Blog
Aswath Damodaran – Laws of Valuation
Wednesday, January 9th, 2019Great talk by Aswath Damodaran on the corporate life cycle and how companies evolve over time. Here is the video and some key takeaways:
Key Takeaways:
- Companies don’t like to get old: fighting it can be one of the most dangerous things a business can do
- Most value is destroyed by companies not acting their age
- What makes for a great CEO of a company changes over the course of the life cycle
- The progression of a company through this life-cycle:
- The life cycle of a company is getting compressed: a 20-year old tech company is an old company
- There are three main ways to make corporate finance decisions that maximise the value of a business:
- The investment decision: Invest to earn a return greater than a hurdle rate
- The financing decision: ensure the optimal mix of debt to minimise the hurdle rate
- The dividend decision: if you cannot find investments that meet the minimum hurdle rate, then return cash back to shareholders
- These decisions are heavily influenced by the life cycle: a start up would mainly be taking equity because it doesn’t have predictable cash flows, mature companies should think about financing mix as the cash balance start to build up and declining companies should be focusing on returning cash to shareholders
- On Amazon as a disruption platform: it is unclear if Amazon will ever make money on any new business it enters but it is guaranteed that the existing players will lose money.
- Valuation is never just about the numbers; there is always a story that drives the numerical projections, especially for young companies. for mature companies, the numbers would drive the valuation more because you are at chapter 34 of a 35 chapter book and cash flows are predictable
a16z Annual Summit
Tuesday, January 8th, 2019Andreessen Horowitz recently put up a number of talks from their a16z annual summit which cover many areas related to the ongoing disruption across various industries due to technology. Here are few of the videos that I found particularly interesting:
Moving Beyond Advertising only business models
The Evolution of Brands
How the US government used Crypto to catch fraud
The software disruption coming to real estate
Monthly Market Summary: December 2018
Monday, January 7th, 2019We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.
We use data for these charts from Investing.com
Global Equities
The Sensex was flat for the month and has outperformed its peers in both emerging and developed markets. Broader markets fell sharply led by the fall in the S&P500 of around nine per cent. Barring the Sensex, most equity markets have given negative returns in the last year.
Fixed Income
Indian bond yields continued to correct in December, falling from 7.65 to 7.43. The collapse in crude oil prices and an easing of the liquidity situation has led to some relief in the bond markets.
Gold
Gold moved higher, but still was within range during the month. If the commodity moves strongly away from 1200-1400 dollars per barrel, it would give a better indication of the long term trend.
Oil
Oil continued to fall in December. From a value of 86 in early October, it closed at just above 54 dollars per barrel at the end of last month. This is a very sharp correction and is a positive development for the Indian economy because of our large dependance on oil imports. It is important to keep an eye on this figure as it can have a destabilising effect on our macros.
Indian Rupee
The Rupee was range bound in December, reflecting global currency movements.
Linkfest – 97
Monday, December 31st, 2018Some articles from across the web in the last few weeks:
There’s No Such Thing As A Part-Time Watchdog – Bloomberg Quint
Smaller FMCG firms race ahead, put bigger rivals on notice – Livemint
India is missing the wake-up call from its shadow-bank bust – Bloomberg
Are consumption stocks invincible? – Business Line
Weaker growth ahead – Neelkanth Mishra
Urbanization – Our World in Data
What’s Not Going to Change in Financial Services? – A Wealth of Common Sense
Millennials Didn’t Kill the Economy – The Atlantic
Which matters more for building wealth – Get Rich Slowly
Rational vs. Reasonable – Morgan Housel
The shape of all things digital in 2019 – Founding Fuel
24 Cognitive Biases – Visual Capitalist
Changing the Indian state from bully to ally – Livemint
Overview Of Global Shale Oil Developments – Alpha Invesco
Capital infusion won’t fix PSBs – Debashis Basu
GST: The Many Course Corrections – Bloomberg Quint
10 learnings from 2018 – Bloomberg Quint
Zero-fee funds – Quartz
A macro update on bonds – IDFC MF
Factor investing and index funds – Bloomberg
99 Good News Stories You Probably Didn’t Hear About in 2018 – Medium
51 Ideas from 2018 – Safal Niveshak
Monthly Market Summary: November 2018
Monday, December 3rd, 2018We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.
We use data for these charts from Investing.com
Global Equities
The Sensex and the S&P500 both outperformed their broader emerging and developed market peers respectively. The Indian market in particular bounced back strongly after a few months of correction. Meanwhile the broader emerging markets and developed markets have fallen sharply in the last year.
Fixed Income
Indian bond yields corrected in November from 7.88 to 7.65. The collapse in crude oil prices and an easing of the liquidity situation has led to some relief in the bond markets.
