One thing clear in all the 3 industries – the more you complicate, the more money you can make. So whether it is a Kellog, or a Gillette they can take a simple thing to great heights and charge a premium. There is a big set of people willing to buy the products – MAKE NO MISTAKE about the size of the market.

Caveat: I am a shareholder of Gillette

The food industry is the GREATEST CONTRIBUTOR to what is called the ‘life-style disease’ industry. Obesity, Cardio Vascular diseases, blood pressure, lung and throat cancer, etc. have been CAUSED by the likes of Coke, Pepsi, McDonalds, and a slew of high fat, excessively processed food. Most of these items have an excess of salt, sodium, sugar, …etc. They can take a healthy product like potato and convert it to an unhealthy product like chips!

In the US the Medical Insurance industry got into the act and pushed the anti-tobacco legislation. However will they get behind the Big Food industry and lobby for a tax on cola, processed maida (fine processed wheat), sugar laden snacks, etc? I hope they do.

The general insurance industry in US is pampered because of the HUGE clout that they have in Washington. They have fought for every piece of legislation and have had their way through – they can change the way Big Food behaves!

The pharma industry has a vested interest in TREATING/CURING diseases like obesity. It is far more lucrative to TREAT rather than prevent.

If a doctor PREVENTS your being ill, what is the incentive to pay him a fee? Zilch. However if you are in pain and he helps you come out of it, you will be willing to pay him a fortune!

See only bad news sells….even to one own self! ha ha ha….

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Warren Buffet is a great investor, and a great CEO for Berkshire Hathaway. He regularly makes very profound investment statements regarding the investment world…and the other managers. One of the statements attributed to WB is:

‘When all you have is a hammer, the world looks like a nail‘.

This is easy to interpret. Take the case of a typical Relationship Manager working in a bank or a brokerage outfit. His bonus/ commission is decided by the amount of premium he collects in UNIT LINKED INSURANCE/PENSION PRODUCTS. Obviously these products are very profitable for the manufacturer and hence get a good commission. So the salesman thinks all the people he meets need and can afford an expensive unit linked product. Obviously the higher the charges, the greater the commission for the salesman and the organisation which he represents.

Now look at Mr. Warren Buffet’s investments – they are largely in the USA. Of course he says all his investments are in USA – but it could be companies which are present in a big way in India / China – and their growth could be coming from there. Look at Gillette, Coke, etc.

Look at the way he attacks Standard & Poor – whenever they take a decision – he said USA should deserve AAAA, not just a AAA. Fairly obviously if all your money is in USA, you want the higher ranking.

Look at the way he attacks gold – an investor in just gold over the past 10 years has beaten Berkshire Hathway. Of course I am not suggesting anybody to buy gold – just giving you an example. My views of gold are Buffet like too!

WB criticising Moody is completely unheard off! – Remember he has a stake in Moodys, but not in Standard & Poor.

It is not easy to understand what WB says and what he does, so one has to be careful. He is normally very critical of high salaries of fund managers – and the financial industry in general. However he has invested in the past in Goldman Sachs and Bank of America!

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Too many pundits and journalists jump to declare ‘The market is now in a bear phase’. My left foot. None of us know whether the market is in a bear phase or in a bull phase. The day I finish saying the market is in a bear phase, it can go up 5% and make my prediction look stupid. Even if it was a bear market which pundit knows whether it will remain there or will it go up?

The whole market argument (or rather pundits argument) about bear market and bull market is completely futile and absolutely useless. Markets always have good shares to buy and bad shares to sell. Check your portfolio – see what is worth selling off even today because the management is not good or the products are not selling. Shares like Gillette, ITC, P&G and Colgate also loose sheen when the markets are doing badly. However these companies are NEVER available at a price earning multiple of 10 – if that is what a bear market is supposed to mean. Does it really matter that the index is at 18000, 17500 or 15500 – but the shares that YOU want to buy are still quoting at a price earning ratio of 28 – albeit lower than 31? If you were a buyer at 31, you can buy more at 28!

Strategy for bear markets:

Let us assume that we are in a bear market. Should you rejoice or feel sad? Well depends on whether you are in an investing mode or you are in a withdrawing mode! Most people I know (from age 23 to age 84!) are still in investing mode..so a bear market (or a market are depressed at the current stage) is a blessing. I have no clue which share is a good buy and which is a good sell ..but if you are in such a doubt pick up an ETF of the sensex or the nifty.

Pick a real low cost etf (if you are aggressive pick the Sensex etf and if you are not so aggressive pick a Nifty etf). If you are already an investor in a mutual fund, just pump in some money into the funds that you are already investing in.

