Chaitanya Patel

Writing one post on ‘why fundamental analysis is difficult?’ is a brave attempt! Very good chance that a few thousand people will call up and REFUTE (which is all right) and many many more may call in to say, there is much more to it.

Both are absolutely true.

When we got a balance sheet for Fundamental Analysis, we would start at the Board of directors (page one of most annual report). Here we would find husband, wife, sons, fixers, friends.

Very very rarely would you find an independent director. If you were looking for an eminent independent director it was almost impossible. People like S M DATTA (ex Chairman Hindustan Lever) it was impossible. Some so called ‘eminent independent directors’ are a complete joke. They come completely unprepared, and like a friend said …’he opens his mouth just to eat the sandwiches’ and has an opinion only on whether sales incentive trips should be to Greece or West Indies’.

So if you are looking for an independent board, you will have to search real far and wide. Very few directors can stand up to the current management and really have an independent view. If you think mutual funds owning shares in companies is a good thing because they will have an independent view, again you are sadly mistaken. Other than Templeton – and going ahead perhaps Fidelity, very few fund houses have an independent view. If they do have an independent view, there is no clue as to how it is being exercised.

The next item that attracts your attention is the name of the STATUTORY AUDITOR. Once upon a time when people like H K Bilpodiwala or even Y H Malegam were at their peak, their names added some confidence in the analyst’s mind. Clearly remember S B Billimoria (Y H Malegam was a partner then too I guess) giving up the audit of Raymonds. It is not clear why they left (personal reasons?) but as soon as they left the company declared a bonus. (Those days the statutory auditor had to certify the free reserves). However a few small auditors too have stood up in the past, but not at too much of liberty to write about friends. In some cases the owners are friends, in most cases the CA is the friend!

will write more…

ps: when the media says ‘you should do fundamental analysis and then invest’ I am so amused…:-)

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Photo Credit: Jimmie

Every now and then, a piece of good news gets announced, and then something puzzling happens.  Example: the GDP report comes out stronger than expected, and the stock market falls.  People scratch their heads and say, “Huh?”

A friend of mine who I haven’t heard from in a while, Howard Simons, astutely would comment something to the effect of: “The stock market is not a futures contract on GDP.”  This much is true, but why is it true?  How can the market go down on good economic news?

Some of us as investors use a concept called a discounted cash flow model.  The price of a given asset is equal to the expected cash flows it will generate in the future, with each future cash flow discounted to reflect to reflect the time value of money and the riskiness of that cash flow.

Think of it this way: if the GDP report comes out strong, we can likely expect corporate profits to be better, so the expected cash flows from equities in the future should be better.  But if the stock market prices fall, it means the discount rates have risen more than the expected cash flows have risen.

Here’s a conceptual problem, then: We have estimates of the expected cash flows, at least going a few years out but no one anywhere publishes the discount rates for the cash flows — how can this be a useful concept?

Refer back to a piece I wrote earlier this week.  Discount rates reflecting the cost of capital reflect the alternative sources and uses for free cash.  When the GDP report came out, not only did come get optimistic about corporate profits, but perhaps realized:

• More firms are going to want to raise capital to invest for growth, or
• The Fed is going to have to tighten policy sooner than we thought.  Look at bond prices falling and yields rising.

Even if things are looking better for profits for existing firms, opportunities away from existing firms may improve even more, and attract capital away from existing firms.  Remember how stock prices slumped for bricks-and-mortar companies during the tech bubble?  Don’t worry, most people don’t.  But as those prices slumped, value was building in those companies.  No one saw it then, because they were dazzled by the short-term performance of the tech and dot-com stocks.

The cost of capital was exceptionally low for the dot-com stocks 1998-early 2000, and relatively high for the fuddy-duddy companies.  The economy was doing well.  Why no lift for all stocks?  Because incremental dollars available for finance were flowing to the dot-com companies until it became obvious that little to no cash would ever flow back from them to investors.

Afterward, even as the market fell hard, many fuddy-duddy stocks didn’t do so badly.  2000-2002 was a good period for value investing as people recognized how well the companies generated profits and cash flow.  The cost of capital normalized, and many dot-coms could no longer get financing at any price.

Another Example

Sometimes people get puzzled or annoyed when in the midst of a recession, the stock market rises.  They might think: “Why should the stock market rise?  Doesn’t everyone know that business conditions are lousy?”

Well, yes, conditions may be lousy, but what’s the alternative for investors for stocks?  Bond yields may be falling, and inflation nonexistent, making money market fund yields microscopic… the relative advantage from a financing standpoint has swung to stocks, and the prices rise.

I can give more examples, and maybe this should be a series:

• The Fed tightens policy and bonds rally. (Rare, but sometimes…)
• The Fed loosens policy, and bonds fall. (also…)
• The rating agencies downgrade the bonds, and they rally.
• The earnings report comes out lower than last year, and the stock rallies.
• Etc.

But perhaps the first important practical takeaway is this: there will always be seemingly anomalous behavior in the markets.  Why?  Markets are composed of people, that’s why.  We’re not always predictable, and we don’t predict better when you examine us as groups.

That doesn’t mean there is no reason for anomalies, but sometimes we have to take a step back and say something as simple as “good economic news means lower stock prices at present.”  Behind that is the implied increase in the cost of capital, but since there is nothing to signal that, you’re not going to hear it on the news that evening:

“In today’s financial news, stock prices fell when the GDP report came out stronger than expected, leading investors to pursue investments in newly-issued bonds, stocks, and private equity.”

So be aware of the tone of the market.  Today, bad news still seems to be good, because it means the Fed leaves interest rates low for high-quality short-term debt for a longer period than previously expected.  Good news may imply that there are other places to attract money away from stocks.

Ideas for this topic are welcome.  Please leave them in the comments.

by Viral Shah.

From 2010, I worked in the Aadhaar project for three years. This helped me learn how Government works and how it does not. The one big takeaway from my experience of working with the Executive arm of the Government was that to bring about true and lasting change, to restructure our defunct institutions and build new ones, one needs to engage with the Legislative arm, with politicians.

Politics in India is a cottage industry. Everybody loves to talk about it; most are cynical; very little is known about how things actually work. The professional ways of working -- which are found in business, science and slowly in government -- are least visible in politics. In particular, the crucible of politics -- the election campaign -- is just black art. In the last 20 years, we have seen family businesses get shaken up, professionalise, and embrace technology and process engineering. We have seen some parts of government do the same. We have seen a transformation of some parts of academiaa. The one place which has seen the least change is politics in general and election campaigns in particular.

