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Sunday, January 13, 2008

The year that was 2007

As 2007 came to a close, the annualized return so far remains at 36.6% (35.7% - 2006), whereas Nifty is trying to play catch-up reaching 28.2% (2006 - 24.1%) and Sensex at 29.2% (2006- 26.3%).My return inclusive of dividends is 40.2% (2006 - 36.6%). I don't have a definite percentage target in my mind. As long as I am able to double the investment every 5 years, I should be satisfied.

In the first week of January, I have sold off majority of my holdings – most of which were trading at high PEs. It has been a good performance so far. However, it doesn’t guarantee future performance. There are companies trading at 30 times TTM earnings. At that multiple, comparing to an investment of 8% Fixed Deposit (taxable at 25%), it would take 9 years for the cumulative earnings yield of the stock to catch-up with the compound interest of the fixed deposit. So if you see the multiple re-rating downwards soon to 20, you need only wait 3 years, and 15 (anything less than 16.67, for that matter) would give instant excess returns.

Arguably, you could buy at 30 PE and sell soon at 31 PE. However, it is a game of musical chairs with liquidity replacing the handbell/music. I had a strong dislike for that game even as a kid. I haven’t found a compelling reason to like it in the last quarter century, either. Interestingly, Chuck Prince of Citi made a now infamous statement of 2007 that they are paid to dance, before booking the losses.

It doesn’t mean that my view on Indian economy has changed. I believe it will be more like the Nifty go-go era in the US Market for the high priced stocks. The economy is very strong and should continue to be strong. There are sectoral opportunities due to over-pricing of risk, on the other extreme. I will post the specifics as and when they play out with my positions, in accordance with my policy of no tips.

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