Interviews of Charlie Munger

Monetary Policy Impact on Shriram Transport Finance Complay Ltd (STFC)

This monetary policy announced on May 3rd has a new guideline whereby all loans by banks to NBFCs will now NOT be considered under priority sector lending (PSL). This has impacted the stock price of Shriram Transport Finance Complay Ltd (STFC) greatly. The stock has been hammered down by nearly 25% in the last few days. 
Let us quickly look at the facts:-

• 20% of the companies funds come from banks. The rest is from retail and institutional borrowing.
• The company foresees a slowdown in CV (commercial vehicle) sales in the next 3-6 months as interest rates rise.
• Since the company primarily lends to used CV owners (70% of the loans are for used vehicles), there is a lag when the slowdown would impact the company. 
• It is possible that the slowdown may hit in the next financial year and the company may grow at 10% instead of the 15%-20% it hopes to do now.
• The company does not expect any significant impact on NIMs after the monetary policy
• FY12 Q1 results would need to be keenly watched for possible future direction of the company.
• The stock may not breach the 52 week low of about 530. I would be really surprised to see it go down much below 600.

Even if I assume a slowdown and a 10% growth for FY12, the expected FY12 EPS would be about Rs. 60. The expected price at an approximate PE band of 12-14 would result in an approximate price of 720-840.

I think STFC may be providing a good risk-reward situation for long term investors.

One Stock Portfolio - A thought experiment

Suppose you have a fairly large amount to invest in the stock market. Assume that the amount is a significant amount of your networth. And also assume that you can invest only in one stock. What would you do?
To look at this problem in the Charlie Munger way (by way of inversion), let me see what I would NOT do.

• I would not invest in any company with the following characteristics:-
• Commodity producer
• Capital intensive (one which requires a lot of incremental capital)
• Large debt on its balance sheet
• Company with poor scalability of its core business
• Free cash flow is negligible or negative consistently
• Questionable management
• An insignificant player in its sector

The more I think about this from a top-down approach, the more I get driven towards FMCG, Pharma/Healthcare or Financial sectors. The main aspect for this investment would be that I would not want to lose much of  the money. Here are some stocks I would shortlist:-

• CRISIL
• HDFC Bank
• SBI
• Apollo Hospitals
• Cipla
• ITC
• Godrej Industries
• Titan

The specific pick can vary but I think over time the probability that all these stocks will beat inflation (and fixed deposits) is high.

Prof. Bakshi's 8 vantage points to look at a stock

As usual, great post from Prof.Bakshi. In this he goes through the eight ways of looking at a company and provides nuggets of wisdom while looking at the financial statements from the company.

Vantage Point: 8 Points of View For Evaluating a Stock

Yes Bank - Stellar Performance & Stupidity rolled into one!!

First the stellar performance:

Highlights for Full Year ended Mar 31, 2011 (FY11)

• Net Profit up 52.2% to 727.1 cr (477.7 cr in FY10)
• Net Interest Income up 58.2% to 1,246.9 cr (788.0 cr in FY10)
• Operating Profit up 37.9% to 1,190.4 cr (863.3 cr in FY10)
• Net Interest Margin at 2.9% 
• Return on Average Assets-RoA of 1.5%; RoA has been at or above 1.5% over the past 3 years
• Return on Equity-RoE of 21.1%; has been 20% or above over past 3 years
• Basic EPS of  21.1 and Diluted EPS of 20.2

Other Key Highlights as at Mar 31, 2011

• Advances up 54.8%
• Deposits up 71.4%
• Total Assets up 62.2%
• Basel II Capital Adequacy Ratio of 16.5% (Tier I – 9 .7%)
• Gross NPA at 0.23% of Gross Advances 
• Net NPA at 0.03% of Net Advances 
• Book value per share of 109.3 (91.0 as at Mar 31, 2010)

Now, the stupidity:

Yes Bank made 2 announcements - 1) dividend of 2.5/share (approximately 85 crores) and 2) it has plans to raise up to USD 500 million (about Rs 2,000 crore) during the current fiscal to fund business growth . 

These two announcements, to my mind, are contradictory in nature. Why does a company earning 20% RoE growing at over 40% need to pay a dividend? Specially, if it needs to raise equity capital in the near future. Beats me.

Bottomline: Great bank, keep buying on dips.

Book Review: Warren Buffet Portfolio by Robert Hagstrom

This book came very highly recommended to me. Hagstrom's more popular book The Warren Buffet Way was the first book related to investments that I had read. I was eager to read this to understand the approach for creating a portfolio. However, this book was a big let down. Hagstrom, to my mind, has tried to rehash some very popular and easily accessible material from Buffet's shareholders, Poor Charlie's Almanac and other such sources and put together a book. There is nothing is this that a reader can learn from that he won't get from reading the Buffet's letter to shareholders and books on Munger. 

The idea that is propagated throughout the book is to build a focused portfolio of not more than 10-15 stocks. Have a holding period of not less than 5 years. Increase your knowledge about every company you hold. Learn about them, their industry and competitors. 

In a nutshell, a book that has no new insights and repeats very well-known investment ideas and themes. Better to avoid.

Book Review: Investment Gurus by Peter Tanous

I just completed reading Peter Tanous' Investment Gurus. This book has been written on the lines of the Market Wizards series by Jack Schwager.That is, it is a collection of interviews with famous money managers. Added to those are a list of academicians. The list of interviewees are a very good collection of money managers. It includes people like Peter Lynch, Mario Gabelli, William Sharpe, Richard Driehaus and Eugene Fama.

The focus of the book is on finding out the method that each use to consistently beat the markets and to understand if the efficient market theory actually has any basis in reality.

This is a good book to read if you want to flip through the investment strategies of some very well-known and outperforming managers. If you want to have in-depth understanding of any theory, then this is not the book for you.