January - March 2011

April 25, 2011 

Whilst your individual returns are with you, I would like to share how we think about our performance at Jeetay.

1)   We look at a "representative" portfolio. Most of the older portfolios usually have in the past had performance numbers clinging around the numbers of the "representative" portfolio. Newer portfolios take time to build up and usually mask true performance and may even distort it. This "representative" portfolio is that of our oldest client.

2)   We benchmark our returns against the Sensex. We are size agnostic but usually find values in the mid-cap space. However we carry fairly large amounts of cash and so a mid-cap index may not be the right benchmark. We have chosen the Sensex to give you a sense of the "opportunity cost" of not being in the market and not as some sort of a competitor with whom we are in a quarterly rat race.

3)   Short-term underperformance does not bother us and short-term outperformance does not excite us. What should count are long-term figures. Our idea of the long-term is very long. We will be honest - we do not have performance figures for our definition of the long-term. So we have sliced the performance figures into various shorter-term horizons, to suit your perspective of what should be a sensible investment horizon.

4)   We usually measure the cheapness of our portfolio in relation to each security's historical valuations and not against the current market valuation i.e. we would like to have some sort of absolute cheapness and not relative cheapness.

5)   The figures cited are before taxes and fees. This is because the taxes are paid by you and vary depending on whether you have short-term capital losses and the quantumof short term gains. The fee structure varies due to 1) different plans 2) different entry points (high watermarks). These should shrink the magnitude of outperformance, although not eliminate it, except perhaps for the last exhibit.

6)   We do not only look at returns, but at risk-adjusted returns. We do not measure risk by simple volatility, but by downside volatility, drawdowns and portfolio cheapness. On a risk-adjusted basis, our returns, even after taxes and fees, should compare well with the Sensex. Since we believe that markets are unforecastable, we usually hedge our positions by carrying fairly large amounts of cash.

7)   We continue to use the "representative" account methodology so as to be consistent (Tables 1, 2 and 3).

8)   We have found that the "representative" account, which has been that of our oldest account, now has a different portfolio composition from newer accounts and even some of the older accounts. It may thus in the future not properly track overall performance. We have included Table 4 in which three sets of figures are shown:

a)   The "representative" portfolio returns.

b)   The weighted average returns of all the discretionary portfolios in the Jeetay PMS.

c)   The weighted average returns of those portfolios with over 60% equity at any point since inception. These may be generically thought to be the "older" portfolios since "newer" portfolios take some time to build up and may not be representative of portfolio performance. They are of course included in the weighted average returns of all the portfolios.

9)   We will now be reporting "weighted average" returns along with those of the "representative" portfolio.

Table 1

Since Inception

 

 

 

 

Period

Portfolio Return (%)

Sensex Return (%)

% in cash

 

June 07, 2003 to June 07, 2004

80.80%

48.00%

Almost fully invested

Audited

July 05, 2004 to  June 30, 2005

31.45%

42.10%

Around 65%

Audited

July 01, 2005 to  March 31, 2006

30.32%

56.80%

Around 40%

Audited

April 01, 2006 to March 31, 2007

33.73%

15.62%

Around 20%

Audited

April 01, 2007 to March 31, 2008

7.41%

18.60%

Around 30%

Audited

April 01, 2008 to March 31, 2009

-22.26%

-37.94%

Around 35%

Audited

*April 01, 2009 to March 31, 2010

85.16%

80.50%

Around 30%

Audited

April 01, 2010 to June 30, 2010

14.5%

0.99%

Around 29%

Audited

July 01, 2010 to September 30, 2010

13.64%

13.38%

Around 32.50%

Audited

October 01, 2010 to December 31, 2010

4.58%

2.19%

Around 26%

Audited

January 01, 2011 to March 31, 2011

-5.13%

-5.19%

Around 21%

Audited

Cumulative Return

723.33%

461.94%

 

 

Table 2

Since 2006

 

 

 

 

Period

Portfolio Return (%)

Sensex Return (%)

% in cash

 

April 01, 2006 to March 31, 2007

33.73%

15.62%

Around 20%

Audited

April 01, 2007 to March 31, 2008

7.41%

18.60%

Around 30%

Audited

April 01, 2008 to March 31, 2009

-22.26%

-37.94%

Around 35%

Audited

*April 01, 2009 to March 31, 2010

85.16%

80.50%

Around 30%

Audited

April 01, 2010 to June 30, 2010

14.5%

0.99%

Around 29%

Audited

July 01, 2010 to September 30, 2010

13.64%

13.38%

Around 32.50%

Audited

October 01, 2010 to December 31, 2010

4.58%

2.19%

Around 26%

Audited

January 01, 2011 to March 31, 2011

-5.13%

-5.19%

Around 21%

Audited

Cumulative Return

166.89%

70.42%

 

