ION EXCHANGE - The water and environment story!!!

The business seems interesting because of the varied businesses related to Water Treatment and Agro etc. Please check the website and dig more. Will be looking more into it. The stock is a good bet for next 1-2 yrs given on the scope of the related business. The current market cap at 180 crores with not a huge debt gives a good entry for the long term.

ABOUT THE COMPANY
They provide total environment solutions – water treatment, liquid waste treatment & recycle, air pollution control, solid & hazardous waste management and generation of energy from waste( speciality of Ion Exchange). They have over four decades experience doing this.

They serve myriad industries as diverse as power, refinery, fertilizer, food & beverage, automotive, pulp & paper, textile, pharmaceutical and electronics.

SOME SNACK ON THE WATER TREATMENT INDUSTRY
According to a recent report by McKinsey, in collaboration with the World Bank affiliate, International Finance Corporation, in the next two decades, global water consumption will increase from the present 4,500 billion cubic meters (bcm) to 6,900 bcm. This will be 40% more than the estimated reliable and sustainable supply today, if no action is taken to conserve water and use it more efficiently.

The situation in India will be dire as water demand will grow annually by 2.8% to reach a whopping 1,500 bcm while supply is projected at only about 744 bcm, that is, just half the demand, according to the report. This increase will be driven by domestic demand for rice, wheat, and sugar for a growing population, and a growing demand for a better diet. As a result, most of Indias river basins could face severe deficit by 2030, with some of the most populous, including the Ganga, the Krishna, and the Indian portion of the Indus facing the biggest absolute gap.

Hence there is a need for an integrated approach of Total Water Management. Ion Exchange is a pioneer in the water management, and also since it is held by ace investor Rakesh Jhunjhunwala in his portfolio.

RESULTS HAVE NOT BEEN SO GREAT SO FAR.
In the last three years, its revenue has only improved from Rs 405 cr., to Rs 433 cr., on standalone basis. On the consolidated front it recorded net sales of Rs 500 cr. Now, what’s been disappointing is the state of margins commanded by the company. They have not been able to move ahead of 2.5% on NPM, while for FY2008-09 they suffered a heavy blow with NPM dropping below 0.5%.

The main concern is the rising cost of raw materials. While the company suffered steep rise in raw material costs in first half of the year, the third and fourth quarter were marked by a slowdown in demand for their products and services.

SOME REVIVAL IN THE LAST FEW QUARTERS
Looking at the results for half year ending Sep’09, then the company has definitely shown revival with the stabilization of raw material cost. It has already made a net profit of Rs 2.9 cr, almost double of what it made for the entire FY2008-09. The Engineering services segment experienced a rebound.

CONCLUSION
The water and environment industry, by its very nature of business is highly sustainable. Increasing water scarcity and fresh water contamination due to untreated municipal sewage and industrial waste will require advanced technologies in water and waste water treatment. Recycle of waste water is becoming mandatory for housing complexes and industries.

When Emotions Move the Markets

YOU may keep a cool head, dispassionately analyzing corporate results, economic data and emerging business trends to pick investments. But that doesn’t mean that everyone else is just as reasonable. If others act irrationally, markets can be distorted and your returns eroded.

Some portfolio managers, adherents of an academic discipline called behavioral finance, say that there is no “if” about it. They contend that investors are driven largely by emotions, the sort so vividly on display in the stock market during the last year.

Those emotions cause investors to misjudge the impact of events in systematic ways, the theory goes. Identifying these patterns and trading against them, the managers say, allows them to enhance performance.

“Humans are emotional individuals, and that gets exaggerated when it comes to taking risks,” said Christopher Blum, chief investment officer of the U.S. Behavioral Finance Group at J.P. Morgan Funds. “There are errors that investors make. We try to exploit anomalies in valuations and momentum” arising from those errors, he added.

- Source (Web)

Buy & Hold Style of Investing

Warren Buffett was once asked what his preferred holding period was when he bought stocks. His short answer? "Forever".

This one word represents the essence of Buy & Hold Investing. Investors who practice this strategy prefer to buy shares of blue chip companies at cheap valuations, which typically occurs when they pass through a difficult phase, and essentially hold the shares for as long as possible. During the long holding period, investors reap returns from multiple sources. More often than not, blue chip companies have high dividend yields, which may be reinvested in the stock. Secondly, as the company's earnings continue to grow, the stock price follows earnings. Thirdly, companies sometimes undertake stock buybacks, when they feel that the share price undervalues the company.

