An humble investor

I was reading the transcript of Warren Buffett's interview with Financial Crisis Inquiry Commission and the following quote made me feel humble:

I can tell you it’s very hard to change. I was at Solomon (laughs) and it, the nature of Wall Street is that overall it makes a lot of money relative to the number of people involved, relative to the IQ of the people involved and relative to the energy expended.They work hard, they’re bright, but they aren’t, they don’t work that much harder or that much brighter than somebody that, you know, is building a dam someplace, you know, or a whole lot of other jobs. But in a market system it pays off very, very big, you know. And it, in effect, you know, boxing pays off very big now compared to what it did when the only auditorium we had was 25,000 seats at Madison Square Garden and now you’ve cable television so you can put a couple of, you know, lightweights who you’ll never of again, you know, on pay per view and they’ll get millions for it now. Market systems produce strange results and Wall Street, in general, the capital markets are so big, there’s so much money, taking a small percentage results in a huge amount of money per capita in terms of the people that work in it. And they’re not inclined to give it up.

I have never heard a doctor saying that what he is doing is not harder then what a person working as a garbage collector is doing. A lawyer will never be able to accept what he is doing is not harder than what a cook is doing. An architect would never be able to convince himself ever that what he is doing is not harder than what a barber is doing.

Here is a man who has been working in the investment industry for more than 55 years and he thinks people in his field are not doing work harder than what a man building a dam is. Kudos to his humility and modesty.

I would suggest you read the whole transcript.

Statement of lifetime

Following is a statement from K V Kamath, one of the most respectable and experienced banker in India

We can't afford to raise interest rates any more.

The statement was said in an interview with economic times on 10 October 2010.

I have a tendency to keep statements of famous individuals in my blog noted down with the date when I feel the person is saying this due to his vested interest and I strongly disagree with his statement. As per my own understanding, the US Treasury yields bottomed (and not topped) in the second week of October. The lending rates in India has gone up by more than 150 basis points (1.5%) since this statement and I think there is more to come.

Earlier, I already noted down one of the statement from Mr Deepak Parekh of HDFC on May 5, 2010. Some of these statements might become famous along with the person just like the famous statement from Irving Fisher before the great depression

Stock prices have reached what looks like a permanently high plateau.

Sensex Nifty EPS after Q2FY11

Sensex ended at 19691.84 on 23rd November with P/E at 22.47. This gives Sensex EPS of 876.36. Nifty ended at 6010 on 22nd November with P/E at 23.98. This gives Nifty EPS of 250.62. This compares with Sensex EPS of 781.98 and Nifty EPS of 230.38 after Q2FY10. Thus Sensex EPS has increased by 12.07% and Nifty EPS by 8.78%. If the first two quarter numbers are anything to go by, the Sensex EPS at the end of FY11 should be 12% higher than last year's 828.5, i.e. somewhere around 930 and Nifty EPS should be 8.78% higher than last year's 239.64, i.e. around 260. Compare this with analyst's estimates of 1100 by Rakesh J, Motilal Oswal and Credit Suisse. This requires EPS growth of 25.52% in just two quarters, i.e. 51% compounded annually. All the best to analysts.

It is contrary to human nature for investors to take extreme precautions against future collapse when current conditions make for optimism. - Benjamin Graham

SEC (Securities and Exchange Commission) agrees with me!!!

Please read the title again. The SEC here is the securities and exchange commission, the counterpart of SEBI in the US. Am I kidding? No. Read the article here. Exactly one year and three months back, I had pointed it out that Buffett has made two mistakes and not one. It is not just Conoco Phillips but also Kraft which was a mistake by Warren Buffett. SEC has sent a letter to Berkshire Hathway asking why the losses in Kraft have not been written down and the company is still holding them at purchase price? The CFO has replied that they believe that the share price would recover above their buying price in one or two years. So Berkshire do not get any capital gains for four-five years since the buying of Kraft took place somewhere in 2006-07. Even Buffett is not perfect.

I don't want to know the price of the stock prior to my analysis. I want to do the work and estimate a value for the stock and then compare that to the current offering price. If I know the price in advance it may influence my analysis. - Warren Buffett

Some comparison

Recently I got hold of some old lectures of Walter Schloss, a renowed value investor who was only noticed by Wall Street when Warren Buffett mentioned his name in "The superinvestors of Graham and Doddsville". One of his letters talks about overvaluation in Blue-chip stocks sometime around May 1956. He talks about four companies namely, General Electric, Dow Chemical, Minnesota Mining (3M) and Minneapolis Honeywell. Here is a snippet from the article:

Dow chemical, based on its current price, is selling at 49 times is earnings for the past 10 years. Similarly, Minnesota Mining is presently selling at 61 times its last 10 years earnings, 51 times its last 5 years earnings and 32 times its 1955 earnings.

One of the four companies (General Electric) is distributing nearly all its current earnings and still only yields 3.1%.