This suggests opportunities for achieving important change. Shankar Maruwada, Naman Pugalia and I started a company -- FourthLion Technologies -- to provide professional services to political campaigns. Over a couple of campaigns, we have slowly learned how elections in India work. We have looked at an array of data from various public and private sources, and developed tools and technologies to aid election campaigns in multiple phases.

Elsewhere in the world, election campaigns are run through scientific management. In the US, both the Democratic and Republican parties have voter databases, where one can search for any voter by name. Through a variety of analytical methods, campaigns know fairly well which voters are likely to vote for them, and which ones are marginal, and on which groups of voters, no resources should be expended. Starting with such databases, every voter contact is recorded (a volunteer knock, a telephone call, a letter sent, an email, or a tweet) in the same way companies manage customer services through a CRM system. It took a decade of work for the machinery of election campaigns in the US to get to this stage, to transplant ideas which were well developed in the world of business.

When thinking about election campaigns in India in a professional way, there are many challenges. There are multiple parties, many races are multi-cornered, and with first-past-the-post elections, a candidate can win with as few as 20-30% of the votes. The voter lists are very poor in quality, with every possible error of inclusion and exclusion. They do not capture the large scale of urban migration and are often tampered with. Although the Election Commission of India has made great strides in conducting free and fair elections over the last several decades, much more remains to be done, and the quality of the voter list is perhaps the weakest link in Indian democracy today.

Every election has three natural phases: Registration, Persuasion, and Turnout. A campaign should start 6-12 months before voting date, by registering voters. Three months before the election, voters need to know the candidate and be persuaded, and finally the last week is focussed on "Get The Vote Out", or Turnout. At each stage of the campaign, one has to focus on the message and mobilisation. The message is all about what the candidate says and does, and mobilisation is about execution on the ground, in the digital sphere and in the media. Each stage as a distinct methodology for scientific management, and the problems faced can be quite surprising. As an example, it is not uncommon for 2 to 3% of the population of a constituency to be working for all the candidates, put together, in the last 2-3 weeks. This calls for the processes of large-scale management.

We provide tools and technologies for different parts of the campaign, starting with coalition dynamics, seat selection, analysis of past elections, formulation and testing of messages, calculating the reach of every channel (hoardings, TV, radio, print, etc.), managing call centres, and a control room for the turnout operation and voting day. We use data, analytics, and technology at every stage of a campaign to aid decision making and efficient deployment of resources. Traditional politics often deploys resources in a "Spray and Pray" manner, while we try to combine all available information and intuition so as to use resources more effectively.

In our experience, an incumbent who has a good chance of getting the ticket has a head start as he is able to do preparatory work for the campaign well ahead of time. As emphasised above, the campaign should really start 6-12 months before the voting. All too often, in India, candidate selection is left to the last minute. This makes it impossible to mount a serious campaign, and generally plays in favour of the incumbent. Once we start thinking of an election campaign as a systematic project, this induces the discipline of a minimum time period that is required to execute all the steps, just as is the case with all well planned projects.

On one hand, our thinking about process improvement for election campaigns consciously draws from successful techniques of scientific business management which have been perfected in the worlds of business, science and government in India. Along the way, we have seen that the speed, agility, and scale required in political campaigns in India is something unique when compared with the worlds of business, science and government in India. To some extent, we are seeing innovations in the field of election campaigns that can usefully inform, and sometimes get directly transplanted, into the other three worlds.

We are learning how our democracy works. The accountability is jarring, as any politician will tell you: voters make every possible demand, and speak their mind to the candidate, in as direct a way as can be. Millions of micro-deals are struck with candidates by individuals and groups of people. These are genuine deals about actions of the State and not bribery or corruption. These micro-deals bubble up into the processes of government and ultimately shape policy. It is a rough and tumble world which clashes against our dreams of representative democracy, but it is also astonishing how much this is about representative democracy.

Photo Credit: Moon Lee || When is this train going to arrive?

There are several ways to gauge the Federal Open Market Committee wrong. I am often guilty of a few of those, though I hope I am getting better.  Don’t assume the FOMC:

• Shares your view of how economies work.
• Cares about the politics of the situation.
• Knows what it really wants, aside from magic.
• Won’t change its view by the time an event arrives that was previously deemed important for monetary policy.
• Cares about the reasoning of dissenters on the committee.
• Understands what is actually happening in the economy, much less what its policy tools will really do.

But you can assume the FOMC:

• Cares about the health of the banks, at least under extreme conditions
• Wants to do something good, even if their minds are poisoned by neoclassical economics
• Will err on the side of saying too much, rather than too little, when it feels that its policies are not having the impact desired on the markets and economy.
• Will act in the manner that most protects its continued existence and privileges.

So if we want to guess when the FOMC will tighten, we can do three things:

1. Look at market opinion
2. Look at the FOMC’s own opinions, or
3. Something else

Let’s start with market opinion.  At present, Fed funds futures have the Fed funds rate rising to 0.25% in the third quarter of 2015, and 0.50% in the fourth quarter.  Now, market opinion has tended to be ahead of the actual actions of the FOMC on tightening policy, so maybe that will be true in the future as well.  So far, those betting for tightening in the Fed funds futures market have been losing over the last few years along with those shorting the long Treasury bond, because rates have to go up.

Okay, so what does the FOMC think?  Starting back in January of 2012, they started providing forecasts to us, and here is a quick summary of their efforts:

In general, they have been overly optimistic about growth in the US economy.  They probably still are too optimistic.

They have been better at forecasting the unemployment rate, even as it has become less useful as an indicator of how strong labor conditions are because of discouraged workers and more lower wage jobs.

In general, they have expected inflation to perk up in response to their policies a lot faster than it has happened.

And as a result, like the market, they have expected to tighten in the past a lot sooner than they are presently projecting, which is not all that much different than the view of the market.  Also like the market, you can’t simply take an average of their views as representative of where Fed Fund will be.  Since the FOMC relies on voting, the median view would be more representative than the average Fed funds rate forecast, and that has remained at a relatively consistent “tightening will happen sometime in 2015″ since September 2012.  The median estimate of where Fed funds would be at the end of 2015 has also been 0.75-1.00% over that same period, which is higher than the current market estimate of 0.60%, but lower than the FOMC’s own estimate of 1.1%.

