ZEE Entertainment – Fool’s Paradise or Ugly duckling?

While, I have stopped actively looking at Zee entertainment and have not followed its results in detail.  I have been pulled back by a number of messages seeking my opinion after the company Q4FY21 results.

Some of the points that demand a look at ZEEL are:

  • Improvement in cash flows – a key concern of the past.
  • Withholding investments in sugarbox – an unnecessary deviation earlier.
  • Improved receivables from Dish tv. 

But is it all expectations management?

A para from Expectations investing by Michael Mauboussin

Analysts have to guess how much a company will earn each quarter. But a company is allowed to give guidance, about what it thinks its earning will be.  This guidance number usually shows up as the consensus estimates among analysts. If the company’s actual earnings meet or just beat the consensus, both the company and the analysts win:  the stock goes up, and everyone looks smart.  The game might not sound so hard, but it requires a lot of cooperation.  Companies are under pressure to achieve the consensus earnings estimate, while analysts rely on the companies to help them from their earnings expectations in the first place.

Companies have two levers in the game. They can manage expectations, manage earnings or do both.  

Now we all know that ZEEL promoters are pushed to the wall and they are left with only 4% shareholding of the company. Also, the group’s other assets have been sold to pay off.  The only scope for the promoters to get back is through their investments in ZEEL.  They have the maximum incentive to do make things look good.

What has not changed and always been my worry is the ballooning and never-ending investments in inventory which for an outsider is a black hole.  I have earlier shared why the very size of the inventory in books is a bold question mark given the limited size of annual movie rights in India.  While investment in sugarbox was an obvious red flag, the ballooning inventory is a less obvious red flag.  Given the nature of it – an analyst’s ability to judge the quality of investments in that will be always limited.

My final take – I don’t invest in cryptos because of two reasons – I don’t understand and cannot trust.  For ZEEL it’s just the trust. 

And I am not writing a blog on its investment in Radhe – I don’t understand it. 

My previous blogs on zeel:

My First Failed Interview – A blessing in disguise.

I would have not given more than 5 interviews in my life for a Job after campus. The first interview was with Shilpa Krishnan – analyst at Kotak securities. Second – was to Telecom analyst at Merrill known for short temper. The third was for I-SEC in 2007 from where I retired.

My first failed interview was one of the most defining interviews of my career.  Kotak securities in 2005 was one of the best places to work with Sanjeev prasad as Head of Research and Alroy Lobo as Head of Equities.  I had applied for a job as an associate under the Cement analyst – Shilpa Krishnan.  The interview was quick with Shilpa and she cleared me and I was next to meet the Head of research.  Sanjeev Prasad asked me typical questions on DCF and WACC and I would have given reasonable answers which had cleared me for a job. I then met someone from HR and they detailed from me by when I can join.  However, as what seemed to be a formality before confirmation, I was to briefly meet Alroy Lobo. 

Meeting with Alroy Lobo – turned out to be unexpected. I was not aware that Alroy had been an ex-IT analyst.  In my first year at SBI caps – I was an associate to the IT analyst – Pratish Krishnan.  As part of my first report as an associate – we had initiated coverage on a company called Subex systems (now bankrupt) and within a few months, the stock had nearly doubled.  Alroy had read about my coverage in my resume and started to ask me questions on Subex. 

Some of the questions were:

  1. How is the accounting of acquisitions being done by the company?
  2. What is the Cashflow adjusted ROI of the company?
  3. How is the company accounting for revenue from its contracts?

I tried to mumble a few answers. I soon understand that Alroy had gauged into my soul and understood my complete ignorance and superficial understanding.  I knew the end result.

Not getting the job – was the best thing to happen.

I did not get the job but after the interview, I made a pledge to myself to never feel humiliated when questioned.  I started to work 6-7 days at SBIcaps putting in late hours– something that was not regularly done at SBIcaps. All I can say is that failed Interview with Alroy was one of the best things to have happened to me.

I met Alroy a few years later when he was part of Kotak MF as their team wanted to understand the TV18 group.  Their team was told that I was the go-to guy for anything on the TV18 group – despite not having coverage. The meeting which was supposed to last for an hour – lasted for more than 2 hours.  At the end of the meeting – I thanked Alroy for the failed interview in 2005. 

The secret of DMart Success- Hawk Eye focus on costs

(Only for Laughs )

One of the many successful attributes of successful promoters has been their focus on cost control. Azim Premji has been known to own a preowned Mercedes and would be seen switching off lights after employees left. Jeff Bezos’s first desk was made of a wooden door and amazon warehouses are knows for acute cost control. Radheshyam Damani, Dmart Promoter, has known to lead a simple life and seen always dressed in white. However, this changed recently with the acquisition of a Bungalow by him for a meager of Rs 1001cr.   

DMart Sucess Mantra

The reason for Dmart success has been the companies tight focus on costs across operations.  I have been able to put together the below list of cost-cutting measures adopted by Dmart to ensure that they are able to provide their customers – the best value.  Policies of D-Mart:

Employee-funded cafeteria:  All employees are expected to collect 5 sachets of sugar and 2 sachets of sauce, 2 straws, and 6 paper napkins whenever they visit a restaurant and deposit it at the DMart cafeteria. Employees of the rank of Vice president and above are expected to get oregano and chili flakes sachets. Last year, the company was able to have zero budget allocation to the above ingredients.   Some surplus was also generated by selling off excess sugar which was added to the bonus kitty of employees.  

Meal Reimbursement policy: No reimbursements will be done for food during outstation travel. The company has a list of temples that provide free food:  Tirupati, Isckon, Vaishno Devi , golden temple, etc. This list will soon be updated with names of Gurudwaras providing Langar. They are also tying up with Akshaya Patra for across the country free food.   In case of compulsion to go to a restaurant, employees are expected to visit unlimited thali restaurants and the entire group shares a thali.

Outstation hotel accommodation policy:  Travel to outstation for meetings is only be approved for employees who can share details of relatives or friends in that city. So that they can get free accommodation.  Marwari employee’s travel is auto-approved as they have relatives in every city.

Late-night transport:   Company will not be reimbursing late-night transport charges.  They recommend you to place an order for some products from your home for Dmart and take a free ride back with Swiggy, Dunzo, Wefast . 

Nature-friendly meetings:  All client meetings to be done at public parks and at waterfronts. Employees are permitted to be magnanimous and offer snacks like Peanuts/Bhel for clients to consume and in case of big-ticket clients also offer them cutting tea and bun maska. 

Modular Furniture:  All employees should have the same comfort in their office that they get while they are at home. Employees are therefore asked to get their own personal chairs and desks to suit their body needs. 

PS: I am taking consultancy offers for explaining in detail the cost-cutting policies.  The first call I expect is from Azim Premji. 

Book Review #15 of 2021: How I almost blew it.

Incredible lessons from India most successful digital entrepreneurs by Sidharth Rao

A fascinating and must-read book for people who want to get a synopsis of start-ups of India.   The book details the struggles of some of the Indian start-ups and how they almost blew it.  One common theme in the success of all startups was the perseverance of founders and sheer dumb luck of raising capital at opportune times. While The Golden tap by Kashyap Deorah sticks to the Big boys, this book details many entrepreneurs the author was personally involved with. 

One of the reasons I picked up the book was Sanjeev Bhikchandani – the mentor and poster boy for the startup world shared a tweet on the book from Bookmyshow founder. One cannot agree more that the focus of startups should be to like cockroaches and only a few survived the dot-com bust and GFC. 

I have been lucky to have known Sanjeev Bhikchandani professionally.  As a media Analyst, his business was competing with the classifieds section of Indian print and I had to gauge the trends.  Also, because HT media and TOI group had businesses that compete with Infoegde.  Sanjeev Bikhchandani would never miss an ICIC securities conference probably because we were the IPO bankers. I had on multiple occasions the chance to listen to Sanjeev’s views in between breaks and lunch during conferences. Sanjeev loves to talk.  

During the Rahul Yadav – housing.com fiasco, I happened to quiz Sanjeev on what will happen to Rahul and how does he see the situation. While one would expect competitors to enjoy such developments. Sanjeev clearly had kind words to say of Rahul Yadav, how the guy is very competent technically and should be able to definitely start something new. Sanjeev was always focused on profitability and he narrates an interesting incident on how a VC would react saying that “ If you are making a profit then you have a vision problem “

Some interesting quotes:

Investors and business owners compare their relationships to marriage. I believe that their relationship is somewhere between a friendship, marriage, and business relationship.

Rediff.com was to India what Yahoo! Was to the silicon Valley in the nineties. Sadly, both blew up. 

If you want to succeed in China get close to the government, if you want to succeed in India – stay away from the government.

Deep Kalra – Makemytrip – I understood that online stock broking will ultimately belong to a financial institution.  So he chose online travel company.  Time for Deep to Meet Nitin Kamath – Zerodha.

Once you spot the opportunity, acting as fast as cheetah is the only right move. 

What I can Teach Rakesh Jhunjhunwala?

In Q3 FY21 concall of zee entertainment, Rakesh Jhunjhunwala had a disagreement with mgmt about them being conservative about ad growth forecast.  I have tracked and covered Zee entertainment stock for 15 years. My experience says that an analyst and companies’ ability to forecast industry or company ad growth in any given year has been at best 50% strike rate. A coin toss is equally successful. 

What’s the Dharma on a concall?

  • Analyst Dharma:  If you feel mgmt. is being conservative, temper your own expectations rather than pushing mgmt.  to up their expectations.  Conservative expectations don’t hurt and always remember the mgmt. has far more details and they might not be willing to share their reason for being conservative. 
  • Trader Dharma: If you are invested, then it’s very important for you to expect better guidance and that management show more optimism.  One has to try to make the mgmt. sing your song. 
  • Investor Dharma: Mispricing and different expectations are only an opportunity. In the long-term guidance and optimism do not matter and eventually, actual numbers are all that matters.

Rakesh Jhunjhunwala: You have an economic growth which in the third quarter was, as I see, a breakeven level. Now the predictions of 15% to 16% nominal GDP growth next year. How can the advertising not go up you tell me? When the delta is so high in the economic growth from nearly nil to 15% and after advertising is a product of the total growth in the economy so I don’t understand that how can there not to be a substantial increase in advertising revenue next year. So the GDP grows by 15%, the GDP grows by 15% revenue only, advertisement should grow by at least 20%-25%?

Ad growth for Television lags GDP growth

A look at past trends clearly shows that Ad growth has started to lag nominal growth in the last 3 years. Subscription revenues are doing better during the same time period.  Also, Television growth has been lower than industry ad growth and is projected to remain lower as per KPMG.

Operation leverage at ZEE – Marginal profitability is low

Rakesh Jhunjhunwala: The one-third may not gain but two-third you will gain and there the marginal profitability is very high. In my mind I can be totally wrong but this kind of delta in the economic growth all people whose businesses are high fixed cost based should become very-very profitable.

While, it might seem to be that any significant uptick in ad revenue should lead to margin expansion – as there are no direct costs attached, leading one to believe that marginal profitability is high. However, this is at best a benefit of a quarter.  Higher ad growth has always led to higher investments in content as competition takes over and a key reason for poor cash flow over last 5 years for ZEEL has been the substantial increase in inventory.  Inventory has increased from Rs 13bn in FY16 to Rs 53bn in FY20.

Marginal profitability is good, but focus should always be on cash flows. And more so given the problems of the Essel group.

Concall discussion in Q3 FY21

Rakesh Jhunjhunwala: My first question is that traditionally the IPL is held in the first quarter and this time our large part of the IPL was in the third quarter. How much has the advertising been affected because of the IPL being in the third quarter?

 Punit Goenka: Part of it would have impacted us but it also helps us in a way because the way IPL sells advertising it is category exclusivity so all the competitors or the people who buy IPL actually for share of voice go to competition. So, it also helps us in one way and therefore while there has some impact but also some help to us. Overall from the industry point of view IPL from Q3 would have taken away both on TV and digital put together about, correct me if I’m wrong about 1400 crores of advertising.

Rakesh Jhunjhunwala: What was the total revenue of advertising digital and TV?

Punit Goenka: With both is about 2000 crores.

Rakesh Jhunjhunwala: Total industry-wise revenue?

Punit Goenka: Industry-wise revenue for Q3 is about 8000+ crores.

 Rakesh Jhunjhunwala: That means about 14% to 15% of the revenue which in every quarter wouldn’t go to IPL this time?

Punit Goenka: That’s right.

Rakesh Jhunjhunwala: And everybody is affected to the extent of 10% to 12%?

Punit Goenka: That’s right.

 Rakesh Jhunjhunwala: You have an economic growth which in the third quarter was, as I see, a breakeven level. Now the predictions of 15% to 16% nominal GDP growth next year. How can the advertising not go up you tell me? When the delta is so high in the economic growth from nearly nil to 15% and after advertising is a product of the total growth in the economy so I don’t understand that how can there not to be a substantial increase in advertising revenue next year. So the GDP grows by 15%, the GDP grows by 15% revenue only, advertisement should grow by at least 20%-25%?

Punit Goenka: Mr. Jhunjhunwala you are right. It should grow by that somehow but that will be the advertising growth for the entire industry overall.

Rakesh Jhunjhunwala: You are part of that industry, you may gain some market share, you may lose some market share but if the industry grows at 20%, that should be substantial and your marginal costs are very few, so it will reflect in my rate. So, in my personal opinion your profitability should show fast, greater growth and I don’t understand your hesitation in saying that?

Punit Goenka: Give me a minute to try and explain to you. There are certain parts of the industry which we don’t play, for example the digital side which is not related to video which is a large part of the industry today which is search and display advertising. We have no role to play in that part and that part also grows significantly higher.

Rakesh Jhunjhunwala: Punit, I understand that but how much percentage of search and the other part in which you are not there is a total take in the revenue. It may be 10% of probably advertising revenue. If the industry grows at 20 you may grow at 15 because you don’tparticipate there? I don’t understand if the economy is to grow at 15%-16% nominal then how advertising growth can be less than 20%? You are not in those segments today; your segments have also grown 20%. You are not there in those segments even today.

