Monday, August 25, 2014

REIT - Why stocks are BETTER than Real Estate

(This article appeared in Deccan Chronicle, but with a misleading heading- Alas, those are things that a writer cannot have a say in)

Real Estate Investing

Investing money is not easy.  Apart from safety of the money, the other key reason to invest money is to manage inflation. Thus, if we expect inflation to be ten percent per annum, we need to earn at least that much to preserve our buying power.  Every investment idea is an attempt to try and improve on that. And in every investment, one has to also worry about taxation. Taxation is takes a bite out of future buying power. Alas, inflation does not recognise taxation. It is absolute and moral, unlike the immoral taxation which penalises you. And taxation is cruel. You pay taxes and save the tax paid money, which can be again taxed for earning something on it.
In stocks one could do a SIP to overcome the pitfalls of wrong selection and/or timing. Unfortunately, we cannot do this in real estate. REIT, the yet to be born animal, promises a way out, but it is too early to comment on its liquidity and efficacy.  So, in real estate, one is committed to a choice. Once you have plonked your down payment and signed the agreement, you either pay up the entire sum or risk forfeiting all or part of what you have paid.
For most Indians, if you include the house you live in; real estate is very likely to form the chunk of your assets. With our economy in a growth phase for many more years to come, it is unlikely that inflation and rentals will settle down to any predictable levels. One could perhaps take a ten percent call on inflation, but on rentals, I will hesitate to take a call. Hence, owning one home to live kind of becomes an imperative.
If we take the value of houses across time periods, most cities would have given returns in excess of inflation.  Of course, it also depends on what quality of house, precise location, city etc. Variances would be huge. Of course, there were also several ‘hot’ periods in recent memory (1994, 2008-09 etc) where if you had bought a house, the returns would be perhaps lower than inflation. Similarly, in a city like Chennai, you would have got better returns if you bought in the heart of the old city as opposed to the extended city. Each city and each property is unique and there is no single measure of what appreciation the house went through.
However, it is my belief that if you compare stocks to houses, as a universe (if I take the index like the Sensex) of stocks is likely to have given a better return than the house, over long periods. Of course, one can choose specific time periods to prove either way, but as a class, I would rather bet on equities.  Of course, it all depends on the extent of wealth one has and the attitude to life one has. For instance, I may be the kind of person who will buy a second home, so that the rental income becomes a pension for my non-earning years. I may also have a large portion invested in shares. Here, it is not a question of my trying to maximise returns, but of having to give in to my likes and dislikes. Everything in life cannot be measured with numbers.
Whilst measuring our success on real estate investing, we generally forget the time lapse. We like to talk about houses bought ‘long’ ago which have multiplied in value, but when it comes to shares, we say things like “in five years the stock has done nothing”. The problem is most people do not hold stocks long enough. Since it is possible to invest a few hundreds of rupees in stocks and try our hand, we give up easily. If a stock does nothing for five years, we can sell it off. However, if you bought a house and then the value falls, you cannot bring yourself to sell it. You always tend to wait for a better time to sell. Often, we forget that when we buy a house, it comes with associated costs of maintenance and upkeep. For a stock, the only thing could be a demat charges that your service provider will debit you with.

REIT s will soon be hitting the market. By investing in a REIT, you are becoming a ‘landlord’- own property, get tenants, collect rents, maintain property etc. And of course, the rental that comes your way by whatever route is taxable. So do your maths on the returns. And of course you will be promised ‘indicative’ returns on property appreciation, that should be taken with a generous pinch of salt.

