This single infographic speaks volumes! One might think that these are too obvious. But then the question is to ask where did we place ourselves in the previous cycles?
Thanks for making the point. There could be many scenarios, post Coronavirus impact. But to get a sense of where the ODDS lie, one needs to get into the nitty-gritty, which are not about pharma - but essentially business issues, which you may like to think about.
That would mean
a) reality check on which are the very few countries doing bulk API manufacturing today - easily found out
b) reality check on Key Starting Materials (KSM) - base raw material for APIs - even when a company like Alembic says I am fully integrated - it still has to import key KSMs from China; has to keep at least an years supply in its most profitable APIs to ensure business continuity
c) alternate sourcing ability/local manufacturing is a function of 2 things 1) Volume economics 2) Process Chemistry skills/efficiency (which is an incrementally iterative pursuit - no one is super efficient year1, but Pharma or Agrichem plants for that matter have a common trait of being great at sweating the same assets for higher and higher sales incrementally, why?)
If you do a bit of study - read up, and ask the Pharma experts in VP - they might share a very different reality picture, and how long it will take for say US/other countries to do everything - even if they wanted to do it, and could do it say. The volumes for the investment needed. Some key KSMs (think China) and some key APIs (think Divi’s) are at such volume and process efficiency levels - they have cut out the rest of the world from the game. Some countries (like India) have an entire Pharma (and now increasingly Agri-chem) eco-system - check how many businesses in Pharma - listed/and unlisted - that can be easily incentivised with volumes - for own country consumption. But for a country like US where own country consumption may be high, but API and KSM eco-system may be very thin, mostly formultaors?
One needs to pause and re-think/re-verify on these 2nd order facts/data-points while evaluating the 1st-order claims. Could that be just posturing for upcoming elections, post which reality-checks will drive the new alignments in the world.
One thing is for sure, there will be newer alignments. There will be huge incentives for local production in every country, including India. But NOT all can be done locally. Specialised industries global supply chain will go thru re-alignments, new bargains, but are not as disrupt-able /uproot-able as say Basic Industries. That should give us more food for thought, to lay out the unfolding puzzle better for ourselves.
earnings in recessions get completely crushed. (wether blended, forward or lagging). we all know 2021 (fy) or 2020 (cy) earnings are going to be a disaster. how should we still interpret P/E? and i know when things are smooth and normalized its a good indication for overvaluation. but just in the current scenario find it a bit hard to read. did you use P/E in 2008 or 2000 so equity selection?
Crisis Investing: There is a bunch of approach and material out there. Ofcourse, timing is everything.
Crisis_Investing_Verdad_Advisers_Ebook.01.pdf (7.9 MB)
I recently wrote down my thoughts about navigating this crisis on my blog. Reproducing the article below.
I was listening to the Patrick O’Shaughnessy podcast – invest like the best – with Gavin Baker. He talks about an important theme which I had been thinking about as well. Which are the companies which will not only emerge but emerge stronger from the crisis. One way to think about this is any industry where the competition will be reduced due to bankruptcies. A very obvious industry is hotels/ restaurants which are run by owner operators. Unfortunately many of these establishments may not be able to survive this crisis. But eating out is not going to disappear. We have all been eating home cooked food and many of us are getting sick of it. As we emerge from the crisis, there will be a lot of pent up demand for outside food. But during the initial period, we may not prefer a dine in restaurant as the virus concerns will probably persist. But who among us will not want a pizza or burger delivered to their homes. There will be a spike in demand for such food. A very obvious beneficiary of this demand is going to be Jubilant Foodworks. It is an already strong businesses, which should get a one time boost as we come out of this crisis.
