|»5 Minute Wrap Up by Equitymaster|
On This Day - 19 FEBRUARY 2016
'Hours of Boredom Punctuated by Moments of Terror'
'I feel like a pilot,' she told me.
My conversation with a long-lost friend, who claims to be a value investor, began with this punchline.
I was impressed! I thought she was telling me how meticulous she is. I thought she was likening a pilot to someone in control. I imagined here running through checklists and taking precautions.
It turned out my imagination had run too far...
My friend was trying to convey her distress - not impress me. She thought of pilots as professionals who endure 'hours of boredom punctuated by moments of terror'. And she considered her plight as an investor to be no different.
The sharp volatility in the markets over the past month had particularly riled her confidence in her value-investing skills. She didn't know whether to remain calm, like a good pilot, and execute a safe landing...or to panic and hit the eject button.
Although my encounter with her was a short and sudden one, I had enough time to put three questions to her. Something told me those questions would cheer her up.
My first question was, 'Why did you buy the stocks in the first place?'
Value investing doesn't just mean buying stocks cheap. I wanted to understand if my friend had bought the stocks with sufficient knowledge of their businesses and managements. If she had, her reason to let go of the stocks would be not just about valuations peaking or markets crashing. Rather, she would want to see if her assumptions about the businesses and managements remain intact.
My next question was, 'Does the market know something about the stocks you don't?'
Since most of her stocks had been hammered in the market crash, it was important that my friend find out the exact reasons. She needed to know if she was missing a vital piece of information about the companies she owned. It may not be enough for her to read annual reports and follow quarterly performances. She needed to be aware of sector, regulatory, and competitive headwinds. She needed to figure out whether management was focused on EPS guidance or long-term value.
My last question was, 'Should any of that change your view?'
Knowing the minutest details about the businesses she owned was unlikely to help my friend. Rather, she had to decide whether any of the information was relevant enough to change her long-term view on the stocks.
I wish I could have comforted my friend more. But at the end of our conversation, I told her I hope she will continue to think of herself as a pilot.
Not a pilot who gets distressed during moments of sudden and sporadic terror. But a pilot who takes caution to avoid terrors in the first place...but also knows the steps to follow should any unforeseen crisis arise.
I hope the next time I see her she will recount how she guided her portfolio to a brilliant and safe landing.
2.50 Chart of the day
Substantial portion of India's government revenue has continued to depend on divestment of stakes in PSUs over the last few years. However, these divestment targets are hardly met. The government's plans to shore up funds via stake sale in the PSUs has been a flop show so far.
Government stake sales continue to hit the stone wall
The reason? ...
The management of public sector undertakings (PSUs) has been abysmal. Many are wallowing in losses. Social obligations have taken a toll on their profits. Consequently, government faces problems trying to off shares in the PSUs in stock markets. Barring a few exceptions, all PSUs have very poor capital allocation. And in cases like Air India and MTNL, which have been loss making for more than a decade, the government continues to throw good taxpayer money after bad!
Failure to divest stakes in such PSUs leads to ballooning fiscal deficits, which in turn threatens to derail the nascent economic recovery.
Recently, in his interview to The Inner Circle newsletter of Bonner & Partners, Vivek Kaul talked about how the government continues to run an extensive network of loss making businesses. According to him, the biggest reason for the sad state of the PSUs is that the government wants them to survive. And whenever there are decisions to let go of the PSUs, there are protests.
The decisions on PSU disinvestment cannot always draw consensus or get timed according to market sentiments. The point is that if the government wants to push through disinvestments, it needs to be firm about it.
Talking about disinvestment, one cannot omit Life Insurance Corporation of India's (LIC), role in it.
As reported in Business Standard, LIC's total investments in public sector banks declined to Rs 278 bn, based on shareholding pattern as of December 31. The insurance behemoth which has bailed out several PSU follow on offerings, has lost around Rs 104 bn after the sharp plunge in the markets. This is because stocks of major PSBs have touched fresh lows. LIC has taken stakes in 23 out of the 24 listed public sector banks (PSBs) And in doing so, the institution's ability to make prudent investments decision has been clearly compromised.
In one of the editions of The 5 Minute Wrap, we had highlighted how government is using LIC to make coerced investments in the PSUs. That too at the cost of policyholders' money. Bailing out PSUs through follow on offers with insurers' money is clearly misuse of funds. Taking into consideration LIC's large corpus one may argue such losses may not make sizeable impact over time. But it is time the government stops making LIC a party to its wrong decisions on PSU bailouts.
After opening on a weak, the Indian indices are witnessing sharp volatility. At the time of writing BSE Sensex was trading lower by about 80 points. Sectoral indices are trading mixed, with stocks from oil and gas and energy sectors leading the pack of losers. While stocks from telecom and consumer durables are the leading gainers.
4.50 Today's Investing mantra
"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." That's what value investing is all about. - Warren Buffett
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