"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." - Warren Buffett

"Forecasts may tell you a great deal about the forecaster, they tell you nothing about the future" - Warren Buffett

"We ignore outlooks and forecasts... we're lousy at it and we admit it... everyone else is lousy too, but most people won't admit it." - Marty Whitman

"Guesses - just so we're clear - are merely expressions of prejudice." - Michael Crichton

"Economists make predictions because they're asked, not because they know." - John K. Galbraith

Posted by toughiee at 7:33 PM | Permalink | Comments | links to this post

Posted by toughiee at 5:50 PM | Permalink | Comments | links to this post

In this regard, Graham's parable of 'Mr. Market' stands in good stead. This is, probably, one of the best metaphors ever created for explaining how stocks can become mispriced. Through this parable, Graham asks investors to imagine a non-existing person called Mr. Market who is your (investor's) partner in a private business. He appears daily and names a price (stock quotation) at which he would either buy your interest or sell you his. Now, despite the fact that both Mr. Market and you have stable business interests, his quotations are rarely so. At times, he falls so ecstatic that he sees only the favourable factors affecting business. And this is the time he would name a very high buy-sell price because he fears that if he does not quote such a high price, you would buy his interest in the enterprise and rob him of imminent gains.

And then there are times when this very Mr. Market is so depressed that he sees nothing but trouble ahead for both business and the world. These are the occasions when he would name a very low price, as he is terrified that if he does not do so, you would burden him (sell him) with your interest in the business.

Now, Graham says that if you were a prudent investor or a sensible businessman, you would not let Mr. Market's daily communication determine your view of the value of your interest in the enterprise. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But at the rest of the time, you would be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

What Graham tells investors through this parable of Mr. Market is that they should look at market fluctuations in terms of the Mr. Market example. They should make these fluctuations as their friend rather then their enemy. This means that they should neither give in to temptations that rising markets bring with them nor should they think of doom when the markets are falling incessantly.

Coming back to the abovementioned definition of an investment operation, investors need to have a long-term (two to three years) perspective when making their investment decision. Only then would the promised safety of principal and an adequate return accrue to them. Now, the term 'adequate return' typically varies from investor to investor. A high-risk investor would demand a high return from his investment from the extra bit of risk he is taking. On the other hand, a low-risk investor would settle for a relatively lower return. Having said that, in a rising market, expectations tend to be on the higher side without a fundamental premise. Here is where 'Mr. Market' could mislead you. If you believe that 15% per annum is an 'adequate return', then stick to that irrespective of whether it is a bull market or a bear market. Otherwise, you are changing i.e. risk profile is changing, which is not required.

As Graham says, '...in the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion. However, in the long-term, the market is a 'weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism.' Happy investing!

Note: Characters in italics are quotes from Benjamin Graham.

Posted by toughiee at 10:39 PM | Permalink | Comments | links to this post

Healthy growth in corporate earnings, rising institutional interest and ample liquidity have been the main drivers of high stock prices over the past three years. Conventional parameters apart, the recent re-rating of stocks has also been driven by other factors. Companies are valued not just for their core businesses but also for other strengths that have the potential to add value to core operations. Here are a few such triggers investors need to take note of:

Listing of subsidiaries

With the primary market in spate, companies seeking to hive off a new business for subsequent listing stand to receive an attractive valuation for the new business that isn’t captured in the company’s books. The listing of a subsidiary by an existing company has more often than not delivered value to the holding company. Consider Reliance Energy.

Since the filing of the draft prospectus of Reliance Power (early October-07), Reliance Energy has returned about 76 per cent, while the Sensex appreciated by only 10 per cent. Pantaloon Retail, following the announcement of the listing of Future Capital Holding (late September-07), its 78 per cent subsidiary, spurted 40 per cent between the date of announcement and that of the IPO, outpacing the 20-per cent rise in the Sensex.

The price surge in HEG and Rajasthan Spinning and Weaving Mills (RSWM) can be traced to similar factors. Given their rather indifferent valuations, news of the potential listing of Bhilwara Energy, their commonly-held subsidiary, drove their stock prices to new heights.

HEG more than doubled and RSWM appreciated more than 150 per cent in just two months while the Sensex managed a piffling 6 percent rise only!

Going by these trends, investors looking for potential upsides should watch for proposed listings of subsidiaries by companies such as ICICI Bank (planned listing of ICICI Securities and ICICI Ventures), M&M (Club Mahindra) and L&T (L&T Infotech).

Tracking the draft prospectuses of these arms on the SEBI site and looking into the potential valuations of these new companies may help investors time their investments in these stocks. One caveat here is that valuations would hinge on the sector leanings of the subsidiaries concerned.

