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.

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The full article can be read here [link]

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)

Stock markets behave like a voting machine...

...in 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 !?!

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.

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.