October – December 2010

January 31, 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:

    1. The "representative" portfolio returns.
    2. The weighted average returns of all the discretionary portfolios in the Jeetay PMS.
    3. 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

Cumulative Return

767.85%

492.70%

 

 

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

Cumulative Return

181.32%

79.75%

 

 

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

Cumulative Return

151.93%

111.22%

 

 

*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

(April 2010 - December 2010)

"Representative" portfolio

33.73%

7.41%

-22.26%

85.16%

36.07%

Weighted average return of all discretionary portfolios

28.66%

7.12%

-23.85%

78.4%

25.65%

Weighted average return of "older" portfolios

30.11%

8.68%

-23.85%

79%

26.48%

**Returns are before fees but after all other expenses

 

--------------------*--------------------

 

Enclosed is an end-of-the year piece that I wrote for "Outlook Profit" which I'm reproducing below. Whilst the market has "corrected" from a Sensex level of around 20,000 in mid December, Jeetay remains cautious of the overall valuations and environment, a fact that is obvious in our overall cash levels.

 

The Lotus-eaters

 

"Notwithstanding the current crisis engulfing Greece , ancient Greece and Rome had much wisdom to guide economic and ethical behavior. Reading Homer, the blind poet who sang verses to listeners on the Ionian shores, may well help investors to navigate today's markets.

In Homer's epic, "The Odyssey", the protagonist, Ulysses, began his long journey back home after the Trojan War. One of the first stops in the voyage recounted by Ulysses, amongst the Lotus-eaters, carried the risk of memory loss after eating the sweet fruit of the lotus. This risk of forgetfulness recurs several times in the epic: in the sorceress Circe's drugs and the Sirens' song.

With the heady climb of the markets, investors, like Ulysses, are at risk of forgetting the economic Trojan War that almost brought the world financial system to its knees not long ago. A passage back home is full of perils for those who choose to forget.

Pliny the Elder, the Roman author and natural philosopher, as well as a naval and army commander of the early Roman Empire , had a maxim in his classic "Natural History": "In order to weigh up life properly, one must always remind oneself of human fragility." For investors it can well stand as: "In order to weigh up investments properly, one must always remind oneself of market fragility."

Overoptimism, the illusion of control, self-serving bias and inattentional blindness (not expecting to see what we are not looking for) blind investors and financial intermediaries to "predictable surprises". Granted that investors are not in the "prediction of market levels" business but they certainly should be in the "protection of capital" business. There are however many "predictable surprises" that have a high probability of happening even though their timing is uncertain. For instance, the breakdown of the euro, the loss of confidence in the dollar and paper currencies, high global inflation and interest rates, growing global social strife, wars fought by the great powers over fast depleting natural resources and eccentric climate changes which in the history of human civilization have been one of the causes of the collapse of great societies. Juxtaposed again this are the opportunities that emerging markets like India offer which have been well recounted in many forums and would likely lead to needless repetition.

At current levels, as I write in mid - December, many of the stocks in the mid - cap space are at levels 40-50% higher that Benjamin Graham's "investment value" (nothing being paid for the "speculative component" or future looking factors). This does not mean that they are trading above conservatively calculated intrinsic value, which should take into account both the "investment" and "speculative" components. It does mean however that the requisite "margin of safety" is probably absent or is not sufficiently large.

Put another way, if 12000 on the Sensex is currently the level which approximates with Benjamin Graham's "pure investment basis" where there is negligible probability of even mark-to-market losses from the market's overall speculative foundation, 15000 is probably the level where an investor is paying for only the "investment component" of common stock valuation. Obviously at today's level there is a non-negligible "speculative" component.

Benjamin Graham was never against speculation. He however distinguished between "intelligent speculation" and "non-intelligent speculation". He cautioned investors to be only "intelligent speculators" where the bet is made with knowledge and where the odds are in favor of the bet being successful.

Rather than following "stories", investors should follow valuations and likely positive "predictable surprises" or "free options". A whole crop of companies is likely to be de-listed in the near future because they may be unwilling to follow SEBI's 25% free-float requirements. There are also some other companies that are buying back their shares and in many such cases the current price levels offer a decent "margin of safety". More "speculative" bets can be found in high growth of earnings power and a high prospective (say three years) earnings yield at current prices. Companies having hidden asset values, masked due to looking at stand-alone numbers, or unexploited resources may also offer value. The normal Grahamian screens should also throw up some ideas - discernment would be required because they may not necessarily be very cheap in relation to their historical valuations. In addition to spreadsheets, use checklists. And - the difficult and time - consuming part - kick the tyres! Good "scuttlebutt" is fun - but not easy.

Keynesian stimulus will have little impact on the long-term health of economies that have grown unwieldy on malinvestments caused by a cocktail of low - interest rates and a surfeit of liquidity. Hayek will probably be right in the end and investors should be alert on what could cause the gush of liquidity to turn into a trickle. In the meantime, inflationary conditions should prevail.

Paradoxically, inflationary conditions should immensely benefit asset-light companies that enjoy superior competitive positioning, high entry barriers and strong balance sheets. The reinvestment needs for both maintenance and growth would be minimal which should lead to large free cash flow generation. The same may not be the case for those asset-heavy companies which operate in the commodity space, unless they have advantages in cost of operations. At current valuation levels, these great companies may not necessarily be great investments. Even some of the recent takeovers of good franchises have been done at levels in which the acquirers would, in all probability, suffer "the winners curse".

Whilst quantum physics and especially its elegant mathematics should have little to do with value investing, the underlying idea of probabilities on sets of outcomes is common to both.

Like Schrodinger's cat in the famous thought experiment in quantum physics, which was both dead and alive at the same time, till the observation was made, investors' portfolios should be both dead (cash) and alive (equities) at the same time through asset allocation, till observations of market bubbles or market bottoms are made. It is better to have a portfolio dead (all cash) than alive (all equities) at observations of unsustainably high valuations and the other way around at observations of unsustainably low valuations. In moments of market indeterminacy (the precise cheapness or expensiveness of the market and the direction in which it is likely to go in the near - term), as at current valuations, a portfolio must be both dead and alive at the same time, by varying the cash levels.

Mirza Ghalib, probably the greatest Urdu poet, lived at a time of turmoil and change - the British conquest of India was in the ascendancy and the Mughal Empire was coming to an end. Similar global powershifts are evident today. A beautiful "sher":

 

"Rau mein hai rakhsh-e-umr kahan dekhiye thamey

Na haath baag par hai na pa hai rakab mein"

 

"The horseman of life speeds by, where can it be stopped

There are no hands on the reins, no feet in the stirrups."

 

Investors' vulnerability and fragility always ride in conjunction with the market's splendorous yet seductive rise."