Gold
Gold stayed in range during the month. If the commodity moves strongly away from 1200-1400 dollars per barrel, it would give a better indication of the long term trend.
Oil
Oil continued to fall in November. From a value of 86 in early October, it fell to to just under 62 dollars per barrel at the end of last month. This is a positive development because of our large dependance on oil imports. It is important to keep an eye on this figure as it can have a destabilising effect on our macros.
Indian Rupee
The Rupee appreciated sharply against all major currencies in the last month, to the tune of roughly 5 per cent. This is probably linked to falling oil prices and a return to normalcy in the market from the earlier panic situation.
Linkfest – 96
Friday, November 23rd, 2018Interesting commentary from across the web in the last few weeks:
Over dependence on cab aggregators is hurting auto profits – Scroll.in
No One is Crazy – Morgan Housel
Thriving With Systematic & Discretionary Investing – The Integrating Investor
How the contracting PE multiple stole 2018 – The Reformed Broker
Coffee Can Investing: Rajeev Thakkar – Money Control
Japan’s stockmarket is poised for a comeback – The Economist
Tiny Improvements, Big Results – A Wealth of Common Sense
The Surprising Power of The Long Game – Farnam Street
How Athleisure Conquered Modern Fashion – The Atlantic
The shopping revolution: Barbara Kahn – The Big Picture
The Wall Street Math Hustle – Institutional Investor
Trends & Time Lapses – A Wealth of Common Sense
Lending slowdown is affecting consumption – Bloomberg Quint
Zoom Out – Safal Niveshak
How the American Consumer Got Addicted to Choice – A Wealth of Common Sense
Life Insurance – Know What you are sold – Bala’s Blog
Fees continue to fall in US funds – Morningstar
Four Things Leonardo da Vinci Can Teach Us About Investing – Of Dollars And Data
The Myth of Private Equity – YouTube
How these penny pinchers retired in their 30s – YouTube
Aswath Damodaran: Making sense of market mayhem – YouTube
Monthly Market Summary: October 2018
Thursday, November 1st, 2018We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.
We use data for these charts from Investing.com
Global Equities
Most major equity markets globally faced a steep correction in the month of October. While the S&P500 and the Sensex outperformed their developed and emerging market peers, they still recorded a correction of 5-7 per cent in the month.
Fixed Income
Indian bond yields spiked sharply in early October to roughly 8.20 but then fell over the course of the month to 7.82. The concerns over defaults on the systemically important IL&FS initially created an overhang on the market. This was amplified by concerns over oil prices spiking, the FED raising interest rates and the currency depreciating sharply. Post the MPC meet and post the government taking steps to change the board of IL&FS, there seems to be some calming of sentiment in the market.
Gold
Gold moved up in the month and closed above the 1200 dollars per ounce. If the commodity moves strongly away from the 1200-1400 range, it would give a better indication of the long term trend.
Oil
Oil corrected sharply in October. From a value of 86, it fell to to just over 74 dollars per barrel at the end of the month. Because of our large dependance on oil imports, it is important to keep an eye on this figure as it can have a destabilising effect on our macros.
Indian Rupee
The Rupee seemed to stabilise against most major currencies in October.
Linkfest – 95
Monday, October 29th, 2018Interesting commentary from across the web in the last few weeks:
MIB: Howard Marks, Oaktree Capital – The Big Picture
Confessions of an equity analyst – Value Research
The impact of NBFCs on fund flow to the economy? – Bloomberg Quint
The $80 Trillion world economy in one chart – Visual Capitalist
The next recession – The Economist
The future of healthcare – The Economist
Beware of market timing rules of thumb – Insecurity Analysis
The land challenge underlying India’s farm crisis – Livemint
Amazon’s private label business – CNN
The NBFC scare isn’t over yet – Bloomberg Quint
Public sector enterprises are poor investments – Mihir Sharma and Aarati Krishnan
Warnings mount for leveraged-loan market – FT Alphaville
Decoding the NBFC bailout – Capitalmind
23 charts and maps that show the world is getting much, much better – Vox
A lost decade of dollar cost averaging – A Wealth of Common Sense
Oil’s rally isn’t over yet – Bloomberg Quint
Moral investments aren’t outperforming – FT Alphaville
Slowing US momentum- The Reformed Broker
What happens when interest rates rise? – Morgan Housel
Haste Makes Waste – Morgan Housel
The electric future will start on two wheels – Bloomberg
Credit Risk Funds pose a problem – INR Bonds
Investing is Hard – YouTube
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The global tightening of financial markets
Saturday, October 20th, 20182018 has seen tightening in financial markets across the globe. This is having divergent effects on growth for different economies. This trend is in sharp contrast to to the synchronised recovery and easy liquidity conditions we were seeing in 2016 and 2017.
