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

23 comments:

Mohan R September 19, 2010 at 4:37 AM  

This article is great on explaining things in detail.

I like your two and don't like two.

Lakshmi Energy and Food - High Debt
SEL Manufacturing Company Limited - Promotors like to cheat Investors.

Geodesic Limited - Worth Investment at this price.
Oil Country Tubular Limited - Valuation Looks Attractive

Anonymous,  September 19, 2010 at 5:00 AM  

Really an eye opener post.. i didn't know that BSE sites can do such mistakes..
I also agree that RJ might have rec'd insider information or huge capital to reach at this level..

nelogal September 19, 2010 at 7:50 AM  

I appriciate that you spend lot of time on searching investment related financial information. I admire you for that. what you said in your above article is absolutely correct.You have explained with simple analysis that they have invested lot more money than simple Rs750/ or Rs5000/. It could have been a first step in investing.Any way another interesting article. thank you.

Shabu's September 19, 2010 at 8:15 AM  

Dear Kumaran,

Its a great work and seems first in it's kind. I am fully agree with your logic and the so called media is least interested in such analysis before pumping baseless news. We too compelled to beleive things, when reputed medias quote these people blindly.The story of Chabria & Rakesh can surely be motivate the investor community, but I hope there can be
some unfair tricks behind all these propaganda.

Thanks again for such an excellent and audacious work...

Keep writing

KK September 19, 2010 at 9:19 AM  

Dear Kumaran,

I hope, you are doing great. I was, in fact, waiting for your next article and got to see that today. I really appreciate the new investment ideas you have shared. I am in the process of selecting one or two from your list. Thank you so much.

Regards,
KK

Venkat September 19, 2010 at 1:05 PM  

Kumaran...you have proved yet again you are master in explaining things in stock market in simple and practical sense.!!

I & others who are reading your thought provoking articles are very lucky in that sense..

Thank you& keep writing such a powerful articles explained in a simple manner but making a practical sense at end.

Regards
Venkat

Nannu,  September 20, 2010 at 12:55 PM  

Dear Kumaran,

Excellent article. A one of its kind. I really liked your reasonning. Just awesome.

Regards,
Nannu

Kumaran September 20, 2010 at 2:41 PM  

Mohan,

I do not know where you got the information regarding high debt for Lakshmi Energy and Foods Limited. All the sources I searched for show Debt-Equity ratio of less than 1 which is one of the lowest in the Rice Processing Industry. If this is not true, please share the information to benefit everyone.

Rgds,
Kumaran.

Anonymous,  September 21, 2010 at 1:52 AM  

Mr Kumaran, Am a great follower of your blog. And I've created my portfolio mostly as per the stocks suggested by you. And also I made mistakes like you said of selling before time of some good stocks. I would like you to comment on my portfolio. Kindly inform the email address where I can email my portfolio and pls give your kind suggestion on my stocks.
Regards
MR.

Praveen Goswami September 21, 2010 at 5:25 AM  

As Usual .... Detailed and crystal clear view with support of numbers.

I personally believe "Number beats Opinion" and I can easily extract from this article.

I am following you from a long time and even learnt and earned also. I was searching you in other social site but not able to find you.

Please put your linkedin or any other professional link to this web page.
Thanks in advance.
Keep writing

Kumaran September 21, 2010 at 4:44 PM  

Praveen,

Here is my Linkedin page.

http://www.linkedin.com/pub/kumaran-seenivasan/5/b49/958

-Kumaran.

Ankit Jain,  September 22, 2010 at 6:43 AM  

Hi Kumaran,

I have been reading your blogs since last 3-4 months and i really appreciate your efforts. it is very helpful for investors like me.

I wanted your view on Niraj Cement Structurals Ltd. as this infrastructure company looks like a good valuable pick to buy for long term.

Please suggest.

zarir wadia September 24, 2010 at 3:00 AM  

Dear Kumaran,
It is always a pleasure to read your articles and this one is just as informative. you have nicely illustrated that market timing is the most difficult thing to do and nobody has ever perfected it. Better to be long term value investor than to go in and out of market.
Keep up the good work.
Regards,
Zarir

Krishna Raaj September 28, 2010 at 1:40 AM  

Hi Kumar,

I follow your blog regularly and each and every article is precise and very informative. I had geodesic in my mind but the FII holdings in that company is 50% which makes me think twice before investing. With the trade and currency war, currency devaluation,US debt, treasury bond bubble, unemployment,money printing, fiscal deficit, inflation going on we have to really carefull before investing in small caps. I am sure these are really good companies but with world economy in utter chaos, as a retail investors we have to be really really carefull.

The Other Side..... October 3, 2010 at 5:58 PM  

Hi Sreenivas,

First of all, I would like to thank you for the insightful research, that you provide in your posts.

About SEL Manufacturing, I had 2 doubts.
1. Their growth is great, but isnt it coming at a great cost. Their outstanding shares has increased multifold, so the EPS has rather reduced. Dont you think that Return on Investment is not good here.

2. Rather more technical doubt, for understanding purpose. How does the outstanding equity shares increase for a pub listed company. Is it that the company continues to issue shares to institutions for the money it takes for explansion etc? More info would be helpful.

prayas

lpk October 15, 2010 at 2:36 AM  

Once again made a quick bug from your recommendations...I have following your blog for a long time and from 1st day of the month ,I will be frequenting ur blog for new posts. Expecting more new articles in high frequency.

Anonymous,  October 23, 2010 at 1:41 AM  

I just signed up to your blogs rss feed. Will you post more on this subject?

gaurav,  January 4, 2011 at 4:53 AM  

They might have surely invested more, but the point is that they both started without a silver spoon. Neither Yogesh Chabria ji or Rakesh jihad someone spoon feed them and they are self made men.

I got started with investing only after having reading Chabria ji's books. His simple explanations helped me save a lot of money by not speculating with brokers sending tips. Best is to learn from the positive of them.

Anonymous,  January 20, 2011 at 2:48 AM  

Great job on the blog, it looks great. I am going to bookmark it and will make sure to check back weekly

Anonymous,  January 22, 2011 at 7:13 PM  

Excellent & thoughtful post.

Anonymous,  January 30, 2011 at 6:12 AM  

It is simple to see that you are very informed about your writing. Looking forward to future posts.Thank you.

Venkateswara Rao February 8, 2011 at 9:34 AM  

Interesting post and discussions...just joined the blog

thavva,  February 8, 2011 at 9:35 AM  

Interesting post and discussions...just joined the blog for followup

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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
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