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Archive for November 2005
To Diversify or Not to Diversify
by Robert Kiyosaki
Monday, November 28, 2005
Warren Buffett, one of the world’s greatest investors, said, “Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.”
Many financial advisors recommend that you diversify for your own protection. What they fail to tell you is that it is also for their protection. Since most financial advisors cannot tell you exactly which stock or mutual fund is a great investment, they tell you to buy a bunch of them.
Instead of diversifying, my rich dad taught me to focus on finding the best investments. That meant sifting through hundreds of offers, studying, analyzing, and determining the pros and cons of each. Learning to focus was one of the best real-world business lessons I received from my rich dad. It helped me become a better entrepreneur and investor. Focusing on investments also allows me to make more money with less risk, because I’m not buying a bunch of sub-par assets and praying they will do something.
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Of Chinese whispers & Indian equities!
Source: Equitymaster.com
Yesterday was quite an eventful day for India. While the Indian cricket team defeated the Proteas to level the one-day cricket series, the Indian stock markets (read, the Sensex) cruised higher to cross the ‘much-awaited’ 9,000 points level. While the Indian cricket team had to come from behind to register their win over the world’s second best team, the stock markets’ moved up with effortless ease.
At this stage, loud noises of ‘what to buy?’ seem to have turned to whispers as every investor is trying to get hold of (clandestinely) the ‘one’ stock that is still undervalued despite the markets having turned overbought. And now with experts vouching for the Sensex to reach the 10 k level by this year-end, the whispers have got thinner and thinner. Every one wishes to get hands to that ‘elusive’ buying opportunity that does not really seem to be there in the whole scheme of things.
At the current levels, the Indian markets (the Nifty) are trading at 17.8 times trailing 12-month earnings. Even considering that the constituent companies of the Nifty grow their earnings by 15% each year in the next two years, the 2-year forward P/E comes to over 13.5 times. For foreign investors, these valuations are not really ‘attractive’ considering that most of the other emerging markets are trading at sub-15 P/E on a trailing 12-month basis.
As far as domestic retail investors are concerned, while there still are selective opportunities in the waiting to be grabbed for long-term investing purposes, the risk return ratio has skewed deeper towards the former, i.e., risk. At the current juncture, thus, we believe that investors should introspect about the sustainability of this ‘liquidity driven euphoria’. It would be a wise move now to think about what could go wrong that could lead to FIIs (as they are the pump primers of this rally) pulling out their investments from Indian equities.
We have already witnessed (in October 2005) as to what can happen when FIIs decide to pull out. While our concern should not be construed as if we are bearish on the markets, since we continue to believe that Indian equities are a place to remain invested in for the next 3 to 5 years, we do believe that investors must strictly follow a bottom-up approach to investing. Do not rely on ‘whisper-based’ investing. That is going to lead you to nowhere!
Note: When a story is told from person to person, especially if it is gossip or scandal, it inevitably gets distorted and exaggerated. This process is called Chinese whispers.
Interview of Rakesh Jhunjhunwala
Please find Interview of Mr. Rakesh Jhunjhunwala at the following link:
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Assessing value: My education as an investor by Rakesh Jhunjhunwala
By Rakesh Jhunjhunwala
Source: DNA Money (Direct Link to the article)
Source: DNA Money (Direct Link to the article)
When markets are experiencing irrational exuberance (making money in the stockmarket is taken as a birth right), to be in cash, and to be overinvested when the markets are gripped by fear and extreme pessimism, is as we all know easier said then done.
“In markets it sometimes feels like being undersexed in an harem and oversexed in a dessert.” I think good investors should be always feeling undersexed when there is depression and oversexed when there is irrational exuberance.
It’s a fact that one cannot be a successful investor without understanding markets. Markets are the basis and temples of capitalism. I have learnt that markets are ruthless and very intelligent. A market participant should always respect markets as being the ultimate arbitrators and deciders. I believe that the markets always decide rightly and correctly over a sufficient period of time. It is amazing that in a supposedly corrupt nation like India, the three companies having amongst the highest market capitalisation are Wipro, Hindustan Lever, and Infosys - companies with the highest perceived integrity. Sometimes, the ability of markets to filter and value truly astonishes me.
Last, but not the least, my experiences as an investor have altered me as a human being. I, one of the most dogmatic men, have now learnt to say, “I can always be wrong” at the end of every opinion I express. The stockmarket has humbled me. I have also learnt that good investing calls for a careful examination of all points of views and alternative scenarios. The ability to adapt and change and mitigate prejudice is crucial to success in the investing world. Discipline, just like in all walks of life, is very important in investing, too.
