Friday, January 30, 2009

Open letter to Chairman & CEO, P&G USA...

...written by Rohan Shah (on 30th Jan '09) is available on (a very useful site for anyone interested in stocks and stock markets). The letter is pasted below:



Kind Attn: Mr. A.G. Lafley

I write to you today as a minority shareholder (and on behalf of other minority shareholders) of Procter & Gamble Hygiene & Healthcare Ltd. the Indian-listed subsidiary of Procter & Gamble, Inc. USA with about 30% of its equity ownership with the Indian public.

I have been a great admirer of Procter & Gamble - the company, its products, and its policies on corporate governance and responsibility to society. Inspired by such a great culture and the continuous praise and support received by two of the world's most respected businessmen (Warren Buffett & Charlie Munger), I bought some interest in the Indian subsidiary of P&G - P&G Health & Hygiene Ltd.

However, I was surprised to experience that there existed significant differences between the culture at the Indian subsidiary and its parent, for reasons detailed below:

1. P&G Health & Hygiene has surplus cash reserves of about Rs.200 crores (approx USD 45 million).

2. These were given as loans to P&G Home Products(a 100% owned subsidiary of P&G-USA, the parent) from which most of the company's products are being introduced. In short, the funds of the listed company were being used by the parent's 100% owned subsidiary, with no benefit to us as minority shareholders.

3. Myself and other shareholders then wrote to the company requesting them to utilize these surplus funds for the growth of the listed subsidiary by introducing new products from our parent's vast portfolio. This was denied by the Indian management in subsequent interactions, and minority shareholders were impressed upon that these surplus funds would not be utilized for P&G Home Products and would be eventually distributed as a special dividend. As per the last balance sheet, the said funds have indeed been received back from P&G Home Products and we now await the special dividend. (for your information, this amount has now been given to P&G Home Products from the surplus funds of Gillette India Ltd, another of your Indian listed subsidiaries, This is again not the quality of corporate governance expected out of any of P&G's subsidiaries).

However, the reason for me writing to you today is on a larger issue being that of our company's ultimate survival and being fair to all stakeholders in the long term.

Currently as you know, P&G Hygiene & Healthcare Ltd (listed subsidiary) has two strong products i.e. Vicks and Whisper which are growing at respectable rates in the markets. However, no new products are being introduced and this has started worrying minority shareholders like me that 'a company with no new products clearly means that the company is not evolving, and it will eventually lead to stagnation, death and extinction'.

In your recent visit to India, you mentioned about the excellent Indian demographics & rising purchasing power and how P&G would be at the heart of innovation and introducing new products into this largely untapped market. We were hoping that our listed subsidiary would have a large part to play in this growth story. And thus, I write to you seeking your help and intervention in this matter. P&G USA already owns about 70% of P&G Hygiene & Healthcare, so why not introduce all products thru this company into India? This will be a great reference point for other multinational companies operating 100% subsidiaries in India and work wonders for the P&G brand, corporate image and enhance its high respect in the mind of Indians.

I am sure you will agree with me that when a company does fulfill all its obligations to all its stakeholders, it has a rub off effect on its customers and vice versa. Therefore, if the minority shareholders, who are large in number, start having a perception that the responsibility to it and in turn the Corporate Social Responsibility is not being fulfilled, the question that begs the answer is - for how can such a company survive in the perception of the consumers? Have there not been numerous such examples in the world when there is no congruence - the products and revenue streams of a company have dwindled? What is good for the majority shareholders should also be good for minority shareholders, which epitomizes the Corporate Governance and in turn the Corporate Social Responsibility. I'm sure you would agree that the future of consumer companies is dependent on the '% of mind share' rather than '% of market share'

I now await your positive action which would be in line with P&G’s Corporate Governance Report "your company's reputation is earned by our conduct: what we say, what we do, the products we make, the services we provide and the way we act and treat others. As conscientious citizens and employees, we want to do what is right. For your company and P&G's global operations, this is the only way to do business" It will also be in line with the principles of Warren Buffett, Charlie Munger and Ben Franklin - "There is a huge line dividing what is legal and what is moral"

Thanking you,

Yours truly

Rohan Shah

-------End of letter-------

I completely agree with Rohan.

