CategoryGeneral thoughts

2013 market predictions

By Rohit Chauhan
In General thoughts, Uncategorized
November 22, 2012
3 Min read
24 comments
2

We are approaching the year end and soon the experts will start coming out with their predictions for next year. As there is a lot of competition to be the first one, I decided to get ahead in the line by kicking it off in November itself

So here goes
1.    Barring any macro-economic shocks and if sensex earnings exceed 15%, the stock market should be up next year. If however we have a crisis in Europe or we get an oil shock then the index could even touch 10000 levels.

2.    Gold could be up by 10%, if we get a major recession in US due to the fiscal cliff and it could surprise us on the upside if it coincides with the further instability in Greece and Spain. Over the long term, the macro-economic and supply-demand drivers point to a continued increase in gold prices.

3.    Capital good stocks in India could surprise on the upside if the current momentum on the reforms continue. One needs to focus on high quality names in the sector

4.    The consumption story continues to play out and high quality names should outperform the market in 2013, barring any sudden depreciation of the rupee. Demand from consumption centers, such as India and China largely seem to be on a firm footing

5.    The real estate market will continue to face headwinds of high interest rates in the initial part of the year, but if  RBI starts cutting rates in the second half, we could see higher activity in certain pockets of the market

6.    Rohit Chauhan will become the smartest and richest investor in the Indian stock markets.  President Obama and other world leaders will seek his counsel on how to fix the developed economies J

Did I get you? Do you realize how absurd these predictions are?
There is a consistent pattern in all these predictions. They are not predicting anything and are simply stating that a market will go up if all conditions are right, otherwise it will go down (if the conditions go bad). This is similar to what you would hear from an astrologer if you were to ask him about your future.
One more point – I did not make up all these predictions. I just googled some sites and cut and paste what I found for 2012 (yes for the current year !!).
If you really feel the urge to get some predictions for 2013 on the cheap, please email me and send me 10 Rs. I know a guy on the street with a parrot, who for 10 bucks , will ask his bird to pick a card and will use the card to tell you the future. The parrot is a better fortune teller (50% accuracy), is crisp and short (no beating round the bush) and much cheaper.
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If facts change, do you change your mind?

By Rohit Chauhan
In behavioral finance, General thoughts, Uncategorized
July 19, 2012
3 Min read
12 comments
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I have often ‘preached’ on this blog – when facts change, one should consider them rationally and change one’s mind if required. Well, as always, it is easier to preach than practice.

Let me tell you a recent story.
I spoke very briefly about a company in this post. The company was Ricoh (I) ltd. You can download my detailed analysis of the company here.
So after doing this detailed analysis in late 2010, I built a decent position at an average price of around 35-37 Rs/ share.  The company continued to perform poorly (as I expected) as it had done an acquisition and was also investing heavily into sales and marketing.
The topline grew by 40%, but the net profit dropped from around 15 Crs to a loss of 5 Crs in 2012. The price continued to stagnate in the range of 37-40 rs during this period.

I have been consolidating my portfolio and weeding out the weaker ideas for the last 2 years. As a result, I exited Ricoh in the feb-march time frame. I think it was a rational thing to do based on the information I had as of March 2012.
The change
The company declared the Q4 2011 results in April and reported the following

Q4 sales growth, YOY – 60%
Net profit growth, YOY – 73% (12 Crs profit in Q4 versus 11 crs loss in Q3)

The price action can be seen below

As you can see, the market did not react immediately to the turnaround in the performance and there was a 1-2 month window for an intelligent investor to digest this information and purchase the stock.
So that proves my level of intelligence J

The explanation
It is easy to call the decision, stupid and move on. The true reason for my failure to capitalize on the change in performance (which I was expecting) is due to a behavioral bias.

The bias is called the commitment and consistency bias. In simple words, once one makes a decision, the tendency is to ‘commit’ to the decision and be consistent with it. This results in ignoring positive information as in the above case or holding on to a losing position (inspite of consistent negative news) and hoping that the price will rise in the future.

