Reader Questions and Answer
I receive questions in my email and I attempt to respond to all of them. I tend to ignore questions that fall into the category of “looking of quick tips or opinion”. I do not mean to be rude to individuals to whom I do not respond. But I believe in being thoughtful, objective, and worthwhile in my response. If I cannot, then I just leave it as is.
Once in a while I like to sample out few questions that may be applicable to wider audience. Since the last Q and A, I received few interesting ones and I am discussing below.
Quality of the Content in Blogosphere: why is it that free content sucks! Why are bloggers repeating the same content. Do you have any blogging study reference material which has done research to show blogging quality and its ability to earn side income.
I do not agree with this statement. This is more of a perception and context in which this individual is looking at. I had responded to this earlier, therefore, you may read one of TIPBlog’s old posts. I cannot comment on blogging study or research material in the context of earning side income. I have not done that; you can guess that I am not interested in it.
My area of interest is not blogging, but investing. For me blogging is just a means (a tool).
In one of the quarterly updates you mentioned about discussing private equity as an asset class. It’s been quiet a while we have not had a single article about it.
Simple answer is, I could not figure out how to cover this aspect on this blog. It is really difficult to explain and provide a process-based description. Just because I know about it and I know how to do it, does not necessarily mean I can help explain it to others. Suffice to say, I underestimated the effort, and hence I gave up.
Your stock buying activities are very limited. I have reading this blog for 4 or 5 months now, and it seems you have bought only one stock in hawkins cooker. Is this really such a small number or you have decided to only talk about long term stocks.
Yes, it is indeed a correct observation. In last four of five months; I have only bought one new stock. The way my investing objectives are set, in a good year, I end buying only five or six stocks in a year. Early this year I added to my existing positions. You may read my earlier TIPBlog portfolio update for first half of 2009. Furthermore, I do not have any short term stocks. I buy stocks with an expectation that I will not sell for next 10 years of more. I doesn’t always work out, but that’s an objective.
Is it possible to add more information on this blogs such as dividend paying companies, some dividends history, your recommendations, etc This would be really helpful.
That is a good suggestion. However, please note that my objective is not to have “one stop shop type of website”. This is my personal blog. What this means is it my personal journey to build a portfolio. The intent here is to share my experience and thought process. I get to learn quite a bit from reader comments. In this process whatever information I gather or collect or use, I will try to include them on this blog.
Is it possible to provide a sitemap for ease of navigation? There is quite a bit of interesting and very helpful articles. But it is difficult to find where they are?
I will attempt to include a site map (assuming it is easy to figure it out). In the meantime, the best way to navigate is by using (1) Categories; or (2) Tags under each article. I am novice in IT subjects, so please this to take sometime. Meanwhile, I welcome suggestion that is quick and easy to implement.
You have an investment process page and articles on toolbox page. Can you convert it into PDF and make is available for downloads. It is not always possible to come to internet to read it.
Good suggestion. When I include the sitemap, at that time, I will look into if there is any easy way to include PDF conversion capability. I believe there should some Word Press widget out there. Again any suggestions are welcome.
That’s all for this time.
Hi,
I have been looking for few judging parameters for making a long-term portfolio.
After reading through various blog, nonetheless, I liked your most and your approach too.
Please comment on the following strategy.
1.List out stocks 1yr High and low P/E.
2.Check last 3-5 years debt to profit ratio.(anything near or below 1 is ideal)
3.If stock is in 20% range of 1yr P/E low.
–>> Buy for long term.
I ‘d appreciate your comments.
Basis of the above approach are 2 facts.
1. Low valuation.
2. Debt paying capability of the company.
Incase you want to mail me, here’s my id tiwari.yogesh84@gmail.com
Regards
Yogesh Tiwari
Hello Yogesh,
It is a fair strategy but there are few implications that, perhaps, you should understand.
(1)Looking at only one year worth of data for high/low PE ratio is short term view. On many many occasions, companies show high profits once in a while due to non-operating transactions. This will artificially offset your PE ratio towards low side. I suggest using atleast two data point from 10 years, or 5 years, or 3years.
