From 1996 to 2015: What hasn't changed at Equitymaster? - The 5 Minute WrapUp by Equitymaster
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From 1996 to 2015: What hasn't changed at Equitymaster?

Jan 7, 2015

In this issue:
» India's Maharatnas to take on more debt?
» The urgent need to revive public sector banks
» Will US stocks see a correction in 2015?
» Roundup on markets
» ...and more!

We started off in 1996 with one aim in mind - to help investors like you build wealth with honest research. Charging a fee in an industry where advice is available for free was not easy. Some even considered us a fly by night operator. However, over all these years we have not only survived but also thrived and achieved a respectable position to say the least. Our three pillars - honesty, transparency and conservative mindset - have helped us achieve this feat.

The first two factors are rare to find in stock markets and hence we stood out of the crowd. We earned investors' trust though our honest opinions.

However, the last factor turned out to be a double edged sword for us. And we knew it would. That's because when the prices go down a conservative mindset helps but when prices move up the approach backfires. It is then when people start questioning your philosophy. And it took us ages to help our readers understand that preserving capital is more important than risking capital in search of higher returns.

The 5 Minute WrapUp has been the primary medium through which we aired our opinions to educate investors since 2008. And it seems we have been successful at least to some extent here. Over the past one year, some pertinent discussions on Equitymaster Club. have also helped throw more clarity on our approach and key principles followed.

Allow us to highlight one such discussion on a recent Club thread. The question put to us was whether Equitymaster has chosen to compromise on margin of safety in a bid to constantly recommend buys. The doubt emanated from the fact that we have managed to recommend stocks to buy in few services even as markets went up in the past few months. Now those who have had the chance to see our updates in recent months know very well that we have recommended investors to Sell a lot more stocks than the number of buy recommendations. Booking timely profits has been on top of our mind too. But most importantly, none of the buy recommendations have diverted from the key principles we adhere to while recommending stocks, margin of safety being one of them.

Now, the approach of stock selection differs across products. For example in The India Letter, the Megatrend investing opportunity and its impact on high growth stocks is a key criterion. In ValuePro, stocks that do not qualify for any of the 'Buffett would buy criteria' are never selected. And in Hidden Treasure, the business model and moat of the company is given utmost importance. But none compromise on the margin of safety criteria. Never will. Even if that means asking investors to wait before buying stocks at more attractive levels, at the risk of annoying them!

Warren Buffett once said "Have the purchase price be so attractive that even a mediocre sale gives good results" . And for that one needs to wait to allow the price to fall into your buy zone.

This could happen when markets are on sale and not when positivity starts building into the price. In fact, this is the time to be vigilant and assess the business fundamentals and valuations carefully. If not, you may fall prey to buy high syndrome and repent later.

Do you get carried away and feel the urge to invest more when the markets are rising? Let us know your comments or share your views in the Equitymaster Club.

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  Chart of the day
Talking about our conservative mindset, let us tell you that even the "Maharatna PSUs" have quite a conservative approach to borrowing. In all, there are 7 Maharatnas and all share a conservative mindset when it comes to borrowings with the exception of IOC. As can be seen in today's chart, except for IOC the debt to equity (D/E) ratio of most Maharatnas are in the comfortable range. In fact, Coal India and ONGC (not included in the chart) are virtually debt free.

Do Maharatnas have more room to borrow?

Considering such a risk averse mindset, the Centre is likely to prompt these PSUs to borrow more in order to fund their projects. As government is the key shareholder and it is itself proposing the move to borrow more, it will not be difficult for these PSUs to get the approval to leverage themselves. While there is a huge scope to borrow in case of certain companies like Coal India, BHEL etc we reckon that borrowings should be restricted whenever possible. This is because high debt brings along a multitude of problems with it.

The PSU banks nevertheless are battling a different set of problems. Here are some interesting data points of the banking industry. Public sector banks (PSBs) have a share of about three-fourth of the business in the country. This is both in terms of advances as well as deposits. However, when it comes to share of the NPAs, PSBs have a larger share of 90%; clearly indicating their poor performance, a fact widely known to all.

As reported by the Business Standard, the average business per employee for the PSBs (average of 26 such banks) stands at about Rs 14.2 crores as compared to that of Rs 6.5 crores for private banks (average of 20 banks). However, when it comes to profit per employee, PSB data stands at Rs 3.93 crores as compared to Rs 7.6 crores for private banks.

