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Tuesday, May 5, 2009

About portfolio suggestions and a stock not to be picked

Quite often I receive emails from young readers of this blog, requesting me to suggest a 'good portfolio' or 'some good stocks'.

I enjoy responding to such requests - it is one of the main reasons why I write this blog - but am often hamstrung by the fact that many readers do not reveal details like their age, professional background, risk tolerance, years of investing experience and existing portfolios. 

Without such minimum information, giving any suggestion is worse than shooting in the dark. You don't know who or what you will hit!

Another of my frustrations is caused by the proverbial 'generation gap'. Being a dyed-in-the-wool long-term investor, I believe in large-cap stocks with proven management, a portfolio allocation plan, capital preservation and the concept of accumulating wealth slowly.

Many young investors find such an investment philosophy boring and unexciting. Can't really blame them. I was once single, 27 and earning a reasonable salary also. (It was so long ago that my memory of those happy times are quite dim!) Like young lion cubs in a Discovery channel documentary, the thrill of the chase was more important than the actual prey.

The end result of chasing stocks like Indu Nissan Oxo Chemicals, Albert David, Hanil Era Textiles, and many other equally forgettable and forgotten companies was an empty wallet and a big hole in the pocket. It taught me some important lessons. Just like lion cubs learn that chasing a grown baboon up a tree isn't the smartest idea.

Not every young investor is as clueless as I was. Particularly impressive is young Rishi, who is not yet married but planning to do so in 2/3 years. (I didn't have the heart to dissuade him!)

He came up with a 20 year financial and investment plan for his future that included his marriage costs, his children's education and marriage expenses and his retirement plans! I doubt investors double Rishi's age have thought through and have a plan like his (that we honed over an exchange of several emails).

I will conclude today's post with a real-life example of a stock pick (or, rather, a stock not to be picked). Reader Donald sent me an email with the following information:-

"Came across Temptation Foods. Do you know of this company?
The results are impressive (perhaps due to slew of acquisitions, last acquisition was Everfresh in Jan 2008)

Summary of financials over last 3 years in Rs Crores:

Year
2008-09*
2007-08
2006-07
Revenue 872.0
348.1 40.8
EBITDA 73.4
32.3 6.6
PBT 55.0 27.4 5.8
PAT 52.7 23.8 5.8

* Based on quarterly results

Roughly 8.5% EBITDA margins is not so bad nor so great in this FMCG-like sector. But then the revenue growth is impressive and most importantly, zero debt (as per Mar 2008). But I see 10.28 Cr paid as Interest in FY2009 vs. 0.01 Cr in FY2008, so there is some debt now. BV =70; TTM EPS=21; CMP=33 (Apr 29).

There was some stricture by SEBI against the company in Feb 2009 for failing to disclose key developments.
http://www.thehindubusinessline.com/2009/02/17/stories/2009021751001200.htm

More than the non-disclosure, why would a zero-debt company pledge shares?? So what do you make of this meal??
Rgds"

Many investors would have simply asked me: 'What is your opinion of Temptation Foods?' To which my answer would have been: 'I have no idea about the company or what they do.' And that would have been the end of it.

But Donald is not only enthusiastic, he is also diligent. So he did some digging, came up with facts and news, and then asked for my opinion. This not only made my task simpler, but also motivated me to put in some effort from my side. Here is how I responded:-

"I have no idea about the business of Temptation Foods.

Eye-popping growth is usually to be looked at with suspicion. When it is accompanied by a rapid increase in negative operating cash flows (check out the numbers in money.rediff.com - EBITDA 32 Cr last year; op.cash flow -83 Cr) then you know it is a stock not to be touched with a 10 ft pole. Add SEBI strictures for stock market shenanigans with a competitor's stocks - and you have a perfect example of fraud management who will stoop to any depths to generate some money.

No wonder the stock dropped from 350 to 18! Always remember that there is only one Infosys and one L&T and one Microsoft. Look for the 'next' Infy/L&T/Microsoft at your own peril!

