Comments on Unfair Value: Defense is the best attack

In 2005, when the stock had hit 200, my exposure t...

2009-04-29T06:43:00.000-07:00

In 2005, when the stock had hit 200, my exposure to company had become 10% of my portfolio. Apart from Jindal Steel, other commodity stocks I owned namely Sterlite, GMDC, MALCO had similar stellar run and in total commodity stocks had become 33% of my portfolio.

Even though I was happy with the way the company was performing, I was not comfortable with my overall exposure to commodity stock and that's why I paired my exposure.

There is no way one can be sure of the levels to which a stock can rise or fall. At least I'm never sure. That's why I don't buy/sell in one swoop.

Hi Kamlesh, If you were convinced that the stock ...

2009-04-29T05:55:00.000-07:00

Hi Kamlesh,

If you were convinced that the stock was over-valued at more than Rs 200, why did you not sell all? And if you were not convinced, why did you sell some? Could not understand the logic. Seems more like trying to time the market?

I admit its difficult to define "overpriced" for t...

2009-04-27T06:17:00.000-07:00

I admit its difficult to define "overpriced" for the companies that I own because I would invest only if the company is good.

What I do is that I apply a margin of error while deciding to sell. Given that I typically invest when price falls below the value I'm comfortable with leaving a big margin of safety. That means if I think price should be 100, I'll buy it at 50-80 range. As the years pass and price shoots up, I revise my valuation. Now if I think that 300 is the fair valuation, I'll not sell at 300. I'll starting selling at may be 600 and continue pairing the exposure.

To give you an example, here are my transactions on a stock was one of my favorite, Jindal Steel and Power. (All prices/quantities are split/bonus adjusted. x is some constant number because I don't want to share details on the value of transactions)

16-Apr-01 Buy 16.54 6x
26-Apr-01 Sell 25.00 -6x
22-Jun-01 Buy 17.05 8x
25-Jul-01 Buy 14.73 6x
14-Sep-01 Buy 12.28 10x
1-Nov-01 Dividend 0.29
6-Aug-03 Dividend 1.25
24-Nov-03 Dividend 0.75
22-Dec-03 Bonus/Split 2 for 1
29-Jul-04 Div 1.25
2-Mar-05 Sell 211.62 -3x
10-Aug-05 Sell 233.29 -4x
13-Aug-07 Sell 789.60 -4x
16-Aug-07 Sell 779.99 -7x
12-Sep-07 Sell 849.02 -2x
13-Sep-07 Sell 905.00 -2x
20-Sep-07 Sell 985.00 -2x
21-Jan-08 Bonus/Split 5 for 1

As you can see, I started getting jittery at the price above 200 which was more than 12 times what I paid for it. But the company's revenues and profits had kept pace with the price. I was unsure whether the dream run of commodities will last. So I sold some stocks and waited. Later the valuations became really high...more than 20 times the profits, too high for a commodity company. So I started selling. At the same time, the management became over ambitious and started talking about expansion projects which were 10 times their networth. So I gradually sold it all. the stock is at 1624.00 today. But I don't repent my decision. I couldn't have held it because it had become purely speculative.

The exact multiples of book value and profits that make me sell depend on the type of business, prospects and my confidence on the management.

I buy when the stock is screaming BUY and I sell when the stock is screaming SELL :-)

"....by selectively pruning exposure into stocks w...

2009-04-27T02:07:00.000-07:00

"....by selectively pruning exposure into stocks which had become overpriced ...."
Dear Kamlesh, what is "overpriced" in your view? I mean when will you decide whether to keep a DCI or sell it?

Yes, I believe that in long term markets do recogn...

2009-04-24T00:25:00.000-07:00

Yes, I believe that in long term markets do recognize value. It may test your patience though. Sometimes the financial situation of the company deteriorates in the meantime and then markets, correctly, continue to ignore the company. That's why I said in a separate discussion, that if you follow Cigar Butt approach you need extra diversification.

Warren Buffett once told about his conversation with Graham where he asked Graham 'What if market never recognizes the value?'. Graham replied that it inevitable does. Buffett says from his personal experience that Graham was right. My own personal experience hasn't been any different.

What made me see the converse could be one of the ...

2009-04-23T20:46:00.000-07:00

What made me see the converse could be one of the two :
1. My very limited attention span :-)
2. The fact that you expect markets to eventually catch up with value.

To give an example, MTNL has been a value stock for over 10 years now. Yes, it has underperformed a Bharti, but if you forgive that, it pays 6-7% on yield, makes tons of FCF, has entrenched customers - who cant move unless landline number portability kicks in - has a decent broadband and other value services.

This has been true since 1999 since when I have been tracking it. Since that point to now, the mcap has steadil declined on an average of about 1-2% per year.

Whereas topline and EDITDA have increased about 2-3% CAGR.

Having said all of this, as I said before, I agree with most bit of your ideas.

The underlying assumption of value investing is th...

2009-04-22T22:39:00.000-07:00

The underlying assumption of value investing is that markets are NOT efficient all the time(I don't know what made you see the converse of it in the article. Efficient market theorist live in the state of denial, refusing to acknowledge what is evident to naked eye, i.e. complete inefficiency in pricing the asset in short term).

But in long run, prices inevitably catch up with the fundamentals. Graham had said that the market is a voting machines in short term but its a weighing machine in long term.

This post's underlying assumption is an "efficient...

2009-04-22T21:50:00.000-07:00

This post's underlying assumption is an "efficient" market theory, whereas in reality, I think the stock market are more akin to Keynes beauty contest example (The idea being you get rewarded in the market (contest) for not choosing the most beautiful girl, but for choosing the girl which a large probablity will find beautiful.)

Thats the reason a Balmer Lawrie, a Dredging corporation will underperform the "stars" of the market.

Having said all of that, I do agree in most part to your approach (minus the efficient market theory), which is if you can get 15+ return y-o-y minus capital erosion, you will be the Indian Buffet.

But that, sadly, is a golden goose that has been cooked too often :-)