Which businesses will emerge structurally stronger from this crisis? I believe that not all Banks/ NBFCs will be able to survive this crisis. During this period of slowdown, there will be an increase in NPAs for most banks and financial institutions, and some may not emerge from the slowdown. After the crisis, the there will certainly be lesser competition and the remaining Banks/ NBFCs will be in a good position to take advantage of the open playing field. But, the institutions which somehow survive the crisis and come out on life support with high NPAs may not be able to take advantage of the situation. In this respect gold loan NBFCs are in a unique position. I have mentioned it before as well that these businesses are like cocroach and there is no doubt that they will survive this crisis, just like they survived demonetisation in 2016 and crash in gold prices in 2012. And as we emerge from this crisis, they will be ready for business.
On a broader theme, I have little doubt that we are entering a period of prolonged slowdown in India. The economy may take 3-5 years to recover from this slowdown. It may not be such a bad thing. Only after all the excesses have been cleared from the system and we have hit rock bottom can a recovery truly start. Of course, usually the stock markets bottoms out much before the the start of the recovery. But unfortunately nobody can predict the timing.
Companies with weak business models and too much leverage will struggle and many of them may go out of business during this difficult time. The first and most important thing during this downturn is to stick with companies which will survive this downturn. I will initially focus on high quality companies where overall purchase price is a small part of the consumer wallet. These include – Page Industries, United Breweries, Jubilant Foodworks, FMCG (such as Nestle, Colgate, etc.), PVR, ITC, Avenue Supermarkets, etc. I don’t own any of them at this time. Despite the recently correction, these businesses continue to trade at expensive valuations and the idea is to see if during this downturn, we get an opportunity to acquire few of these at our terms.
These are all fairly obvious ideas. Another obvious idea is Gold. Gold is very well positioned to take advantage of the present conditions. The global financial system is more fragile than ever. The policies of central banks around the developed world since the global financial crisis have encouraged irresponsible behavior from companies and consumers and investors. The financial system is fragile and does not have the internal strength to deal with recessions on its own. It is dependent on the stimulus from governments and central banks. With all the stimulus, we will come out of this crisis with very high levels of leverage across government, corporates and probably consumers as well (Coronavirus legacy – mountains of debt). All this debt will act as a drag on the growth going forward. With the renewed money printing, Gold should be a beneficiary of this as it reclaims its place as a store of value.
Thanks Carlos for the Crisis Investing PDF. Had a quick look. There may be important ideas here (for Equity). Will revert on relevance here back in this post, when I find the time.
Summarized below is the key message from this article on Crisis investing.
How to invest in times of crisis?
Which asset class works?
Amongst various asset classes (treasuries, investment grade bonds, US market index, High yield bonds, and US Small value index), in times following any crisis, US small value index gives the best returns (even in comparison to distressed debt and private equity).
Which stocks perform the best? What’s the criteria?
Firstly, leaders in one bull expansion are never the leaders in the next bull run.
Second, a good place to maximize returns during crisis is small-value equities which typically show following characteristics (and are capable of generating 2-3x of market returns post a crisis):
a) Asset turnover – Buy businesses which make the best use of available resources – Proxy to return on capital – higher the asset turnover, higher the return.
b) Higher the income and cash flows better the performance (unless you are in a very inflationary environment – in which spending today is better than spending tomorrow – and hence negative cash flow cos can perform too, case in point is 1970s/early 1980s when this did happen).
c) Stocks with low volume of trading give the best returns – as price dislocation due to panic is higher in such stocks.
d) Cheap stocks outperform expensive stocks in times of uncertainty – measured through EV/EBITDA, P/B, P/E and FCF yield.
e) Positive Operating CF cos will have higher returns. Generally, companies generating positive cash flow, and who are less reliant on capital markets will perform better than companies with negative cash flow.
f) Leverage increases dispersion of outcomes – can be good and bad. Companies with high leverage who reduce debt in times of stress show better returns. High leverage however also leads to high number of defaults. Thus, debt has to be seen along with FCF, asset turnover etc.
I feel post coronavirus, US pharma would definitely try and diversify their pharma supply chain away from China. Over dependence on China for medical supplies has been perceived to be a big risk to US national security. This issue was a concern even before coronavirus, when an influential Chinese economist had suggested earlier this year that Beijing should curb its exports of raw materials for vitamins and antibiotics as a countermeasure in the trade war with the US.
