24 ideas followed by Warren Buffett

The book, "How Buffet Does It", is a step-by-step guidebook for investing like Buffet in any market environment.
This book presents 24 ideas Buffet has followed from day one.
Your reviewer enumerates below these twenty-four ideas with his comments for your ready reference:
1. Choose Simplicity over Complexity
When investing, keep it simple. Do what's easy and obvious.
If you don't understand a business, don't buy it.
2. Make Your Own Investment Decisions
Don't listen to the brokers, the analysts, or the pundits. Figure it out for yourself.
Become a value investor. It's proven to be a very rewarding technique over the long term.
3. Maintain Proper Temperament
Let other people overreact to the market.
To succeed in the market, you need only ordinary intelligence. But in addition, you need the kind of temperament to help you ride out the storms and stick to your long-term plans. If you can stay cool while those around you are panicking, you can surely prevail.
4. Be Patient
Think 10 years, rather than 10 minutes
Don't dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future. If the question is, "How long will you wait?" – "If we're in the right place, we'll wait indefinitely" says Buffet.
5. Buy Business, Not Stocks
Once you get into the right business, you can let everyone else worry about the stock market.
Business performance is the key to picking stocks. Study the long-term track record of any company that is on your buy list. Buffet looks for following five main things before investing in a company.
(i) Business he can understand
(ii) Companies with favorable long-term prospects
(iii) Business operated by honest and competent people
(iv) Businesses priced very attractively
(v) Business with free cash flow
Don't think about "stock in the short term." Think about "business in the long term".
6. Look for a Company that is a Franchise
Some businesses are "franchises". Franchise generates free cash flows.
7. Buy Low-Tech, Not High-Tech
Successful investing is rarely a gee-whiz activity. It's less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.
Do not be tempted by get-rich-quick deals involving relatively complex companies (e.g., high-tech companies). They are the most unpredictable in the long run. Look for the absence of change. Look for the business whose only change in the future will be doing more business, e.g Gillette Blades.
8. Concentrate Your Stock Investments
A the "Noah's Ark" style of investing – that is, a little of this, a little of that. Better to have a smaller number of investments with more of your money in each.
Portfolio concentration – the opposite of diversification – also has the power to focus the mind. If you're putting your eggs in only a few baskets, you're far less likely to make investments on impulse or emotion.
9. Practice Inactivity, Not Hyperactivity
There are times when doing nothing is a sign of investing brilliance.
Be a decade's trader, not a day trader.
10. Don't Look at the Ticker
Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth.
Abstain from looking at share prices every day. Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.
11. View Market Downturns as Buying Opportunities
Market downturns aren't body blows; they are buying opportunities.
Change your investing mind-set. Reprogram your thinking. Learn to like a sinking market because it presents great buying opportunity. Pounce when the three variables come together. When a strong business with an enduring competitive advantage, strong management, and a low stock price come onto your investment screen.
12. Don't Swing at Every Pitch
What if you had to predict how every stock in the Standard & Poor's (S&P) 500 would do over the next few years?
In this scenario you have very poor chance of being correct. But if your job was to find only one stock among those 500 that would do well? In this revised scenario you have a good chance. A few good investments are all that is needed.
13. Ignore the Macro; Focus on the Micro
The big things – the large trends that are external to the business – don't matter. It's the little things, the things that are business-specific, that count.
It's possible to imagine a cataclysm so terrible that the markets would collapse and not bounce back. Externalities don't matter – and you can't predict them, anyway. And what can you do about them? Focus on what you can know: the workings of a good business.
14. Take a Close Look at Management
The analysis begins – and sometimes ends – with one key question: Who's in charge here?
Assess the management team before you invest. A investing in any company that has a record of financial or accounting shenanigans, (creative accounting, accounting jugglery). Weak accounting usually means weak business performance. Strong companies do not have to resort to tricks.
15. Remember, The Emperor Wears No Clothes on Wall Street
Wall Street is the only place where people go to in Rolls Royce to get advice from people who take the subway. Ignore the charts. A value investor is not concerned with charts. Invest like Benjamin Graham. Graham told investors to "search for discrepancies between the value of a business and the price of small pieces of that business in the market." This is the key to value investing, and it's far more productive than getting dizzy studying hundreds of stock charts. Offer documents of most mutual funds say – in small print – that past performance is no guarantee of future success. Buffet says the same thing about the market: If history revealed the path to riches, librarians would be rich.
16. Practice Independent Thinking
When investing, you need to think independently
Make independent thinking one of your portfolio's greatest assets. Being smart isn't good enough, says Buffet. Lots of high-IQ people fall victim to the herd mentality. Independent thinking is one of Buffet's greatest strengths. Make it one of your own.
17. Stay within Your Circle of Competence
Develop a zone of expertise, operative within that zone.
Write down the industries and businesses with which you feel most comfortable. Confine your investments to them.
18. Ignore Stock Market Forecasts
Short-term forecasts of stock or bond prices are useless. They tell you more about the forecaster than they tell you about the future. Take the time you would spend listening to forecasts and instead use it to analyze a business's track record. Develop an investing strategy that does not depend on the overall movement of the market.
19. Understand "Mr. Market" and the "Margin of Safety"
What makes for a good investor? A good investor is one who combines good business judgment with an ability to ignore the wild swings of the marketplace. When the emotions start to swirl, remember Ben Graham's "Mr.Market" concept, and look for a "margin of safety".
Make sure that you also understand Buffet's concepts of Mr. Market and the margin of safety. Like the Lord, the market helps those who help themselves. But, unlike God, the market doesn't forgive those who "know not what they do". Bide your time, and wait for Mr. Market to get depressed and lower stock prices enough to provide a margin-ofsafety buying opportunity. 20. Be Fearful when Others Are Greedy and Greedy When Others Are Fearful
You can safely predict that people will be greedy, fearful, or foolish. Trouble is you just can't predict when or in what order.Buy when people are selling and sell when people are buying.
21. Read, Read Some More, and Then Think
Mr. Warren Buffet spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks.He therefore advises get in the habit of reading. The best thing to start is to read Buffett's annual reports and letters. Finally, restrict your time only to things worth reading.
22. Use All Your Horsepower
How big is your engine, and how efficiently do you put it to work? Warren Buffett suggests that lots of people have "400 – horsepower engines" but only 100 horsepower of output. Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways. The person who gets full output from a 200-horse-power engine, says Buffett, is a lot better off.
Make sure that you have the right role models. Strive for rational behaviour, good habits, and proper temperament. Write down the habits, practices and philosophies that you want to make your own. Then be sure to keep track of them and eventually own them. Financial success is a "matter of having the right habits".
23. A the Costly Mistakes of Others
This is self explanatory and need no comments!
24. Become a Sound Investor
Buffet says that Ben Graham was about "sound investing". He wasn't about brilliant investing or fads and fashions , and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor.
To become a sound investor, you need to develop sound investing habits. Always fight the noise to get the real story. Always practice continuous improvement.It's less about solving difficult business problems, says Warren Buffet, and more about a ing them. It's about finding and stepping over "one-foot hurdles" rather than developing the extraordinary skills needed to clear sevenfooturdles.

ndian Aviation: Ready for take-off

With the opening up of the Indian aviation sector, there are opportunities for the taking Over most of the last two and a half decades, the aviation sector world-wide, has substantially moved away from government control and ownership towards deregulation and private ownership. The origins of this trend can be traced back to the deregulation of the U.S. airline industry in the late 1970s, which led to lower fares and higher improved productivity of assets and capital. This transformation also subsumed another trend of privatization of government owned airlines designated by a country's government to operate international air services to and from that country as evidenced in Australia (Qantas Airways), U.K. (British Airways), Germany (Lufthansa) and Japan (Japan Airlines).

