Archive for January, 2006
Random Readings
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The Wash Sale Rule, Explained
Greenspan steps down after 18yrs
Bullish on Dabur India, says SSKI
Brokers bullish on Tata Steel, Dr Reddy’s, IDBI, ITC
Gujarat Ambuja: Consolidating locally
Stock watch: Biocon
World Inc can’t afford to ignore India: FM
There is no such thing as paper loss. The paper loss is very real loss – Jim Rogers
India – The Current Account Challenge: Morgan Stanley
What’s New? The rising current account deficit is threatening to slow the virtuous cycle of strong capital inflows: sharp fall in real interest rates, stronger consumption growth, above-trend GDP growth attracting higher capital flows. The rise in the current account deficit has caused accrual in foreign exchange reserves (net injection of foreign liquidity) to decline sharply, resulting in short-term interest rates (91-day T-Bill rate) rising by 150 basis points to 6.7% over the past four months.
Conclusion: Our base case view is that the current trend of almost zero net annual foreign liquidity will continue to push real interest rates higher, hurting debt-funded growth. Assuming that government and corporate business investments rise moderately, we think overall growth momentum will still slow from the current 8% to an average of 6.5% over the next four quarters.
Where could we be wrong? We think the key upside risk comes from a rapid and possible change in the government’s policy response, such as large-scale privatization of PSEs and/or increasing infrastructure investments by about US$20 billion per annum (from current US$25-30 billion). Such a response could also help boost FDI inflows and ease the transition to higher sustainable investment-driven growth.
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Random Readings
P-Es aren’t perfect for picking stocks
A: Wouldn’t it be great if all you had to do was buy a stock with a low P-E, hang on, wait for it to “get discovered” by other investors and then sell it for a quick profit? Unfortunately, investing isn’t that simple.
P-E ratios are handy tools for investors. They tell you how much investors are willing to pay for each dollar of a company’s earnings. They are calculated by dividing the company’s stock price by its earnings per share.
The higher the ratio, the more badly investors want to own the stock. When a P-E gets too high relative to the rest of the stock market, its industry or even to its historical P-E range, that should make you stop and ask why that may be the case.
And there is some evidence that stocks with low P-E ratios have produced above-average returns, even adjusted for risk, according to the book A Random Walk Down Wall Street by Burton G. Malkiel. But Malkiel points out that this approach doesn’t work all the time and a company’s accounting can skew its P-E ratio.
P-E ratios by themselves aren’t always good ways to make money in stocks. Sometimes stocks with low P-Es are cheap for a reason. They may be trying to sell products nobody wants, or have other problems. If that’s the case, there’s no guarantee the company will try to fix its problems. And even if it does, that doesn’t mean the efforts will be rewarded by investors.
Consider Ford. In 1995, the automaker had the lowest P-E ratio of all the members of the Standard & Poor’s 500, according to S&P’s Capital IQ. But investors who bought Ford stock on Dec. 29, 1995 because of its low P-E and held it would be disappointed, because – despite a runup in the interim – the stock was lower on Dec. 30, 2005. Certainly, you can find plenty of examples of stocks that did have low P-Es and ended up doing rather well, but it’s not a guarantee.
So, what’s another problem in choosing stocks that have low P-Es? You might miss out on some great stocks with high P-Es. A good example is Google. The stock ended 2004 at $192.79 a share and reported earnings for the year of $1.46 a share. That gave the stock a staggering 132 P-E. Using your rule, you would have avoided Google. But guess what? The stock gained another 115% in 2005, making it one of the best performers on the Nasdaq.
The final problem with P-Es is how to decide what’s a “low” P-E. You might say 15 is low. Someone else might think that’s expensive. It really depends on what industry you’re looking at. A 15 P-E is high for regional banks, but low for technology companies.
Again, this is not to say P-Es are worthless. They are definitely important for investors to monitor and can be great benchmarks to show how popular a stock is. And sometimes, buying stocks with low P-E ratios relative to the stock market can pay off handsomely. When I analyze a stock, the P-E is one of the things I consider. But they aren’t a perfect tool, so you shouldn’t treat them that way.