A SIP is a good idea, but so is picking up some stocks which you understand…However I do not think markets are at mouthwatering levels for many shares, so please be careful…Remember roses are surrounded by thorns!

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There is a big problem all distributors face. When the product becomes good and has a successful track record, the distribution margins reduce. So it is a catch 22 situation. You work hard, collect money for a fund house, they employ a good fund manager who delivers good results…so the scheme does well. Then the fund house says – no foreign trips, no booze, no…..

What does a distributor do…..this is a REPORTED conversation. You would have heard parts of it on television, from your distributor, or read it in articles in magazines. The media also DOES not like the funds which do really well – their media spend also goes down. They do not offer ‘intelligent sound bytes’ (ok Taleb calls it an oxymoron) on all topics…here it is:

Client: I wish to start a SIP of Rs. 100,000 for 10 years.

Distributor: Yes sir, I would suggest ABC supernova fund.

C: Why not Hdfc Top 200?

D: Sir it is a good fund, but the corpus is become too big sir.

C: So how does it matter? It will get better attention from the fund manager, media, analysts, is that not good?

D: No sir. The nav of this scheme is already at 190 – ALMOST 200, so it is expensive. The fund I am suggesting has an Nav of just Rs. 31 sir. You see by the time 31 becomes 62…200 cannot become 400 no?

C: Arre, Subramoney says Top 200 is a good fund because it is a well managed fund. He never talks about NAV.

D: Sir I do not know who is Subramoney, but sir you know that I do not recommend expensive funds. That is why I am recommending ABC supernova fund, from ABC fund house.

C: Hmm I agree – I have seen with shares also..a small share can become a multi bagger, a big share cannot. Subramoney says he had bought Gillette at 37 and now it is 2300. If I buy at 2300 will it be a 100 bagger, it will not!

D: Yes sir, that is what I mean…Sir which scheme is Subramoney recommending now?

C: that is the problem. He does not recommend. He only ridicules his readers for making mistakes. Like this conversation he may put it on the blog.

D: Sir where does S invest his money?

C: Oh he has 80% of his money in direct equities – and I believe he bought even last week…but I do not know what.

D: Why do you not ask him for a peek into his portfolio? Even big investors like Rakesh Jhunjhunwala allows it.

C: Never asked. However from a reading of his blog, I know the following funds exist in his portfolio: Hdfc top 200, Hdfc Equity, Hdfc Prudence, Franklin India Blue Chip, Hdfc Tax Saver, Franklin India flexicap, Franklin Prima.

D: OMG….sir these are such expensive funds!! All of them have an NAV of 200+. Sir, he is misleading you. He must have bought it long back.

C: Hmmm

D: Sir he must have bought it 12-14 years ago when these funds were cheap -say 15-20 Rs. Now he must be asking you to buy, so that he can sell.

C: OMG I never thought of that….

D: Sir you should know which websites to trust. Please visit out website -ABC fund house. You can even visit some independent websites sir. Last week we were rated 4 star. It shows the scheme NOW has a great potential.

C: arre, this also Subramoney says…’Ratings are backward looking, not forward looking’…and you are saying…

D: Sir people like Subramoney may be knowing fund managers personally so they may be investing in some schemes…we have to stick to cheap fund houses sir.

C: Now I see…your presentation is so nice…see last one quarter ABC Supernova fund has performed better than hdfc prudence fund! So indeed ABC Supernova is also a performing fund…it has done better than Hdfc prudence!

C: I agree…please give me ABC Supernova fund form….and here is the cheque for Rs. 100,000.

Learning? well i want comments on the learning please!

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My parents lost Cadbury, Kodak, Hoganas, ITW Signode, …significant shares in their portfolio to a ‘buy-back’ in the 1980s…or 1990s, not sure.

Buy-back is a process of a company / its promoters buying the shares of its listed entity – with a view to rewarding its shareholders OR to take the company private. Here we are talking of the second variety.

Now thanks to this new law which says that at least 25% of the company should be in the markets for a company to be listed they are likely to lose a lot of shares like Colgate, Procter & Gamble, Gillette, Oracle, Alstom, ABB, Siemens, Areva T&D, Basf, Ingersoll Rand, Cummins….and perhaps some others.

Also there is no clue how promoters of Indian companies with very small outside holding will react – Mahindra Holiday Resorts, Wipro, Cholamandalam Investment and Finance, Wendt,

If the proposal becomes a law and all these companies decide to go private, suddenly my parent’s portfolio will be full of Ntpc, Nhpc, L&T, Tata Power, Tata Steel,….and look like an infrastructure portfolio and not a balanced one! Funny how risk can come from anywhere!!