Peer re-rating

Had you invested in Tata Power three months ago, you would now be sitting on profits of over 70 per cent on the investment, thanks to the high-profile Reliance Power IPO. In the same three-month window, other power stocks such as Torrent Power, JP Hydro, NTPC and CESC have turned in double-digit returns, a rare phenomenon in the sedate power sector. This bout of re-rating was prompted by the Reliance ADAG group’s decision to list Reliance Power.

The spate of new listings in the brokerage/financial space in recent times — Motilal Oswal Financial Services, Religare Enterprises and Edelweiss Capital has had a trickle-down effect on listed brokerage firms, such as India Infoline and Geojit Securities, IL&FS Investment Managers, and so on. The price investors were willing to pay for Motilal’s offer also pegged up the valuations for holding companies with unlisted broking businesses — such as Kotak Mahindra Bank and Indiabulls.

The mega public offer of DLF also had a similar impact on its realty peers. Given that most IPOs today enjoy strong investor appetite, a new listing usually contributes to a fresh discovery of the prices investors are willing to pay for the growth prospects of the business.

In this context, the price action in peer group companies of Emaar MGF (DLF), Oil India (ONGC), Wockhardt Hospitals (Apollo Hospitals and Fortis Healthcare) and Titagarh Wagons (Texmaco), among the many in line for initial offers, bear close watching in the weeks ahead.

Private equity deals

The private equity party in India has just begun; nonetheless, PE deals have altered the price discovery mechanism of our markets. For instance, Eton Park Capital’s acquisition of a 5 per cent stake in Reliance Capital for Rs 500 crore had valued the latter at about 13 per cent of its assets under management. This valuation was quite liberal when compared to the values earlier accorded to Reliance Capital’s asset business and thus drove a re-rating of comparable AMCs, such as Birla Sun Life.

Birla’s AMC business is housed with Aditya Birla Nuvo, the flagship company of this group. The Aditya Birla Nuvo stock gained 30 per cent from the time of this deal.

Similar benchmarking was also used to drive an expansion in price-earnings numbers of several listed broking companies, which attracted private equity deals in good number over the past year or so.

Valuation ‘gaps’ between two firms in a similar business have been swiftly bridged. This underlines the fact that investors are increasingly willing to bet on businesses and stocks if they are available at cheaper valuations in a bull market, rather than try and justify standalone absolute valuations for a business.

Nonetheless, it might not be such a great idea to invest blindly in companies that have attracted PE money. While most such companies have generated profits for shareholders, investors may be better off tracking the company fundamentals before taking the plunge.

For instance, while Nagarjuna Constructions returned about 85 per cent after the Blackstone deal, Gokaldas Exports, despite a similar private equity deal, has delivered only about 7 per cent.

Investment books

Prolonged bull markets, such as the current one, tend to soak up the supply of stock candidates that are available at good “value”. This may explain the trend among market participants to unearth hidden sources of “value” in a company’s asset base or balance-sheet that could add a few rupees to the company’s intrinsic worth.

The market value of investment books of companies (the value of securities/stakes held by the company as a part of its trade or non-trade investments) have been drivers of re-rating for stocks such as Tata Investment Corporation, Ramco Industries, Rallis India, IDFC, and many others. Consider Ramco Industries. The stock price shot up by a whopping 33 per cent in the last one month on discovery of a valuation mismatch; its investment book value per share was higher than the market price.

Arguments on similar lines may partly explain the surge in stock prices of companies such as Tata Investment Corporation, LMW, Dewan Housing and IDFC, to name a few. For instance, in Tata Investment Corporation, the value of its investment book would stand at about Rs 841 per share at current market prices; LMW’s investment book would be valued at about Rs.64 per share.

However, the caveat here is that though the market value of the investment book may be much higher than the book value, it must be capable of value unlocking through a sale of those shares at market price. Companies that do not actively manage their equity portfolios and cross-holdings between group companies may not lend themselves to such unlocking. Moreover, the market value of the investment book too is directly related to the state of the stock market and any meltdown could lead to a swift mark-down in values.

Beware the black swan

More often than not, while such triggers have made stocks outperform the broad market till now, they may not continue to do so. Investors should primarily base their investment decisions on a company’s core business fundamentals.

The Bajaj Auto demerger is a case in point. Contrary to the general market sentiment that demergers are good for shareholders, the stock crashed by about 13 per cent after the terms of the demerger were announced; the stock continues to languish despite a bull market. Investors expecting value discovery for Bajaj’s insurance business were caught off-guard on disclosure of a call option at a nominal price with its insurance partner, Allianz.

This came as an unpleasant surprise to market participants who were pegging up Bajaj’s insurance business at about Rs 600-1000 per share. Such damp-squib occurrences are rare but they prove that investors may be better off going by stock fundamentals for long-term investments.

