Zenotech Labs - Bitter Pill

I had earlier posted on Zenotech Labs laying down the original premise of the trade in a post here.

http://investingvalues.blogspot.com/2009/11/curious-case-of-zenotech-labs.html

After much delay the supreme court judgement came and the court ruled in the favour of Daichhi and the minority shareholders lost the case. The open offer will now happen at Rs 113.6. The stock promptly corrected to the Rs 100 mark where I exited my position taking a loss of about 10-12% on the trade.

A bitter pill to swallow but the downside was factored in the trade in case the judgement came in favour Daiichi.

The stock has subsequently moved down to the Rs 94 level and at some point of time will start becoming attractive considering the high acceptance ratio on the open offer.

Positioning for Luck

In my previous post on Abbott Labs, I had written how part of the returns that the stock delivered for me was good stock picking and part of it was pure luck.

Can u position yourself to get lucky? How do u ensure that u get hit by good luck more often than bad luck.

I want to put across a example from my life in terms of how one can be positioned for luck. On finishing my 12th Std/ HSC/ Jr college, I took up admission into a engineering college in the stream of production engineering. A friend of mine from the same batch took up admission in a stream of medicine called “ Occupational therapy”.

In my batch of 80 students, there were 3 girls and 77 boys. In his batch of 50 students there were 2 boys and 48 girls. I m sure you will appreciate who amongst the two was positioned for luck :-). So even if I was a cute guy with a great sense of humour and extremely sensitive ( I cant claim I m any of the above), the stakes were just loaded against me to be able to woo a charming lady. My friend of course was in such a envious position that he would really have to shoot himself in the foot to get it all wrong.

There is of course always the probability that I managed to woo one of those three girls and my friend managed to get it all wrong but I would assign a very low probability to it.

He was just positioned to be lucky.

When we come to stock picking, unlike choosing u r graduation stream we have the option of choosing what stocks to buy and what to avoid. We can work our way to get lucky more often than been unlucky. Spot more white swans coming our way as opposed to encountering black swans.

Lets look at IT companies right now. Both Infosys and TCS are great companies with great business models. But at 26 PE with the world economy slowing down, currency turbulence, political pressures etc we are positioning ourselves to get unlucky on this one. These companies could still deliver great numbers and growth but at these valuations there is a high probability that we could get unlucky on these stocks. I cannot at this point visualise what possible events could happen which could make me lucky in these stocks.

I bought Clariant chemicals in my portfolio a couple of months around the Rs 430-440 mark. The stock came on my radar after I heard a global announcement about a plant shutdown in thane which would release some prime property ( about 36 acres) and unlock value. On the operating level the company has been delivering great numbers and improving performance on all fronts. I bought the stock around the 8-9 PE mark.

Beyond this Clariant has about 120 acres of land more at another plant in Kolshet Thane. It has maintained a very high dividend payout ratio over the years. The parent is in a bad shape and is rumoured to be up for sale. A possible sale will trigger a open offer in India.

Of the above variables only the operating performance and the land sale are known variables. All other variables are events that I could possibly get lucky with. They might not necessarily happen but when I bought the stock at 8-9 PE, I was positioned more to get lucky as opposed to get unlucky.

There is of course the other way of doing this

It was to get your parents to name you “Lucky” which would have resulted in you being lucky for the rest of your life :-).

Abbott Labs

I had originally put out a post on Abbott labs about 2 year back when I added it in my portfolio. The link is enclosed below.

http://investingvalues.blogspot.com/2008/05/stock-idea-abbott-india.html

I had bought it around the Rs 540 mark when the markets were around the 16500 range. The stock ended today at 1134 with the index at 17,400 levels. Along the way I sold about 50% of my holding around the 735 mark and continued to hold the rest.

So on a like to like comparison Abbott has delivered me over 110% return as compared to the Index which delivered about 4% in the same period. ( I haven’t factored in the dividends that came thru and the share buyback that took place).

Thought process

1) My original premise on Abbott was the fact that it was a great business with high ROE and throwing out surplus cash every year. Though there are other pharma companies with a similar structure, what I liked about Abbott was the fact that the parent globally had a philosophy of returning cash back to shareholders in the form of dividend or share buybacks which made it more attractive as a holding.

2) I also along the way anticipated that the parent which was generating surplus cash would direct that surplus cash into acquisitions with a greater focus on emerging markets. Abbott acquired Solvay and followed up with its current acquisition of Piramal Healthcare making it the largest pharma company in the country.
The market has of course carried out a round of PE re-rating and assigned it a PE in sync with large MNC pharma companies from the tier 2 pharma company PE that it was getting.

Doesn’t all of the above make me sound like a great analyst?

I want to bring here the interesting concept of “Hindsight Bias”. To quote Wikipedia “Hindsight bias is the inclination to see events that have occurred as more predictable than they in fact were before they took place”. Simply put we believe that we predicted or were prepared for event that have happened in the past. Invariably most people will recognise hindsight bias when something goes wrong. For Ex Most people will tell you that they knew that the sub prime crisis was waiting to happen.

The real challenge of hindsight bias to recognise it when something goes right for you. For ex In Abbott’s case my hypothesis was based on point 1 of the thought process that I have listed above.

Point 2 of how I predicted that they would be acquiring companies in India and become the largest pharma company in the country is complete hogwash and a attempt at making me look very intelligent and insightful.

