Interesting investments

List of companies/investments which are of good quality immaterial of if they are fairly priced or not.

1. SKF India: Debt free. Makes bearings. P/E of about 17. FAG bearings and Timken are close competitors. FAG bearing is also debt free.
2. FAG Bearings: Debt free company. German company.
3. Vesuvius India: Cool Hand Luke analysed the company. He says that the financials are pretty clean.

The four things!!

The four key factors that drive equity markets: valuation, liquidity, sentiment and fundamentals. Check out the full article here.

What I think about the four right now.

1. Valuation: Is slightly below average. Might be better to look at individual stocks than the overall market.
2. Liquidity: Looks like there would be a lot of liquidity both from the ECB and also from RBI's anticipated decisions to decrease rates, cash reserve ratios, etc.
3. Sentiment: Hard to tell. Looks like a wait and watch attitude. That could be the reason for all the seesaw movement of the indices.
4. Fundamentals: Not completely in place but positive. The policy decisions by the Indian govt. can definitely help. India seems to perform not because of the govt. but in spite of the govt. In that sense the long-term story is still in place.

How I compute the right P/E

I would expect a good company to grow at at least twice as fast as the overall economy. So, if the GDP is about 7%, I would expect the company to grow at 14%. With a 14% growth rate, the appropriate P/E would be around 9+0.5*14 = 16. The 9 is from MoneyChimp which roughly has all the unknowns incorporated into when you roughly know how the EPS might grow. If you are willing to pay higher P/E multiples, one should be fairly confident that the company can grow at a much faster rate than 14% which I think only a few companies would be able to pull off.

I have a query regarding the calculation of averages from the financial results. For eg. if a retail investor wishes to know the CAGR (compound annual growth rate) of a particular parameter like EPS or sales, does he/she sit down and calculate (might be write a code), or is it possible to get these annual growth rates of companies online.

@Srini: Comments on your portfolio

General Comments

• Too much diversification. It's true that one should diversify to spread risk. But diversification on 49 stocks is a bit too much. Just as the risk is spread, so are your gains. Even if a stock which you have assigned only 0.5 % increases 5x (which is a bit of a really long shot), the impact on the portfolio would be about 2.5 %. Obviously, then it also depends on what you are expecting from the investment. I realize I also have too many stocks. I am trying to reduce them.
• On specific stocks I will write my comments later.

Guidelinea for self

1. Never assign more than 10% of the portfolio to a particular stock.
2. Choose to assign stocks with one of the following weigtages: 1%, 2%, 5%, 10%
3. Ideally I would like to have 75% in large-cap/mid-cap stocks and 25% in small-caps. Obviously this will vary. Could be 70-30 as well.
4. No more than 2% to each stock in the small-caps to begin with. Keep adding if the financial results of the business are always improving or at least stable.
5. I would aim for 5% for each stock in the large-cap/mid-cap combinations and in combinations of 1%, 2% in small-cap stocks. So, that would get me to about 15 stocks in large-cap/mid-cap and to another 15 for the small-caps.

1. Cox & Kings: Expensive valuations. I would be skeptical to invest in companies witha P/E of more than 15. 20 would be my soft limit and 25 would be a hard limit. There anyways are always exceptions. Check out MoneyChimp for various valuation methodologies.
2. Maruti Suzuki: Seems to be at fair value.
3. Nifty Junior ETF: As of now fair value I guess.
4. OnMobile: There seem to be no dividends. EPS is more or less stagnant. I would expect a P/E of 10 to be fair.
5. Petronet LNG: Looks fine.
6. GAIL: Stagnant EPS. But looks fine.
7. Sun TV: Fairly valued. But I didn't consider it because of all the politics surrounding it.
8. Glodyne Technoserve: Looks good.
9. Punjab National Bank: I also have it in my portfolio. Just a default stock. Think SBI is expensive, so just chose PNB and Corp. Bank as my investments in the financial space along with LIC Housing Finance.
10. SpiceJet: No airlines for me. Too much competition. Until the subsidies for Air India are removed there's no way there would be a level playing field for any of the players. -ve operating cashflows in four out of the past five years. A negative cashflow from operations implies that one is spending more on expenses than one is getting back from sales (I think) which is never good for a business.
11. Ashoka Buildcon: I have no idea. But one should really have a good look at the financials of all these infrastructure companies. I am also not sure if all of them report their financials honestly.
12. Gujarat State Petronet: Looks like a good one.
13. NMDC: Looks like a good one.
14. SBI: Too expensive I guess compared to the next biggest public sector bank which is PNB. PNB has P/E of about 7 and SBI has 19.
15. ICICI Bank: Don't have a very good opinion on this one. Would stay away from it. Expensive as well.
16. Andhra Bank: Looks Ok.
17. Magma Fincorp: Business seems Ok. But the price seems to be high.
18. Bank of Baroda: Why so many banks? I can understand that it's hard to choose between so many banks. At the same it does not make sense to buy so many of them. Maybe a better idea might be to just buy one of the PSU Bank ETFs.
19. Larsen Toubro: Right now, fairly valued I would say.
20. Dewan Housing: Looks good. I also have +ve view about housing finance. One reason for my choice of LIC Housing Finance.
21. Indian Bank: Again, another bank. I have no idea.
22. South Indian Bank: Same thing. Looks a bit expensive.
23. Federal Bank: Same thing.
24. City Union Bank: I have seen one close to my house in Hyd. Was good. Looks good right now as well. But I might be having a familiarity bias. ;)
25. Hindalco: Tata Steel sells at 7 P/E. Hindalco sells at 11 P/E. All metal stocks that I know always have been selling around 6 P/E. So, I would be suspect about Hindalco.
26. Allahabad Bank: Same
27. Maharashtra Seamless: Fairly priced I think. The sales haven't grown much in the past 5 years.
28. Karur Vysya Bank: Fairly priced I think.
29. Gateway Distripark: 18 P/E. Hmm... alarm bells. But I like the business though. There is growth in sales but no proportional increase in the EPS. Maybe other companies in the same line of business might be attractive.
30. Gujarat Gas Company: Looks fairly priced. Like the business. Might buy around 12 P/E.
31. Tata Power: 18 P/E. Expensive in my opinion. At least fairly valued.
32. Jagran Prakashan: Fairly priced.
33. Transformers & Rectifiers: For a market cap of 200 Cr. a 10 P/E sounds expensive. But looks like they are having a tough year. 30 EPS in the past two years has come down to 18 in the trailing twelve months (TTM). Hmm... should consider this carefully.
34. Essar Oil: Profit in only of the last five years. How did you buy this one?
35. Rain Comm: Interesting one. The consolidated EPS is close to 30 while the standalone EPS is only 0.83. Taking the consolidated EPS of 30, the stock is selling for cheap. Has a high debt/equity ratio of about 2 though.
36. Dena Bank: Looks Ok.
37. Tata Chem: With respect to the Consolidated EPS (CEPS), it's good.
38. Sundaram Finance: Looks good.
39. Vardhman Textiles: I like this one as well. Good one.
40. Sterlite Industries: Looks Ok wrt CEPS. But the EPS always seems to be going down.
41. Shriram Transport: Is good.
42. Union Bank: Hmm... one more bank.
43. Tata Steel: Good to buy I guess.
44. Canara Bank: Looks Ok.
45. Reliance Banking:
46. Corporation Bank: I have this one. Think is Ok.
47. Petron Engineering Construction: Hmm... Sales double but EPS becomes 4x in the past 4 years. At the present valuation, it looks good though.
48. Kotak PSU Bank: So many banks and again the ETF?
49. Nifty ETF: Valuation close to historical average. So, guess not really a strong buy at this time.

