The Last Attendant

Stock Market rallied since last three days and everyone is getting a call from there most preferred brokers.”Buy this buy that" ,but there is one very interesting call I got from my icicidirect account(I prefer it because it's a plain portal and does not flash stock tickers for you every one second or so, more about ticker experience later). Well there call was buy HUL above Rs.238. Confused, well anybody can get confused, that why the hell are they asking me to buy HUL above so or so price. Is this some kind of joke from icicidirect , i don't know but that's for sure if you can get something for Rs.10 and your neighbor offers you to sell it for Rs.11, in most of the cases you will deny. I though a lot about this call and was not able to digest the fact. So people don't get caught in such kind of calls.
About experience with tickers: Earlier whenever researching about any company I give a lot of thought to the moving averages and prices and which impacted my decisions. I researched a lot about the company, always remaining very conservative in my valuations but in the end was moved away by rising prices. And this was the cause of my failure. But I never lose hope and one day I got the answer from my buffets letter. I changed my philosophy and now I started analyzing companies first, Note all the good points in xls , do scuttlebutt and note these too in xls, do conservative DCF valuation (DCF valuation should be your last destination and I have read this from all great investors and it’s true also because you should always valuate a good business not a sub standard one.) I note the valuation also in xls and how I did it.

On Agriculture Business: I’m really bullish about agriculture and renewable energy business in India, more specifically agriculture because it’s one sector which has great potential and has been left unnoticed since long although our economy is based on agriculture. And I think it’s not Indian railway which is the world’s largest employer but it’s Indian Agriculture. Read this http://www.fao.org/docrep/u8480e/U8480E0w.htm Karuturi Global has already reached Africa, Advanta is into hybrid seeds making and Jain irrigation is into drip and sprinkle irrigation technology and tissue culture there is lot and lot going to happen in this sector but why I’m betting on karuturi and jain irrigation because they have see one complete business cycle and have come up really well. They have tasted success and can repeat it year on year, if the current management remains intact. Moreover these are owner managers who have made fortunes, investing in such off track businesses and became market leaders.

I’m constantly reading Warren Buffet letters and would like you to read and discuss with me, I’m always open for discussion because it has always helped me learn new stuff and hope it will help you also.

These points are mentioned by Philip A. Fisher in his book "Common Stocks and Uncommon Profit" and he called it Scuttlebutt. But are these points really helpful? Well before starting with scuttlebutt make sure you understand the business and the company and whose data you can easily find. You can apply scuttlebutt in newly listed companies also. But it'll be better you apply it on already listed companies whose 5-10 years data can be easily obtained. Also you know that bargains can be only found in second hand products so why to invest in new products.

Also it is not important that company complies with all the 15 points and 9-10 points will give you the indication/intuition about whether to invest or not. During Fisher's days he himself has to go and meet people but in today's Information Technology world you can very well take the use or several applications like orkut, face book yahoo groups or Google groups, also just Google about the company and get each and every bit of information you can get about the company, like news, future prospects, interviews of the managers etc.

Now let's me write all the 15 points of scuttlebutt:-----


1) Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

2) Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

3) How effective are the company's research and development efforts in relation to it's size?

4) Does the company have an above average sales organization?

5) Does the company have a worthwhile profit margins?

6) What is the company doing to maintain or increase it's profit margins?

7) Does the company have outstanding labor and personnel relations?

8) Does the company have outstanding public relations?

9) Does the company have depth to its management?

10) How good are the company’s cost analysis and accounting controls?

11) Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investors important clues as to how outstanding the company may be in relation to its competition?

12) Does the company have a short-range or long-range outlook in regard to profit?

13) In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?

14) Does the management talk freely to investors about it’s affair when things are going well but clam up when troubles and disappointments occur?

15) Does the company have a management of unquestionable integrity.


These were the 15 points of scuttlebutt. It’s true that no one method is enough to find great company. But in my view the best start will be know what the company does and if you see that company’s business has a great growth potential and can grow itself like a tree with many businesses connected to the main business of the company. Scuttlebutt is difficult but in today’s internet age NO WAY!!!!!. Just think about Mr. Fisher where he had to directly deal with company people and customer , but today even using orkut communities of almost all of the companies you can get any information you want.But yes you have to be careful not to ask something which is internal to the company.