I have learnt that in investing decisions all the factors are numerators but there is only one denominator - which is pricevalue. It is ultimately the price or value at which you buysell shares which determines not only your profits. It is also a very important aspect of the risk that you take.
At a value, I am a buyer of everything, including the most hated companies. It is important “what you are buying but it is more important at what valueprice you are buying.”
I thought ‘beauty’ was a difficult adjective in the English language, until I started to assess value in order to invest. In conclusion, both ‘beauty’ and ‘value’ are the most difficult adjectives in the English language. My quest of finding both beauty and value is a process of education that is just never ending - as I learn something new and educative with every passing moment.
The above piece, written by Rakesh Jhunjhunwala some time back, is as relevant today as the time he had written it
Is the market rally different this time? by Rakesh Jhunjhunwala
Source: DNA Money - 28th November, 2005
A paradigm shift has begun in the market, and it will continue over the coming years
“Those who forget history are condemned to repeat it,” said George Santayana. History tells us that it is never different, there is no ‘New Deal’.
Yet, there have been paradigm shifts in different markets at different points of time, like the decade-plus moves resulting in multifold rises in the Nikkei and the Dow Jones indices.
The Indian equity markets have made unprecedented gains in the last two-and-a-half years with the benchmark Sensex gaining more than 300% in the period.
The breadth of the gains is further demonstrated by the out performance of the broader indices — BSE -200, BSE-500 and the sectoral indices. The experiences of Indian investors during the last two bull markets in India during 1989-1993 and 1999-2001 have been transitory and bitter. Reflecting them, most Indian investors are either not participating in the current rise or are doing so with a great sense of insecurity.
I think they are influenced by their experiences of the previous bull markets, forgetting the course markets have taken since time immemorial.
I, for one, believe that there has been a paradigm shift in the economic performance of this country and as a consequence, we are set for a multi-decade structural and secular bull market in India.
This seismic shift reflects a structural change in fundamentals, which has to be inevitably followed by an alteration in perception. The question we seek to address is “Is it different this time in India?” and “Is it sustainable?”
For the answer, we have to look at the reasons and the reasons behind the reasons for the Change that is taking place.
We believe India, too, has begun its journey on such a paradigm shift in its equity markets, which is a reflection of the structural changes in India’s demographics, critical economic mass, policy frameworks, and corporate competitiveness and governance. Would you have expected the following for India?
1. Sustained 7%+ real GDP growth for more than four years
2. 40% rise in consumer credit and 56% growth in mortgages
3. Consumption boom across categories - mobiles, cars, 2-wheelers, watches, jewellery
5. Infrastructure spending at $20 billion
6. Rising employment, with wages rising even faster
The quality of corporate performance has undergone a sea-change. This is more than adequately reflected in the DuPont analysis shown below for India’s top 200 companies. There has been a sustained improvement in the return on equity for the corporate sector, despite lower tariff protection, lower inflation and deferred tax accounting.
The fixed-asset efficiency as well as the working capital efficiency has improved. The revenue and profit per employee has improved significantly. India Inc has among the highest return on equity in the world.
India is in the midst of a consumption boom, and we believe that a capital expenditure boom is around the corner.
Can you believe that until recently India was saving more than it was investing? In spite of a superior incremental capital output ratio compared with peer countries, India’s investment to GDP ratio is significantly lower.
The thrust on infrastructure build-up over the last five years and improving cash-flow profiles of India Inc combined with the reality of higher utilisation and increased competitiveness mean a capital expenditure cycle inevitable. If there is a confluence of capital expenditure and consumption cycle in the coming decade, India’s economic and corporate performance will surpass all expectations, and we could see high double-digit GDP growth.
The institutional framework in India is now vastly superior to what it was a decade ago, and is probably among the best in emerging markets. The Indian banking system is much more evolved and robust compared with other emerging markets. The Indian equity transaction framework (including electronic trading systems and dematerialisation) have very impressive trade densities, lower transaction and impact costs; and robust, effective regulation.
The breadth of the sectors, business models and companies provide a very wide choice for investors. IPO disclosures, listing obligations, and quarterly results with segmental reporting make India an investor-friendly market.
All these have been achieved under democratic conditions. Democracy is deep rooted in India. This is reflected by the fact that although there is no single party in power in the Parliament in the last 16 years, all the necessary institutions of democracy such as the Supreme Court, the defence forces and the Reserve Bank of India are all working perfectly and all changes in the government have taken place in accordance with law.
