taming the bull

What I write is nothing profound; but, usually, I find what most others write about investing just crap. So I read those just for fun and entertainment. I believe that it is always better to do your own research and then act based on it. Two advantages: one, you will gain knowledge along the way; two, you will learn to both appreciate research and luck, and accept your mistakes. Blame game is no good; learning lessons from mistakes is better. 

The markets are on a high, and many call it a bull market. And there is always a dilemma in dealing with it. To buy or not to is the question for genuine value seekers. They may find that it is becoming quite difficult to pick stocks in this market now. Price, based on the fundamentals, may look to be expensive. If you don't buy, and prices still go further, there is loss of profits; ouch, envy. If you buy despite your expectation that a correction is imminent and prices fall, you meet with realized losses; ouch, greed. The bulls too have their ways of dealing with investors. 

To tame the bull, you have to be tactical. There is a limit up to which you can be comfortable in placing buys for individual stocks. A better way of buying is through regular intervals: Buy only the broader index, not stocks, say, each month, either in fixed quantity or cash. Continue this program as long as you can, or at least until the bulls are tamed. 

The bull markets are also better suited for some betting, if you're keen, on the derivatives market; and a better way to do that is with the money separated from investments. It is both fun and exciting, and yeah, can be rewarding too, if carried out methodically; after all, there can be a method to one's madness.

Nifty hasn't got much to offer at these levels unless we have a surprise, surprise on the earnings growth. So it is advisable to show some restraint. For that to happen, though, you have to learn to deal with greed and envy first. Otherwise, it could be a greater fool's story, which left even one of the greatest minds in history dumbfounded and sort of starstruck.

fool, or a greater fool

As Nifty closed at 9316.85 today, I am reminded of someone's remark:

And there was a good reason why he said what he said. There are plenty of people who are calling targets for individual stocks and the index. One such is Sensex heading to 60000 in a few years. 

We have to remember that over the years, the productivity increases, GDP increases, corporate earnings increase, and therefore the market index increases. In January 1996, Nifty was at 908.01; it has marched forward despite political and economic issues; cross-border problems; droughts and floods; cold and heat waves; and so forth. We do not need anyone telling us that the index will increase in future; it will. 

That does not mean, however, that we need to start buying stocks overlooking the price. The single most important factor in deciding the rate of return on investments is the price. Therefore, it is always nice to have a good look at it before the purchase. People often do that while buying fridge and washing machine, or even groceries. For stocks, though, they pay what market asks. Well, the market is a maniac. We need to prove that we are not by not falling prey to its psyche. The more it appears to be sloppy, the more we need to be careful. The trick is to make money out of the market inefficiency, and not be part of it. 

As of now, the Nifty is not cheap. Nevertheless, for periodic buyers that does not matter because of price averaging. I have noted several times that for the long term index buyer the index levels do not matter at all, which is actually a very good strategy. Market returns are not going to be bad either. 

It is chasing excess returns that causes problems. Several individual stocks are currently trading at steep valuations. My search is on for gaps between value and price. Cash is a more rational decision at such situations. Ignoring comments like buy or you will miss the bus, etc. is wise. Most advisors will tell you to buy more when the prices are going up and high, and sell when they are down and low. 

As of now I cannot tell at which stage of the market we are in. Yet we can at least learn some lessons from the financial history; and I am reminded of one picture:

We need to ask ourselves at which stage of the market are we entering. Remember though that the final stage of a bull or even a bear market is always a greater fool's market; and fools have to often part with their cash. While we are not capable of measuring motions of heavenly bodies, we can at least try to stay away from the madness of people. Is that asking for too much? I would rather work towards making money out of their madness.

apple: 11 acquisitions, and no big deal

I noted earlier in 2014 how Apple can use its cash more productively. Although not much innovation has taken place at Apple, its market capitalization grew from $600 b in October 2012 to $765 b now. Never mind if it is not much of an appreciation for the investors. I also argued in February 2013 that with $140 b of excess cash, Apple had to do something. In late 2014, there was much talk of Apple being on sale, what with a market valuation of equity estimated to reach $1 trillion. In November 2015, Apple's market value reached $676 b; it had peaked to $750 b in 2015; and Apple had had a marvelous decade. In August 2016, we heard that Buffett had bought Apple stock, a news of the decades event. Recently in March 2017, I had wondered what Apple could do for its investors with a market capitalization of $744 b, 34% short of $1 trillion. I also expected that Apple could be a 7.50% returns business, which is actually not that bad in the present environment. 

Now we are back to Apple. At the current market price of its equity at $765 b, and a staggering cash hoard in excess of $250 b, Apple has become interesting; well, it has always been interesting. This story came up with some of the things that Apple can do with its cash. But then I thought of my version as I pleased. 

This time I would like to make it more interesting by moving to an emerging economy, which of course has the potential to provide higher returns even by the dollar terms. The most valued company in terms of market capitalization in India is either TCS or Reliance, each priced between $65-70 b. Compare that to just the amount of excess cash that Apple has; the perspective is evident. 

Apple has an enormous volume of fixed currency. Most of that is tottering outside of the US waiting to be repatriated once the tax laws are made favorable. This is not invested in any of its operating businesses. Consequently, Apple can use the cash as it pleases without hampering its business. The best use of excess cash is to return it back to the shareholders. It can be done through share buybacks if the stock price is much lower than its intrinsic value. If not, cash can be returned in the form of dividends. 