One impact of the above would be, that part of pharma manufacturing could shift to US– I feel this can’t be done in a very big way as their medical cost will increase significantly and thus have implications on the overall US medical bill. They might do this for critical medicines etc.
Second, US will diversify its supply chain to other countries – which can be helpful for countries like India. Any future contracts are likely to include a stipulation that the supplier has to be completely backward integrated (for API, KSM etc.) and not be dependent upon China in any way. Also, any contracts for supplies will become more stringent to ensure continuity of supplies even during force majeure events like this virus.
Also, these events can lead to reduced pressure on generics pricing (unlike last few years) – as continuous price decline in generics is what led to such consolidated supply chains in the first place. There will be other important considerations playing out (viz country, continuity, reliability etc) rather than only the price, for deciding the suppliers etc. Resilience of the supply chain in return for slightly higher prices will become a reality.
There could also be other safeguard measures implemented like mandatory ‘country of origin’ label for APIs used to make drugs, stricter liabilities for any unsafe drugs etc.
What this means for Indian pharma:
- We can get a higher share in US generics market going forward
- We need to get completely backward integrated including KSM etc.- with the Indian govt also pushing this - API cos will get a boost.
- Margins can get better with easing US pricing pressure
Though PE in one of most valuable tool to evaluate a stock yet u can not assess a stock / benchmark completely on the basis of a single ratio. In fact u have to analyse the circumstances under which such valuation is justified considering the future growth prospects of a company or even a nation, for that matter. We could not sustain the benchmark valuations in 2008 when India seemed to be growing at around 8.00% forever and at large was unaffected by global financial crisis, then, how could we justify higher valuations in current scenario, even before the Covid-19 crisis, when it is struggling to maintain a respectable growth rate is a question needs to be contemplated on.
A post was split to a new topic: Q&A with Kuntal Shah: Working through an Uncertain World
Sharing MY old Notes taken from various Blogs,Books etc for bottom fishing, how to act in bear market, & position sizing
How to take positions
Nothing works for an investment portfolio like sensible bottom fishing. Bottom fishing in the stock market ensures that you pick great stocks easily at extremely attractive valuations. Bottom fishing ensures that you minimise or even eliminate the prospects of long term capital loss. And, when sentiment reverses significantly, bottom fishing buys generate extraordinary returns.
Everybody agrees on the merit of bottom fishing in the stock markets, Yet, most people are unsure of when to set out to do it. The trouble is that nobody knows a market bottom. Few can predict it. With such poor odds of getting a prediction right , one must not even venture to predict. If you cant predict a bottom , when do you go bottom fishing ? How do you decide that ?
The only way to do it is to be a contrarian and have a process to do your bottom fishing… If no one else is wanting to buy, one must take a hard look at the valuations of companies. If the stock valuations look attractive , you must simply step out and start buying in small lots . When valuations get progressively more attractive , then you must buy more. If the deals get better and stocks trade even more cheaper , you must grab as much as your bank account permits. If pessimism is extremely high , buying should peak at around that time. If you have exhausted all the money by then , take a vacation from the stock market. The fact that you ran out of cash ahead of a market bottom will only reduce returns and not alter the overall outcomes too much in the long run. All you can do to tide over a cashless phase is to imagine that the markets are shut for a short while. Soon, you will realise that a market bottom & reversal had occurred.
What should one do to ensure that he manages the bottom fishing process effectively ?
Identify companies which you always wanted to own but stayed out because the valuations were not to your liking. Decide a price for each company which you believe is a reasonably attractive valuation. Estimate the premium at which the current price is trading. If the premium is within 20% , then it is probably time to start bottom fishing. Decide on how much money you wish to allocate to each company at current prices. Buy 10% of your target quantity for every 5% drop in share price until you reach your target price. When you reach your target price raise the quantity to 20% and continue buying when the prices drop below your target prices. By following this approach , your will ensure that you will have enough money left to buy . But, there is a possibility that you may at times end up buying less than you aspired to own if the valuations do not fall below a certain level.