"If it’s not going to go forever, it will eventually stop”. A great saying but I read it in Warren Buffet Letters to shareholders. Well it applies to our water also which is used by us as if it will never end. Recent example is rented house where I was staying and later I was forced to move out because the boring which was serving around 10 houses in the building dried and owner was infrequent in providing water from external source. He tried to dig the boring again and again but the result was wet mud and only that even after spending lacs on the boring. Well while things were going fine nobody in the entire building including me thought about such a scenario and everyone was extravagant in spending water. Now I moved to a new well furnished house where there are two water sources, a municipal one and a boring. But I’m still wondering what if one day I will have to face the situation that people are facing in Delhi(Many of them) or Mumbai, and you know what I’m referring to.
Scientists expect water scarcity to become more common in large part because the world’s population is rising and many people are getting richer (thus expanding demand) and because global climate change is exacerbating aridity and reducing supply in many regions. What is more, many water sources are threatened by faulty waste disposal, releases of industrial pollutants, fertilizer runoff and coastal influxes of saltwater into aquifers as groundwater is depleted. Because lack of access to water can lead to starvation, disease, political instability and even armed conflict, failure to take action can have broad and grave consequences. The condition of our major rivers like Ganga is worsening and can be catastrophic in the years to come if measures are not take. Well there is lot to tell about the water problem and there is no limit to think where it can lead to.So let's finish up with this and come to point as a true chemical engineer and company analyst to discuss about the solutions and the companies working on them (Well offcourse listed and unlisted both):-

Solving the world’s water problems requires, as a start, an understanding of how much freshwater each person requires, along with knowledge of the factors that impede supply and increase demand in different parts of the world. Malin Falkenmark of the Stockholm International Water Institute and other experts estimate that, on average, each person on the earth needs a minimum of 1,000 cubic meters (m3) of water per year—equivalent to two fifths of the volume of an Olympic-size swimming pool—for drinking, hygiene and growing food for sustenance. Whether people get enough depends greatly on where they live, because the distribution of global water resources varies widely.

Providing adequate water is especially challenging in drier, underdeveloped and developing nations with large populations, because demand in those areas is high and supply is low. Rivers such as the Nile, the Jordan, the Yangtze and the Ganges are not only overtaxed, they also now regularly peter out for long periods during the year. And the levels of the underground aquifers below New Delhi, Beijing and many other burgeoning urban areas are falling.
Well I read a lot about the ways to limit water waste but they are not looking feasible in my view. Like increasing price of water which will only cause trouble to poor people and farmers and as usual indian middle class will adjust with it. When the goal is to save water, another key strategy should be to focus on the largest consumers. That approach places irrigated agriculture in the bull’s-eye: compared with any other single activity, conserving irrigation flows would conserve dramatically more freshwater. To meet world food requirements in 2050 without any technological improvements to irrigated agriculture methods, farmers will need a substantial rise in irrigation water supplies (an increase from the current 2,700 to 4,000 km3), according to the IWMI study.I think what Jain Irrigation(BOM:500219) is doing can be of tremendos help to farmers.I was reading an article in forbes asia about jain irrigation and came to know about the tremendous management team with Mr. Jain and his three sons taking charge of everything and have brougth the company from getting bankrupt in 2002 to a billion dollar company. I have studied a lot about this company and was waiting for the opportunity to invest in it and Mr.Market gave me my price.They have a future model of renewable energy which will be a combination of solar bio fuel and wind.Well while doing my analysis (extracting details from all possible magazines the one I personally love is SME world. It contains some of the possible future multi baggers (even if it is not listed) you can keep a watch on them . From these gems I have found Permionics(http://www.permionics.com/ . Check out the website and find yourself what it does,well it's desalination of sea water using membranre technology and is a market leader in it. Even Ion exchange tried to buy the company but there founders rejected it.Google it and find it what it is. Ion Xchange is another company which is working in waste water management but due to very tight profit margings of the company I'm not yet interested in it.
Finally there is a very interesting article I read while browsing internet and that is of virtual water. On the first go it was kind of difficult to get the crux of what it really is.The term relates to the amount of water expended in producing food or commercial goods. If such products are exported to a dry region, then that area will not have to use its own water to create them. Hence, the items represent a transfer of water to the recipient locale and supply them with so-called virtual water.Provision of goods—and the virtual-water content of those goods—is helping many dry countries avoid using their own water supplies for growing crops, thus freeing up large quantities for other applications. The virtual-water concept and expanded trade have also led to the resolution of many international disputes caused by water scarcity. Imports of virtual water in products by Jordan have reduced the chance of water-based conflict with its neighbor Israel, for example.
Well here I'll end my discussion becasue the topic is too vast to discuss in one go .The main motive to give you details about the water crises and give some idea of the companies which are working well in these area. With Indian economy still largely dependent on agriculture . The provision of providing water and in a managed way can inccreas the productivity of our land many folds. Also with depleting natural resources of water companies coming up with best and the cheapest ideas will thrive and continue to grow.


