The election verdict in India was totally unexpected. yes the exit polls were predicting a slender lead for UPA. But none expected them to get anywhere within striking distance of a majority. This was the ultimate gamechanger in market history, long after the verdict of 1991 where the P.V.Narasimha Rao govt won absolute majority and intitiated the first generation reforms under the able guidance of Mr.Manmohan Singh through the New Industrial Policy. The times that we are living in are so gloomy that this sort of a positive news has changed market sentiment overnight and can be judged to a large extent as putting us on the right path to get out of the bear market far earlier than expected. There is almost conviction amongst market participants that the lows of Oct 2008 will not be revisited even under highly stressful or catastrophic global events. The markets reacted with such high euphoria that we opened gap up on Monday morning with the sensex rising more than 2000 points and market operations halted for the rest of the day due to circuit filters getting breached. The velocity of this rally has taken the entire investing world by surprise with its speed and tearing momentum. The markets crossed 9000 on 23rd March 2009 breaking out of a channel formation and it was expected that the same would be a bullish reversal. Most of the auto, banking and interest rate sensitive stocks broke out of their respective patterns around this time, but none of us prognosticators expected the market to break above the 200 day moving average of 11000. The markets too faced a strong resistance at these levels and struggled throughout April consolidating around the moving average levels. I guess the fact that the market broke out from 9000 levels was the first opportunity for long only investors to get into the market and for the naysayers one more chance went abegging once the moving average levels were surpassed towards April end. Now where do we stand..Most of us have missed an entire 50% ride from the lows to 15000 given the pessimism (justified to an extent) and skepticism with which we viewed the surge and dismissed the same as a mere bear market rally. Yes, this might well still remain a bear market rally disguised as a new bull market. The rally was the result of extreme pessimism and disbelief amongst investors. The more and more analysts kept predicting doomsday scenarios predicting a 3 year bear market with further lows at 6000, investors were filled with negativity and their eyes could not see the opportunity that was presenting itself with stocks quoting at unbelievably cheap prices far lower than replacement costs or even cash value. Examples i can think of are Sesa Goa, Neyveli lignite, opto circuits etc. As investors saw markets rising from 8000 to 9000 and then 11000, they were just hoping for a correction to buy on dips and markets refused them the chance to do the same. The veering trend we witnessed from the lows of the satyam saga just kept pushing the market to consistently higher levels and then the masterstroke in the form of UPA poll verdict. Now investors are smarting from the lost quarter. Mutual funds that were sitting on huge cash and thumbsucking all these months are facing difficult queries from investors about their underperformance. This rally which initially started of from 8000 as a liquidity fuelled rally from anglo saxon FII's was a reversal of risk aversion to a partial extent given the positive greenshoots and stimulus packages from various governments of the world in what was seen as a coordinated effort to restore the financial world and prevent a systemic crisis that might result in a debt deflation for the main economy. Throughout 2008 and early 2009, money was flowing into US treasury bonds for safety and reflected the risk aversion displayed by market participants. With stimulus packages being doled out dime a dozen and banks/financial institutions awash with liquidity, money had to chase profitable performance. Parking all the money in US bonds was only going to yield sub optimal returns. With Obama coming to power in the US and the new treasury secretary Geithner's Public private investment plan to recapitalise banks exuding confidence coupled with G20 promising coordinated action to restore financial stability, risk aversion had begun to scale down and money has started flowing into equities globally. Considering the fact that emerging markets are considered riskier, the indices have outperformed the SnP over the last few months.