Whatever knowledge of history I have tells me that no society has achieved economic growth and sustained it without a democratic framework and what would growth mean without human right and freedom?
Growth is surely slower but more deep-rooted and sustainable under democratic conditions.
I believe that all growth is an evolution and all success is chemistry. I feel that India has had bottoms-up growth in a perfectly evolutionary manner — growth has not been thrust down India’s throat.
Although there are always risk factors in any economic system I believe that there could be intermittent periods where growth could slow down because of various factors; but you can only slow and not reverse India’s march to inevitably being one of the economic powers of the world.
A very large part of the index gains are driven by the corporate earnings growth, with valuation expansion hardly playing a role.
This is usually the case in the first phase of a structural move in equity markets. The next phase would have to inevitably reflect improved valuation in the composition of index gains.
Such valuation improvements will also be driven by a sustained increase in equity exposure of domestic investors from the current minuscule levels.
The following chart shows the level of savings house hold savings in India. These savings are projected to go up from $175 billion in the financial year ended March 31, 2005, to $355 billion in the financial year ended March 31, 2010.
Household exposure to equities in India as per the latest statistics is only 1.5% compared with between 15-25% in most developed, and some emerging market, economies.
Even if 15% of the fresh household savings is to flow to Indian equity markets by 2010, you are talking about $50 billion of domestic money entering into the local markets.
You can well imagine what this will do to the price-earning ratios of Indian stocks. The increased penetration of insurance and the need to develop a modernised pension system will further fuel the fire of equities.
As one can observe, all of the above are factors that are unprecedented for Indian equities.India is now on the radar of multinational corporates as well as global investors. The addressable markets for India Inc have expanded multifold.
The mindset, confidence and attitude of India Inc is superlatively different from ever before.
The taxation environment for Indian equities is the most favourable that it has ever been. Alternative investment opportunities offer poor returns.
Indian pension and provident funds as well as the public sector banks have no significant exposure to equities.
The Indian mutual fund industry have come of age, and now has distribution and management capabilities to cater to the needs of Indian investors to enable them to put a greater component of their savings in equities.
So, let me reiterate our hypothesis:
1.We have seen rapid earnings growth over last three years, and we expect about 20% average earnings growth over the next years decades.
2.The quality of earnings has improved dramatically, and the quality of earnings will sustain going forward.
3.There is endemic under-exposure to equities in the Indian savings basket, which we expect to correct over the coming decade.
4. The institutional framework to make this possible is now in place, and will continue to improve in the coming years.
We believe that the paradigm shift of Indian equities has begun, and will continue over the coming years. The changes are structural and unprecedented. The critical mass of change is upon us, and the pace of change will accentuate.
The markets will reflect the reality of this change sooner or later, but the perception of this change is gaining momentum.
Investors will be well advised to respect this structural change and not focus on short-term factors. We truly believe “This time it’s different” and time will judge our conviction, though it may test our patience.
Indian Aviation: Ready for take-off
Ashok Kumar / Mumbai November 28, 2005
Over most of the last two and a half decades, the aviation sector world-wide, has substantially moved away from government control and ownership towards deregulation and private ownership. The origins of this trend can be traced back to the deregulation of the U.S. airline industry in the late 1970s, which led to lower fares and higher improved productivity of assets and capital. This transformation also subsumed another trend of privatization of government owned airlines designated by a country’s government to operate international air services to and from that country as evidenced in Australia (Qantas Airways), U.K. (British Airways), Germany (Lufthansa) and Japan (Japan Airlines).
With the opening up of the Indian aviation sector, there are opportunities for the taking
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IPO Review on Compulink System & Repro India
Compulink System - Click Here for the Complete Article
Repro India - Click Here for the Complete Article
Sector Review: Heavy Metal
Atul Sathe / Mumbai November 28, 2005
The outlook on aluminium and non-ferrous metal stocks are bright given India’s cost competitiveness and strong metal price trends.
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Can Tata Steel buck the trend?
| by Sunil Nayanar / Mumbai November 28, 2005
These are not good times for steel stocks. Riding on the back of an upturn in global and domestic steel demand and hence steel prices for the better part of the past three years, the tide is apparently turning for steel companies. And the markets as usual have been quick to pounce on steel stocks, giving them the cold shoulder, while rewarding most others. |
| Compared to a near 47 per cent rise in the Sensex in the past year, leading steel stock returns pale in comparison. The Tata Steel stock has appreciated by 10 per cent during the period, while that of SAIL (Steel Authority of India) has actually declined by 3.38 per cent. Other steel stocks are not doing any better. Click Here for the Complete Article
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