The choice which an investor needs to exercise while doing bottom fishing is simple. He must decide if he wants to buy his quantity paying a small premium or to play it safe and buy only if the prices keep dropping to extremely attractive levels . In the first approach , he will ensure that he deploys his money and makes decent returns. In the second approach, he will deploy his money fully only if markets become extremely attractive and his returns will be significantly higher.
For now, it is time to get your fishing gear out. Happy bottom fishing.
Below are notes from 1 marquee investor taken during last crash
The Indian stock markets are clearly racing towards a bottom. The negative symptoms are quite overwhelming. Index heavy weights keep regularly hitting new lows. Money shifts from cyclicals to defensives. Retail money moves out of stocks into debt instruments. Stock broking houses are practically empty and activity is at a low. FII’s are selling everyday and exiting stocks. The next phase in the race to the bottom is when desperation grows and panic sets in. The selling spreads to the mid caps which see sharp slumps when FII’s sell them. Retail investors get to the verge of giving up and go into a state of limbo. Nobody seems ready to play the race to the bottom. The over arching fear is that the bottom could be far away and entering now could only add to the pain. But, is that the right thing to do ? Are we actually helping our own cause by shunning stocks ? Let us first understand how stocks behave on this rough-ride to the bottom. And, let us decipher how we should play the race cautiously and productively.
The race to the bottom is the ultimate test of contrarian investing. Stocks tend to be dumped as people want to sell before the markets hit the bottom. The selling gets frantic and desperate when investors press the exit button and simply want out. Valuations hardly matter when investors press the exit button. This naturally leads to stock prices getting disconnected from their intrinsic value. The disconnect between the price and value exists only for a short window of time. It is the contrarians call to pick up the challenge and make the most of this opportunity.
Normally, FII selling is characterised by this pattern. FII’ s decide to reduce exposure or to exit specific markets and this macro view drives investment decisions across stocks. They do not specifically evaluate the merits of individual stocks when they hit the CTR-ALT-DEL button to shut down an entire portfolio. They relentlessly dump stocks day after day at lower prices till they have emptied their holding in a company. Typically, once all the selling by such sellers is complete the stocks gradually revive and stabilise at significantly higher levels. Subsequently, the stocks get rerated in line with the business fundamentals of the company and prices once again return to being driven by the earnings and valuation metrics of the company. This pattern plays out in every single company where FII’s decide to press the exit button.
The opportunity thrown up by the mindless selling of FII’s is the most significant opportunity in the race to the bottom. Investors need to be sensitive to this opportunity and must mentally prepare themselves to take advantage of this selling window. If someone is selling at any price and exiting a stock, a contrarian must quickly evaluate the fair value of that stock and then get ready to buy it. Before starting to buy the stock, you need to decide how many shares you would like to own and what is the fair value of the stock. As the stock trades below the fair value, the contrarian must keep buying the stock progressively as the prices drop below the fair value. You need to ensure that you have bought the entire quantity you wanted to own when the stock trades significantly below the fair value.
When contrarians are buying , it is likely that the markets may well be in panic mode. The most crucial thing for contrarians to remember is to ignore sentiment and to be focused purely on valuations. Sentiment is fickle while valuations are forever. Sticking to the valuation and basing investment decisions on them is a sure-shot way to win the race to the bottom. Get rich by racing to the bottom.
Next are notes how to hunt for new ideas and wait(like a hunter) if I get sense of bear market is aproaching
The stock investor should be like the solitary reaper. Doing your own thing as your mind tells you. Oblivious of the world.Tuning up `numbers’ of a different kind. Totally focused on your work. Waiting for the day when your wait will end. Accepting that the D-day may be anytime-near or far. The game is all about waiting. When the wait ends, it will be a rush to work.
Work could be anytime and anywhere. Actually, it could even be everywhere. You can’t stop yourself from thinking through something that hits you. In a business which is all about ideas, you must just LET IT BE. Where do you go looking for ideas? You go nowhere. Actually, the ideas just come to you. You simply play receiver and host.