However all is not lost for the value investors. They need to take a step back and look at what has happened over the last week or so in a clear and lucid manner.They should ask themselves tough questions like "What was not looking cheap at 9000, how is it looking cheap at 14000" before putting their money to work. We are already trading at more than 16 times FY 10 EPS which by no means is cheap. We must not follow the herd mentality and be branded as pioneers of the "greater fool theory" and end up buying the junk at high prices. What we saw from 3600 to 4500 was irrational exhuberance and lets allow some time for rationality to set in. Markets wont gallop in a tearing hurry from here on. They will give us opportunities time and again. Mr.Market is not a one way street. The market is not going to race away to 21000 from here and will take its pause, consolidate, yo-yo for some time and then come down before resuming its bullish ways. Remember the global recession is not over by any means and there's still some distance to travel before we wre completely out of the woods. Even from the domestic viewpoint, the fundamentals of the economy have not become buoyant all of a sudden. The problems on the export front have not disappeared. Having said that this rally of golden monday and tuesday has indeed created a disequilibrium in the market as explained in the theory of reflexivity by george soros. He evangelises the concept that just like how fundamentals can affect markets, market movement can also affect fundamentals which is largely acceptable and true. Its only the formation of a stable government at the centre without the leftist interference that has spurred sentiment favourably. There are expectations of reforms in various sectors of the economy and with political stability in place, business confidence is also set to rise. With FII's and hedge funds looking out for profitable avenues to park their money, they have zeroed in on India for the time being in the hope that many positive changes can happen here in quick time in an otherwise gloomy global setup.
Elliot wave chartists have also predicted that we have almost turned the corner as far as bear markets are concerned. We have already completed the five waves of a bear market from 21206 to 7697 and we are in the process of completing the balance 3 waves out of the total 8 waves of a bear market. We are in the last wave C of the bear market and that in my opinion has ended when the market came within kissing distance of 15000. So if you are an investor who believes in elliot wave theories, the next time we witness a solid fall to lower levels should be an opportunity to buy as the next rally we might witness on the upside might be sowing the seeds of a new multi year bull market which will take us to newer highs on the nifty and sensex over a period of time. Having said that, the probability of we tetsing the lows from here on is next to impossible. We will not fall below 9000 even under the worst global circumstances. I can say that with reasonable conviction now. The present pull back in the sensex over the last couple of days might continue until we reach 4000 on the nifty. Thats the support level where one can expect some more buying to happen. It would be prudent for investors to allocate 30-35% of their funds when the index scales back to 4000 on the nifty. The biggest advantage of having a pro reforms government is that business sentiment gets a huge fillip in such a short span of time. Banks start lending, IIP goes up, Capital flows reenter the country, FDI and private equity deals start happening again. To put it in a nutshell, the growth prospects of the economy appear positive and many global equity analysts will upgrade India and accord a premium valuation to frontline stocks as markets always factor/discount the future well in advance. The decoupling theories have already started doing the rounds in investor circles. The intelligent verdict of the indian populace to vote for a stable pro reform government has been the biggest greenshoot our economy has received so far.The key sensitivity or risk to buying Indian stocks can only be an abnormal slackening in the pace of reforms which might end up disappointing the markets at large. Also the other point investors should keep in mind is the fact that its the same beaten down stocks that are moving up again like the same real estate and commodity stocks, which some theorists point out is a continuation of the bear market.
About Me
- dharma
- I believe in "Baptism by fire" that will transform me from an average joe to a true blue bee's knees in corporate finance and investment banking
Thursday, May 21, 2009
Thursday, May 14, 2009
The Legend Lives on : By Dr.S.Krishnaswamy
A tribute to the greatest actor and one of the great Tamilians that we all know of:
Sivaji Ganesan's voice and diction not only changed the course of dialogue delivery in Tamil films and plays, but also had a deep impact in the manner in which the language is spoken by narrators on Radio and Television.
ALTHOUGH WE are constantly aware that we are all mere mortals, we are unable to reconcile with the mortality of some people. ``Sivaji'' Ganesan is one such - an immortal in our minds.
