Category: Observations

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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.

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Observations

Should fund managers declare their assets?

One of the astonishing aspects of the Indian Capital Markets scene is the abysmal size of the Indian Mutual fund industry.

The total asset size of Equity funds (including ELSS) is around 190,000 Crores Rs (around 35 Billion $) as of Nov, 2012. (source AMFI)

This is approximately 55% of the annual turnover of Reliance Industries !

While many people have blamed distributors/fund houses/Govt/SEBI for the mess that Indian MFs are in, one section that has been immune to criticism are the fund managers

There was a conference couple of years back where the panel consisted of fund managers.The moderator asked the panel about their personal asset allocation.It was shocking to hear that some fund mangers had less than 5% of their personal portfolio in equities.For most of them, their biggest asset was the house they lived in Mumbai !!

Its fairly clear that Indian fund managers don’t eat their own cooking and don’t have any skin in the game.

If ordinary muncipal corporators/govt employees are asked to declare their assets publicly, shouldn’t fund managers who manage thousands of crores in assets do the same?

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Observations

So should farmers invest like Adi Godrej ?

In an earlier post, I had written about the hypocrisy of Adi Godrej wherein Adi had told that farmers should give up their land for compensation which should then be invested in mutual funds.

Well, funnily enough,Adi Godrej does not invest in mutual funds himself.In an interview to Outlook Business, he mentions:

“By and large we don’t invest outside of our group, except for a couple of family members who may have bought shares in some other companies. We have never relied on professional wealth managers for advice and we know that the best investment for us is our own group.”Godrej invests in jewellery and homes for personal use. But that apart, he’s not a big fan of either bullion or real estate, perhaps because the group itself owns vast tracts of land (3,500 acres) at Vikhroli in suburban Mumbai and also has a realty development arm. “While equities in the short-term may not have delivered, over the long-term they definitely have outperformed other asset classes, including real estate,” says Godrej. He explains with an example. In 1963, Godrej paid Rs 1 lakh to buy his first house, a 2,916-sq ft apartment at Usha Kiran, Carmichael Road, in tony South Mumbai; early last year, he sold it for Rs 25 crore. “On the face of it, it looks like a stupendous gain but the fact is, the appreciation is just around 20% CAGR,” he points out. “Now, after we demerged Godrej Consumer from Godrej Industries in 2001, in just 11 years, the CAGR in the share prices of Godrej Consumer and Godrej Industries has been upwards of 40% and 50%.”

 

So should farmers now give up their land and buy Godrej group stocks?