Portfolio Performance - 2011

2011 was an interesting and eventful year (probably like any other). For the Indian equity markets, it was full of fears that was imported from first US and then Europe. This year started with the Sensex at 20509 and Nifty at 6134. It closed the year at 15455 and 4624 respectively. This amounted to a decline of 24.6% on the Sensex. Along with the general market, my portfolio also fell. For the whole year, the portfolio was down 15.19%. That is a substantial percentage. The fall was especially vicious during the last couple of months. When I look back, the portfolio was generating positive returns till the end of October and then fell off sharply. This is because the only stocks I hold are mid and small caps and they have been beaten down in the current environment of extreme uncertainty with respect to the currency depreciation and Eurozone problems.


Although, I do not expect a great turn around in 2012, I would continue to deploy most of my savings to stocks. This is primarily because I am more convinced about the future of businesses to generate above inflation returns than any other form of investment I am aware of. With the market fall, stocks (specially the small and mid-cap variety) are available at good valuations for someone with a reasonably long time horizon. I am not very concerned about short term currency fluctuations and other issues. I don't expect basic business demand & supply to alter based on macro economic concerns, and good and resilient businesses should be able to weather the storm.

Serial #	Name of Company	% of Portfolio (Dec'11)	% of Portfolio (Jan'11)	Since Jan'11	Comments
1	Astral Poly	4.94%	0.00%	New	Accumulate
2	Balaji Amines	5.19%	8.34%	Down	Hold
3	Balkrishna Industries	4.49%	3.59%	Down	Accumulate
4	Cravatex	4.22%	0.00%	New	Hold
5	Elecon Engg	2.43%	0.00%	New	Accumulate
6	GEI Industrial	3.77%	0.00%	New	Accumulate
	Hira Ferro	0	5.12%	Sold
	Indag Rubber	0	0.95%	Sold
7	JK Lakshmi Cement	2.38%	3.32%	Down	Accumulate very slowly
8	Lloyd Electric	1.67%	5.03%	Down	Hold
9	Manjushree Tech	3.70%	0.00%	New	Hold
10	Mayur Uniquoters	10.44%	5.29%	Up	Accumulate aggressively on every dip
11	Opto Circuits	6.05%	8.32%	Down	Hold
12	PI Industries	6.51%	0.00%	New	Accumulate
	Pidilite	0	0.00%	Sold
13	Poly Medicure	1.34%	0.00%	New	Hold
	RSWM	0	6.68%	Sold
14	Shriram TransFi	7.37%	10.90%	Down	Accumulate aggresively on every dip
15	Sintex India	4.02%	9.97%	Down	Accumulate aggresively on every dip
16	Supreme Ind	16.86%	20.65%	Down	Hold
	Supreme Infra	0	3.64%	Sold
17	Titan Industries	4.36%	0.00%	New	Accumulate very slowly
18	Yes Bank	6.86%	5.88%	Up	Accumulate
19	Cash	3.21%	0.09%	Up
20	Nifty Put Option	0.19%	0.00%	New

Buy insurance for your portfolio

This is that time of the year when most salaried employees start thinking about tax saving and inevitably one of the first things that people think of is insurance. It is probably our conditioning that we buy LIC (and these days from private insurers) policies without blinking much of an eyelid. 
What exactly is a life insurance policy? It is nothing but a put option on your earning power. Basically, it protects your family from the loss of your earnings if and when you are no longer there. Simple.


However, a lot of stock investors do not think of buying similar "insurance" policies for their portfolios. I call these stock insurance policies "catastrophe insurance". No, they are not sold by LIC or other such insurance companies. They are traded on stock exchange in the form of PUT and CALL options. 


One way of buying such an insurance is to buy out-of-the-money PUT options of the index for a long duration. For example, if you buy a 4000 or 3900 PUT option for the month of February or March now, you are sort of covering a part of your losses in case the markets tanks. This typically makes sense for people who have very large equity portfolios. You pay a low/moderate premium to get some peace of mind. The way the markets are poised right now, I think it would be a prudent thing to do.

Margin of Safety - The most notable quotes from Seth Klarman's investment classic - part III

I just finished re-reading Seth Klarman's "Margin of Safety". This time I made notes of all the important lessons from the book. This is the last and concluding post of this series. Read them at your leisure. In it is some of the best wisdom on the stock markets from a person who is a "Investment-Hall-of-Fame" life-member.


Part I
Part II


On Portfolio Management

An investor's portfolio management responsibilities include maintaining appropriate diversification, making hedging decisions and managing portfolio cash flow and liquidity.


