Category: Observations

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Observations

How some equity research is lazy, foolish and unprofitable

As the cliche goes, any company’s biggest assets are its employees.So while researching  a company, equity analysts try to figure out the ability, motivation levels etc of the employees. In private equity, it is fairly common to touch base with ex employees to get some color on what exactly is happening in the target company.

In this instant age, many analysts instead of actually speaking to employees (or ex employees) get their employee assessments from Glassdoor.

Glassdoor is a website where employees can write reviews about their company and even of their CEO.So these armchair analysts visit Glassdoor, if they see a couple of negative reviews, they conclude “The management sucks” and drop the opportunity.On the other hand, if their reviews are positive, they go ga ga and recommend the stock.

I believe this is a serious mistake mainly because there is no authenticity.You can go right now and write a review of any company you want.So if you want to have positive reviews for your company, you can do so.On the other hand, if you want to spread malicious rumors of a company, just go and write some garbage.

Many analysts have been led down the garden path by relying on Glassdoor reviews for their equity research.Take for example, Arshiya International.A search on Glassdoor indicates “75% of employees recommend this to a friend !”

On the other hand, if you rely on online rants of employees, you will never invest in a TCS,Infosys,Wipro,HCL Tech etc.The employees of these companies are tech savvy and use the net to vent their frustrations etc.

Take for example, TCS. If you google “TCS Sucks”, you will get 269,000 results !Does that mean TCS is a lousy company to invest in ?!!

There is only one way to assuage the employee strength of the company-that is offline.Speak to the employees themselves, they will tell you about the company’s management,sales, competition, outlook etc .

Relying on online reviews is plain lazy, foolish and unprofitable !

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Observations Parody Lyrics

Remember the time Karvy recommended Tricom

There is an old quip “The problem of being experienced is that you keep forgetting what the experience was !!”

Today as I was perusing the stock exchange data, Tricom caught my eye.Tricom crashed by 18.46% today to close at 2.65 Rs.

I remember in the hoary past (in 2006) to be precise, Karvy was going around town recommending Tricom.It had put a buy target of Rs.220 then !!

Am screwing up Michael Jackson’s lyrics of his song “Remember the time”

 

Do You Remember
When Karvy Fell In Love with Tricom
We Were Young
And Innocent Then
Do You Remember
How It All Began
It Just Seemed Like a Multi Bagger
So Why Did It End?

Remember The Times
Do You. Do You, Do You,
Do You, Do You
Remember The Times
On the TV, On The Internet
Remember The Times
Karvy & Tricomn
Remember The Times
What About, What About…

Remember The Times
Ooh… In NSE
Remember The Times
After Market Hours…, Do You, Do You, Do You
Remember The Times
Do You, Do You, Do You, Do You
Remember The Times
Yeah Yeah

And the MJ video follows below:

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Observations Promoters

Different species of Promoters’ sons

Warren Buffett has often stated that his favourite holding period for a company is forever.

This is difficult to do in India as most of the stocks listed are run by promoter families.As time goes by, the original promoter steps down and the next generation takes over.The performance of the company (and the stock) then wholly depends on the capability of this next generation (who are typically sons).

For the benefit (!) of the readers and my own amusement, I have categorized the sons of the promoters into different categories:

A.The Nawabs

These scions have typically been brought up in the lap of luxury and are living their life in the style and manner of the late Nawab of Awadh.Unfortunately, the shareholders of their companies have to pick up the bill.Some examples:

1.This promoter’s son is heavily into party drugs.He ODed recently and landed in a hospital.The matter was hushed up but God save his companies !

2.This promoter’s son belongs to a well known business family.He flies hookers from Russia and East European Countries via specially chartered flights.The bills for the same are expensed to the company !

This reminds me of a well known fund manager.He attended the premises of the company and happened to see these ladies.He was told that they were the employees of the company.He came back and gushed to his HNI clients “Yeh company itni achi hai ki videsh ke log isme kaam karte hain !!”

