Heads - I am bruised, Tails - I am crushed...

...where Heads means a company reported numbers that were "either in-line with the street estimates" or were "better than expected", and where Tails means a company reported poor numbers for the just concluded quarter ended Dec 2008.

Further, where "I am bruised" means that the stock witnessed a small decline in price or remained unchanged (more or less!), and where "I am crushed" means the stock is sharply down since the current earnings season began.

Some of the companies drawing Heads include Oriental Bank of Commerce, Axis Bank, HDFC Bank, Wyeth Ltd. etc...where each of these companies reported healthy growth in profits given the current business environment and yet each of them is down by anywhere between 7-20% since the beginning of the year.

Companies drawing Tails include Divis, Reliance Capital, Zee, etc...where each of these companies fared poorly (it wasn't a disaster though!) only to lose a third of their market value in a little more than a months time!

It seems as though stock prices have just one desire - to keep losing value; little by little every week! Looks a lot like 2001-02 and early 2003, isnt it?

Ofcourse, we all know what followed then, dont we? :)

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

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

To:

P&G
USA

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.

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."

Source: http://blog.mises.org/archives/009256.asp

How I learned to stop worrying and ignore volatility...

...is 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]

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].