Assessing value: My education as an investor by Rakesh Jhunjhunwala

By Rakesh Jhunjhunwala Source: DNA Money (Direct Link to the article)
When markets are experiencing irrational exuberance (making money in the stockmarket is taken as a birth right), to be in cash, and to be overinvested when the markets are gripped by fear and extreme pessimism, is as we all know easier said then done. “In markets it sometimes feels like being undersexed in an harem and oversexed in a dessert.” I think good investors should be always feeling undersexed when there is depression and oversexed when there is irrational exuberance. It’s a fact that one cannot be a successful investor without understanding markets. Markets are the basis and temples of capitalism. I have learnt that markets are ruthless and very intelligent. A market participant should always respect markets as being the ultimate arbitrators and deciders. I believe that the markets always decide rightly and correctly over a sufficient period of time. It is amazing that in a supposedly corrupt nation like India, the three companies having amongst the highest market capitalisation are Wipro, Hindustan Lever, and Infosys - companies with the highest perceived integrity. Sometimes, the ability of markets to filter and value truly astonishes me. Last, but not the least, my experiences as an investor have altered me as a human being. I, one of the most dogmatic men, have now learnt to say, “I can always be wrong” at the end of every opinion I express. The stockmarket has humbled me. I have also learnt that good investing calls for a careful examination of all points of views and alternative scenarios. The ability to adapt and change and mitigate prejudice is crucial to success in the investing world. Discipline, just like in all walks of life, is very important in investing, too. I have learnt that in investing decisions all the factors are numerators but there is only one denominator - which is pricevalue. It is ultimately the price or value at which you buysell shares which determines not only your profits. It is also a very important aspect of the risk that you take. At a value, I am a buyer of everything, including the most hated companies. It is important “what you are buying but it is more important at what valueprice you are buying.” I thought ‘beauty’ was a difficult adjective in the English language, until I started to assess value in order to invest. In conclusion, both ‘beauty’ and ‘value’ are the most difficult adjectives in the English language. My quest of finding both beauty and value is a process of education that is just never ending - as I learn something new and educative with every passing moment. The above piece, written by Rakesh Jhunjhunwala some time back, is as relevant today as the time he had written it

BEST BUY -LLOYD ELECTRIC &ENGG

BUY Lloyd Electric & Engineering
Current Price Rs 182

BSE Code 517518 Face Value Rs 10 NSE Symbol LLOYDELENG

Lloyd Electric & Engineering is in the business of manufacturing of Heat Exchanger Coils for airconditioning and refrigeration application as well as assembling of airconditioner equipment for all the leading domestic and MNC brands. The company is also a key player in metro and normal railway coach airconditioning units. It has chalked out aggressive organic and inorganic plans to capitalise on the fast growth in Heating, Ventilation, Air-conditioning and Refrigeration industry in India and other Asian and Gulf countries.

All the following EPS are on current equity, which will increase after the proposed qualified institutional placement.Actual EPS for March 2006 Rs 9.1 Projected EPS for March 2008 Rs 22.0 Actual EPS for March 2007 Rs 15.3

How to Value Stocks

So just how do you value the shares of a company? Based on earnings, revenues, cash-flow. . . or something else entirely? Or do you simply apply multiple valuations in order to discern what the fair price for a share of stock might be?

In this series of informative articles, Fools get a chance to learn lots of potential ways to value a company's shares, as well as helpful methods to determine whether or not a stock is undervalued right now

Liquid: A Journey Through the Balance SheetIn a series of articles entitled "Liquid," Randy Befumo explores the mechanics of a balance sheet. This series defines the items that go on a balance sheet and give the reader a sense of how to harness this knowledge to pick stocks.
Valuation: Principles & PracticeHow do you value the shares of a publicly-traded company? This helpful series of articles detailed the many and varied ways one can use fundamental information about a company's basic business to value its shares. Learn to use earnings, revenues, cash-flow, equity, dividend yield and subscribers to figure out how much a company is worth.
Security AnalysisInvesting, like marriage, isn't something that should be entered into lightly. You wouldn't get married on a first date, would you? Ok, maybe some of you would, but that's not really very Foolish. Before you marry... er, I mean invest in a company, there are more than a few things you need to know about it.
The Fool RatioThe Fool Ratio, also known as the PEG, is one of the principal ways that Foolish investors use to value growth stocks. How do you calculate the Fool Ratio? When should you use it to value a company? What is the YPEG? These articles cover all of this and more.
Return on EquityDisarmingly simple to calculate, return on equity (ROE) stands as a critical weapon in the investor's arsenal if properly understood for what it is. Return on equity encompasses the three main "levers" by which management can poke and prod the corporation -- profitability, asset management, and financial leverage. This series walks you through how to use return on equity to value stocks.
Return on Invested CapitalIt's not profit margins that determine a company's desirability, it's how much cash can be produced by each dollar of cash that is invested in a company by either its shareholders or lenders. Measuring the real cash-on-cash return is what return on invested capital (ROIC) seeks to accomplish. This series is an introduction to how ROIC is calculated.
The Motley Fool's Online PEGulatorHave difficulty figuring out the Fool Ratio (PEG) on your own? Do those fractional roots cause all sorts of consternation? The Fool has a solution -- the PEGulator. Calculate PEGs online by simply inputting all of the necessary information.

US bull market coming to an end: Rakesh Jhunjhunwala

Rakesh Jhunjhunwala, Investor and Trader said that the US housing market is unlikely to bottom in mid-term. He added that US economic growth was unsustainable.
According to Jhunjhunwala the bull market in the US had signs of excesses. He said that he believes that the US bull market is coming to an end. Jhunjhunwala forsees a big slowdown for techs if the US markets slow down.
He added that interest rates and commodity prices will also come down.
Excerpts from Rakesh Jhunjhunwala's speech at Capital Markets Seminar:
It is difficult to believe that the largest holder of the US treasury bonds is China. To me, I think it is geo-politically very sensitive issue and if I were to be the President of America I would redeem them the next day. They have forgotten where Hindi-Chini bhai-bhai led (Indians) to.
Having said that, the US economy was the engine of economic growth worldwide. It was an unsustainable methodology of growth, where you borrow, borrow,borrow and consume, consume, consume. Also we had a 25-year bull market in America and all bull markets, regardless of regulators, always produce excesses. Excesses are not products of loose regulations but more products of bull markets because then markets make people lose their sense and they become absolutely greedy.
I personally believe that the US housing market is not going to bottom in the next 36 months; because you built 21 million houses in 2 years as against 16 million every year. So you build one million extra and at least out of those 16 million normal ones, 40% of the houses in the last two years have been sold to subprime and allied alternatives.
In Miami, you have a building boom amongst the housing bust. So I think the world is underestimating the consequences of this subprime or the meltdown of the US housing. There was a vicious cycle in America where you gave money to people on credit to people who could not afford USD 50,000 - you gave them half million dollars; not based on their ability to pay, but on the value of their capital assets. They primarily drove the buying of houses in the last 24 months.
On interest rates:
It is not the question of interest rates. No one in his right sense now is going to give loans to sub-prime mortgages again. The resets are just starting.
So I foresee a few things.
One, the problem in the housing market problem is going to get worse because there will be a lot of foreclosures. Two, there is lot of housing under construction which cannot be stopped immediately. And third, people say there is full employment in America. But housing is 70% of America’s GDP and that itself would lead to a slowdown in America.
This slowdown in the housing industry is going to lead to a slowdown in the US economy. This again, would mean lower wages and lower employment, which could result in greater housing loan repayments defaults.
I read an economist saying that Europe has had faster increases in housing prices than America. There is a very large subprime market even in Britain. So I think this will continue to transfer itself even to Europe.
I believe there have been great excesses in the US bull market. That bull market, in my opinion, is coming to an end and the real excesses will be exposed only after the bull market is over.
Though at the moment we are all very happy and feeling that this is something like long-term capital management or the Russian debt crisis, where the Fed reduces interest rates and all problems go away. I do not believe that because credit is not only available on cost; it is also a question of risk appetite to borrow and risk appetite to lend.
So I think that credit is no longer going to be available in America or if it is, it is going to be available in a measured manner. There is going to be a slowdown in America.
There are various opinions that if US interest rates comes down money will flow into emerging markets. Let us put the impact in two parts – one, how they will affect economic activity and how they will affect asset prices.
On India:
As far as India is concerned, I personally foresee a big slowdown for the software industry. I do not think that if America slows down; more work will come to us. I think if America slows down, more work could come 36 months later. I think 25%-30% IT budgets are discretionary and there will be big cuts in IT budgets.
As far as other Indian exports are concerned, I do not think they are going to be affected very substantially. As far as commodity prices go, I think they will come down. Interest rates also will be down, which is good for India.
US is a very dynamic economy; it has great self-correcting measures. This recession in America depends on factors like whether it is going to be orderly, or create a lot of disequilibrium etc. If it is an orderly one, I think Indian markets will be not be affected to a very large extent. But if it is a huge disequilibrium, then things are going to be quite unpredictable.
Labels: Rakesh Jhunjhunwala

Frightening Forecast for Earth

2007: The world population surpasses 6.6 billion as more people now live in cities than in rural areas, changing patterns of land use.