How this can be compared with our current valuations? See some of my previous post on overvaluation in FMCG and Pharma here. I am repeating the table here with some additions:

Share	Market Cap (INR Cr)	TTM P/E	P/E of 10 Year Average EPS
3M India	3860	41.23	87.5
ABB	16525	58.4	61.8
Asian Paints	26950	30.6	96.1
BHEL	116900	27	67.8
Bosch	18870	25.37	51.5
Colgate	11275	24.8	66.5
Crompton Greaves	19500	22.7	78.2
Cummins India	14450	32.8	65.9
Dabur	18509	35.69	82.25
Exide	12760	25.85	87
Godrej Consumer Products	9860	29	83
HDFC Bank	100000	34	91.9
Infosys	159650	25.95	55.7
Marico	7550	32.6	70
Nestle	30630	43.7	94.4
Titan	13400	46.75	164.35

Even companies like Bajaj Electrical, Hawkins cooker and TTK Prestige are trading at 60-70 times last 10 years earnings. Nestle, which nearly pays all its earnings as dividends, yields just 1.55% at the current price. Remember that the price-wise correction wasn't very severe in US. But over the next 24 years, i.e. till 1980, the index just managed to double from 500 to around 1000, a return of less then 3% compounded annually. Investor would have got dividends though to satisfy himself. May God Bless Indian Investor at this time.

It appears to be a financial axiom that whenever there is money to invest, it is invested; and if the owner cannot find a good security yielding a fair return, he will invariably buy a poor one. But a prudent and intelligent investor should be able to avoid this temptation. - Benjamin Graham

Contrarian Indicators

When my blog is talking about bubble in FMCG and Pharma, Jayakumar of prime securities has started recommending them. He talks about Asian Paints, Nestle and Glaxosmithkline Pharmaceuticals, all of which have been shown to enter a bubble territory recently on this blog.

How has his recommendation in the past turned out to be? He recommended Bharati Shipyard in January 2010 at a price of 220-230 and said it would be a multibagger for the year 2010. The stock price is still hovering around 235 and change. Thomas cook was recommended in the same article trading at 70-75 and is hovering at 69 and change right now. Sugar space was recommended in the article with a retail sugar price touching 60-65 which was hovering at 50 then. The prices have come off to 30 and sugar companies are bleeding. Balrampur chini was at 140 and going for 83 and change right now. Bajaj Hindustan was 230 and going for 115 and change right now.

He also recommended Nestle and Asian Paints in the same article which were trading at 2500 and 1800 respectively. They have given satisfactory returns where Nestle has appreciated by 20% and Asian Paints has appreciated by around 45%. But they do not seem cheap right now.

Would you want to listen to him?

Any intelligent person, with a good head for figures, should have a veritable picnic on Wall Street, battening off other people’s foolishness. - Benjamin Graham

You are a fool!!!!

Mark this day and the time and following statement from Deepak Parekh, the Chairman and Managing Director of HDFC.

I would say that if you do not put it in the stock market you are a fool.

The statement was said in response to the following question asked by Vir Sanghvi on a show named "Tycoons"

Supposing somebody came to you, youngish guy and said I have Rs 10 lakh, I don’t want to look at them for another 10 years, should I put them in the stock market what would you say?

Let's also note down Sensex and Nifty values @16925 and @5075 respectively. Let's see how our corporates are doing in predicting the future course of stock market in India.

Something out of the box

The quote that feels more relevant in today's environment:

"nothing sedates rationality like a large dose of easy money"

-Warren Buffett

Has buffett made two mistakes and not one?

Buffett admitted in his 2008 Berkshire Annual Letter to shareholders that he made a mistake buying Conoco Phillips shares at the peak oil price. Looking at Berkshire's complete portfolio it seems Buffett has made one more mistake, that of buying Kraft shares. (This is my own opinion so take it with a pinch of salt.) The reason is pretty clear. The company's last ten year history shows that the company's moat is becoming weaker and weaker year after year. The net profit margins have shrunk from double digits to less than 5%. ROE has declined from low teens to around 8.5% which is way lower than the average of its competitors. Kellogg's has ROE of 79%, with a net profit margin of 9%, General Mills has ROE of 25% with an NPM of 9% and H J HEINZ also has better ROE and profit margins than Kraft. If inflation is a big concern due to pumping of liquidity by federal reserve, than interest payment on 18B USD worth of debt that Kraft has accumulated for acquiring businesses is going to eat up a lot of profits in the near future. The competitors are smaller compared to Kraft in terms of size but that do not make them vulnerable. Let us see how this investment turns out for Berkshire.

How is LIC in managing investment?

LIC is the biggest insurance giant in India. Most people know that LIC has a very long term view on investments. But even long term investors like Buffett doesn't like to loose a lot of money in the short term (it is a different matter that Buffett lost 89% of USD 288 Million investing in Irish Banks this year). Lets take a look at the investments made by LIC in one recently listed company, Gateway Distriparks. Following is the investment pattern of LIC in GDL:

Quarter	Shares bought	Average Price	Total Investment (INR Crore)
March 2007	945601	170	16.07
June 2007	831423	180	14.96
Sept 2007	767772	140	10.75
Dec 2007	3314496	145	48.06
Total	5859292	153.35	89.85

At the end of December 2008, the total INR 89.85 Crore invested in GDL was worth just INR 26.37 Crore on 6th March at a price of INR 45 per share. I will try to find more such investments.