Punit Goenka: I pray that your bhavishyavani comes true.

Rakesh Jhunjhunwala: My bhavishyavani is based on certain facts. If the growth tapers off, I could be wrong. I don’t think if the growth comes at 15%-16% nominal, advertising growth in your segments can be less than 18% to 20% and as companies prosper more and compete more they tend to advertise more.

Punit Goenka: Sure and also we are coming from a lower base so yes the numbers should be high.

Rakesh Jhunjhunwala: Your marginal profitability should be very high because the content cost doesn’t go up with the advertising revenues?

Punit Goenka: That depends. It will go up because of the other sectors. Television profitability absolutely you are right will go up because the cost will not go up in that same proportion but the investments in other pockets of our business will impact properly.

Rakesh Jhunjhunwala: You may invest; today advertising is a bulk of your revenue?

Punit Goenka: Correct.

Rakesh Jhunjhunwala: So advertising should be 75%-80% of your revenue?

Punit Goenka: It’s about 65%.

Rakesh Jhunjhunwala: 65 is two-third.

Punit Goenka: Yes.

Rakesh Jhunjhunwala: The one-third may not gain but two-third you will gain and there the marginal profitability is very high. In my mind I can be totally wrong but this kind of delta in the economic growth all people whose businesses are high fixed cost based should become very-very profitable.

Punit Goenka: Sure.

Rakesh Jhunjhunwala: I thought it will be better if you, when I don’t know, let’s see time will bear us out.

Punit Goenka: Sure, we will see how it plays out but I can assure you if industry grows at whatever pace we will beat that rate.

Rakesh Jhunjhunwala: I like that attitude. Thank you and once again congrats on a good performance and you are going to make some changes in your Board of Directors so when can we expect that to be done?

Punit Goenka: We have already brought two new Directors onto our board that we had announced last quarter itself.

Book review #14 of 2021: Expectations Investing by Michael Mauboussin

Reading stock prices for Better returns

Michael and Alfred Rappaport in the book provide intricate details of how to understand the mispricing of stocks from looking at the best indicator of a company – its own share price. This is a framework that helps in easing out “what’s factored in” and to put it in context I can say that Tesla’s stock price today captures a very high market share in the automobile industry even on Mars.

My entire finance education on valuations has been fueled by following the works of 2 people to who I was lucky to be introduced on the campus itself.  While Aswath Damodaran is the official Bhagavad Gita on valuation and part of all MBA curriculum.  I was lucky to be introduced to Michael Mauboussin way back in 2003 as part of a course project.  The project involved understanding one of Michaels’s framework called – Market implied competitive advantage period or MICAP and applying it to a sector in India to identify mispriced stocks.

The concept of MICAP is nowadays more loosely known as reverse DCF where instead of assuming DCF variables, we let the current stock price let us know what the market is assuming as growth/margins, etc.  I was so fascinated by the course that I spent multiple night outs figuring it out and was one of my best projects undertaken during my MBA.

Links to Michael’s articles

I strongly recommend all of Michael’s writeup and reports for understanding valuation and stock analysis.  Link to Michael’s paper on the Competitive advantage period on which my project was based ( Here ). One other paper that was my favorite is –   The economics of customer business

For more check out : https://www.valuewalk.com/michael-mauboussin/

Understanding Key value triggers

A good equity analyst with experience is able to narrow down companies’ performance of 2-3 key variables at best.  These variables can change for a company over a period of time. While for a long period key variable for ZEE entertainment was advertising and pay-tv revenue growth; recently it has only been cash flows; pledge and Corporate governance. In the case of Dish TV, the key variable was ARPU and Churn and the company kept misreporting these 2 numbers by underreporting churn.  In the case of Bharti Airtel; the key variable during 2004-2008 was subscriber addition and incremental Ebitda margin; 2008-2014 was regulatory actions and spectrum pricing and recently just JIO actions on pricing.  I strongly recommend analysts follow the book to be able to narrow down key-value triggers for each company. 

How Aswath Damodaran messed up in Netflix

Aswath Damodaran put out a detailed valuation blog on Netflix in April 2018 pegging the value of Netflix share at US$173. However, the key investment hypothesis of Aswath in that report was that Netflix’s ability to contain its content costs would be the key value driver.

“In my earlier post on Google, I noted that every company has a value driver, one number that more than any of the others determines value. In the case of Netflix, the key value driver, in my view, is content costs. My value per share is premised not just on high growth in subscribers and continued subscriber value, but also on content costs growing at a much lower rate (of 3%) in the future. “

I had disagreed with the value triggers as I had strongly believed that content costs would continue to increase and the pace of subscription will be much higher. Aswath had projected the subscriber base of Netflix in 2020 to be 178 mn where the company actually ended up at 203mn.  No wonder the current stock price is 3X of Aswath Damodaran’s fair value.  The objective of this is to understand that zeroing in on value drivers is a very difficult exercise and requires a lot of experience and study and even the best can still get it wrong. 

Interesting Quotes from the book:

Market commentators and investment managers who glibly refer to ‘growth’ and ‘value’ styles as contrasting approaches to investment are displaying their ignorance, not their sophistication.  – Buffet.

Investors make short term bets on long term outcomes.

Forecasts usually tell us more of the forecaster than of the future.  – Buffet .

The most important thing to do when you find yourself in a hole is to stop digging.  – Buffet on the stupidity of averaging down.

Stock prices are not merely passive reflections; they are active ingredients in the process and determine the fortunes of companies.

Lessons from Zerodha – What business are you in?

Nithin Kamath, Founder and CEO of Zerodha, made a few innocuous-looking tweets yesterday which should send the entire broking industry, promoters, and investment bankers into some soul searching.  I had recently read in Simon Sinek book “Start with why”- while most companies are able to articulate what business are they in and how they are going to achieve it, the reason for “Why are you in business” is soon forgotten.  

A quick search in Google “Why Icici Direct”, “Why Motilal Oswal” or “Why Edelweiss” will reveal that they claim their the largest or have the best research or simple platform.  However, Nithin changed the entire discourse by saying that our entire focus is “customer profitability”. We are in the business to ensure higher profitability for the customer. Only when this is your focus can you have “nudge” like functions that reduce trading and revenues for Zerodha but are right for the customers.  One of the nudges that help me is that the software highlights which options are illiquid and does not let me place a market order.  (ICICI direct had been shameless and fraudulent in squaring of my illiquid options despite margins citing covid urgency (causing me unwanted loss), I approached NSE but that’s a strenuous, time taking battle)

Nithin is forthcoming in saying that what is right for investors is hardly ever right for consumers. Zerodha employees do not have any revenue targets. Whereas all other brokers are largely focused on revenue targets.  I regularly get unwanted emails and calls from inexperienced relationship managers from ICICI direct trying to advise me when they hardly understand that my experience in markets is 5x of theirs.   Zerodha surprisingly does not sell me any advice nor makes any stock recommendations.

Can you trust bankers to give you the right advise?

I have been part of many investment banking pitches. And one of the sections of the pitch is why the timing is right to raise money in markets.  This section talks about rising markets, high FII interest, and recently successful IPOs.  There is no section which talks about “Why the company does not require money” or “what are the costs of raising equity”.  The cost of return on capital of freshly raised money, the pulls and pressures of quarterly estimates, etc.  Most Indian promoters believe that the cost of equity is zero and bankers let them leave in fool’s paradise.

I am a happy Zerodha customer since Dec-2020 and I am not using Zerodha because it’s cheap. It’s because the product, interface, and platform are much superior. And like one of my friends said give me 3-4 more promoters like Nithin whom I can invest in and I am sorted for life.

Things to remember:

Investment bankers have revenue targets – they are worst suited to advise you on the timing or need of IPOs.

If you are in short-term game – your targets are more brokerage from customers. If you are in for greatness, its more profitability of customers.

Equity capital is one of the most expensive capital.

PS: Note to self – convert 10 family members to Zerodha this year.

What Credit Suisse can learn from Santa Banta?

Credit suisse to reveal losses from Archegos ; estimate $7.5 bn losses. ( Article)

If any of you have ever played live poker with me, you are bound to hear a specific joke of Santa Banta from me -Slipping over a banana peel. The joke goes like this: Once Santa Slipped over a Banana peel and fell. Later he saw another banana peel and cried out ” Oops! I have to slip again”. This joke I immediately say after I see a repeated dumb play from a poker player where he ends up gifting most of his stack.

Credit Suisse is going to potentially take $7.5 bn loss in Archegos. The reason I see the loss of credit Suisse and other bankers as dumb is based on past record of Bill Hwang. In 2012, Bill Hwang had pleaded guilty to insider trading and agreed to a $44mn fine to SEC. The SEC said Hwang and his business had short-sold three Chinese bank stocks based on inside information—borrowing the shares, selling them high, and aiming to buy them back low and pocket the difference.  There are a lot of crooks in financial markets, but based on the SEC’s description of Hwang’s actions, he was less a garden-variety fraudster than a triple-crown winner of financial cheating: an insider trader who got unfair market discounts and tried to manipulate prices through other means.

Goldman Sachs which had blacklisted Hwang till 2018, also gave in to the greed of commission. The same year, Goldman was embroiled in a corruption scandal related to 1mdb. The greed among investors is so high that they somehow always forget very recent history and repeat the dumb mistakes. While there are no records of any wrongdoing here prima facie and being seen as a case of just margin call, I am pretty sure that leverage standards were bypassed.

I have seen a very similar behavior among Indian investors supporting companies that have earlier short-changed investors. There were enough people backing companies like Deccan Chronicle and Manpasand Beverages despite enough data of wrongdoing.

I wish someday people can learn from Santas mistakes and not slip again.

Types of Equity Analysts – Encounters of the Worst Kind

The Management Pet:  Always starts with “Great quarter guys!” and is always first to ask. . The analyst wants to show everybody that he is the most experienced analyst with a Strong BUY recommendation and that’s why his question was taken first.  So, my question is “How were you able to deliver such a strong quarter”.

Micro Guidance seeker:  Is focussed on getting precise guidance.  Questions are like – Will you be closer to the upper end or lower end of your guidance of 6.6-6.9% growth? You have said growth will be in teens – will it be high teens or low teens? I know you do not give guidance but can you help us if you will beat industry growth or lag?  Also, what will be the industry growth?

Monthly forecaster:  How has been your growth this month / this fortnight. How is the current quarter looking? Has the quarter-to-date growth higher than last quarter?  (Such analyst own forecasts are never close but will never leave the pursuit of monthly forecasting)  

Late entrant: Sorry I logged in late, can you repeat everything you said.  (Basically, such analyst doesn’t own a watch and are begging the mgmt. to gift them one)

Endless questions inquirer:  Sir I have basically 2 questions – one on the balance sheet and another on the income statement.  On the Balance sheet, my question has 3 parts…. On the Income statement, my question has 4 parts and the 4th part has 3 sub-parts.

(Operator- participants please limit the question to 2, so that everybody can get a chance)

 Class participation:  Most/all of my questions have been answered.  These are analysts who need to record their attendance to the fund managers.

(Operators – please press 02 to remove yourself from the question queue is never understood)

The attention-to-detail Analyst:  Can you help me understand the nature of “other revenues”. They are now 0.3% of all revenues as against 0.15% last quarter.   Also, why is your tax rate up by 30 bps?   (Announcing to the world my excel models are very detailed)

The stock pitcher Analyst:  I have a 3-part question are on the new business/acquisition (like Dunkin Donuts). Do you think your new business can be the biggest growth driver for your business? Second, would you say that the new business margins will be overall margins accretive? Third, do you think stock markets are not giving you full credit by not doing a sum of parts valuation?  ( Please help me – as I am the only one doing SOTP valuation)

The Meeting seeker:  Can you explain to me the accounting difference leading to the variable tax rate, depreciation, and amortization vis-à-vis peers? Can I take these answers offline in case you don’t have them handy?

The color seeking analyst:  Can you give some color on the nature of growth expected for the year?  Mgmt. – the color is baby tomato pink.

Attention seeker:  That was my associate dialing in.  This is senior writing analyst XXX here.  My question for you is ….?  (To announce the world, I have an intern/associate)  

The Student Analyst:  Can you please explain how do you calculate same-store sales growth (SSSG)? Also, can you explain what is your unit economics?  Mgmt. – Please read past 10 years’ transcripts.

PS: Even I have been guily of the worse behavior on a occasion or two.

Book review #Thirteen of 2021: Start with Why by Simon Sinek

How Great leaders inspire everyone to take action.

I would recommend people to watch the Ted talk ( Link here) which became famous of Simon Sinek on the same topic.   The book goes into further details with a lot of examples to prove his point.  I liked the concept of the golden circle but the author connecting almost all major success and failure to the theory behind the golden circle is way too much.  I believe too many people try to force-fit theories to explain examples of success and at times of failure.

Apple – Cult like status

It’s true as the author says that companies like Apple are able to sell you a multitude of products not because their products are better but because you tend to believe in the company. I am a fan of apple and I almost have bought all apple products. I am a part of a cult. People who try to convince me anything otherwise about Apple are wasting their time. I will remain a Buyer of all apple products until I die or afford it. The same can be said about Harley Davidson riders or maybe Starbucks coffee drinkers.

It’s true that some companies are able to achieve phenomenal success by focusing on making the consumers believe in “Why” they are in business. However, I would say many companies would have failed to do the same and one can start explaining that – but clearly a single theory trying to explain success and failures of companies – I cannot buy into.  A company like “general magic” should have been as big a success as apple but they failed miserably.

PS: Very glad to have finished 13 books in 1st quarter. As an Analyst quartrely meeting guidance is very important.

Types of Fund managers (based on personal experiences)

Techno Fundamental FM: I agree with your structural fundamental story – charts are also showing accumulation and break out.

Pseudo Long term FM: This is a structural story that will play out. Yeh quarter number kya lagta hai.

