Earlier this year..

Foraging in the food and processed food industry brought me to Vikas WSP earlier in 2010.  By my metrics, it was undervalued to begin with back then.  The company was netting about a billion and trading at around two times that.  I started buying at around 25, with fair value assessment of over 50.  By December 2011, it dropped to 9.36 and I kept buying averaging at 13.  By March 2012, it had moved to over 60 and it was time to close out the position.

The thesis was food to begin with - Vikas is into guar gum products - interestingly, the products are sold also to oil drillers.  The gum is used to ease drilling process and prevent fluid loss.  The market for product was good and kept getting better with more exploration activities.

The supply for the industry is almost limitless.  The company is based in Rajasthan which has abundant guar - you see trees with guar on the road-sides.  The manufacturing process was refined over the years.  There is an active futures/forwards market as well for both guar and gum.  The by products are also saleable.

The company was planning for organic guar production to reinvest the gains from the new business line.  The strategy is brilliant in the long-term - Vikas bought land which wasn't returning anything during the organic conversion process.  My thesis didn't hinge on it - but explained the low capital efficiency.  The land was the downside protection for my investment.  There were also some governance issues of the past that was mostly done away with.

The Year that was!!!!!

For most people I know, 2008 would be the year when reality (not the sector) bit and chewed off most of their savings.

As I look back on my investment activities, I had started to take a closer look at valuations as early as Mar 2007, when I started the sells on most of my investments. I re-invested in July 07 and was almost completely back in cash by Jan 2008.
Here's a short-recount of my investing history. I started investing this portfolio in April 2001, with my peak capital outlay being in May 2003. After that month, I have not invested any funds from outside the portfolio - all new purchases were funded by either sales or dividends. If you had invested in Nifty, during that time and till Dec 08, you would have made an annual return of 12%. My portfolio, not including dividends, made 24% for me. Over this period, I have over-performed by 130%.

After Jan 2008, I have made some very selective underpriced investments for short-term and made some quick money. In the periods from Oct-Dec, I have bought some very under-priced securities - one of which is a typical Graham play, trading at less than its net-net. You could buy this particular security at a value at a discount to its Net Current Asset less Long term liabilities per share. This means that you are getting the Fixed Assets free of cost.

These type of short-term opportunities are worth looking for only if you have the patience and the capital for it. Other than these purchases and some special situations from late 2007 that are still developing, I am entirely out of the market in India as of December.

So much for status updates.

I think of this situation as an opportunity, following the maxim to be greedy, when others are fearful.

Assuming someone invested Dec 31 of every year since 1991, here's how the return would look like. If you invest for a period longer than three years, unless you are investing right at the height of the market, you will make decent returns.

It is like Overs 16-35 in a One-day cricket match. These middle overs are for patient batsmen. Runs flow in ones and twos and occasional fours and sixes. The main goal is to to avoid errors of commission and lose wicket during these times. Likewise, my main goal for these middle overs (not talking of my age - but market conditions in general) is to patiently invest with the aim of not losing capital. I would look for Ones and Twos in the form of dividend yields with an occasional Four or a Six when Mr.Market throws me that sweet loose ball. Oh and be sure, they will come.

As someone who is looking to buy securities in the next few years, I want the market to remain under-priced for as long as it can. I am not looking towards market prices for affirmation that I have made right investments. It would be like asking your barber whether you need a haircut.

My approach doesn't change overall. I will be looking for under-priced securities in businesses that I can understand and that are not vulnerable to change, run by good management team. I would be perfectly satisfied if I managed to earn about 4-5% above the return of G-Secs such as the National Savings Certificate (8% plus 4-5%).

Besides, long-term prospects for India are only starting to get better. A look at some of the mass market products is enough to give you an indication. Movies, for instance. Slumdog Millionaire winning Golden Globe for AR Rahman is a portend for things to come in the next 20 years or so. Short-term political and geo-political uncertainity is throwing up a lot of investing opportunities.

Investment - Key Metric

Posting an email response that I sent out recently(italicised phrase are for clarification) for a question on my previous post on TDYT:-
As an investor, I am interested in what I term "Real RONW". I define it as the Return on Net Worth (RONW) I get by investing at the current price. Let's say you have a business earning 30% RONW currently and it trades at 3 times book value, as an investor my real RONW will be 10% (30%/3). This is an indirect way of coming up with an accounting goodwill calculation. Usually I compare the real RONW to the expected yield on stocks/bonds to decide whether to do further research on the business. Let's say I am buying a significant stake in this business, the way I would pay (assume market price USD 30 per share), USD 20 as goodwill and USD 10 would be the net equity in the books on consolidation. At the end of a year, the business (assuming the business earned at the same rate) earns the same return, I would increase the net equity by USD 3 (30% of USD 10 Net Worth or 10% of USD 30, the price). As a result, even though the business earned 30% on its networth, I earn only 10% because I paid 3 times the book value.
For TDYT, I didn't have to go into this whole exercise. It was a screaming buy, just because of the P/E and the fact that management reported in 10k that their true value was somewhere close to USD 2.50. The more than 40% calculation was just the inverse of P/E (P/E was a little over 2, if I remember correctly). I also realised that the business was facing strong headwinds because of its presence in the housing market. This was one of the reasons I was looking at it as a short-term trade than a long-term buy.

