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Showing posts from 2007

Inefficiency and the Perils of Inaction

A lazy afternoon opened my eyes to the perils of inaction in the investments business. When going through some of my old files, I came across a company that I had identified about a year ago (October 06). I had done all the hard work, done the numbers, saw the opportunity…and did not do anything. I share some valuable lessons in this post with the company as the protagonist. This story is about Gujarat Narmada Valley Fertilizers Company (GNFC)

Inefficiency manifests itself
GNFC is engaged in the Fertilizers business. What was so special about a company operating in a regulated, commodity business where no one player seemed to enjoy a strong ‘moat’? There were better investment opportunities elsewhere in other industries. I don’t disagree. As a Buffett follower, I wouldn’t have touched this company, never mind the price…But as a part believer in Benjamin Graham’s ‘cigar butt’ type stocks, I couldn’t pass this company over after what I saw…

Cigar Butt stocks: A discarded cigar butt allows…

Blast from the Past

Two unrelated cases happened over the past week that compelled me to pen down my thoughts on them. Both are, of course related to the markets, but they aren't related to one another. The common tether that binds them is investor psychology. Read on...

Black Monday
October 19, 2007 marked the 20th anniversary of the demonic 'Black Monday' crash that shook the markets exactly 2 decades ago. On Monday, October 19, 1987, the Dow remarkably dropped over 20% in one day's trade. Most global equity markets suffered declines of over 20% by the end of that fateful October month.
Experts continue to argue about the possible causes behind the collapse. Program trading, bulk selling, overpricing, illiquidity were all put forth as reasons behind the event. In this section, I will write about human psychology 2 decades since. Maybe there was some pattern somewhere?
The table shows 1-day price change for selected major world indices on three specific dates, beginning with 'Black Mond…

Anatomy of a 'Structured' disaster

The financial world seems to be coming a full circle. While the global markets are busy trying to adjust to the problems triggered by the sub-prime meltdown in the US, data on the economic front threatened to spoil the recovery party. Suddenly, everyone is worried about 'risks', which they thought had been effectively 'diversified' away. The very financial innovation (Structured Products) that made investors happy till recently has suddenly turned their worst enemy.
And, as usual, turmoil in the markets leads to a round of scapegoating and finger pointing. The scapegoat ranged from rating agencies to the structured products themselves. In this post, I put investor behavior under the scanner. We will see the extent to which man - greedy as he already is - can stretch himself for that extra penny. I look at the whats-n-whys of 'Structured Products', the resulting collapse, and end with a commentary on investor thinking. 

'Structured' to perfection?
Problem s…

Weather and Equities: A connection?

After venting my thoughts on the state of India, the country, I return to the world of equities – and sanity - with this post.
Seasons come and go, years go by…but to suggest some connection between the weather and the equity market would sound somewhat ludicrous, won’t it? I had this strange hypothesis of Summer being the worst ‘season’ to trade Indian equities, and Winter the best. Did the actual numbers support this theory? Apart from the intellectual exercise, I wanted to see if a trading strategy could be built around the Indian seasons. Here’s the outcome of my curiosity...
In this post, I take a look at the performance of the BSE Sensex since its birth. A ‘filter’ here is that I have split up the months of the calendar year based on the ‘Indian Seasons’. So, I have June to September representing the Monsoon season, October to January representing Winter, and February to May representing Summer.
Summer Effect
There are some sound reasons for Summer being the worst season to trade e…

One Small Voice

Continuing in the spirit of Haphazard Linkages, I look at the consequences that a false sense of ‘progress’ has on an economy. Things may look ‘good’, but is it a true and justified reflection of the resources at a country’s disposal? Can things be made better? An economist aims for efficiency. A state where one individual cannot be made better off, without making another worse off in some way.

On the 60th anniversary of India’s independence, patriotism and a sense of well-being abounds everywhere. People are mostly unanimous in their verdict that India had arrived and bask in glory…The Times of India headline, “60 and getting Sexier” couldn’t have captured it better. Every news channel and celebrity waxed eloquent about how much progress India had made during this time. Waxed eloquent about India’s stupendous GDP growth…about India Shining.
Did this appraisal reflect reality? Or was it just another day where patriotism oozed out of wherever anybody cared to look? As much as I want to …

Update - Lessons from Credit Spreads

History...once again triumphed...The gloomy story painted by the behavior of Credit Spreads played out in the equity markets (again). The S&P 500 finally fell by over 7% from its high in response to the developments in the credit markets. Expectations of ever higher premiums in takeovers finally receded into the background.