Corp Governance conscious FM: We will not buy zee stock as it was linked to KP. Can you however get me Zee Cine awards Tickets? My wife would like to attend.

No Insider info FM: Our Fund house has a strict policy against sharing insider info. Please take down my non-official mobile number. Drop me a message, if you hear anything.

Travel Enthusiast FM: We have invested in Motherson sumi. They have set up 41 new plants in 16 countries. I have visited 14 of their plants. Mexico trip was amazing.

Foodie FM: Can we have the mgmt meeting at “Masala library “. Heard they have introduced a new express menu.

Ground research FM: Did you check with watchman if MD comes on time to office? How many cars does CEO use? 

Butterfly Effect FM: Can you incorporate sensitivity of raw material cost, currency, sales decline, interest rate change on your DCF? Can you incorporate demonetization impact also?

DCF geek FM: WE only believe in DCF. Your WACC is too low. Your terminal Growth rate is too high? What is the Market implied growth rate factored in? You have to have 20-year DCF, please.

Pseudo Accounting nerd FM: Did you check the company’s payment to directors? Why is paying so much to auditors? Why is CEO salary so much? Do they have a plane? Who uses it?

Celebrity crazy FM: Get me meeting with Ekta or Jitendra (Balaji telefilms), Will Dhoni be present in India cements analyst meet?

Book review #Twelve of 2021: Robert Iger – The ride of a Lifetime

Lessons in creative leadership from the CEO of Walt Disney company

The book reads like an autobiography of Robert Iger – one of the most successful CEOs in the world.  Robert Iger deserves a lot of respect given he has been successful in steering a company of the size and legacy of Disney. The Media sector has seen unprecedented disruption in terms of delivery of content and Disney has been able to successfully disrupt its own traditional distribution to pave way for Disney+ and be a valid alternative to Netflix, prime, etc.

The story of Robert’s rise is fascinating. While the success rate of acquisitions is generally poor, he was able to execute multiple high-ticket acquisitions like Pixar, Miramax, and Lucas films and the latest being 21st-century fox.  The book details the path Disney took and how he was able to execute and integrate multiple acquisitions.

Disney and Ronnie – A failed bet

Disney in India however, I think made a colossal mistake by investing in UTV of Ronnie Screwvala at astronomical valuations. While the acquisition of Hungama channel made sense, the acquisition of UTV was more of its own inability to build an Indian film studio. What Disney India did not realize was that Ronnie was a craftsman in creating new business and disposing of them at rich valuations based on potential despite low profitability.  Many Disney employees would openly share with me later, that everybody realizes UTV investment was a big mistake, but nobody talks about it. Ronnie Screwvala was a master at telling stories and would try multiple things to woo analysts for research coverage. This included fully paid trips to Japan for understanding video gaming. I am not sure anybody remembers the mobile gaming division of UTV.

Star India – Disney’s Best bet for India

The acquisition of 21st Century FOX, however, has given Disney a formidable position in India with Star India and Hotstar.  Also, Disney has been smart in recognizing the true value potential of STAR India and the talent at star India and elevated Uday Shankar to the role of president of Walt Disney Asia.  Uday Shankar’s journey has been that of the meteoric rise and off risk-taking which defined the way of Star India. Many seniors team at star India would regularly tell me that it’s a crime at star India to not fail/take risks.  

3 Key thoughts from Robert’s career:

  • Be relentless in pursuit of perfection. 
  • Take risks and fail rather than not fail at all. Fear of failure destroys creativity.
  • KNOW WHAT YOU DON’T KNOW.

Why you should not play tennis like Boris Becker and play poker like Andre Agassi

Deepak Dhayanithy in his book “Strategy Huddle” talks about a very interesting event to understand behavioral strategy .

This is about Andre Agassi telling the world how he had an important “tell” when he faced his great rival, Boris Becker.   The “tell” was that Boris tended to stick his tongue out, pointing towards the direction of where he was going to serve.  So, if Becker was serving at deuce and he was going to serve wide of the court, his tongue would point towards left and so on. Agassi picked up on this “tell” and won a significant majority of his matches against Becker.   Also, Agassi only used this “tell” selectively in big matches only.

Andra Agassi talking about the Tell

Game theory Optimal Vs Exploitative

Well, today the poker world is increasingly debating between GTO vs Exploitative play.  What Agassi was doing was exploitative play and he used it optimally to ensure Boris Becker did not adjust his game accordingly and not allowing him the Game theory optimal play.  While, Boris Becker picked up poker after Tennis and was a celebrity Pro at PokerStars, given he had to declare bankruptcy, he was not likely good at it.  And given Agassi’s observational skills, I am pretty sure he could have been a great poker player.

The book “Strategy huddle” is a goldmine of many such incidents from the world of sports.  For a football fan, the book is a must read, given the number of examples of game changing strategies in the world of football listed in the books.  The book covers 27 different sports phenomena across 9 chapters and with each chapter themed on a strategic management topic.

Book Review #Ten of 2021: Hard thing about Hard things

A book by Ben Horowitz. I heard it is so popular among Venture capitalists, that they refuse to fund a startup until the founders have read this book. 

When a book has praise from Mark Zuckerberg, Larry Page, Dick Costolo, and Peter Thiel on its back cover, one is guaranteed he is reading a good book.  No wonder this book was recommended to me by 2 CEOs of startups who have successfully raised money.  The book stands out from other books as it tries to answer some critical challenges common for startup founders and how to navigate them. Hiring and firing and promoting talent are some of the most important challenges for a startup and there are no easy answers. The book’s appeal to me was limited as its core audience is a Startup CEO.  Nevertheless, I found some apt ideas to evaluate listed companies and CEOS. 

Companies not meeting guidance:

Nobody cares about why u missed guidance. So, stop kidding. They are no good excuses. Also, guidance mgmt. is a slippery slope. It is very common for companies to justify the low growth/margins this year owing to lumpy last quarter or one-off.  The question is did they disclose last quarter there was a one-off or it was lumpy?

Learnings for across companies:

Employee Pay:  In many companies, the best way to get a raise is to generate an offer from another company and then threaten to quit. This I witnessed is a very common practice among equity analysts and the team felt cheated when few people were able to get raises just because they got counteroffers.

Guidance miss- Nobody cares: Companies either meet guidance or miss guidance.  Companies come out with elaborate press releases to explain reasons for missing.  Frankly, nobody cares. Either get better at forecasting or stop forecasting.

Quality beats quantity:  Almost all managers will try to enforce a quantitative way of evaluating employees. For equity analysts, some of the quantitative measures are the number of calls done to clients, number of reports written, etc.  I have seen gross ways of people gaming the system. Analysts would record calls done to the fund manager even if the FM did not take the call or hang up the phone as he was not keen. Every insignificant event is converted into a report as a stock/ sector update. Thankfully, our organization soon understood how the system was gamed and discontinued it.

A good book recommends or gives ideas of other good books. Some recos:
  • Yertle the Turtle by Dr. Seuss
  • Only the paranoid survive – Andy grove
  • Good to Great – Jim Collins
  • High output management – Andy grove
  • Jeff Bezos 3-page letter to shareholder in 1997 outlining the company’s story. Attached

Quotes from the book ( For CEO’s / Founders) :

 What would you do if capital was free?  Is a dangerous question to ask an entrepreneur.   It’s kind of asking a fat person.  “what would you do if ice-cream had the exact same as broccoli?

The best option among a particularly ugly set of options.

If a warrior keeps death in mind at all times and lives us though each day might be his last, he will conduct himself properly in all his actions. 

On company missing guidance: they were not lying to investors, but rather, they were lying to themselves.

We take care of the people, the products and the profits – in that order.

Being a good company is an end in itself.

Great CEOs are basically people “Who didn’t quit”.

Most people define leadership the same way as Supreme court justice defined” pornography “I know it when I see it.

Why I Bought ACC and Sold and Started to listen to Music?

No one in Mumbai can be a trader/investor until and unless he has traveled in the local trains where the wisdom of years of trading are available for free by Gujju/Marwari traders. I traveled for 4 years in the Mumbai local.  This is a story of one such exploit.

 The Mumbai local in the morning is largely filled with traders rushing to the market and in Mumbai all brokerages operations teams are largely Gujju or Tamilian.  While the Tams are known to be quiet and reserved, the Gujjus are verbose and are very quick in giving Tips.  On one such morning, a very loud Gujju was recommending a BUY tip on ACC to everyone. Given the confidence with which he was recommending, I was sure he had some inside information, and I went and asked my Cement analyst to look into ACC if anything was brewing. The Gujju analyst immediately called a few of his connections and found nothing.  I still insisted and he realized I had some Inside information.  The Analyst quickly released a sales note recommending our sales team to push ACC stock, as cement prices are expected to firm up.  

The next day I saw the gentleman in the train again recommending ACC stock to everybody and with much more enthusiasm.  I went back to my office and mentioned to my Head of Research (Another Gujju) that something was cooking in ACC.  The HoR summoned the cement analyst and asked him his views on ACC. The Cement analyst on seeing interest from both HoR and me in ACC, assumed something was brewing in ACC and released an Upgrade report.  

The next day, I saw the gentleman in the train even more verbose and recommending everyone to BUY ACC.   I bought a few ACC stock for myself that day and called up some Fund managers to enquire about it.  The Fund managers were unaware of ACC stock, but he said he will check with the cement analyst of other brokerages.  Over the next few weeks, multiple upgrade notes were written by other brokerages as they saw Fund manager’s regular query on ACC.

Later, that week, the ACC stock had climbed by 10% points and I saw the gentleman in the train still recommending it vociferously. I approached the gentleman and asked him the reason for his bullishness.  Given he knew I was an analyst, he informed me, I had seen the technical charts of ACC and was recommending it based on charts.  Then I came across a sales note from your brokerage which got me more excited. After that, I saw an upgrade report from your house and followed by other houses so my conviction increased and I have been recommending it to everyone.

That day, I went and sold my position and started to listen to loud music on train. 

Book Review #NINE of 2021: Extraordinary Delusions and the Madness of Crowds

An Investment classic published in 1852.

People like crowds. The bigger the crowd, the more people show up. Small crowd, hardly anybody shows up. -Gallagher

With Gamestop, Tesla, and Bitcoin being the most talked-about investment idea in the last few months.  I decided to get back to the first principles of understanding and knowing manias. The book chronicles 3 manias in the world of investing namely Mississippi mania, the south sea bubble, and Tulipomania.  The book scores high on detail but low on storytelling and I would recommend people read up about these manias on Google or Wikipedia.

The Manias often were started with a novel idea, followed up with fancy stories, and then leading to mad frenzy among the crowds.  The most common result of all manias is enriching a few and losses for the uninformed gullible crowd.  Personally, I believe, more than understanding the nature of mania, the events give us a deep understanding of the markets and investor behavior.  

It is a very common saying in India that a bull market is not peaked until the local paanwala does not start offering you investing advice.  Well, all I can say is I get a similar feeling about Bitcoin as people with no knowledge are questioning my reasons for missing out on this opportunity.  I have a golden rule in investing; I don’t invest in something I don’t understand. This was a lesson learned very early in my career when I invested in pharma stocks.

Recently, Lot of people at 15000 Nifty have started giving me unsolicited tips in stocks. While, I still remember I got worried about the 2008 markets way early in 2006, and stocks moved up much higher before the 2008 crisis.  I am not saying we are in a bubble situation, but there is of course a mad frenzy in a lot of areas. 

Please don’t convince me to invest in PSU stocks, ever.  I would die a pauper rather than invest in PSUs.

Link to my blog of 2006 November – Markets: Dizzying Heights.

Book review #Eight of 2021: Bulls, Bears and Other Beasts

A Story of Indian stock market by Santosh Nair

I had an induction course at my MBA Campus and a 2-day induction session at my first job at SBI capital markets. The inductions still left me unprepared for the real stock markets.  I suggest this book as an induction material for all present and prospective participants of the Indian stock market as it so aptly captures all the major events of the last 3 decades in the stock market and more so from a personal angle making it a thrilling read. SCAM 1992 series was an awesome series on Harshad Mehta; though I believe the series since it was being told with Harshad as the protagonist tended to be not critical enough of his misdeeds. This book is an apt read after the series has whet your appetite for the stories of market manipulation. 

My Father has been a trader in the stock markets for 30 years, so I have been used to hearing names like Himachal futuristic, DSQ software, and ZEE telefilms very early in my life on a regular basis.  Also, at least 2 of my close family members lost their life savings in the markets triggered by the KP scam. So, the books bring out a lot of memories. My father has been telling me how the markets worked than especially Badla, Kerb trading, and shouting in the pits.  Every trader has their own exploits and my father still remembers vividly how he was able to do arbitrage in a few stocks because of the difference in pricing in Kolkata vs Vizag.

The book mentions few events – where I had a ring side view as well. 

Run on ICICI Bank:  ICICI securities (ISEC) was hosting a conference in Singapore with Chanda Kochhar meeting FIIs and explaining to them why ICICI bank is not affected by sub-prime credit.  Parallelly there was news on business channels that ICICI UK had some exposure triggering a run on the bank.  I was at the conference and the only talking matter was ICICI Bank.  I had friends calling me to withdraw all my money from ICICI bank as both my savings and Job was at risk.   Thankfully, I ignored them for I was clear I did not want the rumors to be a self-fulfilling prophecy and also “ICICI bank is too big to fail”.

P-notes and Chidambaram: ISEC was hosting a US conference and the biggest selling point of the conference was that Chidambaram, the FM will also be speaking at the conference. Immediately before the conference, there was an uncertainty on the P-notes, and FIIs were worried about them.  We had a packed house in New York for the FM session and it is at the ISEC conference Chidamabaram clarified the govt stance on P-notes (not to ban), which led to a rally in the market.

ZEE entertainment and pledges:  ZEE entertainment has been a very active stock and almost all fund managers had very strong opinions about the company and promoters. Old-timers would ridicule it as a Ketan Parekh stock and Bulls would argue it’s a new company under Puneet Goenka. Given the huge amount of interest and history and web of shareholding, a large part of my career was dedicated to researching ZEE. Despite that, I was surprised when I realized how ZEE had managed to bypass reporting of its actually pledging as that done offshore was not reported.