My memory goes to where I got my best ideas. Strangely, my best thoughts were always when i was vacationing. Vacation somehow doubles up as ideas time. But, try writing down your ideas when you are in a swimming pool or on a roller coaster. Turning an idea into an opportunity is a market centric thing. you may like an investment idea. But, there should be a willing seller. The trick is to find willing sellers and closing deals. You must know your moment. And, simply seize it. Strangely , the moment will present itself before you when you are least prepared. You must simply take it will all you have. I would always be buying big on vacation. No, its not something like you watch in the film zindagi na milegi dubara. It’s not about compulsive workaholism. Sometimes, things just happen when you are not expecting them to.
I will be a fool to stop them. If you did, chances are that when you go in search of them again, they will be gone. Opportunity always gets taken in the stock Market. If it doesn’t get taken, mostly it will not be the best one. In fact, it may not even be worth it. But, the best ones always get taken. The world is filled with more people of the smarter kind than we think.
While playing the waiting game, one must prepare himself for the rush moment. The homework should be done, the money lines should be kept open, the powder should be dry, your thought clarity must be worked upon and a state of alert must be established. You will then know your rush moment when it comes. Nothing will stop you. All you need to do is to go with the flow.
There is excelent discussion during lock down between four major PMS managers…
Few Years back, housing finance was touted as a multi year (or perennial) growth story where growth rates were assumed to anywhere between 1.5-3x GDP growth.
Above is a slide from investor presentation of PNB Housing Finance which broadly puts the housing finance market in perspective. Total Mortgage Loan assets were INR 19 trillion in June 19 as per the presentation. Out of which HFCs share was INR 10.5 trillion.
If you observe in the pie chart, DHFL having 8% market share is already bankrupt. Others like IBHousing, Edelweiss were already de-growing loan book before COVID.
Post COVID, growth in housing market is expected to take a hit in the short term at least. Some of these HFCs especially those with high developer exposure and LRD exposure would find it difficult to grow. Stock prices of HFCs have taken a very bad beating with some falling more than 90% from the highs of 2017-18.
The point here is trying to assess who would be doing the incremental lending from FY 21 onwards. Could we be looking at a new order ?
Already in FY 20, some PSU Banks were aggressively growing Housing Loan books including through sourcing through NBFCs. Lots going in their favour such as cleaning of books in last few years, liquidity on merger for some banks, beneficiaries of overall increase in liquidity in system by RBI.
Some better placed HFCs to gain disproportionate market shares - eg: HDFC and Bajaj Housing Finance in White collar salaried class, regionally strong financiers like Aavas
What about Private Banks - Is the cake big enough for everyone to have a good bite?
Or are we looking at a situation where housing growth will fall drastically for next 1-2 years which would be a much larger systemic risk since it would affect all parties involved- Developers, Workers, Govt and Financers.
I feel this is one area where the pendulum swings of investor sentiments are in the extreme. Winners emerging from current market situation are likely to provide very good returns.
Locked for thread clean-up and direction setting/influencing.
Charlie Munger: ‘The Phone Is Not Ringing Off the Hook’
Date : 17/04/2020 @ 15:29
Source : Dow Jones News
Charlie Munger: ‘The Phone Is Not Ringing Off the Hook’
By Jason Zweig
If the coronavirus lockdown has frozen your investing plans, you’re in good company. Charlie Munger is watching and waiting, too.
Mr. Munger, vice chairman of Berkshire Hathaway Inc. and Warren Buffett’s longtime business partner, likes to say that one of the keys to great investing results is “sitting on your ass.” That means doing nothing the vast majority of the time, but buying with " aggression" when bargains abound.
I spoke this week by phone with Mr. Munger, who turned 96 years old on Jan. 1. He sounded as sharp and vigorous as ever, and as usual he drew bright lines between what he’s fairly certain of and what he thinks belongs in the “too-hard pile” – where he and Mr. Buffett consign questions they don’t know how to answer. Overall, Mr. Munger made it clear that he regards this as a time for caution rather than action.
