What's Warren Buffett Betting On?

Warren Buffett the Oracle of Omaha bets on these companies even as the world reshapes amidst a severe economic crisis:

1. American Express

2. Bank of America

3. Carmax

4. Coca Cola

5. Conoco

6. GE

7. Goldman Sachs

8. Home Depot

9. Lowe's

10. Wal-Mart

Cairn India: Downgraded

Cairn India Target Price Downgraded to:

Industry: Oil Exploration
New Target Price: Rs 173
Book Value Rs 167.90
Current Market Price: Rs 144.15
Horizon: 12 months

Gateway eroded by 57%

On September 13th, 2008 I had posted a blog about exiting Gateway Distriparks due to the negative cash flows the company had and decrease in future earnings and EPS based on a VIH analysis. The stock since then from a level of Rs 170 has fallen by more than 57% to Rs 73. I would still stick to my call on exiting the stock and not buying even at current levels. The results for the coming quarter will provide better insight into company's future potential. Until then, i would suggest staying away from fresh positions in the stock.

Unrealistic Price: Asian Granito India Limited

It is only normal to see many stocks battered below their book value in spite of the earnings and growth being impressive. Let me bring to you notice one such stock courtesy Saurabh Jain.

Stock: Asian Granito India Limited
Industry: Ceramics
Book Value: Rs 74.70
Market Value (As on 11.11.2008): Rs 19.85
52 Week High: Rs 135
Sales: Rs 202.94 Crore as on March 2008
YoY Sales Growth: 23%
Net Profit Margin: 13%

That's something to chew on...

Indian Investor Buffoons

What my experience in the markets has taught me is that most of the Indian retail investors in the stock market can at best be termed as "Buffoons". They simply piggy back on a well heard name or a friend's referral and invest in the markets. I personally think that the king of over hyped companies in India is Reliance. Reliance on the basis of its brand name has managed to attract investors even for companies whose current business is running in air and have no full scale operations. Take Reliance Natural Resources Limited for example. The stock is currently trading at Rs 94.60 which is a 440% increase from its list price of Rs 17.50 and all this is based purely on future expectations and no current fundamentals. Another example is Reliance Petroleum Limited which is years away from being operational and is still trading at Rs 157.05 which is a premium of 93% over its list price of Rs 81.10.

Reliance Power Limited is my personal favourite for "Buffoon Makers". As per a research report by Edelweiss Capital Research, the company will start full scale operations by 2017 but is currently trading at Rs 547.80.

I think Reliance ought to come out with a new company "Reliance I Will Start Business Sometime Limited" and I'm sure it will find investors for that too.

Sensex: 17 Years of Mimicking NASDAQ

This is a little alarming. I collected the data for NASDAQ and Sensex for 17 years and tried to find out how and if they have any considerable impact on each other. I always knew that global cues have some impact on Sensex but I was caught off guard with the findings of the data. The table below shows how perfectly Sensex mimics NASDAQ.

They are almost like mirror images of each other. The trend is for Year-on-Year percentage increase in the indices since 1992. In fact the coefficient of correlation between them stands at 0.5065. This just shows how much impact NASDAQ really has on the Indian Sensex.

This augmented my curiosity. I collected the data for all Global indices where Indian companies were listed and tried to find if there is any significant correlation between the Indian stock exchange and the Global stock exchanges such as those of London, Luxembourg, New York, Dubai, HongKong and others. The table below shows the correlation between all the companies in Indian stock exchange and those of the above mentioned Global stock exchanges based on Equity, Sales, Net Profit and Market Cap.

The findings suggest that HongKong has the highest impact on Indian stock exchange with a correlation coefficient of 0.98 followed by London at 0.97 and NASDAQ at 0.95

The Dummy Owner - Mr.Shareholder

"Shareholders are the legal owners of the firm and the management has a fiduciary obligation to act in their best interest".

Sounds great!! doesn't it? But experience has taught me that most of the rights the shareholders have are only on paper and that the management first acts in Self Interest and then probably in shareholder interest.

If shareholders were really the "owners" of the firm and could exercise the rights they think they have, then we would not have had instances like those of Enron, Tyco, Worldcom would not have occurred in US. Neither would have companies in India such as DCM Financial Services and Morepen Laboratories Limited faced investigations.

