...Shibulal, do your own thing...

No sooner Infosys announced its Q4 2011-12 results with a lower guidance, than the market pundits started pummeling it for hoarding up all its cash and not going in for acquiring businesses. I am tempted to ask - What else will they do...?

The problem with stock market / industry analysts is that the so-called free strategic advisory they proffer is nothing but a leaf out of the consultants' manual that is the thinnest ever tome with a two-size-fit-all strategy. First, if they are hired by a diversified firm, the consultants would advise them to merge/consolidate/ integrate. And if the hirer is a single vertical behemoth, they'll say Break-it-down. With just this two options, they get a life, ruining the clients' own. If you guys know a third strategy a consultant has, feel free to write in.

Now they see Infy sitting with a cash pile of Rs.20,500 crore (Roughly $ 4 billion) and they are urging it to acquire businesses. Why wouldn't they ever concede that if a company management was smart enough to pile all that cash up, wouldn't it know when and where to deploy it...? We all know the major acquisitive frenzy unleashed by Wipro with its string-of-pearls strategy got it - to the 4th or 5th place in the pecking order from its 3rd place after TCS and Infy. Like a good hunter, Infosys should wait for a right synergistic acquisition that falls in line with its future growth projections. Sitting on a cash pile is any day better than soaking it up into a bad big-bang deal and going down with it. Infosys CEO S.D.Shibulal is a veteran and I think the decision is better left to him. I am sure Infosys will get its act together, in time...

On to the worm now

This was pure music....

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Real estate, after the meltdown, was my favorite. DLF to be precise. Don't think I did big bang research that made it quite a find. Just a wistful hunch when I saw the stock languishing at Rs.300 levels. Now I read about the Mutual Funds newfound love for all things realty. Ha!

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The MFs exposure to realty rose from Rs 1.24 bn in March 2009 to Rs 1.71 bn around December 2008 to nearly Rs 11.13 bn by the end of Q1-FY09. By July 09, it rose to Rs.14.21 bn according to this news report in BS.

Nice to feel like an early bird... On to the worm now !!!

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When it's other people's money....monkey around

My logic hasn’t been out of place entirely. I had this belief that if I have to make it big as a fund manager or in Private Equity, I need to be a good judge of an early investment opportunity. I was too dumb not to take the easier B-school route to PE superstardom. Instead I began using my sparse savings and tried out my luck investing in the stock market to prove myself in an old fashioned way, back in 1995. If I can win with my money, I could do it with others' as well. I needed that validation.

Till date, my least lucrative exit over a one year horizon has been at an ROI of 165%. Now as I told you I started with my sparse savings and I was totally aware of the need to stay liquid to buy into the next opportunity; hence my horizon was restricted to just one year (so that my returns come tax free).

Then come the PE champion investors. I marveled at the ability of these guys that raise huge funds and thought they must be wunderkinder notching up stunning returns. I looked up their profile and thought the degrees from Harvard and Wharton must have magic in them. Everyone had an Ivy League record and some excellent career profile. No wonder they are where they are – right at the top of PE fund houses. Moreover since PE being alternative investment thro negotiated deals, they have access to classified information (`insider information' if I have that) besides some special rights granted by covenants built into term sheets (such as veto, tag along, pay for play, ratchets etc. etc.)

So I thought the game’s up for average folks like me. How do I stack up if the game starts with such a mighty disadvantage? I began to watch their investments in Indian companies (that I relate better) and often wondered why they take exposures in companies at such high valuations. “Silly, they’re from Harvard and Wharton; they are not dumbasses”. “May be, they see value that you don’t - they have access to classified information, you know?” I taunted myself.

But today I read this. The portfolio companies where PE funds invested are all trading at steep discounts to their acquisition price and now the same PE funds are on a Rupee cost averaging spree by mopping up shares from the secondary market to even out the gap. Apax partners bought 11.41% in Appollo Hospitals at Rs.605/- a share. Now they are buying from the market at Rs.505-550 a share hiking their stake to 14.52%. Several others including Standard Chartered PE (in M&M Financial services), Blackstone in Gokaldas partners, Promethean in Nitco Tiles/EIH, New Vernon in Shriram EPC are also hurriedly playing catch up.

Now wait a minute! That’s how I too build my portfolio. How different are these guys? Why are they perched in a higher league? I managed minimum 165% returns over just one year but these guys wait for over 6-7 years to get a CAGR of 25% or even less. I don’t have a Wharton degree alright, but I beat these guys in their own game by many a wide mile. Isn’t that endorsement enough for my stock picking skills? I don’t follow analysts. I just look at managements, their track record, state of health of the business and a few key ratios like ROE, RONW, Debt:Equity and P/BV besides an occasional peep at price/volume charts. By keeping things simple yet systematic, the stocks that I pick end up as sure winners.

Perhaps the awareness that I could go wrong keeps me on the edge. A bit fearful at times that always makes me keep looking over the shoulders even after I invest. The feeling that I am up against informed investors that wield mighty clout never allows me to be smug. Over and above, it’s my own money and I need to be liquid always. These factors have put together a strong foundation for my portfolio architecture. The PE managers can afford to cover their conscience and be reckless. After all, it’s not their money at stake. They do get their management fee whether they win or lose. More than an occasional freebie from stock brokers that manage their portfolio as well. Why should they care? It’s their investors that pay a price.

Now I know why I could be a misfit in a PE environment. No regrets.

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Can't buy a bank stock

I can never buy any bank stock; Public sector or Private Sector – no matter what a multibagger it may turn out to be.

All I can remember is sitting there all day tearing my hair out and screaming within (at the teller) why can’t she release a banker’s cheque quickly or trying to figure out how to get the lady to stop updating her colleague on her latest jewellery acquisition and wondering if you need to call an exorcist because maybe the bank is possessed by the devil. You need to be a bit psyched up too to buy the bank sock. I know it’s not very smart – but then you know I am only human.

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Black Swan - CNBC killer?

Thanks to this post by Matt McCall of DFJ Portage Ventures, I could read this splendid write up by Michael J Mauboussin of Legg Mason Capital Management on Strategies. Find the link in Matt’s post.

Stowing away some startling insights for my own recall and for you, my readers.

- The difference in [investment] return has nothing to do with knowledge; and everything to do with emotional and psychological factors. (Curtis M Faith – Way of the Turtle)

- What separates the good from great investors is not knowledge or raw smarts, its but patterns of behavior.

- All investors must be alert to black swans – events that are outliers, have an extreme impact and are explained only after the fact. We get closer to truth if we focus on`falsification’ (seeing one black swan) instead of `verification’ (seeing lots of white swans does not allow for the statement all swans are white; but seeing one black swan does disprove the theory).

- Cognitive errors including loss aversion are often the source of sub-optimal investment decisions. They tend to focus on frequency [of losses/gains] than on its magnitude. Buffet distinguishes between experience and exposure. Experience looks to the past and tries to predict the future. Exposure, in contrast considers the likelihood and impact of an event that history, especially recent, may not reveal.

Great nuggets of wisdom…. I had never been a fan of quant models of investing. (Confession : I had consulted on a quant venture some time back for a friend from the hedge fund world. But that I did for a living… can’t thrust personal beliefs on clients) My logic – no model can predict a million minds and their billion different views that spur investment decisions. Now I am a total heretic. Buffet, Taleb, Mauboussin, Matt and now I, give you one more reason why you should stop watching CNBC that gives rebirth to the breed of analysts that should have long been dead and gone…

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