Monday, August 18, 2014

PSU Banks- How to steal billions, year after year

The PSU Banks are a great place to deposit one's money and not worry about losing anything. The owner makes sure that frauds happen, capital is depleted and then replenished without fail. And I have faith in the ability of the government of India's printing presses.
I started my formal working life with a nationalised bank. I survived three years there. A couple of years more and I would have been part of the system. Happy to not work and happy with mediocrity. And perhaps a witness ( I do not think I had it in me to be a party to it) to rogue activity around me.
Unions have killed the banks. One year, one increment. What work you do, whether you do or not, is not relevant. Ambition and merit are snuffed out. Ambition to reach the top only if you enjoy the fruits of corruption and the trappings of power.
Have you spotted any IIMs or IIT passed guys spend their life in a PSU Bank? Would love to meet such people.
So there is no point in ranting at their NPAs. They are a poor lot, with no clue about analysis. Forms are filled by the brokers or agents who fix things. For larger well known names, the CEO is just wined and dined or is simply a source to meet targets. And having worked in industry, we have treated PSU banks just as sources for fund based borrowing and nothing more. Inflexibility and their poor decision making ensures that every client with good credentials simply goes to the private sector. Why? Simply because the private sector is more flexible and fast.
PSU Banks are by and large unregulated. If they were, we would not have bad lending. RBI has no clue about banking except issue circulars one after the other on operational issues that they do not understand. Just look at the ATM charges circulars and you will understand. RBI is a wasted entity as far as regulation of banks are concerned.

Wednesday, August 13, 2014

Bhushan Steel and the friendly bankers

Bhushan Steels is in the news for not so nice reasons. Here is a summary of their quarterly numbers

Is it not amazing that for a company with a annual turnover of around 10,000 crs, the bankers think it prudent to give loans of the size of Rs.40,000 crores? The company's reported networth is under Rs.10,000 crores. This kind of leverage is normal only for a well managed non banking finance company or a bank. Our PSU Bankers seem to be very generous in lending this magnitude of money! And assuming that the total loans are around Rs.40,000 crores ( the March 2013) balance sheet shows total loans of around Rs.35,000 crores), the quarterly interest numbers are very low, showing that the company is capitalising its interest costs and that the cash losses are far higher than what the last few quarters have shown.
The company has been in the news for various accidents at its main 3 million-tonne-per-year steel plant in Odisha. At least 72 people have died in accidents since the commissioning of the plant in August 2006, according to a state regulator. (
The company has been a frequent diluter of its equity through private placements (presumably) and whatever it is planning to build or is under construction is unlikely to generate enough to service the debt.
Below is from the directors' report of FY 2012-13

 Your company is under implementation of 0.35 MTPA capacity Colled
 Rolling cum Electrical Steel (CRNGO) Complex at estimated project cost
 of Rs.1563 crores at Meramandali, Orissa.
 In addition to the above, the company shall also be completing the Coke
 oven plant (1.3 MTPA), Coal Washery (2.5 MTPA) and 2 DRI Kilns
 (aggregate capacity of 0.34 MTPA) and 197 MW Power Plant at the
 existing site of Integrated steel plant at Orissa in the current
 financial year i.e. 2013-14.
 In order to maintain its leadership position in downstream segment of
 steel industry and to maximize the margins, the company is setting up
 the downstream capacity of 1.8 MTPA, where the company shall come up
 with PLTCM of 1.8 MTPA and CAL of 1 MTPA with the estimated capex of
 Rs.5995 crores at Meramandali, Orissa to fully utilize its additional
 HR capacity. With this the company''s total downstream production
 capacity shall be increased to about 4 MTPA by FY 2017.

The arithmetic of spending close to 30,000 crores seems a bit fuzzy to me, though I am sure that the able PSU bank credit committees and the Boards of their banks would have done a thorough evaluation and that they know everything. 

One more extract from the annual report: 
The Working Capital facilities for Sahibabad, Khopoli and Orissa Plants have been appraised by PNB, the lead Bank, for Rs.11390 crore (Fund  Based limit of Rs.5390 crore and Non Fund Based limit of Rs.6000 crore) for the Financial year 2013-14. 
Clearly, these total up to a full year's sales numbers!! Some evaluation this!!

I have nothing to say on this, except that the credit ratings are by CARE, a rating agency that was promoted by IDBI. I just note that neither CRISIL nor ICRA have any outstanding credit ratings on this company and to me that says a lot. With half a dozen 'recognised' credit agencies, the bankers happily accept any two rating agency tags. And if neither CRISIL nor ICRA is one of them, I ignore the ratings. 

Monday, August 4, 2014

For the First Time Investor in Equities

This was the Q & A with ET- What is quoted is as per his convenience!

