Sunday, May 28, 2006

Well, what a fortnight?

Well, what a fortnight? Gains of three months wiped out in a fortnight!

Some interesting articles to read:

1. Yen_carry_trades unwinding
2. Its a musical chair out there, Indian stocks v/s Chinese
3. Women flock to stock markets
4. And, the best for the last "Indian markets can decline to 6000-9000, says Marc Faber".

By the way, the last article is an interview with Marc Faber conducted by Jitendra Gupta. He is one of my colleagues from the 2001--03 MBA batch. He works with the Financial Express. All the best Jitendra. Great going.

Monday, May 22, 2006

Non-ferrous commodities v/s companies; In hindsight ofcourse!

Non-ferrous metal companies witnessed ruthless selling pressure over the last six trading sessions. Here's how the major companies performed:

Sterlite Industries: -41.1%
Hindustan Zinc: -38.6%
National Aluminium: -29.9%
Hindalco: -27.4%

In comparison, the decline in the respective non-ferrous metals was as follows:

Zinc: -15.0%
Aluminium: -16.9%
Copper: -11.6%
(, updated upto 22-May-06)

The decline in non-ferrous metal scrips seems too fast and too furious, isnt it? But have a look at the performance of these scrips (vis-a-vis the respective commodities) since January this year. The chart says it all. Non-ferrous metal scrips ran too quick and too high!

Where are these companies headed? I do not know. But a colleague (who looks at metals - ferrous and non-ferrous) tells me that Hindalco Industries is most undervalued, compared to its peers. This is on the back of a turnaround in the company's copper business, which incurred losses till the Dec'05 quarter, but is now into the black.

Friday, May 19, 2006

Who is selling big ? Institutions are not.

NSE Nifty declined by a phenomenal 13.5 per cent over the last seven trading sessions. During this period, FIIs turned sellers. Their net sales amounted to Rs.3,676 crore. But, at the same time, MFs were net buyers to the tune of Rs.2,372 crore.

Total institutional activity turns out to be: FIIs + MFs = -1,304 crore (ie. -3,676 + 2,372).

Net sales of Rs.1,304 is too small an amount to result in a 13.5 per cent decline. Then why did the benchmark indices fall at such an alarming rate ? And more importantly, who is selling big, if not the institutions (taken in aggregate) ?

Any ideas/guesses ?

Thursday, May 18, 2006

Markets plunge by over six percent; Is this a beginning ?

Maybe not. A few weeks ago I had pointed to the fact that domestic mutual funds are sitting on mountains of cash. The amount was of the order of Rs.25,000 crore. So have things changed since then? Lets re-visit those numbers. Between Jan-Mar 2006, domestic MFs had raised Rs.29,735 crore. They raised another Rs.5,471 crore in April. This takes the tally to a phenomenal Rs.35,206 crore, raised in just four months. Phew !!

Now lets look at their net investments so far. As per the data available from SEBI, following are the net investments for MFs during Jan-May 2006.

Jan: -1,172
Feb: - 246
Mar: 4,483
Apr: 3,121
May: 2,626 (so far)
Total net investments so far: Rs.8,812 crore.

Cash lying with the MFs (net of investments): 35,206 - 8,812 = Rs.26,394 crore.

Thus, even after investing over Rs.8.8k crore in the last three months, domestic MFs seem to be still sitting on mountains of cash. What does this mean for our markets ?

I think MFs are actively buying shares and taking advantage (?) of the FII offloading. I think they will remain net buyers for another 2-3 months. FIIs have been the culprits in the declines recorded in the last few days. Will this continue for long ? I think NOT.

MFs will increase their support, and FIIs (some hedge funds, is the market grapevine) are likely to turn positive numbers, or so I believe.

Moral of the story: If you've been smart enough (or rather lucky) to convert some of your holdings into cash recently, then start nibbling. And, if you are fully invested, remain so. Do not let a 7-8 per cent crash go bonkers. Instead, stay calm and remain invested. Markets will soon stabilise.

Happy Investing.

Saturday, May 06, 2006

Trouble with investing in growth stocks

I recently came across this nice (book review) article on "Problems of growth stock investing" on capitalideasonline. The book under review was Hedge Hogging by Barton Biggs.

Here's an excerpt -

Growth stock believers argue that you want to own stock in companies whose earnings and dividends are consistently increasing. What you pay for the shares of these companies is important, but not as crucial as correctly identifying true growth companies. By definition, these companies tend to have excellent managements, proprietary positions in businesses that are not particularly cyclically sensitive, and to be highly profitable.

Ideally, growth stock investors want to hold shares in great businesses, and they sell only when the business itself falters, not because the price of the shares has risen. Academics have proved that if you had perfect foresight and bought shares of the companies with the fastest earnings growth, regardless of valuations, over the long run you would outperform the S&P 500 by 11 percentage points a year, which is an immense amount.

The problem is that no one has perfect foresight. In fact we are all generally overconfident and overoptimistic about our skill in picking growth companies. Identifying growth ex ante is extremely difficult, and as noted previously, growth companies have, for one reason or another, a high propensity to fall from grace, in other words, to stop being growth companies. By the time you the investor can clearly identify a stock as a growth stock, it usually will already be valued accordingly. Therefore, you end up buying the expensive stocks of good companies.


A compelling argument for sure. After all how many of us would have invested in Pantaloon Retail India between 1992-2002 during which the company's mcap was less than Rs.30 crore. Fast forward to 2006, and its trading at a mcap of Rs.5,100 crore. I think the same holds true for IT stocks in mid-nineties or the breweries industry in all of last one and a half decade of stocks investing in India. Ofcourse, there would be an odd investor(s) who would have hit gold by investing such stocks. But, those are clearly the "outliers" in the whole galaxy of investors. So what should one do to hit one such gold mine over one's lifetime ? My personal opinion (greatly influenced by WB and BG) is as follows:

1. Identify good and sustainable businesses (ones whose products do not run the risk of vanishing like the pagers, type-writers, etc.)

2. Reasonably good management with some kind of track record.

3. Buy these companies when they are reasonably unknown, thereby buying them at cheap rates more often than not.

4. Last but the most important, hold them all for a life time.

Not all companies selected by the method above will turn into multi-baggers, but even if one does, returns on one's entire portfolio are likely to be fairly good. If 3-4 stocks turn multi-baggers, then well (!), one should contemplate writing yet another "How to Make Money by Investing in Stocks" and make even more money ;-)