I wanted the post to be more interesting. Unsolicited as it may, I suggest acquisition of some wonderful businesses from India, which have the potential to become bigger through passage of time. The acquisitions are only a fiction as none of this is going to be allowed as per the laws. That does not stop imagination, though.

HDFC bank is a wonderful banking franchise, which has rewarded the investors handsomely during the past decade. Interestingly, it is still a growing business. 

State Bank of India has not been a performer; it rather has been a trading stock. Yet, it is a banking behemoth operating in some very interesting times.

Hindustan Unilever was struggling until 2011. Unilever offered to buyback shares at a price of Rs.600 in April 2013. The stock has been rolling since then.

Maruti Suzuki is the largest automobile business in India, and will likely continue to grow.

I strongly believe that both ICICI bank and Kotak Mahindra bank will grow at a decent rate in future. 

Asian Paints is the largest paints manufacturer in India, and has been an investor's delight for years.

Nestle has done very well in India, and probably will do well in future too.

I would be surprised if Asian Paints, Nestle, Dabur, and Marico do not do well in years to come. Just have a look at the chart. 

And there is Pidilite, an adhesives company, which has rewarded its investors big time.

There you go. If Apple acquires these eleven businesses at current prices, it should spend its entire excess cash, and yet be able to continue sale of iPhone, iPad, and Mac without any hitch. In fact, soon it might even generate cash, albeit in much smaller doses.

I would like to believe that over the years, these acquisitions will provide higher returns than Apple's core business unless of course Apple surprises me with innovation. 

news: of course it's fun

I have heard some investors boasting about how they don't read the news; they consider that it is quite cool to say that they shun it. They call it the noise, and go about giving reasons why it is uncool to actually read the news of the day. I reckon the chances are that they belong to this or that camp.

Well, I find them crazy; they could even be perverts obsessed with certain philosophies. Why do I care? Heck, I find it funny that since they have cultivated naive followers, they are able to exercise certain influence on them; and that is pretty bad. 

I don't understand why it is wrong to read the news; there are several newspapers that talk about various aspects of life, be it politics, business, sports, or even daily events. I religiously read topics of my interest every day. Shouldn't one be appraised of the events shaping our city, state, country, and our world? And the funniest part is that the same people who bash news items are the ones who choose to give their thoughts on them on their blogs and twitter accounts. If they don't like news, why do they mention about a particular news event? They do it because they don't preach what they do, a reason good enough to shun them rather than the news.

I almost find it fun to read news, whether from the newspapers, magazines, or generally from the Internet. It is another matter that I do not usually read opinions about stocks. I would rather read the source documents such as annual reports, etc. than hear someone giving any shit about a business. My stock picks are based on my own analysis, rather than someone else's thoughts. It is easier to blame or appreciate yourself than others for results of your actions. 

Opinions on any matter other than stocks, and I am game to hear. I think these people who propagate shunning news and making it a big deal are actually paranoid. I wish I could address all those simpletons who follow their favorites without some thinking. They got to wake up, and start pondering. And above all, they should start reading some news of the day.

The news stories spice up our life. I sometimes even read blogs of those clowns, and entertain myself. Howzat!

berkshire hathaway: return of cash

In July 2016, I noted that Berkshire Hathaway is a decent business that is not going to let its investors down, and yet it will also not be a market-beating investment. It is worth more than $400 b now, and sitting on a cash of over $85 b.

And it is its cash that is letting it down. Each quarter while the stash gets bigger, there aren't much avenues for its use. You cannot expect treasury returns on them forever; that would be an injustice to the shareholders. It's time now, probably, for Berkshire to consider the opportunity costs of its shareholders rather than its own. 

Berkshire has done very well in the past 5 years. 

As of May 2017, Berkshire stock has beaten both the Dow and S&P-500 by a decent margin. That's not the problem now though. As investors, we look at future rather than past. Quite naturally, we are interested in Berkshire's future returns.

Berkshire cannot sit on cash forever. Its operating businesses need far less cash for reinvestment than they throw out. Assuming that there are no further acquisitions, there seems to be an urgent need to return cash back to its shareholders. Even after allocating some cash for acquisitions, it is more rational to return cash than to keep in treasuries. 

The shareholders will have far better investment opportunities in the present environment than Berkshire for at least two reasons: Berkshire has grown too big such that its acquisition size has to be gigantic to make any meaningful return. Investment choices in marketable securities meeting both size and return criteria are rare; it would shake up the market prices. Opportunity costs of the individual shareholders are much higher. Therefore, cash in the hands of shareholders has much more value than in Berkshire's custody.  

Cash can be returned by way of either dividends or share buybacks. This is the single most important task in the hands of Berkshire; yet considering the towering brand of its two capital allocators, no one is brave enough to even talk about it. 

Let's allocate $10 b each to its two younger investment managers, Todd Combs and Ted Weschler. Let's keep $20 b in treasuries that is required for a good night's sleep for Buffett and Munger. That leaves Berkshire a one-time free cash of more than $45 b to give back to its shareholders. Each year, there will be free cash available to return based on an approved (significantly higher) payout ratio.

And return it must, in spite of its historical track record, and despite its iconic managers. We all have to appreciate that when facts change, we got to change our mind.

Who's going to show courage to inspire the bosses there?