All of the above, deliver long term returns to patient investors. However, one must be aware that this is not the route to quick riches. Returns in buy and hold investing come from patiently holding stocks for many years and allowing the returns to compound.

However, the potential wealth that can be built through this style of investing is nothing to be sneezed at. For an example of this, the story of an American women known as Grace Groner is instructive.

Grace Groner worked as a secretary in Abbott Labs for over 30 years till he retirement, and earned a modest salary from this. She lived in a frugal way, and never engaged in any ostentation. When she died, she willed her estate to her alma mater. To everyone's surprise, including people she had known for many years, the estate amounted to over 7 million dollars. The source of her fortune? A decades old investment in shares of Abbott Labs, which had compounded over many years. Her original investment was just $ 180 (i.e. 3 shares of $ 60 each). Over 75 years between 1935 and 2010, her investment (including reinvestment of dividends, and many splits, bonus issues, etc by the company) had returned her more than 15% p.a.

As I said, the kind of wealth that Buy & Hold Investing can generate is nothing to be sneezed at.
The key is to identify blue chip companies which one strongly feels will survive for many years to come, and continue to generate earnings growth for many years. Warren Buffett purchased shares worth $ 10 million in The Washington Post company in 1973, through his investment company Berkshire Hathaway. Today that investment is worth over $ 1 billion, and generates annual dividends greater than the original purchase price of the position. If anyone knows of such examples in India, please write in to me @ my email address listed below.

4 Rules of Value Investing

Warren Buffett is arguably the greatest equity investor of all time. An investment in Berkshire Hathaway in 1965 has yielded returns of 20% per year compounded. At this rate of return, money doubles approximately every 3.5 years. 1000 rupees invested in shares of Berkshire Hathaway in 1965 would amount to > Rs 35 lakhs by 2010 at 20% per annum. A savings account yielding 8% p.a. would have amounted to just ~ Rs 31000.

Despite such a phenomenal record, Mr. Buffett's investment techniques are not widely known and understood in India. While most serious participants in the Indian markets have heard of Mr. Buffett's name and track record, there is insufficient understanding of the methods that have helped him to deliver such results. Many people ascribe his phenomenal performance to his investment genius and maybe even luck.

Successful investing is a combination of art and science. While the 'art' aspect can gained only through years of experience, it is possible to discern some of the science of Mr. Buffett's investing techniques through his writings and speeches.

In a fantastic book titled 'The Warren Buffett Way', Robert Hagstrom has distilled the wisdom from Mr. Buffett's writings into 4 key attributes to be sought in any investment:

1. Competitive Advantage: As a long term oriented value investor, Mr. Buffett looks for companies having sustainable competitive advantages. Companies with such advantages generate high rates of return on capital, and hence are able to provide high returns to investors. Economics 101 tells us that any industry which is highly profitable attracts competitors who quickly bid down the levels of profitability in the industry. Only those players who have a sustainable competitive advantage can maintain their sales and profitability in the face of aggressive competition. Competitive advantage can come in multiple forms: 1. Cost Leadership. 2. Differentiation through presence in niches. 3. Intellectual Property leadership. 4. Economics of Scale, etc.
2. Circle of Competence: The main idea behind this point is that one must invest in companies and industries whose dynamics one understands. The importance of this cannot be understated. Investing in sectors and companies which we understand reduces the prospect of making some obvious errors in investment decision making. For example, some of us may work in the automobile industry. As industry insiders, we may understand the intricacies of various automobile components and which companies supply these parts. We may also be aware of which companies are industry leaders in specific segments of the market. This makes the process of investment decisions much smoother. Similarly, a pharma graduate might be better placed to identify key trends and companies in the pharma sector than a banker. Hence, Mr. Buffett advices customers to stick to their circle of competence.
   
   As an aside, during the height of the dotcom boom, Mr. Buffett eschewed investing in any technology companies because they were outside his circle of competence. Needless to say, this proved to be prescient when the dotcom boom subsequently turned into a catastrophic bust.
3. Management: In an F1 Race, the podium finish goes to the best combination of driver and car. This analogy is applicable in the field of investing. Mr. Buffett seeks rational managements, to whom the interests of shareholders are paramount. The key to identifying such companies is to look for those having significant management/ promoter ownership. This ensures that the interests of management are aligned with those of shareholders. Managements which frequently issue fresh shares and dilute equity usually destroy more value than they create.
   