For me, while the book talks a lot about market operators and underlying scams, it’s actually a celebration of how far Indian markets have come in improving transparency and fairness.  I think market participants don’t give enough credit to SEBI for what it has achieved.  Today most retail investors are guaranteed a fair chance in IPOs.  Grey market trading is still very prevalent, but I think SEBI has limited ability to correct that unless it makes IPO grey market as a segment on the bourses. (I own IPR for this idea – please give me due credit for this).

The book also puts in perspective why the Indian market is so glued to every union budget. Despite the reducing impact on the budget in the markets, the old-timers know that the budget was a key event earlier. Also, the role of market operators will continue and this is why my father still believes all stock movements are because of operators.

Quotes from the Book:

Experience tells me that it is a good sign to have some disbelievers.

When stocks become overvalued people try to justify it rather than admit they are expensive.

It is like all milk is adulterated, only the proportion of water varies.

Fun facts from the book:

DSP MF initial full form is DS Purbhoodas.

Harshad Mehta celebrated his triumph over bear cartel by feeding peanuts to a bear in the city zoo and getting that recorded. 

Newspapers carried IPO grey market rates along with regular stock quotations in the 1990s.

On Feb 11, 1986, 110 issues were launched on a single day.

Dot-com boom: Even news of an old economy company launching its website was sufficient to get investors excited.  (Later in 2008, markets got excited about GMR announcing an Ice cream option at its airport.   https://www.capitalmind.in/2009/01/gmr-announces-ice-cream-options-in-hyd/

Fictional Cryptocurrency in India

A satirical note. Please dont try to invest in them.

U-turnCoin – This is a negative cryptocurrency.  All political leaders are given 100 coins by the election commission.  As soon as they do a U-turn in policy, one coin is detected from their wallet.  They cannot contest an election after they have exhausted all their coins. To make things equitable, Delhi CM to be given 500 coins.  

FekuCoin – This is an attempt to mine coins by the relentless work of bhakts on social media. New coins can be mined by coming up with a new Feku idea.  A coin is added for every new Feku idea, once that Feku idea is outdone by somebody else, the coin shift to the guy with the best idea. Ashoka road is the official registrar of these coins.  More than 3 coins can be exchanged for a MLA seat and 6 coins for a MP seat. 56 coins can earn a CM seat.

RagaCoin– These are coins distributed to enhance the stupidity of political discourse. For every stupid political discourse, the participant achieves 1 coin credited to his wallet.  On gaining 5 coins a person can admit himself to the opposition party and on winning 10 coins he is given an MLA seat.  50% of the coins are always with the VP of the opposition party. Given the limitation of earning power of these coins, many people tend to shift to FekuCoins.    

GodiCoins -These coins are for the Media Houses. Godicoins are a replacement to TRPs and all advertising dollars spend to be linked to the new currency instead. These coins can be mined by promoting Fekucoin owners. Govt patronage will depend on Media houses wallet sizes and will be offered exclusive interviews once they earn 100 Godicoins.    In extreme situations this currency can also be used to get swift bail hearing.     

DharmaCoins–  These are coins restricted to the Bollywood industry kith and kin. All current families of Bollywood are given a number of Dharma Coins. New coins are credited for every newborn in the Bollywood family. Dharma house is the official custodian of these coins. All kins of current Bollywood families can exchange these coins for launch in Bollywood. In case, of Dharma house stack is full, the coins can be redeemed at Chopra house.  These coins are strictly guarded and are only at threat from viruses like Kangna.

FreespeechCoin– These coins are specially for standup comics.  This coin can be earned by comics after they approach the Judiciary and win a case.  The easiest way to do this is to challenge the owners of Fekucoins. Any attempt by Muslim comics to mine this coin is a non-bailable offense.

Book review #Seven of 2021: The Ten Commandments of Business Failure

By Donald Keough – A Coco-cola executive and with foreword from Warren buffet.

This book immediately jumps into the best books on business in my list and simply put not many books are worthy of a foreword by Warren buffet (Halo effect).  While, there are many books that talk about reasons for business success and as we have seen it those studies suffer terribly from the “Halo effect”, this book does the opposite of citing references of acts that are bound to lead to business failure.  This book is a must-read for managers and analysts of business and gives a good checklist to evaluate if the company is on the path to failure

Donald Keough has worked for the Coca-Cola Company for 43 years and rose through the ranks to become  President and COO. After retirement in 1993, he served on the boards of Coca-Cola, Buffett’s Berkshire Hathaway, etc. This book is a product of a nudge by Warren buffet to Keough to convert his wisdom delivered into talks into a book.

The 10 commandments of business failure listed:

  1. Quit Taking Risks:  Xerox is a prime example of a company that developed the personal computer interface which was stolen by Apple / Microsoft.  While, Jeff Bezos on the failure of Fire phone said “If you think that’s a big failure, we’re working on much bigger failures right now — and I am not kidding,”. “Some of them are going to make the Fire Phone look like a tiny little blip.”
  2. Be Inflexible.  “A man who never alters his opinion is like standing water, and it breeds reptiles of the mind.”- William Blake
  3. Isolate Yourself (i.e., Be Out of Touch): The book says one way to isolate bosses is to hire a good personal caterer and follow the strict isolationist diet.   Saw this at work in a different way in my career. I had visited Havells plants and offices multiple times and every time the lunch was at the office canteen which was common for all be it top mgmt. or factory staff. At the same time, in ICICI securities (I worked 2007-2019) for a very small office at Churchgate, there is a hierarchy in the canteen.  And most top mgmt prefers to dine in inside their own cabins.  When I joined ICICI sec in 2007, our floor had 3 different conference rooms for meetings and no individual cabin and analysts were required to bounce off ideas with each other in brainstorming sessions. Thematic reports and sector initiation reports were always brainstormed. When I left in 2019, there was not a single conference room on the floor.   
  4. Assume Infallibility
  5. Play the Game Close to the Foul Line.  Essel Group/ Zee groups Subash Chandra has made his empire but can say played close to the foul line. While most of the time he emerged victoriously and therefore did not see the downside risks of the leverage or financial creativity. Things did change in 2019.    
  6. Don’t Take Time to Think
  7. Put All Your Faith in Experts and Outside Consultants One company that exhibits almost all of the commandments of business failure is HT Media and I think one can fill volumes about “how not to run a business”.  While, I tried to be objective about reaching the valuation targets of all companies, my valuation target for HT Media was decided by the current market price less 15-40%.   The company was notorious for hiring consultants to streamline their business, this is despite in every quarterly conference call, I offered them free advice.
  8. Love Your Bureaucracy: MTNL is an awesome example of bureaucracy at work at its best.  The company’s business model from fixed-line was challenged by mobile, making many employees redundant.  the company initiated a voluntary retirement scheme but without enough takers. So to absorb the excess staff, they had to create roles for the excess staff.  The CFO office which I visited had 3 secretaries working behind a single computer. 
  9. Send Mixed Messages
  10. Be Afraid of the Future
  11. Lose Your Passion for Work-for Life: The bonus commandment and the most important as per me.  Passion for work to me is the single most important driver for success and vice versa.
Quotes from the Book:

Having things too good is also not too good.

Here lies a company that died risk free.

Einstein said that he needed at his new office … a very large wastebasket “for all the mistakes I will make”.

Whatever you do in life, surround yourself with smart people who will argue with you. 

I never meta successful person who did not express love for what he did and care about it passionately.

Book review #Six of 2021: Business Adventures by John Brooks.

Twelve classic tales from the world of wall street.

The bizarre move in Gamestop stock last week prompted me to read this book especially to understand a similar stock cornering incident that was executed by a single person. In 1923, Clarence Saunders the promoter of Piggly Wiggly stores was involved in a corner and had a very novel financial engineering attempt to finance it.   Nick Maggiulli had done a detailed twitter thread on it (Read here) and recommended this book.  One can also read the Barons article on the story.  There is another stock cornering incident for control of EL Bruce & co which was a “natural corner” which i intend to read on.

Redditors VS Hedge Funds
Enjoy the Party, But dance near the door

 The key learning from the Piggly wiggly story is that things don’t really end well for individuals and the institutions are able to at time tweak rules. If only the game stop investors had read about this, they would have figured out the end result of Gamestop move.

The book has some other stories on
  • A coordinated action by an exchange to make good the losses for individual shareholders from a brokerage.
  • The attempts to save the Sterling pound from bear attack.
  • Federal income tax history and the peculiarities of the innumerable tax savings route for the smart people.  Esops and Tax deduction for oil drillers.
  • Insider trading in a mining company and the law thereafter.
  • The ruling with respect to what constitutes trade secret and how are employees in knowledge industry impacted.
  • The story of xerox – which is very similar to new age startups.
Some Interesting quotes:

Every dog has one free bite.  A dog cannot be presumed to be vicious until he has proved that he is by biting someone.  A man should not be prevented from taking a job simply because the job presents his with unique temptations to break the law.

Wall street got licked and then called for “mamma”.   (institutions pleading to regulator to intervene when they are on the wrong side of a short squeeze)

In 1913, individual income tax was enacted from 1% to 7%.  In 1918, owing to world war 1, tax rate was 6% to 77%.  In 1925, tax ranged from 1.5% to 25%. In 1944-45, tax ranged from 23% to 94%.

PS: First time tried Audio book . It is a good usage of evening walks but i end up losing on making bookmarks.

Book Review #Five of 2021: Lessons life taught me unknowingly

An Autobiography of Anupam Kher.

The first time I watched Anupam Kher on screen was in the Movie Karma – the Multi starrer and I would repeatedly as a kid enact the scene “iss thapad ki goonj suni tumne”. For people of my generation characters like Anupam Kher, Kader khan and Amrish puri were the quintessential villains and after a period Anupam Kher and Kader khan switched sides to comical roles.

Similarly, between me and Anupam Kher is that both our big breaks came as portraying bald men, I am also rapidly balding and I am also very vocal with my opinion.

Anupam Kher in Saransh at age of 28 portraying an old man. Myself in a play ” The Jury”” .

Around 2018, when I decided to quit corporate life, I was seriously contemplating taking up theatre very actively and for training contemplating joining the acting school of Anupam kher “Actor Prepares” which is known to be training ground of many Bollywood stars. It was then that I bumped into Anupam Kher at the Jet airways lounge in Delhi.  While, I am generally cognizant of not disturbing celebrities, I saw this chance encounter as a sign and I seated next to him and sought his advice on joining acting.  He went on for the next 15 mins or so explaining me why I should immediately join and should never consider age as a factor. He also convinced me that I should also join the dancing session and when I said I have 2 left feet, he said that’s even more reason and told me I would be pleasantly surprised.  Had it not been for COVID-19, I would have by now joined Actor prepares training.  The only doubt in my mind is that its more training for movies whereas I am keen on theatre.

I had already watched the autobiographical play of Anupam kher tilted “Kuch bhi ho sakta hai” and will recommend it to everybody so I was aware of what to expect from the book. The book is frank tell-all by the actor and his struggles and his relationship with Bollywood. It’s a decent read for all aspiring actor and those interested in Bollywood.

What I liked and did not like:

I really like the session were the author talks about how he went into debt due to poor business decisions (At the same time Amitabh Bachchan floated ABCL and had similar fate). Also, despite what we see has a hugely successful actor, he too slipped into depression and sought professional help. What I did not like in the book was some incidents where he felt not being fairly treated by others and the section immediately talks about how the person faired poorly after that. In this case, about a director having continuous flops after he parted ways with Anupam kher.  Also, Anupam kher portrays Salman khan as a person who was always trying to give new comers a chance. My current understanding is that Salman Khan family is very vindictive and Arijit Singh has to face his wrath. 

Some interesting Quotes / lines:

Life is what happens to you when you are busy making other plans.

If you can meet with Triumph and Disaster; And treat those two imposters the same.

Dialogue from movie Daddy:  Sach ko sach banana ke liye, do logon ki zaroorat hoti hain. Ek jo sach bol sake, doosra jo sach sun sake.

My life is not bound, not limited, not defined. My life is free, infinite and immeasurable.

Book review #Four of 2021: Feast for Vultures

It is easy to get anything done in India provided you know whom to contact with how much money.

I had heard Josy Joseph on TedxGateway in 2016 and his talk was gut wrenching and so is no holds barred book investigating the dirty mafia of politicians and industrialist nexus.  While, the book may seem to be as a guide on how to do business in India, it is actually a hard-hitting dossier of challenges and struggles of doing business. The author does not hold back in naming names of top Industrialist like Naresh Goyal, Jindal and Ambani and how they have “gamed” the system.  Also, a very detailed work on defense sector which has rocked many governments. 

One of the key takeaways for me to understand is that while the rise and fall of some people and industrialist can be charted with their association to a political party/leader. The biggest industrialist are the ones who game the system across political parties, for they know politicians are only loyal to money.  Naresh Goyal was one of them.

While, I have been an Equity Analyst – I would have liked to be ideally an activist Analyst.  An equity analyst job has so many encumbrances that it is impossible to do a fair / unbiased job. However, I am proud to say that I had over the years gained the notoriety of being an activist and was not welcomed by few corporates.  When I quizzed one of my peers why does other analyst not asks difficult question in conference calls – the analyst was quick to retort that they left the dirty work for me. (one of my prized compliments I have ever received).  My bosses received many complaints from corporates but they did not reprimand me.  The only time I was asked to however oblige was in the case of “Deccan chronicle” on while I had written a SELL report questioning “Cash” – I was asked to drop coverage of the stock as a middle path given the noise of the report has reached the top offices of the ICICI bank and was damaging business. Though I was free to speak at will. After reading the book, I am inspired to write a very detailed note on my experience with Deccan chronicle. 