Not a one off case
The above incident was not a one off in my case. I have made the same mistake twice earlier – in the case of VST industries and Mayur uniquoters. I sold the stocks and then saw the fundamental performance improve, after the sale. Instead to getting back into the stocks (as I already knew about the companies), I just ignored them and lost out on pretty decent gains.

I have become alert to this bias now and am paying more attention to sudden turning points in the performance of the stocks I hold or have held in the past.

It is better to look foolish (in my own eyes), than miss out on a good idea

Added note – The above example does not mean Ricoh India is a good buy and should be purchased at the current price. It is quite possible that the performance may regress and so would the stock price. The example is only for illustrative purposes.

Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please read disclaimer towards the end of blog.

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A speculative bet

By Rohit Chauhan
In General thoughts, Uncategorized
July 5, 2012
4 Min read
7 comments
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An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative – Benjamin graham, father of modern security analysis and value investing.
Some background
I had written about globus spirits earlier – read here. The stock price has since dropped by around 10% versus the index,  which has  essentially been flat during this period.

So what happened during this period ? Well, the company declared the Q4 results and the market reacted negatively to the drop in operating margins from around 16.8% to around 13%. The company closed the year with a 40% growth in topline and a measly growth of 2.5% in net profits.
This drop in net margins was mainly due to an expansion in the capacity to 84Mn litres and additional new capacity of 40 Mn litres which should come online in the middle of next year. This additional capacity has caused an increase in manufacturing expenses (initial startup costs) and higher interest expenses (due to higher debt to add the capacity). These costs in combination have depressed the operating margins.
So what is my bet ?
I think that the drop in the operating margins is temporary due to the new capacity which is being added in the current and next year. As the new plant stabilizes, the extra costs should reduce and with the extra topline , we should see an  improvement in the margins.
In addition, a decent portion of the additional capacity has been booked by USL for the franchise IMFL bottling (outsourced production)  which should help in boosting the bottom line. The management is targeting a 15% operating margin for the next year.
The management has also indicated that they would be able to grow the topline by 20% or more in 2013 (which appears doable based on past results). If we put all of this together, the company should be able to increase the operating profits from around 73 crs to 100 Crs, with net profits in excess of 55 crs in 2013 (interest costs should also reduce due to a planned reduction in debt)
The company is current selling for around 5 times the current year’s depressed earnings of around 40 crs. The company is thus selling at historically low valuation too (past valuations have generally been in excess of 7-8 times earnings).
In addition, all the other companies in the sector sell for 10+ times earnings, inspite of having much lower ROE and higher debts.
So why is it speculative?
Have I built a good case that the company is really undervalued – from absolute, historical and comparative valuation perspective?  I think I have done that.  At the same time I am still calling it speculative …why is that ?
Please look at the definition in the beginning of the post – An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.
The key word in the above definition for our example is promise.  I am not confident about the above analysis and think it is a 50-50 proposition. I am still concerned that the industry has extremely poor economics and it is generally quite difficult for a single company to buck the trend of an entire industry.
Speculation is subjective
The key point is that  a stock can be both a  speculation or an investment at the same time and that depends on the investor himself. If you know what you are doing, then it is an investment, otherwise it is a speculation.
The danger is not speculating, but in confusing a speculation as an investment and betting heavily on it.
I am personally not very sure if the above thesis will play out and hence have committed a very small amount of money to it. In effect, this position is just to scratch an itch and not meaningful. If it turns out well, I will brag about it on the blog, otherwise you will not hear a peep on it 🙂

Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please read disclaimer towards the end of blog.