So, where does this leave us, but with a view that the FOMC will tighten policy next year.  But what if the monetary doves on the FOMC remain dominant?  After all, those that are permanent voting members are more dovish than the average participant tossing out an estimate.  That leaves me with this, which reflects the influence of the doves better:

This graph is based on the average forecast, which includes a decent number of outlier views from some of the doves, which at present suggests tightening in January of 2016, but if you take into account the time drift of views since September 2012, it augurs for tightening in August of 2016.

The drift has happened because the economy has not strengthened the way the FOMC expected it would.  If we muddle along at the average rate of growth over the last two years, the FOMC may very well sit on its hands and not tighten as quickly as presently expected.  After all, labor conditions are soft, and inflation as they measure it is not roaring ahead.  (Please ignore the asset price inflation that aids the non-existent wealth effect.)

As it is, statements from the FOMC have been noncommittal, only saying that they are ending QE.  They are still waiting for their grand sign to act on Fed funds, and it has not come yet.

Summary

Current expectations from the market and the FOMC suggest that the Fed funds rate will rise in 2015.  Prior expectations of FOMC action have signaled much earlier action than what has actually happened.  From my vantage point, it is more likely that the FOMC moves later than the third quarter of 2015 versus earlier than then.  The FOMC has been slow to remove policy accommodation; it is more likely that they will remain slow given present economic conditions.

Does every business have to be profitable?

Do all businessmen do a business to earn money? For themselves and their stake holder?

To the common man, yes!

Not true, not true, not true at all!

Many people do businesses to:

– keep themselves busy

– to show to the world that they are doing a big business

– hoping to make money 10 years, 20 years or 30 years later!

-for their own ego – and the price is paid for by the shareholders.

Let us take the case of ‘keeping themselves busy‘. In this category are a bunch of retail grocery stores. Most of them will earn much, much more by selling their shops and investing the monies well. However just because they have no hobbies, and have no clue about how to manage their time (but for the shop), they continue to go to the shop. What I mean is – If you are the owner of a shop with a market value of say Rs. 1 crore, and are aged say 55 – you should earn at least Rs. 15 lakhs a year – right? Well I know of shop keepers with a Rs. 2 crore shop and earning Rs. 5-6 lakhs…but WILL KILL ME, if I suggest a sale of the shop….’What will I do all day’ is a good rebuff. Not arguing against it, just enumerating as the first …

The second is worse. They are actually wasting good money after bad. They have a big set up, an office, daily visits to the office, AND ARE ACTUALLY LOSING money. One such category I know are some wholesale traders – they ‘invest’ say Rs. 5 crores in stocks…and at the end of the year they earn about Rs. 50-60 lakhs. Again not having a hobby (which means they need to go to an office till they CANNOT go) is a must. I know of a 70 year old who goes regularly…and frankly is destroying wealth. What do you tell him? Nothing.

There are some businesses which justify to their stakeholders business models based on hope. Or optimism. Hoping to make money after 7, 10 or 20 years. This is really funny simply because they way people buy things or services is changing fast. Very few people are capable of or willing to make long term commitment. So to think that businesses must build brands, build a ‘loyal’ customer base…sometimes need to be checked again and again.

The worst are those businesses that are run for the ego of the owner. There is no way on earth that a ‘gas’ or ‘petrol’ agency from a PSU (Fortune 500 Companies!) will ever make money. It is also very difficult to make money from an auto agency of a small car company. However it gives a lot of ‘social’ standing. So people with a lot of money (and own old real estate) need to be roped in.

Of course the absolute worst are subsidiaries of big large companies which may not earn money. The distance between the shareholder of the parent company and the company making losses is so huge that NOBODy really pays attention to what is happening. Shareholder activism, mutual funds becoming active in such companies, or threats of asset stripping are all necessary to help the shareholder. Not seen it in corporate India for a very long time.

Sad, is it not?

Corporate Egoism and Egotism are far more difficult to spot compared to Alcoholism.

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I know many IFAs read my blog and so do many investors. I know a couple of fund managers too read it, especially when I write about their fund – but more if I write about a competitor fund.

So here is a Completely Contrarian View.

1. Every site tells you that the ONLY thing you can control is costs: True. So you should buy a fund with the lowest costs. Correct. However my take is, well, a little different. If you are reasonably sure about the fund manager, and his capabilities, it is worth taking a risk with that fund manager. Once upon a time I owned a Unit Linked Endowment Plan and a unit linked Pension plan too.

I had done the theoretically the right things. I had picked up the ULEP with the CHEAPEST fund management costs.

Excellent, so my fund should be doing well, right? Wrong. Saurabh Nanavati quit the fund house, and with it my advantage of paying only 0.80% as fund management charges. Even now Hdfc ULEP is a well managed fund, with a low amc, but my returns on other funds is superior DESPITE the higher fund management.

2. The name of the fund manager is not important, only the process and the fund management skill of the team is important: Guilty. I interacted and found that I would be happy dealing with Siva and then also had some interaction with a couple of CIOs of Hdfc. Once PJ came on the comfort level surely went up. I had started investing with Hdfc Growth fund, and had no complaints. Then the Pioneer funds came into the Hdfc fold and along with it PJ. I felt here was a good fund house (sanitation was in place), and a good fund manager had joined. Remember I had NOTHING against Sanjoy B – but he was a little carried away at times….but I still do hold Hdfc Growth fund..and have no major complaints. But yes the amount of money at stake was still small.

3. My trust on the ‘brand name’ Icici Prudential started ONLY on the day Nilesh Shah joined from Templeton and attracted brilliant fund managers like Naren Sankaran. Here I had the luck of knowing NS from an earlier relationship. Nilesh of course from FT – but he was not what we call the ‘star’ equity fund manager. However he meant ‘cleanliness’ and we saw the results quickly. NS took charge of a couple of funds like Discovery and Dynamic – so that became our favorites too. Since many of us did not make the mistake of investing in Infra, etc. our portfolios did well.

4. The fund house is not important: For me at least, the fund house was very important – which meant I was restricted to about 5-6 fund houses, and on a concentrated basis just 2-3 fund houses to do business. This is tough if your business model is ad dependant…I am not.

