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Retirement planning – Risk and return

By Rohit Chauhan
In Investment process, Uncategorized
September 6, 2009
9 Min read
19 comments
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I do not plan to layout a template which can be followed step by step to plan for retirement. It would be difficult to do that as individual circumstances vary and so would the solution. My attempt in this post and the next would be to layout my thought process on various factors for retirement planning which can be used to think through and execute a plan.

Risk and return
The starting of risk and return should be risk and not returns. One should not start with a return target of x% and then work out the investment plan. On the contrary, it is important to look at your risk tolerance and how much time you would have to cover losses, if any.

Risk tolerance in turn is a difficult and subjective topic. What is risky for me, may be low risk for you. As a result, risk should be analyzed from a personal perspective. I personally do not follow the typical risk measures of beta and other such academic concepts.

I look at risk as doing something without the knowledge and experience to do it, especially where I do not have a clear view on how much I can lose in the worst case scenario. Lets explore that point further – Lets say I wish to invest for my family in such a way that they are able to get a return of 10-12% over 3-5 year period. It is easy to get around 8% through FDs and other such fixed income instruments. In order to get the extra 2-3% per annum, I need to look at equity to improve the returns.

My own personal experience and the last 10-25 yr data shows that the BSE index has returned between 12-15% per annum over the long term. However at the same time, this average return has been marked by 30% drops and 40% increases too. So in this case I can look at index funds as a possible option as I have a rough idea of the risk and return profile.

Now suppose someone suggests that I should invest in gold or real estate as these are good hedges against inflation. I would hesitate for multiple reasons

– I have never invested personally in these asset classes for investment purpose.
– There is lack of enough long term information and transparency in case of real estate (or atleast I do not have access to it)
– Gold has not provided good long term returns over the last 20 yrs. Now the next 10 yrs could be different and there seem to be a lot of pundits saying so, but I don’t have the data to validate it and hence would stay away from it.

In a nutshell, risk for me is a lack of understanding the investment option in terms of the long term return and the maximum possible loss under various scenarios.

Expected returns
The next aspect of investment planning is returns. Returns are closely tied with the level of knowledge and sophistication one can bring to the process of investing. Let’s look at some scenarios

The know nothing investor – you have no idea of investing and have never invested in the stock market. Your idea of a bull market is the bull or cow you may have seen in a local indian market J. A person who has no idea of even the basics of investing should look at investing in bank FDs and look at 7-8% returns. Such an individual when planning for retirement for self or for parents should not go beyond these FDs. There is however a risk for such an investor too. The risk is inflation. As the investor is barely earning 1-2 % above inflation (or even less), there is serious risk that the investor would not be able to support himself with the excess 1-2% returns over inflation. If the investor draws any more than 3% of the capital per annum for expenses, he or she will run out of money in due course of time

The beginner – you have some idea of investing. You have invested a little bit in mutual funds. You typically watch CNBC and think the anchors are dispensing good advise. Your idea of the stock market is that this place is like a casino where you can make it big or lose money big time. A person at this stage is at the highest risk of losing his or her capital. Half knowledge is always dangerous. A person at this stage needs to decide whether he is ready to invest the time to learn more about investing. If this person is not ready to invest the time and energy to do so, then the best option for such a person is to invest a small portion of his capital every month in a good index fund (via a systematic investment plan) and the rest in bank FDs. If the person is able to keep a 40-60 asset allocation (40% in equities), he or she can expect 10-11% returns over the long term.

The key issue for such an investor is that he or she needs to start saving and investing early in life and reduce the equity allocation to a max of 20% after retirement. I would not recommend an equity exposure (via index funds) of more than 20% of capital for anyone in this group who has crossed retirement.

The sophisticated investor – This kind of investor has been investing for the last 6-7 years. He or she has seen 1-2 bear market and has not been scared by it. He understands the risk involved in investing and has a fair amount of risk management skills. If you parents fall in this bucket, I doubt they would need your help.