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The return of the stock picker

By Rohit Chauhan
In General thoughts, Uncategorized
June 24, 2012
5 Min read
13 comments
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The period from 2008 to 2012 has been a nightmare, right? How could it not be?
The market went from 20500 to around 17000 levels. That’s a loss of 18% in nominal terms, and if one considers an inflation of around 8%, then the loss is a mind numbing 42%. So if one had complete foresight and could see the future, then 100000 invested in a bank deposit would be worth 144000 versus around 82000 in the stock market.
So where is the debate in this?
The time of the stock picker
I know of several fellow investors who have actually done quite well during this period. They may have lost money on a few ideas here and there and suffered through temporary drops during the market swoons in 2008-2009. However over the course of these 4+ years, most of these investors have soundly beaten the market and delivered double digit annual returns
So how have these guys achieved this feat ? Do they have a special diet or drink something special 🙂 ? I don’t think so as far as I know
What has enabled these returns
I would say that there two reasons for the above result. All these investors who have done well, have a long term view of investing and don’t invest with one week or one month in mind. In most cases, they invest after a thorough analysis of the underlying business and only when the market undervalues the business.
A disregard for short term performance, usually results in a long term outperformance.
The second reason I would say is that all these investors are focused and work hard at finding good ideas and then purchasing the stocks, inspite of all the negative news around them.
It helps to be emotionally stable as far as the stock market is concerned. One need not be like Mr Spock from star-trek, but as long as you can avoid extreme greed or fear, you will do fine.
Hard work and focus
This is one of the most under-rated factors in being a successful investor. I am pretty sure most of us were told as young kids, that the way one can be successful in life is by working hard and being diligent about it.
This simple lesson which we apply to almost every other walk of life, is conveniently forgotten by a lot of people, once they enter the stock market. It almost as if, investors collectively expect a Santa Claus to give us returns just for putting up some money in the stock market.
I cannot think of any successful investor who has succeeded without a lot of effort and focus.
Enjoying the process
At the same time effort and focus is not enough to succeed in the long run, if you do not enjoy the process of investing. There are long periods of time when you will not make a meaningful return and all the effort would be seem to be in vain.
I personally went through this phase quite early in my life as an investor. The period 2000-2003 was one mind numbing and grinding bear market when the index went from 6000 levels to 3000 levels over a period of three years. It was no different from what we are experiencing now. Companies like L&T, concor, BHEL sold at 5 times earnings.
The only reason I was able to keep learning and keep going was due my passion for investing. A single digit return on a few lac of rupees is not even minimum wage …why else would any sane person keep working hard for less than minimum wage 🙂
Everyone can do it
The secret to being a successful investor is that there is no secret at all. Inspite of the nonsense propagated by media, that the common man should leave investing to professionals, I think anyone can become a good investor.
The most important factor to be a good investor is to really enjoy the process of investing. If one loves the process, he or she will find the means to continuously learn and improve as an investor.  The returns usually come in time, if one is patient.
The return of the stock pickers
The period 2003-2008 was a big tidal wave. All one had to do was to point his or her boat in the right direction (real estate or infrastructure ?) and the wave carried you through.
The  investors who have done well in the past few years are most likely the ones who enjoy the process (and ofcourse want to make money too) and are continuously learning and getting better at it. The last 4+ years have been a time of stock picking and hard work. If you looked for good ideas and operated with an independent mind, the results have been quite good.
Let me make prediction – I am close to 100% sure on this. Once the next bull run starts (it looks unlikely , but will happen in time), you will find a lot of new investors who will boast of their investing prowess and will think that making money in the stock market is easy and effortless.
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Evaluating the impact of rupee depreciation

