04 – ONCE A DARLING, NOW AN EVIL

The fourth part of Series “Once a darling, now an evil”. This series is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. I am trying to put some of the number-crunching facts by which we have identified ongoing issues in the companies and have saved our wealth.

I am starting this part with one of the network service company which has an all-time high price of ~Rs.3500 and now last traded price at Rs.1.25. and high of Rs.464 in the year 2010.

On the first instance, this company looks having not a huge problem except debt rising but for understanding it in a better way, we need to go deeper.

If we look at the tax paid in cash flow then that tax outflow is higher than what the company has posted in P&L statement. If we look at the actual PAT and reported PAT then both have a good diversion. This shows that the company has boosted PAT by ~40%+ on an average basis.

Now, if we look at the sales to the related party then that was ~44% and 43% in the FY08 & FY09 respectively. In FY09, ~44% payable was from the related party out of total payables. Company has made ~80%+ investment in its subsidiaries out of investment shown on the balance sheet. In addition, the company has 25+ subsidiaries and few were at Mauritius.

Also, during when the price was traded near too high in the year 2010, the promoter has started putting their stake in a pledge.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

CYCLE POSITIONING – 14 – MASTERING THE MARKET CYCLE

It is always important to be defensive and aggressive over a different period of time. We cannot be defensive for every time or aggressive all the time. The most important is when we should become defensive and when we should become aggressive, it matters a lot. If we become defensive at the bottom of the cycle and aggressive at the top of the cycle then it will be dangerous for our wealth.

We require aggressiveness, timing and skills for achieving success. Aggressiveness at the right time creates a fortune.

For getting success, we have to focus on key elements mentioned by Mr Marks.

• Risk in our portfolio in the cycle, which assets we are holding in the portfolio and among those which are overweight or underweight.
• Aggressiveness such as holding second-grade assets, leverage, macro dependent investment, putting more capital at risk. Defensive investment such as holding cash than securities, safer assets, avoid leverage. Selection from above both depends on where we stand at the cycle and what can be a future market development.
• The skill requires to make a balanced decision. Luck required when randomness has more effects on the events. Skills help us to make a decision in the portfolio but luck can fail our right decision or proven to succeed in our wrong decision in the short run. Skills win the battle in the long run.

When we found that we are positioned in the cycle where pessimism at lowest, the economy has better development, etc. and we have become aggressive towards portfolio positioning then it will reward us with greater profits while the market does well as per our assumption. And also incur losses if the market does not work as per our assumption.

Being right is not into the control of anyone due to the involvement of randomness and luck factors.

When we found that the economy started being optimistic, the psychology of investors started optimistic, good news started flowing then we need to cut position in our portfolio which we feel overpriced. This effort helps us to reduce risk when slowdown or recession occurs. But this decision requires a skill set otherwise we will underperform the market at whole.

We always have to keep in mind that when the market is low in the cycle then the probability of losses is low and the probability of making profits is higher. Reversely, when the market is high in the cycle then the probability of incurring losses is higher and the probability of making profits is lower. We cannot predict the outcome but we can take advantage of the cycle by making an assumption of it.

After identifying the market cycle, we need to make a selection of the assets. If the price of the asset is lower compared to its intrinsic value then it will do better than other assets. And if the price of the assets is higher compared to its intrinsic value then it will not do much better than other assets. We also should focus that whether the intrinsic value of the assets has scope for further growth or not.

Theoretically, it quoted that the market is efficient and all the information is available with everyone so that no one can make profits from it. But reality shows something different. It shows that few people can think differently from the crowd and get above average than all. This is called second-level thinking where we need to think wise and differently from the crowd. Those who use second-level thinking they can do above average than consensus. This is key to assets selection.

Winners have a tendency to fall less than the market and during the rising market, they meet the market. And those who do not have a skill, they fall more than the market and does not have a higher return when market raises.

Aggressive investors with superior insights, fall slightly more than market in falling time but raise more than market in good time. Whereas defensive investors with superior insights, outperform in the worst time and underperformed the market in good time. We need to keep a balance between both. The person who can make a balance between both aggressive and defensive with superior insights, that investors outperform the market at the worst time as well as in the good time also.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

Checklist about market cycle – 13 -MASTERING THE MARKET CYCLE

We cannot predict the future and cannot see the future so that can we prepare for the future? How can we be positioning our investments? Answers to these questions lie in the understanding of the cycle and at where we stand at the current cycle.

It’s not always what we buy that matters but at what price we are buying that matters a lot.