2008: Global oil production peaks between 2008 and 2018, triggering a global recession, food shortages and conflicts between nations over dwindling supplies.

2020: Flash floods increase across Europe. Less rainfall reduces agriculture yields by up to 50 percent in some areas. Population reaches 7.6 billion.

2030: As much as 18 percent of the world's coral reefs are lost as a result of the changing climate and other environmental stresses

2040: The Arctic Sea is ice-free in the summer, and winter ice depth shrinks drastically. Some say this won't happen until 2060 to 2105.

2050: Large glaciers shrink by 30 to 70 percent as a quarter of the plant and vertebrate animal species on the planet face extinction.

2070: As warmer, drier conditions lead to more frequent and longer droughts, electricity production for the world's existing hydropower stations decreases.

2080: Between 1.1 and 3.2 billion people experience water shortages and up to 600 million go hungry.

2085: The risk of dengue fever from climate change increases to 3.5 billion people.

2100: A quarter of all species of plants and land animals -- more than a million total -- are driven to extinction.

2200: An Earth day is 0.12 milliseconds shorter, as rising temperatures cause oceans to expand toward the poles, speeding up the planet's rotation. Source: Intergovernmental Panel on Climate

ChangeAll this because of Global Warming

RED HOT STOCKS TO BUY FOR NEXT ONE OR TWO QUARTERS

Indsil Electrosmelts
------------------------


Group Asset Profile
1.INDSIL ELECTROSMELTS LTD.,Smelter Works at Palakkad, Kerala.
* Ferro alloy smelter* Steel melt shop
* Low carbon Silico Manganese (14,000 tpy)* Mild steel ingots (30,000 tpy)
Rs 1140 million

2.INDSIL ELECTROSMELTSHydro electric works at Rajakkad, Idukki District, Kerala
* 21 MW hydro electric power plant
* Power
Rs 180 million

3.INDSIL ENERGY AND ELECTROCHEMICALS LTD.,Works at Raipur, Chattisgarh
* Ferro alloy smelter
* Low carbon Silico Manganese (12000 tpy)* Regular Silico Manganese (8400 tpy)
Rs 750 million

4.INDSIL ENERGY AND ELECTROCHEMICALS LTD.,Power plants
* 12 MW coal fired thermal power plant
* Power
Rs 280 million
INDSIL ELECTROSMELTS LIMITED - Note on Performance for Quarter ended 30 June 2007
http://www.indsil.com/download86.html

INDSIL ELECTROSMELTS LIMITED - Note on Performance for Quarter ended March 31, 2007
http://www.indsil.com/download81.html


FUTURE PROSPECTS :
Low carbon Silico Manganese prices have started looking up towards the end of the year. The stainless steel industry, after a
brief lull, has started picking up steam and is expected to drive demand for your company's products in a strong manner.

The coming year should witness stable operating profits on the smelter side and the hydro electric division subject to normal
monsoon conditions, should witness an average PLF of about 25%.

Your company has recently acquired rights to set up hydro electric power projects totaling to 20 MW capacity in the State of
Kerala.
The company is also bidding for rights to set up another 8 to 10 MW and in sum total, generating capacity of the hydro
electric division is expected to touch 50 MW by the year 2008-09 yielding operating profits of about Rs.75 crores per annum.

BUY FOR LONG TERM PROSPECTIVE

RED HOT STOCKS TO BUY FOR NEXT ONE OR TWO QUARTERS

Sika Interplant Systems Ltd.


Company is evaluating to its new projects at Bangalore, Mysore and taking effective steps for implementation. expect further growth to come through Present business, Acquisitions and New projects.

1.The Board approved the formation of a Joint Venture (JV) in India with MACCON GmbH, Germany for design, develop & manufacture Motion Control and Servo Systems for aerospace, automotive industry. Further Board approved the investment of 51% per cent equity in the proposed joint venture.

2. The Board approved the investment for aerospace components & assemblies project which includes investment of 55% towards equity in a new Company in United Kingdom. The proposed new Company is being promoted with specialist in aerospace components & assemblies.

3.M/s. Spaceciti Projects Pvt Ltd is amalgamated with the Company, consequent upon the amalgamation M/s. Spaceciti Projects Pvt Ltd its subsidiary M/s. Sikka n Sikka Engineers Pvt Ltd have become the subsidiary of the Company which is got a land of about 6.75 acres at Bangalore under lease cum sale agreement with KIADB for engineering activities. The Company will make suitable announcement when said land explored for any development.
4.
Dr. C G Krishnadas Nair, former Chairman of Hindustan Aeronautics Ltd joined the Board of Directors of the Company
5.
the recent merger of M/s. Spaceciti Projects Pvt Ltd with the Sika Interplant Systems Ltd,. Under merger the shares of Sika Interplant Systems Ltd were issued at Rs 78.45 per
6. The Board approved the formation of a Joint Venture (JV) in India with MACCON GmbH, Germany for design, develop & manufacture Motion Control and Servo Systems for aerospace, automotive industry. Further Board approved the investment of 51% per cent equity in the proposed joint venture.

7. The Board approved the investment for aerospace components & assemblies project which includes investment of 55% towards equity in a new Company in United Kingdom. The proposed new Company is being promoted with specialist in aerospace components & assemblies.

hold the stock with along term prospective .

RED HOT STOCKS TO BUY FOR NEXT ONE OR TWO QUARTERS

Bombay Paints Limited.


manufacture a wide range of paints based on alkyds, epoxys, polyurethanes, vinyls and acrylic resins, which helps in reducing corrosion on metallic surfaces. The product categories inclue:
Quick Drying Low Bake and Stoving Systems, for tarctors, Farm Equipments, Harvesters, etc.
Quick Drying Paints, casting sealers and stoving paints for commercial vehicles.
Paint systems for two-wheelers.
Exterior wall coatings, based on Vinyl Polymers.
Zinc silicate primers, Epoxy Paints, Polyrethane Paints and other heavy duty coatings for chemical, Fertilizer and Petro-chemical plants.
Paint System for thermal power plants, Nuclear Power Plants.
Shop Primers for shipyards

Year Mar 07 Mar 06 Mar 05 Mar 04 Mar 03


Sales Turnover 35.55 29.53 25.20 17.20 16.60

Profit After Tax 1.32 -1.01 -1.37 -4.28 -6.23

P & L Bal. carried down-13.73 -15.05 -14.04 -12.48 -8.20

latest quarter results:-
http://www.bseindia.com/qresann/result.asp?scripcd=509475&scripname=Bombay+Paints+Ltd&quarter=JQ2007-2008&type=54
last four years results:-
http://www.bseindia.com/qresann/result.asp?scripcd=509475&scripname=Bombay+Paints+Ltd&quarter=MC2006-2007&type=53.5

company pramoted by Grauer & Well India Ltd

buy for a target of 100 in a six months time

what Rakesh Jhunjhunwala is buying next?

