Sunday, September 19, 2010

Semantic Noise in Financial Journalism

Equity investment requires lot of hard work to read and gather financial information and related things so that investors stay informed about the history as well as day to day happenings. Like many I am also one of the people who invest time (Or Money value of that time) to read anything related to stock investment and I must say that I spend 40% of my time to gather information and 60% time to verify if the gathered information is true or not and decide what to believe and what not. Many people who come to stock market do so or at least get influenced by the information that they can make millions by just starting with a capital of Rs. 1000. We can’t find fault with them because the information available both in the print and online media say that Yogesh Chabria started with a capital of Rs.750 and Rakesh Jhunjhunwala started with a capital of Rs. 5000. I too read all these but I always had a feeling that these statements in the media mislead people or people misunderstand what is reported.

I am not saying that the information is wrong (With due credit to both Legends) but I contend that the information is only partially true (For the benefit of budding investors) and I am going to present the logic on why I believe so. Media reports that Yogesh Chabria started with a seed capital of Rs.750 and Rakesh Jhunjhunwala started with Rs.5000. Many budding investors think that the initial investment of Rs.750 and Rs.5000 has created the kind of wealth they have right now. Well, they might have said that when an interviewer asked how much they had when they started and they might have answered without elaborating. Here is what I believe. They might have started with Rs.750 and Rs.5000 respectively may be on the first day but they should have infused more capital shortly afterwards to achieve this kind of success. I don’t think they invested less than Rs.5000 and traded in the stock market to create working capital and then reinvested and that initial 5000 has grown in millions and billions. Let’s make assumptions on both cases to see the logic.

Let’s Assume we start with Rs.750 and I have no idea how it is possible to start investing with Rs.750 when account opening charges itself amounts to at least Rs. 1000 with majority of the brokerage houses if not all. Logic just doesn’t support this statement and only in movies we can see that and not in real life.

As I said, we can’t open a 3-1 account for Rs. 750. Let’s assume, we got the account opened for free. What all we can buy for Rs.750? Of course I am not that dumb to argue pathetically saying we can buy 0.25 SBI shares. Arguing honestly, we can buy may be 250 shares of FCS Software or similar companies which trade under 3 rupees. Then what? Based on their advice, we can’t trade. We can’t sit idle thinking that FCS will be a next Wipro. It is next to impossible for any common investor other than the promoter to just invest Rs.750 or Rs.5000 in a company and expect that the stock will return 200 crore’s 25 yrs later. There are various sources saying an investment of Rs.100 in 1981 in Infosys or Wipro could have given Rs.100 Crore or something, but they are all factual assumptions after these companies have become giants. Is there a source giving details about who invested Rs.100 in 1981 and held on to that stock for 29 years expecting Rs.100 Crore? Even if there is one, I just simply don’t believe that. ONLY PROMOTERS can hold like that.

I totally agree with the fact that Narayana Murthy started with a seed capital of Rs. 10000 and he has built an empire because he invested in a high growth business and Rs.10000 (Equal to Rs.72000 in 2010 if we assume 7% inflation) in 1981 is a significant amount. So, it is acceptable. But investing in stocks is a risky venture and starting with something like Rs. 750 or 1000 is illogical. May be this amount would have been enough when we got independence.

So, my thinking is he might have started with Rs.750 and slowly added outside capital to support his trading income or equity income whatever you call it to be in the position of where he is today.

Let’s assume we invest Rs.750 and we also assume that we are better than Warren Buffet and Charlie Munger and we manage to get 25% CAGR (4% higher than Warren Buffet) for next 30 Years. You know how much will be the amount after 30 Years? It will be mere Rs.6 Lakhs with which you will be able to pay one month rent in 2040. We will look at another way. We will start with Rs.750 and we aim to make Rs.10 Crores in next 15 Years thinking 10 Crore is a reasonable amount in 2025. You know what should be the CAGR for next 15 years? It should be 120%. For that to happen we need 2008 recession and 2009 pullback every year for next 15 years. So, things did not happen as it is reported in the media.