By Rohit Chauhan
In General thoughts, Uncategorized
May 30, 2012
4 Min read
6 comments
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The 22% drop in the rupee against the dollar is worrying to say the least. There are several ramifications for the Indian economy, if the slide continues.  Anything which impacts the economy, is bound to impact the stock market as a whole.
One can find a dizzying array of macro-economic analysis on the impact of the rupee depreciation and as many forecasts of the future levels of the exchange rate.
I personally consider macro-economic analysis too complex due to the huge number of variables involved in it and hence any analysis from my end is as good as yours. Instead I have been trying to evaluate how the rupee depreciation will impact my portfolio on an individual stocks basis.
I think there are three factors through which the fundamental performance  can get impacted
Factor 1: Level of Raw material / capital good import
What is the level of raw material / capital goods imported by the company?. If the company imports a substantial amount of raw material/ capital goods then it is likely to get impacted severely, if it cannot pass on the costs to the end user without impacting the volumes
Factor 2: Level of export
What is the level of export sales in the revenue of the company. A high level of export will benefit the company, if the company can maintain or improve its margins as a result of the rupee depreciation.
Factor 3: Level of foreign debt
What percentage of debt is ECB (external commercial borrowings) or FCCB? There are two key points to note here – What is the maturity schedule (payment timing) and the level of debt in comparison to equity / market cap?
The above three factors cannot be looked in isolation and have to be combined to come up with a final impact on your company.
For example – A company may have a high level of export and imports, with the exports exceeding the imports (due to value addition on the raw material). In such a case, the company will have a net benefit.
 A company using domestic inputs and exporting most of its output will gain the most from the depreciation (IT and pharma). Conversely a company using imported inputs and selling most of it domestically will be hurt badly (Oil companies).  Finally a company with high level of imported inputs, selling domestically and also carrying a high level of foreign currency debt is toast (to put it politely)
If level of export >= import + debt payment (ok)
If export < import + debt payment (trouble)
Let me give you two examples of the analysis I am currently doing on my portfolio stocks
Balmer lawrie
The company has zero debt and actually has excess cash of around 200 Crs. So we do not have forex related debt risk with the company
The company imported around 4% of its inputs and earned roughly the same amount in exports.  So at first glance, the company has close to zero risk from higher raw material costs due to currency depreciation. However the grease and lubes division uses various base oils which are petroleum based and will be impacted by the price of crude oil. As the division does not have much of a pricing power, the net margins of this division are likely to be impacted.
The other divisions such as logisitics and tours & travel are unlikely to be impacted directly due to the currency depreciation.  However the overall business will definitely be impacted by the overall slowdown in the economy.
Lakshmi machine works
The company has close to 700 Crs+ excess cash on the books and hence the risk of forex debt does not exist.
The company exported around 250 Crs of machinery and components in 2011 and imported roughly the same amount in terms of raw materials and spare parts. As a result , the company is unlikely to get directly impacted by the rupee depreciation. On the contrary, the company could benefit to a certain extent as the competitive pressure from imported machinery will reduce.
Finally I think that the textile industry level issues will have a bigger impact on the company performance than the currency depreciation.
Not a quantitative analysis
The above analysis is not a precise numerical analysis and I would be suspect of any such analysis, as there are too many variables which impact the performance of a company. The best one can do in the current circumstances is to figure out if your portfolio company falls in the high risk or low risk bucket (due to the currency depreciation).

If the risks are too high (even if not quantifiable), then one should consider reducing the position size even if it results in a loss

Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please read disclaimer towards the end of blog