It is 12.30 pm at RaRe Enterprises, Nariman Bhavan. There are five monitors showing more red than blue. The market is facing a blood bath. The Sensex is falling. In the thick of the action, Rakesh Jhunjhunwala turns from these screens, he is unruffled.
There is a massacre happening as investors lose wealth but Mr Jhunjhunwala looks at you almost bored and says “lets not discuss the markets”. The biggest investor in India is chewing paan as he loses wealth on his screens. He lights a cigarette. He loosens his white shirt. He has not worn a tie for the last five years.
“I know I am losing wealth but should I let this bother me? I don’t think so. I would be crazy to look at my wealth like this. I believe that India stands on strong fundamental grounds and over a period things are only positive. But please do not interpret this as Rakesh Jhunjunwalla is saying that the Sensex is going to touch 40000. Some day it may touch. But who knows when?”
For a man who purchased Tata Tea for Rs 5000 when he was only fifteen years old, Rakesh Jhunjhunwala has a total networth of ap-proximately Rs 6000 crore along with his wife Rekha Jhunjhunwala. The exact value of the portfolio is something he doesn’t like to talk about.
He doesn’t have any rules for his science of investing. But his ap-proach is fundamental and takes a long-term view thus he is also re-ferred as the Warren Buffet of India. Jhunjhunwala has never met Warren Buffet but admires and even follows his style of investment.
“Don’t insult the great man by comparing me to him. I am young and I’m constantly learning. There is so much to learn from others.” He pauses and refuses a phone call from a big corporate house in India. “But at the end of the day I want to be only Rakesh Jhunjhunwala and nobody else”, he says.
Retail investors, analysts and fund managers always want to know what he is buying. Everybody wants to be a part of Rakesh’s stocks. He knows that. He leans back and looks at you and tells you that he is not an advisor or a fund manager.
He and his wife came into the limelight with Crisil Limited. At the end of April 2005 he was holding 14.26% of the company, accounting for Rs 70 crore. In the same year the couple made Rs 27 crore after they sold out to the S&P open offer at Rs 775 per share. Today his in-vestment in Crisil is worth more than 200 crore and the holding accounts for 7.63% of the entire company. In all the companies that he has invested, it is this investment that has given him his famed mo-ments.
In India, bull runs have been associated with certain individuals. In the nineties it was Harshad Mehta and in early 2000 it was Ketan Parekh. But Jhunjhunwala does not like to be associated with any booms. He believes that the market is above individuals. Individuals can be associated to excesses in the markets, but not to the phase of the markets itself, he believes. It is like if the market is at a P/E multiple of 20, an individual might just make investors believe that the P/E should be 22. He thinks that individuals who believe that they are bigger than the markets do not last for a long time.
“The market is rational. An individual can never be smarter than the market”, he says and his phone rings. Someone wants to sell him a credit card or personal loans. He politely refuses and drags on his cigarette.
“The market is about greed and fear. Sometimes there is too much greed and sometimes there is too much fear. It has a lot to do with the psychology of the market. You have to sometimes read the market like you read an individual”, he adds.
But Mr Jhunjhunwala has not taken any courses in psychology or behaviorial finance to understand the psychology of the market. He has always believed that psychology cannot be learnt in classrooms. He has learnt his lessons in finance by practicing them and never believed in borrowed wisdom. He has liked his experience first hand. “I have experienced the markets from its core. You know I was there during the day of the bomb blasts when it happened. I have seen ups and downs so my understanding of the market is from being in there”.
That is probably why international fund managers like to spend time with him to understand the Indian equity market. He meets at-least two international fund managers a week. Probably that is where he markets or tries to sell the India story to the global equity fund managers. He doesn’t like it when he is referred in this context.
“How can you sell the Indian equity to the global fund manager? Is it an FMCG product like toothpaste or a shampoo? These fund managers are here because they believe in the fundamentals of the country. Not because a Rakesh Jhunjhunwala wants them to buy Indian equity”. He gets slightly excited.
Incidentally, foreign investors are selling Indian equity as global markets are facing a liquidity crisis. Those who have purchased the India story are jittery. Highly leveraged funds that invest into global markets based on borrowed money are facing the heat. They have purchased assets that they are not able to value. They don’t even un-derstand the nature of these assets.
As the ground beneath their feet starts to shake, Rakesh Jhunjhunwala sits firm. He was in Lonavala watching movies when the crisis was very severe. He is patient and knows that this shall also pass. The red on the screen will turn to blue. The market will once again be the winner. Mr Jhunjhunwala will remember this. His greatest fear - he might fall prey to his own philosophy. The market will remain above all individuals.
At a time when the market is going through volatility and an uncertain phase, Jhunjhunwala has no advice for the investors. “I don’t advice anybody. I don’t manage anybody’s money. I manage my wife’s money because I don’t have a choice.” He smiles and stubs his cigarette

Benjamin Graham’s investment principles

Know the businessThe investor needs to become knowledgeable about the business or businesses carried on by the company in which they propose to invest – what it sells, how it operates, what is the competitive environment, what are the threats and opportunities, the strengths and weaknesses.An investor who bought a fruit shop, or a shoe factory, without investigating these things, and knowing them, would be foolish. The same applies to share investment. An investor who does not understand the business should not be investing in it.
Know who runs the businessAn investor who cannot operate the business for himself or herself, needs a manager. This is the position of the average share investor, who owns a share of an enterprise that is run by others.The owner of a business in this position would want a manager who will manage the business competently, efficiently and honestly. The share investor should not be satisfied with less. Unless the investor believes, through sound research, that the company is managed efficiently, competently and honestly, in the best interests of the shareholders, the investment should not be made.
Invest for profitsAn investor would not normally buy a business that did not, on proper research, appear to have reasonable expectations of producing good profits over time. Share investors should take the same approach and buy, as Graham says, "not on optimism, but on arithmetic".
Have confidenceGraham encourages investors to properly research their investments and, if they believe their investment judgment to be sound, to act on it. He cautions investors in this position against listening to others.
"You are neither right nor wrong because the crowd disagrees with you. You are right [or wrong] because your data and reasoning are right [or wrong]."
Let's Salute the wisdom of this Investing legend who has been referred to as "Father of Value Investing" for propogating the Investment wisdoms through his everlasting writings.

Understanding Ben Graham's Investment Philosophy

Margin of Safety"To have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience" - Benjamin Graham
Graham looks for what he calls a "Margin of Safety" when investing in stocks. This is defined by how much a stock is trading below its intrinsic value which is what the business would be worth if it were sold today.Graham was most insistent that any security purchased should represent good value. He felt stocks should be bought like groceries, not like perfume, and he distilled his investment philosophy down to just three words, "MARGIN OF SAFETY". By margin of safety, he meant that any stock bought should be worth considerably more than it costs. He sometimes suggested at least 50 percent more. Stocks bought with a margin of safety give some assurance that one has invested wisely. And stocks bought with a margin of safety should be low risk, high return investments.
Investment Versus Speculation
The distinction between investment and speculation is central to Graham's investment philosophy. He defined these terms thusly: "An investment operation is one which, upon thorough analysis promises safety of principal and adequate return. Operations not meeting these requirements are speculative.
Buying and Selling points - Mr. Market Theory
Stocks will fluctuate substantially in value. For a true investor, the only significant meaning of price fluctuations is that they offer ". . . an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal."
Using his famous Mr. Market parable, Graham suggests the attitude one should adopt toward fluctuations in prices.
Graham's favourite allegory is that of Mr. Market, an obliging fellow who turns up every day at the shareholder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price. The point is that the investor should not regard the whims of Mr. Market as determining the value of the shares that the investor owns. He should profit from market folly rather than participate in it. The investor is advised to concentrate on the real life performance of his companies and receiving dividends, rather than be too concerned with Mr. Market's often irrational behaviour.
Select Low Price/Book Value Stocks
Graham felt rather strongly that an investor should not pay much more than book value for a stock. In his word, "Strangely enough we shall suggest as one of our chief requirements . . . that our readers limit themselves to issues selling not far above their tangible-asset value."
Selecting Unpopular Stocks If an investor is to do better than average, Graham argued that his or her investment policies should not be popular. He believed that most Wall Street professionals tend to seek out stocks with the best growth prospects and to ignore other stocks. This bias causes unpopular stocks to become undervalued and good buys.