Dear Mr Balakrishnan,

I am an Assistant Editor with ET Wealth (part of ET group), a personal finance newspaper that appears on Mondays. I am based in Delhi. We had earlier exchanged emails when I was doing a story on the malpractices of brokers. I am now working on a do's and don'ts story for first-time stock investors.

 The story

With the markets in a buoyant mood; the euphoria surrounding the formation of a stable government at the centre; the FM coming out with a reasonably reformist Budget; the economy on the cusp of a turnaround; and so on, many first-time investors are currently entering the markets. Some are not taking the mutual fund route but venturing directly into stocks. This story is aimed at them. It will advise that they should first prepare and then invest. It will also advise them against committing some of the common errors that novices tend to do. I have listed a few points. I shall be grateful if you would give me your views on some of them, and add some of your own.
The first time investor always comes at a time when prospective returns from investment are near their lowest. However, I do not believe in timing the markets. The key is to buy a stock at a reasonable value. The first time investor has to come with a clear goal in his mind about his duration, his patience and temperament. Investment is about attitude. Greed or the need for speed are the worst enemies in investing.
At the outset, come in with money that you can afford to lose or will not miss if lost in its entirety. Investing in stocks is a route to wealth creation and not a route to attaining specific goals in a definite time frame. The markets may not cooperate with you when you need the exit.
Of course, many will get lucky with their first punt- make quick money, sell out. Then buy something which keeps sinking and becomes a very long term investment.

The story will be written favouring a long-term, buy-and-hold approach.

1. What should you do by way of preparation before you decide to invest in stocks?
 Understand and realise that you are buying a business. So understand what you are buying. Spend more time in buying stocks than you do spend on buying a shirt or a mobile phone. Learn some basic financials if possible. If you do not invest time in education, then direct investment is not for you. One nice way to start off ANY TIME is to choose some four or five companies you understand or think will last twenty plus years and have a history of over twenty years. Sell something that you understand and which people will need increasingly- This will direct you to companies like HUL, Nestle, Colgate, Glaxo, ITC, HDFC, Gillette etc.
Do a SIP in these stocks for five to ten years.
Or if you can spend time, then take one or more of the following
a. Join an investment club.- discuss, ASK, invite specialists, experts, company executives etc to talk to the group
b. Join a short-term course on stock investing. (not much use- )
c. Read a few classics on stock investing.  (Absolute must- Also on business analysis- for instance, a MUST is to read Competitive Strategy by Michael Porter)
d. Invest in a database (expensive proposition for individuals, but possible for groups). (nos become less important on a daily basis)
e. Read reports from brokerage houses.  (AVOID AT ALL COSTS) do your own homework-
2. Points to remember when investing
a. Pay attention to company fundamentals.
b. Don't ignore valuations.
c. Have a long-term investment horizon.
d. Know when to exit.
e.  Work out price points where you are happy to buy- Wait for the prices-

3. What are some of the things you should definitely not do when you are still a novice in the stock markets? Some of the common errors that first-timers commit.
a. Avoid IPOs.
b. Avoid F&O trading.
c. Avoid buying and selling on tips.  
d. Don't engage in day trading. 
e.  AVOID margin trading-
f- buy small cap or mid cap companies which you do not understand
g- DO Not buy stocks of companies whose business you cannot understand
h- Find out about the owners, auditors and ask around
i-                    Use google- websites like ; SEBI website etc for bad news on promoters

Economic Times- Selective Advice?? Not a nice piece , I think

Aug 04 2014 : The Economic Times (Mumbai)