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About a year ago when I saw the prices of auto and FMCG scrips I was happy to sell them. Specifically I was happy to sell Colgate at 430, Gillette at 900, Ashok Leyland at 49, Tata Motors at 600,..and there were many others too…..so I called my broker. Thank God not doing it online has its advantages – there is a counter-view to all your decisions .

Other than 400 shares of Ashok Leyland (which he had made me buy in 1995, 2002, and 2008 at sub-20 prices) all other shares stayed. Even in Ashok Leyland 3600 shares stayed .

If you see today’s price you understand the value of a second opinion of a person whom you trust……..and the brokerage that I could have ‘saved’ (presumably it would be cheaper) is not worth the trouble….surely all of you agree?

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This was the reaction of about 40 people I met last fortnight at a ‘pre-wedding’ food party at a Gujarati friends ‘so called’ party. The food was amazing and for a non 5* setting Rs. 1900 per plate was what I thought well, too much. Considering that the food did not even contain onion or garlic .

However as is wont the discussion went to ‘investing’ (between these 40 people in the room they could have been holding a small portion of the Indian market capitalization!!). These are not the guys you meet in the day to day business – almost all of them would be having a net-worth in excess of Rs. 20 – 25 crores..and a few of them could ad at least one zero to it. One of them is a huge builder whose son’s wedding was attended by a big part of the Maharashtra state cabinet and a couple of Ministers of the Central cabinet. Obviously when these people invest / trade in equity markets they are dependent on their CA, an analyst, a portfolio adviser, …and some of us who give ‘vishesh tippuni’ from time to time.

Now in a conversation with a group of 3-4 people I heard stunning stories of hammering the index by a mile even in this decade of 2000 to 2010. This period of course saw the greatest every bull run, then a great fall o f 2008, and a spectacular come-back of 2009. To them the ‘Index’ did not mean anything. For example one investor had invested in Siemens which he exited in 2007 Dec / 2008 Jan to invest in a huge office property. He calls this sheer luck because prices in that location had not fallen after his purchase. Even ignoring such transactions these people have got far, far greater than the Sensex. Their take on mutual funds:

a. Integrity of fund managers is impossible to monitor the way we monitor our portfolio.

b. Forget corruption, how do we monitor competence of fund managers?

C. WE HEAR OF fund manager corruption FROM corporates who place shares with them….what should we do? How do we react?

d. When our broker asks us to buy a share in most cases he gives us a price at which a particular fund is planning to buy a stake – what should we do?

These people have all kept it very simple. Their portfolio consists of some bonds / bank fixed deposits / post office savings – the income from this technically can take care of their day to day living expenses. This allows them to buy equities – shares like Gillette, Colgate, Siemens, Tata group shares, Birla group, other Mnc bluechips are in almost all their portfolios. Immaterial of what happens some of these shares will never go out of their portfolios – 5-7 years of under-performance does not bother them. Principally they do not trade -but 4-5 of them have given their money to one broker for ‘trading’. This portfolio they review once in a while and feel good (i guess!).

One very philosophical statement I heard was “when too much money is accumulated in one place the government will try to get something out of it”. Look at the ‘trail commission’ being used for ‘investor education’ – goddammit, it should NOT BE CHARGED…WHO the @#$%^ is amfi to say that I should pay for ‘investor education’ from MY MONEY. Damn the investor who does not get educated!

2-3 of them are so against going short that they do think of people who go short as people who should be banned!

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Markets are driven by 3 factors – Earnings of the companies, the future expectations (price-earning ratio) and the liquidity in the market. In the current market earnings are at their peak – the next couple of quarters is likely to see flat or slowing down of the earnings. This itself reduces the price expectation (or the p/e goes down) and the Greece problems might mean some FII money could get pulled down.

So the market is surely headed down, correct?

Well not so fast. What I told you in para 1 is known to everybody in the market – so you could argue that all this is already played out and therefore the market will remain stable. Difficult to say.

MY PERSONAL view is that some shares in my portfolio that I felt was overpriced and therefore I sold were – GMR Infra, Eid parry (sugar prices are softening), Mahindra Holiday Resorts (looked like a good buy at 340 and a good sell at 544), Hero Honda (needed money to fund Shivam Auto an auto ancillary), Cummins (at some stage in life you need to sell some shares – been holding it for 19 years, so sold a miniscule 200 shares), Dabur, Marico, (fmcg was fully priced??), Ashok Leyland (had a choice of holding on to Tata Motors or ALL, sold ALL), Kerala Ayurveda (If I did not know why I bought how can I tell you why I sold!!?? – but made a fantastic 30% return over a 2 year period, so no regrets), Idea, Themis Medicare (bought @ 188 sold @ 298 – bought because the fundamentals were improving, the p/e was not, SOLD because it went up too fast. Had thought it would reach 300 in a year’s time – it reached in a months time. Serendipity ??)