Investing Legends : Benjamin Graham

Benjamin Graham : The Father of Value Investing

“The individual investor should act consistently as an investor and not as a speculator. This means.....that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase.” Ben Graham“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.” - Graham on Market Moods
"The one principal that applies to nearly all these so-called "technical approaches" is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success in Wall Street. In our own stock-market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus "following the market." We do not hesitate to declare that this approach is as fallacious as it is popular." Graham on market Startegy

Yes, I know I made you wait a lot to put forward the second article in the series of knowing about legendary Investors and their investing styles. In this article we are going to discuss about none other than the Guru of the Gurus, "Benjamin Graham". Yes, We are talking about the man who taught Investing skills to the most well known Investment Guru "Warren Buffet".
Childhood Struggles and the Natural InvestorBenjamin Graham was born in London in 1894, the son of an importer. His family migrated to America when Ben was very young and opened an importing business. They did not do well, Graham’s father dying not long after moving to America and his mother losing the family savings in 1907 during an economic crisis.Destiny had something else for this GeniusGraham was a star student. He managed to get to Columbia University and after graduation, offered a teaching post. However, destiny had somethign else in store for this genius and he took a job as a chalker on Wall Street with Newburger, Henderson and Loeb. It did not took him long when he began doing financial research for the firm and he became a partner in the firm.Learning the hard wayIn 1926, Graham formed an investment partnership with another broker called Jerome Newman. He also started lecturing at night on finance at Columbia, a relationship that was to continue until his retirement in 1956.The Crash of 1929 almost wiped Graham out but the partnership survived with the assistance of friends and the sale of most of the partners’ personal assets. Graham’s wife was forced to return to work as a dance teacher. Graham was soon back on his feet but he had learned valuable lessons . These lessons build the edifice for the greatest book to be ever written on Investment.The partnership between Graham and Newman continued until 1956 but never again lost money for its investors, earning an annual return of about 17 per cent.Security AnalysisIn 1934, Benjamin Graham together with David Dodd, another Columbia academic, published the classic Security Analysis which has never been out of print. Despite the crash, the book proposed that it was possible to successfully invest in common stocks as long as sound investment principles were applied. Graham and Dodd introduced the concept of ‘intrinsic value’ and the wisdom of buying stocks at a discount to that value. This books has been regarded as the "Bible " for the students of Investments for a decades. However this was just a beginning and the history had yet to unfold another gem written by benjamin.The Intelligent InvestorThe Intelligent Investor was published in 1949, is a widely acclaimed book on investing. Famous investor and billionaire Warren Buffet describes it as "by far the best book on investing ever written".Ben Graham taught investments for 28 years at Columbia University, and perhaps his success as a professional investor is matched by his success as an academic, which is most unusual. His published works have instructed many thousands of students and, indeed, his strength as an academic is derived from his many years experience on Wall Street.

Warren Buffet’s Value Investing principles

The business the company is in should be simple and understandable.The firm should have a consistent operating history, manifested in operating earnings that are stable and predictable.The firm should be in a business with favorable long term prospects.The managers of the company should be candid. As evidenced by the way he treated his own stockholders, Buffett put a premium on managers he trusted. The managers of the company should be leaders and not followers.The company should have a high return on equity. Buffett emphasizes return on equity (ROE), a key measure of a company's profitability. He prefers to invest in companies where he can confidently forecast future ROEs at least 10 years out. He is particularly fond of firms that don't require a lot of capital, as they tend to produce much higher returns on equity.Consistently Strong Free Cash Flow. Buffett also seeks companies with significant free cash flow. Always mindful of the risks associated with investing, he ensures that his companies have plenty of money left over to invest in their growth after they have paid the bills.Limited Debt. In the 1990s, Buffett bought insurers Geico and General Re because he liked how the companies limited and managed their debt.Buffett also likes the "float" that insurance companies offer. Policyholders pay premiums up front, but claims are paid out later -- providing insurance companies with a steady stream of low-cost cash to play with. Until policyholders collect on their policies or claims, the company can invest those billions in stocks/bonds or other areas, and who better to invest that money than Buffett himself?Margin of Safety. If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you'd need.
Labels: Investing Legends, Value Investing, warren buffett

The Oracle of Omaha – Investing since Childhood

About Buffett’s Personal Life

Warren Edward Buffett was born on August 30, 1930. The only boy, he was the second of three children, and displayed an amazing aptitude for both money and business at a very early age. His father was a stock broker turned Congressman.In 1947, a seventeen year old Warren Buffett graduated from High School. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000). His father had other plans, and urged his son to attend the Wharton Business School at the University of Pennsylvania. Buffett stayed two years, complaining that he knew more than his professors. When Howard was defeated in the 1948 Congressional race, Warren returned home to Omaha and transferred to the University of Nebraska-Lincoln. Working full-time, he managed to graduate in only three years.Buffett married Susan Thompson in 1952. They had three children, Susie, Howard, and Peter. The couple began living separately in 1977, though they remained married until her death in July 2004. His daughter Susie lives in Omaha and does charitable work through the Susan A. Buffett Foundation and as a national board member of Girls, Inc. On his 76th birthday Buffett married his longtime companion, Astrid Menks, who had lived with him since his wife's departureAn Investor by birthWarren showed an Investing aptitude since his early childhood. He was a born Investor though he refined his Investing sense under stalwarts like Benjamin Graham.As a boy, irrespective of his family background, he delivered newspapers to make extra money and this probably sparked his interest in the media where he has made several successful investments including the Washington Post Company, a stock that has made him a lot of money and which he vows never to sell.At the age of 13, Buffett filed his first income tax return, deducting his bicycle as a work expense. At the age of 15, Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in a barber shop. Within months, they owned three machines in different locations.Association with BenjaminBuffett enrolled at Columbia Business School after learning that Benjamin Graham and David Dodd, two well-known securities analysts, taught there. Buffett graduated and wanted to work on Wall Street.Buffett offered to work for Graham for free but Graham refused. He purchased a Texaco gas station as a side investment, but that venture did not work out as well as he had hoped. Meanwhile, he worked as a stockbroker. He finally got the job with Benjamin Graham’s firm and, as he generously acknowledges, learned a lot about stock investment from The Master.Graham retired and folded up his partnership. Since leaving college six years earlier, Buffett's personal savings grew from $9,800 to over $140,000. He returned home to Omaha and created Buffett Associates, Ltd., an investment partnership.Berkshire HathawayIn 1962, Buffett discovered a textile manufacturing firm, Berkshire Hathaway, that was selling for under $8 per share. Through his partnership, Buffett eventually purchased 49% of the outstanding shares. Buffett maintained BH's core business of textile milling, but by 1967 was expanding into the insurance industry and other investments.Berkshire first ventured into the insurance business with the purchase of National Indemnity Company. In the late 1970s, Berkshire acquired an equity stake in the Government Employees Insurance Company (GEICO), which forms the core of its insurance operations today (and is a major source of capital for BH's other investments). In 1985, the last textile operations (BH's historic core) were shut down.Berkshire Hathaway , a massive holding company headquartered in Omaha, Nebraska, USA, that oversees and manages a number of subsidiary companies. Berkshire Hathaway's core business is insurance, including property and casualty insurance, reinsurance and specialty nonstandard insurance. The Company averaged a phenomenal 25%+ annual return to its shareholders for the last 25 years while employing large amounts of capital and minimal debt.

Warren Buffett and value Investing

"You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it."

There have been a lot of Investment guru’s around the world, but one name that is cynosure of all eyes and is most respected for his investing sense is, undoubtedly, Warren Buffett. Though I do not cover such articles on my blog, I thought it would be a good idea to occasionally post few such posts featuring the great investors and their ideologies. And when it comes to investing , who should we talk of first, other than warren buffett, who is the Second richest person in the world and he did it all through investing. We will cover Benjamin Graham, Charlie, David and of course India’s investing sensation Rakesh Jhunjhunwala among others in a series of posts.

GTL Limited:

GTL is a leading network services company, offering services and solutions to address the entire network life cycle requirements of telecom carriers and technology providers. GTL has executed projects in over 25 countries, has built over 35 cellular networks, installed and commissioned over 20000 cell sites, connecting over 20 million subscribers and has set up over 500 corporate networks. Manoj G Tirodkar is the Chairman and Managing Director of the company.
The company declared a net profit of Rs.67.4 crores for the period between July 2006 – March 2007. The operating profit margin was 16.39% as of March 2007 and long term debt equity ratio was 0.51. Latest available EPS is 6.44 and book value is 106.40.
The stock’s highest ever close at NSE was 3310.85 on March 8, 2000. Last month it closed at 229.90 (a loss of 93% from highest close).

