Thursday, March 14, 2013

Equities and Generalizations.

New Oaktree Memo

The equity risk premium thing is atrocious - makes very little sense, especially as it is used in media. Oddly, it is never used in India. But then, that makes sense - we are not academically as inclined towards finance and the equity markets are still seen as a gambling den; somebody recently noted (when I said I was going to Vegas) that "hey, just because BSE and NSE is not making you money eh?!!". "Ha, ha. (f U)"

He goes on and talks more rationally about doing an e/p ratio and getting an earnings yield. So, the current yield differential in the US is 525 bps based on a 6.25% yield on stocks and 1% yield on the 30 day T Bill (and in India, the difference is negative as it has been for a long long time. - might have to do with structural inflation? )

The yield is the highest it has been in a long time, but is that the whole story? It never is; nothing's that simple - especially in the world of investing.

Furthermore, it seems to me - based on what he read in the 1970s - that India is in the first phase of a bull market. When very few players start seeing the better picture ahead.

This:

In the mid-1970s I was fortunate to happen upon one of the first of the time-worn pearls of wisdom that contributed so much to my education as an investor.  It described the three stages of a bull market: 

·         the first, when a few forward-looking people begin to believe things will get better,
·         the second, when most investors realize improvement is actually underway, and
·         the third, when everyone’s sure things will get better forever.


- But does this matter?


Anyways - the last paragraph is fantastic and sums the attitude as it ought to be right now:

"And if I’m wrong – if there is no rotation from fixed income to stocks – I’m not that worried that I’ll end up with great regret over having failed to pile into T-bills yielding zero or the 10-year note guaranteeing 2.0%.  When attitudes are moderate and allocations are low, like I feel is currently the case with equities, there’s little likelihood of investing being a big mistake.  And when interest rates are among the lowest in history, it would take deflation, depression or calamity to make failing to invest in Treasurys and high grade bonds a serious omission."

My interpretation (And it seems not to change anymore):
As long as you buy cheap and well, in this kind of a scenario in the US - you're gonna be alright.

Funny conundrum: If you invest in a company that derives 70% of its topline and bottomline and cash flows from the US and Europe, are you investing in an Indian company?

If the Indian company has raised debt from the US to fund its US operations, is it still an Indian company?

If I have 4 companies in my portfolio, and all 4 of them have geographically, globally spread operations - do I hold a diversified portfolio?
Furthermore, if 2 of those companies have different business segments through different companies - am I even more diversified?

To take this thought even further, a mutual fund scheme that invests in 40 companies - does it own 40 companies or more like 100 companies?



Addendum:

Something about his life from this article.

"For all his intellectuality, Marks hardly lives the life of an ascetic. Last year, he sold his Malibu estate for an eye-popping $75 million and a month later bought a fancy apartment on Park Avenue in New York for $52.5 million. He shows up on the most recent Forbes 400 list with a net worth of $1.4 billion.
He met his wife, Nancy, and got her telephone number during an eight-floor elevator ride in Manhattan in 1969, and he pursued her with characteristic determination. After she spurned his subsequent marriage proposal, both she and he married others.
Then, in the mid-80s, they were reunited by the chance intervention of a mutual friend after their respective marriages had ended. They have been together ever since, and have two grown children -- a daughter by Nancy's first marriage and a son by their union.
Clearly, tenacity has paid off for Marks in both markets and life. "

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