For the many investors who prefer to remain fully invested at all times, it is easy to become complacent, sinking or swimming with current holdings. "Dead wood" can accumulate and be neglected as losses build. By contrast, when securities in a portfolio frequently turn into cash, the investor is constantly challenged to put that cash to work, seeking out the best values available.


There is nothing inherent in a security or business that alone makes it an attractive investment. Investment opportunity is a function of price, which is established in the marketplace.


Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years. While such a strategy may have made sense at some time in the past, it seems misguided today. This is because the financial markets are prolific creators of investment opportunities. Investors who are out of touch with the markets will find it difficult to be in touch with buying and selling opportunities regularly created by the markets. ... Being in touch with markets does pose dangers, however. Investors can become obsessed, for example, with every market uptick and downtick and eventually succumb to short term oriented trading. There is a tendency to be swayed by recent market action, going with the herd rather than against it. ... Another hazard of proximity to the market is exposure to stockbrokers. Brokers can be a source of market information, trading ideas and even useful investment research. Many, however, are in the business primarily for the next trade. ... Never base a portfolio decision solely on a broker's advice, and always feel free to say no.


On Trading
The single most crucial factor in trading is developing the appropriate reaction to price fluctuations. Investors must learn to resist fear, the tendency to panic when prices are falling and greed, the tendency to become overly enthusiastic when prices are rising. One half of trading involves learning how to buy. In my view, investors should refrain from purchasing a "full position" (the maximum dollar commitment they intend to make) in a given security all at once. Those who fail to heed this advice may be compelled to watch a subsequent price decline helplessly, with no buying power in reserve.


Evaluating your own willingness to average down can help you distinguish prospective investments from speculations. If the security you are considering is truly a good investment, not a speculation, you would certainly want to own more at  lower prices.


Decisions to sell, like decisions to buy, must be based upon underlying business value. Exactly when to sell - or buy - depends on the alternative opportunities that are available.

Margin of Safety - The most notable quotes from Seth Klarman's investment classic - part II

I just finished re-reading Seth Klarman's "Margin of Safety". This time I made notes of all the important lessons from the book. This is part two of a three part series. Read them at your leisure. In it is some of the best wisdom on the stock markets from a person who is a "Investment-Hall-of-Fame" life-member.


Part I
Part III


On Managing Liquidity
A reason long-term oriented investors are interested in short-term price fluctuations is that Mr.Market can create very attractive opportunities to buy and sell. If you hold cash, you are able to take advantage of such opportunities. If you are fully invested when the market declines, your portfolio will likely drop in value, depriving you of the benefits arising from the opportunity to buy in at lower levels. This creates an opportunity cost, the necessity to forego opportunities that arise.


Bottom-up investors can easily determine when the original reason for making an investment ceases to be valid. When the underlying value changes, when management reveals itself to be incompetent or corrupt, or when the price appreciates to more fully reflect underlying business value, a disciplined investor can re-evaluate the situation and ,if appropriate, sell the investment. Huge sums have been lost by investors who have held on to securities after the reason for owning them is no longer valid. In investing it is never wrong to change your mind. It is only wrong to change your mind and do nothing about it.


Investors should pay attention not only to whether but also to why current holdings are undervalued.


Investors may find it difficult to act as contrarians for they can never or not they will be proven correct. Since they are acting against the crowd, contrarians are almost always initially wrong and likely for a time to suffer paper losses. By contrast, members of the herd are nearly always right for a period. Not only are contrarians initially wrong, they may be wrong more often and for longer periods than others because market trends can continue long past any limits warranted by underlying value.


On "How much research and analysis is sufficient?" 
First, no matter how much research is performed, some information always remains elusive; investors have to learn to live with less than complete information. Second, even if an investor could know all the facts about an investment, he or she would not necessarily profit. ................ 


Information generally follows the well-known 80/20 rule: the first 80% of available information is gathered in the 20% of the time spent. The value of in-depth fundamental analysis is subject to diminishing marginal returns.................


Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time uncertainty is resolved, prices are likely to have risen. Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty. The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information.

Margin of Safety - The most notable quotes from Seth Klarman's investment classic - part I

I just finished re-reading Seth Klarman's "Margin of Safety". This time I made notes of all the important lessons from the book. I will be putting these up in the next few posts. Read them at your leisure. In it is some of the best wisdom on the stock markets from a person who is a "Investment-Hall-of-Fame" life-member.


Part II
Part III


On investing

To investors stocks represent fractional ownership of underlying businesses and bonds are loans to those businesses. Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They transact when they think they know something that others don't know, don't care about, or prefer to ignore. They buy securities to appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk.


