Thursday, November 23, 2006

Real Estate Soaring in Chennai

In today's Hindu Business Line, there is an article about Vijay Shanthi Builders new residential project in central Chennai being sold out in just one day. What surprised me was not the speed with which the apartments were sold but the price at which they were sold. Each 5000 Sq feet apartment was sold for 4.25 crores !!. Whew !!. That must be some kind of a record for Chennai.

Looks like we are heading into a real estate bubble.

Sunday, November 05, 2006

Great sites for info on Business and Economy

I'm an avid reader of the Knowledge@Wharton news letter: Knowledge@Wharton. They have excellent articles and insightful interviews with business leaders. Now, they have introduced a new India specific site known as India Knowledge@Wharton. Check it out here: I highly recommend that you subscribe to the news letter. It is really worth our time.

Monday, May 08, 2006

My Current Portfolio

I last posted about my portfolio in Feb 2006. So here is my current Portfolio. Explanations to follow.

Wednesday, April 26, 2006

An arbitrage opportunity?

I was reading a news about IPCL planning to merge with itself 6 Reliance companies and these are Apollo Fibres, Central India Polyester, India Polyfibres, Orissa Polyfibres, Recron Synthetics and Silvassa Industries. And the swap ratios are as follows - one equity share of IPCL for every 25 shares of AFL, 23 equity shares of CIPL, 28 equity shares of IPL, 28 equity shares of OPL, 34 equity shares of RSL and 38 equity shares of SIPL. I checked in iccidirect and out of these companies, I could find only 2 listed – Central India Polyester with a CMP of 10.73 and Recron Synthetics with a CMP of 2.45.

That means, if we purchase 23 shares of CIPL at 10.43 - a purchase price of 246.79 rupees, we will get one share of IPCL with a CMP of 266 – a gain of 19.21 rupees.

Now lets look at Recron Synthetics. If we purchase 34 shares of RSL at 2.45 – a purchase of 83.3 rupees, we will get one share of IPCL with a CMP of 266 – an amazing gain of 182.7 rupees !!!. Does this really compute or have I made a mistake somewhere? I'm not sure.

Sunday, April 02, 2006

India's first "value" oriented fund?

There are lots of existing mutual funds which claim that they follow value investing philosophy in India but very few actually do so. But, i think slowly value investing is gaining traction in India and we are starting to see emergence of funds which explictly state upfront that they are "value funds" and the first of them seems to be Quantum Mutual Fund from Quantum Asset Management, who also own Check out the fund at

What got my attention was their tag line "Warning - Quantum Long Term equity Fund is ideal for long term value investors. It is not for investors looking to make short term gains".

In order to keep the costs low, they have not appointed any distributors for the fund and one can only invest either online or by calling their call center.

Also, the exit loads are structred in a way so as to discourage early exits.

Good beginning. Wish them luck.

Thursday, March 09, 2006

An experiment in speculation

Though by definition, I'm a value investor (or at least try to be one ;D ), I'm fascinated by the "dark side" - that is pure speculation. My portfolio, selected based on value parameters is not doing great even in this booming market - looks like there is almost a negative co-relation between my portfolio and sensex. When Sensex goes up, my portfolio goes down and when it goes down, value of my portfolio goes up ;). So I decided to do a little experiment to find out how a layman without any knowledge of stocks whatsoever, based on pure speculation, can invest and hope to make money "investing" in stocks. This little "experiment" was triggered by a query from a colleague, who knows nothing about stocks on advice to buy a "stock" that will guarantee at least 50 % returns in an year or so.

Here is the criteria I followed:

1. Check last one week's news paper (mainstream not business) and choose a company/companies which is/are prominently in the news.

2.Choose the "cheapest" stock in the list. Here, "cheapest" means the stock which has the least market price - after all, the stock should be "affordable" to buy.

3. Invest in the stock, sit back and wait.

For my first criteria, I used "The Hindu" which is the newspaper I read at home - I just went through the past 6 days editions and made a list of companies. Unsurprisingly, "Reliance" was the most prominent in the news.