I am largely an equity man and still find it easy to do a portfolio construct / deconstruct…

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Photo Credit — Javier || Buffett believes in America

Yesterday there was an article where Buffett was quoted on getting mortgages to buy houses. Let me quote the most relevant portion:

“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel,California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”

Now, when I read the comment stream on the article, I was not surprised at the level of disagreement, but the vitriolic nature of the the disagreement.  Buffett is certainly not made of Teflon anymore, and fame has led to its share of detractors.

Now, I don’t think that Buffett is giving the right advice to everyone here, but I also don’t think that he is talking his book because has has investments in firms that sell:

• Real estate
• Manufactured housing
• Building materials
• Mortgages
• Etc.

Indeed, Buffett has enough investments that almost anything he says could be talking his book.  I think his character is such that he does not talk his book — his firm is one that is built on “low hype” attitudes, at least, low hype for a company of its size and complexity.

Should everyone run out and get a mortgage because it is a cheap time to be borrowing money?  That is an individual question, hinging on how secure and high your income is versus the likely payment on the mortgage, and other housing-related expenses.

The interest rate may indeed be low relative to history, but how well will the economy do in the future?  Maybe residential housing is too expensive in some areas to get a lot of people excited about buying.

Buffett also said:

“Household formation falls off dramatically in a recession, at least initially,” he said. “But that doesn’t last long. Hormones kick in and in-laws get tiresome, too.”

Unless something changes in US culture, there have been changes to the demand for homes, driven by the following factors:

• People are marrying later and less frequently
• They are having fewer kids
• Urban areas are more attractive for many people to live in, reducing commute time and costs.  Even car-buying is affected.
• There are fewer move-up buyers because of the financial crisis.
• The ability of lower middle class people to afford homes has been reduced, particularly in high cost of living areas.
• The financial crisis has ruined the illusion that residential real estate is an investment that can’t lose money.

There may be more reasons, but even though the 30-year mortgage is the cheapest long-term financing that an average person can get, there are more people than before who are not interested in buying a home.  Renting suits their goals fine.

As such, I think Buffett is wrong here, and that borrowing to buy residential housing will not be as prominent as it was in the past.  But I don’t think he has any bad intentions in what he said — he believes in America, and thinks that we will return to the consumption patterns of the past, which relied on too much debt in my opinion.

Final note: I’m getting tired of reading comment streams.  The people there are often too cynical, and too loose with the truth.  Their expectations for what they deserve in this life are also inflated beyond what is reasonable.  Some turn to conspiracy theories to keep themselves from blaming their bad fortune on their own actions.

Buffett is generally a good guy, and a good example as far as businessmen go — he does not deserve the abuse.  I don’t agree with Buffett’s politics, but I don’t think that he is not sincere.

Full disclosure: long BRK/B and WFC

Of course I will…in fact when somebody asked me some questions, I had already answered it…so here I am sending you the link!!

Here are some questions: i have already answered them in earlier posts, hence just connecting..sadly wordpress is not working well…and I am not able to link it..please cut and paste the links on the browser and it should work…

1. Subra I agree that short term predicting of markets is difficult, but some of these mutual fund schemes have given 20% return over 25 years…will they not give 20-30% returns over the next 25 years?

http://www.subramoney.com/2012/03/will-equity-give-the-best-returns/

2. I do not want too much returns, but over the next 25 years, by picking direct equities in good companies like L&T can I not get 6-7% p.a. MORE than the index?

http://www.subramoney.com/2011/06/equity-returns-depend-on-timing/

3. I have about Rs. 20,000 pm to invest. I cannot afford a financial planner, do I really need one?Can I use websites like yours and…(name deleted) instead of using a financial planner? Is a planner charging say Rs. 8k per annum as good as a planner charging 20k?

http://www.subramoney.com/2008/01/financial-planner-do-you-need-one-at-all/

4. I am doing a course in Forex trading – I paid US $ 3000 for it. They say they will GIVE me money to play in the Forex markets so that I learn properly, is it a good course?

http://www.subramoney.com/2010/06/doctors-losing-money-in-equity-markets-a-story/

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All these experiences are anecdotal and may not be useful at all for you. However it could be illustrative of what happens in the RE market..and could become some kind of a learning. However it may or may not work for you, so that is the caveat.

I have been looking to buy a house in Nerul, a suburb of Navi Mumbai. This would be about 40 km from the central business district called Nariman Point. For most people in So Bo (South Bombay – many of them still have not reconciled to Mumbai). So it could be an unwanted, eastern suburb of Mumbai, but if you saw the RE prices you would think you are in Manhattan.

1. Brokers are the only ones chasing you. Literally unemployed from dawn to dusk they chase you with houses which could be much beyond your budget, or much smaller in size, or at a location which you have specifically said NO to.

2. We wanted to buy in one colony called Army Colony, Nerul. That experience should be a separate post! We met people asking for Rs. 1.55 crores to people asking for Rs. 2.1 crores for SIMILAR house, with same level of interior work done. Amazing, but no deals have happened there in the past 6 months, so pricing is just a number in the sky.

3. We saw a 2500 sft house priced at Rs. 7 crores, and a 2000 s ft house about 700 mts away NOT SELLING for Rs. 1.8 crores. I believe he has now UPPED THE offer to Rs. 2.1 (my broker was laughing). But hey if he wants to sell, he wants to. If he does not want to sell, he does not want to!!

4. One lady is trying to sell a 3 bhk for Rs. 1.56 crores and buy a 1 bhk. Her best offer is Rs. 1.46 for the flat she wants to sell and she cannot get a 1bhk for anything less than Rs. 77 lakhs! amusing. Demand and Supply I guess.

5. There are people in the market who come regularly to feel ratified that their house is quoting at a particular rate. No intentions of selling, aise hi, time pass kar liya..

6. If you think selling a house is difficult, it is so damn true. Hey buying WITH a budget in a particular LOCATION of a particular SIZE is a good damn pain in the wrong places.

7. All the RE websites are infested with brokers offers.

8. Brokers lie. One broker said the deal is closed, but the SELLER had not even heard of this broker.

…can go on…instead I want YOU to add YOUR home buying / selling  nightmare…

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Yahoo SDC (Software Development Center) is laying off everybody in India . The last day is November 7th and out of 2250+* people in Yahoo SDC Bangalore, only 250 remain (some of them have been given an option to go to Sunnyvale office).