What Rakesh Jhunjhunwala & other Money Monarchs expect this year?
| SI Team / Mumbai January 30, 2006 Seven stock market stalwarts debate the prospects for Indian stocks in the annual round-table organised by Capitalideasonline.com. |
| Ramesh Damani: Good evening ladies and gentlemen and welcome to this round table. In the comedy “Shall we dance” actress Susan Sarandon, talking to an acquaintance, poses the question, “why is it that people get married?”
People get married, she muses, because they want a witness to their lives. Fast forward to 2006. The romance with Indian equities is in full bloom and today we assemble, the great witnesses to what we call the great Indian bull market. |
| In this cathedral to capitalism, in this hallowed hall, the soul of the Indian stock market, if you will, when this group of witnesses last assembled in 2003, the Sensex was at 3000 — it has now tripled; the number of Indian companies with a $1 billion market cap has crossed 75 and India’s market cap is over $500 billion. |
| In 2003, when we asked our panelists what they thought of the market, the opinion was unanimous and prophetic. They all said “bull market ahead.” What are they saying in 2006? |
| Is India today where Japan was in the 1960s? Are these valuations sustainable? |
| Can oil prices or terrorism or the Iran American conflict derail this global economic expansion? These are just some of the questions that we are going to pose today. And as usual, we start with Rakesh because you can’t keep him quiet for half an hour! |
| In November 2003, Rakesh said I am an India bull and we are just watching the trailer. My first question today is: Have the hero and heroine met or are the credits rolling? |
| Rakesh Jhunjhunwala: I would say the trailer has given us confidence that the movie is going to be very good. I think the momentum in the Indian economy now ,is like never before.
With every passing day, every Indian is getting more confident. Of course, this is being helped by the fact that he is making money when he invests in the markets. So, I would say that the trailer is over. About the hero and heroine – I don’t know. |
| I’m not a scriptwriter but my feeling is that at this juncture, there is good growth momentum and people are confident that this will sustain. I think that’s important because that itself will contribute to the growth of the economy and the momentum. |
| Ramesh Damani: In terms of the movie analogy, are we at the interval? |
| Rakesh Jhunjhunwala: I think we are just seeing the titles. After the trailer, you see the titles, no? I am not some political theorist or economics professor, I am share bazaar road cheap. |
| But I feel that kind of prosperity towards which India is marching and the manner in which it is marching is unbelievable. It’s not a view because the index is 10,000. Even if the index falls to 7000 tomorrow, I will hold the same view. |
| Ramesh Damani: Rakesh, is there anything you’d like to see in the budget? |
| Rakesh Jhunjhunwala: Sometimes I wonder about the reforms we have had the last 24 months. Right? Now we had a very skillful Finance Minister who has been able to meet so-called social needs, through small doses of taxation. We have had VAT. |
| What I feel now is that governments are inconsequential. And I draw comfort from my study of history which tells me that when a democratic society decides what is in its favor, the happening of that is inevitable. There are Communists in Delhi and capitalists in Calcutta. Every politician realizes the inevitability of reform. |
| And what will the government do in the budget? They will tinker a bit here and there. I only hope that the FBT goes and that the STT does not increase. You know the government of India might never have collected even Rs 1000 crores as long-term capital gain tax. |
| And they have collected Rs 3000 crores through STT this year. And they want to increase the rate? The only thing that is disturbing is that something which pays is being taxed to death. My only wish is this should not happen. |
| Ramesh Damani: Right. Rakesh, you know, three years ago there were many doubters even in this audience about whether India was heading for this long structural secular bull market you talked about so passionately. Are you astonished at what has happened? |
| Rakesh Jhunjhunwala: You know sometimes I feel like singing “ki shayed tu aise hai jaisaa maine socha tha.” Right? By God’s grace things have panned out as I envisaged them. But the true believers will be seen when the index corrects by 2000 points. |
| Ramesh Damani: Doesn’t the pace and the resilience astonish you? |
