Buying opportunity of a lifetime

Apr 13, 2009

In this issue:
» Emerging markets on a tear
» Principles for a 'Black Swan-proof' world
» Satyam gets a buyer in Tech Mahindra
» India's elite finally wake up to elections
» ...and more!!

Investing gurus are often asked to summarise investing wisdom in a catch phrase. For Benjamin Graham, it was 'margin of safety'. For ace investor Marty Whitman, it is 'credit-worthiness'. In a recent interview with Forbes, he has warned against buying stocks of companies that need continuous access to capital markets. In other words, his view is that one should stick with companies with very strong balance sheets. For example, a company with a cash balance in excess of liabilities can be said to have a strong financial position.

Whitman also emphasises the need for long term perspective - "I want to pretend this is 1932, and I would not want to be selling GE common in 1932, because the outlook for 1933 is bad. Values in well-financed situations have never been greater in my lifetime than they are today."

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The Wall Street Journal carries an article on how stocks in emerging markets have run up sharply over the past few months, and why this has made investors nervous of a major pullback in coming the months. So far this year, emerging markets have turned out some of the best performers among global markets. The emerging-market index tracked by Morgan Stanley for instance is up 12% in dollar terms since the start of this year. Compared to this, the index tracking stocks in developed markets (excluding the US and Canada) is down 9%. The Dow Jones Industrial index is down almost 8% so far in 2009.

Source: Yahoo Finance
Led by the respective stimulus packages announced in these countries and a general improvement in optimism, the benchmark indices in China, Russia and Brazil are up 34%, 30%, and 21% respectively during the year so far. As for India, the BSE-Sensex trails these emerging markets with gains of just around 12%. But then, apart from the usual economic weakness, we have the upcoming elections to blame for the relatively muted performance, given that signs are increasingly of a fractured mandate. Over that, investors here also seem to be concerned of the chances that a Third Front government might come to power to wreak havoc on the country's reform process.

However, going by the view of Mr. Ajit Dayal (Director at Quantum Advisors Pvt. Ltd. and Quantum Asset Management Company Pvt. Ltd.), as he has posted in the latest issue of The Honest Truth, stocks in India offer tremendous opportunities of wealth creation to long term investors. He writes, "The Indian economy is more balanced than some of the larger emerging market economies. China is very reliant on exports; Russia is dependent on oil exports; and Brazil is dependent on a few commodities and China's ability is to export these processed commodities to the developed world."

In continuing with the concerns that we Indians might have with our political parties, if the Samajwadi Party (SP) supported government comes to power at the Centre this time around, many companies in India might have to write off another kind of loss from their books - loss on account of unused computers. After all, the party's supremo Mr. Mulayam Singh Yadav believes that - "The use of computers in offices is creating unemployment problems. Our party feels that if work can be done by a person using hands there is no need to deploy machines." Incidentally, the party is also against stock markets, use of English language, agricultural machines, and high corporate salaries!

It has become fashionable these days to call a highly improbable event, 'A Black Swan event', an obvious reference to the hugely popular book 'The Black Swan'. And now, Nassim Taleb, its author has once again decided to cash in on the phenomenon by coming out with what he believes are 10 principles for a 'Black Swan-proof' world. While we would not be able to discuss all the ten principles for lack of space and time, we leave you with the last one, which we believe is all-encompassing and the one that will ensure that a 'Black Swan' event like the current credit meltdown is avoided at all costs. And what is this principle?

Taleb states, "This crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the "Nobel" in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties." We hope the regulatory authorities are listening.

After more than three months of confusion and speculation, Satyam finally got its new owner today in the form of Tech Mahindra, selected through a competitive bidding process. L&T and Cognizant-Wilbur Ross were the other two contenders in the fray for the beleaguered IT firm but Tech Mahindra out bid them with a comfortable margin.

Tech Mahindra (through its subsidiary Venturbay Consultants Pvt. Ltd.) will now pay Rs 58 per share to buy a 31% stake in Satyam through a preferential allotment. L&T and Cognizant-Wilbur Ross, on the other hand, had reportedly put in their bids at Rs 45.9 per share and Rs 20 per share respectively.

There appears to have emerged a considerable shift in the attitude of voters in India. In a country, where politics was largely considered an arena for the poor and the rural areas, it is now India's urban elite that has started evincing considerable interest in the same. And sadly, what has shaken them out of their apathy are the brutal terrorist attacks in November 2008 on two of India's luxurious five star hotels in Mumbai. Suddenly, the rich and the elite had a glimpse of terror, which was hitherto the bane of the middle and lower classes. Until now, unlike in the US, voter participation rates in wealthy city neighborhoods in India have tended to be lower than the national average. In South Bombay, for instance, home to some of the country's richest business families, the average voter turnout has hovered at under 40%, well below the national average.

Therefore, the upcoming general elections could witness this trend changing. Having said that, there has been some amount of skepticism as well and many are of the opinion that a lot of these elite contesting as independents have little or no chance without political experience and party backing. That the independents, no matter how sincere, could draw votes away from the experienced politicians with good track records has also been cited as one of the concerns.

Whatever be the case, we believe that voting should be taken seriously by all classes alike as it certainly augurs well for a democratic country such as ours.

Stocks across Asia were off to a rollicking start this week, as gains are seen in the benchmark indices of China (up 2.8%), Hong Kong (2.9%) and Singapore (2.6%). The Indian benchmark BSE-Sensex closed nearly 1.2% up. Gains in stocks today were seemingly on the back of positive economic reports stating that while Japan has more than doubled its economic stimulus package, bank lending in China has again picked up a strong pace.

As far as India is concerned, stocks have rallied strongly over the past few sessions (the BSE-Sensex has gained almost 34% since its lows in the first week of March). However, this is despite the fact that India Inc. is expected to turn out weak quarterly performance as a whole given the pressures most companies have seen on account of factors like demand slowdown, supply bottlenecks and currency volatility. Also, in light of the Satyam issue, most companies are expected to delay their result announcements considering that they will be making themselves pretty sure of the reported (and audited) numbers!

 Today's investing mantra
"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value." - Warren Buffett

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1 Responses to "Buying opportunity of a lifetime"

gopikrishna reddy

Apr 14, 2009

I think we should appreciate our govt. because it saved almost 40k employees without using any tax payers money, even thou it could not save investors. Lets hope the guilty is punished

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