Investments, even long term investments like newly planted timber properties, will eventually throw off cash flow. A machine makes widgets that are marketed, a building is occupied by tenants who pay rent, and trees on a timber property ultimately are harvested and sold. By contrast, collectibles throw off no cash flow; the only cash they can generate is from their eventual sale.


There is nothing esoteric about value investing. It is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple. The greatest challenge is maintaining the requisite patience and discipline to buy only when prices are attractive and to sell when they are not, avoiding the short-term performance frenzy that engulfs most market conditions.


On Margin of Safety
A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others.



There are only a few things investors can do to counteract risk: diversify adequately, hedge when appropriate, and invest with a margin of safety. It is precisely because we do not and cannot know all the risks of an investment that we strive to invest at a discount. The bargain element helps to provide a cushion for when things go wrong.


The trick of successful investors is to sell when they want to, not when they have to. Investors who may need to sell should not own marketable securities other than US treasury bills.

Taxes in India: Wake Up Call

Looking at the tax scenario in India is very depressing. Only about 3% of Indians (35 million out of 1.2 billion) pay taxes.

	India	China	Brazil	Russia
Tax Receipts /GDP	16%	21%	36%	37%
Total debt /GDP	68%	17%	66%	8.5%

A recent report by Global Financial Integrity estimated that between 2000 and 2008 $104 billion was illegally transferred out of India to avoid taxation. That amounts to around one-third of the country's external debt.

But India does not seem to be very interested in trying to curb black money or arm-twist the banking safe-havens into telling the country who the depositors are. Does the government have something to hide themselves or are they actively shielding their near and dear ones?

The tax to GDP ratio is really scary. We need to quickly increase the tax base by taxing all types of income. The source of income should not be made a determinant of whether it should be taxed or not. So, all income whether agricultural or not needs to be taxed. I see no reason to not take taxes from the rich and super rich farmers. Also, this loop hole makes cheats out of otherwise honest men. (Remember, Amitabh Bachchan suddenly realized he was a farmer and bought farm land in UP!!)

Implementation of GST is also important to create a standard policy environment across the states. It has been delayed but the FM had promised that it would be implemented in 2012. I am hoping he will keep his word.

If we can take the tax/GDP ratio to nearly 30%, it would mean a lot more money in developmental and social schemes. I hope the government sees some sense.

Sintex Industries - Fallen Angel

Sintex Industries has corrected significantly over the last few quarters.


The main reason it has corrected is the currency overhang on their FCCB borrowing of $225 million. The market is assuming that since Sintex took on the loan at a rate of Rs 40.53 and the rupee has depreciated to Rs 50-51, there is a large impending forex loss.

Here is where I think the market is wrong. If you look at this year's annual report and read through the details of the FCCB, here are some of the facts you will get.

1. In respect of US$ 225 million zero coupons foreign currency convertible bonds (FCCBs) raised by the Company on March 12, 2008 during 2010-11, no FCCBs were converted into equity shares. The bondholders are entitled to apply for equity shares at a reseted price of `246.50 per share with a fixed rate of exchange on conversion of `40.53 to US$ 1. On full conversion of FCCBs paid up capital of the Company will increase by 36994928 equity shares of `1 each amounting to `3.70 crore.

2. Premium payable on redemption of FCCB conversion is 263.17 cr is already put in as Provisions in this years Balance Sheet.

3. Total Rs 986.11 cr Fixed Deposits. Rs. 507.11 cr are lying as unutilized amount of FCCB as part of the FD.

The 3rd point is the most critical one here. Out of $225 mn, nearly $100mn is lying unused in the bank as an FD. The company has a total of about $190 mn in Fixed Deposits on Mar 31, 2011. So, it should have no problems at all in paying back the FCCB. I am assuming they would not be converted as the price of Rs 246.50 will be tough to get to by Mar 31, 2013 when the FCCBs come up for redemption.

Sintex is also a company which has paid a dividend consistently for the last 78 years!!

Valuation
The Consolidated EPS for FY11 was 16.97. The management has guided a 20% revenue growth this year. Even if we take a conservative view and take a flat growth, at a consolidated Rs. 17 EPS, the stock is currently available at a PE of 5.1. This is less than half of the last 5 year's average PE of 11.

If someone can hold on for 2 years from now, the expected 2014 EPS is likely to be upwards of Rs 25. At a PE of 8-10, the possible price range is Rs 200-250. That is more than a 100% appreciation in 2 years.

Note: I am invested in Sintex and may be biased. For all investment decisions, please consult your financial planner.