Further, if the P&G group has no interest in expanding its product portfolio in India, then they should simply delist their companies (PGHH & Gillette India) and do it at a fair price. But, keeping the stock listed and NOT adding any products to their portfolio is simply 'unfair' to shareholders, minority or otherwise.

MNCs that have short-circuited their Indian shareholders in the past have faced two outcomes:
  • they are rated poorly on the stock markets
  • their overall business performance has been sub-optimal
This list includes companies such as Merck, Novartis, Pfizer, etc. To get a clearer picture, one needs to simply compare their performance (both, on the bourses and in their businesses) with those of Hindustan Unilever, 3M India, Glaxo India, Aventis, Areva, etc.

On a tangent note, maybe the Government of India can do away with all the restrictions on foreign direct investment in India and introduce one simple rule for anyone willing to invest in India:

"MNCs may own a maximum of 51% in any company they plan to set-up in India, the remaining 49% should necessarily be divested to the Indian public by way of an Initial Public Offer"

The impact:

- This will resolve a lot of problems and issues that the GoI is currently facing when it comes to allowing FDI in banking, insurance, telecom, et al.

- It will also do away with the issue of MNCs short-circuiting minority shareholders, given that under the new rules, any company / JV formed by MNCs will have to be divested in favour of Indian public.

Friday, January 23, 2009

Place of economics in learning

Here's a nice post on the importance of economics in our daily lives and how we don't give the kind of attention and importance that it deserves. The entire article has been pasted below:

To Which Defunct Economist Are You Currently Enslaved?

January 18, 2009 10:24 PM by Justin Ptak

John Maynard Keynes once wrote that "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."

Economic theory does indeed have quite a large impact on our lives that is far greater than most any of us are willing to admit or understand. Policymakers and politicians guide fiscal policy, set monetary policy, and collaborate on financial regulations that impact almost every transaction in the market place. These theorists and philosophers all begin with a set of ideological constraints that frame their world view. Will you sit back and allow them to create the rules of the game?

As Ludwig von Mises stated in one of the concluding chapters of Human Action on The Place of Economics in Learning:

"Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man's human existence...

There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen. In such vital matters blind reliance upon "experts" and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people's domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake...

Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen."


Thursday, January 22, 2009

How I learned to stop worrying and ignore volatility... a nice little strategy note released by Michael Mauboussin. [link to the article]

The article talks about the times we live in and what strategy a long term investor can adopt. The note is timely and insightful to read. Mauboussin concludes the note with the following advice:

1. Decide if you can be or should be a long-term investor. There’s nothing sacred about it—you just have to make sure you properly align your thinking, policies, and processes around your time horizon.

2. Don’t overbet. Constantly consider the problem of induction and the deleterious effects of leverage and incentives.

3. Work to reduce stress and maintain perspective. Some documented ways to lower stress include:
a. Exercise
b. Maintain and cultivate social connections (family & friends)
c. Get sleep and maintain a healthy diet

4. Don’t dwell on short-term portfolio moves. Sidestep loss aversion if possible.

5. Remember the story from Abraham Lincoln. He recounted that an Eastern monarch once charged his wise men to invent him a sentence that would be true in all situations. They came back with the words: “And this, too, shall pass away.” As Lincoln said, this phrase “chastens in the hour of pride, and consoles in the depths of affliction.” This too shall pass and long-term investors stand well to gain. I agree. [link1, link2]

Sunday, January 18, 2009

Greatest hits collection on Investing Widsom...

...compiled by the Value Investor Insight team, is a useful document. It's available for free and can be downloaded from here [link].

Thursday, January 15, 2009

The hunters get hunted, and badly!, on a day...

...when Volkswagen was momentarily worth 240 billion sterling pounds, the most valuable company in the world!

A brief excerpt...