(2)Debt to profit ratio – Using profits as your basis has its disadvantages. Profit is a calculated term. Meaning it can be artificially inflated by transferring expenses to other accounts or many times it is recorded even if it is not yet received. I am not saying using profits are bad idea. What I am saying is it needs to be evaluated in certain context.
(3)Debt should be weighed against the ability to generate cash from operations (and not against profits). This is because companies have to service this debt by paying interest. This interest payment should be dependent upon the cash it receives by selling its product. Profits are just an accounting calculation and accounting term. It cannot be used to service debt.
I like your thought process of using low valuation and ability to pay debt. That’s a good way of looking at it. But they should looked in certain context and not in isolation.
Best Wishes,
Hello sir,
I am trying to understand some macro economics concepts in addition to my continued focus on fundamental analysis.I was going through min paper yesterday and few doubts cropped up.
In a column discussing the alternative to dollar,there was a discussion that pressure is mounting on china to make yuan freely convertible and let it appreciate more.
My questions are:
Why is China not allowing its currency to appreciate by market forces like other countries(i understand that the currency is not entirely free,as central banks do interfere many times,but with China its very rigid).
The column also says that rupee has not appreciated that much probably because india runs current a/c deficit.What does this mean and how it affects the currency.
Finally ,the column says that most central banks are obliged to support their currencies.what does this mean.I mean what will happen if we let rupee appreciate to say 30rs..why cant be do that…
Hello Saif,
Great questions.
China not allowing its currency to appreciate: The stronger currency will make its goods expensive for foreigners to buy. i.e. the products manufactured in China will not be cheaper with higher valuation. This will shut down China’s export oriented economy. Exports contribute 25 to 30% to China’s economy. This vast dollar amount that it has accumulated is based on keeping its currency artificially low. In order to make its export competitive, it artificially pegs yuan to a fixed value.
On India rupee not appreciating. That’s because when someone (i.e. Indian government) is running in deficit, its value will diminish. This is a perception issue and more of likelihood scenario. If I am in debt, why would someone increase my value? When I am in debt or running my budget in negative, two things can happen (a) I can print money which reduces value – more supply of rupee will reduce value (b) I can default – which again means reduction in value. In early 90s, Indian government was very close to default. Our government had only 2 months worth money left in its coffers to pay foreign debtors. The gold reserve saved it. Indian government mortgaged our gold to get money. Furthermore, during that time frame, our government took a very bold action to devalue the rupee. In early 90s, dollar was approximately equal to 33 rupees. It devalued to around 39 or 40 rupees (don’t know exact change of value). This helps increase exports because our products become cheaper.
Why we do not let Rupee to appreciate? There are quite a few intricate implications. But for simplicity I will mention only one. Rupee appreciation will make our Indian goods expensive in global market place. This will reduce our competitiveness and hence affect our economy. Indian economy (or its exports) still has a very low contribution to the global economy. Hence we cannot command that influence or value to affect our product sale. Therefore, currency is one way to make it competitive.
Why governments are obliged to support their current? We cannot let our currency to be too volatile. If it does, it creates business issues and it affects the economy. Typically, businesses work on long term defined vision or roadmap. In many cases projects take years to implement. If the currency keeps swinging in both directions, it creates problem of transactions, which is a negative factor for doing business. This will affect the business sentiment or environment and global companies will shy away from India. e.g. Company A provides a service which costs Rs40. Therefore, it contracts with foreign company for one dollar expecting Rs5 profit. But payments take place over a period of time depending upon when the service is rendered. So if towards the end of the year one dollar = Rs38. This company A is loser….. Expand this example to many businesses and Indian economy and it will be a mess. Therefore, when rupee appreciates, government pumps in rupee into the economy through banks. Rupee supply increases and hence it starts reducing in value. When rupee depreciates, government goes pumps dollar into the economy. Thus, governments are obliged to support their currency. A limited range in volatility is acceptable because that’s how market drives it, but wild swings in short time is not good.
I tried to give you a very simplified view. There are more complications, but everything boils down to these fundamental aspects.
