Thursday, July 31, 2014

Berkshire Model – will it work for others?


Many investors and business people across the world admire Warren Buffet's business model and try to emulate. However, it has proven to be tough task. This article attempts to help whoever wants to try Berkshire Hathaway (holding company of Warren Buffet’s businesses) model.

Step 1: Become an Analyst

Buffett followed his master, Ben Graham, who taught him value investing. Through in-depth analysis he would find forgotten or discarded companies, trading at deep discounts to the value of their net assets.

He had passion for analysis & over time he became an expert. He would find companies which offered ‘value arbitrage’ i.e which he could extract a little bit of value.  These stocks were often ‘not so great’ companies, but were trading below liquidation value, so offered ‘value arbitrage’. Buffett called them “cigarette butts,” because like discarded butts—from which one could enjoy one last puff—they offered one last bit of value. While most investors looked for some great companies, Buffett mastered extracting that value from such “cigarette butts.

Step 2 – Take calculated ‘big’ risks

When Warren Buffet decided to go big, he decided to close his investment partnerships. Then he bought a textile mill in late 1960s and took charge as its main decision taker. He had no plans in dominating textile industry, but using the funds of the textile mill he bought and insurance company – but it was a brilliant move and the net cash outflow was zero.

After one year, the ‘cash floats’ from the insurance company and whatever surplus (cash) the textile company produced were channeled into ‘value investing’ . But in this second stage, Warren Buffet moved beyond “cigarette butts’ and focused on large companies.

Buffett might have started with unknown companies, but his analytical skills provided him with insights to make his fortune in brand names like Coca-Cola. When he accumulated Coco-Cola shares, the company was coming out of a bad phase – what looked for others as ‘big’ risk, was a ‘value arbitrage’ for Buffet. i.e. the value arbitrage in terms of future performance.  

Step 3 – Develop Passion for what you do

All successful entrepreneurs say this. You have to get passion so that you can be optimistic when everyone around you is pessimistic. This allows you to put more efforts despite initial failures. Buffett’s edge was similar. He was willing to put in the time reading Moody’s manuals and annual reports cover to cover when no one else bothered. It takes immense discipline, patience, time, and lots of energy to know a business inside and out, but the effort is worth it.

Step 4 – Become a Leader

While many books speak about Warren Buffet’s investing techniques, not many speak about his leadership skills. He is a fantastic leader, because he is able to find talented, skillful and passionate CEOs to run his 100+ companies. He rarely speaks to them or gives them guidance. In this auto-pilot system, the CEOs work for Warren Buffet’s holding company without the usual top management push and pulls. I think he trusts his CEOs and seems that if couldn’t trust some CEO, he would fire him and would get a man he could trust in the job. In some cases, empowering others leads to phenomenal results.

Thursday, April 10, 2014

CLUELESS FED RESERVE - Marc Feber & Raghu Ram Rajan

Recently, the US Fed Reserve has decided to continue their liberal monetary policy (money printing + low interest rates) which they started 5-6 years back.

Financial Thoughts agree with Marc Weber (correctly pointed out some of the stock market crashes in the past) when he says

"I believe that the market is slowly waking up to the fact that the Federal Reserve is a clueless organization," Faber said. "They have no idea what they're doing. And so the confidence level of investors is diminishing, in my view."

The consequence of the note printing (QE) is that there is temporary boom in the US economy. China is the biggest taker of such notes as it holds USD 3 trillion (& China has its own justifications). You can also repeat this to boost your economic (financial) position by printing IOU notes to suppliers of various goods (house, cars, etc) to you. Only thing is that your creditor shall hold it in their reserves and shall not make a claim on you. That is what China is doing - the moment China decides to liquidate US Dollar holdings, that will cause the world to witness something no-one in the economics or finance has seen. Probably, that may even lead to World War III

Let us focus on Marc Weber views on US Fed policies and its consequences. Whilst China may decide to hold on to its IOU notes from USA ad infinitum,  such policies will have its own consequences in the near term

Weber goes on to add that as investors adjust to this fact, and valuations shrink, he predicts a massive decline in the market. He predicts 30% correction in US Stock Market in 2014 - this is not good news for world markets (including India) as the global financial markets are inter-connected.

That's where we can understand the question Rajan asked Ben Benarke in a recently gathering of Central Banks. Rajan asks an interesting question
 
"If the (Fed) policy hurts the rest of the world more than it helps the United States, should this policy be pursued?"

It is reported that Bernanke was upset - he got even more upset when Rajan mentioned that the benefits of QE will be less clear if its prolonged. Bernanke said something that Rajan and emerging market economies are worried about their exchange rates & according to him, the QE which is a monetary policy may not be mixed up with Foreign exchange policy.