The buoyancy in stocks is empting investors.
Here's a guide for first-time entrants to the equity markets.
Two months ago, D P Tejas, a 21-year-old student of IIT Kharagpur, bought his first stock, Crisil.By investing in stocks directly, Tejas wants to avoid the fee that mutual funds charge. With optimism abounding about the prospects of both the economy and the markets, first-time investors are entering the equity markets in droves. But investing in equities can be risky, especially when indices are close to their alltime high levels. In this week's cover story, we draw a road map for first-time investors in stocks. Find out what you need to learn before you enter the stock markets and the points to pay heed to while investing. We also warn you about some of the common pitfalls to avoid. INVESTING THROUGH MUTUAL FUNDS For several reasons, we would advise first-time investors to enter the equity markets via mutual funds. According to Nimesh Shah, managing director and CEO, ICICI Prudential Mutual Fund, “While it is true that equities are necessary in a portfolio to meet longterm financial goals, jumping straight into the equity markets without knowledge and expertise may not be a prudent decision.
Investors should utilise the mutual fund route to derive the benefits of professional management, diversification and flexibility at a low cost.“ His views are echoed by others. “First-time investors will be better off entering the equity markets via exchange traded funds (ETF) and index funds,“ says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. These are low-cost funds that allow you to invest in a basket of stocks belonging to one of the major indices, such as the Nifty, Sensex, Nifty Junior, S&P 500, and so on. Investors don't have to worry about choosing the best fund or fund manager when they invest in these passive funds.
Once you have lived with these passive funds for a couple of years, tested your ability to hold on to equities in declining markets, and educated yourself about how to choose the right funds, you may graduate to investing in active funds. The bulk of your equity corpus should be invested in mutual funds. Only a small amount of money, ring-fenced from the rest of your corpus, should be invested in the equity markets directly. Bangalorebased Puneet Arora (see picture), who entered the equity markets directly in January 2014, has taken this precaution. BEFORE YOU INVEST
No quick gains At the very outset, investors must accept that the equity markets are not a route to quick riches. “Greed and speed are the worst enemies of sound investing,“ says investment analyst R Balakrishnan, a former mutual fund CEO. All direct investments in equities should be made with a time horizon of at least 3-5 years. If you ignore this tenet and adopt a high-churn strategy, you will soon come to grief.
“You may get lucky on your first punt and make some quick money. Then, inevitably, you will buy something that will keep sinking,“ says Balakrishnan. If the markets tank and the uneducated investor is left holding stocks of suspect quality, his corpus value erodes rapidly and does not recover for a long time, if ever. Many investors get so badly singed by their first such brush with the equity markets that they decide to stay away from stocks forever.
Educate yourself
Before you start investing directly in equities, make the effort to educate yourself. “If you won't invest time in educating yourself, then direct stock investing is not for you,“ says Balakrishnan. Learn the ropes of investing from an unbiased source with no conflict of interest. Says Dhawan: “Many brokerage houses today run short-term learning programmes on equity investing. Brokerages earn more when you transact more. Hence, they have a vested interest in teaching you investment strategies that involve a high churn,“ he says.
In our view, the approach with which you stand the best chance of making money is one based on fundamental analysis and buy-and-hold. Also, by reading investment classics, you may have the best chance of developing an approach that is time-tested (see Classics that can guide you). Balakrishnan suggests that in addition to investment books, you should also read Michael Porter's Competitive Strategy, which will help you identify businesses with sustainable competitive advantages.
Start small
Initially, bet only the money that you can afford to lose entirely. “It will take about 2-3 years of regular work for a few hours every week to get an idea of how to invest in stocks.
This process cannot be hastened. Any losses incurred during this period should be treated as the cost of learning,“ says S G Raja Sekharan, who teaches wealth management at Christ University's Institute of Management, Bangalore, and has recently authored an investment book titled, How to Get Rich and Retire Early.
Stick to large-caps first
The segment of stocks in which you invest is also important. First-time entrants in the equity markets will be better off sticking to large-cap stocks for two reasons. One, the volatility in large-caps is much more palatable than in midand small-cap stocks.
Two, a lot more information is available on largecap stocks. Since they are intensively tracked by both the analysts and media, more is known about their business and management. This minimises the probability of unpleasant surprises. The chances of falling prey to issues like aggressive accounting and cooked books are also lower among these stocks.
Develop an exit strategy
Develop a clearly defined sell strategy even before you enter the markets. “Once you are in the game, taking the right decisions becomes difficult unless you have a strong decision framework in place,“ says Dhawan. This decision framework, he suggests, should be based on a mix of fundamentals and valuation. If a stock's fundamentals remain sound but its price has fallen, you should buy more.