The book clearly documents the path of corruption taken by many industrialists and most of the names are easy to guess. While these industrialists might today be in regular news for achieving some much of market capitalization, almost everyone knows the path has been a sinister one. After reading the book, my respect for industrialist like Narayan Murthy, Azim Premji, Anand Mahindra and Uday Kotak jumps manifolds who at least I think are the most ethical.   

The Author does a very detailed work on Naresh Goyal and Jet airways during its Initial years.  The Beauty of the rise of Naresh Goyal rise was that he did great in all political regimes. In India, it does not matter which party is in power, if you know the right hands to grease. Also, this book should be read along with Vinod rai – Ex CAG book “Not just an accountant” which does a similar job in showcasing corruption.  

One of the best incidents noted in the report is about Anurag thakur – the minister for state for corporate officers.  Anurag Thakur played a Ranji Trophy match against Jammu & Kashmir in November 2000 when he was the president of HPCA. He has played one match in first-class cricket representing Himachal Pradesh and leading the team as captain in a match against Jammu and Kashmir in the 2000/2001 season. He picked himself for the match so as to fulfill the BCCI criterion (to have at least one first-class match experience) for becoming a selector at the state level. He appointed himself as the chairman of selectors of HPCA Ranji trophy cricket team. He later became BCCI President only to be Sacked by Supreme court.

This is a hard-hitting book and will leave you with anguish and anger.  However, every investor should read this book, so he knows for life which stocks and companies to avoid. 

Quotes / Notes from the book:

In 2009, a planning commission of India study of the distribution of subsidized food items through Public distribution system found that only 16 paise out of a rupee reached the targetter poor.   (In 1985, Rajiv Gandhi said 15 paise reached the poor – A increase of only 1 paise in 25 years)

I have to be forever on the right side of the people, It’s not always easy.  – A middleman

CBI is often called DDT – The department of Dirty tricks.

Ratan Tata in 2010 – We approached 3 prime ministers. But an individual thwarted our efforts …. I happened to be on a flight once and another industrialist said to me: I don’t understand. you people are stupid. you know the minister wants 15crores. So why don’t you pay it?

PS: The cheat code for beating target of reading books is first pick up easy to read 200 odd pages books. Over to some bulky ones now.

Book review #Three of 2021: Azim Premji – The Man beyond the billions.

An Authorized Biography of the very private man Azim Premji.  

They are 4 business leaders who have influenced me a lot Narayan Murthy, Azim Premji, Bill Gates and Steve Jobs.  Any book which helps in getting to know more of these personalities is a welcome.  The book does justice in trying to get all possible details about personal and professional life of Azim Premji.  However, given the Halo effect, interviews with friends and co-workers were unlikely to throw any sharp criticism.  Full credit still to the author for not failing to report on Azim Premji style of hands-on approach and miserly payout which could have hindered the growth of Wipro.

The Greatest Indian Philanthropist

Azim Premji has inked is name among the greatest business leaders by giving away US$21bn in Charity. In March 2019, he donated 34% shares of Wipro worth USD$ 7.5bn for Philanthropy and the best thing is that the focus will be on improving education. Azim Premji has over the years displayed miserly behavior in personal life which is euphemistically called cost- conscious. However, when the intent is to give it all back to the society, one understands the nobleness of the behavior. Also, during COVID-19 times, Son Rishad has been equally forthcoming in taking charity initiatives and WIPRO emerged as one of the largest donators.

I started of my career as an Associate to IT sector Analyst in 2004.  One of my first corporate meetings was with Laxminarayana/Lan (Investor relations) of Wipro, whom we had reached out to help us in understanding the difference in accounting by IT companies so that we can compare them.  Lan meticulously explained us the differences in accounting and from that day on I decided that equity analyst job is very easy provided you can find people like Lan to help you.  The last few years Premji invest has been a client and I completely vouch for the authors observation that the fund is very meticulous in their research. 

Wipro has been a clear underdog in the IT pack languishing and one can blame may be blame micro-management style and reluctance to pay top dollars to employee of Azim Premji to be a reason for that.  However, one should look into perspective how the group emerged from a trader of vegetable oils lead by a young person who had to drop his education at Stanford mid-way to start taking care of business.  So, from a 60-year lens it’s a great job but from a 20-year lens it could have been better.

Some interesting quotes from the book:

It is impossible to generate a few good ideas without a lot of bad ideas.  Failure should be forgiven and forgotten quickly.   – Azim Premji.

In 2000, Azim Premji was worth US$ 39.5bn, enough to buy reliance industries, Hindustan Unliver and infosys.

Any child not in school is in child labour. –  MV foundation

Premji to a Director on Board:  Don’t come to the meetings if you have not read the papers.

Premji to CFO Suresh Senapaty’s wife not buying Wipro baby products – You cannot even convince your wife to buy Wipro products. Later, when Rishad’s (Premji Son) wife was not buying ‘Wipro baby products for – “You don’t know how to sell products to her”.

PS : Too much of sweetness after reading about Azim Premji. Shifting gears to pick up murk – A Feast for Vultures is the next book.

Book Review #Two of 2021: The Halo Effect

Halo effect- A cognitive bias in which our judgements of a person’s character can be influenced by our overall impression of them.

A MUST READ for everyone who is interested in Analyzing companies or understanding what drives business performance because “We most likely don’t know”.  I would have been a much better analyst had I read this book earlier and maybe I would have given better arguments why the company/stock will do well. The booked was mentioned as best book ever by Fund Manager Samir Arora (Voracious reader) in Sept -2020 tweet and mentioned it as 1 of 3 books which he likes to read repeatedly.

The Author Phil Rosenzweig writes about the Halo effect on analyzing companies where stock market or profit performance leads to making impression of everything that Corporates/CEOs do is good or bad.  The author brings about the argument very strongly how most analysis and research focused on understanding what drives business performance are more likely correlations; which are being represented as causality.  Many bestselling books like “In search of excellence” and “Good to great” attempted to analyze successful companies to prove drivers of business performance and have come up with Focused approach, Good place to work/ Good HRM, Strong corporate culture, Listening carefully to the customer, Visionary leadership etc.   The analysis is questionable because mostly they analyzed successful companies and what was said about them in magazine and awards.  People always like to say good things about successful companies and great performing companies always are good places to work or customer friendly.  Well performing companies are good places to work because the good growth and profits means more rewards from employees as bonus or offsites and also how could a company be successful and not listen carefully to the customer.  (Exception being APPLE/ Steve jobs – We built [the Mac] for ourselves. We were the group of people who were going to judge whether it was great or not. We weren’t going to go out and do market research.”)

Investment community – Tail wagging the Dog. 

Evaluation of company strategy is directly corelated with stock performance. I have seen this behavior in work myself in the investor community as stocks seeing good returns are marketed by analysts as good Leadership, Good strategy, Good products etc. etc. and the same arguments are turned upside down for companies whose stocks are not doing well.  Also, in order to prove a SELL argument, an analyst will start questioning a company’s business policies or corporate governance when the only argument should be the “Valuations are expensive”.  A company like Page industries (Jockey) which has been a favorite company of mine, I went completely wrong with valuations as I wasn’t able to explain the expensive valuations so I had a SELL rating for a long time. But this never meant I questioned the companies Accounting or Strategy or Corporate Governance to support my SELL rating.  

Corp governance -Always a function of stock performance

The downside of being a Media analyst was that every investment pitch meeting involved regular cross questioning on corporate governance (CG) policies of the companies. While, I could provide a somewhat objective view of companies of CG practices but it would be fair to say they ranged from Bad to Worse.  However, the Fund managers opinion of a Media company CG was always a function of what they owned or didn’t own. When I was Pitching ZEE entertainment to a top Indian FUND house – the Fund manager quipped that how could I recommend a stock with such a poor CG track record. Sad to say, the same fund manager had been a Long-term investor in Deccan chronicle (after the companies’ issues were in limelight) and biggest owners of TV18 group stocks.    

Corporates tend to publish awards and accolades achieved during the year. Awards and accolades are generally a function of stock or reported profit performance. Please do remember Satyam computers had won the coveted Golden peacock global award for excellence in Corporate governance for 2008.  Manpasand Beverage was given the award of Food and Agri company of the year 2018 by VcCircle.

Some of the favorite Quotes / lines from the book:

When times are good, we lavish praise and create heroes. When things are bad, we lay blame and create villains. 

To be excellent, you have to be consistent.  When you’re consistent, you’re vulnerable to attack.  Yes, it’s a paradox.  Now deal with it.

To revise a well-known phrase – Nothing recedes like success.

How little we know, how much to discover.  How little it matters; how little we know. – Frank Sinatra song.

PS: Genreally after reading a Good book ; You get ideas about reading other books . In this case I am forced to not read many books analyzing business perfromance. Next book is Azim Premji – The Man beyond the billion By Sundeep khanna and Varun Sood. A Leader on whom I see the Halo.

Book review #One of 2021: The Psychology of Money

Why I feel very wealthy and successful after reading this book and hopefully stay.

The Psychology of Money by Morgan Housel is a very interesting read and a must recommend for all people for understanding and managing personal finance.   The book is easy to read and structured into small chapters talking about each topic. It explains some of the basics of personal finance which though well-known are not implemented.

There are many interesting topics like the importance of staying wealthy, the power of compounding, the Role of luck, Role of unknows etc.  However, the most important topic which struck a chord with me was the importance of Wealth as a source of independence. 

The Author says- The highest form of Wealth is the ability to Wake up every morning and say, “I can do whatever I want today”.  The ability to do what you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

July 2019 – I can do whatever I want from now on. “Hopefully”

As some of you know, I recently quit my Job in July 2019 – to take on the pursuit of happyness – to do whatever I wanted to do – Learn, Travel, Poker and Contribute.  Or as Nassim Taleb put it – True success is exiting some rat race to modulate one’s activities for peace of mind.  I enjoyed the Job I had of an Equity Analyst, the only role for 15 year of career, and had done well with it. However, a job also takes away considerable time in doing things which are no longer intellectually stimulating (boring meetings and non-sensical targets and report writing) and not to forget the wasteful time spent in commuting.   (I didn’t earn well enough to afford a place closer to work).  This was good enough reason for me to quit and now I am in complete control of my time.  Ability to do what you want is also best achieved by people like valuation guru Aswath Damodaran.  To remain totally unbiased to valuation exercise and to teaching the professor has decided to not take up any consultancy jobs ( Independece over Money) .  Being completely unbiased is near impossible as an equity analyst job. An employer chasing an IPO/Fund raising mandate will like the Analyst to tone down the negative views on the sector / company. 

Dont Agree on Savings View of Author

I do not agree with the authors views on Savings. The Savings topic seems to suggest that “nothing is enough” and keep saving till eternity. One should plan for shocks and surprises and then save some more but not to the point that he keeps earning money as the sole objective of life. One reason I see people not quitting the rat race because they are paranoid of savings. The only amount you need to save is what will help you in maintaining your current lifestyle for life. The actual benchmark of this is much lower but I would suggest save two folds of this amount and then instead of saving, give back the surplus to charity. The world is a much better place because of Bill Gates, Azim Premji and Chuck Feeney. Chuck Feeny is the Billionaire who wanted to go Broke and have his last cheque bounce and he is their.

Some of my favorite quotes from the book are:

History never repeats itself; man, always does.   -Voltaire

A genius is a man who can do the average thing when everyone else around him is losing his mind. – Napoleon

If you think that’s a big failure, we are working on much bigger failures right now. I am not kidding.  Some of them are going to make the fire phone look like a tiny little blip.  – Jeff Bezos on FIRE phone failure

PS: I have set a target of reading 52 books this year. 

ZEEL Q1FY21 : Band-aid on something that needs stitches

Q1 FY21 results of Zee entertainment was an exercise by management in trying to shore up investor confidence in governance and give some straws of hope to the few bullish analyst and investors to hang on.

Governance building measures: Isn’t good faith enough?

Company committed to Qtrly disclosures of balance sheet and Zee5 data along with break-up of inventory. This is a good move and well appreciated. However, more data increases confidence of forecasting and not accuracy of forecasting.

Company uploads new policies on – Investment, Treasury and Related party transactions (RPT). In my 15 years career as an Analyst, I never have read a company’s policies on RPT or investment policy. These are best judged by historical actions of the company rather than policies or statements by management.

Zee has uploaded 9-page RPT policy. Length of Reliance, Kotak, Infosys policies is only 4-5 pages and seems more like a regulatory requirement. The best RPT policy or any policy should just be – “We will act in good faith”. No policy can be a deterrent if intent is not right. Both Dish TV and Siti Cable seem to be pain point for ZEEL in terms of getting receivables. Simple management check should be restricting content to them until they pay their dues.  (How will you judge a bank which has a strong NPA policy, but is ever-greening NPAs?). No RPT policy can prevent bad deals.

Balance sheet: Some straws of hope

A stock which is down 90 % and goes up 50 % after that. Is it up 50 % or down 85 %?

ZEEL inventory has improved by Rs 1bn in Q1 FY21 from Rs 64.1bn to Rs.63bn.  One can say it’s a 2% reduction sequentially or inventory is actually up a whopping 75%+ from Fy18 levels. Also, the management has guided that inventory will be down on a full year basis in FY21. We wish that this guidance is met, but should be seen in the context of lockdown, as content available is limited for buying.  Please see below management comments on trajectory of inventory after a sharp spike in Q4 FY18 and you will know why one cannot rely on guidance.

What the managment guided ….
What actually happened…

Cash levels improved:  Cash increased in BS to Rs 13.2 bn in Q1 FY21 from Rs 10.1 bn in FY20. Receivables were also down by Rs.13.5bn and we hope this is receivables from related party. The quarter stand alone is good and investors can only hope the trend is maintained. 

Looks like the long term quality conscious investors needed these commitments from management and they will lap up the commentary and reason for remaining invested. Lets hope they are right and value is created with a lot of fingers crossed.

SOMETIMES HOPE IS THE ONLY STRATEGY FOR A STUCK INVESTOR.