So the return that the stock generated from about Rs 540 to about Rs 725 was my stock picking skills but the return from there onwards to 1100 bucks is pure luck :-). But then I m not complaining.

I though however believe in a concept which I call “ Positioning for luck”. Will write a separate post on that.

Nowhere Man

After my previous post on women and investing, I must admit there is one woman beyond my wife that I observe everyday. She is my daughter who is currently three years old and hence, the boss of the house :-).

Is there something to learn from observing her?

If u have a child around the same age or maybe + 2-3 years you will observe a interesting phenomenon. The child has infinite amount of physical energy. It is extremely difficult to restrain the child in a given place or position beyond a few seconds. She is in a constant state of physical motion with arms flaying and legs moving. Try getting a child to do nothing for 10 minutes and u will accept defeat even before you start the task. Getting her to stand still beyond a few seconds is a non starter. It’s like Brownian motion

So the point is

I want to quote Blaise Pascal here. The man I disliked in my engineering days for giving us hydraulics but the man who came up with very interesting insights in human behaviour.

“All human evil comes from a single cause, man's inability to sit still in a room”.

Like the child we crave for activity. Maybe not physically but our brain never stops. It wants action, wants to be in the thick of action and if not anything create action where non exists. The itch to put in the next trade or buy the next stock that you analyse.

And like the child, it really is not in control of its actions.

I have been in the last 15 days working hard to do nothing :-). Caught up on some reading, steered clear of annual reports and spent time thinking.

The title of this post of course comes from a nice song by The Beatles

Nowhere Man

"He's a real nowhere man,

Sitting in his Nowhere Land,

Making all his nowhere plans

for nobody"

Post on Stockshastra

Stockshastra which is a new initiative by Moneyworks4me with the objective of providing timeless principles of stock investing had invited me to participate in a blog carnival tittled " How I arrived at my style of stock investing".

I was in my writing moods so wrote a slightly different post. The link is attached below.

http://stockshastra.moneyworks4me.com/guest-articles/ninad-kunders-style-of-stock-investing/

Time to attain rationality

I had earlier posted about a trade that was carried out in Britannia industries where the company issued bonus debuntures and the markets mispriced the stock post the record date giving reasonable returns in the time frame that the trade was carried out. The link to the post is enclosed below.

http://investingvalues.blogspot.com/2010/04/britannia-bonus-debentures.html

I had a round of email exchanges with a friend whose bone of contention or query was

How do u that the market will misprice when u initiate the trade? Is it just experience or a element of probability or pure luck?.

I am attaching the email response that I had sent him …

The starting point in a trade like this is to ensure

1) The market risk is very low which is to time the trade very close to the actual event date or the record date.

2) More importantly - valuation comfort. If everything else goes wrong are u still comfortable holding the stock from a valuation standpoint.

Without valuation comfort the trade is a strict No go.

Lets look at the markets are irrational part. True markets do turn irrational at times but i want to inverse that statement. Markets are not rational all the times which is not saying that they are irrational but they take time to reach a level of rationality. I dont know whether I am able to spell out the subtle difference by inversing that statement. The time that market takes to attain that rationality is the time window that a arbitrageur gets for the trade.

So it comes both from experience/ insight and probability. The market has diff kinds of participants day traders, arbitrageurs, tech analysts, long term investors who look individually look at diff information points so at a given point a participant would not have not digested all the news points. For ex If i am buying a stock from a long term objective i might not have look at the technicals ( i anyway dont believe in technicals) and vice versa. So not all participants would have digested a particular corporate action. If it is a bonus or a dividend then most participants would digest it but other corporate actions which have a element of complexity dont get digested as fast.

This is more true in the midcap/ small cap segment which is under researched and uder tracked. If HLL had done a similar exercise i would doubt the arbitrage window would have existed.

 It isnt risk free by any stretch of imagination. Its just about how much risk can u eliminate and dont get into a situation of picking pennies in front of a roadroller.

Trust that could add some value.

Cheers
Ninad

PS: Remembered a interesting exchange from Alice in Wonderland
Alice: But I don't want to go among mad people.
The Cat: Oh, you can't help that. We're all mad here. I'm mad. You're mad.
Alice: How do you know I'm mad?
The Cat: You must be. Or you wouldn't have come here.
Alice: And how do you know that you're mad?
The Cat: To begin with, a dog's not mad. You grant that?
Alice: I suppose so,
The Cat: Well, then, you see, a dog growls when it's angry, and wags its tail when it's pleased. Now I growl when I'm pleased, and wag my tail when I'm angry. Therefore I'm mad.

HSBC Investdirect - Exit

This one worked out better than I expected. I had earlier posted on the delisting opportunity of HSBC Investdirect. The link is enclosed below

http://investingvalues.blogspot.com/2010/04/hsbc-investdirect-delisting.html

As the book opened for delisting the initial bids came at the Rs 350 mark. The markets promptly anchored to this price and the stock ran up from the 300 band to a high of 335 yesterday. I promptly exited my position at a average rate of Rs 328 without waiting to find the delisting price. Afterall there is a huge risk that the 2 large players Mathews and Deutsche could tender it at a price lower than 350. This was better than my initial expectation of delisting in the 315-325 mark.

This transaction delivered me a return of 41% on my original investment in a 3&½ month period and about 16% on the second tranche of my investment in a months time.

Off to searching newer opportunities which are becoming very scarce with the run up in stock prices.