Hedge funds believed they were on safe ground by short selling VW shares, which they saw as overvalued when all car manufacturers are feeling the squeeze.What none of them knew was that Porsche had quietly been adding to its 42.6 per cent stake in VW by taking out options to buy VW shares owned by a number of German banks. Germany's somewhat eclectic financial regulations did not require Porsche to disclose this, and so none of the hedge fund managers had a clue what Porsche was up to.

That all changed with spectacular consequences when the sports car manufacturer suddenly issued an announcement, in German, just after 3pm on Sunday declaring that it either owned or had the option to own 74.1 per cent of VW.With the state of Lower Saxony owning another 20.1 per cent, this meant that just 5.8 per cent of VW shares were available to buy.

But hedge fund managers had promised to sell to third parties a total of 12 per cent of VW's shares, and 12 into 5.8 doesn't go.

One London-based fund manager saw the news when he flicked through financial websites on his BlackBerry during a Sunday afternoon walk."I ran like a madman back to my house," he said. "I assumed the numbers were wrong. I called my broker and couldn't get through."But when I finally did speak to him, and he told me he'd had a dozen panicked calls already, I knew it was true."Across the capital, and in financial centres across the world, brokers rushed to their offices to work out just how big a hit their clients were about to take.

Throughout Sunday afternoon, their phones rang off the hook as traders called them begging for help, undisguised panic in their voices.Hours before the markets opened here on Monday morning, hedge fund offices in "hedge fund alley'' in Mayfair were already buzzing with activity as traders went through the numbers over and over again, unable to do anything more meaningful until the German stock exchange opened at 8am.

"We knew there would be a bloodbath as soon as the market opened," said the trader. "We knew the price would rocket, widening the exposure of lots of hedge funds – they would be offering their daughters in return for the stock, just to get out of it."The scramble for shares meant that shareholders could name their price, and VW stock went from 210 euros to more than 1,000 euros in two days, making VW, at one point on Tuesday, the world's most valuable company at £240 billion.

Meanwhile, the fund managers who hadn't managed to buy enough shares to settle their accounts watched with horror as their losses spiralled out of control. Some of the bigger funds are thought to have lost as much as £4 billion.

And as the price of those precious shares quadrupled, Porsche made a paper profit of more than £100 billion, dwarfing the money it makes from selling cars.


The full article can be read here [link]

Tuesday, January 13, 2009

Good advice from the man who has seen it all...

...Irving Kahn, one of the earliest members of the Value Investors' gang led by Benjamin Graham. This fortnight's issue of the Outlook Profit is carrying an interview of Mr.Kahn. The interview is worth a read, and so is the magazine (atleast thus far it seems to be reading better than many of the other finance related magazines available in the market).

In reply to one of the questions in the Outlook interview, Mr.Kahn gave the following reply:

"Yes, you are quite right, when it is raining you wear a raining jacket and when the sun in shining you don't need an umbrella. I think that you should have to be prepared for bad times and short-term depression but you have to recognize that when stocks (are trading) below fair value, that is the time to get your money out and buy equities. Also, if you are a good invetsor, you do not ask about which month or in which three months or in which year (you can get returns on your investment). Instead, you hold, waiting for a number of years for something to happen. You must allow time to pass (for market participants) to recognize what needs to be done."

The above statement makes a lot of sense. And, since a large section of today's market participants are overtly worried about the next month, quarter, year, it makes sense for long term investors to use it to their advantage. As I mentioned, in one of my earlier post,

"Growth will not be a problem so far as India as an investment destination is concerned, its the price that one pays for the investment that will determine returns over the next decade. And it is this factor that is now in the favour of the long term investor..."

A brief about Irving Kahn:

Irving Kahn (born December 19, 1905) is an American value investor and, with over 77 years experience in the investment business, one of the oldest financial analysts on Wall Street. Educated at the City College of New York, Kahn served as the second teaching assistant to Benjamin Graham at the Columbia Business School. At the time, other notable students and/or teaching assistants to Graham included future Berkshire Hathaway chairman, Warren Buffett, and future value investors William J. Ruane, Walter J. Schloss and Charles Brandes, among others. Graham had such an enormous influence on his students that both Kahn and Buffett named their sons after him. (source - wikipedia)

Saturday, January 10, 2009

Stock markets behave like a voting machine... the short term, while in the long term they act like a weighing machine", said Benjamin Graham in his bible on investing, Security Analysis, the sixth edition of which has just been released, a highly recommended book.

