What a result!!

In my previous post, I wrote about quality of information and here I came across this example. Read this-
http://neerajmarathe.blogspot.com/2011/12/todays-writing-products-amazing-result.html

Management and Auditors who certified previous year's numbers should be sent to jail.

Chartered Frauds

Now this is odd title for blog meant for value investing but one article in ET on SEBI asking for a separate regulator to monitor Chartered Accountants provoked me to write this. Now this is not for bashing a particular profession but it is hard truth. Now every investor depends on information to assess his investments and financial information being one of keys to it. But what if information is prepared with all purposes but fair report of state of affairs. Below comments are from my experience with quality of information I have seen over years as a banker.

1. 95% of balance sheet we see in India are figment of imagination rather than accountant's independent view on state of entity.

2. 80% of CAs in India are in profession anything but accounting and most common professional service provided by CAs is bribe collection agents of Income Tax Department.

3. It is prevalent that banks do their own amendments to treat this information. Like unsecured loans are considered as equity!! Most NBFCs use multipliers ranging from 1.5 to 5 times to arrive at real income from reported business income to calculate loan eligibility. Some CAs even prepare different balance sheets from Income Tax and Banks.

4. Who pays for accounting? So go advice businessmen how to cheat on sales tax, excise and of course income tax. Advice how to fudge accounts to claim exemptions etc.

5. 80% of businessmen in India will be Rs.200 as bribe rather than pay Rs.100 as tax. It is built in their blood and culture. If you are paying taxes, you are considered an idiot in business community. 

6. Most businessmen will argue-Why pay income tax if all politicians are corrupt and anyway will waste our hard earned money if we pay tax. But it does not prevent him from paying bribe to politician for buying land, putting up plant and getting exemptions. It is all self interest.

How to correct this? It is all incentives which are at work and control regime of Nehru made it profitable to bribe than be honest. We need to change systems to get incentives right. For example prohibition is Gujrat probably makes liquor cheaper than anywhere else because there are no taxes. Instead of Govt. earning anything it is illegal distribution network involving police and politicians who get these bucks and it is all in name of Gandhi. Another example of Gandhian way of black money is exemption on VAT on fabric. Why? because it was symbol of freedom. How it works? No VAT means you can have as much fictitious entries in this trade without any cost. So most of balance sheets of traders of fabric include large number of money laundering activities. These are just few examples of wrong controls and exemptions.

Now coming back to topic, SEBI is very right to demand a regulator for CAs which should be different from ICAI. It is more of a gang to promote its own interests than regulate profession. A lots of black money and economy's problems will be solved if we have auditors doing their jobs rightly.  

Now why I should be writing this piece here. Reason is that though we have more listed companies than anywhere else in world but very few worthy of even considering for investment because you don't know what discount factor to apply to information for such manipulation. I drop further probe in 90% of companies due to these reasons. Even in I have invested I still have very major doubts on quality but there is no escaping this as of now.

Market is getting interesting for value pickers

Since last few months, markets have turned jittery with few temporary rebounds. And when this fear starts prevailing in market with everyone talking only negatives, it becomes interesting time to look at what Mr. Market is offering. Though it is still not that kind of gloom days still there is value available now. Few things I found interesting recently-

1. Piramal Healthcare- It sold its main business for some Rs.17000Cr odd and now sitting with cash and if you only count cash(received and to be received), you get remaining business OTC, CRAMS and now merged drug discovery business for almost free. And market seems to be negative on cash utilization but considering past record of Piramal, it has been value creating fair and competent management. I feel there is little downside from here and it is worth accumulating. For detailed story, one can read few research report available on websites like moneycontrol.com. I first read logic on one blog quite popular among value investing community - http://fundooprofessor.wordpress.com/

2. Bajaj Auto- If you have seen past success of Hero Honda and even Bajaj Auto itself, this stock makes very compelling pick. It is gaining market in motorcycle market and main competitor Hero has lost technology edge after separation from Honda and Japanese competition is still not that great considering reach of Bajaj in even in small towns. And it is huge cash generating business with economies of scale, written down plants etc.

Good time to buy.

3. Jain Irrigation - This is somewhat concept stock for value investor and more of long term story on trend change. Its business will only get boost from long term changes in population growth, scarce land and water and need to increase productivity of agriculture.

Will post few more stories.....

P.S. - This blog is not intended for stock or market advice.