Note:- I have read many different magazines before writting this article still I have restricted myself in directly copying the materials from these magazines. I am only presenting those ideas which I liked the most.For any discussion about anything leave a comment.My motive is to create a community where people of different circle of competency advise each other in analysisn businesses.

1) On investment banking
"What are they doing ? Shifting money back and forth without creating value.Most mergers don't work, but Wall stree trumps them up, and the CEO agrees because he wants to run a bigger operation. And some of those wrap accounts are terrible for clients - fees on fees"
2) On business scale :-
"Staying small is simply good business .it wouldn't be fair to out customers if we had to spread our ideas too this.There aren't that manu great companies."

3)On the new economy :-
" Ben Graham said to be careful of the good idea because it is apt to be terrible overdone."

4)On Market Crashes:-
"You have stocks at inflated levels for a long time ,just as they were at deflation levels from 1974 to 1982.

Now some definitions of IIP I found on internet and I’m pasting here….Hope they help me in future :--( Note : Treat IIP just like any other stock market indices whose base here is 100)

In Investopedia:--

Industrial Production Index - IPI

An economic indicator that is released monthly by the Federal Reserve Board. The indicator measures the amount of output from the manufacturing, mining, electric and gas industries. The reference year for the index is 2002 and a level of 100.

Production data is often received directly from the Bureau of Labor Statistics and trade associations, both on physical output and inputs used in the production process. Each individual index is calculated using the Fischer index formula.Investors can use the IPI of various industries to examine the growth in the respective industry. If the IPI is growing month-over-month for a particular industry, this is a sign that the companies in the industry are performing well.


In WIKI:-

The Industrial Production Index (IPI) is an economic indicator which measures real production output. It is expressed as a percentage of real output with base year currently at 2002. Production indexes are computed mainly as fisher indexes with the weights based on annual estimates of value added. This index, along with other industrial indexes and construction, accounts for the bulk of the variation in national output over the duration of the business cycle.


http://www.forecasts.org/index.htm :- This link will provide you with the current trends and forecasts.

http://mospi.gov.in/welcome.asp : This is the Ministry of statistics and Program Implementation web site browse it for monthly IIP data of various sectors.


I think this much detail is enough for IIP which is nothing but a trend and trends can be misleading sometimes so be careful and invest in businesses with proper business analysis . This is a thought straight from Buffet and it very important and I’ll advice you to apply not in stock market but in any investment you make. I can see so many people are investing in LICs and ULIPs without understanding the details of the policies and they end up filling pockets of the asset management company and the Insurance agents. There is an interesting story which I got from Mr. Sanjay Bakshi’s blog (BFBV course) :-

1) 1 burger = Rs 10
2) You have 100 Rupees then you can have 10 such burgers.
3) Now let’s assume instead of buying burger you think that time has come you should invest some money. So you invested Rs 100 instead of buying burger.
4) Now let’s say after one year you made 112(including principal) which is infact a 12% return. Now your burger man thought of increasing the price of the burger as raw materials(like onion and tomato and potato) are costly now and his calculation make the price of the burger to be Rs 12.
5) You went to your burger man to buy burger from your return and burger from your principal for your family.
6) Well he will say “Sir Commodities are costly and so we have increased the price of the burger to Rs 12 ”. Confounded you bought the burgers (10 burgers) and came back. You gave some thought about what just happened to you and you found that your IRR was zero and you had never thought about the return which you need to get to buy some extra burgers from your return.

Well average compounded annual growth rate of Indian market is between 16-17 %( Think about reversion of the mean). In my view if you can’t give time for research and reading then stick to index fund. Well this is from Benjamin Graham and it’s really true. I validate most of the best funds ,yes using ww.moneycontrol.com , and found that maximum number of funds are finding difficult to beat or even meet the market. Instead of that people are constantly investing in those funds giving 2.5% of there hard earned money. Some times these funds also charge exit load. But just check the Entry load of the Index fund (Which you can easily buy from you www.icicidirect.com (all the funds) ,it just 1% with no entry load . I never made an investment in one but for people who are locking there money in FD or bonds, GO FOR INDEX FUND!


[Note: My Thoughts are only for my tutorial purpose. I read and search a lot of interesting material and put in my blog.For anyone disagreeing with my thoughts, I would like him to leave a comment or mail me at ashutosh.nigam37@gmail.com . I love arguing about stuff and will love to talk to people who are pointing out errors in my writings. ]

http://businesstoday.digitaltoday.in/
http://www.businessworld.in/index.php/Archive/http://www.businessworld.in/index.php/Magazine/
http://money.outlookindia.com/
http://business.outlookindia.com/

http://www.sanjaybakshi.net/
http://www.ibnlive.com/
Economic Times
Times Of India
http://www.moneycontrol.com/
http://www.sciam.com/sciammag/issues.cfm
http://www.forbes.com/
http://www.officialwire.com/main.php?action=posted_news&catid=865 One of the best of it's kind
Putting all the links here so that I can navigate these sites quickly.