These checklists help us to an understanding regarding cycle and where we stand at the cycle. That understanding helps us with what we should do and what can be the portfolio positioning. These checklists also help us to remove some mistakes such as buying little when risk is low so that capital allocation decision also can be improved. The capital allocation also one of the key elements to becoming a successful investor.

We all see the everyday events which were covered by the media but we also need to put effort to understand that what it is going to indicate to us. These efforts help a lot to us. I got saved in recent market turmoil due to understanding of the cycle which I have practised after reading “The Most Important Things”.

I want to quote my learning from the most important things here to explain this concept with a few additions.

The earlier scene in the year 2017-18

The current scenario in the year 2019-20

We need to focus on the current scenario what it is indicating to us, not to worry about the future. If the current scenario tells us to stay away and we are into the third phase of the bull market then we need to adjust our portfolio accordingly. And if the current scenario suggests the third phase of the bear market then we need to adjust our portfolio positioning accordingly. We cannot track each and every information flowing around the world but we need to understand which of them are important and help us to reach the conclusion.

When market and psychology of the investors flying then do not care for the valuations. People argue that old valuation techniques do not work in the current period. Another argument is that we should look at the business, not stock so that valuation does not matter. But what happens to this logic when bear take a charge?

Old technique again starts taking place. Higher P/E looks as an unhygienic for the health of the portfolio and low P/E tempted to the investors.

We can see that during the bull period even non-qualitative companies also traded at the multiple of quality companies.

There are qualitative and quantitative two phenomena which we can study to understand where we stand in the cycle. We always need to ask the question to ourselves how the assets priced and how the investors around us behave? That means the quantitative part refers to the valuation of the assets. And qualitative part refers to the behaviour of investors around us & understand it.

Example – one of the E-Commerce company of India

When the market is booming, the psychology of investors is positive, economy growing, people are eager to make an investment then low-quality securities also getting issued by providing a better rating.

We have to be contrarian, have to learn to go against the wind prevailing in the market.

When market falling, people tend to stay away from it. They argue that keep away from catching a falling knife. But when dust gets settled and we realize that the final bottom has made, a bargain will also be gone.

There is no way to know when and at what price exact bottom has made. We come to know about the bottom only after it has made.

We should avoid buying with leverage money because when pendulum moves towards extreme pessimism then we cannot able to know where it will stop and we get a margin call, due to the leverage. We get a disastrous outcome of such an act.

John Maynard Keynes is reputed to have said: “The market can remain irrational longer than you can remain solvent.”

When the economy is in a troublesome period and investors psychology also negative then only, we get a good asset at a bargain price.

We have a two-risk scenario – one is a risk of losing money and the other one is a risk of missing out an opportunity. Investors have to make a balance between the risk. When market moving higher in the cycle, we have to focus more on the risk of losing money and when market-moving lower in the cycle, we have to focus on the risk of losing the opportunity. When there is a high chance of losing money then we have to play defensively and when there is a chance of missing out an opportunity then we need to play aggressively.

The cycle is going to happen and how we respond to it is the key matter. Successful investors are those who have survived under the different market cycle and that cycle makes them more thoughtful.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

03 – ONCE A DARLING, NOW AN EVIL

The third part of Series “Once a darling, now an evil”. This series is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. I am trying to put some of the number-crunching facts by which we have identified ongoing issues in the companies and have saved our wealth.

I am starting this part with one of the company which is engaged in providing Services Incidental to Onshore Oil Extraction which has an all-time high price of ~Rs.347 in 2008, ~Rs.308 in 2011 and now last traded price at Rs.0.42.

the company having huge sales and profit growth. Might be having something like a turnaround case or some Capex has started giving result.

But as usual, I get suspected on everything so as per habit I go deeper.

Wow…. What a wonderful company!!!

Company has taken a borrowing but does not have to pay any interest on it. I like it, I also get such a loan then can achieve many things with it. 😉

Another point is, the company also need not pay any taxes. Wow… no interest and no tax.

Huge diversion between CFO and PAT but yes, positive and when looking at the FCF then its huge negative.

Now, more feather to add into it… need to compare consolidated and standalone balance sheet.

Here, when we see that company get ~Rs.800+ cr of cash in FY10 but that cash has gone out in FY11. So, where these much of cash gone? When we check the standalone balance sheet then that cash has gone as an investment.

If we look at the few of the items of the balance sheet then we realize that the company has given a huge loan and advances to the related parties. Also, huge other receivable, what meant by others?

If we go and check a list of subsidiaries and few data then we can come to know that three subsidiaries out of five doing well but those three subsidiaries do not get a good amount of capital compared with the first subsidiary which is operated in Mauritius. This subsidiary does not have any turnover, not make any investment into the assets then why need such huge capital?

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.