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A few contrarian thoughts

By Rohit Chauhan
In General thoughts, Uncategorized
April 24, 2012
4 Min read
14 comments
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The key to superior returns from the market is to hold an accurate, but divergent view from the consensus.
How does this statement sound ? I made it up myself J. This is something, an overpaid consultant would say to his or her client !!
Let me now put it in common English – If you want to make high returns, you need to think differently. If you follow the crowd, you will only make average returns.
I enjoy trying to question the consensus and see if I can hold and act on a divergent view. Here are some of my contrarian thoughts, most of which may turn out to be incorrect (the consensus would be right). Even if you do not agree with them, just give them a thought.
Now is the time to invest
India has been the toast of the world community for the last 5+ years. We have a young demographic, growing population and educated work force …blah blah blah.  Almost everyone thought,  that we could do no wrong (us included). As a result, the stock market took off in the last few years and the valuations reflected the optimism.
The view now is that India is fast turning into a basket case, where nothing can and will be done right. I personally think, that reality is somewhere in the middle. The optimism in the past was overdone and so has been the pessimism. The stock market valuations now reflect the pessimism and more.
I personally don’t like what is happening with our government, but I don’t let feelings influence my investing decisions which should be based on company specific facts and valuations.
Government PSU’s are not bad investments
My previous post on mining companies may have given you an impression that I hate these kinds of companies and would avoid any PSU. In addition, recent incidents such as the recent decision on gas pricing or the recent directive from the finance ministry to banks to cut interest rates, can only re-enforce this view point.
I am not dogmatic about these things – there are no hard and fast rules or likes and dislikes in investing. It is all about the quality of the company and more importantly the price. If the pessimism keeps increasing , the prices may become very attractive and I may end up investing even in PSU stocks.
Consumption stocks are over-rated
I know this statement is going to make some of you feel very uncomfortable and even annoyed !. At the same time, if you invest in a company based on some kind of simplistic ‘story’ , then you may be in for a negative surprise.
The stock market tends to get into these stories from time to time. It was the IT stocks in 2000, infrastructure and real estate in 2007-2008, Indian growth story from 2004-2010 and now the so called consumption stocks
The typical turn of events is quite standard – Some stocks do well.  Investors start noticing the performance and start bidding up the price of these stocks.
 A story is then woven around these stocks with a plausible reasoning behind it (India needs X amount of housing and hence real estate companies will do well). Any stock which can fit into the story, sees a rise in valuations (justified or not). Finally, the valuations run up too high or some part of the story is discredited and the stock price drops.
Will it happen this time? I don’t know. Let’s see how this story plays out.
US markets are a good place to invest
The conventional wisdom is that developed markets are a bad place to invest, due to all the macro –economic problems in these countries.  As a result, large and established companies such as Microsoft are selling at throwaway valuations.
For example, Microsoft with an annual free cash flow of around 22 Billion dollar and excess cash of almost 58 Billion on its balance sheet, is selling for around 10-11 times earnings. This is for a company with a huge moat and expected growth of around 7-8% per annum. There are several such companies in the US and other markets,  available at very attractive valuations.

Will my contrarian thoughts turn out to be true? I don’t know, but I am betting some part of my money on these beliefs. At the prices i am getting, I don’t have to be 100% right to get a decent return on my investment.

Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please read disclaimer towards the end of blog.

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It’s all warm, sunny and bubbly

By Rohit Chauhan
In General thoughts
October 5, 2010
2 Min read
26 comments
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Happy days are here again ! The index is at 20400 and will soon touch 22000 and then maybe 25000 or even 30000. The sky is the limit with India growing at 9%, and with a young population and all the other great factors working in its favor.

2008 was actually just a small bump on the way and the smart folks who bought during the downturn have made several times their investment. So the smart thing to do now is to load up on the small caps and midcaps as they have returned 100%+ returns in the last 2 years.

All the news channels are buzzing with hot new stocks and the smart thing to do is to watch these programs for tips and buy these stocks the next morning. The other day all those stock gurus and pundits were saying that now is the best time to buy as India has such a bright future ahead of it.

One should hold these stocks for a couple of days and sell it for a quick 10% profit. One only needs to do this a few times a year to make more than 100% on his or her investment. Actually, if you are really bullish, you should take on debt and dabble in options. Then the upside is unlimited and one should be able to retire in the next few months.

The problem with the news channel is that they don’t give the hottest tips. To get the hottest tips, one should join a penny stock service and use those tips to ‘play’ market. There is no time to waste on analyzing companies as most of these opportunities are available only for a short time and anyway who is planning to hold for more than a couple days ? So why bother !

It really does not matter that the IT stocks did badly after the 2000 bubble or the real estate stocks crashed in 2008. It is different this time!!!

Now is the time to get all excited and one should be fully invested, so that you don’t miss the opportunity of a lifetime. Heck, all my friends are making money and now my milkman and dhobi is in the market too!!

Note: If you are new to the blog, I hope you have realized that this is a sarcastic post and the exact opposite of my views.