In this Web exclusive, we present further excerpts from his talk with the students, in which the megabillionaire offers his insights on judging managers, buying businesses, what metrics - if any - he relies upon, and why he views his job as similar to painting the Sistine Chapel.
Q: You said before that one of the things you look for in businesses you're buying is good managers who are honest, capable, and hard-working. To me, that's a hard judgment to make if you haven't known him for long on a personal level. How do you go about figuring that out about somebody, and how long does it take you to make that evaluation?
WB: Well, almost always, we're buying businesses where the managers come with it, so I do have a record [I can judge]. If I had to pick out the five people in this group here who would be the best managers, I wouldn't know how to do it. I mean, you all have great IQs, you have great academic records. You've all shown the energy to get into school and push hard and all that. So you'd have all these attractive qualities.
Can I pick out the five best? I don't think I can do it. What I can do, when I've seen somebody run a business for 20 years, is decide whether they're going to keep behaving in the future as they have in the past, if I keep the conditions that caused them to behave that way in the past. So when I buy a business - it's the biggest question I ask myself if I decide it's a good business - is "Do they love the money, or do they love the business?" Now, if they love the business, we can do business. If they love the money, we can't.
Now, let's say they love the business, as our managers do. They sell me a business for a billion dollars and can hardly wait to get to work in the morning.
In that situation, I'm the only guy that can mess it up. I can take that out of them. I can't put it into them. But I say to myself, "Why do I go to work in the morning?" I've got enough money. I've got Social Security now, even. [Laughter] I'll make it, you know? The kids won't get much, but that's their problem. So I say, "Why do I go to work in the morning?"
Well, there are two reasons. I love painting my own painting. I come down to the office, I get on my back, and I start painting. And I think I'm in the Sistine Chapel. It's my painting. Now, if somebody says, "Use more red paint instead of blue. Paint a seascape instead of a landscape," I would hand them the brush in five seconds and I'd say-I'd say a few other things, too - but I'd say, "Do your own painting. I'll go paint what I want to paint." I get to do my own painting. And then I get applause - if I deserve it. And I like that. I like having the painting admired, and I like to get to paint my own painting. That's so much more important to me than getting my golf score down three strokes or beating somebody at shuffleboard or something. I mean, it is the ultimate pleasure.
Now, if that turns me on, why won't it turn on these people who have built their own businesses? They have spent their life creating a wonderful painting. Now, for one reason or another, maybe tax reasons, maybe sibling reasons, who knows what, they need to sell it, they need to monetize it.
They come to me, and they know that at Berkshire they're going to keep the brush, they're going to keep doing the painting, and I have to look at them and decide whether they are people that really care about their painting or care about the money. [One giveaway is] if they auction the business. We've never bought a business at an auction. Never. Anybody that wants to auction off their family or auction off the creation of a lifetime, that's not what we want.
I tell people you've got two choices. You've spent a lifetime building this business. Or maybe your father built the business and you carried it on. Maybe your grandfather. You've given up vacations sometimes. You worked on weekends and all these things to create this really incredible painting that you're bringing to me. Now, if they want to auction it, they're not for me.
I tell them they have two choices. They can sell it to us, and it'll be in the Metropolitan Museum of Art. We'll have a wing for their painting. People will come and admire it, which they do. And they will say, "That's one hell of a painter." And you get to keep painting. Or you can take this marvelous painting and you can sell it to a porn shop. [Laughter] And he'll take the thing and he'll make the boobs a little bigger, something like that. And put it in the window. And a guy will come over in a raincoat a few years later, and he'll buy it, post it in his window, and it'll become a piece of meat, basically. We get the ones who care about having in it the Metropolitan Museum.
I got a fax almost three years ago on a Wednesday from a fellow I'd never met about a company I'd never heard of. This fellow named Peter Liegl ran Forest River over in Elkhart, Indiana. He sent me a couple pages, and said, "This is the sort of thing it looks like you're generally interested in."
I called him up that day. I said, "Pete, send me the last few audits. FedEx it, and I'll call you tomorrow afternoon." Never met him, never heard of the company. (It's a recreational vehicle company.) So I got in on Thursday morning, and I called him that afternoon. I said, "Pete, here's what I'll do. And if it works for you, fine." I'd never met the guy, but I could still tell by just the way he presented it and his thinking on it. And he said, "Fine. I'll come over next week with my wife and daughter, who own the stock."