Best wishes"

The moral of the story? By all means send your requests for portfolio and stock suggestions. I welcome such interaction and love to hear from my readers. But please include some basic information about yourself (as mentioned above) and do some homework before asking your questions. You will become a better investor in the process, and help me to provide more meaningful feedback to you.

6 comments:

S.Sujai Gangatharan said...

Dear Subhankar ji
Good initiative.
Sujai

Eswar Santhosh said...

Speaking of plans...

This may be a bit crazy for others. But, being crazy is "normal" for me.

So, here goes: Reader's Digest pampers me for buying their newest books and dangles the carrot of Rs. 1 Crore first prize quite often.

What if I had Rs. 1 Crore? I tried to work out a plan for post-tax money viz., how much for safe keeping, how much for investing and what to spend etc.,

To be borne in mind: I am too frugal. I do not even have an A/c since heat is just a two month phenomenon around here in Coimbatore :-)

So, no doubt most of it will be invested after providing a well knit safety net. IF I eventually get a windfall like that, I will at least be ready :-)

Subhankar said...

Thanks Sujai and Eswar for the feedback.

Eswar, are you planning to plan or do you have a plan? You don't need a windfall. Rs 1 Crore is not that difficult a target if you are 'frugal' and have a financial plan for 25 years. (I have an
AC - but only use it for a couple of months.)

Eswar Santhosh said...

Just a rough allocation plan in my head as of now.

You are right about Rs. 1 Crore being an easy target if one has plan, patience, preparation and time. My plan with my investments is on track so far.

But, what I was referring to was that these windfalls (usually) are very easy to lose if you do not have any idea what to do with them.

Starting with the fact that - According to Income Tax site, such prizes are taxed at 30% and the tax will be deducted at source. So, even if you win Rs. 1 Crore, you will only get Rs. 70 lakhs or less.

At this stage, most people start with their list of needs, which will morph into list of wants and will soon become "Let's burn money, we got only one life to live" list.

What I am thinking is

=> Better start with how much emergency funds I need.

=> Followed by how much would be a good enough amount to save without ever needing to touch for 10 years - like a MIS + RD combo or something similar). It should not be big enough to make you break it in case of any (thinkable) emergency.

=> Next would be how much actual need based expenditure I have to do. Absolute needs first, very useful wants next. An A/c is a very useful want; Buying the entire Criterion collection of Akira Kurosawa movies - a "need" that can be postponed though it looks like a very small figure in the face of the prize won.

=> The rest can be invested. It does not mean that I necessarily want to buy only stocks. I will definitely buy stocks, but I will also have funds in FDs, Debt funds etc., until a good opportunity presents itself for investing in stocks.

That's the general layout. But, very rough plan since I do not think that it will become a reality :-)

Of course, if someone is willing to give me right now, I will update the plan right here :-)

Guess my comments are getting longer than your actual blog posts :-) :-)

Subhankar said...

Eswar

The more the merrier (except salt and murders)!

I recently made a 10 years 'smart FD' at SBI @8.5%. Quarterly interest will get deposited to my SB. Beyond a certain amount, the rest of the money will get 'swept' every month from the SB into a 1 year FD at prevailing rate. I can write cheques for multiples of Rs 1000 in case of any emergency requirements. The FD will get 'broken' to the extent of my cheque amount only.

I know you prefer debt MF over FDs - but I can't afford the surprise of finding the debt MF going broke because of investments in Unitech's real estate ventures!

My suggestion: go ahead and start writing the plan down. You'll know what makes sense and what doesn't. If you make stock investments only from part of the returns of your fixed income investments - it will be less exciting but a lot more prudent.

The Visitor said...

LOL. Subhankar - you do have a point - there is no single-size-fit-all kind of asset allocation. :)

I doubt investors double Rishi's age have thought through and have a plan like his...

So true. Diligence and meticulousness have nothing to do with age; they are inborn traits. *sigh*

Good post.