Hope this helps!
Thanks for taking out the time to reply sir.
You mentioned that Indian govt is running a current a/c deficit(which basically means the imports are greater than imports) .I read somewhere that we run almost 3% of GDP as deficit (that wld be some 30 billion dollars taking our economy at trillion dollars).If we have around 290billion $ of reserves ..why don’t we just pay the deficit and then take some policy changes.
Also does the current situation mean that we never let rupee appreciate substantially so that our exports continue to remain cheap so as to increase the contribution to global economy?Is there any adv of rising rupee if it is only to not stop the export factor.
Also in another article ,there was a mention that most of the reserves are due to taxation on capital inflows FIIs..so the quality of reserves is not something to be proud of because its not generated from within rather its at foreigners mercy.
The deficit is not export/import. Deficit is what the government earns and its expenses. All earnings are from various taxation, while expenses are salaries, social programs, etc. The 3% deficit is prior to stimulus that it gave during this global downturn. If we include the current stimulus, it is projected that deficit will be 5% or 6%.
Your observation about quality of reserves is correct. It is indeed the taxation from capital inflows. Our government will not be able to generate reserves from internal resources. Now, government does try to balance deficit by withdrawing from this reserves. But it cannot use it all once or twice and become empty. Because it knows it risks accumulation if capital inflows reduces. It is necessary for our country to have reserves otherwise we will lose credibility in global economy. Nobody will lend us and nobody will do business with us. Another approach that our government uses for balancing the budget is to sell stakes in PSUs. That’s where all the money goes – balancing the budget deficit.
Well, I cannot predict what will happen to Rupee. It may appreciate or it may depreciate, who knows. But government will not let this happen in short term, probably slowly over a period of time, depending upon how the economy grows over long run.
thanks for the reply.it clarified some of the macro economics doubts i have.
i was surprised to see to twitter and facebook fan page. Every blogger even with 10 post puts up facebook fan page or hundereds of twitter account. You should also do it. It is good for your traffic. Any reason, why you do not have it?
Please comment with your thought
Rutwik,
Thanks for the suggestion. Hard to find time for doing that.
Best Wishes,
Once again, I m back with another question.
Before that, Thanks for replying to my last question. I got your point. Maybe its time for this science grad to understand some financial metrics too.
Recently, after going through a lot of articles over value investing. Here’s my find for a long term investment.
1.Low Equity base (Best if no splits may have happened.)
2.Low debt to equity ratio.
3.Price/Book Value ratio not more than 1.5-2.
4.High promoter holding.
5.+ve EPS growth.
Please comment on each of these points. I m most confused in significance of points 1 and 4.
Regards
Yogesh Tiwari
Hello Yogesh,
sorry, i missed your message. See below for my comments.
Low Equity base (Best if no splits may have happened.): This is not necessarily true. A company can have a low equity base, but high debt. So on EPS basis, the earnings may look good. But then it is has to service its debt. It is important to see how the company utilizes all of its available capital (equity + debt), instead of standalone equity.
Low debt to equity ratio – I do not like this ratio. When in debt, company needs to service its debt i.e. interest + principal repayment. Equity is moving metric depending upon how the markets. It continuously remains variable. I use debt to operating cash flow. The cash flow is used to pay interest and repay the debt. e.g. For the same debt level, if cash flows are good, AND equity goes down, its time to buy.
Price/Book Value ratio not more than 1.5-2: Again, price is a fluctuating parameter, while book value can be misleading. Instead look for intrinsic or tangible book value. You may use Price to intrinsic BV.
High promoter holding: It is not necessarily a good. It can go both ways. Many promoter’s make the company pay high dividends, even if they need capital for business growth, or take on debt.
+ve EPS growth. This is good, but not necessarily a holy grail. EPS can be improved by share buyback or by keeping low equity base (even with high debt). So when looking at EPS, put it in proper context with other aspects.
Best Wishes,
Thanks for replying. I shall make a note of all said above.
I really appreciate that you educating this novice.
Regards
Yogesh Tiwari