ZEEL -There is seldom one cockroach in the kitchen

ZEEL a 15k crore market cap made provisions/write offs of Rs 1500cr of write off and claims in a qtr!!! . A company whose promoters who have lost almost all shareholding (Mere 4.77% left) – write-offs should be seen with dollops of salt.

Let’s look at the write offs/provisions/ claims in the quarter

Inventories write off -Rs 260cr:  The company had written of RS 260 cr inventory in the quarter. Inventory spiked to Rs 5400 cr from RS 3900 cr, a whopping increase of 1500 cr and when the company would have expensed Rs 1100 cr (assuming 50% of last year in digital and movies) of inventory.  So, a gross spends of Rs 2800cr in movies and digital rights in FY20!!!  But wait, the overall size of inventory market in 2019 is projected at Rs 4300cr (EY report).  Most importantly analyst questioned mgmt. for being less active with new content on Zee5 as against hotstar and other platforms and mgmt. replied they are not in race to acquire content!!!

Investment write offs – Rs 385cr: The company had written off Rs 385cr from a Rs 600cr investment. Now this Rs 600 cr investment was in two funds Poseidon opportunities fund Rs 380 cr (based out of Bermuda) and Actinium investments Funds limited (based out of British Virgin Islands}. Investors and analyst have questioned mgmt. for holding investments in this obscure offshore entity to which mgmt. replied it would be reversed. What investors were not sure off was they will be reversed with a write off.

Auditors Qualify US$ 52.5mn or 400cr regarding Letter of comfort:  The auditors have qualified the result with a note. ZEE has not recognized this liability of US$52.5 Mn as it believes (based on legal advice) that LOC is not considered as guarantee and this dispute doesn’t require recognition of liability. This is a new issue and investors were never aware of such an issue.  Please read notes to accounts for more details, finally we see Yes bank claiming its dues post new promoters.

Related party and goodwill provisions write offs and some more (Rs 435cr odd):  Company has provided for Rs 118 cr provision wrt to Dish tv and another Rs 43 cr from advertisers.  Apart from that another 180 cr was written of from multiple items which the company did not share details.  Rs 114cr was written off from online business goodwill.  If stock prices are any hints, we would not hope much recovery from Dish tv or Siti cable.

A welcome change in directors:  Piyush Pandey and Alicia Yi

On 20th match 2020 – two company independent directors had resigned – Sunil Sharma and Niharika Vohra after a scathing letter questioning company practices. They were replaced by Surendra Singh and Aparajita jain clearly guessed by the market as not very independent.  Finally, we have 2 new director additions in place of Aparajita jain and Surendra Singh as Piyush Pandey and Alicia Yi.  Well independent directors in india have not had a record of speaking up; and when they have in case of zee the investors have still ignored them.

But Whats in for Bulls or ZEEL investors: An Open letter by CEO

The letter talks about Zee 4.0 and the 5Gs of Governance, Granuility, Growth, Goodwil and Gusto. I would recommend 3Cs for investors – Caution, Caution and Caution.

ZEEL investors are a fancy breed

You can fool people some people some of the times; but you can fool ZEEL investors all the time.

To name a few:  Invesco Oppenhiemer funds, Government of Singapore, Amansa holdings private limited, Vanguard, Vontobel,  Schroder international and the omnipresent LIC. Most of these investor write fancy letters to shareholders and articles, emphasising on corporate governance and Quality. We had a lot of Indian fund managers priasing Zee promoters, but thankfully they kept praising but exited all stock. looks like the FIIs know much more and have a relatively more tolerance for quality. While, its important to be greedy when others are fearful , the question is are you allowed to be blind?

The Bizarre Case of ELCID Investments: A 18x-70x bagger ?

Elcid Investments is a listed entity on BSE with a Market cap of mere 18 lakhs.   However, the company is an investing company and owns 4.3% or 4.06 lakhs shares in Asian Paints which means an investment value of Rs 6800 cr or Rs 3.5 lakh per /share.

The company has two subsidiaries: Murahar Investments & Trading Company and Suptaswar Investments & Trading company. Both these subsidiaries are registered with the RBI as NBFCs.

Why does the company trade at mere 18 lakhs?

There have been less than 20 trades in ELCID investments over the last 5 years and the stock is stuck at single digit price of Rs 5-9.   Currently, there are 2 lakh shares outstanding and the value of each share approx. 3.5 lakh and even after taking a 75% holding company discount is at least Rs 90,000.  This ensure that no holder wants to trade at current price and therefore the stock price cannot move up. 

How did the Stock end up in this mess?  Chronology of Events.

Feb-2103 – Company tries to Delist:  SEBI makes it mandatory for companies to have minimum public shareholding of 25% and the time to comply is by June -2013.  Not wanting to increase public shareholding, on feb 2013 the company made a delisting offer for shares at Rs 11,455 per share.  Offer is made for 40,750 shares or 20.38% of the company.  Details here.

March 2013- Delisting Fails:  Only 16,500 shares were offered by minority shareholders and therefore delisting is a failure.  Market value of investments in Asian Paints is then RS 2000cr or Rs 1lakh per share. Minority reject the low price. Company forced to comply with SEBI guidelines of min 25% public shareholding.

May -2103 – OFS at RS 5000/share: IN order to comply with SEBI order company is forced to make an open offer.  Company does an OFS of 4.75% or 9500 shares at Rs 5000 to the public.   Stock then trades at Rs 2-3. Details here.

Minority investors are stuck: Why is SEBI sleeping?

While, buying the company stock at Rs 5000 in OFS was a no brainer as it was available at 95% discount to Market value of Investments, the investors were in for a rude shock. There are no way investors can exit legally with current stock price at Rs.9.    Investors have reached out to SEBI for enabling a one-time price discovery of the stock through a one-time call option mechanism. Investors have also reached out to the high court but with no solution. SEBI should be worried of the minority shareholders who are stuck with paper gains of Rs 5bn -15bn. Also, in this case the exchanges can be proactive and ensure laws are enabled to protect the minority shareholders.

This entire event /mess is created because of the action of SEBI to implement the 25% minimum public shareholding rule.  Why did SEBI allow an OFS at Rs 5000 per share when CMP was Rs 2-3?  And if it allowed why cannot is mandate a one-time price discovery mechanism. 

Shareholding of ELCID – The entry of 3A capital 

While, prime facie there can be no gainer from mispricing and it is a case of everybody losing. However, a close look at shareholding over the years shows an interesting trend. In 2014 after the OFS, the promoter family held 74.9% shareholding and another Mr. Nadir Vakil (Shares surname with family) held another 8%.  In FY18, though we see the exit of Mr. Nadir vakil and We see new shareholders by the name of 3A Capital and few others. 3A Capital needs special mention because it’s a firm which specializes in buying of “unquoted, unlisted, suspended and illiquid shares of companies”. 

Mispricing: Vultures at the Gate

Now, given the quoted price of ELCID investments is Rs~9 and minority investments are stuck with illiquid holding of ELCID investments.  The mispricing vultures knock at the gates of minority, making offers of buying the illiquid stock of Elcid at Rs 40,000 /share (started from Rs 10,000 some time back).

 

Question is why would somebody buy these illiquid shares? The buyer…  

  • Has a more long-term outlook.
  • Aware of price discovery will happen soon. 
  • Taking a punt.     

Well, given the promoters initially tried to delist the company and only did OFS when the delisting failed and that too at a discount price of RS 5000.  The promoters where the biggest losers in the OFS and the minority who participated but the gainers. Not fighting for price discovery by the promoter’s hints at their complete apathy to minority shareholders interest and meanwhile Vultures trying to buy at a lower price makes things fishy.

Who are the Vakils?

Asian Paints was founded by 4 friends in in 1945 – Champaklal Choksey, Chimanlal Choksi, Suryakant Dani and Arvind Vaki.  Choksey family later exited and the remaining 3 families today own Asian paints.  The Vakils own Asian paints shares directly and via Elcid investments. Amrita vakil and Abhay Vakil are directors in Asian Paints.

Will SEBI , Promoters of ELCID, Exchanges wake up to this mispricing? 

House Money Effect: Why I watched Cricket World cup for a Lakh and A Fund Manager Sold his house?

In 2011 cricket world cup, India had entered the Quarter finals in World cup and I fancied a chance of India reaching the finals to be played on Wankhede.  I reached out to a close friend with strong connects and was able to source tickets for World cup final whose MRP was Rs 7k each for an offered price of Rs 13k each.   As India defeated Pakistan in Semi Finals, the grey market price for the tickets soared for the same was Rs 1 Lakh.  TOI Article

This presented with a Dilemma.  I would have not have been able to afford a ticket for the finals at Rs1 Lakh.  I did not see the marginal utility at watching it for 1Lakh and selling the tickets should be right rational decision. 

I ran a poll on Twitter recently on whats the Cost of the Ticket and the answer to this was an overwhelming value “Priceless” with the hindsight knowledge of we winning it.  The reason I exercised the option to watch the cricket match was the “House Money “effect. My mind assumed the increase in ticket price as a Windfall gain. 

The House Money Effect: Isn’t money Fungible?

Casinos have found out that gamblers are far more likely to take big risks with money that they have won from casino (ie. House money).  Also, gamblers are not as upset about losing house money as they are about losing their own gambling money.

People tend to segregate money into buckets:
Precious money earned through hard work and sweat.  (Salary, stocks gains, business profits etc).
Less Precious money from Gambling. (Casinos, Lottery tickets etc).

But isn’t the buying power of money the same for “Precious money” or “House money”.

In an earlier blog we talked about Loss aversion and how losses makes us 2x more unhappy then Profits make us happy. Well but losses of “House Money” does not tend to make us as unhappy as losses of normal income.

Will you sell your House?

I did not sell my tickets because I saw it as a windfall gain.  The same applies for real estate bought for personal use. If real estate prices sky rocket would it not be rational to sell away your home (Just like stocks) and buy it later when prices are more rational.  Most of us will not do that as we attach sentimental value to our home.  However, it would be a right move if you are rational.  Meet Sankaran Naren, Who sold away his home in 2012-13, because real estate prices didn’t make sense to him. 

Excerpts from an Interview – Sankaran Naren, CIO ICICI Prudential AMC . Full interview here

Saurabh Mukerjea : On the converse side, you took a contrarian position and it worked out like a dream.

A: I think the most contrarian position I took was actually outside equities; in real estate. I used to see everyone buying real estate between 2007 and 2013, and you know I had seen in 2007 most of the infra stocks was pricing in 2014 earnings.

So, when you approached 2012-13, I saw a number of people buying projects under construction real estate, what could come 4- 5 years later or 7 years later, from builders whose antecedents were not clear.

I could see there was a reasonably large bubble in real estate and I said I don’t need to stay in my own house so I ended up selling my flat in Chennai and Bombay, and I have been very impressed that in 5 years that the real estate prices have gone nowhere, and people ask me how did you come to the conclusion. I said I used a simple equity technique for valuation.

No one understands the valuation of real estate. So I looked at rental yields and at mortgage interest rates. In the US, at the same time when Indian property prices were high, rental yield was much higher than the mortgage interest rate. Whereas in India there was a 7 percent gap. That means the mortgage interest rate was nine and a half percent, rental yield was 2 percent. I said the seven and a half percent gap can’t continue.

So, that was a fairly good contrarian call because it was a scale call. Because the number of people who made mistakes in India in real estate, in that period is not small.

“House Money effect” is seen very actively work in investing. It is very common for people to sell half of their Stock holding after a stock doubles, the argument is that they have now taken out their initial capital invested and their is no fear of loss. Once they have taken out the intial capital , Investors are more prone to hold on to the remaining stock even when their is evidence to the contrary. Also, Recreational Poker players after a big tournament win are more likely to indulge themselves.

How to Fight the “House Money “effect

Let’s say you want to gift a friend a Gym membership, a Season pass for Theatre Festival or Club Mahindra membership. There is a chance that the gift might not get utilized.  Instead of gifting you should ask the friend to purchase it and reimburse it only when he uses it. This will add an incentive for your friend to use it.  Whenever, we friends go on a sponsored holiday, Tickets are purchased individually and reimbursed only on travel by the host, so that there are less Dropouts. Also, when you get a free Complimetary suite in a Casino after big wins ( Like in Movies), remember they want the “House Money” back.

The Priceless Cricket World Cup Tickets


Trip to Norway and Why I got deported?

-Co-authored with Vidish Mantri

The northern lights have always fascinated me and I with my nephew decided to travel to Norway this winter (Jan 2020) for the experience.  To increase our chances of viewing the northern lights, we decided to keep enough days in Tromso (4 days) and added Svalbard (3 days). Svalbard archipelago fascinated us purely because of its remoteness (Google maps does not go any more north than it). The trip was largely unplanned and we had a flexible itinerary.

BE PREPARED ( FOR WHATEVER)

Why is Svalbard a crazy destination – geographically ?

Longyearbyen is the largest town in Svalbard archipelago with a population of ~2000. Given its location the region has polar night and midnight sun for ~90 days. Svalbard was used as a whaling station in 15-16th century and in 20th century for coal mining owing to its high-quality coal deposits. However, now its economy is largely dependent on tourism and research.

The Svalbard treaty of 1920 gave full Norwegian sovereignty over the archipelago. While, it’s owned by Norway, Svalbard is still on its own in many ways. Norway is part of Schengen – Svalbard is not. Svalbard does not have any restriction on foreigners visiting / migrating and therefore NO Visa. Anybody can work and live in Svalbard indefinitely regardless of citizenship.

Now comes the tricky part on Visa Norms

While, Norway is part of Schengen, Svalbard despite being part of Norway, is not part of Schengen.  So, once we travelled to Svalbard, we exited the Schengen area rendering our visas invalid because it counted as an exit from the Schengen Area(Something we did not know). We had gone to Norway with a single-entry Visa. Partly it was our fault for not indicating our travel plans to Svalbard while obtaining the visa and partly the authorities at Oslo airport were also at fault for allowing us to travel to Svalbard on a single-entry visa. When we arrived in Tromso, our passports were confiscated and we were asked to visit the police station and we were asked to cancel our tickets.