Then I went and checked as to which was the "cheapest" "Reliance" stock - out popped Reliance Natural Resources Ltd - then trading at 17 bucks a share. (Remember, i do not anything about the fundamentals of this stock - infact, it was just listed a few days back).

Invested in 100 shares of Reliance Natural Resources at an average cost of 18.13 per share.

Now for the result - as of writing this post, the current market price of the stock is - hold your breath - Rs 31.20 - a return of 72.09% in just 3 days !!

Take aways from this little experiement:

1. As they say, in a bullish market, even a donkey can make pots of money.

2. "Investing" in stocks is addictive - just like gambling. No wonder retail investors end up loosing money. Who will not be enthused by a 70 % return in just 3 days and keep on gambling till the inevitable happens ? The "inevitable" being a market crash?

3. It is difficult to be a "value" investor in a booming market. It requires all your pateince and fortitude not to get lured into "gambling" in stocks - especially when people around you are making pots of money.

Nuggets of wisdom from Buffett's shareholder letters (1978 - 1990)

Though I have read bits and pieces of Buffett's shareholders letters till now, I never had a chance to sit down and go through the entire Berkshire Hathaway Letters To Shareholders to Shareholders in sequence. So, this time, when I got some time during the "transition phase" (Office speak for sitting on my bum doing nothing till the next project starts ;D) ), between projects, I downloaded the entire set and read it in sequence. This collection of "nuggets" is very subjective – I have taken the ones that I liked – your favorites may be entirely different. I strongly suggest that you download and read through the entire set. Here are the nuggets from 1978 to 1990. I will post the ones from 1990 onwards, in a separate blog.


Appropriate measure of management performance is return on equity capital.

Important to be in a business where tailwinds prevails rather than headwinds.

Equity should be selected in much the same way as we would evaluate a business to be

a) One that we understand.

b) With favorable long-term prospects

c) Honest and competent management

d) Available at an attractive price.


Even if the criteria a, b & c are satisfied, criteria d may prevent action as that is the most important criteria.


The ratio of operating earnings (before securities gains or losses) to shareholders’ equity with all securities valued at cost is the most appropriate way to measure any single year’s operating performance

The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.

The inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings) - can be thought of as an “investor’s misery index”.

When this index exceeds the rate of return earned on equity by the business, the investor’s purchasing power (real capital) shrinks even though he consumes nothing at all.

Both our operating and investment experience cause us to conclude that “turnarounds” seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.


We believe that short-term forecasts of stock or bond prices are useless. The forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.


One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it.

We report our progress in terms of book value because in our case (though not, by any means, in all cases) it is a conservative but reasonably adequate proxy for growth in intrinsic business value - the measurement that really counts.

Book value’s virtue as a score-keeping measure is that it is easy to calculate and doesn’t involve the subjective (but important) judgments employed in calculation of intrinsic business value. It is important to understand, however, that the two terms - book value and intrinsic business value - have very different meanings. Book value is an accounting concept, recording the accumulated financial input from both contributed capital and retained earnings. Intrinsic business value is an economic concept, estimating future cash output discounted to present value.

Book value tells you what has been put in; intrinsic business value estimates what can be taken out.


Investors should pay more for a business that is lodged in the hands of a manager with demonstrated pro-shareholder leanings than for one in the hands of a self-interested manager marching to a different drummer.

In what I think is by far the best book on investing ever written - “The Intelligent Investor”, by Ben Graham - the last section of the last chapter begins with, “Investment is most intelligent when it is most businesslike.” This section is called “A Final Word”, and it is appropriately titled.


You might think that institutions, with their large staffs of highly-paid and experienced investment professionals, would be a force for stability and reason in financial markets. They are not: stocks heavily owned and constantly monitored by institutions have often been among the most inappropriately valued.

Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient, and therefore calculations of business value - and even thought, itself - were of no importance in investment activities. (We are enormously indebted to those academics: what could be more advantageous in an intellectual contest - whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?)


Investment managers are even more hyperkinetic: their behavior during trading hours makes whirling dervishes appear sedated by comparison. Indeed, the term "institutional investor" is becoming one of those self-contradictions called an oxymoron, comparable to "jumbo shrimp," "lady mudwrestler" and "inexpensive lawyer."

Most investors usually confer the highest price-earnings ratios on exotic-sounding businesses that hold out the promise of feverish change. That prospect lets investors fantasize about future profitability rather than face today's business realities. For such investor-dreamers, any blind date is preferable to one with the girl next door, no matter how desirable she may be.

Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.


Whenever Charlie and I buy common stocks for Berkshire's insurance companies (leaving aside arbitrage purchases, discussed later) we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale.

Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts - not as market analysts, not as macroeconomic analysts, and not even as security analysts

Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him. Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic- depressive his behavior, the better for you. But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game. As they say in poker, "If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy."

Ben's Mr. Market allegory may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising "Take two aspirins"?

Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price. Charlie and I have found that making silk purses out of silk is the best that we can do; with sow's ears, we fail. 1989 Many managements view GAAP not as a standard to be met, but as an obstacle to overcome. Too often their accountants willingly assist them. (“How much,” says the client, “is two plus two?” Replies the cooperative accountant, “What number did you have in mind?”) Even honest and well-intentioned managements sometimes stretch GAAP a bit in order to present figures they think will more appropriately describe their performance. Both the smoothing of earnings and the “big bath” quarter are “white lie” techniques employed by otherwise upright managements.

To evaluate arbitrage situations you must answer four questions: (1) How likely is it that the promised event will indeed occur? (2) How long will your money be tied up? (3) What chance is there that something still better will transpire - a competing takeover bid, for example? and (4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?


If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long- term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit. Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original "bargain" price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost. Time is the friend of the wonderful business, the enemy of the mediocre.

Thursday, March 02, 2006

Companies that i would love to own - given a chance

I'm not a great fan of investing in IPO's . I would rather wait for the script to get listed and buy at a dip - most of the times at a price much below the IPO price. However, here are some of the companies that i would love to invest at the IPO stage itself. All are currently privately held.

1. Himalaya Healthcare

An ayurvedic/herbal healthcare products company, Himalaya has been an innovator since it's inception (Remember their Ayurvedic concept ads?). They have brought out a very distinct range of health care products backed by innovative and world class research. I have personaly used their products and am a very satisfied customer. I would rate them better than Dabur in thier ayurvedic product range and also in the quality of their products. Check out their web site here.


A food /catering services company, i first came into contact with them at my clients place where they were running the company canteen. Later, i found them in Tidel IT park in Chennai too where they are running the food court.

Apart from running company canteens, RKHS also caters to oilfields and even to ships anchored offshore.

They are good at what they do and it is not easy to replicate their business model and economies of scale. Very impressive client list, captive clientele and high operating margins (must be - in the food court they charge 12 bucks for a small cup of lemon with soda !!). Group companies include Accor Radhakrishna (Ticket restaurant food coupons) and Unisol infraservices (facilities management).

3. Hidesign

Hidesign makes world class leather products like bags, jackets, belts and other accessories. I can personaly vouch for their quality - i bought a leather laptop bag from them 2 years back and it is still in excellent condition despite very rough use. Previously i used to run through bags from other brands at least once in 6 months or so!!

Hidesign is a fairly well known brand with their own exclusive shops in airports like Hongkong and Gothenburg.

Recently, i bought and carried 2 bags and 3 jackets from the Hidesign store in Chennai to South Africa for my South African collegues because the price difference between Chennai and South Africa (Hidesign has exclusive show rooms in upmarket malls in SA) for say a good laptop bag was something like 9000 rupees !!.