If you are planning your own retirement and have 15-20 years to go, then you are in a good position. A 60-70% allocation in equities can be maintained. A 30-40% investment in stocks with the rest in good mutuals or index funds can be built via a systematic investment plan (investing a fixed amount of money each month).

This kind of investor needs to keep the long term in mind and should avoid a short term approach of performance chasing. The risk of losing capital for an extra 2-3% is fairly high and should be avoided. An investor in this group can expect around 13-15% return in the long run and if he or she starts an investment program early, should be able to retire very comfortably

The expert or the guru – This kind of investor has been investing for more than a decade. He or she has beaten the pants out of the market (in excess of 20%). If you parents are in this group, congratulations !!. They will take care of your retirement 🙂

If you fall in this group, I am not sure why you are reading this post. A person in this group has no reason to think or worry about his or her retirement. Any one who can compound money in excess of 20% can retire a very rich man ( for ex: such a person can convert 100000 to 40 lacs in 20 years). A person in this category can manage money for others and become seriously rich before his or her retirement.

Various instruments
In the above discussion I have discussed about fixed income instruments and equities. You would have noticed a lack of discussion about other assets such as real estate, gold, commodities, options etc. Let me share some thoughts on the various asset classes below

fixed income : One can expect returns in the range of 6-8% and low risk. Typical options are bank FDs, Post office deposits and debt mutual funds. All these options are low to very moderate risk and good for the first two group of investors (the know nothing and the beginner)

Equities : One can expect returns in the range of 12-14 %. Typical options are index funds and mutual funds. This option has moderate to high risk and should be handled with care. A beginner should look at only index funds or some good mutual funds. A sophisticated investor can look at stocks as long as he or she knows what they are doing. A lot of investors and financial planners would like to assume that equities can returns in excess of 20%. However the indian markets over the last 15-20 yrs (a typical retirement planning horizon) have returned around 13-14% and I would not like to assume anything more than that when planning for retirement.

Real estate : This asset class has become a hot favorite in the last few years. However the long term history of real estate across the world and across time horizons is that the returns from this asset class are 1-2% lower than equity. If you are beginner or a know nothing investor, I would really not look at putting money in real estate (other than for primary residence). This is an illiquid asset class with lack of transparency in india. If you are a sophisticated investor, then it may be possible to get a fair return, but then one has to be ready to spend the required time managing it too. I have written about real estate here in the past

Gold, commodities, and options – I have clubbed all these options on purpose. If you are a know nothing or beginner, I would stay away from these assets as far as possible. In these categories I will buy gold when I am buying jewelry for my wife and commodities when I need sugar or wheat for my kitchen :). The only group which should invest in these assets should be the experts. I would even say that sophisticated investors should not look at these assets for long term investing. If you need an ego boost, invest a little bit for fun, but If you are not an expert, you can get you’re a** kicked big time in the market.

If the above post has not put you to sleep already, then the next one will surely do it 🙂 I plan to cover the following topics – asset allocation, admin tasks, portfolio rebalancing and finally putting it all together

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Retirement planning – I

By Rohit Chauhan
In Investment process, Uncategorized
August 31, 2009
4 Min read
17 comments
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I recently received an email from anirudha asking my suggestions on retirement planning for his parents. The timing of his question is good as I have been working on this topic for the last few weeks for my family.

I will try to detail out my thoughts on the above topic in a series of posts. This is however my own idiosyncratic way of doing it. It may make sense for some of you to approach a licensed financial advisor (if they exist in India!) for advice.

