October – December 2009

January 30, 2010

“Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.”

– William Shakespeare, Hamlet

Most governments are in an unenviable position – one that no private equity investor would like to be in – fully invested with no “exit” strategy. The liquidity engine should eventually sputter and die – but before that untold damage could have been done, not least the illusion of false prosperity.

I’m however no forecaster of markets or economies. Forecasting is a kind of fraud, as John Kenneth Galbraith so well wrote:

“Predictions from a financial firm, Wall Street economist or financial adviser as to the economic prospect for a corporation – recession, scheduled recovery or a continuing economic boom – are thought to reflect economic and financial expertise. And there is no easy denial of an expert’s foresight. Past accidental success and an ample display of charts, equations and self-confidence affirm depth of perception. Thus the fraud. Correction awaits.”

An investor cannot be in the forecasting business – his job is simply to buy pieces of businesses at attractive prices and sell them when they are no longer so. The emphasis is on valuation, not timing.

We calibrate our cash position to the level of the markets and will continue to do so. If we decisively outperform a rising market, as we have done so this quarter, despite carrying the cash that we do, then some part of it must be attributable to luck. What we are really aiming for is not to lose a lot of money in a falling market.

We have invested in some special situations – a delisting that was not successful and a contested open offer that is currently before the Supreme Court.

We have exited a MNC pharma company that gave us handsome returns due to a global takeover – it may become a special situation and we will review it when it does.

We remain cautious at current levels and have the cash to buy should markets move substantially lower. If Mr. Market however gets into a merry mood, we will sell.