B. The Debt junkies

These Promoter’s kids have a huge chip on their shoulders.They want to prove a point that they are the best businessmen around.So they strive for a “Growth at any cost ” strategy.To get that growth, they pile on huge amounts of debt which inevitably turns out to be unsustainable and the companies collapse.Some examples are:

1.This promoter’s son wanted to build a company bigger than Walmart.Unfortunately, all he had were some sugar mills.That didn’t deter our man from going on a massive expansion debt fueled spree…the hangover of that party is still being felt

2.This fellow belongs to a reputed business family in Mumbai.Started real estate projects and has around 5L square feet of space under construction.Unfortunately, he is neck deep in debt and is unable to complete any of his projects.He could have started small and would have been very successful but the desire to be the next real estate Mogul of Mumbai cost him dearly.

C.The Quiet Incompetents

This breed of promoters’ sons are incompetent and they know that they are incompetent.Their strategy is similar to the strategy of the Pakistan Govt “Muddle along, and leave the rest to God”

The companies under their watch don’t collapse but they don’t show spectacular growth either

Some examples are:

1.This promoter is the fourth generation businessman from his family.He has attended the best Universities in the US that money can buy.If you had bought his company’s shares when he took over and held on to them, you would have had a 80% erosion in purchasing power.The share prices remained the same but inflation would have destroyed your purchasing power.

2.This fellow is only 23 and he says he wants to pursue his time doing philanthropic activites.That is ok but then maybe its time for shareholders to get out of his companies.

D.The Chips of the old block

This is my favorite type.These people have business running in their blood and are a chunk of the old block.They are hungry, they are smart and are able to take their companies to new heights.

Best examples are Rajiv Bajaj of Baja Auto and Vikas Oberoi of Oberoi Realty.

From an earlier era, I guess Mukesh Ambani,Ajay Piramal,Ratan Tata and Anand Mahindra would be in this category.

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Anecdotes BookExcerpt Observations

Geoge Soros on the difference between broking and market making

Recently, I had an opportunity to deal with Over The Counter (OTC) securities.Since they are not listed, prices are quoted in a large band with riders such as minimum ticket size etc.More often than not, prices are unreliable and vanish when you actually place the order.

In such a scenario, the role of the broker/intermediary becomes critical.But how much should he paid?I find this anecdote from George Soros’s life instructive:

My friend’s father asked me to change some dollars and being conscientious I went to the pain of visiting both of the two markets for this sort of thing,the old Stock Exchange and an orthodox synagogue in another part of town.It turned out that there was a significant difference in the exchange rate, and I was able to get some 20 percent more at the synagogue than at the the Stock Market, which was the only rate that my friend’s father knew about.So I brought him the larger amount and said that I deserved a higher cut, but he refused.

“He said,’You are a broker and it’s your job to get the best rate, that is what you are getting paid for.’ I remembered that years later when I became a market maker in over-the-counter securities.,” George Soros observed.”Because if you are a market maker and can make someone an extra 20 percent and raise your own cut by half a percent that’s different and better than being just a broker.So in the end by his refusal to raise my compensation he encouraged me to be a market maker rather than a broker, which turned out to be quite useful and I suppose I was paid for that experience.”

-from the book Soros by Michael Kaufman

 

 

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Observations

Does tracking insider buying and selling work in India?

In theory, insider buying or selling is supposed to be a great indicator of future stock performance.

But I wonder if it works in India.In India, insiders (aka ordinary employees) are usually the last to know anything !!

Some real life anecdotes to illustrate my point:

1.Some friends worked in Financial Technologies when all it made was Odin Software.They got stock options in the 20/30 Rs range.As soon as the stock hit 100, almost all the employees sold their shares…thinking yeh sau se upar thodi jayega.Within a year or so, FinanTech crossed into 4 figures or more !

2.Another friend worked in WNS.He had a ton of stock options.WNS listed handsomely and once the lockin period was over, he had an opportunity to sell at 40$/share.He held on as he read a research report (!) which said that WNS would be the Infosys of the BPO sector.He got out a few years later around 9$/share

3.This is an example of classy inaction.eClerx provides KPO services to clients such as Lehman,MS etc.In the financial crisis of 2008, the stock was hammered out of shape and reached sub 100 levels.No one,not the employees nor the promoters bought their own stock in their own company which they know so well.Around 2 years later, the stock crossed 700 Rs !

These examples suggest tracking insider buying/selling in India is probably a huge waste of time.You are better off doing your own research and following your own processes.