Before I discuss about the above topic, let us look at the above issue by inverting the problem. We need to identify what we should absolutely not do when planning for retirement – especially for our parents

1. Chasing returns: Repeat after me – I will not put my parent’s or family’s funds at risk in pursuit of returns. Please read this a few times and memorize the statement. I cannot stress this enough. It would be completely stupid and irresponsible to chase an investment idea for extra returns with your parent’s money when they are depending on this capital to support themselves for the rest of their lives

2. Due diligence – Do not put your family’s money in any instrument without complete due diligence. This includes the obnoxious ULIP schemes sold by most banks and guaranteed return policy sold by friendly insurance agents to unsuspecting seniors. The agents in question are not targeting your parents out of malice. Most of them have good intentions, it’s just that they do not fully understand the product they are selling. So please avoid all such agents unless you are sure you are buying something worth it.

3. Be realistic – Do not assume returns in excess of 10-12% for a conservative, low risk portfolio. Even if you have made 30% returns in the past and consider yourself a finance whiz kid, please hold your horses and spare your folks of your brilliance. If this performance turns out to be a fluke or you hit a bad patch, they will suffer and you will carry the guilt (which is a horrible feeling)

4. Face the facts – If your parents have unfortunately not been able to save enough for their retirement, do not target higher returns to cover for it. It could mean tough decisions for you and your parents in terms of lower standard of living (though assured) or help from you to maintain their current living standards.

5. Paper work and admin – Do not develop an intricate investment portfolio where your parents have to spend half their time filing documents, visiting banks and other such administrative tasks. I have done this in the past and made it difficult for my family.

6. Teach – Do not keep them in the dark about where their money is being invested. Teach or atleast educate your parents about the investment options you are selecting for them. Do not make it mumbo jumbo for them – When the market hits the top and retracts 5%, I will sell 6% and move to cash! Keep it simple and understandable. It will also ensure that you will pick some sensible options for them.

I will cover the following topics and more in the subsequent posts

Risk and return planning
asset allocation
Administrative tasks
Portfolio rebalancing and tracking

The subsequent posts will not be a how to guide which you would be able to use to pick the right investments and build a portfolio. I will only discuss my thought process on the above topics. In order to execute it, you may have to work on it yourself or find an honest advisor.

Final point: If you are completely new and have no clue where to invest for your parents, please invest the entire capital with a safe bank till you have figured it out with your own money. The last thing you want to do is to have your parents pay the cost of your learning how to invest (after spending all the money raising you 🙂 )

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Tracking sheet

By Rohit Chauhan
In Uncategorized
August 27, 2009
2 Min read
10 comments
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I was recently asked to for a copy of the tracking sheet I mentioned in an earlier post. I have uploaded it in the google groups (see here). It is a very simple tracking sheet with intrinsic value for each stock noted in the sheet to prevent me from focussing too much on the current price or cost.



A few key points on how I use the tracking sheet
– I regularly compare the current price with my estimate of intrinsic value (column B). If the discount (column F) is 30% or more and I have confident about the company, I will add to the holding. Conversly if the stock sells above the intrinsic value, I will start selling.
– I tend to check the quarterly and annual reports to see if there are any reasons for me to update the intrinsic value of the company (for better or worse).
– My focus is to ensure that current value of the portfolio (B19) is at a discount of 30% or higher from the total intrinsic value (B18). This ensures that I am selling overvalued stocks and looking for or buying undervalued ideas. The idea is to ensure that the portfolio does well and there is an upside in the form of undervaluation.
– I also have dividend for each stock on the spreadsheet. I am not too focussed on it, though I like to track the value for each stock and for the portfolio as a whole.

I use the above spreadsheet to drive my buy/ sell or hold decisions and to anchor my thinking to the intrinsic value, rather than the cost or current price. As you can see, there is nothing fancy about the spreadsheet, its as dumb as it can get.

Disclaimer : Please do not read too much into the stocks listed on the spreadsheet. The above list may not be a true representation of my current holdings.

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Performance

By Rohit Chauhan
In Uncategorized
August 21, 2009
3 Min read
7 comments
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There is one key point missing in this blog – My portfolio details and performance. The omission is by design and there are several reasons behind it.

I have written in the past on my reluctance on sharing my portfolio in detail, especially the performance. I have disclosed my portfolio in the past (see here) and it has more or less remain unchanged since then.