To give an Indian Analogy, its like someone telling you that you have exhausted your Indian Visa because you travelled to Anadaman and Nicobar islands.

Panic and Help poured in from all corners

The Police were very co-operative and understood the genuineness of our mistakes, they had to follow the guidelines.  While, we were relaxed after we visited the police station, we were read out guidelines of deportation which were the same for wilful criminal or ignorant tourists. We decided to seek help.

While caught by Police and being deported sounds very traumatic so did not want family members to panic back at home. Hene decided to shoot a WhatsApp to my batchmates group 200+ of them.  Within a few hours, I had support from all corners of the globe, trying to help us in the situation.   One friend reached out to Norway consulate in Kolkata and another in ministry of external affairs.  A friend in US, helped us get in touch with immigration Lawyers and assured us the best of guidance. Another close friend, helped in local contacts in Oslo, who could be reached out for help.  We decided to call the Indian embassy in Oslo, the personnel over there to our utter dismay had no clue of the situation or norms of Svalbard.  However, this did not deter the him from scolding me for travelling to Svalbard like a typical indian parent. One of my friends got us in touch with travel rep from Thomas cook, who had seen similar circumstances and was extremely helpful in convincing us that it was not a major issue.    After talking to local lawyer, arranged by a friend from Paris, we were convinced that what the police was doing was normal and should not be worried.

Norwegian Police – The Friendliest

The two police personnel who were in charge of our case were extremely cooperative and understood the anxiety and panic we were in.  They ensured we could continue our local sight-seeing as they did not see us as a threat and in fact guided us on weather and activities.  Also, our prime concern was that it would affect our future travel and will be a remark on our passports. The Police convinced us that this mistake was something that tourists regularly do, and this was to be seen as more of a “Refused to Entry” rather than deportation and will not impact our travel.

Our Travel Itinerary : The 3 Phases

Phase 1 – Road Trip

Day 1 – Oslo: Landed at Oslo early evening. Rented a station wagon at the airport – Plenty of options available, though recommend booking in advance. First thing you notice in Norway is the brilliant infrastructure in terms of roads connectivity, keeping your car below 100kmph is a challenge!

(Tip: Car parking charges for a day are super expensive throughout the country, look for free parking while booking as most hotels don’t have their own parking space).

Day 2 – On way to Bergen: Started early morning on our 500km long road trip to Bergen along the west coast of Norway. Took Detour to see a meteorite landing site (Gardnos Crater) resulted in a dead end, as site was cordoned off. Midway crossed small town of Geilo, well known for its ski resort.  The landscape changed drastically and almost immediately we were thrust into a sea of white. For the next 30-40 odd kms, all other colours except white ceased to exist. Occasionally, we saw tiny specs of color at some distance (turned out to be people para-skiing). Reached Bergen late evening passing along tunnel after tunnel, winding past lakes and bridges.

On Road to Bergen; Ski – Town of Gelio

Day 3 Bergen – Funicular Train and Fjords Cruise:  Took the funicular railway line Floibanen to Mount Floyen – a higher vantage point for a bird’s eye view of the city followed by a cruise which took us deep into the majestic fjords. It was a very chilly day and the strong winds at sea only allows you so much time as to stand on the deck and get that quick photograph in if you are brave enough. A very interesting observation in Norway is the multi coloured houses you see anywhere you go. Another tip for vegetarians, Burger King has surprisingly good options.

View from Mount FLoyen, Fjord cruise view

Day 4 -On way to Flam: Our trip back was delayed by a visit from the crown prince of Norway as the day marked the 950 years of the city’s foundation. We left by afternoon and reached Flam, a sleepy little town which was completely deserted at 6 PM in the evening.

Day 5- Most beautiful train journey: We take the iconic Flamsbana – the world most beautiful train journey. The mini train route that takes you through a passage carved in the mountains, giving you unparalleled views of deep ravines and gorges, leaving you completely in awe of your surroundings. After our 1-hour train journey, we landed back in Flam and started our return to Oslo. Enroute, we passed the longest tunnel of the country, 24 kms in length (Yes, that’s right!!). Norway has one of the most sophisticated system of tunnels cutting through the mountains all across the country.

Road to heaven

Phase 2 – There is no further North

Day 6 – Travel to Svalbard:  Took our flight to Longyearbyen, the northernmost town of the world located in the Svalbard archipelago. Average temperatures in Svalbard was between -20 to -30 degrees during our stay. It’s one of the few places in the world which is home to Polar Bears. Its climate alternates between polar nights (no sunlight for months) in winters to midnight sun during summers.

We reached our cosy little hotel, Mary Ann’s Polarigg and decided to hit the town straight without wasting any time. A 5 min walk to the market, turned out to be a daunting task and took half an hour instead given the extreme conditions.

Our primary aim to visit Svalbard was to get a glimpse of the famous Aurora Borealis or commonly referred to as the Northern Lights. At Night, we went for Northern lights chasing but with no success.

Compulsory to carry a gun out of Town limits of Lonyearbyen; Gun shopping

Day 7 – Local sightseeing and Husky Sledding:  We took a 2-hour city tour which a gave perspective of the city and the history.  Visited, the active coal mine, the Global seed vault, University and the Brewery. Second activity of the day was Husky Sledding, a trip to Husky farm in order to ride a dog sled along the snowy terrain. On our way to Husky farm, we were greeted with a glimpse of the Northern Lights. During our entire sledding activity, we could see faint traces of the lights in the sky. It was a surreal experience, which cannot be put down in words. At Night, again went for Aurora chasing, but were unlucky.

Global seed vault; Husky Fram

Day 8 – Aurora Lights up the skies: We made our customary visit to the town visiting the art gallery along the way. Got a call from Taxi driver, that Aurora was visible right above our hotel. A quick dash outside and we were greeted with the most spectacular dance of the auroras, filling the night sky. We watched this phenomena for over an hour, as long as the cold allowed us to stay outside. Our primary objective of this trip was fulfilled.

Day 9 – Blizzard and Cancelled flight: Flight got cancelled due to a technical glitch as the town was engulfed in a snow blizzard. We were to stay in Longyearbyen for an additional day.

PHASE 3 – Sir, your visa is invalid!!

Day 10 – Landed at Tromso:  We caught an early morning flight to our next destination Tromso, another city in the Northern part which is famous for viewing the Aurora. After landing in Tromso, we headed for the immigration, only to find out a shocking news that we have exhausted our entry. Our passports were confiscated and we were asked to visit the police station after checking in to the hotel in order to get an update on our situation.

Now, here is another twist in the tale. We landed on a Friday afternoon. Due to the police staff unavailability over the weekend, our deportation could not be processed till Monday. Unknowingly, that cancelled flight had become a boon for us, else we would have been deported immediately. The police allowed us to continue with our travel plans in the city till Monday after making another appearance at the station the following afternoon.

Day 11 – Cable car and Police station visit:  We took the cable car – Fjellheisen to the highest spot in the city giving us breath taking views of entire Tromso. Our worries were drowned in the beauty of our surroundings as we sipped hot chocolate on an extremely chilly morning in a restaurant on the hillside overlooking the entire city. We then visited the Architectural beauty the Arctic Cathedral.   Quick visit to police station resulted in some good news finally. Our deportation could only be processed by Tuesday, giving us an additional day to enjoy the city. At Night, we decided to go for another Aurora hunting tour, although we could only manage to catch faint glimpses despite clear skies.

Tromso City

Day 12 – Whale Watching: We embarked on another exciting activity, Whale watching. We boarded a Catamaran, which sailed across the open arctic seas in extremely cold conditions, hoping to catch a glimpse of the Orcas. Half an hour into the journey, we were lucky to spot a group of dolphins swimming in parallel to the ship. However, due to this being the end of the whale watching season, we were not lucky enough to spot a whale during our trip. We were, however, lucky enough to catch a glimpse of our first sun in over 11 days, although only for a few seconds (Yes, you heard that right!!). After coming back, Watched the movie 1917, as the city is near deserted by 6 Pm on Sunday and there was little else to do.

Day 13 – Ice Dome Hotel and Snowmobiling: Deciding to make full use of our additional day, we took a bus to a camp Tamok outside the city for our last adventure, snowmobiling. The site comprises of a spectacular Ice dome hotel – built only by Ice. This hotel is erected every year and functions only for 4 months in winters after which it’s taken down as ice starts to melt away. After a wonderful tour of this brilliant feat of engineering, we proceeded to ride the snow mobiles. An hour later, after being back at the camp site, we fed the reindeers that they had kept in an enclosed area.

Day 14 – Back to India Via Bangkok !!!:  We reached Airport at the designated time as asked by the police.  Only, saddened by the information that we would be travelling Via Bangkok to Mumbai.  We were given the absolute last seats in the airplane and we were given priority entry in a Car to the plane (Felt VIPish and criminal at the same time).  Landed in Mumbai, but Indian ground staff were not cooperative.  They failed to understand the nature of our Deportation – A silly mistake at best and made us wait for 2 hours as they figured out the protocol.

IKIGAI – A year of Quitting

Today marks 1-year of me quitting the corporate rat-race and doing away with the addiction of a salary.   The idea behind this was to now spend more time in doing things that I really wanted to do.  I had a very satisfying job as an Equity Analyst and the only role I ever had in the 15 years of my career.  However, what comes with a corporate job or a salary is a lot of Admin/travel/procedural things and tasks which have little contribution to knowledge or growth. Something that i did not appreciate and therefore quit.

I had figured out my IKIGAI and plan to devote the next few years of my life to things that I truly love: Teaching, Poker, Theatre and Social service and to live healthier and travel widely.

The first one year of Quitting has been mildly successful in terms of goals – COVID did throw a spanner in my plans though. On the health front, I am lighter by 10kgs and there is scope for another 10kgs . 

Travel – As crazy as crazy can get – Got deported

On travel front things have been very exciting until COVID, I kicked off my travel with Amritsar and loved the city food heritage and the Golden temple is something that I always wanted to revisit. In January-2020 I took off for one of the most Exciting 15-day trip to Norway and Svalbard for the Northern lights.  Longyearbyen in Svalbard is the Northernmost town in the world and we were given a mesmerizing farewell by the Northern lights right above our Hotel.  The trip will never be forgotten because I landed back in Norway/Tromso without a valid Visa and then began the process of deportation – An helluva of experience with one of the friendliest police I can ever imagine.

Instead of Teaching – Focussed on learning

Focus on learning/teaching, took a very surprise turn when I got opportunity to be part of a 15-day rail trip around the country with 400 youth as part of Jagriti Yatra.  A very enriching experience and will recommend it to all youth, A trip that will help in motivating you towards your dreams.  I continue to read and understand more of human behaviour and have started blogging to connect them with poker and investing.  Writing is a good way to help one understand things better and thats the entire objective of my blogs.  https://vikashmantri.com/2019/12/24/jagriti-yatra-day-zero/

Poker – The lockdown BOOM

Poker started off with a bang post this year , with me getting a 3rd position in the Baazi Poker tour Main Event for whopping Rs. 1700k- the only Live event I played this year.   Other than this was able to ship Indian online poker championship (IOPC) PLO Highroller for 700k in and 2nd in Pokerstars Sunday Highroller for 350k this sunday.  The tourney scores are a pleasant surprise as I am not a tourney player and largely a cash game player.  With the lockdown from March – Poker industry saw a boom in terms of action, which meant poker players had the busiest of schedules and work hours before them. l was lucky to cash in well into the Lockdown boom in Poker.  With lockdown ending I have taken a semi break from poker and focus is on the improve the game (Something I talk more . but dont do enough).

Investing – it’s the most tricky.

I wasn’t ready for a roller coaster for the markets and the recent crack definitely has had a big dent on my investments .  While, having seen the 2008 crisis very closely I thought I was prepared but that not would the case because I sincerely believe “This time its different”.  Understanding the nature of Covid impact on markets is tricky and I have No opinion. I am erring on the side of caution and reduced my equity exposure.  While, it is said one should be greedy when others are fearful , the problem is I do not see enough people who are fearful of Covid-19 given the swift recovery in the markets.  I wish the markets/economy/business do well and while I will miss some of the uptick, I am ok with it, if the world ends up safer.

Theatre – Watched a lot of plays.  Covid has ensured practising it will be some time away. I have been a big fan of watching movies on opening weekends and also reviewing. That hobby looks like in for a change.

Social service – Focus shifted from enabling long term changes in society in field of education to the near term challenge of migrant labourers. Did whatever little I could do. 

Plans for the next year are hazy with the Semi-lockdown . Focus will be on learning.

Signing off with a beautiful lines by Harivansh Raiji Bachchan.

ऐसा नहीं है कि मुझमें कोई ऐब नहीं है पर सच कहता हूं मुझमे कोई फरेब नहीं है
जल जाते हैं मेरे अंदाज़ से मेरे दुश्मन क्यूंकि एक मुद्दत से मैंने न मोहब्बत बदली और न दोस्त बदले..!!

Gambler’s Fallacy : Do you really have an edge?

The reason to get into any bet or trade is to take an advantage of the pay-outs because of the edge that you have.  The edge could be a function of knowledge or skill. In sports, poker or trading, the side that wins in the long run is the one with Edge . In this blog, we try to showcase how two unseemingly opposite behavioural biases that are irrational a big source of profit for the gambling industry and brokerages.

Can one have edge in Coin toss?

If I asked you to bet Rs 100 on a coin toss.  And every time you win, I paid you Rs 97 (Rs 3 being commission) – Will you bet?  The answer to this simple question is a clear No, as you have no edge. Even the most compulsive gamblers know that this is a losing proposition and will stay away from this bet.  However, if I tell you that heads occurred 8 out of 10 times in recent attempt.  Would you now bet? Are thoughts of the coin being not fare racing your mind?

