs command lower multiples as compared to their private sector peers!

Was planning to give one more illogical example (according to me) of recently announced stock buyback. But Incentive Caused Bias asks me to stop writing anything.

Whose Bread I eat, his song I sing !!!

IPO Investing

Initial Public Issues (IPO) are the first sales of stocks by the company to the general public. The key reasons for IPO are- Need of money for expansion, paying down debt, get reasonably inexpensive promotions ( by getting coverage by media and stock analysts) and as an exit route for insiders, angel investors and Venture capitalists.

There is a key difference in mindset of 'growth investors' and 'value investors' while thinking about IPOs.
Value Investors believe that the last reason is the key reason for IPOs. And that's precisely the reason we see more IPOs in bull markets and very few in bear markets. And they prefer to avoid IPOs reasoning Its Probably Overpriced!!
While 'growth investors' believe New is the fancy and they try to catch the fancy and make money in the process.

So who's right?

If we look at BSE-IPO Index since inception in May 2004 and compares it with BSE- Sensex till now, we can clearly see that IPO Index has been under performing Sensex.
So, Value Investors seems to be making a good point.

Better to avoid IPOs!!!!

King's Experiment with Truth

Vijay 'King of Good Times' Mallya promoted Kingfisher Airlines seems to be heading the headlines for all the wrong reasons in recent news items.
Accumulated Losses.... Huge Debts..... and Bankruptcy.

What is the reason?
No its not Deepika. (There is a joke going on facebook- Deepika dated Yuvraj and he lost his form, she dated Ranbir and he did some crappy movies and then she dated Siddharth mallya- well company hi duba di bechare ki)

The actual reason was highlighted by Mr. Warren Buffett some 28 years back (in his 1983 letter to shareholders). Here is the relevant portion-
"

Businesses in industries with both substantial over-capacity and a commodity product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles. These may be escaped, true, if prices or costs are administered in some manner and thereby insulated at least partially from normal market forces. This administration can be carried out (a) legally through government intervention, (b) illegally through collusion, or (c) “extra legally”

through OPEC-style foreign cartelization.
If, however, costs and prices are determined by full-bore competition, there is more than ample capacity, and the buyer cares little about whose product or distribution services he uses, industry economics are almost certain to be unexciting. They may well be disastrous."

Here is another one which you should have listened to, Mr. Mallya (From 1980 Letter)-

When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, generally, it is the reputation of the business that remains intact.

Now what?
Either government bailout or more equity or bankruptcy. Lets see what happens. 

Just wishing that I am not the one to pay the tuition fees for your education!!! 

Reversion to the Mean

One of the most powerful psychology models is "Reversion to the Mean."

See the recently concluded Australia- South Africa test as a superb example of this.
End of Day 1- Aus- 214/8.
Day 2- Aus- 284 all out. ( M. Clarke- 151)
            S.A- 96 all out.
            Aus- 47 all out ( Recovered from 21/9)
So, S.A needed 236 to win the match which looked huge at that stage.
Not many would have put money on S.A to chase this down.
A trend of low scores was established on Day 2, and everyone (most) would have put their money on this trend to continue.
I, in my office, tried to find mispriced bets for mean reversion to occur. Could not find in this case.

But there is always a place to turn to, to find mispriced bets where reversion to the mean is not expected.
Trends are considered to be the destiny.
See the trend below-

Ask yourself, can this trend continue for ever?
If something can't continue forever, it ll surely end one day.

Fastest Way of Making Money

Do you believe that doubling your money every four-five years is a slow and boring process? Do you think you/your fund manager can surely get 40-50% return from stock market every year? Do you think that you can time the market? If your answer is Yes, then this post is for you, my dear friend.

Today, I plan to reveal the Fastest Way of Making Money as a Diwali Gift!! Yes, I have a strategy for that. Just follow my strategy & you ll make money so rapidly that even Jhunjhunwala ll come to you for tips! I am not kidding. Strategy is not too complicated either. In fact, it is very very simple & easy strategy.

Here is the strategy- BE A FOOL. No, this is neither a typo nor am kidding. The strategy is this only. BE A Fool.

Let me explain- There are three kinda people who operate/compete in the market.

1) Intelligent- These investors try to value a business & compare value with price & take their decisions irrespective of emotions. They follow their father's approach which he has given to them in a book called "The Intelligent Investor". As 'magic formula' man and value investor Joel Greenblatt says- "If we don't know how to value a business, we can't invest in it intelligently." So, these 'alleged' intelligent investors try to value a business & buy with a margin of safety. If they can't value, they move on.

2) Greater Fool- These investors (Forgive me Graham for calling them investors) follow the herd & are always late to the party... Because of chasing consensus, they buy at sky-high prices & sell at rock-bottom prices and a result lose everything.

3) Fool- Now since, intelligent investors walk away when they can't value something or if something is not dirt cheap; they leave a lot of money on the table. These guys pick that money & some more from greater fools & hence can make huge money. Read here.
True There Are No Free Lunches, but You Can Make Someone else Pay For Your Lunch & greater fools pay for their lunch.

If you fall in this category of stock market players, there is huge money in the making. Let me give an example. A overpriced IPO has come in bull market. You Subscribe.... Intelligent guys ll avoid it... so less competition... You ll get a lot of shares.... Bull market has become peak of bull market... Sell on listing day to greater fools at huge premiums... Make a killing... Bull market ll run of steam... Greater fools ll lose money... U enjoy!!!

You may ask- "Why ll it list at a premium on listing day?" I ll say- "Buy Low and Sell High. Subscribe only if it ll list up. Don't subscribe, otherwise."

Yes a little problem is there.
"If You find Greater Fool, you make a killing. If you don't find, Then You are the Greater Fool, my dear friend".
Kinda similar to Warren Buffet saying, "If you have been playing poker for half an hour and you still don't know who the patsy is, you're the patsy".

Irrational & illogical Market??

Do you understand the stock market? You think stock analysts understand the market & that's why they are able to justify the movement with a sound, logical and rational explanation? Yes?
Lets discuss the points further with a few examples from recent times (No, I am not suffering from recency bias but would like to take some vivid {Read- widely discussed and in news for a long time} example).

• US downgrade by S&P- Rationality would go something like this- US less likely to meet its financial commitments now....Cost of raising new debt should be higher now.. Bond prices should go down.... Yield should go up.  But on the next day of downgrade, yields actually fell !!! WTF!! But, man, you can explain any damn thing. Here is my favourite explanation to the event- The downgrade of Treasurys made people so worried about the elevated risk in the world that they ran to Treasurys for safety. (I don't know he was serious or surprised). I found the explanation extremely hilarious.

• Lets come to our own Indian markets now. RBI increases repo again. Market says what's repo & moves up. Analysts say hey! This hike was already factored in. Factored In... is another one of the most common explanations used. I have never been able to understand this term. When was it factored in? I mean which day? How much points? Why didn't you tell it then? How do you know? Can you please tell now exactly what all are factored in and what all are not?

As Taleb says if you try hard enough, you can find points supporting your views (Confirmation Bias) and if you try a bit more, you can present a nice, convincing story based on your views and supporting points (Narrative fallacy). But, then presence of one, just one, black swan is enough to conclude - Not all swans are White!!!