»5 Minute Wrap Up by Equitymaster

On This Day - 19 FEBRUARY 2016
'Hours of Boredom Punctuated by Moments of Terror'

In this issue:
» Govt's failed divestment plans
» LIC's Rs 104 bn loss from PSBs
» ....and more!
0.00
Tanushree Banerjee, Co-Head of Research

'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.

What steps do you take to avoid panic during market turmoil? Let us know your comments or post them on Equitymaster Club.


--- Advertisement ---
Profit From Junior Blue Chips...

We have released our latest Special Report on the best of the best small caps - Junior Blue Chips!

Yes, we believe Junior Blue Chips possess the high growth potential of small caps along with the stability of blue chips.

That is an amazing combination every investor would want in his portfolio.

And the best part is you can get this report for FREE!

Just click here to know how...
------------------------------

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.

3.50

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.

4.45

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

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407