However, Financial Thoughts believe it is better to listen to Rajan, who had correctly predicted the consequences of liberal monetary policy of Allan Greenspan before the Great Crash of 2008.

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Tuesday, March 11, 2014

A Travelers Memory of Kerala 'Gods Own Country'

For the past several centuries, Kerala was crisscrossed by travelers from East and West. Some the travelers included Ibn Bathuta, Marco Polo, Gundert , etc.

Financial thoughts is impresssed by the memory penned by Davin O'Dwyer. He has written an article summarizing his visit to Kerala, which is reproduced below 
  

Kerala, India: They don’t call it ‘God’s Own Country’ for nothing

By Davin O’Dwyer,


As grandiose slogans go, Kerala has one of the best: “God’s Own Country,” they call it, an assertion of divine provenance that’s loudly proclaimed on countless signposts and bumper stickers across the state. In most corners of the planet, such a boast would sound unbearably self-satisfied, tourist-oriented branding at its tritest. But here in this prosperous state on the southwest coast of India, it doesn’t sound smug so much as sincere, precise even. “Rest your eyes on our natural splendor,” it seems to say, “and believe.”
The phrase invokes the stunning natural beauty for which Kerala is renowned, of course, but also alludes to the variety of faiths that thrive here: The coexistence of Hindus, Muslims, Christians and even some Jains is apparent in the busy juxtaposition of towers, minarets and spires that sit cheek by jowl in every city, town and village. If for no other reason, the state can lay claim to the title of “God’s Own Country” because there are so many gods who might be inclined to choose it as their own.
My girlfriend and I arrived in Fort Kochi, a famously quaint heritage city filled with the vestiges of its Portuguese, Dutch and British colonial past, just before Christmas. One evening we stumbled upon aSunday school concert in front of the Santa Cruz Basilica, a grand edifice with a dazzling white facade and twin spires reaching to the sky.
It was an arresting sight — glowing paper star lanterns hanging over a large, busy stage where a choir of small schoolgirls dressed as angels performed Christmas carols for a rapt audience of hundreds. “Silent Night” has never sounded so out of place and yet so universal. This was followed by a troupe of teenage girls in colorful Indian dress who performed an elaborate folk dance, arms and torsos waving in intricate patterns. The contrast of Christian hymns and traditional pageantry should have seemed jarring, but instead it appeared to be a seamless expression of multifaceted identity.
That identity extends to the countryside. From the stunning beaches along the Malabar Coast to the maze of backwater canals cutting through huge rice fields to the glorious rolling hillside tea plantations in the Western Ghats, Kerala’s landscapes are almost as diverse as its people.
But the most abiding quality of those landscapes is the way they unfold in varying shades of lush green, as though the color spectrum had been forced to expand to accommodate the state’s spectacular fertility.
The name Kerala is derived from kera, the local Malayalam word for coconut, and there is an abundance of palm trees across the state, the spiky dark green fronds acting as natural parasols against the glare of the sun. The coconut doesn’t just lend its name to the place, but also acts as a ubiquitous and adaptable natural resource from which countless products, such as coir, a versatile fiber, and toddy, a famous — and potent — local brew, are derived.
Mountains of tea
It’s the plant behind another beverage that gives the area around the hill station town of Munnar, in east Kerala, its famously vibrant shade of green. In this part of the Western Ghats mountain region, the steep hillsides are covered with about 60,000 acres of tea plantations — an industry begun by the British, who established the plantations in the late 19th century.
The result is a stunning vista: The vast swaths of tea bushes cling to the hills like a soft emerald carpet. The narrow pathways between the bushes, the trails followed by the tea pickers, lead to patterned grooves accentuating the topography, appearing from a distance as if some godlike cartographer had inked contour lines onto the mountain slopes.
We normally think of a physical colonial legacy in terms of architectural styles and urban design — the distinctive angles of the roofscape, the width of the boulevards, the patterns of the brickwork. But the colonizer doesn’t leave an imprint just in the city streets, and in the hills around Munnar, we see a different type of physical legacy, a landscape radically altered by the British.
The emerald sheen of the hillsides comes courtesy of the empire’s insatiable appetite for tea. Intrepid colonists such as John Daniel Munro and A.W. Turner made their way up to the High Ranges, as they called them, and discovered that the altitude, gradient and orientation of the slopes were particularly suited to the cultivation of tea.
And that wasn’t the extent of their impact. To provide enough wood to fuel the tea production process, eucalyptus seeds were smuggled in from Australia, and now the hilltops are covered with fast-growing, ramrod-straight eucalyptus trees, standing as if in severe vertical rebuke to the natural curves all around.
As a town, Munnar has been blighted by thoughtless overdevelopment, with large hotels springing up in shambolic fashion. But traces of its history as a hill station, or colonial mountain town, remain, such as a few Christian churches and the High Ranges club, the latter persevering as if the sun had never fully set on the empire.
