I have nothing to add

Here's an article titled "Basically, it's over" in Slate by Charlie Munger in Slate.com.  Enjoy!!!

2008 and 2009

As I had posted before, I had gone substantially into cash and was making selective investments.  I used this last year to re-organize my investment structure with a view to expand in the years to come.  As a result, I am starting a new performance series with 15-Jan-2008 as my new start date.  Initially, during the transitional period, the series is a combination of multiple portfolios which get December 2009.  This transitional period was very convenient due to the portfolio weighing requiring mostly transfer of cash, rather than securities across portfolios.

During the 11.5 months till end of Dec 08, Nifty went from 6206.8 to 3033.45 losing more than 51%.  Then for the next 12 months, it went to 5201.05 gaining 71%.  Overall, it went down 16%. (Percentage returns are not additive - they are multiplicative; so it is (1+-.51) = 0.49 x (1+.71) = 1.71).

It had been a great two years instructive of lessons in weighing your portfolio, giving it the right preference between cash and stocks.  As a result, the difference in return has been a whopping 185% for a period of 23.5 months, essentially meaning that if you had passively invested in an index fund on Jan 15, 2008, you would be sitting on a loss of about 16%, while my portfolio would have returned 185%.  This is more true if you include dividends, the over performance actually becomes 191%.

Here's the interesting factoid about that 185% over-performance, half of that gap was made in May 09, when the market jumped and almost all the stocks hit the upper filter after the results of the elections came out.  Now that is a lesson, against trying to time the market.
In absolute terms, I fully invested by March 2009 and stayed that way till May 2009 when I went to 80% invested and again to 95% invested till October 2009.  End of December, I am about 2/3 invested.  The 2/3 may be overstating it, since I am expecting to receive some additional funds into the portfolio by the last week of January, which would bring it down to 40%.  So effectively, I am 60% in cash.

My process has been pretty simple so far - I time entry and exit based on individual stock valuation; disregarding the overall market sentiments.  A few cases attesting to the point , which I had written about earlier.

Patience has been a true virtue in this rough and tumble road, since I show a quotational loss of upto a third during some months.  This drop came to my attention just now, when I was collecting the data to post.  I usually disregard short-term quotational losses and am focused on entry to exit returns, rather than period to period returns.  After-all, longer the period of measuring, less volatile the returns will look.

Two Companies in Transportation

Company 1:
Average of last six years' Return on Networth is around 31%

Book Value: 7,764 Million
Last Fiscal PAT:  2,267
Last Traded Market Cap: 8,546 (High)

P/BV ~ 1.1
P/E ~ 4
which means your real return is around 28%, if you invest at this price.

Company 2:
Average of last six years' Return on Networth is around 23%
Book Value Per Share: 37,317 Million
Last Fiscal PAT:  7,791
Last Traded Market Cap: 148,850 (High)

P/BV ~ 4
P/E ~ 19
which means real return is around 6%, if you invest at this price

Both are in very predictable industries, which can be seen from their gross and operating profit margin trends and the future outlook is not so similar.  The company 1 has been growing their volumes at around 30% in the last 10 years and company 2 at lower double digits, posting the first drop in volumes in the last year.

Trying to guess which these two are?  It is Concor - company 1 is Concor in Oct 2001 and company 2 is the same Concor in Oct 2009.

The outcomes are definitely going to be contrary on investing on these two dates.

A few steals this year

I was on the look-out for a boring business this March. That's how I found Today's Writing Products Ltd. Their main product is Today's pens. In this internet age, pens are highly unglamorous products. Back when I was still writing most of the time with a pen (and occasionally with a pencil), Today's and Reynolds were the big names.  It was a pure book value play trading well below book, when I looked at it in March 09.  I closed this fast trade in May for a 70% profit.

They say, lightning never strikes twice.  Fortunately, it did with GIPCL. I posted about it earlier in 2007.  It happened again in 2009, this time a 60% return in 4-5 months.  Same conditions held as in the 2007 posting, when I bought it.

Then there was Tata Steel - it was just there for the taking.  Even if the company performs as well as it did in 2003 without any contribution from Corus, it would have given a sweet dividend yield.  I booked (a little early, as is the case with almost every other investment) the gain at 50-60% gain in two months.  The 2% CCPS would have given a better return - my broker didn't have permission for trade in that instrument.

And Corporation Bank, one of the best capitalised and performing banks was beaten down so hard that it gave a good return as well.

There are two more that are still playing out.

Structural Developments in India

While the financial world has been going crazy in the past couple of years, India has been taking steps further develop the country's economy.

The New Pension Scheme which was applicable to Government employees starting 2004 is now open to public. The unique feature of this scheme is it allows investment into equity indices. It also has life cycle type investing plans as the default option. (inspired by Thaler and Sunstein's Nudge - may be?). And it is open to Non-residents as well, as long as they are citizens.

The other has been the recently proposed new Tax Code with a discussion paper. The current Income Tax Act, 1961 structurally looks like the apocryphal camel creation story. It is a mish-mash of various amendments, political concessions and such. The new code de-jargonises the Act and rationalises the structure. There is also an attempt to move towards a EET (Exempt-Exempt-Taxed) concept for savings. The concept is that contributions and earnings on the contributions are exempt and the withdrawals are taxed - very similar to the Traditional IRA in the US. This has been a step-by-step progress made since 2006 and the New Pension scheme becomes part of this step. There is also an attempt to bring stability to taxation rates. According to the current practice, a tax rate has to be notified every year in the Finance Bill during the Budget Speech which become the Finance Act. The tax rates become part of the new Tax Code. Changes to rates will presumably become a legislative amendment. These are just a couple of structural changes.

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.

Wesco Financial Corp - 2009 Meeting Notes

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

Berkshire Hathaway Shareholder Meeting Notes

I attended the Berkshire Hathaway Meeting this year as well. Here is a link to my quick notes from the meeting (pdf) grouped by topic and with some background reference to the questions
I have also included notes from others and other coverage at the end. Feel free to distribute it.