If the fundamentals have declined while the valuation has run up, you should sell. If the fundamentals remain sound but the valuation has run up, you may perhaps book partial profits, and so on.
WHEN YOU START INVESTING Stick to your circle of competence
Gain a sound understanding of a company's business model before investing in it. Unless you do so, you will not know whether to hold on to its stock or sell it whenever the stock price tanks. Stick to simple businesses whose functioning you can understand easily.
The business should also ideally have a consistent operating history. Its 10-year historic revenue and profits should show a smooth and gradual increase. Beginners should avoid stocks with volatile track records of financial performance. It is also best to stick to unchanging businesses. To quote Warren Buffett: “Severe change and exceptional profits don't mix.“ That is why Buffett avoids investing in technology stocks where today's leader is soon replaced by another.
Says Raja Sekharan: “Stick to companies whose products and services will not become obsolete anytime soon.“ He cites the example of Nokia, a good business that has today been overtaken by Samsung and Apple. “Businesses like banking will not change much in the next 20-30 years,“ he says. Steady businesses tend to make steady profits for their shareholders. In businesses where the product line changes frequently, a lot of the money has to be ploughed back into research and development so that the company is able to come up with tomorrow's winning products.
Invest in companies with moats
Buy-and-hold type investors should select companies that enjoy sustainable competitive advantages. It is intrinsic to capitalism that if a company enjoys outsized profits, a number of competitors enter the field and drive down profits. However, some companies manage to remain highly profitable for a long time. These are the ones that possess an economic moat. They have one or more of the following characteristics: a strong brand, a low cost advantage, high entry barriers for rivals, and high switching costs for customers wanting to move to rivals.
Opt for quality management
Satyam Computer was a well-regarded company until its promoter's shenanigans were discovered. The stock price tanked almost 85% as shocked investors rushed to exit. If you don't want a similar fate to befall one of your stock holdings, do some due diligence on the company's management. Watch out for management that doesn't act in the best interests of minority shareholders. Check the announcements made three-four years earlier by the management to see whether it has managed to bring those plans to fruition.
This will give you an idea of its execution skills. Balakrishnan suggests that you should look up Sebi's website and trawl the Internet for bad news on promoters. He suggests avoiding companies where the promoter holding is less than 30%.
Don't invest in high-debt companies
When the economy is expanding, many companies tend to overstretch themselves.
Some take on more projects than they can handle. Others undertake costly acquisitions funded by debt. “If the economy turns, the company's revenue may plummet, but the interest on debt will still have to be paid,“ says Raja Sekharan. This can severely dent the company's bottom line. The debt:equity ratio and the interest coverage ratio are two parameters that tell you about a company's degree of leverage.
Buy at the right valuation
Usually retail investors enter the markets when they are at a high and valuations have already become stretched. Remember that the higher a stock's valuation, the lower the prospective returns from it. “Study stocks and build a list of the ones you would like to buy. Work out the price points at which you would like to buy those stocks. Then wait patiently for prices to reach those levels,“ suggests Ashutosh Wakhare, founder, Money Bees Institute, which conducts investor education programmes.
Bear in mind that the stock that is cheap is not necessarily valuable. It is better to pay a reasonable price for a quality business than a low price for a poor-quality business (see Valuation parameters you should know).
Measure your returns
Finally, be diligent about benchmarking your performance either against a broad market index or the category average returns of mutual funds. If after a year or two, you find that your direct stock portfolio has failed to match these yardsticks, you would be better off taking the fund route. Use portfolio trackers available on Indian financial websites.
Novices should steer clear of some of the common pitfalls of equity investing if they don't want their first foray into the equity markets to end badly. Avoid investing in futures and options. These are highly leveraged bets that can result in steep losses.
Trading on margins--funds borrowed from your broker--is another high-risk strategy that should be avoided. Do your own homework and ignore tips. Day trading should also be eschewed. “Investors make money, not traders,“ says Wakhare.
Finally, if the current bullishness in the markets continues, a large number of initial public offers (IPOs) will be launched. Firsttime investors should avoid them for the simple reason that less information is available about these companies than about players which have been listed on the bourses for over 5-10 years. Besides, when the sentiment on the street is upbeat, promoters tend to price their IPOs expensively.
Chosen well, stocks can be a rewarding investment. Observe the comprehensive list of dos and don'ts listed above and your foray into the stock markets should be both safe and profitable.
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