The above data clearly shows the urgent need for bringing about changes in the way PSBs operate - the key theme of the recently concluded Gyan Sangam conference. Now, while banks have been given the promise (with a caveat of course) to operate with autonomy, there are many challenges that will come about. The article published by the business daily spoke about some of the changes that banks will have to make; which include addressing the issue of talent shortage, revising pay packages, changes in aggression and attitude of employees, and longer tenures of senior positions, amongst other. If banks do not bring about these changes soon, then the possibility of them losing share to the private sector way faster than expected cannot be ruled out.

Having said that, it must be noted that the strong reach and presence of the public sector banks across the country gives them a very strong advantage. The basic issue that needs to be addressed relates to the imprudent lending habits - mainly due to political and government pressures to lend to certain sectors/ companies. In this aspect, the need for banks to be more accountable is something that should be the key area of focus. If the government gets this aspect right, it would take care of a major share of the concerns surrounding this sector. And effectively give a boost to the valuations of PSBs too!

There have been a bunch of analysts and economists that have been forecasting popping of the US stock market bubble. And that too for a while now! With current valuations at levels way above long term averages, the claims of a bubble situation being prevalent in the US continue to make rounds yet again. While the curbing of cheap money - which has been the reason behind the asset bubbles - is one reason behind this argument, taking a fundamental approach to this also points towards the upsides being limited.

As reported by website - the S&P 500 is currently trading at 27.2 (based on Shiller's cyclically adjusted price earnings ratio) which is higher by about two-thirds than the historic average. 'On only three occasions since 1882 has it been higher - in 1929, 2000 and 2007' reports the website.

Whether this correction will happen anytime in 2015 is anyone's guess. It all depends on the measures the Fed takes to deal with matters. From what we have been reading, talks of QE4 have started to emerge. If that is the case, it would not be surprising to see the stock market to continue zooming up. However, with valuations way above comfort levels, it would be interesting to see how this plays out.

The alternate view here is that of Janus Capital's Bill Gross wherein he states that prices for many assets are expected to fall this year as the low interest rates have failed to restore economic growth in the US. As per him the 'good times are over' and by year end, many assets classes are likely to provide negative returns.

In the meanwhile, Indian stock markets were trading near yesterday's closing levels despite buying activity picking up post noon. At the time of writing, the benchmark BSE-Sensex was trading lower by about 30 points (-0.1%). Banking and metal stocks were least preferred while those from the oil & gas space were in demand. Most of the Asian stock markets were trading higher; majority of the European markets opened on a firm note.

 Today's investing mantra
"You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more. And if you can't write an intelligent answer to those questions, don't do it."- Warren Buffett

This edition of The 5 Minute WrapUp is authored by Jinesh Joshi and Devanshu Sampat.

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Equitymaster requests your view! Post a comment on "From 1996 to 2015: What hasn't changed at Equitymaster?". Click here!

3 Responses to "From 1996 to 2015: What hasn't changed at Equitymaster?"


Jan 17, 2015

I don't see any issues in investing when the Markets are rising unless the valuations are correct.
Infact recently I've started to follow the strategy of buy high and sell higher rather buy low and sell high as when a stock price falls we may never know at what price it will bottom out.
I really appreciate EquityMaster for giving Sell recommendations as booking profit on a timely manner is very important than to buying stocks.



Jan 8, 2015

I have found stocks in your Top5 reco to be investmentworthy though I don't fully agree with the price recommended for entry or exit.It is time you always give intrinsic price of the relevant stock in all recommendations,and stock recommended in Megatrend qualifies as a Top stock passing thro' your stiffer ERM filter .Even CRISIL gives fair value of a stock besides rating and I have found them correct


Ravi shah

Jan 7, 2015

The 5minut wrapup of today penned by Jinesh and Devanshu was quite informative and interesting reading.Ilook forward more of this kind.It is anytime better to be conservative in preserving capital rather than repenting latter on losing it.Pl keep the legacy of all three virtues namely honesty,transparency and being conservative.

Equitymaster requests your view! Post a comment on "From 1996 to 2015: What hasn't changed at Equitymaster?". Click here!
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