The US economy continues to have strong momentum. The FED has gradually removed accommodation and has raised rates every year since 2015. As a result, the term spread has started to narrow and yield curve has started to flatten. The BIS has captured this in its latest quarterly review in the following chart:
The “flight to safety” effect has kept long term yields low in the US. It has also probably contributed, along with escalating trade tensions, to the rally of the US dollar. This has put further pressure on emerging market economies. India is not alone in that a number of such economies have been experiencing portfolio outflows with policy or political uncertainty compounding market stress and currency depreciation.
From the BIS:
And:
The long and unprecedented run of 16 consecutive months of net inflows to EME investment funds was cut short in May (Graph 4, centre panel). The slowdown had actually started in February for hard currency bond funds, and then extended to equity and local currency bonds as the US dollar appreciation accelerated in late April. This in turn reduced the returns on those assets for dollar-based investors. Unusually large EME carry trade returns fell precipitously as from April, dropping in August below the low levels of November 2016 (Graph 4, centre panel).
A number of these emerging economies benefitted from loose monetary policy of the developed economies over the last decade. Now that the liquidity is being withdrawn, the economies that have not addressed structural issues are feeling the most pain.
Even in more developed European economies, corporates started to see higher borrowing rates because of euro area sovereign financial stresses resurfacing.
The expectation is that global liquidity and credit conditions will continue to tighten, especially in the USA. A flat yield curve generally portends a recession. With other markets already showing signs of losing momentum, what does it mean if even US growth starts cooling off?
How does the balance of payments affect demand?
Thursday, October 18th, 2018How does a balance of payment problem affect demand in the economy? Neelkanth Mishra of Credit Suisse puts it in an elegant way in an interview with Ira Dugal.
To paraphrase, if you think of it like a household budget: suppose a family has a consumption expenditure of Rs. 120 and an income of Rs. 100. The difference of Rs. 20, which would need to be borrowed from someone, would be the equivalent of the current account deficit. If, say oil prices go up, the consumption basket then becomes Rs. 140 and you would have to borrow more. Quite often it is the case that no one will be willing to lend the family more and therefore their consumption has to be brought back down to Rs. 120. This is the demand adjustment that the economy will have to face.
Neelkanth commented that the demand adjustment may be nearly 2 per cent of GDP and this could be the reason for the current panic in the currency. The balance of payments adjustment also puts a question mark on medium term growth rates. He estimated that even seven per cent growth rate is not sustainable. This is because our energy import bill is at an all-time high even though oil prices are at half the levels seen in the prior peak.
The entire interview is worth a watch:
Other discussion points from the conversation:
- With the MPC not hiking rates, the burden of the balance of payment adjustment has fallen to the currency. In the run up to an election year, fiscal policy is unlikely to give much relief either.
- Price transmission not happening in petrol and diesel will kick the can down the road and make the problem worse
- Our capital inflows as a percentage of GDP have stalled and are back at 2002 levels. There has been a cyclical decline in capital flows globally over the last few years. The reason for this is that the countries that have been exporting capital are the ones that have a current account surplus. Each country deploys this differently; for example, Japan and China deploy them for strategic interests while Germany may deploy it through banks to help prop up lending. As of now there are no signs of these flows picking up.
- FCNR-B scheme is only meant to stall a stampede. Even if you use the scheme, it will solve the problem for a few months and then will again come back because investors will take back their money
- Term spread continues to be high, 10-year bond yields much higher than repo rate in spite of RBI providing liquidity via open market operations.
- If you see the progression of financial markets in India, there have been phases where the NBFCs have grown very rapidly and then a very large number of them have disappeared. Many smaller NBFCs may actually have to look at shutting down. The assumptions on growth of NBFCs and the market size they could get to would be challenged.
- Earlier five buckets of financial institutions that were doing lending. There were the large PSU Banks, the smaller PSU banks, the private sector corporate lenders, the private sector retail lenders and the NBFC segment. One by one each of these legs have started to fall. The smaller PSU banks are grappling with NPA issues, the private sector corporate lenders are facing promoter and management issues, now even the NBFC segment is hampered. What this means now is that the banking system capacity is constrained.
- FPIs have 80 per cent of their holdings in the top 60-70 stocks. They hold roughly 27 per cent of the top 50 stocks. They own 60 per cent of the free float of those top 50 stocks. The recent correction appears to be a stampede out for foreign investors i.e. basket selling. Domestic flows are mainly in the smaller stock scripts and now those flows are starting to get tested.