In 2008-09, the years of the last financial crisis, Berkshire spent tens of billions of dollars investing in (among others) General Electric Co. and Goldman Sachs Group Inc. and buying Burlington Northern Santa Fe Corp. outright.
Will Berkshire step up now to buy businesses on the same scale?
“Well, I would say basically we’re like the captain of a ship when the worst typhoon that’s ever happened comes,” Mr. Munger told me. “We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity. We’re not playing, ‘Oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves [into buying businesses].’”
He added, “Warren wants to keep Berkshire safe for people who have 90% of their net worth invested in it. We’re always going to be on the safe side. That doesn’t mean we couldn’t do something pretty aggressive or seize some opportunity. But basically we will be fairly conservative. And we’ll emerge on the other side very strong.”
Surely hordes of corporate executives must be calling Berkshire begging for capital?
“No, they aren’t,” said Mr. Munger. “The typical reaction is that people are frozen. Take the airlines. They don’t know what the hell’s doing. They’re all negotiating with the government, but they’re not calling Warren. They’re frozen. They’ve never seen anything like it. Their playbook does not have this as a possibility.”
He repeated for emphasis, “Everybody’s just frozen. And the phone is not ringing off the hook. Everybody’s just frozen in the position they’re in.”
With Berkshire’s vast holdings in railroads, real estate, utilities, insurance and other industries, Mr. Buffett and Mr. Munger may have more and better data on U.S. economic activity than anyone else, with the possible exception of the Federal Reserve. But Mr. Munger wouldn’t even hazard a guess as to how long the downturn might last or how bad it could get.
“Nobody in America’s ever seen anything else like this,” said Mr. Munger. “This thing is different. Everybody talks as if they know what’s going to happen, and nobody knows what’s going to happen.”
Is another Great Depression possible?
“Of course we’re having a recession,” said Mr. Munger. “The only question is how big it’s going to be and how long it’s going to last. I think we do know that this will pass. But how much damage, and how much recession, and how long it will last, nobody knows.”
He added, “I don’t think we’ll have a long-lasting Great Depression. I think government will be so active that we won’t have one like that. But we may have a different kind of a mess. All this money-printing may start bothering us.”
Can the government reduce its role in the economy once the virus is under control?
“I don’t think we know exactly what the macroeconomic consequences are going to be,” said Mr. Munger. “I do think, sooner or later, we’ll have an economy back, which will be a moderate economy. It’s quite possible that never again – not again in a long time – will we have a level of employment again like we just lost. We may never get that back for all practical purposes. I don’t know.”
Berkshire won’t escape unscathed. “This will cause us to shutter some businesses,” Mr. Munger said. “We have a few bad businesses that…we could be tolerant of as members of the family. Somebody else would have already shut them down. We’ve got a few businesses, small ones, we won’t reopen when this is over.”
Mr. Munger told me: “I don’t have the faintest idea whether the stock market is going to go lower than the old lows or whether it’s not.” The coronavirus shutdown is “something we have to live through,” letting the chips fall where they may, he said. “What else can you do?”
Investors can take a few small steps to restore a sense of control – by harvesting tax losses, for instance – but, for now, sitting still alongside Mr. Munger seems the wisest course.
Write to Jason Zweig at firstname.lastname@example.org
(END) Dow Jones Newswires
April 17, 2020 10:14 ET (14:14 GMT)
Copyright © 2020 Dow Jones & Company, Inc.
A post was merged into an existing topic: Q&A with Kuntal Shah: Working through an Uncertain World
Creating a Pandemic Portfolio - Interesting interview - Ramesh Damani with veteran investor Vinod Sethi
Creating a Pandemic Portfolio - Interesting interview - Ramesh Damani with veteran investor Vinod Sethi
2 posts were merged into an existing topic: Industry Overview - Challenges & Opportunities - Webinars/Podcasts info