You, Me & IPO

2012 came with some good time for secondary markets. If secondary markets are doing good, primary markets also try to catch the action.... (Envy, Recency Bias, Social Proof)

So should I invest (or speculate) in primary markets i.e IPOs ?

Thinking in terms of probable outcomes should help....
1) IPO is Either Good or Bad... By Good IPO, I mean either good company at fair price or fair company at bargain price. You can get some indication of goodness or badness of a company through IPO grading. But always take that grade with a pinch of salt... (IPO grader gets money from the company he's grading... so Incentive Caused Bias comes into play)

2) Market will either apply or won't apply... Apply means 10-25-50-100 times over-subscription while don't apply means just full subscription or under-subscription.

Knowing this comes my decision... Apply or don't apply?

	Good IPO				Bad IPO
	Market applies	Market don't applies			Market applies	Market don't applies
I apply	Negligible GAIN	Huge GAIN		I apply	Negligible PAIN	Huge PAIN
I don’t apply	Look A Bit STUPID	Can buy after listing		I don’t apply	SAFE	SAFE

The above decision process is self-explanatory.
But it deals only with the magnitude... What about probabilities?

There is more probability of market applying to good IPOs and avoiding bad IPOs. So, there is much more chance of landing in green cells in the above shown decision process table...
And what's the probability of the next IPO to be Good?
Not too high either... Why would an informed seller leave too much on the table for an ignorant buyer?
So more probability of being in Table-2 than in Table-1.
So the most probable final outcome is going to be- APPLY- HUGE PAIN; DON'T APPLY- SAFE.

Where is MCX ?
Monopoly (82% market share), presence of economic moat, PE of 17-18 (on 2012 annualised E), high ROCE made it a Good IPO. 5/5 by CRISIL justifies this opinion. So, we end up in Table-1.
So, in all probability, Market had to apply. Market goes all-out & applies more than 25 times the desired quantity.
Result, If I applied- Negligible Gain or If I avoided- Looking a bit Stupid. Though 25 times over-subscription significantly decreases the magnitude of both the possible outcomes.

And by the way, is it a Good IPO?
Its a good company, and should get 25 PEs IMHO. But at normalised E. Due to recent run-up of gold and silver & muted equities, E looks on the higher side to me. If equities do well for 2-3 quarters relative to gold and silver OR something happens to China, Earnings may well correct for MCX.
That will be a good time to enter!! 

Mistakes- (Direct and Vicarious) & Blowing Up

We, human beings, tend to make a hell lot of mistakes in our life time.
So... Is it Ok to make mistakes?
Tried asking this by Google Uncle & found the following answers-

"If you don't make mistakes, you aren't really trying."                                           -Coleman Hawking

"The man who makes no mistakes does not usually make anything. "                    -Edward Phelps

"The greatest mistake you can make in life is to be continually fearing you will make one." -Elbert Hubbard

"If you aren’t making any mistakes, it’s a sure sign you are playing it too safe."     -John Maxwell

These kinda quotes makes me believe its good (even great) to make mistakes.

So, I, hereby, plan to decide to make at least one mistake everyday!!!

How's that for a plan?? Exactly its Idiotic.

So what should we do with mistakes?

I would say our aim should be learn a lot from vicarious mistakes, make less of direct mistakes (and learn from them, if made) and absolutely avoid Blow-ups. 

Let me explain the terms-

Direct Mistakes- These are the mistakes made by us. We should try to minimise them & learn from them because its a painful and time-consuming experience to make these mistakes & you won't go anywhere if you make all the mistakes yourself.

Vicarious Mistakes- These are the mistakes made by others. These should be our maximum source of learning. As Munger puts it- "You don't have to pee on an electric fence to learn not to do it." 

You should read newspapers not to know what's going around but to see a lot of vicarious mistakes made by others. And you should also use your mistakes in one field & learn from them to not make mistakes in other fields.

Blow Up- I don't know who coined this word but it was introduced to me by Taleb. It essentially means making such a huge blunder that you don't get a 2nd chance to rectify your mistake. Once you make it, and that's it, you are gone. Gone forever. No Second chance.

What causes Blow Ups?

Being a lollapalooza outcome, it has to involve a number of factors.....

