My education as an investor

Must Read Transcript of the recent Berkshire Hathaway Annual Meet

2007-06-27T07:48:00.000-07:00

Head over to Jeff Mathews blog for an incisive and entertaining transcript of the recently concluded Berkshire Hathaway's annual share holders meet - otherwise known as the "Woodstock of the capitalists". This must rank as one of the best transcripts of a Berkshire AGM that I have read in a long time.

Nuggets of Wisdom from Buffett's Shareholder Letters - 1991 to 2006

2007-06-18T11:04:00.000-07:00

I had earlier posted nuggets from Berkshire Hathaway's shareholder letters. This is a continuation of the earlier post with nuggets from letters between 1990 to 2006. Again, I strongly urge you to read though the complete list of letters as this is a very subjective selection.
1991
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We also believe that investors can benefit by focusing on their own look-through earnings. To calculate these, they should determine the underlying earnings attributable to the shares they hold in their portfolio and total these. The goal of each investor should be to create a portfolio (in effect, a "company") that will deliver him or her the highest possible look-through earnings a decade or so from now.

An approach of this kind will force the investor to think about long-term business prospects rather than short-term stock market prospects, a perspective likely to improve results. It's true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings.

If my universe of business possibilities was limited, say, to private companies in Omaha, I would, first, try to assess the long-term economic characteristics of each business; second, assess the quality of the people in charge of running it; and, third, try to buy into a few of the best operations at a sensible price. I certainly would not wish to own an equal part of every business in town.

1992
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We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. However, it is clear that stocks cannot forever overperform their underlying businesses, as they have so dramatically done for some time, and that fact makes us quite confident of our forecast that the rewards from investing in stocks over the next decade will be significantly smaller than they were in the last. Our second conclusion - that an increased capital base will act as an anchor on our relative performance - seems incontestable.

The only open question is whether we can drag the anchor along at some tolerable, though slowed, pace.

Our equity-investing strategy remains little changed from what it was fifteen years ago, when we said in the 1977 annual report: "We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price." We have seen cause to make only one change in this creed: Because of both market conditions and our size, we now substitute "an attractive price" for "a very attractive price."

But how, you will ask, does one decide what's "attractive"? In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth." Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.

We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

In addition, we think the very term "value investing" is redundant. What is "investing" if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labeled speculation (which is neither illegal, immoral nor - in our view - financially fattening).

Whether appropriate or not, the term "value investing" is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics - a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a "value" purchase.

Similarly, business growth, per se, tells us little about value. It's true that growth often has a positive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain. For example, investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth. For these investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor.

In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds. Even so, there is an important, and difficult to deal with, difference between the two: A bond has a coupon and maturity date that define future cash flows; but in the case of equities, the investment analyst must himself estimate the future "coupons." Furthermore, the quality of management affects the bond coupon only rarely - chiefly when management is so inept or dishonest that payment of interest is suspended. In contrast, the ability of management can dramatically affect the equity "coupons."

The investment shown by the discounted-flows-of-cash calculation to be the cheapest is the one that the investor should purchase - irrespective of whether the business grows or doesn't, displays volatility or smoothness in its earnings, or carries a high price or low in relation to its current earnings and book value. Moreover, though the value equation has usually shown equities to be cheaper than bonds, that result is not inevitable: When bonds are calculated to be the more attractive investment, they should be bought.

Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite - that is, consistently employ ever-greater amounts of capital at very low rates of return. Unfortunately, the first type of business is very hard to find: Most high-return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.

Though the mathematical calculations required to evaluate equities are not difficult, an analyst - even one who is experienced and intelligent - can easily go wrong in estimating future "coupons." At Berkshire, we attempt to deal with this problem in two ways. First, we try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change, we're not smart enough to predict future cash flows. Incidentally, that shortcoming doesn't bother us. What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes.

Second, and equally important, we insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success.

