Value-Stock-Plus

What a difference a year makes:

• A year ago, China was embarking on a massive fiscal and credit stimulus plan that would send commodity prices and global exports surging. Today, the People’s Bank of China (PBoC), along with other Asian central banks, is now withdrawing the stimulus (India as well). Is the near 10% correction in the Chinese stock market telling us something about the Chinese economic outlook? Something tells us the Reserve Bank of Australia was on to something when it didn’t hike rates yesterday when the market was fully priced for another move — after all, China is Australia’s most important customer.

• A year ago, it was all about saving the insolvent banking sector. Now it is popular to bash the banks and de-risk them. Notice how the financials haven’t done a thing in five months?

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James Montier Summer 09 Reading List

Investors have an inherent need to make sense of the world around them, and for that they need stories. Stories that engage and explain. “The initial point I’d make is that our minds work very hard to make sure there’s a cause for every effect. If we see an outcome that we can’t explain, it’s like an itch that’s demanding to be scratched,” says Michael J Mauboussin, the chief investment strategist at Legg Mason Capital Management, the ninth-largest asset management firm in the world, with $703 billion under management as on September 30, 2009. (That is a little over four times the current size of the Indian mutual fund industry). OK, business news channels and newspapers try and fulfill this investor need for stories.

But are they really effective? No, if one is to believe Mauboussin. As he writes in his best selling book More Than You Know – Finding Financial Wisdom in Unconventional Places, “The press sounds a lot like a split-brain patient making up a cause for an effect, and we investors lap it up because the link satisfies a very basic need (of stories)… Read the morning paper explaining yesterday’s action for entertainment, not education.” Mauboussin’s latest book Think Twice – Harnessing the Power of Counterintuition is just out.

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Several new articles, all originally written by Benjamin Graham, have been added to the Valuehuntr Collection under our “Resources” section. Two of the new articles are interviews conducted in 1976, the year Mr. Graham past away. Therefore, these documents provide readers with aclear  glimpse of Mr. Graham’s investing framework towards the end of his career.

The added documents are:

1. Special Situations (1946)
2. Stock Market Warning: Danger Ahead! (1960)
3. The Renaissance of Value (1974)
4. A Conversation with Ben Graham (1976)
5. An Hour with Mr. Graham (1976)

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It is that phase of the bull run when analysts are unable to justify the valuations of shares by conventional ratios. Nevertheless, stocks have to be sold to eager clients, and there has to be some story or fundamental hook to it.

As the joke goes,

• If a stock cant be justified as a good buy based on the traditional price to earning multiple, then market it based on its price to cash earnings multiples.
• If it still doesnt look cheap, try the enterprise value to operating profits (EV/EBIDTA) ratio.
• If that doesnt work, look at the market capitalisation as a multiple of sales.
• If that too fails, point out the embedded value in the stock in terms of holdings in group companies and other investments.
• And if everything fails, the scrip can still be marketed as a concept stock , only for the discerning investors with a long-term horizon.

But above all, get the client to buy it!

Source: ET

Pragcap has compiled many of the very best outlooks from various analysts, gurus, hedge funds and investors.  Hope you find the list helpful in mapping your successful 2010

The List

How do I define history? It’s just one f*%&ing thing after another.
– Rudge in Alan Bennett’s The History Boys

I came across this sentence last night and it’s been haunting me ever since. It reminds me of a situation which I encounter almost everyday: “What’s the story?” my editor(s) ask, when I make a pitch to them about something I want to write on.

Well I don’t blame them for asking the same question over and over again. After all, newspapers are in the business of making sense of what is happening around us. But are we really doing that? Or to ask a deeper question, can we really do that?

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Source: NYT

In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

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