Satyam Crisis – What is there to learn?

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One of the significant quote from Benjaman Graham’s Intelligent Investor is that “Every stock has a company behind it!!”. The biggest proponent of value investing, Graham intends to change the way investors look at stocks. The primary aspect of Graham philosophy is to invest only in companies that you know.

This implies that “Assessing Management” is one of the primary aspect of study before investing in the company. An investor need to  evaluate the credibility of the management. While it is important to establish the credibility of management based on what they have delivered in past, but most of the time an investor gets influenced by the image created by the media of its CEOs or promoters. So while “Reliance” is good and the image of Ambani Brothers may be excellent, it is important to look at, what the management delivered for each of the Reliance companies.

This fact is highlighted by the recent Satyam fiasco. Satyam planned to buy two real estate firms Maytas Infra and Mytas properties with 1.6 billion $. The chairman of Satyam, B. Ramalinga Raju justfied the buy saying

Stating that it is part of its plan to de-risk the core IT business in times of recession, Mr B. Ramalinga Raju, Chairman of Satyam, said the combined entity would help face the challenging environment and uncertainty in the market.

This raised suspicion among investors not only in terms of buyout giving significant benefits to the promoter family but also in terms of valuation of Maytas, causing Satyam to drop the acquisition plans.

Byrraju Ramaling Raju has been a well-known and renowned name in the field of Information Technology, receiving lot of awards. Just seaching for B. Ramalinga Raju gives you enough information about the person and the media report will cause you to believe that the person have impeccable credibility. In fact Satyam received “ Golden Peacock Global Award for Excellence in Corporate Governance” 

The honor is especially relevant given that corporate governance best practices are considered key benchmarks by stakeholders who evaluate corporations. In fact, their importance is magnified in difficult economic environments.

If we just look at the stock price of Mytas Infra and Satyam on 16th Dec,

16th December 226.55 (Satyam) 481.00 (Mytas Infra)
19th December 162.00 (Satyam) 246.00 (Mytas Infra)

The dates are important since 16th Dec evening, the news was officially announced of a Satyam buyout of Mytas. This can be significant if we see that stock prices of most of the infrastructure and software companies are going down. This essentially gives a feeling of insider trading!!

The biggest learning for a value investor is that

Do not just bank on the big names in the industry, but to assess the management, go into the details of how much the management has delivered in the past years.

Some interesting reads on this:

Dilbert – Financial Markets Explained

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This is absolutely hilarious. Scott Adams writes on his blog:

Think of financial theory as a stool. The stool is supported by three legs, or truisms.

  • History always repeats.
  • Past performance is no indication of future returns.
  • Asshats are trying to steal your money.

These three truisms can explain any financial phenomenon. For example, if your financial advisor suggests that you invest in a market bubble that is about to burst, he will explain that the past is no indication of future results. Just because a Price/Earnings ratio of 45 has never been sustainable in the past doesn't mean it won't be perfectly safe in the future.
And when the bubble bursts and you lose half of your money, your advisor will explain it's because history always repeats. In other words, he's an asshat trying to steal your money.
This stool also explains the housing situation. Financial experts knew that making loans to hobos had never been a good idea in the past. On the other hand, past performance is no indication of future returns. Maybe this time would be different. Then history repeated and asshats stole your money. As a bonus, they even stole each other's money this time. You have to admire their thoroughness.
One last thing you need to know: People who say it is a good time to invest are called bulls. The bulls are at the center of all financial problems.
In summary, if you want to understand financial markets find a bull and look at his stool.

Best time for car buying is, now !!

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I recently went for a car upgrade and realized that “now” is the best time to buy or upgrade your car. If you have been thinking about buying a new car or even upgrading your existing car or even buying a second hand car, Dec – 08 probably is a bonanza month for getting a handsome deal.

Here are some of the reasons why December this year is better:

Dealer Discounts: December is the month, when car sales usually drop. A typical consumer wants to buy a car in Jan since that changes the model year of the vehicle in expectations of higher re-sale value. This year due to the economic downturn, the car sales have already hit badly, hence dealers are trying to push sales aggressively to reduce the inventory. So you can expect huge discounts on all ranges of cars.

Government Fiscal Stimulus Package : To provide some boost to the automobile sector which is hit by falling sales this year, government has announced a 4% excise duty cut. As per reports :

Maruti Suzuki India (MSI), the country’s largest car maker, announced it was cutting prices effective from midnight. “We are looking at passing on the entire benefit to the customers. We shall be cutting down prices in the range of 3.5-4% from midnight and most of our vehicles will be cheaper by that percentage,” MSI chairman R C Bhargava said.