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Keeping papers in order

By Rohit Chauhan
In General thoughts, Uncategorized
June 29, 2010
2 Min read
10 comments
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This is going to be a fairly odd and short post. I am going to discuss a topic which is not a fun topic, but nonetheless important.

Are your papers in order?
God forbid, if something were to happen to you tomorrow – does your family know the financial situation and has access to all the documentation?

I have heard of a lot of stories and personally encountered some, where the head of the family died and the heirs realized that the paperwork was a mess. I cannot tell you how painful it is to sort such matters.

So, I would suggest each one on us should atleast do the following
· Make a will
· Please add nominee in all your accounts – bank accounts, demats, FD etc
· Have a term insurance which pays in the unfortunate event of your death
· List all your accounts details on a piece of paper, make two copies with one in possession of a close family member and the other one in a locker
· Consolidate your provident fund with your current company – I repeat, please do this now! Getting provident fund issues sorted is a nightmare especially if they are old issues.
· File all the paperwork properly and update it atleast once a year.

I am myself partly guilty on not following all of the above. However I am continuously trying to ensure that my paperwork is in order and plan to clean it up further in the next 1-2 years.

You may be the next warren buffett or Rakesh jhunjhunwala or whatever you are dreaming of, but if your paper work is a mess, your family is going to suffer. The last thing you want is for your family to suffer due to the paperwork in addition to the emotional problems.

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Cooling your enthusiasm

By Rohit Chauhan
In General thoughts, Uncategorized
June 8, 2010
3 Min read
9 comments
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The previous post had some questions on how to handle over-optimism on a stock, especially when one is analyzing it for the first time.

I think it is human nature to be over-optimistic during bull markets and pessimistic during the bear phase. Even if you think you are immune to it, I personally think there is some impact of the surrounding environment. I have seen in my case that my fair value estimates are on the lower side when the market is dropping (being too conservative) and on the higher side when the markets are shooting up.

The first step in managing this situation is to acknowledge that you are not different from others and could be getting impacted in the same manner. If you don’t acknowledge the problem, then there is nothing to resolve.

I typically remind myself of these points when faced with rapidly rising or crashing markets

Cannot predict markets
I cannot predict the markets. Period! I cannot divine the future and care two hoots if others can or cannot. If that is the case, then my decisions are based on what I know as of today and not what may or may not happen. As a result, I have lesser tendency to beat myself up for a decision at a later date.

The next logical point is that the future may prove me right or wrong. However if I make rational and intelligent decisions, luck evens out and I should do fairly well. Till date, I have seen that happen.

I try to note down my thoughts and reasoning when buying or selling a stock. This helps me in checking back on my thought process at a later date.

Cooling period
I have also accepted the fact that I am like everyone else – nothing special. So I will be swept by emotions from time to time. The best antidote to it is to have a cooling period when making a decision on a stock.

I start analyzing a stock and if I get too excited, I will create a small position to temper the urge or itch. I leave the analysis for a few days or weeks and will then come back to it with a fresh mind. A lot of times I have been surprised with my decision (what was I thinking!). The downside is that during a bull market, such an idea can run away from you. I think that’s an acceptable risk.

Search for negative opinion
I try to force myself to look for negative information which goes against my thesis. This helps in countering the optimisim and hopefully improves the analysis.
There are no magic bullets or set formulae in managing emotions. It comes down to our individual makeup and what works for us.

Watch list of stocks
I am analyzing the following stocks these days
Noida toll bridge
Facor alloys
HDFC bank
Patel airtemp

And a few others. The idea of analyzing these stocks is to understand the business and calculate their fair value. I have been building a list of ideas with my estimates of fair value. Most, or almost all the stocks are not in my buy range. However it is important to analyze these stocks in advance, so that when the opportunity comes, one can move fast and create a decent size position

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Replying to a comment, a correction and misc thoughts

By Rohit Chauhan
In General thoughts, Uncategorized
September 8, 2008
5 Min read
8 comments
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I got the following comment recently

If I take u back to 1994, how would u have spotted Infosys. The only way one could spot it could be through the market opportunity, good results and good management.or u may enlighten if there was any other way. So it could have been a kind of recurring deposit wherein one wud have seen good results and put money in that company every quarter.