Shares which I felt was not yet fully ripe to sell, but might fall in the market – Cholamandalam Investment, Coromandel Fertilisers, Gillette, P&G, Colgate, Hindalco, Tata Steel, Hdfc, Bharti Airtel,  – cannot go against the sentiment.

Shares which there was no logic in holding but am still holding – Deccan Gold, Crest Animation – will surely fall, but no action to be taken perhaps purely on sentiment. Sad.

If you are in the mutual funds continue your SIPs – those people who continued their SIP in 2008 and 2009 are better off compared to those who shut it in 2008 waiting for the market to improve!

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There is of course a lot of justification to own shares like Gillette, Colgate, Hindustan Unilever, ITC, Cadbury, Kodak, etc. (Alas! Cadbury and Kodak are not available in India any longer – once upon a time you could have bought it.

The logic for this suggestion is – should you buy things which disappear or something that grows and feeds you? So if a Mahindra Holiday Resorts salesman convinces you to buy the Holiday scheme and you do buy it, Congrats.

Spare some money to buy Mahindra Holiday Resorts shares also! The holiday is an expense (which will vanish) and the equity shares are an investment. However at the current price of Rs. 520, I think it is more than fairly valued – please decide at what price YOU are willing to buy.

PS: I personally do not hold Mahindra Holiday Resorts but the share is present in my father and wife’s portfolios. Bought at various prices, sold, bought again, etc.

Here is a similar thought from -

http://www.fool.com/retirement/general/2010/04/30/buy-the-stock-not-the-product.aspx

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After saying so many things about my blunders, let me tell you the companies where I made some money too! Lest you think of me as a bumbling idiot…and let us see if there is a pattern.

The companies which earned my family nice money are Coromandel fertilizers, Hindalco, EID Parry, Tata Motors, Cummins, Tata Steel, Tata Power, Tata Investment corporation, Tata Tea, Tata Chemicals, Hdfc, Hdfc bank, Hindustan Oil Exploration, Carborandum Universal, Hero Honda, KCP, Areva, Reliance Industries, Indian Hotels, L&T, Grasim, Titan, Cholamandalam Investment and finance, Colgate, HUL, Gillette, P&G, Basf, Cadbury, Hoganas, Kodak, Biocon, Ntpc, Siemens, Lakshmi Machine Works, …please remember these shares were bought in the 1950s (before I was born), 1970s (Fera dilution), 1980s (Hero Honda is perhaps the youngest company in this list), – amazingly long holding period. The dividend income is sufficient to pay for the day to day expenses and right issues if any. Some of these shares were bought in an IPO and some in the secondary market..

Notice a pattern?

1. Barring a few all very, very focused companies.

2. Mostly in dull boring business. I did not make too much money out of Infosys, Biocon, TCS, Idea, Bharti Airtel, – largely my investments were too small. My fault.

3. Almost all the companies in the list are from ‘conservative’ houses – Tata, Birla, Murugappa, Hdfc - but the shareholder returns have been ‘aggressive’.

4. Other than 2-3 companies all other companies are very very high on ethics and corporate governance.

5. Only Cholamandalam’s activities were shareholder value destroying in the past 7-8 years, but now they are on a correction path (hopefully!). As a shareholder I did feel sad and unheard, but watched the ‘employee without a stake’ shatter value. Recently added some more shares to the portfolio.  

6. Kodak, ITw signode, Cadbury and Hoganas – were lost to a buy back. Surely will lose P&G, Oracle, Gillette, Basf, Ingersoll Rand, Mico to buy back, but now able to anticiapate this and am ready for it.

7. I added to these shares whenever I could. Can never forget this dialogue with my broker :
Broker: Buy 200 shares of Hindalco….(remember it was a Rs. 10 share)

myself: Oh, I alreay have it ..!!

Broker: (After a pause) I just checked with Mr. Aditya Birla (remember Kumar’s father?) he has no objection if you increase your holding by 200 shares”

So adding to my portfolio (when it is attractively priced) and selling when aggressively priced TO THE SAME SHARE has never been an issue. I have Tata power bought at Rs. 100 as well as Tata power sold at Rs. 1600+. It has never been an all or none kind of a game

hope there is a learning from all this…!!

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