Lumuhuku

All of us had put the year 2008 (Read – The year that should not be ‘named’) behind us when we welcomed 2009. After having lost more than 50% in the stocks in a year, who wouldn’t??

And just then, at the very start of the year, Mr. Raju of Satyam makes a shattering disclosure that he was fooling the entire IT industry and everyone else in the world, for the last 7 years or so! The company had almost nothing at all in bank balances and assets except its workforce of 55,000. What happened to the stock was not surprising. It lost more than 75% in a single session.

And what does Mr. Raju have to say at the end of it all –

“It was like riding a tiger, not knowing how to get off without being eaten.”

The tiger being the company, with him riding under the fear of his past misdeeds getting back to him.

An awesome analogy to say the least.

But shouldn’t we sympathize with Mr. Raju’s courage to come out and admit his mistakes? After all, it takes a lot of guts to do the same.

I don’t think so.

It is quite simple. Just the fact that a person admits to have lied for several years is reason enough for anyone to suspect that what he might be putting forward as the real truth, might just be another piece of lie!

Maybe he found this the best way to get out of the soup. Maybe there are more unpleasant surprises for all of us in store.

Mr. Raju says that he never took a single rupee for himself or his family. Now that is crap. How the hell is it possible that an IT major which has been competing with other international organizations was not profitable? How the profit margins were just 3% and not anywhere near the industrial average of 25-30%? He even went on to say that they have not sold a single share of the company for the last 8 years. But it has been made publicly known that the promoters have reduced their stake from 22% to around 7% now. So, who is lying again…you get the pattern??

Let me confess it first. Warren Buffet is the equivalent of God for me. So any biases & excessive use of superlatives that might have crept in this post should be acknowledged & respected by you. 

$600,000 is what I paid for a lunch with Warren Buffet. I know it is too much for anything, leave alone a lunch. I could even have bought a Class A or B share and would have been granted an access to the now ‘a pilgrimage of sorts’ Berkshire Hathaway Annual Meetings. I would also have received the letter from Berkshire Hathaway as well as some of the cool See’s Candies…

But this is the price I was always ready to pay to meet my God. And almost an year after having won the bid for the privilege of dining out with the world’s richest man and my idol, Warren Buffet, here I was at New York’s famous steakhouse, Smith & Wollensky, for my big moment & pilgrimage.

I was out of breath when I came out of the taxi. I was already late. That too at such an occasion!! I was really feeling very stupid at this when I saw Warren, dressed in a dark suit and yellow tie, seemingly in no hurry and ‘waiting for me’ outside S&W. I bet I could see a halo around his head! Really. But he had no airs of being larger than life figure. But shit!!! was this a dream? I could see that Warren was not alone. He was accompanied by none other than Charlie Munger and Ajit Jain. Now it is one thing to bid and win a lunch with god (read Warren Buffet), but getting to have lunch with 3 great men @ a price of one, is one great investment. But just then the dream ended, and Charlie and Ajit left me with my God alone. They had some personal priorities greater than me… The Oracle of Omaha was more than happy to let me get as many pictures clicked with him as I wanted.

After the pictures were done, we sat down for our meal. The menus arrived and Warren ordered for a medium New York T-bone steak with hash browns and a Coke (Berkshire Hathaway owns shares in Coca-Cola Co.). Out of awe and respect, even I ordered the same, completely forgetting that I was a vegetarian!! I realized it after a while and called the waiter back, and modified my orders. Warren was all smiles and I knew that nothing was hidden from my God.

It didn’t strike me when we were chatting, but when I look back now I realize that over the 4 hours , we discussed millions of different topics, ranging from Warren’s value system as an investor to his friend and Berkshire Vice Chairman Charlie Munger to the importance of picking the right life partner. But really the thing that made the biggest impression on me had nothing to do with Warren’s investment philosophy. Rather, what was moving was his love for his former wife, Susan. “I never did anything for Suzie, but she did everything for me; I wouldn’t have been as successful without her.” Even great men like him are not perfect when it comes to relationships. 

It was time for dessert (ice cream in shot glasses) and for our lunch to end.

And with that my ‘Cursed’ alarm clock buzzed me out off the bed. Shit!!! I never realized that this was a dream. And I swear that I will always be ready to swap my realities with this dream.)

It has been around 3 years that I have been learning vicariously from Warren. And I, not a very ‘awesome’ investor, have turned into a vastly better human being. Now this is what should be called a dream lunch…isn’t it?? 

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Reliance Power’s IPO got fully subscribed in the very first minute of its opening (!!!) & attracted $27.5 billion of bids on the very first day, equivalent to 10.5 times the stock on offer. But the IPO was neither floated to augment any existing infrastructure of the company nor to expand the company’s presence in its sector. The money was to be used for funding the development of 6 power projects (from scratch) across India. i.e. The company was just a virtual entity till then (!!) And to get the shares in the IPO, people borrowed from various sources, hoping to make a killing on listing and paying back to ‘those’ sources.