``Long live Bharathan....'' blessed Rajaji, after the film ``Sampoorna Ramayanam'' was screened for him. Sivaji Ganesan had performed the role of Bharatan. Those brief words of Rajaji, who rarely watched films, were unconsciously pregnant with identical ideas of film historians and researchers on Tamil Cinema. ``In the desert of Tamil films, an actor by name Sivaji Ganesan is an oasis'', I had said, in my article on Tamil films for an American arts magazine in the 1970s. Earlier, Erik Barnouw and I, in the first edition of our book ``Indian Film'' (1963), had commented, ``Seldom has substantial talent been used more recklessly or profitably''. A world-class actor remained a regional star, essentially because the ethos of Tamil Cinema was never in the wavelength of world cinema - celebrated as the Seventh Art. But even a diehard enthusiast of realism in films, had to sit up and watch Sivaji. That one hand gesture of Bharatan, meaning ``lets go'', in ``Sampoorna Ramayanam'' is not merely etched in my memory, but has been adapted, and re-enacted by a hundred film actors, and even classical dancers on stage.
It was often worth spending the nearly three hours watching immature story lines and inept directorial handling, to experience those sparks of true genius of an inimitable actor - Sivaji. His performance was stylised - drawing from the immeasurable depth of India's racial memory of many millennia, from artistes of ancient Tamil and Sanskrit Theatre. This was often erroneously described or even criticised as ``over- acting''. Well, if your theme is melodrama, your performance has to match it. But Sivaji Ganesan's range and immense versatility, did not confine him to this stylised performance alone. He could challenge any actor of the realistic school, when the need, the story and character demanded it. His career's best performance (in my opinion) as V. O. Chidamabaram Pillai in ``Kappalottiya Thamizhan'', puts him on a pedestal among the all-time- greats of world cinema, as an actor. The biographical, which was well researched, gave him the scope to re-create the ambience, maintaining the integrity of character - the realistic human side of a great patriot of the Freedom Struggle.
In contrast however, many fans remember him for his melodramatic portrayal of Kattabomman. Although made by the same creative team which was responsible for the suave, artistic and authentic ``Kappalottiya Thamizhan'', ``Veerapandiya Kattabomman'' was historically far from accurate. It was more like a costume drama or a mythological. Sivaji's performance was in tune with that treatment. Even today, nearly four decades after the release of the film, when enthusiastic parents bring their children for audition to perform in our TV serials, the boys invariably deliver Sivaji's dialogue from ``Veerapandiya Kattabomman'' to demonstrate their histrionics. Sivaji Ganesan's voice and Tamil diction not only changed the course of dialogue delivery in Tamil films and plays, but also had a deep impact in the manner in which Tamil is spoken by narrators on Radio and Television.
Unique among the film styles of the world, song sequences in our films constitute an inheritance from ancient Indian theatre. There was indeed, no one to beat Sivaji in ``rendering'' the songs. Never for a moment would you feel that he was lip-wagging for the playback singer, since his gestures and mannerisms were emotive manifestations of consummate skill, artistry and flair, unlikely to be matched even by original singers.
Apart from the infrequent courtesy calls, I have had the privilege of talking in-depth to ``Nadigar Thilakam'' - as his fans reverentially called him - three times. First was my hour- long interview for the first edition of ``Indian Film'', in 1962; the second in the 1970s for a Bombay-based film magazine and the third for an American Academic journal in the 1980s. He has sometimes been described as one constantly wearing an actor's mask - that he conversed as though he was delivering a dialogue. On the contrary, at least some parts of my interactions with him revealed a simple, transparent personality. For instance, soon after his return from his first trip abroad (to America as an invited guest of that Government), I asked him ``How was America?'' He first said, ``You have studied there. What am I going to tell you about America?''
``I mean your own reactions - how did you enjoy the visit?'' I asked.