5-prospective stock picks

Rakesh Jhunjhunwala Approach to Investing
His approach to stock picking is somewhat similar to Warren Buffet – buying an undervalued stock when the crowd is least interested. This is one of the reasons RJ is known as the “Warren Buffet of India”.
For example, during the technology stocks boom in 2000, Rakesh Jhunjhunwala stayed away from those stocks. Instead, he was buying some humble public sector stocks. Bharat Earth Movers Limited (BEML), in which he holds 1.47% stake, had appreciated nearly 64 times between January 2001 and April 2006. So, RJ had a vision and his judgement was perfect in this case.
The India Street attempts to find 5 top stock picks which RJ might be interested in investing. All the companies discussed here belong to the BSE Midcap index. These companies had performed reasonably well in the stock market in the past; but of late, these are not the hottest stocks. But fundamentally the stocks are good; we won’t be surprised if these companies bounce back strongly.
Incidentally, these stocks have fallen more than 45% from their all time highs. So, we can consider these as ‘value’ stocks.
Traded names that pass the Rakesh Jhunjhunwala test:



Company
Arvind Mills (BSE:500101)

Cambridge Solutions (532616)
BPO Services

Engineers India (532178)
Engineering Services

GTL Limited (500160)
Telecom

Orchid Chemicals and
Pharmaceuticals
Chemicals/Pharma

source- theindianstreet.com

Best Stock Picking Strategy

Best Stock Picking Strategy

Arguably one of the best strategies around and used by over 70% Fund Managers across the world is the one which Combines the strength of Fundamental as well as Technical Analysis. I wouldn’t deny the fact that i too use this methodology for Value Investing. So, how do you pick stocks using this strategy?First pick stocks that are Fundamentally strong. What stocks fall under this category? Stocks that have shown growth consistently, have improved their Profit Margins, have shown at least 15%+ of ROI (Return on Investment), i would say are reasonably good stocks to own Fundamentally. Much more analysis should follow including Ratio Analysis. However, we will try to limit the same for now.Once you have picked the Stocks you would like to own for a reasonable period of time, you should then try to pick the right time to enter the stock. How many times have you bought the stock just to see it go down? Such instances may be avoided, if not completely, by following the underlying Stock Chart Pattern and Technicals. While looking at the Technicals, you might want to check out the Long term Trend using Long term averages such as 50/200 Day Simple Moving averages as the basis. Weekly Chart should be used instead of the Daily chart, because your Investment horizon too isn’t a few days after all. Make sure MACD is bullish, which will add to your theory of Good long term of the stock.However, you should not mind minor fluctuations here and there.
Timing the entry
One very common mistake made by investors is to try and pick the bottom. Well, for starters, Nobody can pick a bottom. if you have done all your research and are more than confident that the stock will move up and is a good investment for the long term (few months/year(s)), then do you really think it makes any difference if you bought the stock at 100 or 90 when you expect it to go past say beyond 150 or 200? It really doesn’t. Then just do it. Go for it and buy the stock rather than just thinking. If you keep thinking, you will end up doing just that. Thinking.Hence, never try to time a stock when you are looking for a long term investment. Time is right when you think it is. If you keep researching, you may never find the right time.
Stop Loss for long term?
This is the most difficult question to answer. Ok. If you are investing into a stock from a long term perspective, should you really bail out just because the stock moved say 20-30% down? There are of course two sides of the coin.One. You may say, that i am confident about the Research that i did and will stick with it and will NOT get distracted with these minor fluctuations. Moreover, nothing really changed fundamentally for me to bail out of the stock. If i am unable to hold my emotions and take 30% loss then i should not be investing in stock market.Two. You may say, i did do my research right. However, the stock is moving in the opposite direction which means, the stock has proven me wrong. Is it worth holding a stock that has already proven that my decision was wrong? You should probably bail out in that case.
Now, you may ask, i have given both sides of the coin here which one should one follow. Well, as i stated earlier, this one is a difficult one. It completely depends on You, your research, your confidence on the stock and your success percentage doing what you did earlier.

Last But Not the least. Your Comments and Rating is the single biggest motivation that keeps me going. Please make sure that you do comment, rate and also Recommend this site to your friends so that we can all together make up a Learned Indian Investment Community.

Kaveri Seeds IPO

Kaveri Seeds produces, processes and markets high quality hybrid seeds for crops like corn, sunflower, cotton, paddy, and grain sorghum. Located in Andhra Pradesh, the company is one of the few recognised agri-input companies in India. The company has production, processing and R & D facilities in Andhra Pradesh and Karnataka. Its R&D mainly focuses on developing superior hybrids in different crops like corn, cotton, sunflower, paddy, and bajra. All the seed varieties developed are marketed under the brand, Kaveri Seeds.

Kaveri Agriteck, a partnership, was acquired by Kaveri Seeds for Rs 50 lakh in September 2006. Kaveri Agriteck was a venture floated to manufacture micronutrients and bio-products.

Kaveri Seeds has four seed processing plants with 11 processing lines in Andhra Pradesh and Karnataka. The company has a combined processing capacity of 18,000 tonnes per annum. It also has a cob drying plant (to improve the germination, vigour and viability of the corn seed and, in turn, improve the yield of the crop) at two different locations in Andhra Pradesh.

The R&D facilities of Kaveri Seeds are at six different locations in Andhra Pradesh. The one in the Ranga Reddy district of Andhra Pradesh is recognised by the Department of Science & Technology, government of India. The R&D infrastructure includes 273 acres of farmland and state-of-the-art lab facility. About 187 acres of it are owned by the company. The rest are on lease. This protects its germplasm and related operations against any misuse and biopiracy. Fifty-five employees including 13 scientists are engaged in full-fledged research.

The extensive network of loyal and committed distributors and dealers in Karnataka, Tamilnadu, Maharashtra and Andhra Pradesh include 736 distributors and 3,500 dealers across southern India.

Kaveri Seeds intends to aggressively expand its operation to other states to have a pan-India presence. The company intends to finance its Rs 63-crore expansion plan from the proceeds of the public issue. The expansion includes acquiring farmland for R&D, setting up a marketing network in north India, establishing corn-cob drying and seed-processing plants apart from a biotechnology laboratory. The expansion is scheduled to begin in October 2007 and complete by May 2008 in a phased manner. Besides, it also wants to upgrade its existing facilities by November 2008.

Strengths

1. Geographical expansion plans in north and east will result in volume-led growth.
2. Moving up the value chain by introducing better quality products yielding high margin. Reduced dependence on outsourced production of foundation seed has resulted in substantial expansion of operating margin in the year ending March 2007 (FY 2007).

Weaknesses

1. Mainly dependent on two crops – corn and sunflower – which contributed over 68% of the revenue in FY 2007. Similarly, has strong presence only in four states:. Andhra Pradesh, Karnataka, Tamil Nadu and Maharashtra.
2. Operates in the agri-inputs industry, which faces risks related to weather, pests and diseases.
3. The Indian seeds industry is highly competitive with a number of Indian as well as MNC players.
4. Has witnessed continuous reduction in debtors’ turnover due to rising credit periods. The debtors’ turnover has come down from 5.1 times in FY 2003 to 3.67 in FY 2007.

Valuation

Kaveri Seeds has set a price band of Rs 150 to Rs 170 per equity share of Rs 10 each, translating into a PE of 19.5x on the lower price band and 22.1x on the higher side of the price band, according to EPS for FY 2007 on post-issue equity of Rs. 13.70 crore.

Monsanto India, the listed Indian subsidiary of Monsanto, US, which also sells hybrid seeds and genetically modified seeds to Indian farmers is presently trading at PE of 22x based on FY 2007 EPS.

Another hybrid seeds player J.K Agro Genetics is currently trading at PE multiple of 13x based on FY 2007 EPS.