1993
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At Berkshire, we have no view of the future that dictates what businesses or industries we will enter. Indeed, we think it's usually poison for a corporate giant's shareholders if it embarks upon new ventures pursuant to some grand vision. We prefer instead to focus on the economic characteristics of businesses that we wish to own and the personal characteristics of managers with whom we wish to associate - and then to hope we get lucky in finding the two in combination.

An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.
The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as "the possibility of loss or injury."

Academics, however, like to define investment "risk" differently, averring that it is the relative volatility of a stock or portfolio of stocks - that is, their volatility as compared to that of a large universe of stocks. Employing data bases and statistical skills, these academics compute with precision the "beta" of a stock - its relative volatility in the past - and then build arcane investment and capital-allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong.

For owners of a business - and that's the way we think of shareholders - the academics' definition of risk is far off the mark, so much so that it produces absurdities. For example, under beta-based theory, a stock that has dropped very sharply compared to the market - as had Washington Post when we bought it in 1973 - becomes "riskier" at the lower price than it was at the higher price. Would that description have then made any sense to someone who was offered the entire company at a vastly-reduced price?

In fact, the true investor welcomes volatility. Ben Graham explained why in Chapter 8 of The Intelligent Investor. There he introduced "Mr. Market," an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish. The more manic-depressive this chap is, the greater the opportunities available to the investor. That's true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.

In assessing risk, a beta purist will disdain examining what a company produces, what its competitors are doing, or how much borrowed money the business employs. He may even prefer not to know the company's name. What he treasures is the price history of its stock. In contrast, we'll happily forgo knowing the price history and instead will seek whatever information will further our understanding of the company's business. After we buy a stock, consequently, we would not be disturbed if markets closed for a year or two. We don't need a daily quote on our 100% position in See's or H. H. Brown to validate our well-being. Why, then, should we need a quote on our 7% interest in Coke?

In our opinion, the real risk that an investor must assess is whether his aggregate after-tax receipts from an investment (including those he receives on sale) will, over his prospective holding period, give him at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake. Though this risk cannot be calculated with engineering precision, it can in some cases be judged with a degree of accuracy that is useful.

The primary factors bearing upon this evaluation are:

1) The certainty with which the long-term economic characteristics of the business can be evaluated;

2) The certainty with which management can be evaluated, both as to its ability to realize the full potential of the business and to wisely employ its cash flows;

3) The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself;

4) The purchase price of the business;

5) The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor's purchasing-power return is reduced from his gross return.

These factors will probably strike many analysts as unbearably fuzzy, since they cannot be extracted from a data base of any kind. But the difficulty of precisely quantifying these matters does not negate their importance nor is it insuperable. Just as Justice Stewart found it impossible to formulate a test for obscenity but nevertheless asserted, "I know it when I see it," so also can investors - in an inexact but useful way - "see" the risks inherent in certain investments without reference to complex equations or price histories.

The theoretician bred on beta has no mechanism for differentiating the risk inherent in, say, a single-product toy company selling pet rocks or hula hoops from that of another toy company whose sole product is Monopoly or Barbie. But it's quite possible for ordinary investors to make such distinctions if they have a reasonable understanding of consumer behavior and the factors that create long-term competitive strength or weakness. Obviously, every investor will make mistakes. But by confining himself to a relatively few, easy-to-understand cases, a reasonably intelligent, informed and diligent person can judge investment risks with a useful degree of accuracy.

In many industries, of course, Charlie and I can't determine whether we are dealing with a "pet rock" or a "Barbie." We couldn't solve this problem, moreover, even if we were to spend years intensely studying those industries. Sometimes our own intellectual shortcomings would stand in the way of understanding, and in other cases the nature of the industry would be the roadblock. For example, a business that must deal with fast-moving technology is not going to lend itself to reliable evaluations of its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. (Nor did most of the investors and corporate managers who enthusiastically entered those industries.) Why, then, should Charlie and I now think we can predict the future of other rapidly-evolving businesses? We'll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?