With hardly a moment of hesitation there was a sincere answer. ``First I was struck with wonder. Then I was uncomfortable and felt embarrassed. Gradually, I felt very happy'', and then he expanded, ``The first impression of wonder was with the sights which were beyond what I had imagined. I was then uncomfortable because, I felt I was just another face in the crowd. Having got used to the attention of my people back in Tamil Nadu, it was a strange embarrassment to walk in crowded streets without anyone taking a second look at me. Gradually, I felt it meant at the same time, a rare liberty to be myself. And I enjoyed that''. It was candid, childlike and unpretentious.
In another session, I asked him ``Do you feel that you are not being used to your fullest potential, because of the limitations of Tamil cinema?''
``I can put it this way. I want to function as a fountain pen. My ambience expects me to perform as a pencil. Sometimes this results in my writing as a ball-point pen'' he described, in graphic terms.
In 1986, I was addressing The Washington Institute for Values in the US Capital, on the subject ``Culture As Political Phenomena''. In the small group of high profile audience, a senator, surprisingly well-informed about India, asked, ``Why is your great actor Sivaji Ganesan not politically successful like your M.G. Ramachandran?''.
I quoted from the narration of my biographical TV documentary on MGR. My narration says, ``The MGR Phenomenon was an amalgam of fact and fiction, dream and reality. The only archetype character he performed in all his films was of a hero who combined in himself the strength of a Hercules, the modernity of a James Bond and the love and compassion of a Jesus Christ''. The political value of this ingenious image is unparalleled in the history of media.
On the contrary, Sivaji Ganesan was the last word in versatility, performing any role of any shade - often that of a tragic hero, the self-pitying brother, the negative womaniser of ``Thirumbipaar'', the treacherous foreign spy of ``Andha Naal''.
He performed these different roles as a true artiste, interpreting every shade of character with ingenuity, involvement and ``finesse''. There was no fusion of an off-screen image and an on-screen image, to create a political mascot. Hence Sivaji Ganesan's attempt to build a political brand-equity failed. It was certainly a price worth paying - for he will be remembered as one of the greatest actors of modern India.
In my ``MGR Phenomenon'' I had said, ``Although MGR was an actor by accident, he was a mature politician by deliberate choice''. It will be equally true to say, ``Although Sivaji Ganesan stumbled into politics, he was a born actor par excellence - a thespian of whom India will be eternally proud''.
Vazhga Engal Nadigar Thilagam
Sivaji Ganesan's voice and diction not only changed the course of dialogue delivery in Tamil films and plays, but also had a deep impact in the manner in which the language is spoken by narrators on Radio and Television.
ALTHOUGH WE are constantly aware that we are all mere mortals, we are unable to reconcile with the mortality of some people. ``Sivaji'' Ganesan is one such - an immortal in our minds.
``Long live Bharathan....'' blessed Rajaji, after the film ``Sampoorna Ramayanam'' was screened for him. Sivaji Ganesan had performed the role of Bharatan. Those brief words of Rajaji, who rarely watched films, were unconsciously pregnant with identical ideas of film historians and researchers on Tamil Cinema. ``In the desert of Tamil films, an actor by name Sivaji Ganesan is an oasis'', I had said, in my article on Tamil films for an American arts magazine in the 1970s. Earlier, Erik Barnouw and I, in the first edition of our book ``Indian Film'' (1963), had commented, ``Seldom has substantial talent been used more recklessly or profitably''. A world-class actor remained a regional star, essentially because the ethos of Tamil Cinema was never in the wavelength of world cinema - celebrated as the Seventh Art. But even a diehard enthusiast of realism in films, had to sit up and watch Sivaji. That one hand gesture of Bharatan, meaning ``lets go'', in ``Sampoorna Ramayanam'' is not merely etched in my memory, but has been adapted, and re-enacted by a hundred film actors, and even classical dancers on stage.