As has happened so often in India, the imposed traditions of the occupier, from the Mughals to the British, have been subsumed into the local identity, assimilated with ease into the larger national narrative. Thus, Indians drink copious amounts of “chai,” usually sweetened beyond recognition, and the tea landscape, too, becomes absorbed into the local tradition, a proud part of the heritage rather than evidence of an alien legacy.
Grasses and goats
On Christmas morning, we made our way to Eravikulam National Park, about eight miles from Munnar, which stretches over some 37 square miles above the line of vegetation, the green giving way to yellow-tinged, tough grass and exposed rock.
The treetops and tea plantations are arrayed on the hillsides below, and from here you get an unrivaled view of the rolling countryside, with pockets of mist occupying some valleys while occasional lost-looking clouds skim the highest peaks. Looming over the reserve is Anaimudi mountain, which, at 8,842 feet, is the highest mountain in southern India. It’s a forbidding hunk of rock, earning the nickname Elephant Head with its imposing outline.
One of the chief attractions of Eravikulam is the Nilgiri tahr, a rare mountain goat that was nearly extinct a century ago but now numbers approximately 3,000, about half of them in this reserve. Unlike the wild elephants that you can glimpse in certain wide pastures in the valleys below, the Nilgiri tahr are happy to approach the pathway, mingling with visitors in nonchalant fashion.
Signs warning people not to stray off the track are in English and Malayalam, which uses a script peculiarly apt for this part of the world. The voluptuous letters, all round curves and looping twirls, beautifully match the landscape. Fittingly, the word Malayalam itself means “hill region.”
Every dozen years or so, the tough grass suddenly turns bright blue as the native Kurinji flower blooms across the hillside, adding another dose of color to the landscape, almost as if nature is offering occasional respite from the pure greenery below.
In the backwaters
Quite another shade of green characterizes the famous Kerala backwaters near the coast. Although the tea plantations are closer to emerald, the vast rice paddies of this area are an almost luminous jade, fringed with palm trees and banana plants. The wetlands area around Kuttanad is a dense maze of canals, rivers and lake, largely south of the Vembanad lake, one of the largest in India. The mythology has it that Kerala was created when Parasurama, an incarnation of Vishnu, threw his battle axe into the sea, resulting in this conflicted countryside, neither all water nor all land.
A voyage along the backwaters on one of the traditional thatched boats is one of the quintessential Kerala experiences; the kettuvallam, as they are known, were once used to carry rice and passengers around the waterways and are now being adapted as houseboats, many extremely luxurious. They come in all shapes and sizes, the roofs usually bowed, curving gracefully toward the water.
We take an overnight cruise, meeting our charming crew of three at the busy coastal city of Alleppey. It is one of those chaotic, choked Indian towns that thrum with an anarchic energy, where speeding rickshaws and mopeds play real-life dodg­em on the streets before being held up by the occasional elephant progressing along in stately fashion.
The contrast with the waterways couldn’t be starker. Once you’re on the water, the delirium of Alleppey fades to a dim memory, replaced by a pervasive calm. A cruise along the canals is captivating — so serene, so tranquil that it weaves a kind of meditative spell, like a deep-tissue massage for the soul. We slowly glimpse the quotidian charms of local life here — the beautiful little cottages along the waterways, with moored boats instead of parked cars; small shops and toddy bars; numerous churches, some daringly modern in style, others tracing their roots back to the time of St. Thomas, the doubting apostle, who is said to have arrived in these parts in the 1st century.
As the houseboat chugs along, we regularly hear the slap-slap-slap of cloth smacking against stone as mothers do the family laundry by the water’s edge while children pause in their games and wave in our direction.
The captain docks the houseboat beneath some palm trees as we stop for lunch, and we become distracted by a most unusual sight: A lone duck herder on a canoe is expertly chaperoning a flock of hundreds of quacking ducks along the water, steering them this way and that with the use of a very long stick, both paddle and conductor’s baton, with which he propels himself and splashes the water to keep his charges on course, corralling them toward his colleagues on the riverbank. With the ducks safely home, the herder moves on to do it all again with another flock, an act of Sisyphean patience.
Later, we pass a cramped cricket game unfolding in the space between some palm trees, a scrawny wicket worn on the wiry grass. The boys wield their bats expertly, accounting for the tree trunks as if they were rival players. They, too, stop and smile and wave, the sense of hospitality boundless.
As the afternoon draws to a close, we take a canoe along a narrow canal, passing small, pretty cottages, and then walk along the small dams near the rice paddies, bending to duck beneath the broad leaves of banana trees. With the sun setting to the west, the rice paddies before us glow an iridescent green. It’s a dazzling sight, a vivid example of Kerala’s natural beauty.
We return to the houseboat as darkness falls and the vibrant colors fade to black. Whirring bugs accumulate in the air around us, and we catch a faint call to prayer echoing from a distant minaret and enthusiastic singing drifting over the water from a nearby church.
God’s own country, they call it. We close our eyes on the natural splendor, and believe.
O’Dwyer is a freelance writer based in Hamburg, Germany and Dublin. His Web site is davinodwyer.com.