Reliance Power debuted on the stock markets when the bearish phase of the markets had just started (January 2008). And ended the day 17 per cent lower than its issue price on the Sensex (BSE).

Yesterday, the stock closed at Rs. 122.60 (down more than 70% from IPO price)

So how does Warren Buffet (the God) answer our question “Why Reliance Power’s IPO tanked on listing ?”

He once said –

“When you combine ignorance and borrowed money, the consequences can get interesting.”

In Reliance Power’s context,

IGNORANCE – People were ready to pay a high price for a company that will earn its first Rupee after 5 years of IPO (!)

BORROWED MONEY – People dug into their life’s savings to invest in the IPO & some idiots even took loans (!)

>

(Buffet – “Hey Anil, Were you sleeping when you priced your IPO?”)

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I found this really ‘intelligent’ presentation on the ongoing credit crisis. In just 23 slides, it shows how stupid the American Financial Geniuses have been.

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For knowing what really did happen in the last 5 years, which led to this current economic mess, you may read a really simple article – A step by step process of world economy destruction

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Or see how a Sunday (A holiday!) changed the World Economic Map at Wall Street & US Economy destroyed

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Have any questions regarding the $700,000,000,000 bailout package? Or you feel that this gigantic bailout is bad for the American taxpayers? Or you wan to know what the experts have to say about it? Read it all at $700,000,000,000

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Or for a complete coverage of the current economic mayhem, read The Financial Mess

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Indian stock market investors will always remember 24th October, 2008 as the blackest Friday the Indian stock market as seen till date. The Sensex plunged 11% while the Nifty ended down by 12.20%.

The gains of the 4-year bull-run have been wiped out in just eight months!

So, what does the biggest bear of them all -  Shankar Sharma would have to say about this carnage?

___________

Q : Good evening sir, did you see what just happened in the stock markets today?

A : Why? Did it rise 100 points?

Q : Oh come on sir, you must be joking!! Sensex and Nifty fell more than 10% today itself. Sensex is trading near 8500 and Nifty near 2500!!

A : See? I have been telling you all for the last 9 months that the party is over. The days of easy money are over dude. India has run way ahead of itself. And investors can’t expect a compounded annual growth rate of 30-35% each year.

Q : But this day is different from other falls. The blue chips like RIL and ONGC cracked today. That too over 15% !!

A : Yeah…I agree with you on this. Your Finance Minister P Chidambaram also tried to intervene and calm frayed nerves but that did not help the markets. And you know what? He was saying that they were ready to adopt conventional and unconventional tools!! Tools?? These are times to go short. Nothing else. Pure shorting.

Q : So you didn’t even buy a single share today? Some of the blue chips were really attractive today.

A : No!! Why on earth would I do anything like that ?

Q : Sorry. Stupid of me. Sir, where do you see Sensex on 31st December 2008 ?

A : 7000

Q : And sir 3 years from now ?

A : 3000

Q : In the year 2015 ?

A : Base Value

Q : What sir?

A : I mean 100. Sensex at 100.

Q : You must be joking sir. Sensex at 100?? No way.. But at least at 7000, will you buy anything in the Indian market?

A : Well, first I will think of covering my shorts. Buying….? no hurry yet…may be by 2015. Lets see.

Q : Sir what are your views on real estate stocks? The Realty Index fell 25% today. And Unitech plunged 52% and DLF fell close to 24%. Puravankara Projects crashed 45% and Parsvnath was down 21%. There must be a lot of value in them now?

A : Value? In real estate stocks? No way. You can better invest your money in buying bricks. Even if Unitech falls to its 2003 prices of Rs. 1.50/-, I will short it. But DLF around 25 will be a good buy.

Q : Unitech @ 1.50 , DLF @ 25 !! But DLF’s IPO came in at about 500? Even I bought it. It was just too good to miss.

A : Then DLF guys made you a fool 25 times over. [Laughs]

Q : Which is the best buy you think currently?

A : Best buy is “short sell”.

Q : Sir a few personal questions. What is your favourite color ?

A : Red

Q : hmmm…oh I should have guessed it….Why do you have a picture of BEAR in your living room?

A : Oh that? He is Mr. Sharma, my father. And did you see our family picture?

Q : What?? ….Ohhkk sir, it was a pleasure talking to you and thanks for this bearish interview.

A : My [short] pleasure.

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Disclaimer: Unfortunately, this is not a real interview.

Read about his earlier BULLS-BEARS-OSCILLATIONS view here.

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First lets see what happened a day before. On Monday, the markets set a record of gaining 241% in a single trading session. And today, that is Tuesday, they gained another 257% !!

But the fact is that these figures are just meaningless. Citizens are turning to equities in a desperate attempt to protect their money from the country’s stratospheric hyperinflation. This is just a representation of Zimbabwe’s collapsing economy. Inflation is officially running at an annual pace of 231 million percent, but some experts put it more at about 20 trillion percent.

