nifty at 100000, is that so

While Nifty took 21 years to increase from 1000 to 10000, here's someone telling us that it will increase to 100000 sooner than that. Well, it might as well be. At the same time, we cannot stop people from saying something, right? When there is demand, supply comes naturally. There is a lot of euphoria these days; so anything that attracts headline is game. 

Of course, both political and economic environments are far better as of now. So returns from the Indian equities are going to be much better than any other alternative investment opportunities. Nevertheless, we need to be aware of the pricing game and the value game; both are different. 

How about making an annualized return of 139.92%? Nifty increased from 5000 in September 2007 to 6000 in December 2007. This happened even while the index was 22.49 times earnings and 5.33 times book equity. Extrapolating, or hoping for the repetition of historical returns, there is an expectation of similar returns now. That's because Nifty is trading at more than 25 times earnings, and more than 3.5 times book equity. 

Well, the story is not complete. What happened after December 2007 is important. Another 1000 points increase to 7000 happened only in May 2014. The annual return over more than 6 years was 2.40%. Yeah, there was the great financial crisis in the middle. But then at 6000, the index was quoting at more than 26 times earnings, and more than 6 times book equity. If you know that your returns are hugely dependent upon the price you pay, you would realize what it means to buy in December 2007. 

Of course the buyer in May 2014 at 7000 was hugely rewarded leading the index up to 8000. But not the one at September 2014, who thought 8000 was a bargain at less than 21 times earnings and less than 3.5 times book, for the annualized return was only 4.69%; even after holding it until 10000, the annualized return is only 7.89%. 

During boom times, as it is now, there will be a number of idiots talking about, what else, boom. The exuberance tends to be irrational. As someone said, it is only when the tides are gone you will know who is left naked. I reckon, these days there are more men and women naked than those who are not. We will only find that out much later after the bulls are tamed, and bears march in. 

It is also good to know that change from 1000 points to 2000 is a 100% increase; and from 9000 to 10000 is an increase of just over 11%. Yet, people talk as if both increases are similar. The optimism in the tone is apparent. The index took only 4 months to increase from 9000 to 10000 in July 2017; that's an annualized return of 33%.

Unfortunately, people don't see the fundamentals underlying the index value. You cannot make more than what the business behind the stock makes in the long run; and equity investing is for the long run, for businesses are meant to be run for long. If the business is making say, 15% on capital in the long run, any expectation of more than that from the stock market is unrealistic. Stock prices follow business eventually. Of course, anything can happen in the short run. Yet we have people putting their hard-earned money into things that they don't understand. They will take time to check smart phone prices, but not stock prices. Heck...

Some perspective: To bring the earnings multiple down to say, 20, the Nifty earnings will have to increase by 25%, and its value will have to remain at 10000. Will that happen in the near future? I don't know about that; but, what I know is that the earnings will have to go up more than the index itself in the coming years in order to give a reasonable return to the buyers at the current level. 

It's time to get real, I guess. 

life lessons; it's all for good

It's an old story; but I have to do this. I had sent an email to someone, who I thought I had admired, but it turned out I did not, in November of that year. The response was immediate on the next day. Happily I wrote on the same day mentioning how I admired his approach to investing, and noted my plans of leaving the job and starting investing as a career choice. I asked a few questions and sought some clarifications. 

Fourteen days later (yeah, I did not note the signs) I get a response saying that he was quite busy at that moment to guide me individually, but was happy to answer my questions in January next year. He also graciously extended his offer to meet him in his city if I wished to. I mentally noted that I had not sought individual guidance as he perceived it, but had only sought some clarifications on his approach to investing and my journey as such. Anyways that was that. 

As was my wont, I promptly replied on the same day. I mentioned that I would be happy to meet him, and also that I would be happy to call him in January as he preferred. I also sought some information on reaching his city since I was working elsewhere. 

Four months later (yeah, I should have noted the signs this time) in March I get an apology (I give it to him for that) for the late reply and asking me to call him the next day at his number that he supplied.

A week later it was my turn to apologize as I was tied up with work and could not check mails. I sought another date and time for the call. Five days later I wrote again to tell him that I would be out of station and would not be in a position to check mails for a week. A week later I promptly wrote again asking him to give a date and time convenient to him. Eight days later in April I again wrote to him. A week thereafter I wrote again. 

Finally the next day of my previous mail I get a response (effectively a month's delay, and no apology this time) asking me to call him the same day. I said fine as it was my problem, not his.

The fun and games began on the call that I placed in April. I mentioned about my plans to leave the job and start investing as a career choice managing my own money. The conversation was so embarrassing that there was no time to ask questions and seek clarifications I had noted in my first email. He vaguely said something. Then he said that I was a professional and how I could talk about specific stocks. I mentally noted how the heck he thought that I was seeking stock advice. Was he out of his mind, I mean, was his mind somewhere else? Was it lack of interest? There wasn't mention of a single specific stock. I neither give, nor seek stock advice. It was my turn, obviously only in my thoughts, to note that he also was a professional and I did not expect such a sloppy response from him. Then I had to close the call as he appeared to be in a hurry. Man...Neither any of the questions I had in my mind were asked, nor any of the clarifications were sought. It was one such waste of time. 

All my working life I was with the biggest of consulting firms in the world. I met strangers often both in life and profession. If there was a call, there would be a response. If there was a mail, there was a reply. Nothing great about it; every professional did this. More importantly, if there was no interest in communication, there was an apology to that effect. No stretching, dragging, and crap. That's professionalism both in life and work.