4. Subhiksha Discount Stores

A unique concept when it was started in Chennai, Subhiksha essentially is a discount grocery store and pharmacy. Thier USP is that you get all groceries (branded and unbranded) at atleast 10 % of the MRP. Same thing goes for medicines too.

I have been a faithful customer of Subhiksha for the past 4 years (though their service standards have come down sharply in the recent years). Basically, there is no "shopping experience" at a Subhiksha store - you carry your own bag (they do not give out plastic or paper bags), go to the counter and list out the stuff you need. The person at the counter picks up stuff you need as per the list and passes on to you with the bill. You cannot "browse" like in a regular super market.

This helps them to keep thier overheads low and pass on discounts given by manufacturers to the end customers.

Out of these four, Hidesign and Subhiksha may go in for IPO's this year. Subhiksha plans to expand in Maharashtra, Karnataka and AP. My advice? Invest - as long as the terms of the offer is not too much over the top.

Wednesday, February 22, 2006

Martin Whitman's rule of thumb for valuation of stocks

Here are Martin Whitman's ( a legendary value investor) rule of thumb for evaluation of stocks:

1. Financial-services companies and depositories: Stated book value.
2. Small banks: 80% of book value.
3. Mortgage portfolio: Calculate yield to maturity and perform credit analysis.
4. Financial-guaranty insurers: Adjusted book value - a publicly disclosed number that is book value plus the equity in the present value of certain future premiums.
5. Insurance companies: Adjusted book value.
6. Real estate companies: Private appraisal value or market value.
7. Real Estate (REITs): Appraisal value or discounted present value of cash flow from operations.
6. Broker/dealer and asset managers: Tangible book value plus 2% of AUM.
7. Operating companies: 10 times peak earnings or below "net asset value."
8. Tech companies: 2 times book value, less than 10 times peak earnings, 2 times revenue and cash larger than the book value of all liabilities.

Read the whole article by Brian Zen here.

What will be of interest to us are the rules for valuation of banks and tech companies. I have been searching for a reliable method for valuation of banks based on Shankar's comments on valuation of banking stocks though have not come across anything reliable so far.

Monday, February 13, 2006

Infomedia India

Here are the stats:
CMP = 196.00
P/BV = 3
PE = 9
Dividend Yield = 4%
Almost no debt.

Was a TATA company till it was taken over by ICICI Ventures which is the VC arm of the ICICI bank.

Why buy?

Good "moat". The company is in the printing and publishing space with very good titles like "overdrive" the auto magazine, "CHIP" the computer magazine and has introdcuced "Better Interiors" an interior design magazine and other magazines like "AV MAX" , "Better Photography" and "Circinfo magazine" .

Infomedia is also the media partner of many industry associations like CII, Society of Indian AUtomobile Manufacturrers (SIAM) etc.

Infomedia is the leading publisher of Yellow pages and business directories in most of the major cities in India.

Has decided to get into publishing outsourcing area and have recently taken over 2 U.K based companies. Also has a "publising BPO" in Bangalore.

The company has divested it's non-core business like film production to concentrate on its core business.

Infomedia has announced a share buyback plan at Rs 245 per share.

Thursday, February 09, 2006

My Current Portfolio

I started investing in stocks only from Jan 2006 onwards . So here goes:

Stock Average Purchase Price CMP Gain /Loss

Pricol 48.58 41.20 -15.9

PNB Gilts 22.00 21.20 -3.64

Tata Investment Co 430.53 424.50 -1.40

Infomedia India 210.92 198.20 -6.03

In the coming days, will post about why i bought these stocks. Meanwhile, suggestions, comments, criticisms welcome.

Monday, February 06, 2006

Sensex at 10,000? Oh no !!

The talking heads have gone crazy about Sensex touching 10,000. I'm sure tomorrow's papers will be full of "10,000" stories. Why the @#$% are they so happy? I cannot find anything to invest in. Help !!!