Sum of Parts

Here is the story of an interesting trade that I closed at the end of last month. I was running my screens the first weekend of March and encountered this stock. Here are the vitals:-
Price to Book - 1.2
Price to Earnings - 2.0
This meant that you could get more than 40% return on this stock just from earnings. It seemed too good to be true!!! I dug further on this stock - Thermodynetics(TDYT) and found that they had reorganised after the end of the last fiscal and now owned only one subsidiary. The subsidiary - Turbotec - is listed in the London AIM market and has been trading at GBP 0.70. TDYT owns 56.32% of Turbotec. On a per share valuation basis, this puts the value of the investment in subsidiary at USD 2.44. There were no other major liabilities on the balance sheet. The stock was trading at around USD 1.65. I didn't know much about the industry segment TDYT was in - heating, cooling and refrigeration applications.
I immediately placed an order and ended up with shares averaging 1.68 in the next two weeks. As is my practice for such trades, I immediately placed a sell order - good till cancelled
- at my target price of USD 2.40. The order executed at the end of the month. A good return of 36.6% in less than a month's time!!!

Divergent Paths - 1

The next two scrips I bought couldn’t have taken a more divergent path. One was a good cautionary lesson in investing in government companies. Though I didn’t lose the capital, the opportunity cost was heavy.

The Plunge - 1

By then a lot had happened. The bull market of 2000 had crashed. There were a lot of buying opportunities. Mr.Market had hung a sign outside ‘Dalal Street’ with a huge “On Sale” sign. The day I bought my first shares, a stockbroker in Delhi committed suicide along with his family, because he couldn’t pay his debts. Not to lighten the tragedy of unnecessary waste of human life, the coincidence was too striking to me – reaffirming that I was definitely on the right path. My first purchase were two scrips:-
Reliance Industries Ltd (http://www.ril.com/) - 10 shares at Rs.300 – Rs.3,007.50
Godrej Soaps Ltd – 25 shares at Rs.55 – Rs.1,378.50.

Testing the Waters

Testing the Waters – Waiting for Demat
My initial experience in buying stocks in the secondary markets had been a disaster. Circa 1996 (I wasn’t even 20 then), I audited a stockbroker for my employer and established a business relationship with them. I scoured through ET stock pages and bought two stocks. My criterion was that they were trading near their 52-week lows. (Behavioral Finance calls it Reference Point behavior). Of course, I didn’t bother to check if there was any valid reason for such a price behavior. Here are the purchase prices:-

GR Magnets Ltd – 100 shares at Rs.8.72 per share
Goodearth Organics Ltd – 100 shares at Rs.1.00 (approximately) per share
I don’t exactly recall the price I paid for Goodearth. I just know that I paid less than a 1000 to the broker in settlement.

When I placed the order, the lady at the broker’s asks me – did I know that GR Magnets’ Managing Director was arrested for FERA violations (foreign exchange laws)? Of course, I had no idea. But, I nodded along.

Electronic trading and demat were unheard of these days. The broker delivered to me a share certificate with attached transfer deed, where the seller had signed his name and with a few other prior parties’ signatures. I had no idea of the timing of the sale. So, when asked I said I wanted it transferred to my name. (It didn’t occur to me to ask for alternatives – I could have held on to the transfer deed and get it revalidated after three months, if I didn’t sell it by then. Three months, I think, was the time limit to hold the deed without sending it to the company). So I filled out the forms and send it on its merry way to the companies to get the shares transferred.

Here’s the rest of the story:-

GR Magnets – bounced up to Rs.20 within 2-3 months. Good call, I thought. However, there was one hitch. I didn’t have the shares with me to sell it. It was with the company to be transferred. By the time I got the shares back, the scrip was moved to the Z list (equivalent of having the bad boys of the class sit in the backbenches) and was trading way below my purchase price. The last quoted price was close to Rs.1. I still have this certificate and am thinking of framing it as a not-so gentle reminder of my follies of indiscretion.

