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Friday, June 26, 2009

Where are we now?

It has been an interesting time to live as an investment professional since July 2007. "Unprecedented" is an adjective/adverb that was thrown about most of the last year or so - whether it was referring to the market seize-up or to responses to the seizures.

First, a quick recap of the events. Debt fueled growth; asset values stop growing; debt becomes a real "liability"; asset values drop from forced sales and fear of forced sales; Superman (read, government) stops this train-wreck from happening. The last part of this comic book is yet to play-out completely - will the villain (inflation, to name one) come back stronger than before from under the debris or is it a new-new-new world (new world was post industrial revolution, new-new world was after Netscape went public like Michael Lewis says)? My sense is that we are in the eye of the storm. There may be more to come; it is too hard to say. I'll leave predictions about the future events to astrologers and followers of Nostradamus.

Whichever way you look at the recent past, the times have been exciting. It is somewhat like being a student of geopolitics in 1989-92. Poland's independence, consequential effect on the map of the Baltics and the nearby region, Fall of Berlin wall, End of cold war, First Persian Gulf War (remember those greenish night vision images from CNN). Similarly, there are a lot of changes in the financial cartography - no Investment Banks today - one under receivership, two forced to be merged and two converted to banks. Policies are taking a U-turn - earlier everyone wanted to privatize every business in every country; now it is about government taking equity stake in auto, banks, insurance companies. Mostly self-governance vs. government intervention. Read this letter of resignation

Where do we stand in India? There have not been any major mess-ups. I am not forgetting Satyam fiasco - that is part of any downturn. Like Buffett wrote "It's only when the tide goes out that you know who is swimming naked". Every downturn in the stock market of the past had its casualties - caused by fraud or otherwise - be it Global Trust Bank from the fall out of IT crash or Ketan Parekh or Harshad Mehta. Here's an extract from The Great Crash (1929) by J.K.Galbraith and decide for yourself how different things are:-

"Weeks, months or years may elapse between the commission of the crime "(of embezzlement) "and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's businesses and banks. This inventory - it should perhaps be called the bezzle - amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances, the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks."

Systemically, India is in a great shape. The government didn't have to bail out anybody, yet. Domestic demand is much better and there are more opportunities for an individual than there ever was before in India.

The other fallout of this downtrend will be a reduction in the number of people watching the stock markets - the engineer can focus on building and innovating, rather than watching the ticker move up and down on a screen; the doctor can provide more attention to his patients' charts and not be perturbed about what Infy or Sify's chart was doing and the surgeon can watch the life line of his patient on the OR table without wondering about where the Sensex or Nifty's line is. The problem with boom times is everyone regardless of whether they know about markets or not and regardless of whether they know or do not know that they don't know is an expert about stocks. As an adviser on money matters, I am no longer (at least not anytime soon) going to face a rhetorical question of "if the market is overvalued, why is (fill in the name of the stock) rising?". It is hard for reason to penetrate our thick skulls, when the near term experience is to the contrary. As every Grahamite knows, it is a fact of the markets that it is there to serve you and not to instruct you about valuations.

Where do we go from here? Over the long term (long-term is not 1-2 years for me),

1. India is in a great shape. There is no dearth of great companies to invest in.
2. Stocks are still the best investment for the long term and
3. Compounding of returns still does its magic.

Investing consistently is the mantra. And, watch out for those once in a life-time (based on past few years life-time should be in mouse years) opportunity that occurs every once in a while to buy those great companies at a bargain price.

Saturday, June 06, 2009

Wesco Financial Corp - 2009 Meeting Notes

I am posting my notes (in pdf) from Charlie Munger's Wesco (WSC) meeting last month. Good reading.
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