Thursday, July 28, 2011

an AGM, a few tit bits & great learnings

Hope & Ideas inspire men to achieve great milestones. With the recent release of Harry potter's final version of the movie, my thoughts hover around the story of its author JK Rowling. It started as a great idea on a delayed train from Manchester to London. JK Rowling came up with the idea of a boy who discovers he is a wizard. But it would be 7 years before the idea became a huge business worth millions of dollars. Woven in fiction and mystical sets, this is an inspirational story for every entrepreneur. Her life took a nose-dive, fighting poverty and depression, she lived in a mice-infested flat in Edinburgh and struggled to raise her baby daughter on a charity check. Great business are born in times of adversities and out of great but simple ideas. As simple as the story of stories.

Closer home we have several such inspirational rags to riches stories of Indian Businesses. There is something special about them and it became apparent to me only after I met an elderly shareholder during the 3M AGM. We were discussing the business prospects of 3M after the AGM when I met up with his senior gentleman. I was as usual bullish about a few innovative ideas and giving my pep talks on the pet subject. The unassuming elder intervened to tell me his experiences of MNC consumer companies he had invested in. He was sharing how cold and depressing his investments were in the MNC consumer story. He went on to say how his investment in Gillette never paid off any decent returns after he held them for like 5 years. He compared how having invested in an Indian company with deep Indian understanding would have paid off like Adani or Ambani or Biyani. What he went on to say was even more reveling.He said while the MNC executives work out off comfortable plush offices, their Indian counterparts actually toil it out to succeed in this very unique Indian markets. To succeed in our country, requires unique skills you understand only as an Indian. You need to grease palms of bureaucrats & ministers, require skills to work with carpenters & labourers, clear check posts, making adjustments all the time. Working around things, rather than working through is a unique recipe for Indian businesses. This, in his sense was key to identifying great businesses that will succeed. While I personally have least regard for Ambani businesses, and I hold them primarily responsible for such deep rooted corruption in Indian business, one can't ignore what this gentleman said. As an investor, I have never been glued to this filter, the filter of Indian workarounds. Great learning.

Then I also met those who were waiting (for the perfect bride). Waiting for the perfect correction. You can rarely start at the bottom of the markets. Every good investments performs badly for some of the times. Intelligent investors stick around until the bad turns around to good. As the Nobel Laureate & Behavioral Psychologist Daniel Kahneman said, the most natural way to think about a decision is not always the best way to make the Decision. Very thought provoking in investing paradigm.

Happy learning & investing.

Thursday, July 07, 2011

Big idea for the small ones

I am really excited with the concept of 'anticipated growth' of certain types of businesses that operate with special economics. Imagine if our parents had invested in one such. We would have inherited a fortune. This gave me a though that I must open an account for my son. A DMAT in the name of a 7 year old. All I would need is a PAN card. I have been recommending this thought to a lot of my friends. The obvious question is how is it different from ours? The mind is very clever, it will differentiate this for the long-term and refuse to get anxious with short term volatility. This idea of a long term holding coupled by researching stocks with a 20 year growth anticipation will work to build a fortune. This is easier said than done. How do we identify such stocks that will display earnings growth into the future? What are the businesses of the next decades? Tomorrows TITAN and Nestle would be small mid caps today. Stocks have a price but businesses have a value. prices fluctuate but value of a business grows over time. They need long runway to grow into a blue chip.

A business that grows very fast for a long period of time can some times offer no benefit to share holders if it requires constant Financing to grow. If the business requires huge equity financing to support growth, then the larger number of shares outstanding will reduce the earnings per share for existing stockholders. There is no benefit from this anticipated growth. When the growth aniticipated is higher than cost of capital required to grow, Blue chips emerge. Like BHEL, Titan industries, Axis Bank all of which took time to grow but went to create wealth in order of more than 10 times in a decade.

These are conceptual ideas that have the power to multiply and foster wealth. These are rarely advised by the broker or wealth manager as there is no profit to be made for them. As with the quaint exchange traded Niftybees, this is like investing in the NSE index itself. Available from benchmark, Niftybees has returned 8.06 % over one year which is similar to the index returns at low cost. In advanced markets, fund managers find it very difficult to beat the returns from index or the broader market itself. This is because as markets mature, opportunity windows become shorter. It makes for an easy yet diligent job to get into an SIP of an Index itself. Again this is a simple idea that no broker can profit from and hence never recommended. Do you have any such ideas?

last week we learn something very interesting from the story that developed at Padmanabha temple in Trivandrum. For those of you who are not cued into it, a lot of treasure was discovered in the cellars sree Padmanabha swamy temple in Trivandrum. The treasure is valued at more than 100,000 crore, roughly the size of total business of a large PSU bank in a year. The treasure consisted of a lot of gems and gold jewelery. The royal famly of the erstwhile princely state of Travancore had left behind these with the Deity. They talk of a symbolic practice of the royal families dusting sands off their feet when they emerge from the shrine after worship. Meant to convey that wealth of lord Padmanabha should remain with lord and the family will not misappropriate. This is a great lesson for today's politicians who have amassed a lot of wealth belonging to the tax payers and government coffers. Greed knows no limit. There is another great lesson from this for the financially inclined. The magic of compounding. The fascinating effect of compounding gathers up momentum over longer periods of time and becomes an avalanche of wealth. The 100,000 crores accrued as the prices of gold kept inching up over the years. Time as they say, is the best healer. There was this company that came out with an issue in 1983 at Rs 100. An investment of Rs 100 per share at Rs 10,000 is worth about Rs 100 crores. Magic of Compounding. Any guesses?

Happy Investing!