| Rakesh Jhunjhunwala: I personally feel that at this level, we are entering the first stage of the domestic inflows. The moment the investors gain, they will invest more. And I think there is humungous domestic money to come. Unimaginable. You know Indian savings in 2010 is projected to be $410 billion. |
| If 10 per cent is to flow, it will be $40 billion. So even if the index goes down 1000 or 2000 points, as long as India’s growth story continues, the economic story continues, I think the market is just going to march ahead. Of course there will be periods of correction. We don’t know. |
| Ramesh Damani: Rakesh, what would be the themes that are important for the market in 06? |
| Rakesh Jhunjhunwala: Two things worry me. First , the world economy, because I think American consumption has to come down. How it will come down, how global currencies will realign, what effect is it going to have on global demand, that’s going to be very important. |
| The American economy is going to tank in my opinion. When that happens, it will have a big effect on the sentiment towards equity. So we must be alert. Second, I think oil prices beyond a point are going to lead to higher inflation and higher interest rates. |
| Corporate profit growth in India may slow down. But if the essential story of an improvement in quality of profits, higher consumption, and a growth rate of 8 per cent is intact, I don’t think a fall from 25 per cent growth in profits to 15 per cent is really going to disturb the market. It is events outside of the market, which will shake the confidence and also affect corporate profits substantially that would worry me. |
| Ramesh Damani: Rakesh, net net will 2006 be another positive year? |
| Rakesh Jhunjhunwala: If you ask any Dow theorists, they will tell you that if the market goes up for 3 days then it goes up for 5, and if it goes up for 5 days continuously, then it goes up for 8 etc. But it is reasonable to expect that this could be a negative year. But what difference is that going to make? |
| My investments have a entry value and a terminal value. And while trading, the screen talks to you and tells you. So badega to lenge, ghatega to bech denge. If it corrects, so be it. It’s not going to affect my investment thoughts. |
| Ramesh Damani: You know it might correct within the year but overall we are still in the structural secular bull market? |
| Rakesh Jhunjhunwala: Very much. And I don’t think something can slow it. |
Random Readings
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“In the short run, the market is a voting machine but in the long run it is a weighing machine.” – Benjamin Graham
The Ultimate Reading List
I got this list while surfing the net. I hope you find it useful. If you find any misses please leave a comment.
Groupthink*****. Irving L Janis. Houghton Mifflin: 1982. (The best book ever written on the complexities and pitfalls of group decision making, which is what an investment management firm is all about.)
The Alchemy of Finance***. George Soros. Simon & Schuster: 1987. (The master is complex, dense, but superb.His best book.)
Panic on Wall Street***. Robert Sobel. Macmillan: 1978. (The definitive study of American panics.)
Manias, Panics, and Crashes****. Charles P. Kindleberger. Basic Books: 1988. (The best scholarly analysis of the species.)
Reminiscences of a Stock Operator*****. Edwin Lefevre. George H. Doran Company: 1923; reissued by J. Wiley: 1994. (The classic work about intuitive trading. No investor’s education is complete without reading it. )
The Money Game*****. Adam Smith. Random House: 1967. (Nobody writes like Gerry. Full of wisdom. It’s a pleasure to read. )
The Roaring ’80s***. Adam Smith. Summit Books: 1988. (More Gerry; if you get addicted, Supermoney is good, too.)
Contrarian Investment Strategy***. David Dreman. Random House: 1979. (A classic on why and how to be contrary.)
The Battle for Investment Survival*. Gerald Loeb. Random House: 1957. (One great idea. Put all your eggs in one basket and stare at that basket.)
The Great Crash, 1929***. John Kenneth Galbraith. Houghton Mifflin: 1961. (Good study of the Crash.)
Instincts of the Herd in Peace and War**. W. Trotter. Macmillan: 1908; reissued by T. Fisher Unwin: 1919. (Dense, insightful analysis of gregariousness and suggestibility.)
Duveen. S.N. Behrman***. Harmony Books: 1978. (Fascinating biography of the great dealer and a wonderful history of the art market and its fads.)
Investment Policy**. Charles D. Ellis. Dow Jones-Irwin: 1985. (All of Charlie’s books have great insights, especially this one and Institutional Investing***.)
The Way the World Works**. Jude Wanniski. Touchstone: 1978. (I’m prejudiced because I believe, but this is the supply-side Old Testament.)
Wealth and Poverty**. George Gilder. Basic Books: 1981. (The New Testament of supply side.)