   Further, managements are responsible for capital allocation decisions. Rational managements allocate capital where it can produce the best returns. Irrational managements may utilise capital for aggressive expansion or for value destroying mergers and acquisitions. Hence, it is very important to evaluate the management of a company before making an investment.
4. Margin of Safety: Among all the key tenets of value investing, this is often considered to be the most important. Value investing is all about investing in companies which are being quoted at a sufficiently cheap price in order to be able to provide sufficient downside protection. The essence of this is captured in the statement by another famous value investor, Mohnish Pabrai (whom we will be covering in a later post). Pabrai explains it as "Heads I win, Tails I don't lose much'. Therefore, a true value investment is only one which is purchased at a sufficient discount to the intrinsic value of the stock, so that even if the investment thesis does not pan out, the downside is limited, as a large part of the downside would have already been discounted by the market.
   
   While Mr. Buffett's investment performance might never again be matched by anyone, it is hoped that this article would demistify some of the fog surrounding investors' understanding of how these returns were achieved. As regular investors, we may not be able to match such a track record, but we may at least try to improve our investing process in order to better our returns.

- Vivek Iyer, Equity Research Analyst, HBJ Capital Services Pvt Ltd, [Vivek@hbjcapital.com]

Mr. Market

In this blog post, I am posting an article sourced from about.com about the concept of Mr. Market, a revolutionary way to look at the ups and downs of the stock market and to maintain one's composure, in order to be able to make rational investment decisions.


Courtesy about.com

We are going to firmly establish the second of these valuable skills in this portion by explaining the concept of Ben Graham's "Mr. Market". This relatively simple metaphor will forever change the way you look at stock prices, and if employed correctly, increase your investment returns noticeably.

The concept of Mr. Market goes something like this: imagine you are partners in a private business with a man named Mr. Market. Each day, he comes to your office or home and offers to buy your interest in the company or sell you his [the choice is yours]. The catch is, Mr. Market is an emotional wreck. At times, he suffers from excessive highs and at others, suicidal lows. When he is on one of his manic highs, his offering price for the business is high as well, because everything in his world at the time is cheery. His outlook for the company is wonderful, so he is only willing to sell you his stake in the company at a premium. At other times, his mood goes south and all he sees is a dismal future for the company. In fact, he is so concerned, he is willing to sell you his part of the company for far less than it is worth. All the while, the underlying value of the company may not have changed - just Mr. Market's mood.

The best part of this entire arrangement: you are free to ignore him if you don't like his price. The next day, he'll show up at your door with a new one. For your interest, the more manic-depressive he is, the more opportunity you will have to take advantage of him [don't worry, he doesn't have feelings or mind being taken advantage of.] As long as you have a strong conviction of what the company is really worth, you will be able to look at Mr. Market's offers and reject or accept them... the choice is yours.

This is exactly how the intelligent investor should look at the stock market - each security that is traded is merely a part of a business. Each morning, when you open up the newspaper or turn on CNBC, you can find Mr. Market's prices. It is your choice whether or not to act on them and buy or sell. If you find a company that he is offering for less than it is worth, take advantage of him and load up on it. Surely enough, as long as the company is fundamentally sound, one day he will come back under the sway of a manic high and offer to buy the same company from you for a much higher price.

By thinking of stock prices in this way - as mere quotes from an emotionally unstable business partner - you are free from the emotional attachment most investors feel toward rising and falling stock prices. Before long, when you are looking to buy stock you will welcome falling prices. The only time you want to invite high stock prices is when you are eager to sell your securities for some reason. Thankfully, in most cases [except those caused by "Life" which we discussed earlier], you are free to wait out Mr. Market's emotional roller coaster until he offers a price that you consider equal to or higher than intrinsic value. This is perhaps your greatest advantage in your investments.

Broken Clock Syndrome

Whenever there is a stock market crash, there are sundry analysts/ investors/ economists/ bears, etc who proclaim that they had seen the crash coming, and that they had been predicting it since before the crisis.

Yes, there are some people who have a thought process that them to look at every stock market boom with a skeptical eye and judge whether it has been built on a shaky foundation. However, there is another group, the Perma-Bears, who are more often than not bearish on the economy and the markets. They emerge into the limelight when the market starts to move downward and then retreat into the background when the media moves on to the bulls when the market starts to move upward.

This is what is known as the Broken clock Syndrome. i.e. Even a broken clock is right twice a day. (A.M & P.M). Perma-bears are highly invested (I don't mean financially invested, but professionally), in down-markets, as these are the times when they get the highest amount of attention from the media and investors.