Ok, that's the end of my comments. ;)

Which investment style is better?

Now, which style of investment is better is hard to tell. There have been people who have made fortunes with both styles of investing. But if you will make money or no
t is completely dependent on how well one can analyse a business, company or a situation and make a prediction of it's future. In that sense, both styles of investment can make one money give that one has a good grip of what's happening and what it might lead to.
Few people strictly adhere to the first type of investing while a lot of people seem to believe in the second type of investing style. In either case, people who make money are the smart guys. Smart guys are smart because they are either clever or because they are disciplined or in the best cases both. Obviously, they make the money out of the fools who are neither clever nor disciplined. Just from this statement one can see how investing can show how smart and disciplined one is. So, one more objective of the blog would be increase the smartness, discipline and recognize when one is being made the fool by external circumstances.

While not all people can be smart, everyone can strive to be disciplined. But research seems to indicate that the human brain has evolved in ways that disallows one to be disciplined. They seem to have evolved with an eye for short term gratification and a hatred to wait for a longer time even when the return for waiting for a longer time is greater compared to the short term return. More on this some other time.

Investment Styles

First, a short introduction about the two investment styles that I know of.

Long term or Fundamental style or the Warren Buffett style investing

That is to identify and invest in companies at a fair price that have good managements, have a decent growth potential and also have the ability to fend off competition. The most famous example given of Buffett style investing was his investment in Coca-Cola. I don't know at what time he made the investment though.

The method analyses the past, present and the future of a company before investing. The past has financial data of the company and the different strategies it adopted at various times to maintain its business. The analysis might include the knowledge about the management and the strategies that the company is presently adopting to continue its business. The analysis of the future would be based on the past, present and the nature of business itself.

Let's the example of Nokia. When mobiles were first made, Nokia was one of the market leaders in the mobile telephone market. But gradually, it's market share was brought down first by other manufactures like Sony Ericsson, LG, Samsung, Motorola which also made mobiles and then recently again by Apple and Samsung which are about to destroy Nokia completely with their smartphones. Looking retrospectively, one would have wanted to invest in Nokia when it was at it's peak, but no one could have imagined its eventual destruction. Is a similar situation repeating in the case of Apple? Only time will tell. Would you bet on Apple? Analyse the financial data of the past, analyze the strategies of the present, is the management good enough after the loss of Steve Jobs and finally what do you see in it's future. Your bet should depend on all these questions.

The time scale for this kind of investing can last anywhere between a couple of years to a few decades.

Short term or Trend following or Trading style of investing

This style just follows what is happening at the moment and takes bets on the immediate consequences. You gain if your prediction about the immediate future is correct and lose if it is not.

As an example, take the case of the stand-off between USA and Iran. If USA would strike Iran, the price will immediately shoot up but if it does not and the skirmish reduces in intensity, the price of oil might either remain stable or even go down. Given the situation what would be your prediction on the price of oil. One can make money both when the price rises and falls. Let's assume that the price of oil is about 120 USD per barrel. In the first case, let's assume that the US strikes Iran and the price of oil increases to 140 USD per barrel. In the second case, let's assume that the US does not strike and the price drops to 100 USD. One can make money in both instances. In the first case, you just buy oil now and sell it later and make a profit of 20 USD. In the second case, you will borrow the oil from someone for a small rent (let's say 2 USD), sell it now and get a cash of 120 USD and when the price falls down to 100 USD you buy it back again for 100 USD and return the oil. Now, you make a profit of 18 USD (20 USD profit - 2 USD rent).

This kind of investing can last anything from a few hours to an year.