Reading Book- Extraordinary Popular Delusions and the Madness of Crowds

Very apt time to read this book. Though written in 1841, nothing has changed in crowd behavior. I suppose following herd is hardwired in our brains. 

But you may wonder that all informations explosion would have changed us but I have serious doubts on that especially if you read works like Predictably Irrational. I have recently read a lot on Behavioral Economics and now have firm belief that all we read in our MBA classes like those beautiful theories on rational behavior does not even apply to lowest of animals let alone apply to most complex of all- Homo spines.

If wondering why I am writing about all this in blog on value investing and value stocks in India, reason is simple as on date I have all given up trying to find value stocks in Indian market. All these FII money is making this value definition absurd. All these crazy guys from defunct economies have target returns like 3-4% while to me in India just to beat inflation it has to 15% atleast( don't believe in government figures of 7-8%). So when I want returns of at least 25% from stocks (it has be atleast that to account for inflation and all scoundrels who go by name of promoter/ management in India) but these FIIs are happy with 3-4%. Someone has to give up and these FIIs run by Ivy league minted MBAs running(ruining may be closer to truth in long term)  other people's money to get rich themselves are on high and each riding after one another to pray at sensex. I have little hard earned money to invest so I give up and spend all time to read some great books. Even bought a Kindle. So happy reading till these idiots are over with ruining other people's money.

Happy reading....

Value Investors go on Holiday

Well again it is back to good times and there is optimism all around. I have been trying to look for some value stocks for last few months and it has become as really tough task. Even when I spotted something interesting, by the time I finished analyzing it ran up 20-30%.

So what to do these days. Just ignore this market, read some books, spend some time for other hobbies until we again hear some scandal about market or again financial news is filled with some crisis.

Can problem turn into solution?

Now that is rather silly heading for a blog focused on value investing. But these days I can't find a stock worth value so writing about markets and economy. Now these days every market seems to be booming and feel good factor is back. People are again talking about investing in a manner if not now, we may not get another chance. Not yet maniacal like in 2008 but air is now filled with expectation. One thing that seems to have changed is liquidity. Central Banks have lowered rates to all time lows and governments are spending without eye on revenues. This again has provide market with cheap money and whether it is going in to productive capital investments -NO. It is all going into speculation. So what is problem. Simple -something cheap is never valued. So cheap money will chase all kind of investments-even those with high risk and low return. This is exactly what happened in earlier collapse of financial markets. Cheap money was invested in poor real estate assets.

Now how a cause of problem be a solution to the same problem. We are living in fantasy world with all central bankers and governments patting one another for having saved us from crisis with their action. So you can cure drug addict by giving it more drugs. Oh! it will only provide some relief from symptoms with higher doses required every time but will it cure drug addiction.

Solution by governments and bankers of providing liquidity by fiscal incentives and loose monetary policies is exactly like giving more drugs to drug addict. It will solve problem for now but it will be bigger once effect of drug tapers off.

Sooner or later we have to take patient off drug and later we do will be more painful.

Corporate Salaries - Just rewards or Loot

Recently there is some discussions on high salaries paid to corporate executives and debate on regulating salaries. Corporates raised hue and cry on attempts to regulate but questions that shareholders need to ask whether these highly paid executives bring value to their ( yes their ) company.

One striking example in recent times is Sun TV Network. It paid its MD & Joint MD (Wife of MD), Salary of Rs.37.08crores(Rs.370.8million) each for Fy09. This is as good as 21.8% of entire year's profits. Wonderful super executives of India. Does anyone know value brought in for shareholders by these two. super-executives. If the company can fire these two it will immediately add 20 odd % to its bottom line and I don't think any harm to shareholders. You can get  better MD for that kind of job at 1-2crore. And if you read list of top earners in India, it will be full of controlling shareholder and their wives, sons, daughters, in-laws. I use word controlling shareholders, because in truth they are just that NOT owner as media of Page3 analysts will like us to believe and they are treated as owners by government also, which they are not.

After a phase of over regulation India has swung to other extreme. No regulation at all. And that has happened before institutions have been built like in US to counter these forces. We need a corporate democracy movement similar our voting democracy where we through out these Laloos, Mulayams, Paswans and Co after 5years. These promoter- owners running publicly listed companies as their proprietorship are no different from those looters of public money as they steal public wealth of shareholders.