Investors who follow them might end up missing out on big returns. For instance, despite the market rebound in March 2009, Nouriel Roubini kept on predicting a double-dip recession, and many fearful investors decided to wait and watch. Before they realised the Sensex and Nifty had moved to much higher territory and they found themselves unable to enter due to higher valuations.

The conclusion: While it is difficult to precisely predict and time crashes and make investment decisions accordingly, it is still very useful to be follow the writings and talks of perma-bears. They serve as a valuable reality check. At the end of the day, it is upto the investor to follow his own instincts and make his own decisions. After all, if the perma-bears were really so effective, they would be billionaires, and not eternal optimists like Warren Buffett and Rakesh Jhunjhunwala.

Confirmation Bias

Confirmation bias is the cognitive bias due to which investors tend to seek out information that supports their preferences and ideas, while tending to subconsciously ignore information which negates their conclusions. Consequently, investors end up investing in situations which are not completely ideal.

For example, consider an investor who is looking to invest in the renewable energy space and thinks that Company 'X' might be a good stock to buy. He looks at the projected growth of the wind power industry, the forecasts for high oil prices which re-inforce his view that wind power is a high growth industry, and also looks at X's rapid growth and order book. He reaches the conclusion that X definitely an idea worth investing.

While he is still conducting his research, he has become emotionally invested in the idea due to the amount of time he has spent researching X. Now he encounters an article which suggests that while X very good prospects, its debt burden is a problem. The interest outgo as well is a strain on its financials, and is likely to impact earnings, which in turn will impact the stock price.

This is where confirmation bias kicks in. Due to his emotional commitment and the amount of previous research he has done, he is convinced that the possibility of the debt burden leading to financial difficulties is limited and hence he dismisses the issue.

The end result is a bad investment which comes back to bit our investor when the market sentiment shifts and the investment community starts to fret over X's debt burden. This is a recipe for a dramatic stock price collapse.

Peter Lynch's PEG ratio

Peter Lynch was the fund manager of the Fidelity Magellan fund, a large U.S. based equity fund which was the No. 1 ranked U.S. fund in its category for a number of years. During his stewardship of the fund, Lynch delivered an astonishing CAGR of 29% to his investors.

Peter Lynch is not, in the strict sense of the term, a value investor. He is probably best described as a GARP (Growth at a Reasonable Price) investor. We had discussed GARP earlier here. One of Peter Lynch's most famous tools is the PEG (Price-Earnings-Growth) ratio, which is a modification of the P/E ratio. The P/E ratio measures the company's price in relation to its earnings, and high P/E ratios are a clear no-go-area for v investors.

However, Peter Lynch believes that high P/E ratios are justified provided the company is growing its earnings at a pace fast enough to justify such high valuations. The PEG ratio is calculated by dividing the P/E ratio of the stock by its growth. A PEG ratio < 1 means that the P/E ratio, even if it is high by normal standards, is still not in over-valued territory. Hence, the stock might still be worth evaluating.

The risk here is that it is very difficult to exactly evaluate a company's potential growth. Even a company which is in a high-growth industry might be hit by unexpected hiccups, such as the departure of a respected manager, failures in R&D, etc.

Hence, my view is that while PEG is an attractive intellectual model, it is a highly subjective framework, in that it requires an investor to be able to evaluate the prospective growth of companies with a reasonable degree of certainty. As many investors found out to their dismay in 2008, even the best analysts are often unable to predict earnings accurately. Alternatively, investors/ analysts may predict earnings well, but the overall economic environment might deteriorate, and all such analyses might need to be invalidated.

With this in mind, value investors are advised to stick to investing in companies with a sufficient margin of safety, and to enter into PEG situations, only if they are very very confident of what they are entering into. 2 words come to mind: Buyer Beware!

Concentrated Portfolios

This is an article on value investors and concentrated portfolios I recently came across. It is available here.


Some of the brightest minds in investment agree on the notion of a concentrated portfolio.

In 1934, John Maynard Keynes wrote the following famous passage in a letter to a friend: 'As time goes on, I get more and more convinced that the right method of investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for speacial confidence.'

Not only was Keynes one of history's foremost economists whose theories have had a major impact on the global economy, but he was also a confident and successful private investor. In fact, the fund he ran for himself, friends and family could be described as the first hedge fund , such were his strategies and techniques.

In short, this is the theory of the concentrated portfolio. Why have holdings in 50 stocks to lower risk and diversify when as an investor, you really only believe in a handful of those companies?