Friday, January 27, 2006

Why I favour the “value investing” philosophy

I was born in a fairly “well to do” traditional joint family in Kerala. The family had a good income from it’s business – it owned a large amount of land, two textile shops, an umbrella factory (it still does) and even a bank

(Lord Krishna Bank – ). Anyway I was oblivious to all this and was happy growing up in a joint family with lots of kids (cousins, relatives) to play with and enjoy child hood with. Though the family was well to do, when I was a kid, I did not see much money or nor was I given much money.

One thing that was available in plenty were books. The family had an extensive library with books on all kind of topics available – anyone who bought a book in the family on any subject usually deposited it in the library and for me it was an Aladdin’s cave of treasures!!.

It was also customary that a large number of newspapers and periodicals were subscribed to (I remember counting at least 5 newspapers and 6 periodicals at one time) and am thankful to some of these for developing my “world view” and giving me an insight to the world outside an insular Kerala.

Now, you must be wondering what this autobiographical account has to do with value investing but then I believe this phase of my life really shaped my attitudes and out look which made me more receptive to the value investing philosophy.

I remember attending the bank’s board meetings when I was in 8th standard or so along with my father though my only interest at that point of time was gorging on the snacks that was available!!. Also, my interest in computers was piqued when Lord Krishna bank inaugurated its first “EDP” (Electronic Data Processing) department.

This phase of my life instilled in me the values that one cannot make money by hook or crook, you have to really work hard for money, and most importantly, that you cannot judge a book by it’s cover (Link to value investing any one??).

The next phase of my (investing?) life started after my 10th standard. I had about 2000 Rs saved in the bank and made my first investment – a Canara bank mutual fund (Canstar? – I do not remember the name clearly). This was also the time of the big bull – Harshad Mehta. I remember the N.A.V of my mutual fund going up from 10 to 40 and begging my brother to sell – saying that the price was obscene and it won’t last . Also remember my brother buying ACC at 5000 Rs and begging him to sell when it was at 10, 000 saying that no way a cement company can be valued at that level. He did not listen to me and lost his shirt in the market. Around 10 lakhs. Also, remember my cousin who was a sub broker in the Cochin (now Kochi) Stock Exchange telling me that the prices will never go down and then staring at complete ruin after the stock market scam broke.

This changed or rather reinforced my outlook. I never believed that a stock goes up or will go up because some one important took fancy to it or because the “trend” of the stock is “up’. Always believed that there was something more fundamental (remember not to judge a book by it’s cover?) about a stock though I never knew what it was.

Then one day (this is more recent history) I read about Warren Buffett in a newspaper and I was hooked !!!. Here was someone who makes absolute sense!!. Here is a philosophy I can identify with!!

One thing I have noticed about value investing is that either you GET it or you don’t. I have tried to preach value investing among my colleagues but very, very few get it the first time. Maybe it is a temperament thing or may be how you grew up or how you formed your worldview has something to do with it.

Thursday, January 26, 2006

Why India is not yet a mature market and will not be for a long time.

The stock markets are on a roll right now with Sensex touching 9700 yesterday. Everyone talks of "Sensex touching 10000", "huge earnings growth", "India's time has arrived" etc. Among all this hype and hoopla, what has been conveniently ignored is that there is very little retail participation in the markets. I read somewhere that only 2% of the total retail (house hold) savings are invested in stocks.

The reasons for this is not difficult to find. In my opinion, there are mainly two reasons:

  1. Ignorance of what a stock is, what it represents and how the market operates. Well, the ignorance is not limited stocks alone – it extends to almost all avenues of investment.
  2. A lack of true information – fundamental research, latest company information and basic tools that will help an investor.
A case in the point is my futile search for a reliable stock screen. All the ones I saw were either too restricted or had old data – often wrong data. I’m willing to pay for a good one but they are just not available.

It is only when the world of investment – be it stocks or mutual funds (Real estate, government bonds, gold and bank deposits do not count – we Indian’s “invest” too much in them) is made accessible to common man thorough proper investment education and there are reliable channels of information will the retail participation in the markets grow.