These sort of gains might prompt us to think that the guys from Wall Street might be landing their jets in Zimbabwe. But reality is different and on the contrary, only 2 percent of investors are foreigners. This is in comparison to about a decade ago when foreigners made up about 30 percent of investors.

If we talk about the exchange rate of currency, it jumped from 30 million Zimbabwean dollars to one U.S. dollar on Friday, to 100 million to a US dollar on Monday!

Some of the major gainers in individual stocks are -

• Government-controlled Zimpapers, which gained 3,471 %
• Cement maker Lafarge saw their share price rise 1,400 %

But everyone does not consider it to be another bubble ready to burst. With the newest listings in the mining sector. Zimbabwe has vast untapped mineral wealth including gold, diamonds and platinum. Munyukwi said markets were driven by strong, cheap assets which are offering returns that were more than matching inflation. He said -

“Some people think that this is a bubble about to burst, but I don’t think so.”

But he did agree that the market was largely overvalued in Zimbabwean dollar terms but said it is undervalued in U.S. dollars. And volumes being traded are very small and there was no real movement year on year.

So what lies in future, for Zimbabwe?

God help Zimbabwe…or rather Warren Buffet could better answer this question…isn’t it??

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Here’s a very interesting anecdote that describes how an “asset bubble builds up and what are its consequences.”

THE ANECDOTE -

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollar as there were only two pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.

____

2) B decided to purchase the land from A for 1 dollar. So, A and C now each own 1 dollar while B owned a piece of land that is worth 1 dollar.

____

3) C thought that since there is only one piece of land in the country and land is non produceable asset, its value must definitely go up. So, he borrowed 1 dollar from A and together with his own 1 dollar, he bought the land from B for 2 dollar.

A has a loan to C of 1 dollar, so his net asset is 1 dollar.

B sold his land and got 2 dollar, so his net asset is 2 dollar.

C owned the piece of land worth 2 dollar but with his 1 dollar debt to A, his net asset is 1 dollar.

The net asset of the country = 4 dollar.

____

4) A saw that the land he once owned has risen in value. He regretted selling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollar from B and and acquired the land back from C for 3 dollar. The payment is by 2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to C.

As a result, A now owned a piece of land that is worth 3 dollar. But since he owed B 2 dollar, his net asset is 1 dollar.

B loaned 2 dollar to A. So his net asset is 2 dollar.

C now has the 2 coins. His net asset is also 2 dollar.

The net asset of the country = 5 dollar. A bubble is building up.

____

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollar.

The payment is by borrowing 2 dollar from C and cancellation of his 2 dollar loan to A.

As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollar.

B owned a piece of land that is worth 4 dollar but since he has a debt of 2 dollar with C, his net Asset is 2 dollar.

C loaned 2 dollar to B, so his net asset is 2 dollar.

The net asset of the country = 6 dollar.

Even though, the country has only one piece of land and 2 Dollar in circulation.

____

(6) Everybody has made money and everybody felt happy and prosperous.

____

(7) One day an evil wind blowed. An evil thought came to C’s mind. “Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollar in circulation, I think after all the land that B owns is worth at most 1 dollar only.”

A also thought the same.

____

(8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollar coins, his net asset is 2 dollar. B owed C 2 dollar and the land he owned which he thought worth 4 dollar is now 1 dollar. His net asset become –1 dollar.

C has a loan of 2 dollar to B. But it is a bad debt. Although his net asset is still 2 dollar, his Heart is palpitating.
The net asset of the country = 3 dollar again.

Who has stolen the 3 dollar from the country ?

Of course, before the bubble burst B thought his land worth 4 dollar. Actually, right before the collapse, the net asset of the country was 6 dollar in paper. his net asset is still 2 dollar, his heart is palpitating.

The net asset of the country = 3 dollar again.

____

(9) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollar bad debt to B but in return he acquired the land which is worth 1 dollar now.

A owns the 2 coins, his net asset is 2 dollar. B is bankrupt, his net asset is 0 dollar. ( B lost everything ) C got no choice but end up with a land worth only 1 dollar (C lost one dollar) The net asset of the country = 3 dollar.

There is however a redistribution of wealth.

A is the winner, B is the loser, C is lucky that he is spared.

 

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A few points worth noting -

• When a bubble is building up, the debt of individual in a country to one another is also building up.
• This story of the island is a close system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island’s own currency. Hence, there is no net loss.
• An overdamped system is assumed when the bubble burst, meaning the land’s value did not go down to below 1 dollar.
• When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the loser. The asset could shrink or in worst case, they go bankrupt.
• If there is another citizen D either holding a dollar or another piece of land but refrain to take part in the game. At the end of the day, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw..
• When the bubble was in the growing phase, everybody made money..
• If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash.
• Instead of land, the above applies to stocks as well.
• The actual worth of land or stocks depend largely on psychology.

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