We've had two nearly full trading sessions since the news about the fraud at Satyam Computers was made public. During this period, the voting machine has been working overtime (literally, given that volumes on the stock exchanges have shot up significantly, up from an average of around 6-700 million shares on the NSE to over a billion shares per session).

So, what are the votes (in case of the Nifty 50 companies) indicating?

Top Losers (since the Satyam announcement):

1). Reliance Communications -25.0%
2). DLF -22.2%
3). Suzlon -22.1%
4). Unitech -21.8%
5). Reliance Infrastructure -20.2%

Top gainers:

1). Hindustan Unilever +6.8%
2). Sun Pharma +5.7%
3). TCS +5.5%
4). Maruti +4.0%
5). Wipro +3.3%

Intuitively (again in the short term, i.e.), the companies voted out (the top losers category), seem appropriately placed...isn't it !?!

Wednesday, January 07, 2009

Thank you, Mr.Raju...

...for taking away the last piece (the Cash Flow Statement) of the Annual Report, which many of us analysts used to once trust as a reliable source of financial information.

And also for writing this letter. I truly believe you've opened a Pandora's box so far as corporate governance is concerned. Some of the things I hope to learn over the next few days is:

1). How can a Company have "zero" cash on books and yet be able to show cash & bank balance of over Rs.5000 crore? (banks provides fake FD certificates? or the Company forges bank statements/certificates?

2). In the last 3-4 years, the Company claims to have paid Corporate tax of close to Rs.800 crores. On what; profits, which profits?

3). Cash = zero, debtors = overstated by 2000 crore, balance sheet size = 8000 crore, actual b/s size = ???

4). What statements (followed by actions) will come from PWC (the auditor-in-Chief @ Satyam), SEBI, Department of Company Affairs and GoI? (Will Satyam be auctioned-off under the aegis of GoI to various IT companies in India?).

Prof. Verma is right on (link1 & link2). GoI must take this up, and quickly.

Friday, January 02, 2009

King Solomon & Happy New Year

Here's a small but an awesome story, which i think is quite apt for the times we live in -

One day King Solomon decided to humble Benaiah Ben Yehoyada, his most trusted minister. He said to him, "Benaiah, there is a certain ring that I want you to bring to me. I wish to wear it for Sukkot which gives you six months to find it." "If it exists anywhere on earth, your majesty," replied Benaiah, "I will find it and bring it to you, but what makes the ring so special?" "It has magic powers," answered the king. "If a happy man looks at it, he becomes sad, and if a sad man looks at it, he becomes happy." Solomon knew that no such ring existed in the world, but he wished to give his minister a little taste of humility. Spring passed and then summer, and still Benaiah had no idea where he could find the ring. On the night before Sukkot, he decided to take a walk in one of the poorest quarters of Jerusalem. He passed by a merchant who had begun to set out the day's wares on a shabby carpet. "Have you by any chance heard of a magic ring that makes the happy wearer forget his joy and the broken-hearted wearer forget his sorrows?" asked Benaiah. He watched the grandfather take a plain gold ring from his carpet and engrave something on it. When Benaiah read the words on the ring, his face broke out in a wide smile. That night the entire city welcomed in the holiday of Sukkot with great festivity. "Well, my friend," said Solomon, "have you found what I sent you after?" All the ministers laughed and Solomon himself smiled. To everyone's surprise, Benaiah held up a small gold ring and declared, "Here it is, your majesty!" As soon as Solomon read the inscription, the smile vanished from his face. The jeweler had written three Hebrew letters on the gold band: gimel, zayin, yud, which began the words "Gam zeh ya'avor" -- "This too shall pass."

Resolution for 2009, therefore, is:-

1). Invest We Must (in Equities) in 2009 & one of the other (& more important one) is

2). Vote We Must, with all Due Diligence.

Happy New Year to all.