*Update : There are several reports that claims that Yahoo is laying off ~600 employees (mostly engineering). 

The ones who have survived the layoff are mostly from engineering operations team (Yahoo India teams, which looks at Yahoo.in web properties are untouched).

From what we know, this is not a cost cutting exercise, but the company is planning to consolidate its development centers.

Yahoo is giving a severance package of 5 months (in extreme cases, 10 months) and the d-day for employees is November 7th (We hope Yahoo engineers use this as seed funding and startup!).

This comes as a surprise though, given that Yahoo recently acquired Indian startup, Bookpad and in some ways, sent a strong signal of focusing on Indian market for talent.

“As we ensure that Yahoo is on a path of sustainable growth, we’re looking at ways to achieve greater efficiency, collaboration and innovation across our business. To this effect, we’re making some changes to the way we operate in Bangalore leading to consolidation of certain teams into fewer offices. Yahoo will continue to have a presence in India and Bangalore remains an important office.” [Official statement from Yahoo India]

» Tip : For startups looking to hire talent, go ahead and add your job opening details here and attract some of the best engineering talent that Yahoo has.

The post Exclusive : Yahoo Is Laying Off Everybody In India. Everybody. appeared first on NextBigWhat.com

Cera Sanitaryware (BSE: 532443; NSE: CERA) today hit a 52-week high of Rs. 1848 (at 13:56 p.m.). That is a jump of 16.72% from the previous close price of Rs. 1583.25.

Not only did the share price see a surge, there were massive volumes being traded today. A total of 47,009 shares were traded today; the highest since 5^th May, 2014 when 79,870 shares exchanged hands.

Why did the share price jump so much?

Earlier today, Cera released their stand-alone financial results for Q2 2015 (period ending Sept 30, 2014). The numbers look very impressive:

Looking at the year-on-year numbers, we see that:

• Total Income from Operations has increased 25.72%, from Rs. 158.76 cr. to Rs. 199.60 cr;
• Finance Costs have increased ever so slightly; a 5.59% increase year-on-year;
• Net Income has jumped by 48.31%!

That is quite staggering. Cera saw a massive jump in Net Profit for Q2 2015; up from Rs.… (Read On...)

When I see people talking about their portfolios almost all the time, it sets me worrying. This is like body building – doing more workouts results in injury – and some injury could be dangerous. One needs to have a portfolio and a career – the career means some time when you are not fine tuning your portfolio – asset allocation, evaluating performance, asking people ‘what do you think of Colgate? is it over priced? or some shit like that.

Increasingly I find people on websites thinking that by tampering with the portfolio on an hourly basis, their yield will go up. For such people this story is likely to be useful.
The following story is either a part of Panchatantra tales, Buddhist tales or Jataka tales – frankly it does not matter. See how relevant it is in your own life.

When you invest money, you should stay a little away from it for a long time. When you are busy with your life elsewhere, your portfolio grows.

Long long ago…there was a Garden which was beautifully created by a very nice gardener. It was time for Diwali and he too wanted to go to see his wife and children who were staying far away. The owner of the garden told him – find somebody who will take care of the garden in your absence – and after that you are free to go.

He was very sad, but still wanted to go. When he was wondering what to do, he saw a bunch of monkeys who were living in the garden. The gardener wanted to celebrate the holiday, just like everybody else. So he decided to hand over his duties to the monkeys.

He went to the monkey king and said, “Oh king of monkeys, my honourable friend, would you do a little favour for me? I must be away for 2 weeks. Here in this lovely garden, there are plenty of fruits and berries and nuts to eat. You and your subjects may be my guests, and eat as much as you wish. In return, please water the young trees and plants while I’m gone.”

The monkey king replied, “Don’t worry about a thing, my friend! We will do a terrific job! Have a good time!”

The gardener showed the monkeys where the watering buckets were kept. Feeling confident, he left to celebrate the holiday.

The next day, the monkeys filled up the buckets, and began watering the young trees and plants. Then the king of the monkeys addressed them:

“My subjects, it is not good to waste water. Therefore, pull up each young tree or plant before watering. Inspect it to see how long the roots are. Then give more water to the ones with long roots, and less water to the ones with short roots. That way we will not waste water, and the gardener will be pleased!”

Without giving it any further thought, the obedient subjects followed their king’s orders.

When a wise man asked them what they were doing they replied as follows “We are watering the trees and plants, without wasting water! We were commanded to do so by our lord king.”

The man said, “If this is the wisdom of the wisest among you – the king – what are the rest of you like?

Intending to do a worthwhile deed, your foolishness turns it into disaster!”

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For most of us, deciding when to sell is a lot harder than deciding when to buy. It’s not a subject that gets much attention, largely because it can depend on individual circumstances–when you bought the stock, how big a part of your portfolio it is, etc. Also the sell calls are not really high – after all nobody (read management) will really want to pay for such a report, right?

Still, there are some solid rules for when selling is a good idea, and for when it’s not.

Did You Make a Mistake?

In other words, did you miss something when you first evaluated the company? Perhaps you thought management would be able to pull off a turnaround, but the task turned out to be bigger than you thought. Or maybe you underestimated the strength of a company’s competition, or overestimated its ability to find new growth opportunities. No matter what the reasons, it’s rarely worth holding on to a stock that you bought for a reason that’s no longer valid. If your initial analysis was wrong, cut your losses and move on.
I did this several years ago with a shipyard company (heard of Chokani International?). My growth expectations turned out to be way too high, because the India for ship building and maintenance boom that I expected did not happen! I was down quite a bit on the investment by the time I figured this out, but I sold anyway. Good thing, too, because the shares subsequently plunged to penny-stock territory. I recently (about 3 years ago) bought shares of GMR Infrastructure for Rs. 71 – thinking of the Infra demand in the country, the Delhi and Hyderabad airports…etc. (breaking my own rule of NOTHING from Hyderabad). However when I quickly reduced my exposure – and lost just a couple of bucks. Then of course it plunged to 20 or even lower.

Have the circumstances changed?

I bought a piece of shit – Crest Animation – it was supposed to be the Infosys in the Animation space. Then the prices went down a little, added more, because a brilliant merchant banker joined the board. I had no business holding the share once he left the board! (price had gone further south by then)..then reluctantly (reluctance to acknowledge OWN mistake)…I did sell, but had bled a lot by then. Mistake? trusting the shitty management.
Have the Fundamentals Deteriorated?