One of the most crowded tables in any casino is the roulette table.  The roulette table is nothing but a coin toss with 37 outcomes (0-36) and you get paid only 36 times, in effect 1/37 being the casinos commission. A proposition which is equally worse to the coin toss with 97% pay-out. The reason people are betting on the roulette table is that because many people think that they can identify sequences. To nudge the gamblers, roulette tables display the last 20 numbers and Hot and Cold numbers (those being hit frequently and not) – a behavioural trick to trigger the delusions.  

In a game of roulette, the ball has just landed on red seven times in a row. This leads you to believe that it will probably land on red again, so you increase your stake and bet on red. The false idea is that past events are somehow influencing current events. Even though, in the case of a roulette table, each spin is completely independent of the previous. Of course, the odds of getting red are exactly the same as black, just like in all of the previous spins.

Gamblers Fallacies are at play: Monte Carlo fallacy & Hot hand fallacy

The hot-hand fallacy occurs when gamblers think that a winning streak is more likely to continue.  The belief is based on the idea that having already won a number of bets improves the probability that they will win the next bet or the next number of bets, too.  Luck will continue favouring them as they are running hot. 

Monte Carlo fallacy or its inverse the “Hot-hand” fallacy is a huge source of big profits for the gambling and betting industry.  While, basic common sense says that a toss of a coin is a independent event and has nothing to do with previous events as the coin does not know it came heads before. However, when a string of results of independent events are presented the irrational mind is quick in identifying sequences in it and forecasting the future with a higher degree of certainty.

Monte Carlo fallacy nickname was borne out of a particularly crazy night at a Monte Carlo Casino on August 18,1913 when the roulette ball fell into the black 26 times in a row. The probability of this happening is a staggering 1 in 136.8 million. Not even the most seasoned gamblers had ever seen a roulette wheel favour one outcome so heavily. This Monte Carlo casino raked in millions of Francs that night, thanks to the gambler’s fallacy. In fact, it was one of the most profitable nights of all time for any casino, as bettors kept betting on a reversal of outcome.

Hot-hand fallacy is derived from basketball where observers expected a high scorer to keep on scoring. A claim that players are more likely to make a successful shot if the previous shot was successful.   

Match fixing – Unintended consequences on betting

For every cricket match, betting sites like betfair.com and bet365 gives odds of a team winning the toss. Pay-out is generally 95% on this site for getting the toss right. As discussed earlier, there is no reason for anybody to bet on a toss without an even pay-out, as there is no edge.  However, there are enough gamblers who bet on the same and the toss section is a very active market on the betting sites.   But Why? Other than the gamblers and hot hand fallacy there is one another key reason.  Its fixed.

 Two instances of toss fixing have been widely circulated :

These 2 instances though debatable are enough to fuel imaginations of gamblers and forecasting advice of insiders who claim to accurately give out tips on who will win the toss.  Billions of dollars are wagered on sites on who will win the toss in cricket.  Purely because they have been advised by a bookie or an insider.  Or simply put the belief that the coin is not fair. 

Fun Fact:  Faf Du Plesis (Former South African cricket captain) has the record of losing 10 consecutive toss.  Now if after the 7th toss loss by Faf du Plesis would you be willing to bet on the 8th toss of a win or a loss.  Well the answer lies whether you believe in Hot hands streak or not.   Faf du Plesis himself though was convinced of his bad luck and for the 10th toss brought his deputy Temba Buvama as proxy captain to the toss but still lost. 

Do day traders really have an edge?

The stock markets see a lot of intraday volumes. With delivery volumes being only a fraction of traded volumes.  These are basically people trading on an intraday basis on the basis of chart patterns.  There is prospering industry of technical analysts giving intra day calls and Buy today, sell tomorrow ( BTST) calls.  There are multiple subscription services of such calls available and regularly given freely on business channels.  Where does the edge come from?

  • Technical analysts are either believers in the hot hand fallacy.  Trends and patterns are analyzed and stocks going up or down are expected to continue doing so.
  • Everything is fixed (Like Match fixing).  Regular stock rigging scams convince traders that its possible to make money by getting tips from insiders and being early into a stock manipulation trade. 

The edge be it in sports betting or intra-day trading comes from insiders/fixers who seem to know more. But do they really?  Well one can never say. However, the possibility of the edge has fuelled the sports betting and intra-day trading industry.

Poker or Investing – The problem of being STUCK.

Being stuck in Poker or Investing means that you are currently losing money. In poker, this could refer to your current session or this could refer to your cumulative results over a little while.  Being stuck in investing or trading means that you continue to hold an investment/stock because you are losing money in it.

The Key reason for this behaviour is Hope for a turnaround. (As per investors, it is a proven hypothesis that stocks always move up after they SELL) 

Most poker players who are STUCK will continue to play a session with the hope of recovering the losses.  This is when you see poker player instead of playing 4-8 hours session playing for 12-36 hours at a stretch because they are stuck.  One does not come across players who continues to play more than 20 hours if he is significantly up. Same is true in investing most people tend to hold on stock which are down 30-70% for eternity with the hope the companies will turnaround someday.  The same investors rarely hold on to stocks which have given them 4-5x times returns. 

Loss Aversion Explains this

Pain from loss leads to Risk seeking both in poker and investing to cover up the losses. Poker players showcase by playing trashy hands and investors showcase it by Averaging down or investing in penny stocks. 

Risk taking increases when faced with imminent losses:

For example, what would you choose…?

Scenario 1: To receive a guaranteed payment of $900 or take a 90% chance of winning $1000 (and a 10% chance of winning 0)?

Scenario 2: To choose between losing $900 and take a 90% chance of losing $1000?

In Scenario 1, most people would decide to avoid the risk and take the $900 though the expected outcome is the same in both cases.  In Scenario 2, people tend to choose the 90% chance. While, the reason for selecting between taking the chance or not should be a function of inherent risk taking nature of a person.  However, in case of scenario 2 even the most conservative people tend to take the chance.

The Sunk cost trap

Sunk cost trap refers to a tendency for people to irrationally follow through on an activity that is not meeting their expectations. This is because of the time and/or money that is already invested. This is why people finish movies they are not enjoying and finish meals that taste bad.

Most people stuck in loss making stocks always tell me that they will sell off as soon as the stock recovers to its cost price.  The same is in poker, people continue to play a session until they have recovered their losses. 

Confirmation bias

Investors conisder selling a stock in loss as a personal failure instead of conidering it as a natural outcome of probablistic event. you hold on to the stocks and argue that the market is not getting it and someday it will to satisfy your ego. The same is true in poker, professionals think its benith them to have a loss making session as they are better than the quorum. So they keep extending a session – most likely end up with severly battered egos in both case.

How to get UNSTUCK

In investing, the mantra is to evaluate all your stocks periodically on purely fundamental basis.  Well this is easier said than done.  If you are not ready to BUY more of a stock at current level – maybe it time to Sell it.  However, the problem with our loss-making positions is confirmation bias sets in and we are mostly searching for information that justifies the investment. Any information which is against our thesis is discounted and we continue to remain invested in a stock which has halved, convincing yourself for fundamental reasons.

Some behavioural tricks to overcome STUCK

INVESTINGPOKER
Compulsory exit worst stockExit a session after X BUY-in.
Not look at Profit/loss or acquisition price before making a decision to SELL Decide to continue playing based on edge over quorum rather than Profit/loss.
Take external advice for every stock that has corrected 30-50%Ask a friend, if you are tilting or playing Right.
Pre-decide holding period at time of Buying say 3/5/10 yearsPre-decide playing time before start of session say 3/5/7 hours.

Or remember Legendary Paul Tudor Jones Wallpaper: LOSERS AVERAGE LOSERS

Jagriti Yatra – Day zero

15 days , 12 destinations , 15 role models , 500 youth , 8000 Kms

Today I embark upon a 15-day long, national train journey that will take you 8000 kilometers across the length and breadth of India, to understand and build the India of smaller towns and villages through enterprise. Traveling along this train will be 450 youth – from all over the country , who have been selected from over 2700 applications . 40 % of the participants are girls and 50% + from non-metros .

I got to know about it at TedxGateway https://youtu.be/oD6BhGWakzE

Recently , I happened to get introduced to Ashutosh kumar , CEO of Jagriti yatra and a yatri for the last 10 years , who nudged me into joining the yatra.

The main idea of the journey is to make youth aware of the change agents and how they can lead the change themselves among the local communities .

Entrepreurship and social change has been close to my heart always and I recently quit my corporate career to take up projects in these areas. Jagriti yatra combines the best of both and with very motivated and energised youth with diverse backgrounds , I expect it to be hugely enriching experience .

Yesterday was a full day facilitators workshop – where the 70 odd facilitators were guided on how to make this journey an enriching experience for all the participants .

Few interesting personalities that fascinated me yesterday in the introductions were – A lady from rural India working on women upliftment , A lady CEO from US , A young student from China doing a course on social entrepreurhsip , A professional working in Olam Stationed at Mozambique who has been trying since 3 years to take time out for this trip , a story teller cum part time teacher from Chennai, an innovator who enabled usage of discarded tube lights etc .

I will be joining this yatra from Mumbai to Vizag as an expert in the field of finance . Will try to help the participants in looking at the business plans from a finance perspective.

Today 24th December is Day 1 and we kick off the train journey after a launch ceremony at TISS , Chembur .

To know more visit http://www.jagritiyatra.com/

https://www.youtube.com/watch?v=xdpQ6F8osSI

Poker or Investing – The Tough Task of not being Result oriented

Years ago investor Mohnish Pabrai lost big on an investment in a troubled lender called Delta Financial. Soon after he did an interview with SmartMoney magazine:

SmartMoney: How do you deal with Delta Financial, profession- ally and personally?
Pabrai: Investing is a game of probability. Sometimes when you make favorable bets, you still lose them. Even a blue chip could go to zero tomorrow. With Delta Financial, the company didn’t have enough financial strength — that was probably a mistake on my part. I think of it as a favorable starting blackjack hand where unfavorable cards showed up afterward.

SmartMoney: If you could do it over, would you have done the same thing?

Pabrai: It was a good bet.

https://www.fool.com/investing/general/2016/04/07/it-was-a-good-bet.aspx

Poker is all about making bets when you know the odds are in your favor. A player with Aces in Texas Holdem is 4:1 favorite and in PLO (Omaha) Aces edge pre-flop might just be a 3:2 favorite. This basically means even when you play when odds are in favor you are not guaranteed to win. A poker player playing a hand when the odds are in his favor is a good player and not the person who wins the hand.  However, it can occur that a good player can lose for a long time because of luck factor. 

Ed Thorpe, an investor and former successful blackjack card-counter, writes in his book that the best card-counting method provides a mere 2% edge over the house. Which means you’ll spend a lot of time losing. His road to blackjack success was paved with agony:
I lost steadily, and after four hours I was behind $1,700 and discouraged. Of course, I knew that just as the house can lose in the short run even though it has the advantage in a game, so a card counter can fall behind and this can last for hours or, sometimes, even days. Persisting, I waited for the deck to become favorable just one more time.

Michael Mauboussin –  Do not Confuse Outcome and Process

Being result oriented comes easily as we tend to evaluate our decision based on the outcome.  This happens frequently in poker and Investing.  Mohnish Pabrai didn’t in the case of Delta financial because he believed his decision making process was fine. 

Many fund Managers with significant exposure to a sector or because they have a sector fund in vogue may end up out performing despite a failed investment process. This was true for some managers in 2006-08 with significant exposure to Real estate companies like Lanco infratech, DLF, HDIL, Jai Corp.  While, in case of investing the bad process can be hidden for years and at times can go unnoticed, in poker one can know for every hand whether the process was right based on Odds and not the outcome. If a poker player, adopts consistently bad process he will end up losing in the long run.  In case of investing though, the evaluation and judgment of process is not so easy to make.

Losing faith after inevitable losses despite a sound, probabilistic predictions can cause people to quit predicting even when they’re technically good at it.  This is true for both poker players and investors.  The focus should always be on the Process and luck can be evened out in the long run.

PS: This blog was triggered after a Professional poker player losing a big hand immediately said – I played right.  He had made the right probabilistic play.

ZEEL Stake sale- Financial or Strategic Partner. Which Augurs better?

Zee stake sale of upto 50% of promoters holding is likely to be concluded soon as per promoter’s statements in investor concall and on an interview with CNBC.

https://www.cnbctv18.com/videos/business/zee-entertainment-stake-sale-to-conclude-by-early-july-says-ceo-punit-goenka-3489961.htm

Also, the promoters mentioned that they have one binding agreement and expecting another after which the family will decide.  One of them is financial investor and another strategic/financial investor.

For Traders, the only thing that matters is the price paid by the buyer and whoever pays the highest will make sense.  Strategic investor as compared to financial is expected to offer better price.

For Promoter, while given the current situation it looks like it will be a complete sale as the promoters have already lost 5.8% holding in ZEEL since Dec-18 because of pledged share selling.  Promoter stake has reduced to 35.79% from 41.6% in Dec-18.  Promoters have to make a tough choice between lower price and more control to higher price and likely no control.  We see limited scope of a strategic partner coming in and offering a better price as well as control to promoters. A strategic partner would most like to gain for himself synergy benefits, which in case of being in same line of business like Star TV, Sony or Amazon would mean shelving Zee5 (the OTT platform of ZEEL) or making it subservient. 

For Investors, a financial investor makes most sense as the objectives of share price appreciation are aligned.  In case, of a strategic investor we see risks of balance sheet clean up which could mean reevaluating inventory investments, loans to related parties and funds parked in offshore entities. ZEEL has seen a 3x rise in inventory from Rs 13bn in Fy15 to Rs 38.5bn in Fy19, leading to weak cash flows weak for the last 3 years. A strategic partner is more likely to take aggressive write–offs and reevaluate investments , any such reporting is seen negatively by investors and could lead to pressure on stock. Also, the long-term outlook will be a function of the interests of the strategic Investor.  ZEEL resurgence in last few years has been attributed to the dynamic leadership of Puneet Goenka and any change in management can rattle investors.

While traders will rejoice a higher price /Strategic partner, long term Investors should prefer Financial investor.