Saturday, December 19, 2009

Opportunities in Uncertain times

The closure of the Tata Steel's Corus Steel Plants in UK will result in loss of 1700 jobs. This is only an indication of the kind of economic crisis that the economies of the world are still grappling with. The Steel major, second largest steelmaker in Europe has faced a situation of low demand and off-take after many mills around the world had closed unable to even pay the power bills. The employment figures that the US Markets vastly rely on were also not encouraging. I recently listened to a CEO of a large US corporation expecting this recession to last a very long time and called it a L shaped recovery. L indicates the going down and staying there for a long-time. This is opposed to many stock and business analyst who come on TV and speak reassuringly of the recovery and asking gullible investors to fall prey to their excessive greed. They are doing a job. It is the job of every intelligent investor to measure the reality through his eyes. All that is required is common sense and not a fancy degree on economics to understand the glaring reality. Dubai is an example of showcasing story of greed and returns. The real-estate had heated too fast ahead of genuine demand.

The Indian business scene is somewhat different. The Indian economy in stark contrast to the west is not heavily debt driven. The savings rate is one of the best in the world and we have a very strong regulator of banking system, the RBI. The immediate forecast may be a little tumultuous and bumpy but that should not sway away the intelligent investor. He welcomes and embraces such opportunities. People in the know of things actually admit the financial crisis in the west and know of a few large banks that are on the verge of collapse. These will trigger the meltdown of financial markets all over the world bringing great opportunities to invest in companies that comes a begging.

Meanwhile we have heard of more fraud coming out at Satyam and the new management of Mahindra expressed their intent of putting back the company on fast rails within the next 6 months. I am sure that this new management will put them into a place they as a company deserve. Whenever such information of fraud comes out, the markets offer its trademark response - off beating down the shares. Remember when Raju admitted to the fraud initially, how analyst came on TV and assured the share would reach zero or be de-listed. I was very sure that none of this would happen. There was this company with customers and revenue flows. What had happened was one of the biggest frauds in Corporate India, no doubt. But with Market again not able to distinguish Risk from Uncertainty grace it its best treatment. I know of a few Intelligent Investors who had invested knowing the truth that the value of any business is its customers and invested at highly discounted levels.

Such opportunities of uncertainty will prevail at all times offering opportunities to invest and create wealth. Recently the telecoms stocks came under the hammer with a ravaging tariff war. While valuations will change with an imminent change in tariffs, markets generally over react.

The Government of India has recently announced the fresh round of divestment in all PSU’s and divest up to at least 10%. The Government wants to raise around Rs. 60,000 cr and thereby boosting the capital markets and will ease the pressure on our fiscal deficient economy. These funds will be used use in development and infra projects.

Should we invest into such stocks now?
Post elections I had picked stocks like SBI, NMDC and few more due to this reason.
I foresaw the disinvestment happening but now however they have rallied too much for delight. Let bygones be bygones. Market throws up surprises always.

A few more topics of interest to think would be Gold and the Energy & Power sector.

Do all these happenings mean anything to investors like us?
I would like all of us think and look forward to your valuable comments.

The Market is tired

Another year is drawing to a close. It is time to rest a bit and so is it for the indexes. They have been running tirelessly for long. There are a few facets that will lend itself to the behavior of the index. It is the year end for many FIIs that have book closures and will close their positions, January RBI policy announcements are expected to tighten liquidity to rein in inflation, many IPOs are sucking up liquidity from secondary markets. The markets are oversold and running out of steam. This is seen in the leading stocks from their valuations. It is difficult to predict exactly when, but there is good certainty that the markets will correct. This will provide an opportunity for all of us to buy assets at a good discount to their value. So be in cash and hold on to Gold.

I've been getting a lot of people asking me when I'll sell my gold...

First; I have to tell you it is much, much too early to focus on this. This is a time when very few people have gold, many more countries will move their reserves from dollar to Gold and you will see this happening soon. The dollar will loose its old charm as the pressure mounts on US’s foreign creditors to look at other avenues.

To be a successful investor, you must think independently. But I'm only human, so it feels great to find a stock you believe is an excellent company with a first-class management, recommend it to your readers, remind everyone when it gets cheap, defend it against numerous critics... and then watch it deliver disproportional returns. As Buffett doesn't buy unless an investment fits into the four filters he used for decades.

• An understandable, first-class business

• A sustainable competitive advantage

• An able and trustworthy management

• A bargain price

I am right now studying a company in renewable energy. They have had recent setbacks due to inappropriate management decisions in the past. True value buys emerge during special market conditions, bad business decisions, extraordinary industry happenings and extreme pessimism. But if you go by the filters, you will be able to separate the wheat from the chaff. I am reminded of the story of Sudip Dutta who moved to Mumbai in 1988 from small town of Durgapur after his father passed away and he could not support the family. He started working as a packing assistant earning Rs. 15 per day and twenty years later, today he is the largest aluminium foil maker with business over Rs 500 crores. India is full of such entrepreneurial spirit and Indians can take on the world.

Things that you'd think are impossible could be happening with regularity in the next decade or so. Let us just sit back and watch, and wait. As they say, patience rewards the intelligent investor.