After many  years of success, that raging growth company you bought has started to slow down. Cash is piling up as the company has a tougher time finding profitable, new investment opportunities, and competition is eating away at the company’s margins. Sounds like it’s time to reassess the company’s future prospects. If they’re substantially more grim than they used to be, it’s time to sell, no matter what the stock price has done since you bought it. Companies which are in my portfolio and I keep worrying about this problem are Colgate, Ashok Leyland, Hdfc, – but I realized that in all these industries the equations do not change easily. Even ITC with all the new laws in cigarette sales, the margins do not fall off really quick. But one needs to be hawk eyed.
Has the Stock Surpassed Its Intrinsic Value?

Let’s face it: Mr. Market is a capricious individual, and sometimes he wakes up in an awfully generous mood and offers to pay you a price far in excess of what your investment is really worth. There’s no reason not to take advantage of his good mood. What you need to ask yourself is how likely it is that your estimate of what the company is worth could go up over time. If your estimate of intrinsic value is likely to rise, than it’s worth waiting out periods of mild overvaluation.

It is not always easy to ACCEPT that it has reached its peak. Take a look at Cholamandalam Investment and Finance. Not long ago I bought it at Rs. 60, thinking I would happily sell it at Rs. 300 in 5 years. Half way to the 5 year mark it is already at Rs.500 and I am holding almost the whole quantity – sold just 1500 shares enroute.

Generally, it does not take much in the way of a valuation premium to convince me to sell stocks with minimal economic moats. However, I am not so keen to sell stocks with wide moats. FMCG and Pharma in Indian markets quote at such a premium that one does not know what is the intrinsic value – so Pfizer, GSK, Colgate, Gillette, PnG, …etc. continue to be in my portfolio. NO clue when I will sell all these shares which have been with us for 3-4 decades.

Is the share now more than 12%* of your Portfolio? 

Any time one stock grows to become more than 10% of your portfolio, you should start thinking very carefully about how much risk you’re taking on–even if you still think a company has great prospects, it’s simply not prudent to allow it to take up too large a percentage of your portfolio. I learned this lesson the hard way a few years ago. I’d bought a few hundred shares of a small company called Mukand Engineering back in 1999, and five years later it comprised more than 20% of my portfolio. I sold some shares to lessen my exposure, but not nearly enough. As a result of my greed, I suffered more than my fair share of the tech downdraft. Sometimes we need to learn the hard way. (Ah yes this engineering company was masquerading as a technology company for a few years of its existence)

* create your own limits, I am happy with about 12-14% but sometimes break it and allow it to go to 16% in case of commodity stocks…

Of course, spreading your risks around applies to larger categories–such as sectors, groups, market caps, and styles–in addition to individual stocks. Any time you find that too much of your portfolio is in one area of the market, then you’ve probably got yourself some good sell candidates.

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Photo Credit: Sepehr Ehsani — Which project is better, project A or project B?

I can’t remember where I ran into it, but I found this article on a blog that I had not run into before on Calculating [the] Cost of Equity for Value Investors.  I think it gets close to the right answer, and I would like to sharpen it here.

My answer to a lot of economic questions is: what’s the alternative?  Many people look at the shiny formulas in investing but don’t ask what they really mean.  (More people just don’t look at the formulas… which has its pluses and minuses.  The math reveals, but it also conceals hidden assumptions.)

After wisely dismissing how to calculate the cost of equity from Modern Portfolio Theory [beta] and the Gordon model, he considers cost of equity based off of return on equity, and begins to get tied up in problems.  Let me try.

The cost of equity is important for a number of reasons:

• It helps answer the question, “When should a company issue or buy back stock?”
• It provides a measure for the alternative use of equity capital on competing unlevered projects/investments of equivalent riskiness.

Note the each of the reasons is structured as a series of comparisons.  I’ll use a discounted cash flow [DCF] analysis as an example.  Imagine a simple project requiring an investment of equity capital.  There is a certain cost, and the risk is enough that you can’t borrow money for financing — it must be funded by equity.  There are expected after-tax cash flows from the project that you think are a best estimate of returns.  When would you invest in the project?

I would compare investments versus other similar investments, and look at as many similar projects from a riskiness perspective, and see which investment yielded the best return.  The second place project as returns go is the alternative project for investment by which the winning project is judged, and surprise, the winning project has a positive net present value evaluated at the rate of the alternative project.

(An aside: it just hit me that I am recreating part of the learning process that I went through back when I was a TA at UC-Davis 31 years ago, helping teach Corporate Financial Management [CFM], while taking quadratic programming [QP] course at the same time — I ended up doing my QP paper on using QP to choose investments to maximize returns without explicitly calculating internal rates of return, thus quietly solving a problem that the undergrad CFM textbook said could not be done.  FWIW, which isn’t much.)

Now, I’m waving my hands at what I mean by risk, but to me it is the best estimate of the probability distribution of outcomes, thus giving you estimates of what the likelihood and severity of adverse outcomes could be.  The thing is, in real life we know these figures poorly at best, but the framework is still useful because the investor making the decision needs to choose the project of a class of projects with roughly the same risk profile.  Though my initial example included only equity-financed projects, this could be expanded to consider all projects, where the amount of debt on projects affects their risk, and the tax-affected debt cash flows are a deduction from returns.

The process would remain the same: look at as many similar projects from a riskiness perspective, and see which investment yielded the best return on the equity.  The second place project as returns on the equity go is the alternative project for investment by which the winning project is judged.

Back to Stocks

Where does that leave us as stock investors?  I subscribe to the “pecking order” theory of the cost of capital, which says that firms use the cheapest form(s) of capital to fund their incremental financing needs, which means they should rarely issue equity. The exception would be if they are undertaking a project so large that it would make the company significantly more risky if they were to issue only debt for financing.

We do see companies engaging in buyback activity when they can’t find better uses for slack capital.  In many cases, there are few large projects begging for the attention of management.  Buying back stock earns the earnings yield for the firm.  Managements buying back stock make the statement that there are no more incremental projects of equivalent risk that would have an unlevered return on equity greater than the earnings yield for the firm.

Now maybe shareholders may have a bigger set of investment choices than the firm does, so perhaps dividends could be a better choice for shareholders, but it will have to be a lot better, because dividends are taxable.