There are several reasons for not sharing my performance. The key reason for not sharing the performance, is that a public display would put pressure on me and would in turn impact my investing decisions. Investing is tough enough and I don’t want to make it any more tough for me.

The second reason for not displaying the performance is that I want the readers to follow my posts based on the strength of the ideas I present and not the performance of my portfolio. The soundness of idea – sensible and rational value investing – does not change based on whether I perform well or badly as an investor. There are some investors who are far superior to me in performance and practise a similar approach. The performance of these investors is a reflection of their superior skills.

In addition to the above reason, I can choose to put any numbers as there is no independent audit of these numbers. I do not want to create a situation where the readers are always wondering whether the numbers on the blog are real or imagonary.

As you can see in the sidebar, I also publish my posts on moneyvidya.com. This association is non financial and i was contacted by the moneyvidya team in past to be a member of their core blogger team. I have posted my stock ideas on the website in the past few months and thought of sharing a snapshot of the portfolio performance.


A few caveats before you read too much into it.

– The above stocks do not represent my portfolio. They represent a few of my ideas which I decided to post on the website.
– The above is an equal wieghted portfolio of the picks which is not the case in my personal portfolio.
– The portfolio performance may not be a true reflection of my personal portflio in future as I do not have idea of how to take a stock off this model portfolio when I decide to sell it (maybe the moneyvidya team will clarify that for me)

So why publish this portfolio
A few key points stand out.

This dummy ( pun intended 🙂 ) portfolio has been in the top 10% for the last 10 months ( I don’t know how that is calculated though by the moneyvidya team). This in a way shows the validity of picking good stocks and holding on to them.

This dummy portfolio has beaten the index by around 20% during this period. This period is too short to reach a conclusion, but is interesting as typical value investors generally under perform bull market and out perform bear markets.

Finally, not matter what I try to claim, there is a certain amount of bragging involved too. The reason why the last few months have been more satisfying, is that I have been able to follow my convictions, ignore the doomsday predicitions and commit my personal capital to my ideas. That is more satisfying than the gains themselves. I expect this approach to work in the long term irrespective of short term market fluctuations.

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When to sell ?

By Rohit Chauhan
In Uncategorized
August 18, 2009
5 Min read
11 comments
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I recently received a comment from rajiv which is reproduced below

Rohit,
As a stock moves towards its intrinsic value, there is a temptation to exit a little before the final value is hit, especially if you have waited a long time for Mr. Market to come around.
I feel that as a value investor the sell decision is much tougher than the buy decision, because the buy decision usually comes with a big enough margin of safety. However, during the sale decision the market value may be stuck at Intrinsic Value minus 10%, making the investor quite jittery to sell.

I have been asked this question in a several different ways, but all essentially boil down to the point – when should one sell a stock ?

I agree with the point made by rajiv and several other readers – selling is more diffcult than buying. In addition, there is no clear cut formulae for selling. The process of selling is made even more diffcult by the various emotional and psychological factors involved in selling.

Emotional factors
Most the discussions and articles on investing rarely discuss emotions explicitly. I find that strange as anyone who has ever invested in the market can vouch for the emotional roller coaster. The rational aspect of selling is easy for a long term investor – sell when price crosses intrinsic value (or 10% below or above – take your pick of the number)

I have written on the above question earlier – see here. The is the rational way of deciding on when to sell.

Now this suggestion may have sounded irritating to some of you and rightly so. The reason this advice, though rational, does not sound great is due to the emotions involved in selling.

There are two situations in which one is selling – one has made great gains in the stock and wants to capture some of the gains. Selling at this point is driven by the fear of losing the gain, which is counterbalanced by the desire to hold on to a stock which has treated you well and also by the doubt that there may be more upside to it.

The other situation in which one sells a stock is when one has lost money on the stock and wants to get rid of that piece of !!@##. In this situation the decision is driven by disgust.