The markets seem to be rational again...Or, is this just the proverbial tip of the iceberg? Another hedge fund, Sowood Capital, succumbed to the sub-prime disease. It seems there will be more casualties along the way. Evidently, private equity buy-out firms - for whom credit is equivalent to blood - are finding the going tough. But few seem to be openly accepting it.

In more ways than one, the tightening of credit is good for the markets, in terms of adjusting investor perception towards risk. This article from this week's Economist makes for good reading.

I am going to be watching the happenings in the credit markets with rapt attention in the coming days.…

Lessons from Credit Spreads

An army of market watchers around the world spend a lot of time predicting market direction. Some follow the fundamental approach and base their views on things like earnings growth of corporates, P/E multiples etc; while some follow the technical approach. The latter express a view on market dirrection by reading charts. They talk support, resistances, head & shoulders, negative and positive divergences etc. While neither of the methods are per se ‘wrong’, it would be rather intuitive to learn about movements in one asset class by looking closely at what happens in another asset class. Credit Spreads is one such ‘indicator’.
Investors in ‘Junk’ bonds - bonds issued by companies that are teetering on the brink of disaster are classified as ‘junk’ - need to be compensated adequately for assuming higher risk by investing in the junk bond as compared to investing in a government backed Treasury Bond. So they demand a higher yield for investing in these bonds. The difference between t…

'CORN'y Connection

A common theme in investing is that, in the long-term, asset prices adhere to fundamentals. The road to adherence is often an irregular one, prices overshoot and undershoot along the way...but ultimately, they behave like obedient children.
Sometimes though, the relationships between asset prices are hidden from the eye. Peer through the layers and one might just be able to come up with a relationship that could form the basis of a trading strategy. 'Corn'y Connection, is one such linkage...

The Craze for Maize Lot of factors have driven corn (maize) prices of late. The rush of demand for ethanol has ensured that corn finally got its due. Apart from the fundamental factors of demand and supply, speculative demand for the commodity has served to increase the volatility in corn prices. Not surprisingly, corn prices have surged quite a bit (refer adjoining figure).

Along with the rise in corn prices, the 200-day historic volatility has increased significantly. Corn, and indeed other…

Is India Over-priced?

That is a question that is on everyone's minds, after the bellwether index, BSESensex hit its all-time high. A euphoric rise is followed by a 'correction'. And so everyone believes.

I believe that an investor with an eye on the long-term, should spend his time and energy in understanding the big-picture numbers, rather than short-term gyrations that is never under his control. The markets may be foolish in the short run...but it has the good habit of correcting itself in the long run. And numbers get their due.

In this post, I will take a look at the question from a fundamental perspective. I will not predict the Sensex level, which is something best left to the TV channels and the 'experts'. I shall present my perspective of the numbers as they stand today.

The table juxtaposes and compares major Asian countries on key fundamental parameters like EPS growth, the P/E multiple, Return on Equity and Return on Capital Employed. Finally, I have added the Price-to-Earni…

On Physics and Wealth Disparity

Although economics is often hailed as a boring science, I believe it gives us a sense of the reality around us in its own unique way. As a continuation of ‘Random Connections’ (, I started thinking about a rather simple question – Why aren’t all men at the same level of wealth across the world? Maybe an economist would like to say, “Why doesn’t ‘Wealth parity’ exist across the world? This post looks at the question.

The Wealth Equation Let’s look at some obvious reasons for this wealth disparity. If one looks at the economies around the world, one could probably get a consensus on the following reasons behind the wealth disparity. (This isn't an exhaustive list by any means but it more or less captures the 'capturable') 1) Relative disparity in level of technology, 2) Relative disparity in level of education, 3) Relative disparity in level of regulation in an economy and capital markets and, 4) Population I’m not too sure how much is att…