It was often worth spending the nearly three hours watching immature story lines and inept directorial handling, to experience those sparks of true genius of an inimitable actor - Sivaji. His performance was stylised - drawing from the immeasurable depth of India's racial memory of many millennia, from artistes of ancient Tamil and Sanskrit Theatre. This was often erroneously described or even criticised as ``over- acting''. Well, if your theme is melodrama, your performance has to match it. But Sivaji Ganesan's range and immense versatility, did not confine him to this stylised performance alone. He could challenge any actor of the realistic school, when the need, the story and character demanded it. His career's best performance (in my opinion) as V. O. Chidamabaram Pillai in ``Kappalottiya Thamizhan'', puts him on a pedestal among the all-time- greats of world cinema, as an actor. The biographical, which was well researched, gave him the scope to re-create the ambience, maintaining the integrity of character - the realistic human side of a great patriot of the Freedom Struggle.
In contrast however, many fans remember him for his melodramatic portrayal of Kattabomman. Although made by the same creative team which was responsible for the suave, artistic and authentic ``Kappalottiya Thamizhan'', ``Veerapandiya Kattabomman'' was historically far from accurate. It was more like a costume drama or a mythological. Sivaji's performance was in tune with that treatment. Even today, nearly four decades after the release of the film, when enthusiastic parents bring their children for audition to perform in our TV serials, the boys invariably deliver Sivaji's dialogue from ``Veerapandiya Kattabomman'' to demonstrate their histrionics. Sivaji Ganesan's voice and Tamil diction not only changed the course of dialogue delivery in Tamil films and plays, but also had a deep impact in the manner in which Tamil is spoken by narrators on Radio and Television.
Unique among the film styles of the world, song sequences in our films constitute an inheritance from ancient Indian theatre. There was indeed, no one to beat Sivaji in ``rendering'' the songs. Never for a moment would you feel that he was lip-wagging for the playback singer, since his gestures and mannerisms were emotive manifestations of consummate skill, artistry and flair, unlikely to be matched even by original singers.
Apart from the infrequent courtesy calls, I have had the privilege of talking in-depth to ``Nadigar Thilakam'' - as his fans reverentially called him - three times. First was my hour- long interview for the first edition of ``Indian Film'', in 1962; the second in the 1970s for a Bombay-based film magazine and the third for an American Academic journal in the 1980s. He has sometimes been described as one constantly wearing an actor's mask - that he conversed as though he was delivering a dialogue. On the contrary, at least some parts of my interactions with him revealed a simple, transparent personality. For instance, soon after his return from his first trip abroad (to America as an invited guest of that Government), I asked him ``How was America?'' He first said, ``You have studied there. What am I going to tell you about America?''
``I mean your own reactions - how did you enjoy the visit?'' I asked.
With hardly a moment of hesitation there was a sincere answer. ``First I was struck with wonder. Then I was uncomfortable and felt embarrassed. Gradually, I felt very happy'', and then he expanded, ``The first impression of wonder was with the sights which were beyond what I had imagined. I was then uncomfortable because, I felt I was just another face in the crowd. Having got used to the attention of my people back in Tamil Nadu, it was a strange embarrassment to walk in crowded streets without anyone taking a second look at me. Gradually, I felt it meant at the same time, a rare liberty to be myself. And I enjoyed that''. It was candid, childlike and unpretentious.
In another session, I asked him ``Do you feel that you are not being used to your fullest potential, because of the limitations of Tamil cinema?''
``I can put it this way. I want to function as a fountain pen. My ambience expects me to perform as a pencil. Sometimes this results in my writing as a ball-point pen'' he described, in graphic terms.
In 1986, I was addressing The Washington Institute for Values in the US Capital, on the subject ``Culture As Political Phenomena''. In the small group of high profile audience, a senator, surprisingly well-informed about India, asked, ``Why is your great actor Sivaji Ganesan not politically successful like your M.G. Ramachandran?''.
I quoted from the narration of my biographical TV documentary on MGR. My narration says, ``The MGR Phenomenon was an amalgam of fact and fiction, dream and reality. The only archetype character he performed in all his films was of a hero who combined in himself the strength of a Hercules, the modernity of a James Bond and the love and compassion of a Jesus Christ''. The political value of this ingenious image is unparalleled in the history of media.