Growth Opportunities in Common Stocks**. Winthrop Knowlton. Harper & Row: 1965. (This book and Shaking The Money Tree**, with John Furth, are both superb on growth stock investing.)
The Elliott Wave Principle*. A. Frost, R. Prechter. New Classic Library: 1978. (Important to understand Fibonacci et al.)
The Great Depression of 1990*. Ravi Batra. Venus Books: 1985. (We are condemned to repeat the mistakes not of our fathers but of our grandfathers.)
Technical Analysis of Stock Trends**. Edwards and Magee. Magee: 1966. (The manual on technical analysis.)
The Intelligent Investor***. Benjamin Graham with commentary from Jason Zweig. Harper: 2003 & Security Analysis****. Graham and Dodd. Harper:
1951. (The bibles of value investing.)
The Long Wave in Economic Life**. J. J. Van Duijn. Allen & Unwire: 1983. (Best book I know of on cycles, which is what investing is all about.)
Confessions of an Advertising Man. ***. David Ogilvy. Atheneum: 1964. (Wonderful treatise on how to sell consumer products, written with wit and wisdom.)
Green Monday**. Michael M. Thomas. Simon & Schuster: 1980. (The best stock market novel ever written.)
Classics I and Classics II*****. Edited by Charles D. Ellis. Dow Jones-Irwin: 1989 and 1991. (Both collections are great browsing.)
Chaos**. James Gleick. Penguin Books: 1987. (Important to understand chaos theory.)
Investing with the Best*. Claude N. Rosenberg, Jr. Wiley: 1986. (Excellent on how to manage your investment manager.)
Managing Investment Portfolios**. Maugham and Tuttle. Warren, Gorham & Lamont: 1983. (Good stuff, but heavy going.)
Extraordinary Popular Delusions and the Madness of Crowds****. Charles Mackay: 1841; reissued by Metro Books: 2002. (The ancient classic but still should be read.)
The Speculator**. Jordan A. Schwarz. Chapel Hill: 1981. (Superb biography of Baruch. Note how he would from time
to time retreat from the market. )
Capital Ideas**. Peter Bernstein. Free Press: 1992. (History of the ideas that shaped modern finance. Peter
sometimes is too intellectual for me.)
Devil Take the Hindmost*** Edward Chancellor. Farrar, Strauss, & Giroux: 1999. (Erudite, articulate history of
manias and panics over the ages.)
Pioneering Portfolio Management ****. David F. Swensen. The Free Press: 2000. (The best book ever about managing a
large endowment portfolio.)
Stocks for the Long Run****. Jeremy Siegel. McGraw-Hill: Third Edition, 2002. (Absolutely crammed with fascinating information and analysis.)
The Trouble with Prosperity**. James Grant. Times Books: 1996. (Jim writes beautifully and all his books are great reads, although invariably bearish.)
Gold and Iron**. Fritz Stern. Vintage: 1979. (Absorbing history of Bismarck and Bleichroeder, Europe in the 19th century, and capital preservation.)
Markets, Mobs, & Mayhem***. Robert Menschel. Wiley: 2002. (“A modern look at the madness of crowds” and the most recent addition to my list.)
The Innovator’s Dilemma*. Clayton Christensen. Harvard Business School Press: 1997. (Breakthrough idea of why new technologies cause great firms to fail.)
Valuing Wall Street***. Andrew Smithers & Stephen Wright. McGraw-Hill: 2000. (The rationale of the q ratio by Smithers, a brilliant analytical mind.)
The Myths of Inflation And Investing**. Steven C. Leuthold. Crain Books: 1980. (Updated for deflation; consistent, extensive studies; not light reading)
By Indian Authors
The Stock to Riches***. Parag Parikh. Tata McGraw Hill: 2006. (Based on Behavioural Finance & emotional aspect of investing.)
Articles on "Magic Formula Investing" concept
Here are some of the interesting links on “Magic Formula Investing” concept by Joel Greenblatt.
1. Magic Formula Part 1
2. Magic Formula Part 2
3. Magic Formula Part 3
4. Magic Formula Part 4
5. The Most Magical Formula of All
6. Most Magical Formula of All – Bull Market Component
Follow the loser and become a winner