Of course, some investment strategies - for instance, our efforts in arbitrage over the years - require wide diversification. If significant risk exists in a single transaction, overall risk should be reduced by making that purchase one of many mutually-independent commitments. Thus, you may consciously purchase a risky investment - one that indeed has a significant possibility of causing loss or injury - if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but unrelated opportunities. Most venture capitalists employ this strategy. Should you choose to pursue this course, you should adopt the outlook of the casino that owns a roulette wheel, which will want to see lots of action because it is favored by probabilities, but will refuse to accept a single, huge bet.

Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb.

On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices - the businesses he understands best and that present the least risk, along with the greatest profit potential. In the words of the prophet Mae West: "Too much of a good thing can be wonderful."

1994
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We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.

What we promise you - along with more modest gains - is that during your ownership of Berkshire, you will fare just as Charlie and I do. If you suffer, we will suffer; if we prosper, so will you. And we will not break this bond by introducing compensation arrangements that give us a greater participation in the upside than the downside.

We further promise you that our personal fortunes will remain overwhelmingly concentrated in Berkshire shares: We will not ask you to invest with us and then put our own money elsewhere. In addition, Berkshire dominates both the investment portfolios of most members of our families and of a great many friends who belonged to partnerships that Charlie and I ran in the 1960's. We could not be more motivated to do our best.

Intrinsic Value and Capital Allocation
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Understanding intrinsic value is as important for managers as it is for investors. When managers are making capital allocation decisions - including decisions to repurchase shares - it's vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it. This principle may seem obvious but we constantly see it violated. And, when misallocations occur, shareholders are hurt.

For example, in contemplating business mergers and acquisitions, many managers tend to focus on whether the transaction is immediately dilutive or anti-dilutive to earnings per share (or, at financial institutions, to per-share book value). An emphasis of this sort carries great dangers. Going back to our college-education example, imagine that a 25-year-old first-year MBA student is considering merging his future economic interests with those of a 25-year-old day laborer. The MBA student, a non-earner, would find that a "share-for-share" merger of his equity interest in himself with that of the day laborer would enhance his near-term earnings (in a big way!). But what could be sillier for the student than a deal of this kind?

In corporate transactions, it's equally silly for the would-be purchaser to focus on current earnings when the prospective acquiree has either different prospects, different amounts of non-operating assets, or a different capital structure. At Berkshire, we have rejected many merger and purchase opportunities that would have boosted current and near-term earnings but that would have reduced per-share intrinsic value. Our approach, rather, has been to follow Wayne Gretzky's advice: "Go to where the puck is going to be, not to where it is." As a result, our shareholders are now many billions of dollars richer than they would have been if we had used the standard catechism.

The sad fact is that most major acquisitions display an egregious imbalance: They are a bonanza for the shareholders of the acquiree; they increase the income and status of the acquirer's management; and they are a honey pot for the investment bankers and other professionals on both sides. But, alas, they usually reduce the wealth of the acquirer's shareholders, often to a substantial extent. That happens because the acquirer typically gives up more intrinsic value than it receives. Do that enough, says John Medlin, the retired head of Wachovia Corp., and "you are running a chain letter in reverse."

Over time, the skill with which a company's managers allocate capital has an enormous impact on the enterprise's value. Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally. The company could, of course, distribute the money to shareholders by way of dividends or share repurchases. But often the CEO asks a strategic planning staff, consultants or investment bankers whether an acquisition or two might make sense. That's like asking your interior decorator whether you need a $50,000 rug.

The acquisition problem is often compounded by a biological bias: Many CEO's attain their positions in part because they possess an abundance of animal spirits and ego. If an executive is heavily endowed with these qualities - which, it should be acknowledged, sometimes have their advantages - they won't disappear when he reaches the top. When such a CEO is encouraged by his advisors to make deals, he responds much as would a teenage boy who is encouraged by his father to have a normal sex life. It's not a push he needs.