 

Table 3

Since 2009

 

 

 

 

Period

Portfolio Return (%)

Sensex Return (%)

% in cash

 

*April 01, 2009 to March 31, 2010

85.16%

80.50%

Around 30%

Audited

April 01, 2010 to June 30, 2010

14.5%

0.99%

Around 29%

Audited

July 01, 2010 to September 30, 2010

13.64%

13.38%

Around 32.50%

Audited

October 01, 2010 to December 31, 2010

4.58%

2.19%

Around 26%

Audited

January 01, 2011 to March 31, 2011

-5.13%

-5.19%

Around 21%

Audited

Cumulative Return

139.00%

100.26%

 

 

*A mistake we hope never to make again - at low levels of the market, do not wait for even lower prices. Ignore all the negatives, because they usually are already in the prices. Mark-to-market losses should not hurt, only permanent losses of capital.

Table 4

Jeetay Returns**

 

2006-2007

2007-2008

2008-2009

2009-2010

2010-11

 

"Representative" portfolio

33.73%

7.41%

-22.26%

85.16%

29.09%

Weighted average return of all discretionary portfolios

28.66%

7.12%

-23.85%

78.4%

18.57%

Weighted average return of "older" portfolios

30.11%

8.68%

-23.85%

79%

18.40%

**Returns are before fees but after all other expenses

 

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I read about a joke which I would like to share:

"Einstein went to heaven: He warmly greeted the first person he met when he arrived, asking immediately, "What is your IQ?" The man responded, "One hundred twenty." Einstein said, "Wonderful, we can discuss books and ideas." Then Einstein repeated his question to the next man he encountered: "What is your IQ?" On hearing that it was 160, Einstein was thrilled. "Wonderful," he said, "we can discuss nuclear relativity." At his third encounter, Einstein again asked his question and the third man answered, "Eighty." "Terrific," said Einstein. "What fun we're going to have! We can discuss the stock market.""

But seriously, given the IQ level of all of you, my clients, its probably not a smart idea to discuss the stock market, about which I do not have any views anyway except its broad valuation. I have no idea what the stock market is going to do in the short-term although over the long-term it does go up, except if it is expensive to start with.

I also have no views on the short-term levels of GDP growth rates, interest rates and inflation. My strong view however remains that the global economy is debt -driven and unsustainably so. Too much consumption,  too little saving and unhealthy resort to borrowings to  finance daily expenditure is a recipe for disaster,  whether it is for a family, firm or the economy. The "growth rates" that are being witnessed are driven by large increases in credit and thus overstate true profitability and understate downside risks. They are thus dangerously illusory. I put not a small probability on a financial crisis that will surpass the one that was witnessed in 2008-2009, although I have no clue when it will happen.

Many of the ills that are being  witnessed today are because of short - termism and greed about which a lot has been written. Let me give some examples that  relate to investments that we have made.

1)   A company in the auto sector has had a change in the top management.  Jeetay'sscuttlebutt with suppliers reveals that there is alienation that that taken place with suppliers, distributors and there is  an executive turnover not seen in the past. The company's pronouncements are extremely  bullish, but our feedback from the market indicates that ‘dumping' may be taking place. On valuation parameters, the stock is not expensive even currently. But due to our concerns, we have exited. We believe that the management has focused only on short term goals.

2)   A market leader had changed its stock option plans from options granted at the market price on the date of the option issue to " performance shares" at Rs 1/share. The method of accounting for "performance shares" is different from what SEBI has mandated, although to  be  fair to the company, it is more conservative. Howevernowhere  is there  a mention of what accounting polices are followed - the company claims that the amounts are not  "material".

The company further announced and completed a buy back at an average price much, much higher than the price at which " performance shares" have been granted. Our calculation indicates that almost 50% of the shares issued and options granted  from2006 have been bought back.  The company mentions that the buy back and options issued are unrelated. We believe that the parent company ultimately decides and wants to "neutralize" the options issued to maintain its stake. Ultimately the buy backhas not been done at a price which has a "margin of safety", shares have been issued to executives with only upside and the method of accounting (which is different from the SEBI method) has not been made clear at all in its annual reports.  The company maintains that is has not done anything "illegal". But the question to be asked is  -was this "fair" and "transparent"?

3)   This looks innocent compared  to companies issuing options on parent company's shares and interest-free loans being given to ESOP trusts to buy back shares from the market. But these are examples of corporate greed.

I do not want to preach Aristotelian  ethics nor to I claim to be a paragon of virtue but there is much to learn from people who are ethical. The path has to be one of improvement , but what is being witnessed is an all-out decline in standards of behavior from people who should be role models in society. The only atonement for the bad behavior of the past has to be a conscious attempt to raise the standard of behavior in the future.

 

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