Posted by toughiee at 10:57 AM | Permalink | Comments | links to this post

Posted by toughiee at 3:02 PM | Permalink | Comments | links to this post

by Sanat Vallikappen - DNA Money

Cheap, ugly, obscure and otherwise ignored: these are characteristics in companies that Professor Bruce C Greenwald of the Columbia Business School looks for when he makes an investment decision. Being one of the leading proponents of value investing, a paradigm of investing pioneered by Columbia University's Benjamin Graham and David Dodd in their 1934 text, Security Analysis, it's no surprise that Greenwald likes such companies.

Value investing, as the term suggests, works on the assumptions that the market is inefficient, and involves buying companies whose stock price appears cheap when viewed against its fundamental intrinsic value. For a lay Indian investor, who has been in the middle of a secular bull-run right from April 2003, and who has since seen everything he touches turn to gold, Greenwald may come across as rather conservative.

However, Greenwald feels his strategy would best fit the Indian investor. "When Indians plan for their kids, and their kids' kids, that's very long-term planning. Value investing is about planning for the very long term, maybe 30 years," he says. But will it work in India, where every stock is on overdrive and does not exhibit the characteristics that compel Greenwald to invest. "There is always something, somewhere that will look underpriced, and therefore attractive," says this academic, who has been described by the New York Times as "a guru to Wall Street's gurus."

"It does not work for a company that is doing extremely well, and whose stock price gives you lottery ticket-type of returns," he says. Rather, he says his approach to investing works for companies that have a good management, the industry in which it operates has large entry barriers, has a geographic competitive advantage, captive customers and economies of scale, but whose share price may not have taken any or some of these into account. "An investor like Warren Buffett would like such a company," says Greenwald.

"When you buy a stock, you buy it presuming that it's undervalued. But in the same transaction, there is someone else selling it, thinking it's overvalued. One of you have to be wrong," he says. Again he advocates value investing to be the key to make you be on the right side of the transaction. "Strikingly and disproportionately successful investors have shown this," he says, adding that one of the prominent aspects of value investing is that it does very little by way of forecasting.

Greenwald feels that growth investing, in which investors put money into companies that exhibit above-average growth, even if the share price looks stretched, is riddled with a problem. "A company has to invest to keep growing. It needs to pay the people who pay for that investment. Growth is good only if earnings on the new assets being produced with fresh investments are more than the cost of producing those assets," he says.

For the lay investor, the value approach, which uses all information from the balance sheet and organises information by rank from reliable sources, may be a tough nut to crack because of the lack of access to such information, and their inability to calculate intrinsic value. For Greenwald, it would be enough if professionals (read mutual fund managers) in India adopt this approach, and pass on its benefits to retail investors in their funds.

Posted by toughiee at 12:37 PM | Permalink | Comments | links to this post

By Krishna Pokharel - WSJ

Looking to booming India as a haven from the world's skittish stock markets in 2008? If so, here are three sectors -- and three stocks -- that analysts say are poised to outperform this year: infrastructure, consumer goods and education.

Although India's surging economic growth is projected to slow somewhat this year as the effects of tighter monetary policy are felt, there is widespread confidence here that the expansion will continue even with a slowdown in the U.S. According to a recent report by U.K.-based accounting and consulting firm Grant Thornton International, Indian businesses are the most optimistic among the 34 economies surveyed about the prospects for increased profitability and exports and about the economic outlook in 2008.

India's stock market, steadily on the rise since 2005, therefore still has a lot going for it, analysts say. In the first days of 2008, when the major world markets have been buffeted by fears of a recession in the U.S., the Bombay Stock Exchange's 30-stock Sensitive Index, or Sensex, added 2.6% on top of its 47% jump last year. The index hit a new high Tuesday, closing at 20873.33, and fell yesterday 3.55 points, or 0.02%, to 20869.78 after hitting a record high of 21113.13 in intraday trading.

Among analysts, Lehman Brothers, for example, projects the Indian stock market will grow by 18% to 20% in 2008. Macquarie, too, predicts double-digit percentage gains and has a year-end target of 24000 for the Sensex.

But within the broader market, many analysts see the infrastructure and consumer-goods sectors as set to perform particularly well. Education-related companies could also emerge as hot stock picks, some analysts add.

Infrastructure is seen getting a boost from increased government spending and private investment in power generation, telecommunications, roads, ports and airports. The government late last year projected total infrastructure investment of about $500 billion over the next five years, 2.3 times the total projected to have been invested in the sector in the preceding five years.

Nipun Mehta, director and chief executive of Mumbai-based Unitis Tower Wealth Advisors, is bullish on the infrastructure sector in general and likes Punj Lloyd in particular.

Punj Lloyd is an engineering and construction outfit that builds and designs facilities such as transport systems, nuclear-power plants and pipelines. It is India's second-largest engineering company by sales, after Larsen & Toubro, and has recently entered real-estate development and shipbuilding.

"Punj [Lloyd] has a healthy order-book position and is expected to have consistent profitability over the next few years," Mr. Mehta says.