Yet I wrote to him on the same day thanking him for his time. I also thanked him for the encouragement although there wasn't any. I mentioned that I would write to him in August as he had preferred regarding meeting him in his city. In fact, as I had no such plans at all, may be I should not have mentioned about meeting; never mind. 

Any other gentleman would have responded immediately wishing me regarding my decision to move on with a new career. Nope, none of such. Was I expecting, after all of this? Man...

As I reflected on the whole later, I realize that I need not have contacted him at all. I need not have flattered him at all; I need not have admired him at all. I had been investing in stocks long before and had reasonable success. My thought process was already evolving based on my quest to learn. There were books that I had read and was reading. I was tracking life and times of investors I admired. The knowledge was building up, and I was already aware that investing was a life long learning process; and lots of fun too.

More importantly, I had already informed my office regarding my decision to relocate and set up my business of investing. This was long before I first wrote to that person. It wasn't even that he changed my course of sort. My decision to move ahead was independent and irrespective of the results of my communication with that person. All arrangements for relocation had already been made much, much earlier.

Yet these things had to happen, and teach me some valuable lessons. I learned a little more about human behavior. There was reinforcement on how people wear masks all the time. There is no regret of course because I did not know what was about to happen. I find it all funny now because I realize that there wasn't anything special about that person in the first place. Perhaps, I got a little carried away since I was to start this very interesting journey that had been my favorite pastime. 

I had put in my papers already and had announced to everyone in office about that. I was to leave office and relocate. I had made that decision. Yet I had to write that email and place that call. Heck. But then life is like that, isn't it?

Well, I have moved on. I have been investing. I have been learning along; I have been reading. I have been doing exactly what I had planned for myself; Investing as a business has been good for me and my temperament. And more importantly, I have been having fun. 

How about that someone, that person? I don't know, and I don't care. Man...

deutsche goes to lunch with warren

We all know that each year there goes a bid to have lunch or dinner with Warren Buffett, and the proceeds are graciously contributed to a charity. Diehard fans have and are willing to pay up millions just to sit next to Buffett and listen to him. They always come back saying it was all worth it, and why not?; they are the biggest of fans. 

Recently, I came across a report, though, that says $2.7 m that was paid for the lunch was actually worth it for anyone. Bizarre as it sounds, its argument actually is bizarre. 

There are several problems with this argument. First of all, it is stupid, just that. Now we can move on with other.

If someone with just $92,500 to invest should spend that much for lunch, assuming Warren accepts that bid, and also assuming that someone will return with 19% secret, that someone will have no cash to invest any further. Duh!

In 23 years, $92,500 earning 7% annually becomes $438,500. To estimate how much it becomes in real terms, we need annual inflation rates. The report says it becomes $284,000 in real terms, which means it assumes an annual inflation rate of 2%. It's not too much, but the report does not mention about its assumptions. Too bad, aargh!

At 19% annualized rate, $92,500 becomes $5.05 m in 23 years. And assuming the same inflation rate of 2%, at a real return of 17%, the investment value will be $3.4 m, not $3.8 m as the report says. In order to get $3.8 m, the rate of return will have to be about 17.53% annually. Assuming that it is in real terms, for the report misses to mention that, the implied inflation rate is 1.47%. Isn't a bit unfair to use 2% inflation for someone not having lunch, and 1.47% for someone having lunch with Warren? May be the food will have some magical powers to tame the macro. Even when you calculate the nominal, real and inflation rate equations on a compounded (which is more accurate) basis, we note the same shit!

And then. When Warren whispers that secret to 19%, is there an assurance that someone will imbibe the whisper and earn 19% over 23 years? Well, the report assumes that crap.

Finally, that secret whisper isn't 19% as the report notes, rather 20.8%. In the last 50 plus years, Berkshire Hathaway's book value increased by 19%, and its market value per share increased by 20.8% annually. 

It looks like Deutsche not only wrote some stupid report, but also failed to do some homework. What a pity!

tata group, concentrated, or faltering

Tata group includes several companies, listed and unlisted, making a variety of things, and of course, contributing to the economy and society. 

Employment is a massive contribution.

Yet, something is going awry for the group. Yeah, there was this Chairman spat. More importantly, though, it was always about the group companies. You incorporate the business so that the shareholders make money.  

Tata group has total market capitalization of Rs.8482 b. 

TCS (Rs.4726 b) and Tata Motors (Rs.1534 b) make up close to 74% of the market value of the group. Then you have Tata Steel (Rs.543 b) and Titan (Rs.473 b). These four companies are worth over 85% of the group. The concentration appears to be a little too much. When less modest, it means that other companies in the group are faltering.

Let's take revenues. The group had revenues of Rs.6662 b in 2016.

TCS had revenues of Rs.1086 b, Tata Motors had Rs.2755 b, and Tata Steel had Rs.1171 b in 2016. These three companies contributed over 75% of the group revenues. The story is similar with profits.  

Now Tata Motors MD has something to say. 

Tata Motors domestic business never did well, did it? All consolidated profits came from JLR. You can't bet on JLR and China all the time, can you? Remember that ever-loss-making Nano? 

With headwinds on the IT, and no investments in product development, cloud computing, and whatever the shit they call it these days, how can the Indian IT companies move ahead with their head held high? TCS, like others, has got to do something special and urgent.

Tata Steel's story isn't great either. Corus acquisition, large debt, dropping profits have been haunting the business.

Imagine a situation wherein TCS falters and JLR slows down. Tata Sons will then aptly be asked to show the money. Well, it has to start thinking about those lines, and actually be ready to show the money.