And they came over late in the afternoon. I said to him, "Pete, what kind of salary would you like"; this is a company that did a billion seven last year. That's not the way they teach you to do it in business school, but I don't want anybody working for me that has a compensation system they're unhappy with. These people don't need me. They've got all the money they need. I'm going to [invest] hundreds and hundreds and hundreds of millions of dollars [in their businesses]. And he said, "I don't know." And I said, "Well, just tell me because I want you to be happy. You have to run this thing." "Well," he took a little while, "Well," he said, "I looked at the proxy statement, you make $100,000. I wouldn't want to make more than you do." So that became his salary.
Then I said, "You should get paid for exceeding the figures [on which I'm basing the decision to buy the company]. So," I said, "I want you to have a percentage interest in future earnings above this level," which we worked out. But he offered $100,000 and I offered the percentage above that. He has run the business magnificently since then. I've never been to Elkhart, Indiana. I've never seen this place. I hope it's there. [Laughter] Pete may have some 11-year-old kid in there that says, "What figure shall we send Warren?" [Laughter] The guy has done a remarkable job.
If I told Pete whether he should build a new plant, whether he should bring out a new model, whether he should change dealer firms, he'd tell me to take a hike. You know, why shouldn't he tell me to take a hike? He doesn't need the job. As long as that thing is a lot of fun for him, he's going to keep running it. And he'll run it for a long time.
[I get offered all] kinds of deals from LBO operators. I would just love to bet against the projections of every one that they give me. They hand me these books, which I don't even want to look at, but they hand me the books, and of course they always just project like that [points upward like a graph that only increases]. I would just love to make a career out of betting against the figures presented in those books, but I don't get a chance to do that. If you ever get a chance to short investment banker books, that would be a great activity.
Q: When you purchase a subsidiary, you've mentioned that you allow them to reinvest capital if they're able to go above a certain hurdle rate. So I was wondering how you decide what the cost of capital should be on a risk-adjusted basis.
WB: Well, we don't think about cost of capital or risk-adjusted. I mean, we don't want to take any risk, and we don't. That doesn't mean we don't do things that are wrong and all that, but we are not doing anything that risks real losses.
You know, GEICO spends 800 million on advertising. I may spend $200 million that's wrong this year at GEICO or something. But I recognize the things that I can't further refine. What we do with capital is we just look for the best thing we can do at any given time. I mean, in the end, we're going to retain everything.
We don't want to do anything that doesn't create more than a dollar's worth of value for every dollar expended. And we'll do the best we can. And as I said earlier [regarding stock holdings], we would have sold the thing to do something that offered even better opportunity. We won't do that with businesses at Berkshire. That's a pledge I make to people. If they sell me the business, it's going to stay in the Metropolitan Museum forever. I may make a mistake.
If it's going to permanently lose money, I reserve the right to sell it, and if it has labor problems, I reserve the right to sell it. That's in the back of the annual report every year. They've been there for 20-plus years, those principles. But we believe in them. We follow through on them. So we won't dump a business that way. But about 200 million a week comes in to me every week. I like it, too. [Laughter] And it's my job to figure out how to allocate that.
The smaller capital expenditures, or even fairly large ones at the subsidiaries, they just do them themselves. They don't need me, because if some guy comes in to me and talks about something in the yarn plant or something in Georgia, what the hell do I know about it? I mean, they can always present it in a way that makes it look good. If I say the internal rate of return we demand is 15.83, it'll be 15.84. I mean, you just can bet on it. I've never seen a project that doesn't meet your hurdle rate, you know, if they really want to do it. We don't go through those charades. And it saves my time, saves their time.
If we get into bigger deals, then I get involved. Buying businesses of any size and things of that sort. But we just look for the most intelligent thing. And our cutoff point is where we don't think we're creating more than a dollar of value for every dollar we lay out. Marketable securities, to some extent we just look for the things we think have the best expectancy, but we're not buying - there isn't one security that I've got in the portfolio that I look at as-in terms of risky - in the sense of permanent capital loss. They can go down 50%.
Berkshire Hathaway (BRKA, Fortune 500) stock itself has gone down 50% three times since I bought the first stock in at 7 3/8. In 1974 it got cut in half. In 1987 it got cut in half. In 1998, 2000 or so it got cut in half. So that doesn't make any difference. I mean, I just don't worry about it. I worry about permanent loss of capital. I worry about making the right businesses. I worry about keeping the managers happy. Everything else pretty much takes care of itself.