Where Our Investors Work

35 Articles

Equity Investors Should Set Reasonable Expectations

With markets undoubtedly cracking over the last quarter, it is a good time to look back at the last three years and review our frame of reference for equity investing. We saw a global pandemic wreak havoc with lives and supply chains. The war in Ukraine exacerbated global trade problems and drove up commodity costs. The actions of central banks to ease monetary conditions helped create the conditions for increased inflation (which we called out in the past).

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The Thing About Independent Directors

In theory, an independent director is a guardian of minority shareholder rights. The independent director is supposed to scrutinise questionable decisions or plans made by the CEO or the executive promoter. Such decisions might go against the best interests of minority shareholders and could directly affect the value of their investment.

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Understanding Uncertainty

An important part of investing is understanding uncertainty – that we do not know what will happen. And yet, at the same time, we must remain optimistic. We must use our knowledge of our lack of knowledge to focus on the opportunities that uncertainty creates. A 2013 scientific paper (“Managerial Miscalibration”) studied forecasts made by Chief Financial Officers (CFOs) of leading companies, about the stock market.

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The PE of The Boss

According to a recent New York Times article, Bruce Springsteen’s music catalog was sold for $550 million. According to Billboard, after deducting costs of production and distribution, about 20% of revenues, the master recording and publishing catalogs earn $17 million per year.

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Inflation Is Here

We had written in March about inflation creeping into the economy. It is now clearly visible in the data, as well as anecdotally. The Federal Reserve Chair is now considering the possibility that inflation may stick around for a while.

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Please See if You Can Avoid PSUs

We have spoken earlier about investing in Public Sector Units (PSUs; government owned and controlled companies), and why they should be avoided, as a thumb rule, by long-term, fundamental investors with small capital. Today’s reaction in IRCTC’s stock starkly illustrates the point.

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The Wrong Reason to Invest in the Stock Market

Many people think that an important benefit of investing in the public equities market is that they can withdraw or liquidate the investments at short notice. While investing, the liquidity in equity markets should at best be viewed by the long-term investor as a marginal benefit. It’s not a good primary reason to invest in the stock market. If liquidity is a priority, we should keep our money in a bank account or fixed deposit.

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Flip the Price-Earnings Ratio Around

The Price-Earnings – or PE – ratio is used very often by investors and financial analysts to gauge the price level of any given company’s stock. It is the ratio of the price of the stock to the earnings per share of the company in any given year. In very broad terms, all else being equal, the lower the PE of a share, the cheaper it is considered to be, and the higher the PE, the more expensive it appears. This is a very broad brush. All else is not equal.

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SEBI vs. SAT

If you follow the Indian securities markets, you may often come across news about SEBI appealing an SAT order on some case or the other.

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Where To Not Invest

Our Fund Manager, Rishi Gupta, was invited to speak by the Pune chapter of the World Zarathushti Chamber of Commerce on Wednesday, August 25, 2021. The topic of his talk was “Where To Not Invest”.

The video is posted below.

https://www.youtube.com/watch?v=Oe6TI4EmpW0&t=1s

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Bank Credit Growth Is Down

Total bank credit in India as of July, 2021, was 109 lakh crores. Between bank credit and corporate bonds, it is bank credit that does the heavy lifting of providing debt capital to commerce in India. Total outstanding commercial bonds are only about one-third of bank credit (33 lakh crores in 2020). This includes bonds issued by banks themselves.

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Introduction of Accredited Investor

The Securities and Exchange Board of India (SEBI) has introduced the concept of “accredited investor” to the Indian securities markets. Accredited investors will not be subject to minimum investment thresholds for Alternative Investment Fund (AIF; minimum investment one crore rupees) and Portfolio Management Services (PMS; minimum investment fifty lakh rupees) investments.;

In the AIF regulations, SEBI has defined Accredited Investor [individual] as

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Is ITC a value buy?

The world is a complicated place for companies. Commercial, social, ethical, environmental and governance issues intersect and intertwine in many different ways. Companies and investors often talk about “doing good” and making “ESG” goals a priority. Governments try to enforce doing good through measures like mandatory CSR (corporate social responsibility) allocations.

Our contention is that it is not easy to identify or measure how much good or bad is being done by a company.

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Initial Public Offerings (IPOs)

IPOs are highly marketed events. There is an entire intermediary ecosystem that is built to package and sell an initial public offering. These intermediaries have their incentives aligned with the sellers of the IPO. The sellers are either the existing shareholders, or the company itself that is issuing new shares. On the other hand, the buyers in an IPO are all the investors that are generally present in a public equity market, which includes individuals or retail investors.

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Approach Approaches With Caution

SEBI has recently revised its reporting format for Portfolio Management Services (PMS) to include more detailed information regarding their operations and performance. This is a good step towards furthering transparency in the asset management industry and is intended to help the investing public in their selection of the right product or service for their portfolio.

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10 Years of Indian Equities Investing

Shepherd’s Hill has completed 10 years of investing in the Indian equity markets. It is a significant milestone for any investment organisation. We would like to acknowledge the completion of the first decade by sincerely thanking all our clients, partners and teammates for making it possible to achieve our ongoing objective: to provide investors in the Indian equity markets with protection of capital and superior long-term returns.

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Second-order Effects

The world economy is a huge and complex organism with many, many moving parts. Predicting macro-economic trends – growth, interest rates or currency fluctuations – is a hazardous profession.

The Bloomberg article linked below is a good description of how a change in one corner of the world may affect something seemingly unrelated in a completely different sector and country.

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Buffett on Volatility and Risk

Continuing from last week’s discussion about the difference between volatility and risk, here are comments made by Warren Buffett on this topic at the 2007 Berkshire annual general meeting:

… Volatility is not a measure of risk.

… people who have written and taught about [risk] do not know how to measure risk.

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Volatility Is Not Risk

For the long-term value investor, volatility is not risk. This is a very important concept in the investment business. Many people, from analysts to aggregators of performance, from traders to teachers of corporate finance, use volatility as a stand-in for risk. Numerous conventional measures, such as the beta of a stock and the Sharpe ratio of an asset, incorporate the volatility of returns into the analysis of risk and “risk-adjusted” returns.

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First Mention of Fed Taper

The US Federal Reserve just released the minutes of its April joint meeting with the FOMC (Federal Open Market Committee), in which one sentence talks about reducing the pace of monthly asset purchases (up to $120 billion) that the Fed has been making since the Covid crisis began. The Fed’s asset purchases are used to ease liquidity conditions and boost the economy.

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