On the contrary, Sivaji Ganesan was the last word in versatility, performing any role of any shade - often that of a tragic hero, the self-pitying brother, the negative womaniser of ``Thirumbipaar'', the treacherous foreign spy of ``Andha Naal''.
He performed these different roles as a true artiste, interpreting every shade of character with ingenuity, involvement and ``finesse''. There was no fusion of an off-screen image and an on-screen image, to create a political mascot. Hence Sivaji Ganesan's attempt to build a political brand-equity failed. It was certainly a price worth paying - for he will be remembered as one of the greatest actors of modern India.
In my ``MGR Phenomenon'' I had said, ``Although MGR was an actor by accident, he was a mature politician by deliberate choice''. It will be equally true to say, ``Although Sivaji Ganesan stumbled into politics, he was a born actor par excellence - a thespian of whom India will be eternally proud''.
Vazhga Engal Nadigar Thilagam
Saturday, May 09, 2009
Some thoughts on accounting
There have always been interesting areas in accounting where i have questioned the assumptions. A few of them are listed below:
1. When we make purchases on credit, we take advantage of something known as
the "credit period". The creditor however induces us with a discount to pay
earlier. People take advantage of such discounts based on each one's own cash
flow situation. The amount payable to creditors are usually shown as "Accounts
payable" under the liabilities side of the balance sheet. So assuming people dont
avail the discount granted to them, should not this discount be accounted for as
interest as the same has been foregone by the customer.
2. The next query that comes to my mind is on Enterprise value computation. When we
include debt, we only include the book value of debt that is present on the
balance sheet. However we never include fixed committments for the future (im not
talking about contingent liabilities here). A contract with a managing director
for say 10 yrs is a future committment and is a debt in effect and the present
value of the same should be included in the balance sheet debt component which no
accounting rules or standards unfortunately provide for. However valuation
analysts need to keep this in mind. A recent example can be quoted from IPL
whereby corporates have acquired players for 10 year contracts. The franchise as
such represents a future debt committment and will be factored in while valuing
the company.
3. A recent amendment to US GAAP and other international accounting standards
brought a change in the treatment of research and development expenditure. The
standard provided for capitalisation of R&D that was previously being expensed.
The question that i have is how will this treatment be applicable to pharma and
exploration companies in the oil and gas space. These are sectors shrouded with
uncertainity be it new drug discovery or new oil field/ gas dscovery are
concerned. An expenditure has to be capitalised only if an asset comes into being
that gives the company an enduring benefit over a longer time frame. So if R&D is
incurred on a new drug discovery that ultimately doesnt see the light of the
day, how can accountants capitalise this expenditure.
1. When we make purchases on credit, we take advantage of something known as
the "credit period". The creditor however induces us with a discount to pay
earlier. People take advantage of such discounts based on each one's own cash
flow situation. The amount payable to creditors are usually shown as "Accounts
payable" under the liabilities side of the balance sheet. So assuming people dont
avail the discount granted to them, should not this discount be accounted for as
interest as the same has been foregone by the customer.
2. The next query that comes to my mind is on Enterprise value computation. When we
include debt, we only include the book value of debt that is present on the
balance sheet. However we never include fixed committments for the future (im not
talking about contingent liabilities here). A contract with a managing director
for say 10 yrs is a future committment and is a debt in effect and the present
value of the same should be included in the balance sheet debt component which no
accounting rules or standards unfortunately provide for. However valuation
analysts need to keep this in mind. A recent example can be quoted from IPL
whereby corporates have acquired players for 10 year contracts. The franchise as
such represents a future debt committment and will be factored in while valuing
the company.
3. A recent amendment to US GAAP and other international accounting standards
brought a change in the treatment of research and development expenditure. The
standard provided for capitalisation of R&D that was previously being expensed.
