What do we know, what have we learnt

This is from the movie Go, Goa, Gone - where 3 idiots are being chased by zombies.
Applies quite well to the investing world.

I asked this to a friend today...
Any intelligent thoughts on how bad things can get wrt global central bank action and bond markets, and cost of funds?

I ask because it seems similar to 2006-7 where people began knowing there is some kind of a bubble, and that housing prices are not sustainable.
Of course, it took another animal to eventually cause a large scale problem.

Similarly, today, people know about the China overcapacity, real estate bubble, capital flight and bad loan books - and also know that global bond yields are in uncharted territory and central bank balance sheets are becoming absurd.
And yet, people are behaving as though trouble is still far away. especially since there is no real euphoria
..
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And my answer to my own question made me look back at 2007.

People knew about the bubble, and even if they knew about CDSs and the network of assets and liabilities and the illiquidity of the market, etc. - - even then, the best of the best would have said :

AIG, Bear, Lehman, GS are gonna go down - unless they react quickly enough when the losses or illiquidity strikes. But I dont think things are gonna be too bad - -
It will be a bad recession, and just like always the Fed will stimulate the economy and after sometime, we should start becoming fine.

What happened was that many more companies faltered badly - either because they were directly exposed to these assets (or liabilities) or because their network of companies or customers were overly dependent on good house price, or good paper prices or more importantly, access to the credit markets.


Today, I say that this global bond bubble and central bank nuttiness where every economy is trying to stimulate the economy, EU is trying to hold on, China is trying to contain the mess... one, some or all of these things will lead to the next panic.
The next panic is a certainty, the when is not and the extent of it is not.

But, in 2008, a lot of countries were relatively fine even though global growth deteriorated.
Similarly in 2016 or 2020 - a lot of companies and countries will be fine, and might in fact be antifragile and become better.

The key is to understand - that if commodity prices go way down, or global credit markets freeze, or currency volatilities shoot up a lot, then, an exporters of shovels to a global industry will suffer - - but as long as he is better than competition, he will come out stronger.

A provider or desirable goods or services will suddenly find that people are not spending - but if the product is good and becomes better, the consumer will come back.


____


The worrying aspect is that all this is predicated on no major global degrowth.
The third curve - a book by a movie director - opened my eyes to the fact that humans have begun taking growth for granted when in fact a significant erosion in confidence can easily destroy the human ability to spend.

I am back where I started.
Scared, cognizant but the music is playing - hence I dance.

Statue!

The old childhood game.
I feel like a lot is crumbling about us, and all we can see is pro-India stories.
The invisible Gorilla :)

If China is indeed hiding its true capital outlfows, what does it mean for the world?
WB has often said that macro does not matter - and yet he has shown that he stays cognizant of it.
Move forward but with caution is what Howard Marks has been saying.

If China is indeed unable to control its currency, and there is a capital flight (which is actually happening even today), its usually disaster for an economy that does not have a globally tradeable currency. It has happened in Russia, Argentina, The Asian crisis, India, etc.
You start running out of reserves, means you start running out of reserves until there is a crisis - like how Soros thinks about these things. Reflexivity and effects of effects.

What if someday soon, the world realises that China's actual growth is 3% or that its capital stock has been devalued via weakening currency/ recapping the banks (aka the system) - oddly enough, nothing changes except forecasts and expectations.

Does that mean that tons of capital flows to the US? And may be Japan (which Japan hates oh so deeply)?

How does any of this affect my companies?

Volatility and uncertainty always take a toll. When the global investment and consumption machine stalls (recession) it causes effects.
That said, The world has gone through nutty times, and every few months, for the last 100 years and more there is always something around the corner.
And there are always corrections, and at times longer recessions; but as long as we like chocolate, and cars, and entertainment and pizzas, and air conditioning, the world goes on.

All this said, I wonder if a domestic economy is capable of weathering a global storm much better simply due to its own demand for stuff.

We live in fun times, and here I am - very sure that a correction is around the corner - Nifty 8350 - and yet, I stay invested because my companies are good, still cheap and seemingly resilient.

Forward, the Light Brigade!

I knew it

All crashes or dislocations or recessions are followed by: These few people saw it coming.
What makes the current global events odd is that everyone knows about the negative to low interest rate problem that is pushing every saver to invest in faltu assets - trying to chase yield - or the China real estate boom and the bad asset pile, and how theie forex reserves are depleting, etc.
Japan cant control its currency, and Brexit may cause the eurozone countries to begin leaving the Euro.

There was a great piece on MLPs recently - people like yield and they forget the safety of the principal.
And Gross made a sensational tweet about how low interest rates are gonna blow up like a supernova.

A lot of big funds are super cautious and are holding onto cash.

So, what does all this mean?

Again, I turn to Howard Marks and say that the pendulum of collective human emotions is towards cautious and not towards euphoria.
Agreed that there is a herd movement towards higher yield - be it junk bonds, structures, emerging markets, etc.
That said, commodity prices are still super low -  - but China has yet not wound down its bubble of commodity demand and supply.


I strongly believe that a few months from now, or hopefully, a few years from now, people are going to turn back and say - Man, we saw all these things happening and we ignored them.

I wonder what WB would say?
Make sure that the business can always make it through any downturn - that is all that an investor needs to worry about. The business.

Begin Again

I had decided to hide my blog, for over a year now, but I guess it's time to write a little bit here and there.