Mr. Mehta's target price for Punj Lloyd stock in 2008 is 700 rupees (almost $18). Shares closed yesterday at 545.65 rupees, down 2.85 rupees.

Unitis said it doesn't have an investment-banking relationship with Punj Lloyd, but declined to clarify its share-ownership position.

Consumer-goods companies are also expected to perform better in a stock market that may be more volatile this year. Their shares were hit in 2007 by margin squeezes as they cut the prices of their goods, but analysts say that when there are concerns over market volatility, Indian consumer-goods stocks generally give more solid returns than do manufacturing stocks.

A lagging sector last year, consumer-goods stocks have been among the top performers on the Bombay exchange in the early going this year. In 2007, with sector indexes like realty and banks surging by 73% and 60%, respectively, a key consumer-goods index rose by just 19%. This year so far, the consumer-goods sector is up 7.2%.

Tobacco and tobacco-products producer ITC, based in Kolkata, is a favorite of T.S. Harihar of Karvy Stock Broking in Hyderabad. He argues that institutional investors' interest, and buying, will be centered on "defensives" -- stocks that are more stable in periods of volatility, especially consumer goods and pharmaceuticals. This adds up to richer valuations for such companies, Mr. Harihar says.

At the same time, Mr. Harihar believes ITC's stock could get a lift from spinning off businesses such as retail and e-marketing from its core business of cigarettes. The company hasn't disclosed any restructuring plans, however.

"We believe that the brand equity of ITC and the hidden value in its retail and e-Choupal business [an online information and marketing portal for farmers] is yet not captured in its price," says Mr. Harihar. His target price for ITC stock in 2008 is 350 rupees, which would represent a 54% gain from its Wednesday closing price of 227.95 rupees.

Karvy doesn't have an investment-banking relationship with ITC or own the company's shares.

The stock-market wild card could come from an intriguing new sector on the Indian market: education. Some analysts think it is about to take off, with the burgeoning middle class giving priority to better schooling for their children.

Gurgaon-based Educomp Solutions is one of the few listed education companies on the Bombay exchange, and a key pick for Ketan Karani at Kotak Securities in Mumbai. India's young population and rising middle class are willing to pay more for career-enhancing education, which is expected to make the commercial education sector increasingly lucrative.

Because education-as-a-business is now emerging as a key theme in India, Educomp could continue to be a good opportunity to get in early: "It's a niche play right now," Mr. Karani says.

Mr. Karani notes that Educomp is the leader in the sector and was one of the top performers on the Bombay exchange in 2007, with its shares soaring more than five-fold to 4,750.45 rupees. The stock closed at 4,360 rupees yesterday.

Despite Educomp's strong performance last year, Mr. Karani has an 11,000 price target on the company for 2008, up more than double from its current level. He sees the company's stock rising to 20,000 rupees over the next three years.

Kotak doesn't have an investment banking relationship with Educomp, or own its shares.

Source: WSJ

Posted by toughiee at 8:20 PM | Permalink | Comments | links to this post

• Don't try to shoot for big gains by finding the next Microsoft. Instead focus on finding solid companies with shares selling at low valuations.
• Understanding the market's history can help you avoid repeated pitfalls. If people try to convince you that "it really is different this time," ignore them.
• Don't fall into the all-too-frequent trap of assuming that a great product translates into a high-quality company. Before you get swept away by exciting new technology or a nifty product, make sure you you’ve checked out the company's business model.
• Don't be afraid to use fear to your advantage. The best time to buy is when everyone else is running away from a given asset class.
• Attempting to time the market is a fool's game. There's ample evidence that the market can't be timed.
• The best way to reduce your investment risk is to pay careful attention to valuation. Don't make the mistake of hoping that other investors will keep paying higher prices, even if you're buying shares in a great company.
• Cash flow is the true measure of a company's financial performance, not reported earnings per share.

Posted by toughiee at 11:53 AM | Permalink | Comments | links to this post

How impartial are analyst recommendations? In a National Bureau of Economic Research (NBER) paper written last year, titled, Do Security Analysts Speak in Two Tongues?, Ulrike Malmendier of the University of California at Berkeley and Devin Shanthikumar of Harvard Business School set out to study why security analysts issue overly positive recommendations.

To the sceptical layman, there seems to be a straightforward answer—analysts are paid to encourage clients to buy stocks, simply because the universe of potential buyers is always larger than the universe of potential sellers. Malmendier and Shanthikumar, not being so cynical, consider two alternative explanations: One, analysts pick favourite stocks and are genuinely overoptimistic; and two, analysts distort recommendations to maximize commissions and underwriting business, particularly if affiliated with an underwriter.

Click here for the full article.

Additional Reading:

• Liquidity fears may be overblown

Posted by toughiee at 11:35 AM | Permalink | Comments | links to this post