The question that i have is how will this treatment be applicable to pharma and
exploration companies in the oil and gas space. These are sectors shrouded with
uncertainity be it new drug discovery or new oil field/ gas dscovery are
concerned. An expenditure has to be capitalised only if an asset comes into being
that gives the company an enduring benefit over a longer time frame. So if R&D is
incurred on a new drug discovery that ultimately doesnt see the light of the
day, how can accountants capitalise this expenditure.
Tuesday, May 05, 2009
Investors waiting for a correction
I agree that people want a correction, they want to invest in a correction, and the market is not giving that opportunity. This happens when liquidity, momentum is all there. All of us need to be on one side. The consensus today is that there will be a correction and investors will invest in a correction, but that’s exactly the reason why you are not seeing a correction. Once all of us get convinced of a rally, that will be the time the market will give in.
There are two camps here. One which believes a correction is expected and we will get a chance to invest. As long as they are on the sidelines, the markets will continue to move up. The moment everyone is on one side you will see the markets taking another turn.
There are two camps here. One which believes a correction is expected and we will get a chance to invest. As long as they are on the sidelines, the markets will continue to move up. The moment everyone is on one side you will see the markets taking another turn.
Monday, May 04, 2009
Warren buffet's investment strategy
The legendary investor warren buffet has a few investment philosophies in life which have been time tested and have held him in good stead during difficult periods. The strategy and principles that he has adopted for decades are the following:
1. He considers investing in shares as good as investing in a part of the business
of a company
2. He relies on the discounted cash flow method to arrive at the intinsic value of a
company and once he identifies value which is at a significant premium to the
prevailing market price, he goes ahead and buys that stock without any regard
whatsoever to market conditions. He is a typical long term player in the markets.
3. He will only invest in companies that have good pricing power, significant
economic moat and competitive positioning in the market place. He typically
prefers companies with strong brands.
4. He will not invest in companies that have high debt equity ratio and high capital
committments. Howvever buffet prefers companies with products that have reflation
potential.
5. He prefers companies that have a strong management that aims at generating higher
return on invested capital.
6. He would shy away from investing in companies that keep diluting their equity
base. Using additional funds to generate higher returns doesnt impress buffet.
7. Buffet has a huge war chest of funds that hes accumulated over the years from
berkshire's insurance business. Because of the size of funds involved, he
commands special concessions for his investment. The recent example being Goldman
Sachs where buffet subsribed to the preferred stock of the company with a 10%
fixed dividend and share warrants that can be subscribed at a price thats
significantly lower to the current market price.
8. Buffet follows the simple adage of buying when others are selling and vice versa.
1. He considers investing in shares as good as investing in a part of the business
of a company
2. He relies on the discounted cash flow method to arrive at the intinsic value of a
company and once he identifies value which is at a significant premium to the
prevailing market price, he goes ahead and buys that stock without any regard
whatsoever to market conditions. He is a typical long term player in the markets.
3. He will only invest in companies that have good pricing power, significant
economic moat and competitive positioning in the market place. He typically
prefers companies with strong brands.
4. He will not invest in companies that have high debt equity ratio and high capital
committments. Howvever buffet prefers companies with products that have reflation
potential.
5. He prefers companies that have a strong management that aims at generating higher
return on invested capital.
6. He would shy away from investing in companies that keep diluting their equity
base. Using additional funds to generate higher returns doesnt impress buffet.
7. Buffet has a huge war chest of funds that hes accumulated over the years from
berkshire's insurance business. Because of the size of funds involved, he
commands special concessions for his investment. The recent example being Goldman
Sachs where buffet subsribed to the preferred stock of the company with a 10%
fixed dividend and share warrants that can be subscribed at a price thats
significantly lower to the current market price.