I believe that prudence pays well, and I have been cautious for over 3 years now.
The mess in China is unbelievable, and the global monetary mess more so.

Negative interest rates, crazy excess capacities to produce stuff based on potential demand, may be aliba bah is fabricating its sales, may be currencies are bound to be less volatile henceforth than they have been in the last 2 years (remember the CFR, ZAR, Real, ruble) and I wonder whats going to happen to the CNY or the middle east currencies (who cares about names, right mr. feynman?)

The objective of an investor is to understand irrationalities, while also believing in the power of being a part owner of a business; the access of marketability makes fools of us, and that simple concept is difficult to grasp.

Many shall be restored that now are fallen, and many shall fall that now are in honour.

Running businesses well is difficult.
Consistent business performance is an anomaly.
But people have an inherent need to do something everyday and feel worthwhile.

Ruskin Bond has influenced me.

Here's to going for a nice walk and ruminating while people pull out their hair - and I will return, the pig farmer who visited the exchange only when the pendulum reaches its boundaries.
It's a difficult ordeal this - waiting.

To do nothing

My grandfather once told me: Doing no business is a business decision.
Of course, later he admonished me for not investing more, or not selling out bits of my portfolio :)

Quite often, the intrinsic value of a company moves lesser than its market value.
Over the last few months, the Indian stock market has seen a ridiculous escalation in market prices of a lot of its listed companies.
In some cases, this was justified, and in other cases, I deem it pure speculation.

So, if a base case 25% RoE company moves from 8x PE to 30x PE over 2 years - what does one do?
A 5x-7x on a holding says nothing about how overpriced the company may be.
Furthermore, a strong moat evidenced by strong pricing power, strong staying power (balance sheet) and strong market position may justify a rich valuation.

Oddly enough, it may not justify a new investment in the same company based on the principle of margin of safety.

When companies are not priced compellingly well relative to its business strength - like the one foot fence that Buffett always talks about - it makes a lot of sense to do nothing and keep reading.

This is one such time period.

China

Michael Pettis talks about how China's course may evolve over the next few years.
- China's consumption (or rather, use) of hard commodities is still a large chunk of global demand.
- Oddly enough, the bubble has been deflating for a while now
- Chinese equity markets have been on the wane for some years now
- Commodity prices of, such as copper, iron have been falling for a while now
- My belief is that any company or economy that is reliant on Chinese consumption may have hard times coming up
- Any company that does not have pricing power in a globally dealt commodity may face hard times

And Tepper talks about how the bond bubble will begin to end, and more money will flow into equities.

Meanwhile, Indians believe that the bull market has not even started yet.

And Howard Marks says that we are now moving towards the zone of imprudence in the markets.

Dhanuka Agriluck and Tata Motors DVR

I made my first investment note on Dhanuka Agritech in 2010.

"Valuation of 7.5x PE; earnings yield of 13% on a trailing basis with mgmt guidelines for 40% topline CAGR"
"Capex is insignificant; their distribution reach and brand recall are significant barriers to entry"
"They seem to be more license-savvy, and understand their strengths and may be getting into hybrid seeds"
"Little potential of a loss and significant upside"
"The industry is very appealing, and consumption of agrochemicals should rise undoubtedly."

With that stupid analysis and a lot more literature and reading, I made my investment in 2011.

The question is: Was I smart or was I lucky?
I was definitely lucky.

But I was definitely wise when I chose not to sell at 130 a share in 2012, in favour of a cheaper company with better prospects. 
I said that I should just hold on to a company that is making significant returns on capital even in a bad year.

And currently, at 430 a share - I seem wise. But I'm not. I still think I got lucky with my relatively shoddy understanding.
Now: High returns on equity and capital, moat is improving with their focus on formulations and distribution in India only (Bangladesh ignored).
The problem is: what will the company do with the sizeable free cash flows? 
They cant buyback shares.

Another story is that of Tata Motors DVR, which I wrote about 2 years ago.
Here, I believe my analysis was much better. I was focused on the returns on capital at JLR, and the downside muted growth that JLR would do, and still I would do well.
The domestic business got clobbered both on PV and CV, and still, the company has done stupendously well.


All because of the gumption of the Tata and JLR heads who had the cojones to invest sizeable sums of money, and to release a game changing RR Evoque.

I think they got lucky with the Evoque.
I think I got lucky with the RR stable.
But I was smart to understand the irrationality of the mispricing.
Something similar happening in Korea with Hyundai that Tilson wrote about; and amazingly, Tata Motors DVR is cheaper than that, and according to me has a stronger moat and business.

Notes: 
China is a big profit center and the China bubble deflation will take a toll on JLR
Capex is super heavy, but most of it is towards expanding capacity and creating new models (unlike redevelopments at the German 3)
Accounting for depreciation is odd, because they capitalize 80%+ of spends relative to the Germans who capitalise 30% odd
Margins are higher than reported because China sales figures are inflated (I think, recorded gross of import duties)
The company is doing a lot to significantly improve the positioning and retain the premium value of Jaguar and Land Rover brands (and sub-brands)
The company is not chasing volumes at the cost of margins
The cyclicality of the sector can be a big headwind (as is usually) 


It's good to be lucky. 
As you can see: I am clearly biased.

By the way: Eicher Motors is valued at 27000 Cr and DVRs are valued at 120000 Cr
Which one is cheaper?