Bad strategy + Excessive Over-confidence (Excessive Leverage) + Bad- luck = Blow-up

All three are essential for a complete blow-up.

If you can avoid blow-ups (Blow-Ups, and not Blow-Up, because we can blow-up one field of life & can still have a normal life in other fields of life & hence have a chance to blow-up other fields as well) you should do OK in life even if you don't learn anything from vicarious experiences. If you do learn from then as well, you should do super...

Feeling SAD???

What a super start to 2012 for our equity markets........
Sensex above 17K, Nifty above 5K. India is one of the best performing markets YTD. A lot of beaten down stocks of 2011 (Banking, Real Estate, Capital Goods) have even outperformed indices.

How's your portfolio doing? Obviously, up from 2011.
Are you Sad and cursing yourself for not putting all of your cash & cash eq into markets in 2012?

If Yes, then you are suffering from Hindsight Bias.

As Taleb says-  Quality of a decision is not determined by the outcome.

Putting everything in equities 1 month back was not a great decision- There was a possibility of more correction due to problems in EU and US and policy issues in our motherland. ( Interestingly those problems are still very much there, but Mr. Market has forgotten them for now.) And by putting everything, you would have missed ability to buy cheaper (if you would have got a chance).
Though due to Luck, putting everything would have been a successful decision.

But we can't survive for long durations just by Luck.

As Howard Marks says-
There are old investors, and there are bold investors, but there are no old bold investors.

Putting some part into Equities? Hey that was must!!!
Some hint was given here. (Though I had no expectation of such a fast up movement)...

Why?
Why should I answer when I have the luxury to fall back to expert advise.....
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” - Warren Buffett

Life = Interaction of Mental Models

If I am asked to write down my most important learnings during my two decades of education and two years of corporate world, Mental Models would be among the top.

Our Life moves a lot (if not entirely) based on numerous Big and Small decisions we & people we rely on, make thoroughout our lives. And those decisions are influenced a lot by Mental Models.
Those decisions go a long way in detemining where we end up....

Making/ Losing money in the stock market is just a small result of our decision making process affected by Mental models. Belief in God, Marriage, Education, Occupation etc etc all can (to a some extent) be explained by the Interaction of Mental Models.

Let me give an example-
After Satyam Fraud all other IT stocks also fell. Why? Big part of the reason is Social Proof, Pavlovian Misassociation and Representativeness Bias and Vividity.

Belief in presence of God is also nothing but Social Proof, Survivalship Bias, Confirmation Bias and Vividity.

The decisions we take will improve if we are aware of the Mental Models that are affecting us consciously and sub-consciously. And the tragedy of the wrong decisions is not just that we get the wong things, but we lose out on the good things. Always analyze Opportunity Cost before making a big decision.
And to understand the real picture, Zooming Out is necessary.

Wish you all the best for your decisions and Life!! 

I LOVE YOU*

Most stock pickers agree on one thing-  'Don't Fall in Love with Your Stocks'.
I asked why?
Someone (probably Peter Lynch; not sure though) replied back- "Because they can't love you back."

Mungerism inside me again shouted back- "Reciprocity in Love Also !!!!"
I tend to disagree with the above quote. I love all my stocks.
You have to agree that we love a lot of things which can't love us back. Be it Food (Pizza), Game (Table Tennis), Person (Sachin Tendulkar), Place (Gurgaon), Thing (Laptop) etc etc. So why can't we give the same love to our stocks?

I Love my stocks!!! All of them!!!
But Not Unconditional !! With my terms and conditions!!

Imagine a chat between Me and Mayur.......
I: I Love You.
Mayur: TILL WHEN ?
I: Till you keep on making good returns on capital & keep on either using the money at high rates or distributing it to me. And also till Mr. Market is not paying me too much to leave you.

At a time when we get so many stock predictions and stories and new information (most of which is Noise), only love & conviction with my stocks can keep me invested in them to get full benefits from them.
Some other potential answers could be Till you are a Cash Bargain/ Debt Capacity Bargain/ an Economic Moat/ Growth at Reasonable Price/ Asset Play/ Risk Arbitrage.

The key question in this Love (just like in most other Loves) remains TILL WHEN.
I leave too early, I miss out. I stay too late, I suffer!!!

.................................................................................................................................................................
* Terms & Conditions Apply

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 !!!