In case of Rakesh Jhunjhunwala, Wikipedia and many other reports say that he started with Rs.5000 in 1985. But it is also reported that he bought 5000 shares of Tata Tea for Rs.43 in 1986. To buy 5000 shares at Rs.43 you need Rs. 215,000 and I don’t think he earned over 2 lakhs from Rs.5000 stock investment within a year. Earning at the CAGR of 4200% (42 times) even for a year is very difficult. Again Wikipedia says that he earned Rs.20-25 lakhs between 1986 and 1989. It is very hard to believe as India was not even considered as a developing country during that period and there were no FII’s investing crazy money. One need to achieve 375% CAGR growth continuously for 4 years to create 25 lakhs from 5000 if that was true.

Let’s look at another way. SENSEX was at 150 in 1985 and it is trading at 19500 now. If we calculate the CAGR, it works out to be 21.50%. Rakeshji invested Rs.5000 in 1985 and it is reported that he has Rs.4000 Crore these days at a CAGR of whopping 89%. Achieving 89% CAGR for 25 Years in stock market is no joke. If this is completely true that Rakeshji created 4000 crores from Rs.5000, then Warren Buffet is no where near in terms of Compounded returns as he achieved only 21% CAGR beating S&P 500 by only CAGR 6 percentage points while RJ has got 89% CAGR beating SENSEX by CAGR 67% points. Do these numbers seem logical to you? It does not seem logical to me at least. So my point is, they infused more and more outside capital as they went on and did not really depend on the income generated from the initial investment of Rs.750 and Rs.5000 respectively.

My expectation is that financial journalists have to gather more information in detail during the interview so that they can report complete information regarding the success of legends so that the articles motivate budding investors.

Error / Mistake in Quarterly Statements

We discussed about how media reports information and how we misinterpret the same regarding financial information in Media. It is also true with financial statements. I have seen quarterly results of many companies with blatant errors. I will give an example of the latest one I found before finishing up. I found SEL Manufacturing Company as a reasonable buy and started searching for the financial details. Latest quarterly result looked fine but Q4-2010 (Jan 2010-March 2010) quarterly result has an en error in Net Profit and EPS.

http://www.bseindia.com/qresann/detailedresult_cons.asp?scrip_cd=532886&qtr=65&compname=SEL%20MANUFACTURING%20COMPANY%20LTD.&quarter=MQ2009-2010&checkcons=55c

The statement reports net profit of about 95 Million rupees (9.5 Crores) and equity capital of about 303 Million rupees (30 Crores) and if we calculate the EPS, it should be 9.5 / 3 = 3.16 (30 Crore Equity capital means 3 Crores shares of Rs.10 face value). But I do not know how on earth they came up with an EPS of Rs.8.5. This is just one example and there are many out there which I want the budding investors to be careful about.

Here is the list of Stocks that I find interesting in terms of Valuation even at this heating market.

Lakshmi Energy and Food

SEL Manufacturing Company Limited

Geodesic Limited

Oil Country Tubular Limited

But please do your own research on all these before taking any call. The market is heating up without the adequate earnings growth and this is not a good sign for investors entering the market now. My vote is to stay on cash or buy the stocks that are available cheap.

Kumaran Seenivasan

www.stockanalysisonline.com

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Friday, September 10, 2010

Profit Realization – Disadvantages of Selling Early

Equity investment itself is a risky proposition and how about the factors that are adding fuel to it? For lack of better terminology I just do not know how to describe the reduced profit realization due to the early sale of stocks. Some might refer it as notional loss but I think notional loss is something which we do not realize but is on paper. I am talking about the profit we realized already but could have gained more if we waited a bit. Irrespective of what terminology one comes up with, the essence of this article is to describe my personal experience regarding how the stocks I sold ran up to newer highs on almost daily basis within few days / weeks of the sale transaction and how that impacted my profit realization.

Why I sold Stocks?

Having proclaimed myself as a long term investor, what made me to sell the stocks within a year of buying? The idea was to take advantage of the sideways moving market. Because the market was moving up and down and my overall portfolio value was dancing to the market tunes. I waited for few ups and downs and this scenario happened again and again. So, I thought of selling my portfolio when the market reached 17500 and wanted to buy them back when the market comes down again. You know what, this time the scenario I was talking about did not happen and I do not know if it will happen soon. Only scenario that happens constantly is Murphy’s Law. Market has been going up and up and more importantly Indian Market has been so resilient in the recent months. Even a 200 point decline in Dow Jones Industrial Average (USA) did not impact significantly (Once it did). I will give the specific examples after giving my opinion about why Indian Market has been so resilient.