This again brings huge benefit to the ultimate consumers.

Ease of Auto-Loan : With government trying to bring the repo rate down to ease liquidity crunch with the banks, it becomes easier for banks to provide auto-loans.

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

This can bring the auto-loan rate by 1-2% and makes the loan easier on the consumer pockets.

When I walked into the Sagar Automobiles (Maruti showroom on B.G. Road), I realized that almost all vehicle prices are down by a huge amount. For example, a typical WagonR Lxi which was priced at around 4.1 lakhs on road, now coming at 3.6 lakhs on road. If you already own a maruti vehicle and want to upgrade you can bargain for more discounts. Also the loans are coming cheaper with SBI giving a loan at 11.75-12%, while private banks at around 13% (which might be reducing further). BTW another reason to cheer while buying a car is the reduction in petrol prices. Also there is talk of privatizing the petroleum products (Petrol and Diesel), and if that happens, the prices are about to fall further. Consumer is the king for now!!

Mystery of Dividends – Stock Vs Mutual Fund

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I was talking to a friend about dividends in stocks and he suddenly came up with “What are dividends in mutual funds?”. I said it is different. Here is the answer:

Stocks : When an investor purchases a share of a company, he is essentially owning some part in the company.  Dividends are payments made by a company to its shareholders. When a company earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. A dividend payout typically indicates that the company has confidence in earnings growth and sufficient profitability to fund future expansion. Also for investors, it makes sense to earn that extra income for investing in the company, rather than waiting for the share price to rise up to get the profit.

Mutual Funds : When an investor purchases units of Mutual Fund, he is essentially contributing to the mutual fund corpus (similar to thousand others), which the MF will invest in various shares. The price at which these units are purchased at any particular time is called NAV. The problem with mutual fund NAVs is that when a mutual fund declares dividends, the NAV is affected.

For example, say for an XYZ mutual fund scheme, the NAV today is Rs 50. If the mutual fund declares a dividend of Rs 2 per unit. So if an investor has bought 100 units, he will get Rs 200 as cash. The problem is that this immediately reduces the NAV to Rs 48 (Rs 50 – Rs 2). Hence essentially the investor’s remaining worth has been reduced by Rs 200.

So whatever profit an investor has made due to increase of NAV, MF has given some part of it as cash back to the investor and called as dividend. The net worth of investor remained same, just that he has received some of it in cash.

Value Investing

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I was talking to few of my office-mates and realized that out of the team of forty, just ten had exposures to equity (shocking??) and only three-four have demat account and actively trade in stocks. It is not the effect of the recent meltdown, but despite the euphoria that existed just few months before about Indian stock market, lot of people still are stuck with traditional investment/saving plans.

I guess the real reason is the fear of loosing money. I usually do not blog about stocks, since I do not believe in giving recommendations of buy or sell. But for a normal investor, it makes sense to involve stocks as a part of his investments, but it is also important to make it part of long-term strategy rather than thinking short-term.

When I talked to few people, I realize that people want to invest in stocks because:

  1. I want to get quick returns (with few months, I can double the money etc)
  2. My friends are investing and so I should too
  3. I has some lump-sum money, some relatives/friends suggested to invest in stocks.

Most of the retail investors have wrong expectations from the stock market, especially after hearing of friends, relatives earning big bucks from stocks.

It is important to understand that “Nothing is free in life” including returns from stock-market. The people who have earned those handsome amount, have either burned their fingers earlier or have spent lots of time on understanding markets and investing in smaller amounts.

Nobody got instant money from stock market without hard work.

Investing in stocks requires a disciplined approach. One such approach is what is called Value Investing. In simple terms:

Buy stocks which are priced below it’s intrinsic value.

The approach to finding “intrinsic value” is by determining the fundamentals of the company. It is a balanced approach involving analysis of data involving the company. There are lot of books available on the topic (e.g. this book), but “The Intelligent Investor” by Benjamin Graham is considered as the bible of value investing (you can get an e-copy on ensips here, but may be illegal). There are lot of excellent forums for beginners or experts on investing in Indian Stock Markets like Traderji or Equity Desk (an excellent post by Basant on Equity Desk).  I am currently reading the book and may do a review sometime later.