Goodearth Organics – never saw a bounce, never saw the certificate again.

It was a great practical lesson in bad deliveries for me. I stayed away from the markets for the next five years, until demat came into existence.

Performance of Indian Portfolio

I am posting the performance of my Indian Stock Portfolio here in the pdf file link. I have shown the total return, capital gain (realised and unrealised) Vs. Sensex Return. (inserted later) and Nifty return.

The monthly returns are rupee-weighted linked geometrically i.e. monthly compounded. The green % is overperformance over Sensex till date and red underperformance.

Total return is the best way to measure portfolio performance. The Capital gain is displayed for fair comparison since Sensex values (inserted later) and Nifty returns (inserted later)are not inclusive of dividends.

Modified July 21, 2007

The Accumulation Phase

During the first couple of weeks, I had accumulated stocks costing Rs.20k - twice my monthly salary. The shares ranged from ABB, BPCL, Glaxo, HLL, HPCL, Tata Power besides the first two purchases. Most of these were based on recommendations and research from sharekhan. I was good at fundamental analysis by this time and I was working on my tech. analysis.
Another good thing happened within a month. I was sent to the US by my employer. The advantage was that I got a salary from India (which went directly into stocks for 6 months); I also got a per-diem allowance in the US. This meant more savings.
During my stay in the US, 9/11 happened and all hell broke loose in the markets. Like Buffett would say, I was happier in the market because Mr.Market just put up a big "ON SALE" sign. By the end of October, the portfolio had balooned to a little over 100k including my prior investments. Even though the market was hitting the nadir, my portfolio looked strong with only about 10% under at worst days. I took (rightly) as the sign of the strength of my portfolio. By the end of November, I was 5% above. By now, when I returned to India, the portfolio had 16 scrips. I continued my accumulation over the next year or so to reach 195k cost by the end of 2002. By then, the market had slowly started picking up. My portfolio had never looked better with 50% overall return by the middle of 2003 and 115% by the end of the year, after booking some profits. This is all I intend to write about my portfolio and performance, just to give a background. I intend to add a few comments during my monthly discussion. Before I begin that, I am going to discuss the rationale behind each of my scrip selections in the initial period, complete with data.

Tribute to Graham and Dodsville

The Humble Beginnings:-

It is only apt that I should begin this blog with a tribute to the prodigal student of the authors of the book, from the title of which I derive the name of this blog. The student is none other than Warren Buffett, www.berkshirehathaway.com. I discovered him much later in my pursuit of knowledge.

The world didn't begin in such an organised fashion; nor did it begin with the words 'Let there be light'. It was built one step at a time. It probably started way back circa 1991-92, when I bought my first shares. I became the owner of 10 shares of Dhanalakshmi Bank Ltd. - then the brahmin's bank - after my father decided the time was ripe for me to become the proud owner of Rs.1,000 worth of shares. It led to me opening a bank account, even as a minor. Well, the habit of saving had been inculcated into me from the day my father's cousins decided to gift me a post-box shaped piggy bank. It was blue in color with black top and in plastic. The coins went in through the slot and there was a key to open the box too. I don't think I ever thought much of money, back then. The opening of the bank account and my choice of commerce stream for pre-degree introduced me to the world of banks, savings, stocks etc. My active interest in stocks picked up much later. In college, I ended up learning the various basics of commerce and by the time it was over, it was time for me to join CA in 1994. In the meanwhile, a good thing happened. There was a quiz competition based on stock markets conducted by the PRO of Cochin SE at the Kochi AIR. Of course, I won the first prize - it was a Stock Market kit from Dalal Street Journal. That probably sowed the seeds. After Inter CA I tried to dabble in stocks after an audit with a stock broker. It ended in a disaster. I never saw the transferred certificate from one of the companies I bought - Good Earth Organics and I still have the second one - G.R.Magnets - not traded after being Z listed in BSE. I didn't look that way for another 3 years. In the meanwhile, I was reading all I could find about stock markets and stocks in ET www.economictimes.com and I had joined ICFAI's CFA course. (It's another story I had to drop it).

In the meantime, lot of good things were happening in the Indian stock market. The days of bad delivery seemed to be over with the arrival of NSDL and online stock brokers. The market was experiencing another down-turn. This site www.sharekhan.com caught my eye. (This is why I refer to myself as a serendipitious individual. Things just start coming together when I am ready. This is a post-facto observation.) I executed my first trade on April 12th, buying Godrej Soaps Ltd (which later split into Godrej Industries and Godrej Consumer Products) and Reliance Industries. It was on the same day that a stock-broker in Delhi committed suicide. Despite the usual caveats from the home front, I was more convinced that I was on the right track.