Some years back, a CEO friend of mine - in jest, it must be said - unintentionally described the pathology of many big deals. This friend, who ran a property-casualty insurer, was explaining to his directors why he wanted to acquire a certain life insurance company. After droning rather unpersuasively through the economics and strategic rationale for the acquisition, he abruptly abandoned the script. With an impish look, he simply said: "Aw, fellas, all the other kids have one."

At Berkshire, our managers will continue to earn extraordinary returns from what appear to be ordinary businesses. As a first step, these managers will look for ways to deploy their earnings advantageously in their businesses. What's left, they will send to Charlie and me. We then will try to use those funds in ways that build per-share intrinsic value. Our goal will be to acquire either part or all of businesses that we believe we understand, that have good, sustainable underlying economics, and that are run by managers whom we like, admire and trust.
Our investments continue to be few in number and simple in concept: The truly big investment idea can usually be explained in a short paragraph. We like a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong (a challenge we periodically manage to overcome).

Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.

We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?

Before looking at new investments, we consider adding to old ones. If a business is attractive enough to buy once, it may well pay to repeat the process. We would love to increase our economic interest in See's or Scott Fetzer, but we haven't found a way to add to a 100% holding. In the stock market, however, an investor frequently gets the chance to increase his economic interest in businesses he knows and likes.

1996
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Our portfolio shows little change: We continue to make more money when snoring than when active.

Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve's discount rate was predicted or because some Wall Street pundit had reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses? The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.

When carried out capably, an investment strategy of that type will often result in its practitioner owning a few securities that will come to represent a very large portion of his portfolio. This investor would get a similar result if he followed a policy of purchasing an interest in, say, 20% of the future earnings of a number of outstanding college basketball stars. A handful of these would go on to achieve NBA stardom, and the investor's take from them would soon dominate his royalty stream. To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.

In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favor businesses and industries unlikely to experience major change. The reason for that is simple: Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.

I should emphasize that, as citizens, Charlie and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country's standard of living to rise, and that's clearly good. As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride.

Obviously all businesses change to some extent. Today, See's is different in many ways from what it was in 1972 when we bought it: It offers a different assortment of candy, employs different machinery and sells through different distribution channels. But the reasons why people today buy boxed chocolates, and why they buy them from us rather than from someone else, are virtually unchanged from what they were in the 1920s when the See family was building the business. Moreover, these motivations are not likely to change over the next 20 years, or even 50.

Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.

A far more serious problem occurs when the management of a great company gets sidetracked and neglects its wonderful base business while purchasing other businesses that are so-so or worse. When that happens, the suffering of investors is often prolonged.
Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

Should you choose, however, to construct your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices.

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.

2001
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Principles of Insurance Underwriting
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When property/casualty companies are judged by their cost of float, very few stack up as satisfactory businesses. And interestingly ¾ unlike the situation prevailing in many other industries ¾ neither size nor brand name determines an insurer's profitability. Indeed, many of the biggest and best-known companies regularly deliver mediocre results. What counts in this business is underwriting discipline. The winners are those that unfailingly stick to three key principles:

They accept only those risks that they are able to properly evaluate (staying within their circle of competence) and that, after they have evaluated all relevant factors including remote loss scenarios, carry the expectancy of profit. These insurers ignore market-share considerations and are sanguine about losing business to competitors that are offering foolish prices or policy conditions.

They limit the business they accept in a manner that guarantees they will suffer no aggregation of losses from a single event or from related events that will threaten their solvency. They ceaselessly search for possible correlation among seemingly-unrelated risks.

They avoid business involving moral risk: No matter what the rate, trying to write good contracts with bad people doesn't work. While most policyholders and clients are honorable and ethical, doing business with the few exceptions is usually expensive, sometimes extraordinarily so.

2002
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Charlie and I are of one mind in how we feel about derivatives and the trading activities that go withthem: We view them as time bombs, both for the parties that deal in them and the economic system.Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, thoughthe explanation must be general because the word covers an extraordinarily wide range of financial contracts.