Why the Indian Market is so resilient?

For the last two years we have seen the SENSEX behaving in line with Dow Index because the Foreign Institutional Investors (FII’s), Mutual Funds and Hedge Funds in USA were forced to exit Indian market due to domestic redemption of equity mutual funds. But more than two years have passed since the start of the recession and all the investors in USA (Most of them through 401 K Plans) have been sitting with Cash without any appreciation in the value. Banks give no interest and real estate is in shambles. So they are left with no option but to look for greener pastures. They understand the fact that growth in Western Economies is a past story and developing economies like India, China and Brazil hold the edge. The fear for equities that they developed during the market mayhem last year is eased out due to the fact that Indian companies have mostly shown positive results throughout this recession phase. Foreign Investors can’t sit idle for a long time and they have to make the money work and they see Indian equities as a better option than all possible domestic investment option. So, the fund flow into India is steady and it seems even a crash in Dow Index won’t impact SENSEX significantly. I do not have exact facts and figures to support my assertion but this is the opinion I have got and if the readers think of any other reasons, they are most welcome to share.

Profit Realization – Example 1: Parekh Aluminex

I believe I am one of the guys who spotted this gem early when it was Rs.50 last year. Even though I spotted it at Rs. 50, I started buying only when it reached Rs.65 and since then I had been slowly accumulating the stock till it reached Rs.135. This stock was in Rs.100 and Rs.135 range for about 6-7 months and I had the ultimate confidence all this while and suddenly it started moved up to Rs.160 and again came down to Rs.130. Then the stock reached Rs.340 and again came down to Rs.240. I did hold it all this time. But when it reached Rs. 300 again, I thought of selling it and buy it back again . So I sold it at Rs.300 with more than 120% return. But within 3 weeks of selling it, the stock moved up crazily in the past few days almost on daily basis and the present value is Rs.500. Though one can’t take all the profits and need to leave something for others, this is something that we need to be very careful about if we are very serious about making very good returns. Had I waited for a month, I could have got 300% return. My belief that the market would come down this time from 17400 levels did not materialize and that reduced my profit realization.

Example 2: Everonn Education

The same scenario happened again and I will just mention only the cost price and exit price. I bought it when it was Rs.375 and sold it at Rs. 530 thinking that I would be able to buy it back at a lower price again but that was not to be the case. It moved up and up and the present price is Rs.634.

Example 3: Mahindra Finance

Again this is one of the stocks that I have specifically mentioned for long term investment in one of my previous articles as part of Financial Stocks and bought it at Rs.410 and sold it at Rs.460. Present price is Rs.630.


Example 4: Usher Agro

I have already mentioned what happened with this stock as part of the Short Term trading article. I bought it at Rs.40 and sold it at Rs.45. Present Price is Rs.90.

The situations like the ones I have mentioned above happened with many other stocks as well and now I know why the investors hold good stocks for a long time irrespective of the short term blips. Previously I knew this too but you learn the lesson very well when you experience it firsthand and I got the point now.

The point is "HOLD" on to the fundamentally good stocks for a long period of time and do not book profit thinking that you can buy it back again at lower levels. This will not happen when you sell it (Happens when you hold on to it).


Kumaran Seenivasan

www.stockanalysisonline.com

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Disclaimer

This is a blog about stock market investments, investment strategies, and related topics. Any statement made in this blog is merely an expression of concerned authors opinion, and in no case should it be interpreted as an investment advice to buy stocks, sell stocks, or for that matter advice for any other issues be it money related or not. By using this blog you agree to (i) not take any investment decision, or any other important decisions based on any information, opinion, suggestion or experience mentioned or presented in this blog (ii) verify any information mentioned here, independently from your own reliable sources (for e.g. a registered investment advisor) and thereby check for possible inaccuracies. This blog is to create investment wisdom among general population and the authors are not responsible for
any decisions that you make based on the information provided here.
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