These emotions are quite powerful and not easy to manage

Ok, dude then what?
All these emotions are nothing new, right ? Even if you have felt these emotions earlier, it does not mean that you are managing them well.

A few of the readers and my friends have mentioned to me that I seem rational and cool headed. I wish !!. I am no different, atleast in most aspects. In case of investing, I have tried to manage my emotions as much as I can (manage and not master).

I maintain a spreadsheet of all my holding with the qty, intrinsic value estimate, current price and discount to the current price. At any point of time, when I am looking at my holding, I am looking at the instrinsic value and the discount to it. I ‘anchor’ myself to the instrinsic value. As a result if the stock is selling below the intrinsic value, I will continue to hold.

As the intrinsic value of the stock gets updated every quarter, I am not tied to a fixed value. If the business performs well, the intrinsic value goes up and so does the sell target. If the company performs badly, then the reverse happens.

So is this buy and hold ?
Buy and hold is most abused and misunderstood term (more on that in another post). My approach is not buy and hold, tops and bottom or any other term or title. The logic is simple – buy when something sells for less than intrinsic value, hold till it is below intrinsic value and sell when it is above it. Now if the intrinsic value grows faster than the price, I will continue to hold.

Where’s the catch ?
The catch is in getting the fundamentals and intrinsic value estimate wrong. If you get that wrong and refuse to change your opinion, then you are toast.

But you lose money when the market drops !!
Yes, that does happen. If the market drops, my portfolio will drop with the market. I have yet to figure out how to keep jumping in and out of stocks and still keep my sanity. There is so much chatter and noise in the market, that it is easy to go nuts. My way of keeping my sanity intact, has been to adopt the above approach.

Is this the best way ? no I will not claim that. However as I have a day job, I would rather lose a percentage points, than lose my job and maybe my sanity. Finally, I have yet to find another approach which relies on a sensible and consistent logic and not on the opinion of others.

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Johnson & Johnson – part II

By Rohit Chauhan
In Investment ideas, Uncategorized
August 11, 2009
4 Min read
17 comments
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Part II of the analysis

Competitive analysis
The main competitors for the company are the other big pharma companies and the generic firms such as Ranbaxy, Sun etc. We can apply Michael porter’s five factor model to evaluate the company
Barrier to entry – All the segments of the company enjoy substantial entry barriers. The pharma and medical devices have formidable barriers in the form of patents and sales and marketing network. In addition any new drug or device requires substantial R&D expenses and infrastructure. The consumer segment has barriers in the form of Brands and distribution network
Supplier power – Moderate to low in this industry. Suppliers are mainly providers of basic chemicals or contract manufacturers. The value is derived from the IPR of the drug and not from the manufacturing.
Buyer power – Low in consumer goods. However in case of Pharma and the devices segments, national programs such as Medicare have a strong leverage and with escalating cost will attempt to drive down prices.
Substitute product – none
Rivalry – There is intense rivalry in the industry from other pharma majors who are attempting to develop a similar drug and especially from the generics where the price and profits drop by as much as 90% over the course of a few years as soon as the drug comes off a patent. In addition, the generic companies are constantly trying to challenge the patents too.

Management quality checklist
– Management compensation: The company has almost 215 Million outstanding options which would result in 2% dilution. The options do not appear to be excessive.
– Capital allocation record: Fairly good. The management has maintained an ROE in excess of 25%, low debt and a dividend payout of almost 40%. In addition, the management has been engaged in acquiring other pharma companies to pull gaps in its drug pipeline and added to it too.
– Shareholder communication: The shareholder disclosure is good with clear explanation of the benefits assumptions and IP R&D (in process R&D) calculations from the acquisitions.
– Accounting practice: The overall accounting seems to be conservative. However there are some areas of concern. For example – the company has assumed long term returns on plan assets of 9%. I think that is aggressive and could result in additional charges over the years. The IP R&D (in process R&D) charges do not appear to be excessive.