Essentially, these instruments call for money to change hands at some future date, with the amount to bedetermined by one or more reference items, such as interest rates, stock prices or currency values. If, forexample, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivativestransaction – with your gain or loss derived from movements in the index. Derivatives contracts are ofvarying duration (running sometimes to 20 or more years) and their value is often tied to several variables.Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on thecreditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, thecounterparties record profits and losses – often huge in amount – in their current earnings statements withoutso much as a penny changing hands.

2003
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Three suggestions for investors: First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen.

Trumpeting EBITDA (earnings before interest, taxes, depreciation and amortization) is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash”charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?

Second, unintelligible footnotes usually indicate untrustworthy management. If you can’t understand a footnote or other managerial explanation, it’s usually because the CEO doesn’t want you to. Enron’s descriptions of certain transactions still baffle me.

Finally, be suspicious of companies that trumpet earnings projections and growth expectations.Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don’t advance smoothly (except, of course, in the offering books of investment bankers).Charlie and I not only don’t know today what our businesses will earn next year – we don’t evenknow what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future – and we become downright incredulous if they consistently reach their declared targets. Managersthat always promise to “make the numbers” will at some point be tempted to make up the numbers.

End is near for the Real Estate Boom?

2007-05-02T09:11:00.000-07:00

I was always vary about the soaring residential real estate prices in India and was pretty sure that the bubble will burst sooner than later. Looks like that has started happening right now.

This is not because the supply has exceed the demand however. My take on this is that the demand is still there but the real estate prices have become so unrealistic that people just cannot afford to buy a new house or an apartment. In Chennai for example, if you want to buy a decent new apartment measuring say a 1000 Sq feet, you have to fork out anywhere near 40 lakhs - and that acts as a huge barrier because one just cannot afford to pay an EMI of that high a magnitude just on one salary alone.

Another indication of flagging market is that the rents have not kept pace with the real estate prices. I recently rented my apartment out for 6000 Rs a month. The price of my apartment in the market? Anywhere near 35 lakhs. Now, that is a minuscule return on investment if you are buying an apartment as an investment property don't you think?

So my advice for the prospective buyers out there is to wait another 6 months or so before buying any residential real estate.

Real Estate Soaring in Chennai

2006-11-23T01:56:00.000-08:00

In today's Hindu Business Line, there is an article about Vijay Shanthi Builders http://www.vijayshanthibuilders.com 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.

Great sites for info on Business and Economy

2006-11-05T10:02:00.000-08:00

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: www.ikw.in. I highly recommend that you subscribe to the news letter. It is really worth our time.

My Current Portfolio

2006-05-08T08:22:00.000-07:00

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

An arbitrage opportunity?

2006-04-26T03:15:00.000-07:00

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.

India's first "value" oriented fund?

2006-04-02T05:16:00.000-07:00

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 www.equitymaster.com. Check out the fund at www.quantumamc.com

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.

An experiment in speculation

2006-03-09T23:11:00.000-08:00

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)

2006-03-09T22:03:00.000-08:00

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.

1978

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.

1979

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

1980

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.

1981

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.

1984

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.

1985

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.

1986

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?)

1987

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.

1988

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.?

1990

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.

Companies that i would love to own - given a chance

2006-03-02T08:58:00.000-08:00

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.

2. RKHS

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.

Martin Whitman's rule of thumb for valuation of stocks

2006-02-22T20:42:00.000-08:00

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.

Infomedia India

2006-02-13T20:15:00.000-08:00

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.

My Current Portfolio

2006-02-09T03:29:00.000-08:00

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.

Sensex at 10,000? Oh no !!

2006-02-06T08:48:00.000-08:00

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 !!!

Why I favour the “value investing” philosophy

2006-01-27T10:06:00.000-08:00

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 – www.lordkrishnabank.com ). 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 8^th 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 10^th 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.

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

2006-01-26T05:42:00.000-08:00

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:

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.
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.