In general, we want to see management teams be careful users of equity capital, taking note of its cost for the benefit of shareholders.  Every good management team should have their schedule of possible projects for investment, but always recognize there is the alternative of buying back stock as a last resort.  In that limited sense, the earnings yield is the cost of equity for the firm, unless big profitable projects beckon.

There’s more to say here, but maybe this is a good start.  Thoughts?

At what age should one start preparing for retirement? It is customary to say – the day you get your first job. Let us be fair, this will NEVER happen. No 23 year old kid is going to think about retirement (that too his own!) when his parent is still working.

At your age of say 40 years you will find people who played (in your childhood) with you are retiring. Suddenly it hits you that you have to retire too. You may have bought some investments with the word Pension – but honestly you did not pay too much attention to what you bought.

Suddenly one day your wife said “you do nothing around the house..your money is in a mess and you have no clue what you will do for Retirement”

Your company’s head of HR is a close friend of yours and was 3 batches your junior when you did your MBA. One day at lunch he throws a bomb – the company is considering a “Voluntary” retirement for people over the age of 50, and even those who are over 45 will be considered favorably.

You now hit panic situation. You have a house, and the home loan has been paid off, but nothing much more than that. You do a quick analysis – your bank had asked you to pay Rs. 3 lakhs premium in a insurance plan (so over 4 years it should have Rs. 12 Lakhs is what you think), your provident fund is untouched so it should have about Rs. 26 lakhs, you have some shares which at last count was worth Rs. 23 lakhs, but you have not valued them for the past 4-5 years and actually you have no clue.

You have 2 daughters – and the big educational expenses have still not hit both are in high school – so you have the college expenses, and wedding expenses to reckon with. Your mother in law stays with you – she is just 64 and could live another 30 years (at worst!). Your own parents are currently living on their own in Mumbai. They are financially and physically independent – but as the only son you need to anticipate that they could come and live with you!

Bang, bang.

You wake up sweating. You ask your relationship manager and he says that it a ULIP that you have bought and your life insurance plan is worth Rs. 8 lakhs after all expenses and if you surrender it now you will get Rs. 7 lakhs – after a surrender charge. Your equity shares are worth Rs. 35 lakhs (pleasant surprise!!)…and your PF is about 25 lakhs. That gives you a net worth of Rs. 68 Lakhs. That joker Subra of Subrarmoney.com had told you that for retirement you need about Rs. 3.4 crores. What a joke.

Here are my thoughts on preparing for retirement. Many planners who are dealing with people past their earning prime, will benefit to know some of this.

In my experience I have found that people who are doing their own business are more alert – to business opportunities and to their own physical and mental requirements. They are also less concerned about retirement than their service counterparts! However they too need to retire – somewhere they have to accept that the younger gen may NOT WANT their older parents continuing to interfere in the business. The younger gen may want to make changes which you may not be allowing…so hey get out of  the way!

Start planning for your RETIREMENT from the age of 40 or 45 years…..a good age to start. Worrying about what to do at the age of 60 cannot start at the age of 60!

I think doing the following things are useful / important to be in good shape – mentally and physically:

1. develop a serious hobby – play a guitar, ride a cycle, run the marathon, – hardly matters, but it should be something which you always wanted to do passionately.

2. join groups, clubs, - groups and friends have a great impact on your life. Groups with common interests will help you talk, walk, eat, ….the passionate hobby of yours!

3. learn something new - and try to do something physical like reading, writing, knitting, cooking…using both hands improves dexterity.

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First of all we all need to understand that the main stream media (msm) only carries advertisements. Some of it you recognise as ads, some which you do not.

This Saraswati Pooja let us learn and just not fall to their sales gimmicks. Yesterday / Today / Tomorrow you will receive Real Estate specials – full of ads by builders, sanitary ware makers, tiles, etc. etc. and they will also contain ‘articles’ .

What are these articles going to say?

– real estate has not done well in the past 5 months, so it will do well in the next few decades

– give you indicative prices in various locations – I recently saw a deal in Ghatkopar for exactly 50% MORE than the rate mentioned in India’s leading English daily. Hmm 50% cannot be just laughed away I guess.

– you are better off buying property with a loan, and the loan can be easily repaid over the next 20-30 years. All the best.

– you are better off buying RE instead of buying some depreciating item like a/c or washing machine (after all they are the cost, right??)

The bankers in India have lent 5.73 trillion – 573,000,000, 000, 000 Rupees. If you have finished counting the number of zeroes apply your mind. If the bankers had not lent so much money, could the builders have jacked up prices so much?

How did the bankers have so much money? Hey you gave it to them = see the amount of money lying in your savings account, current accound and of course cheap fixed deposits…

Who are the EXPERTS who write in this page? Real estate consultants (aka brokers), builders, landlords, RE fund managers, PMS managers who have lent money to such builders…..lol

What should you do? Research a lot. Once you decide on say Ulwe, visit the place. Then go on to FB and create a buying team – and bargain with the builder for 5 flats. I would be surprised if you DO NOT get a 30% discount without much fighting. Talk to housing finance companies and find out who are stressed is a nice starting point.

This Vijaya Dashmi day go and get educated BEFORE you go and ‘invest’ your money to get fabulous returns.

Go to Pattu’s website and use the RE calculator and see what kinda returns you are getting. Then curse him and me.

Happy Vijaya Dashami.

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I have said this many times in my blog and many people may be wondering what it means. Let me explain what is a Rich attitude with some characteristics of a person with Rich attitude:

1. They are ‘Santhust’ or ‘Satiated’ with what they have.

2. Being satisfied with what they have does not mean they stop working or stop earning. It is just that their standard of living has nothing to do with their net worth.

3. They buy things that they need, not things that they can afford. So a person who needs to travel 20km on a straight road and travel alone may buy a Nano, but if he has to travel 500km a week to visit his factory on a difficult road, he may buy a Honda CRV and hire a driver.

4. He could own a Merc and the humility to go by an auto if the need arises.

5. He lives for himself, unmindful of what the world thinks about his choices.

6. His money making, wealth accumulation and his regular expenses are not always related. Beyond a particular level of wealth, he is just adding money for his grandson / great grandson. However that does not stop him from slogging his butt to make money.

7. Takes good care of his health, has a good attitude towards spiritual health, mental health and wealth.

8. His children have a lot of his qualities – and if they do not, it does not bother him too much. His ability to live within himself is just awesome.

there could be many…but hey here is a start…

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This appeared on qz.com a short while ago.