Valuation
The company has approximately 12 Bn of cash flow and is selling at around 13 times earnings. The company has shown a profit growth of almost 15% per annum with high degree of consistency. At the same time the company has maintained a high level of ROE during this period too. One cannot assume such a high level of profit growth in the future as some part of this has come from the increase in net margins. However with a conservative assumption of 6-7% growth, discount rate of 8% and CAP period of 10 yrs, intrinsic value can be estimated to be between 80-85 (PE of around 20).

The current valuation assumes a growth of 0 or worse and gives no value to the competitive advantage of the company. The company is currently selling at a 5 year low and appears to undervalued by comparative and absolute standards.

Conclusion
The company has performed well in the past in terms of fundamental performance. The sales and profits have grown at a double digit rate. In addition the company has a healthy drug pipeline at various stages of approval which could help in replacing the blockbuster drugs going off patent. The medical devices and consumer division provide stability to the earnings and help in reducing the risks of the pharma division.
The management has been a rational allocator of capital which is visible via the high dividend payout, above average ROE and sensible acquisitions. The company appears 20-30% undervalued compared to the intrinsic value which in turn can be expected to grow at 7-10% in the future.

A new addition: I have created a pdf version of the analysis. Please feel free to download and share with others

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Investment idea – Johnson & Johnson (JNJ)

By Rohit Chauhan
In Investment ideas, Uncategorized
August 7, 2009
5 Min read
8 comments
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About
Johnson and Johnson (JNJ) is a US based pharma and healthcare company. The company has three primary business segments – consumer products, pharmaceuticals and medical devices.

The company had a revenue of 63 billion USD in 2008. The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products. The Pharmaceutical segment includes products in the following therapeutic areas: anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal,hematology, immunology, neurology, oncology etc . The Medical Devices and Diagnostics segment includes a broad range of products such as Cordis’ circulatory disease management products; DePuy’s orthopaedic products; Ethicon’s surgical care products ; Ortho-Clinical Diagnostics’ professional diagnostic products and Vistakon’s disposable contact lenses.

The company operates globaly in a predominantly decentralised structure with over 118000 employees.

Financials
The consumer segment had a global sale of 16 Billion in 2008 with a 10.8% growth. The company also acquired the consumer healthcare business of pfizer in 2007. The consumer segment had an operating profit of 16.7%, an increase of 1% over 2007.

The pharma segment had a sale of 24.6 billion in 2008, a decrease of around 1.2% over 2007. This business saw an increase in operating profit from 26.3% to 31% mainly due to writedowns in 2007.

The medical devices segment had sales of 23.1 billion with an increase of 6.4% over 2007. The operating profit increased from 22.3% to 31.2% in 2008 partly due to some litigation settlements in 2008 and some restructuring charges in 2007.

The company has maintained a high level of R&D investment (around 10% of sales or higher) during this period. This efficiency of this investment is evident from the drug pipeline of the company which consists of around 18 drugs filed or approved and almost 25 in the stage III trails.

On an aggregate basis, the company has has a very steady performance in the last 10 years and more. The ROE has ranged between 26-30% during this period. This improvement has been driven by an improvement in net margins from around 15% to 20%. The various asset ratios such as working capital turns has improved from low teens to around 30. The fixed asset turns has improved during this period too.

The company has maintained a healthy cash flow during this period and has had a dividend payout of almost 40% during this period. The balance cash has been used to pay off the small amounts of debt, invest in assets and make targeted accquisitions.The company is a zero (net basis) debt company and has a cash flow rate in excess of 10 billion per annum.