I was a shareholder of United Breweries Holdings, the holding company for UB Group which belongs to Vijay Mallya. One evening I got a letter in the mail for a voting consent for the company's future JV. It is usually a practice to take the consent of the majority of the shareholders for key decisions about big changes in the company which would impact the shareholder's wealth. It gives the company an idea about the shareholder's perspective and also whether they agree with the decision or not. After all -- they are supposed to be the "real owners".

I was eager to fill it up and mail it when a friend of mine who happens to be the owner of a big brokerage company in Kolkata told me that mailing or not mailing the letter will make no difference. He told me that even if a majority of the shareholders were against the decision, the company would put dummy votes to ensure that its decision goes through.

That made me realize for the first time, how "real" an owner I really was. Speak to brokers and experienced investors and they will tell you that such instances are not unheard of. It is very common and practical at times for companies to keep the investors in the dark. Most of them are not even aware of their rights when they hold the shares of a particular company. Information asymmetry is what gives these companies the "Power". Rest is just limited to your Financial Management books.

Noise Traders

Three years back I came across the concept of stock markets and trading shares on a stock exchange. The way the markets worked and the fancy sounding jargon baffled me. What fascinates me about the markets is the fact that, traders know that the markets are inefficient and ill informed and that is precisely the reason why they enter the markets. In my quest to try and understand the markets better (or so I assumed), I read a lot and a particular theory on Efficient Market Hypothesis caught my attention.

It states that the markets work because of Noise Traders who are traders who do not have any specific information about a security. These traders add liquidity to the market while keeping the valuations undistorted. A well informed trader will never enter a market which is starved of noise traders because it would be impossible to profit from such a market. A volatile market means that the chances a day trade not being turned into a delivery are very high. Moreover, it’s easy to infect the market with conditioned news with the presence of noise traders. So amongst the illiterates the one who can spell "I" is the king.

But like any theory, the experts in the field of Behavioral Finance are divided in their opinion about noise traders. Many say that these noise traders affect the markets ability of arbitrage to a large extent. What I personally feel is that the noise traders are not so much so affected by conditioned news from a well informed trader, as much by their belief of an internal market inside their heads.

Beta Goes "BOOM"

It is a very common practice to analyze stocks based on their Beta level amongst other key performance indicators. Beta refers to the volatility of the stock. An ideal Beta would be 1. So if a stock has a beta greater than 1 then it would be a riskier investment but consequently, returns if any would also be higher. The inverse is said to be true for a stock with a beta of less than 1.
But that’s where the theory meets reality and reality-check it indeed is, big-time. All the Bull Run coaxed investors who entered the markets in early 2003 when the so called bull run started, thought and hoped that their investments would work based on fundamentals and their analysis and research would give them an edge. With time they realized that speculation had a much stronger hold on the Indian stock exchanges than they had imagined.

Logic gave way to Frenzy Buying and Sheep Calls and soon enough most investors found themselves sitting on a pile of cash. This was good enough even for Private Equity investors when the Sexsex was 21,200 levels. But since January this year, most stocks have hit their 52 week lows. The market has been indifferent in this regard to stocks irrespective of a high or a low beta. All 500 stocks listed on the BSE have witnesses at least 25% fall, 35 amongst them hit with 75% or more. The market has fallen by more than 40% since its record highs. These are unchartered waters for the optimistic Indian Investor.

Understandably enough, it’s not rare to hear investment advisors talk about a bear run and advising their clients to stay away from the markets for a while. All of a sudden, the meager looking Gilt Funds and Bonds seem to be the most attractive investment options.

What is hard to understand is that the same people who were willing to buy a UB Holding or an ICICI stock at a 70% premium a year back are not willing to invest in the same stocks at throw away prices. Take Gabriel Industries for example. The stock had an earth shattering volume when it was trading at Rs 22 a few months back. Today the same stock is at Rs 13 odd which is a 41% fall in the price, but there are hardly any buyers. I am not sure that a bear run has started yet. What has sunk in is, a fear neither chance nor fundamentals working anymore. Investors realize now that with such inflated prices it was only a matter of time when the fundamentals would zoom out of the window and now most of them are scared because they don’t know where the bottom lies. Personally, I believe that this is the perfect time to gather and gather cheap buys at throw away prices. The Hindalcos and the HDFCs at a 40% + discount. The condition obviously remains that the investment should have a long term horizon.