Saturday, March 1, 2014

Letters to Investors by Warren Buffet

The much awaited 'Letter by Warren Buffett to Shareholders' is out. Such letters are famous for its education content and insights:

Some of the highlights of 2014 Letter are: 
  • Whilst many equity managers found it impossible to outperform the S&P 500, the two portfolio managers of the Berkshire Hathaway (Todd Combs and Ted Weschler) out performed S&P 500. Each manages a portfolio exceeding $7 billion. 
  • Berkshire Hathaway increased its ownership interest in the following companies
- American Express, 
- Coca-Cola 
- Wells Fargo- (increased ownership to 9.2% versus 8.7% at yearend 2012)
- IBM (6.3% versus 6.0%)
Stock repurchases at Coca-Cola and American Express raised their % ownership
  • Berkshire book value per share gained 18.2% in 2013, underperforming S&P 500 by 14.2%. Berkshire’s gain in net worth during 2013 was $34.2 billion. 
  • Over the last 49 years (that is, since present management took over), book value has grown from $19 to $134,973, a rate of 19.7% compounded annually.
  • The letter says that Berkshire’s intrinsic value far exceeds its book value. They repurchase of shares at 120% of book value . However, they did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive.
  • They made two large acquisitions during 2013, spending almost $18 billion to purchase all of NV Energy and a major interest in H. J. Heinz. 


Friday, February 28, 2014

Moneyscience Interview

Moneyscience, London, UK had interviewed me on ' Advanced Credit Risk Analysis & Management'. Please see below: 

Jacob Bettany: Could you begin by telling us a little bit about your background and how you came to write this book?

Ciby Joseph: I would like to introduce myself as a veteran risk management professional with two decades of banking experience. My expertise includes risk analysis, credit risk management, derivative risk management, financial analysis, relationship management, Basel regulations and investment management. During my banking career, my focus was predominantly on credit risk.
How I came to write this book is an interesting story. In the late 1990s, when I was working with HSBC Saudi Arabia as Senior Credit Analyst, I was assigned the role of teaching credit basics to new recruits under JODP (Junior Officers Development Program). One of the new recruits approached me and asked.......to read more please see the link http://tinyurl.com/osq7rvt 

Saturday, January 11, 2014

RISK LURKS EVERYWHERE - BE CAREFUL & LEARN FROM OTHERS MISTAKES


NSEL fiasco is now well known. The losses suffered from this SCAM includes large investors to small investors. A few sample is given below:

Geojit BNP Paribas makes provision for the dues from NSEL  See the link http://www.financialexpress.com/news/Geojit-BNP-Paribas-hit-hard-by-crisis--net-loss-at-Rs-94-cr/1195052

Motilal Oswal Group exposure is Rs 254 crores
http://profit.ndtv.com/news/corporates/article-nsel-owes-rs-254-crore-to-motilal-oswal-group-327287


Several small investors also lost..........see below
" I invested my husband PF after retirement with India Infoline in commodities, which is now stuck.So many such reports in media are out to question us, the investors,for not asking so many questions before investing and trying to suggest as this is our fault.What are you all suggesting that now onward anyone travelling should ask for air worthiness certificate from airline before making a booking, check all parameters of railway before boarding or for that matter any thing in life? There are bodies who are suppose to look after all that. Just because no one did their job a small investor should suffer. Where were all these agencies when these people started their business activities?How can Govt ministry/FMC/NSEL/IIFL and all other concened can sleep? The least one expect is, please solve the problem.

" I am also facing the same fate. ..... convinced me to break my FD and invest in NSEL. Now money is at stake......" 

The above comments are taken from the following (well written) article
http://www.business-standard.com/article/markets/nsel-anatomy-of-a-trade-gone-sour-113082600402_1.html

Conclusion
In 1992 it was Harshad Metha and since then, there were almost hundreds of investment scams - big & small - in India. Varying amount of sums were lost. I have gathered a few websites that provide details of such scams

Kindly visit them and learn from others' mistakes.




Wish you Happy & Safe Investing !