Positives
JNJ has several key positives as a business and over other pharma companies
– The company derieves around 30-32% of its revenue and around 40-45% of operating profits from the pharma business segment. Although the company faces the risk of its top performing drugs going off patent, the company has a healthy pipeline to manage this risk
– The company has a medical devices division which does not face the generic or patent risk of the pharma division and is fairly profitable.
– The company has a consumer products division with strong brands and an extensive distribution network which act as a hedge to the other segments.
– The company has a deep moat in all its business segments and sustaniable competitive advantage.
– The company has a decentralised operating structure with 250 operating companies across 57 countries across the the globe.
– The company has strong balance sheet and consistent cash flows. The net profit and cash flow has grown at around 16% per annum for the last 10 years. In addition the company has improved its ROE and other asset rations

Risks
The company faces the following key risks
– Several key pharma brands (in excess of 1 bn sales) such as risperdal and Topamax have lost patent protection in the recent and will face drop in sales and profits due to generics. Success of new drugs is not a given and only a few drugs in the pipeline may replace these blockbusters. In addition, there may be short to medium term dip before the new drugs replace the loss in sales.
– The global slowdown is likely to impact the topline and bottom line growth for the next 2-3 years
– The US market accounts for almost 14 bn in sales for the pharma division and 10Bn in sales for the medical devices division. Although I have not been able to find the numbers. the profitability of these divisions in the US is fairly high. This may be at risk due to the health care reforms in the US.
– The recession in the developed markets which account for major part of the sales and profit could keep the topline and bottom line subdued for the next few years.
– The company faces litigation risks related to product marketing, pricing, product side effects and patent issues. These risks are detailed over 3 pages of the annual report and are not easily quantifiable. The company has accrued liabilities against these risk and has stated that these risks in aggregate will not have a material effect on the financials.

next post : competitive analysis, management quality, valuation and conclusion

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Results review – LMW, Ashok leyland and Hinduja global

By Rohit Chauhan
In Investment ideas, Uncategorized
August 2, 2009
4 Min read
30 comments
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Lakshmi machine works
I have written on LMW earlier here. The domestic and export demand for the company has collapsed since then. The company is now running at 40% of its capacity. The company reported a 60% drop in topline and 76% drop in profits. Time to panic and sell the stock ? Not quite.

The market was pricing much worse earlier. For a period of few months, the company sold for almost its cash holdings without any value being given to any other assets.Now that the market has realised that the company is not headed for extinction, it has revalued the company to a certain extent.

At the same time, I do not have any illusions that the fundamentals of the company will suddenly turn completely. The company is in for some tough times till the demand returns back to the pre-crisis levels and accordingly the profit peak achieved over the last few years could take some time too.

However if one looks at the annual report, one can see that the company is doing a great job of managing the downturn. The company does not require much capex and has reduced the working capital too. The cash and equivalents are now up at almost 700 crs which comes to around 60% of the market. I personally don’t think the company is going bankrupt and hence plan to hold on.

Ashok leyland
I have written about the company earlier here and here. The company reported an almost 50% drop in sales and 80%+ drop in profits ( I like companies whose sales are dropping off the cliff 🙂 ).

If you are interested in the company, I would encourage you to see the latest presentation by the company here. The company has taken pains to detail out the problems and how they are coping with the recession.

Ashok leyland has also been hit severly by the downturn and credit crunch. Although the demand is now stabilizing, the current quarter and maybe the next will continue to be hit due to inventory liquidation. The company books sales when it sells to the dealers. The slowdown in the demand has resulted in high inventory with the dealers which needs to be worked out. The only worrying factor in the results is the loss of market shares in HCV, especially in the mid segment.

The company’s results will continue to be hit for atleast a few quarters due to the slowdown and due to the depreciation cost of the capex which was put in place for the expected demand last year. As in LMW, I don’t think the company is going bankrupt and hence plan to hold on. At the same time Ashok leyland is not as cheap as LMW

Hinduja global
I have written on Hinduja global earlier (see here and here). My main concern was the high cash holding of the company which is being maintained in foreign sub. The company has since then tried to clarify the above fact (details of the cash holding are provided in the last quarter’s result).