I agree there could have been companies where the growth wud have stopped, but then its like finding out 20 horses in a race of 5000 and then slowly and steadily identifying the best horse through results only. When I say results I mean higher EPS also and not just a company like Teledata or any other which diluted its equity too.

Thats what big companies like GE, Tatas do. Hire gud people and then thru performance weed out the non performers.

Agreed that Educomp is richly valued or investing in Infosys in 2000 wud have been burning fingers. What I am saying is that implmenting the value investing approach with growth companies.Take micro technologies for instance. It has been growing at CAGR of >50% for last 4 years. It has a book value of 206 approx. It trades at 220. EPS of around 50. Almost no debt. Mcap of 60% CAGR for last few years.

These companies are not richly valued at all.Thru Value Investing combined with Growth, I could see huge returns. Unfortunately I did not put a lot for money. e.g Rajesh Exports in a single year increased its sales from 200 to 2200 crore somewhere around 2003. That time the stock did not appreciate and had excellent value(128 book value, eps around 40, Price around 150. It gave 25 times returns since then), That was the time to enter and make huge money. and I did but with a small amount as I was learning then.

Following is my response :

Hi anonymous
There is a book, The gorrila game, which talks about an approach on how to invest in tech companies.

Approach is similar to the one you mention ..buy the whole basket ..and then follow the results of each. sell the poor performers and invest the cash into the good performers. That could have been a way to make money in infosys.

However it would have been diffcult to have the foresight in 1994 that infosys would do so well.even employees working in infosys did not recognise that (employees who were given options then thought the options were worthless).

I think growth is compatible with valueinvesting. Growth in the end, is a variable in the valuation process. As long as your are paying less than the growth implied intrinsic value, you will do well. So microtechnologies and Geodesic may fall in that bucket. They maybe insanely undervalued due to the excellent prospects. I have however not looked at these companies and hence cannot comment. However I would definitely look at them now.

Regarding your experience with rajesh exports, I can understand what happened as I have gone through similar experiences several times – namely how do you know beforehand that you are right on a company. I think as one gains experience, one learns to identify and benefit from such opporunities.

A correction
In the valuation of several companies I have used the following formulae to check the valuation

Mcap – cash on hand = Net Mcap
Net Mcap / Net profit = effective PE.

There is an error in the above approach. Typically the above cash earns 8-10% as part of the other income. The net profit should be adjusted with this non core income to arrive at the effective PE, otherwise you end up double counting the cash.

The error, lucklily has not changed most of the valuations I have done, but it is an error all the same and has a bigger impact if the cash as a % of market cap (mcap) is high. It is such an obvious error, but I have missed it till now. Well, better late than never.

A quote

I saw this quote from Keynes (A famous economist)

When the facts change, I change my mind. What do you do, sir?

Reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in Lost Prophets: An Insider’s History of the Modern Eonomists (1994) by Alfred L. Malabre, p. 220

This quote is very apt in investing. One analyses companies based on present facts and a set of assumptions. Valuation is finally an exercise of projecting the future. By being conservative, you can reduce the possiblity of an error. However when facts change dramatically, I am reminded of the above quote and find it prudent to change my mind – nothing wrong with that. Even a 60-70% success rate in picking stocks (being right 6-7 times out of 10) can give very good results in the long run.

Misc thoughts
I am reading through the Annual reports of several companies which I follow. I will be posting my analysis on the same. The market seems to be going one step forward and one step back. There are problems developing in the US and the markets may start weakening in the US. In india, inflation seems to be high and somehow the policy response has still not been strong enough. I think the RBI thinks that this inflation is temporary and it will cool on its own.

I hope they are right for everyone’s sake. If however they are wrong and they forced to hike the rates further to kill inflation, then we could have nasty times ahead of us in the market.

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