The seeds industry is not a high-growth industry as its operations are sensitive to agro-climatic factors and unpredictable fluctuations. Moreover, Kaveri Seeds has shown substantial profit only in FY 2007 and its plans to enter the northern markets will take time to bear fruits.

In view of these factors, the asking P/E of around 20 looks high.

Power Grid Corporation (public issue)

Power Grid Corporation (PGCIL) is India’s principal power transmission company. It has been designated a Mini-Ratna Category-I public sector undertaking since October 1998. This provides it with powers to undertake new projects without government of India (GoI) approval, subject to an investment ceiling set by the government. The company has received the highest annual performance rating from the Gol in each year since the year ending March 1994 (FY 1994).

PGCIL owns and operates most of India's interstate and inter-regional electric power transmission system. In that capacity, the company owned and operated 61,875 circuit kilometres (ckm) of electrical transmission lines and 106 electrical substations. In FY 2007, the company transmitted approximately 298 billion units of electricity, representing approximately 45% of all the power generated in India. Since its inception, it has completed 101 transmission projects and schemes.

The average system availability maintained by PGCIL was over 99% since FY 2002. The transmission losses were in the range of 3%-4%, representing mainly technical losses. As the power is transmitted over high voltage, it generally does not involve commercial losses. Nevertheless, transmission losses are factored in the tariff. As a result, it does not impact PGCIL

By creating a telecommunications network principally using its overhead transmission infrastructure, PGCIL has also diversified into the consultancy and telecommunications business, It owns and operates a fibre-optic cable network of over 19,000 kilometres. The company has been leasing out bandwidth on this network to more than 60 customers, including major telecom operators such as BSNL, VSNL, Tata Teleservices, Reliance Communications and Bharti Airtel. In July 2006, it also received a license to provide telecommunication services to end-users and is currently exploring options for providing these services.

The current initial public offering (IPO) by PGCIL is primarily to fund its transmission projects and to partly disinvest the government stake.

Strengths

• Subject to government approvals, PGCIL has plans to invest Rs 55000 crore on transmission infrastructure during the eleventh five-year plan. With this investment PGCIL has plan to increase its inter regional capacity from 14600 MW to about 37000 MW in the eleventh five-year plan. This includes 45 projects that are currently being implemented by PGCIL, which would increase its transmission lines by 30536-ckm and transformer capacity by 29420 MVA.

• With a debt-equity ratio of 70:30, the equity contribution is likely to be Rs 16500 crore. As PGCIL earns a regulated return on equity (ROE) of 14% (excluding north-eastern region), it will lead to additional profit of Rs 2310 crore. The company had earned ROE of 10.16% in FY 2007 as it had huge funds blocked in capital work-in-progress (WIP) and had incurred loss in the telecom business. PGCIL had a capital WIP of Rs 6083.89 crore end March 2007. However, it is earning ROE of 15% on its operational power projects.

• In Q1 (June quarter) of FY 2008, PGCIL commissioned transmission assets worth Rs 2490.49 crore. Apart from this, four more projects (for which the company is raising fund and has spent Rs 704 crore till end July 2007) are to be commissioned in FY 2008. These projects are likely to drive PGCIL’s near term earning.

• Working capital management has improved over a period of time. The average receivable collection period has declined from 76 days in FY 2005 to 47 days in FY 2007. The improvement in working capital management is also visible in the growth in net operating cash flows, which have increased to 1.6 times from Rs 2795.22 crore to Rs 4345.85 crore in this period. Presently, PGCIL has been able to collect nearly 100% of its receivables from state power utilities on time.

• The transmission network of PGCIL increased from 50,745 ckm in FY 2005 to 59,461ckm in FY 2007 and to 61,875 ckm end Q1 of FY 2008. The ratio of ckm to employees has increased from 7.4 ckm in FY 2005 to 8 ckm in FY 2007 and to 8.3 ckm in Q1 of FY 2008. Revenue per employee has increased from Rs 37 lakh in FY 2005 to Rs 48 lakh in FY 2007.

• Unlike power generation utilities, PGCIL was able to achieve its Tenth Five-Year Plan physical target with lower outlay.

• The power transmission industry is capital and technology intensive. This acts as an entry barrier, giving a monopoly to existing players. Roughly it takes about Rs 1 crore of investment to set up 1 ckm of transmission line.

• While starting the telecom business, PGCIL had targeted to make profit from FY 2009. However, the company has managed to post profit in Q1 of FY 2008. As against a loss of Rs 21.96 crore in FY 2006 and Rs 3.73 crore in FY 2007, it posted profit of Rs 9.09 crore in Q1 of FY 2008. For the full year, PGCIL expects to post handsome profit.

Weaknesses

• PGCIL operates in a highly regulated industry. Its current tariff structure is likely to remain in place till FY 2009. Any change in the current tariff policy by the Central Electricity Regulatory Commission (CERC) could adversely impact the company. In the past, CERC has reduced the company’s ROE from 16% to 14% from FY 2005 and had capped the maximum incentive to 2% from 4% earlier. Thus, PGCIL’s net profit had declined from Rs 1023.16 crore in FY 2004 to Rs 829.78 crore in FY 2005. Subsequently with more projects coming on stream and increase in absolute contribution from other businesses, the company’s net profit recovered to Rs 1087.66 crore in FY 2007. At present, however, it appears unlikely that CERC will further reduce ROE as the earlier cut was in a scenario of declining interest rate.

• Typically, PGICL undertakes projects to extend its transmission infrastructure. New electricity generators are connected to its transmission system. As PGCIL is paid ROE only after the commencement of service of a transmission project, delay in its transmission project or the related electricity generation project could block the company’s equity. PGCIL may, thus, go without any returns on that equity during the course of the delay.

Valuation

FY 2007 EPS on post-issue equity works out to Rs 2.6 and Q1 of FY 2008 annualised EPS Rs 4.3. However, translation gain of Rs 198.34 crore has led to decline in reported interest cost and has inflated Q1 of FY 2008 earning. So actual EPS for FY 2008 is likely to be lower than the annualised EPS of Rs 4.3

At the offer price band of Rs 44-Rs 52 and on the basis of FY 2007 earning, the P/E range works out to 17-20.1, respectively. There is no exactly comparable listed entity. PSU power generation major NTPC trades around P/E of 20 times FY 2007 EPS. Generation/transmission utility companies generally do not get such premium valuations. But the encouraging growth prospects in the power sector in India in the next five years have pushed up P/Es. Moreover, PGCIL is the only company through which investors will be able to get direct exposure to the power transmission sector. This will stand them in good stead.

Investment Basics - More Common Mistakes

The other day I got a call from a friend. He wanted to know my opinion on 'Stock A', which was proposed to him by an old hand in the stock market. He was told that the stock would double in a few months and the person who had recommended the stock also had bought some. I told him that this stock was crap and unless an operator was running the stock, I did not see strong reasons on why this stock would double.

I said this not because I have the ability to spot stocks that will double in very short periods of time, but because I am yet to come across people or experts who can do this feat every time.

So in a nutshell I told him to stay away from this stock. Nevertheless he went ahead and took some exposure in the stock, as the seduction of making quick bucks was very high. Exactly 3 days down the line this stock is 18% down with 10% being knocked off in 1 day.

He was now skeptical about making equity investments with the losses suffered in a couple of days. He blamed the stock markets as well as others for his misfortune, but at the same time wanted to participate in the growth of the Capital Markets and our economy.

However, never ever did this friend ponder over the mistake he had committed. I bet there are plenty of people who are guilty of committing the same mistake or others, but never get down to really understand what went wrong and try to learn from their mistakes.

So what are the important lessons for people wanting to create wealth through equities? The cardinal rule is to make as few big mistakes as possible.

Though the list can be pretty long, here are seven common mistakes people make when investing in equities and that you should stay away from.

Mistake No 1: The first and biggest mistake is not to admit making a mistake

People stubbornly hold on to stocks where they are making sizeable losses in the belief that they can exit when the price reaches their buying price. Most of the minds are not trained to acknowledge the fact that they have made a mistake and probably the best thing is to move on.