In addition the company came out with a higher dividend and fairly good results in Mar 2009. As a result the stock has almost doubled since then. In the current quarter, the company reported a topline growth of 30% and bottom line growth of almost 80%. The company continues to perform well. My hesitation in building a large position still continue to be the corporate governance issues, even though the company is cheap by objective standards.

Gujarat gas
I have written on gujarat gas earlier (see here ). The company reported Q2 numbers and i am fairly satisfied with the numbers. The company has been facing a supply issue due to lower level of supplies from two long term sources.

The Q1 results were hit considerably due to the above shortage. The company has been able to secure some supply in the spot market to meet some of the demand. The topline grew by around 10%, though the volume dropped by around 5% during the same period.The bottom line grew by more than 10% if one eliminates the one time gain in last year’s result.

The company is doing quite well and I expect the profit growth to improve once additional sources of supply are tied up. Finally, the company has declared a 1:1 bonus issue. This does not change anything fundamentally other than higher dividends in the future. However the market has reacted positively and pushed up the stock price.

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What did the bear market teach you ?

By Rohit Chauhan
In Investment ideas, Uncategorized
July 29, 2009
3 Min read
31 comments
W

Lets go over what the typical investor was thinking over the last 18 months, from the peak to the current recovery phase.

Jan 2008 – Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!

March 2008 – I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more

Aug 2008 – The market is climbing again!! the bear market is over.

Nov 2008 – What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling

Feb 2008 – This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that

April 2008 – The market has risen a bit, but I am not worried. The market will drop once the election results are announced

May 2008 – The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait

Jun 2008 – let me wait for the market to drop

July 2008 – Let me wait for the market to drop

….and the mental circus continues

I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like

– The market is a casino and one has to be able to predict the market in advance to make money
– I should take more risk and should trade more frantically to make money
– One needs to be glued to the TV to make money
– All the losses are not my fault, though the gains were due to my brilliance

I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past

– There is only one person to blame for your losses – you
– There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
– Prepare in advance – I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
– Stop listening to markets forecast and silly predictions. They will cost you money in the long run
– Learn continuously. You may make money by luck in the stock market, but will not keep it.
– Stop looking backwards – I should have or would have done this, is not relevant. The question is – knowing what I know now, what do I plan to do?

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Quarterly results review – VST india, Novartis, Concor

By Rohit Chauhan
In Investment ideas, Uncategorized
July 20, 2009
2 Min read
9 comments
Q

VST
I wrote about VST a month back and got it perfectly wrong. The company has come out with a 60%+ topline growth and doubling of bottom line. I have not been find more details on the results, but need to figure out how the company has been able to increase topline so rapidly in a business with such a low growth.

Container corporation
The company reported a 10% topline growth and a flat bottom line. The bottom line is flat due to the 20% rise in the rail expenses. Although I don’t have the exact details, the rail charge hikes cannot be passed on the customers immediately and there is a lag in getting the price increase.
The overall results are good in view of the slowdown in the exim markets. Concor has been a long term holding for me and is a very profitable logistics company with a cash rich balance sheet, attractive margins and substantial competitive advantage.

Novartis
I wrote on Novartis earlier here. I have not completely exited the stock as I felt the buyback price was too low. The company has been able to increase the holding to 76.4% now. The company increased the topline by 7% and bottom line by around the same amount.
The performance is nothing out of the ordinary. The stock continues to be undervalued and will most likely remain so. The only upside is a possible buyback and delisting by the parent. However as there is no fixed timetable, it may not make sense to hold the stock for the long term. In my case, I will exit my position when I can find a better idea.

So how is your portfolio doing ?
I often get this question by email. The short answer is – as expected (around 10% in excess of the index returns). I started buying last year from march and went all in by Q4 of 2008. I have not been very active since the beginning of the year due to various reasons ranging from shortage of cash to lack of time.

I have been lucky that my wins generally end up more than compensating for my goof-ups. It is however difficult to know beforehand which idea would be a winner or a clunker. In the final analysis, though it is the portfolio performance rather than individual stock performance, which matters more.

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