It is a theory to which Warren Buffett also subscribes. He believes that concentration will actually reduce risks. This is due to the extra care and attention we pay to an investment if we are to invest a relatively large part of our portfolio. Our comfort level needs to be higher and to do this, we need to conduct more research, due diligence and gain a greater understanding. If after all this we still invest, we were at least very well prepared.

It is a mystery to Buffett why an investor would choose a twentieth or thirtieth company for investment rather than adding more money to the number one holding. Despite the huge funds that have been under the control of Warren Buffett for many years, he still operates on this theory.

His real problem now is that there are fewer and fewer companies in which he can invest that are large enough to make an impact on his portfolio should results be favourable.

Most investors are aware that they do not have the skills or knowledge of a Keynes or Buffett and so, for obvious reasons, lack some of the confidence required to operate a concentrated portfolio.

Unsung Investor: John Neff

Courtesy about.com


Many ordinary folks never heard of John Neff. Yet, within the financial community, he remains one of the most respected, successful, and experienced investors of the 20th Century. Having run the Vanguard Windsor Fund from June of 1964 to December of 1995, he generated a CAGR, or Compound Annual Growth Rate, for his investors of 14.8%. That would have turned an initial $10,000 investment into around $587,000 as compared to only $250,000 for the S&P 500.

His Investment Approach
According to his own book, John Neff on Investing, and other accounts such as John Train’s great interview in The Money Masters of Our Time – John Neff – The Systematic Bargain Hunter, he is a classic value investor. Unlike many of his philosophical and intellectual contemporaries, however, Neff demanded that his stocks generate current income through large cash dividends. He felt that this provided a cushion against market volatility and gave the investor a sense of growth while waiting for Wall Street to recognize the true value of the company.

According to Train, John Neff sought companies with low price to earnings ratios and high dividend yields resulting in a portfolio with an average p/e of 1/3 below the market while averaging 2% more on yield. Train goes on to point out that in addition to looking for a sound balance sheet, satisfactory cash flow, an above-average return on equity, able management, the prospect of continued growth, an attractive product or service, and a strong market in which to operate, John Neff had created a financial metric he called the “terminal relationship” figure. This calculation allows the portfolio manager what he or she is getting for his money when buying a stock.

The calculation itself is easy: John Neff simply took the capital growth rate plus the dividend yield and divided it by the average price to earnings ratio of the entire portfolio. For example, if you had a portfolio you expected to grow earnings at 10% and it generated a 3% cash dividend yield, totaling 13%, and the price to earnings ratio of the whole group of stocks was 10, you would have a terminal relationship of 1.3. If, at the same time, the market had a growth rate of 12% plus a 1.5% dividend yield with a p/e of 17, it would have a terminal relationship of 0.79; far lower than your portfolio. This allows him to see that although the earnings of the market were expected to grow faster, the investor could expect higher returns because he was getting far more future profit for every $1 he spent on a stock. Neff even took this concept further, insisting that each new stock added to the portfolio be at least as attractive as the existing equities he already owned.

Sector and Industry Weightings
John Neff’s Vanguard Windsor Fund was very diversified, typically holding positions that were 1% of assets (although it is reported that he would go as high as 5% in an individual stock if it was extremely attractive.) But as pointed out by my earlier sources, Neff would weight the assets he managed heavily in favor of those areas of the market he thought offered the most value for the money. If, for example, he believed the property and casualty insurance industry was headed for a recovery after a cyclical downturn, he may only take a 1% position in an individual underwriter but he may acquire positions in twenty different enterprising, resulting in 1/5th of assets under management being exposed to that sector of the economy.

Dull and Out of Favor Stocks
Glancing over a portfolio managed by John Neff, you might be surprised to find a list of stocks that are very likely to be highly despised on Wall Street at the time. This disciplined value approach often meant moving into portions of the market for which investors had developed a fear, loathing, and even hatred. A fan of Buying on Bad News, he understood that Price is Paramount – that is, the return you earn is absolutely dictated by the price you paid.

Applying the John Neff Approach to Your Own Portfolio
In addition to the characteristics we already covered, here are some things you might want to look for in a stock if you are trying to invest like John Neff –

* Low Price to Earnings Ratio
* High Returns on Equity
* Management with Disciplined Capital Allocation that Returns Excess Funds to Shareholders
* Above Average Dividend Yield
* Terminal Figure at Least 2x that of the Overall Market
* Out of Favor Industries and Sectors that You Believe Will Turnaround
* Viable Product or Service with Promise