There was this gentleman who had bought a "penny stock" at Rs 9 following a tip and hoping that it would double in a few months. The stock first rose by 20% and then declined by almost 40%. He was unwilling to let go of the position with the belief that he will do so only when the price reaches his buy price and it will happen sometime soon.

The gentleman is still holding on to the stock and the stock has lost a further 40%. He could have exited the stock with a loss of just 28% initially (considering the appreciation of 20%). Now his losses are around 56% and he is still holding the stock. This happened in October 2005. Even several blue chip stocks have actually doubled or tripled since then.

Mistake No 2: Buy on tips and khabars and wanting to make a quick buck

Technology has made our lives much easier but at the same time has caused a lot of overload as well. We are subject to SMSes , emails and flyers with lucrative offers for "buy and sell tips" , commodities trading etc. that at the end of the day leave you confused.

In this state only two things can happen, (a) One is that you procrastinate and not take any action with the fear of screwing it up and (b) Succumb to these offers for making you rich quickly.

The point that I am trying to make is that how people who are conservative or sane can take dangerous calls and sabotage their own well being. I remember having met this conservative gentleman who was targeting only 12% returns but still could not resist the stock market temptation when the broker called and showed him some tantalizing figures.

Mistake No 3: Buying a loser on its way down thinking you are averaging your costs

Mistake No 4: Ignoring Risk in the investment and looking only at the returns

Risk is an integral part of every equity investment and some equity investments are more risky than others. People however look at the returns without giving due importance to risk.

Stock Futures can give you great returns but at the same time they can wipe out your capital as well. In the mutual fund context, people look at returns when investing in the fund, but do not consider the kind of risks the fund manager has taken whether it be concentration in stocks or sectors etc. At the same time betting heavily in Futures & Options, Commodities without understanding the nuances of the same is fraught with risk.

Understand the risk, i.e, the downside inherent in every investment and volatility associated with it.

Mistake No 5: Buying penny stocks thinking they are cheaper and ignoring stocks, which are priced above a certain number like Rs 1000 thinking, they are expensive.

Mistake No 6: Exiting Winners early and sticking to Losers

Ask yourself: Suppose I have a choice of 2 boats. Boat A is strong, consistent and has traveled the sea through many rough weathers as well. Boat B is showing some cracks and leaks in certain places. Water seeped in through this boat sometime back. Which boat will I choose to safely get me from this shore to the next?

I bet all would opt for Boat A and no person in his right mind would opt for Boat B. Yet when this same logic is applied to stocks, people will stick to losers (Boat B) but exit winning stocks (Boat A) to make a small profit.

Mistake No 7: Just thinking but not doing anything

Finally doing makes all the difference. There is no substitute for action. Just knowing that exercise is good will not keep you fit. In the same vein, just knowing this stock is good is of no use unless you buy it.

I come across so many intelligent people who know many things but are simply unable to implement because of lack of time and busy schedules.

"I knew this stock would do well, wish I had put in money here" or "I missed a good time to enter this stock" are some common responses you hear. Whatever the reason be, in the end what matters is whether you did what you knew was right. A better option for people here is to put their investments on Autopilot (Automatically investing fixed amounts every month in stocks and mutual funds).

To be a successful investor and create wealth through equities, you should shun the costly mistakes outlined. And yes if you have made any one of the above mistakes, admit it and correct it. More importantly "Stop Hoping".

At the end of the day 'Hope is not a strategy in the equities market.'

Investment Basics - Reading an annual report

The thought of poring over annual reports to glean information about a company or its growth prospects may seem terribly dull to most new investors. At a time when there is an overflow of information across media channels and scores of analysts churn out stock calls on a daily basis, you may be excused for taking the short cut and just looking up financial snapshots on the Internet.

Nevertheless, the annual report remains the most authentic source of information about a company and contains important facts about its financial condition, growth strategy and current challenges that are not readily available upon an Internet search. A well-written report can give you a rare glimpse into the management’s outlook for the industry or its views on new trends in the market. So for those who do not know (or remember) what an annual report looks like, here is a quick guide to reading this document.

The manner of presentation differs from one annual report to the other; some are mini opuses that promise to be a one-stop guide to the industry and company, others barely make the cut when it comes to providing crucial information. Most reports, though, will have the following important components:

The director’s report, which will detail the company’s operational performance in the year gone by.

Management Discussion and Analysis, where the management provides an outlook on the industry, competitive scenario, new challenges and risk factors and outlines its future strategy.

Detailed financial statements of the company and its subsidiaries, as well as consolidated financials, along with the auditor’s report.

The basics, for starters

You may also find pictures of happy employees participating in corporate events. Heart warming, but we suggest that you skim through all that gloss and start with the director’s report. This will give you an overview of the co mpany’s performance across various segments and an idea of the factors that drove performance.

If you are unfamiliar with the industry the company operates in, then the Management Discussion and Analysis (MDA) is the best place to begin. Clueless about the pig iron industry? Read the Tata Metaliks report for data on the globa l pig iron and foundry market and pig iron price trends. The report also includes an interview with Tata Metaliks’ management, which discusses some of the key events that took place during the previous year and its perception about the competitive scenario.

Companies put forth their views on a variety of topics that concern their industry, be it Government regulation, consumer or user industry trends or changes in the global picture in the MDA. They then articulate their own plans to capitalise on unfolding opportunities.

Between the director’s report and MDA, you will get a fairly good idea of the businesses the company operates in, its key focus areas, the challenges ahead and the measures it has in place to improve financial performance in the year ahead.

For number-crunchers

For those who believe that it is numbers that do all the talking, the financial statements in the annual report provide you with details that you are unlikely to find on the BSE or NSE Web sites. For instance, you can figure out the extent to which a company is able to fund its expansion plans on the strength of its current operations by looking at its cash flow statements.

The schedules to accounts provide break-ups of income, expenditure and other items. For instance, you may want to know what components constitute “other income”, particularly if it has been a significant contributor to profits that year. The item-wise split-up of the components classified under other income will help you decipher how much of the non-operational income is recurring in nature. You are also provided with segmental information — both geographic and business.

Similarly, schedules elaborate on balance sheet items such as long-term and short-term loans. For retailing companies, for instance, inventory management is crucial and you may have to compare the inventory positions over a three-year period to understand how efficiently the retailer manages its stores. Or for cash-rich companies, the quality of their investment book may well play a role in valuations.

The annual report also discloses the financial information of the company’s subsidiaries, besides providing financials on a consolidated basis.

As new, high-growth ventures are typically routed through subsidiaries, companies are beginning to command valuations based on their consolidated numbers.

Be sure to look at the notes to accounts to understand the accounting treatment of various revenue and expenditure items. Those who are unfamiliar with accounting practices can make-do with looking for changes in accounting policies . This might tip you off on the impact of one-time earnings or expenses.

Also look for the auditor’s qualifications to accounts for any assumptions that have been made while preparing or auditing accounts.

Nooks and corners

The annual report also contains little nuggets of information that could provide you with additional insight into the company.

Management background: For instance, you can find brief profiles about the directors on the board of the company. The presence of directors with strong industry standing lends credibility to the management of the company.

The shareholding pattern of the company will reveal the extent of promoter holding and the extent of institutional interest in the company.

Production and utilisation figures: For manufacturing concerns, the production figures assume significance. The production as a proportion of installed capacity (utilisation) could give you an idea of the efficiency at which the compan y is operating and the headroom for further volume growth. This information is particularly pertinent if the company is planning further expansion.

IPO proceeds utilisation: For newly listed companies, the progress on the expansion plans that had been outlined in the offer document and the utilisation of the IPO proceeds are also disclosed in the annual report.

Notices to resolutions: Some special resolutions passed at the annual board meeting also merit attention. For instance, resolutions passed to increase borrowing limits are cues to the company’s desire to leverage its balance shee t.

Explanations are also available on why the resolution has been mooted. For example, Colgate Palmolive India’s latest annual report explains the reasons for its declaration of a special dividend and a capital reduction.

This list is far from exhaustive. Going through all this might mean a lot of time and work. But it does make your information more authentic than the tip from your broker friend or the analyst on TV.