Fixing the laws is fixing the Republic

Badly drafted laws are at the heart of the failures of government in India. Indian laws all too often have vague objectives (hampering accountability), and give sweeping powers (inviting abuse). Today there is a thicket of nearly 2,000 central laws, alongside hundreds of state laws, processes, rules and regulations, The Gazette of India fares badly on publishing central legislations, making it impossible for citizens to know all the laws through which government has powers over them. Everyday life has become a minefield: a person never quite knows what laws he is violating.

Remedying this situation requires large scale rewriting and cleaning of the statute books. The first step is outright repeal of obsolete and anachronistic laws. The second is creating a new wave of well-drafted laws which clean up one sector at a time. A well-drafted law is precise, principles-based and will make sense for a long horizon. One example of this is the Indian Financial Code, which aims to replace all existing financial law. Drafting high quality law is a complex and time-consuming process. Both strategies -- outright repeal and new drafting -- are required to clear the thicket, reduce complexity, uncertainty, mis-governance and opportunities for rent seeking, and ultimately to put the Republic on a sound foundation.

Focus on three groups of laws

Three groups of laws are of prime importance in cleaning up the undergrowth:

1. There are laws from the colonial era which are irrelevant or misplaced today, as the world has changed. Some of these were specifically enacted to curb the independence movement.
2. In particular, during the Second World War, many laws were passed which reflected the exigencies of the war. In numerous areas, freedoms of Indians were taken away to make it convenient for the British war effort.
3. The laws from the socialist period, roughly 1950 to 1980, where the government sought to achieve a dominant role in the economy. Many times, the dirigisme which was initiated as a wartime measure ossified into a system of control under socialism. The years around the Emergency in particular had laws which gave a tremendous increase of State power, the after effects of which are still plaguing the country.

The zone of careful rewrite

While all the laws under these three categories merit review, in many cases, outright repeal is neither feasible nor desirable. Three examples are instructive:

1. The Forward Contracts Regulation Act of 1952 has as its objective the prohibition of options trading. This is not an objective that we wish to pursue today. However, the solution does not lie in a simple repeal of this Act; what is required is a complex drafting of a new law (i.e. the Indian Financial Code).
2. The RBI Act, 1934, was proposed by the British as a `temporary measure'. It is a badly drafted legislation, and has given us an underperforming central bank, but the solution is not a simple repeal but the complex drafting of a new law (the Indian Financial Code).
3. There are huge problems with the Indian Penal Code in areas such as freedom of speech. In a sense, the IPC of 1860 (written three years after the mutiny) is incompatible with the Constitution of India when it proposes to imprison a man for committing the crime of speaking. This, once again, is not a simple repeal. What is required is a full rewrite of criminal law.

The zone of outright repeal

In 2014, a collaborative project was initiated between three organisations -- Centre for Civil Society, Vidhi Centre for Legal Policy and the Macro/Finance Group at the National Institute of Public Finance and Policy -- that aimed to identify 100 laws that can be simply repealed. This initiative came at the back of the new government's undertaking to clean the statute books. The initiative identified laws that are completely out of touch with today's India, where almost everyone would agree that they do not belong, and where there are no complexities other than a simple repeal.

The report of this project has a compact presentation of each of these laws, based on thorough research. This document is a hall of shame of the 100 laws that have no reason to exist. Once there is consensus about this work, a simple `Repeal of 100 laws Act' can be drafted which eliminates these 100 laws.

In the past few weeks, the government has built momentum towards fulfilling its promise of repealing dated enactments -- however, these have focussed largely on low-impact house keeping repeals. This is no doubt crucial. The 100 Laws Project however, goes a step beyond -- it has assembled a package of both low impact repeal recommendations (40 of which have been included by the 20th Law Commission as part of its Legal Enactments Simplification and Streamlining project/248th Report), as well as gathered evidence to recommend repeal of high-impact laws that materially affect business climate and government effectiveness.

Achieving a modern and capable State in India undoubtedly requires more work. There are surely more than 100 laws which merit simple repeal. There are thousands of laws, which can be removed through more complex drafting projects. Most important of all is the constructive agenda, of drafting high-quality laws which create an accountable government with clarity of objectives. However, in that larger journey, this project is a useful and immediate building block.

Reinvigorating the legislative process

In the past, the drafting of laws was dominated by the executive. As an example, the ministry of rural development drafted the National Rural Employment Guarantee Act, 2005. The founding team of SEBI drafted the SEBI Act, and RBI staff have repeatedly had a role in drafting amendments to the RBI Act. This method of drafting generates a bias in favour of sweeping powers and low accountability.

For the health of the Republic, it is important to have independent voices involved in drafting and critiquing laws, and to create public debate on the substance and impact of new and old laws. In recent years, we are starting to see the evolution of thinktanks away from traditional economic policy analysis towards a greater understanding of, and an involvement in, the legislative process. Examples of these organisations include Centre for Policy Research, Parliamentary Research Service, Centre for Civil Society, Vidhi Centre for Legal Research, Indira Gandhi Institute for Development Research and NIPFP. An array of high quality independent writing now dissects laws and regulations, and creates resistance against badly drafted laws. This is an important and welcome new phase in the policy process in India -- in the maturation of the Republic -- one we think should be received with enthusiasm by the new government.

There are 3 statements of Mahatma Gandhi – which are so unique and really awesome. Sadly not enough has been written about these 3 statements.

1. Choosing your problems  – a brilliant concept and I had written about it earlier – here it is

http://www.subramoney.com/2011/02/choosing-your-problems/

2. I am Rich by the things that I can live without! – so true – and here is  a link to that-

http://www.subramoney.com/2010/10/i-am-rich-by-the-things-i-can-live-without/

3. You should be ASHAMED to say that you are not well:

This is another amazing statement. My doctor also tells me the same thing. If you are not well see ‘what have you done to your body for you not to be well’. Generally being unwell is caused by food – too much food, too hot food, too much gap between meals, wrong food (maida, sugar, cola, coffee, – far in excess of what the body can process).

So if you do not abuse your body, you should be fit and fine. As long as you eat simple foods, rest well and sleep well  and exercise regularly – your body is likely to be fine….

So on his birthday….let us remember these three Master statements from him…

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