8. Buffet follows the simple adage of buying when others are selling and vice versa.
Saturday, May 02, 2009
Estimating discount rates under DCF exercise
The estimation of a discount rate while trying to arrive at the intrinsic value of an entity is a tricky affair. Wrong estimation of discount rates can result in sub optimal and misleading valuations that may disrupt informed investment decisions.
Instead of using complex formulas and equations to arrive at discount rates, lay investors can use simple arithmetics and a clear understanding of EIC (Economy-Industry- Company) picture to arrive at the appropriate cost of capital. Investors may take into account the following factors in estimating discount rates namely:
1. The risk free rate as indicated by Treasury bills issued by RBI. These are
typical government bonds whereby payment of interest and repayment of capital are
near certainity and thereby carry little or neggligible risk.
2. To this risk free rate, we add risk premium based on the level of industry risk,
political risk, business risk, financial risk and other exclusive/selective risk
factors surrounding the company under valuation exercise.
3. Companies of smaller size have higher share of risk compared to large sized
companies that have much more diversified business streams.
4. Companies in cyclical industries like steel, sugar or cement have higher risk
attached to them when compared to companies in defensive segments with stable
cash flows like FMCG or healthcare. Therefore cyclical companies will have higher
discount factor.
5. Other factors u may consider while incorporating discount rates are management
quality, corporate governance, Accounting quality etc
For every factor that u feel necessitates a higher risk portion, u should appropriately increase the discount rate.
Instead of using complex formulas and equations to arrive at discount rates, lay investors can use simple arithmetics and a clear understanding of EIC (Economy-Industry- Company) picture to arrive at the appropriate cost of capital. Investors may take into account the following factors in estimating discount rates namely:
1. The risk free rate as indicated by Treasury bills issued by RBI. These are
typical government bonds whereby payment of interest and repayment of capital are
near certainity and thereby carry little or neggligible risk.
2. To this risk free rate, we add risk premium based on the level of industry risk,
political risk, business risk, financial risk and other exclusive/selective risk
factors surrounding the company under valuation exercise.
3. Companies of smaller size have higher share of risk compared to large sized
companies that have much more diversified business streams.
4. Companies in cyclical industries like steel, sugar or cement have higher risk
attached to them when compared to companies in defensive segments with stable
cash flows like FMCG or healthcare. Therefore cyclical companies will have higher
discount factor.
5. Other factors u may consider while incorporating discount rates are management
quality, corporate governance, Accounting quality etc
For every factor that u feel necessitates a higher risk portion, u should appropriately increase the discount rate.
Just an another day in paradise
She calls out to the man on the street
sir, can you help me?
Its cold and Ive nowhere to sleep,
Is there somewhere you can tell me?
He walks on, doesnt look back
He pretends he cant hear her
Starts to whistle as he crosses the street
Seems embarrassed to be there
Oh think twice, its another day for
You and me in paradise
Oh think twice, its just another day for you,
You and me in paradise
She calls out to the man on the street
He can see shes been crying
Shes got blisters on the soles of her feet
Cant walk but shes trying
Oh think twice...
Oh lord, is there nothing more anybody can do
Oh lord, there must be something you can say
You can tell from the lines on her face
You can see that shes been there
Probably been moved on from every place
cos she didnt fit in there
Oh think twice...
sir, can you help me?
Its cold and Ive nowhere to sleep,
Is there somewhere you can tell me?
He walks on, doesnt look back
He pretends he cant hear her
Starts to whistle as he crosses the street
Seems embarrassed to be there
Oh think twice, its another day for
You and me in paradise
Oh think twice, its just another day for you,
You and me in paradise
She calls out to the man on the street
He can see shes been crying
Shes got blisters on the soles of her feet
Cant walk but shes trying
Oh think twice...
Oh lord, is there nothing more anybody can do
Oh lord, there must be something you can say
You can tell from the lines on her face
You can see that shes been there
Probably been moved on from every place
cos she didnt fit in there
Oh think twice...
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