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Satyajit Singh's  Instablog

Satyajit Singh
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MBA, University of Chicago, Graduate School of Business --------------------------------------------------------------------------- I am a disciple of Benjamin Graham and use his 'margin of safety' principle in investing. It is insightful to see how people such as Prem Watsa, Seth Klarman and... More
My company:
Singh Investment Funds
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  • Portfolio Allocation...

    Dear Readers

    Lately I have pondering on whether a diversified portfolio is good or is a focused bet better. The short answer is - it depends.

    I started my career in investing at an early age of 14 years. I was in India and was lucky enough to lose money (yes Lucky!) at a very early age. It shook me and since then my quest began. I have seen all the debt bubble, Asian Currency crisis, India's liquidity crisis, Japanese fall etc. The list is endless.

    But as the time goes by and the more I read, the more I am getting infatuated with focused bets. It involves hard work, blocking and tackling and patience. It invloves the extreme ability to go against the market and have the guts to stay focused but at the end it pays and pays handsomely. To a lot extent this ability is in the DNA. No business school can teach it. I always had the ability to put 70% and sometimes 100% of the portfolio in one single bet. The choice was always very difficult and actually required nerves of steel but somehow it came naturally to me. In my experience, the 80% portfolio bet always gave me ~20% compounded return and the rest 20% (which I did because I have been taught in my MBA that I should diversify) always performed horribly.

    These investments are like kids. The lesser you have, the more focused you are on them. The results are naturally good.

    So as of today I am 80% invested in HPQ. I started buying it at ~$21/sh and then increased my bet drastically as HPQ approached $13/sh range. Till date it has given me ~20% and in next five years it will beat any index / fund on this planet. Just be patient and let the laws of compounding take its course.

    My math is simple and I am sure I cannot convince most of you but here it is:

    HPQ gives $7B (avg) FCF. Historically HPQ has given 90% of its FCF back as cash dividends and share repurchase. Assuming HPQ uses $4B/yr for repurchase, then in next five years it will use $20B to buy its own stock. At present market cap, it amounts to 50% of the company. Lets say HPQ's avg buy is at $40/sh (worst case) then $20B will fetch HPQ about 500M of its own shares and which will bring the outstanding shares to 1.4B. So at the end of fifth yr, FCF/sh = $7B/1.4B = $5 /sh. So how much would you give for a company which gives $5/sh FCF ? It varies. It will be better for investors if the price remain subdued for extended periods of time. This way HPQ can buy its own shares at low prices. The wealth gets transferred from an investor who sells to the one who stays invested.

    No ETF, S&P or any fund can even come close to the kind of return.

    Step One: Stay focused.

    Step Two: Don't forget step one.

    Satyajit Singh

    Portfolio Manager,

    Singh Investment Funds

    Feb 27 12:49 PM | Link | Comment!
  • S&P 500...Where Is It Heading?

    I am trembling in my pants as I am writing this post. The US economy is not growing at all. The Feds have tried every possible measure to stir up the economy but nothing is working. IBM, McDonald's and almost every company I know, is reporting decrease in sales. This decrease is not as prominent as it was in 1929 but the problem is pretty much the same. The Feds have drowned the economy with free fiat money and this has just delayed the pain. In 1929 the pain was severe and short in duration. In current situation the pain till now is less but it would persist much longer and it would cause an irreparable damage to the economy. Here are a few possible scenarios:

    1) The economy lingers, the Feds keep pumping money and the fiscal deficit grows. This is a Keynes model and Japan is a living example. The USD will remain strong as there is no other alternative. The outcome will be that stock market will crash initially but the bigger problem is that the stock market would not come down as much as it should. The reason is that Feds are manipulating the market. This would give an undue hope to the investors that the market will get back but it would keep sinking. As the market would go down, the P/E ratio would keep increasing as the earnings would fall much faster.

    2) The economy lingers, the Feds keep pumping money and the USD comes down. It would act as a catalyst for US exports to increase and imports to decrease. This is what the Feds are dreaming and to some extent it is a dream of our president too. Well when the reality hits, it hits hard. In my opinion, the world economy is tied to that of US's. So in short, USD would not come down and the exports will not increase.

    3) The economy lingers, the Feds keep pumping money and the fiscal deficit grows. But now the politicians and Feds decide that Keynes is probably wrong and his prescription cannot be continued forever. The QE stops and then comes the shocker, the taxes are increased. This would cause a sharp fall in the economy. Everywhere there would be a chaos.

    In my opinion, option 1 has a very high probability. Don't trust the Feds and keep your money under a watchful eye.

    Satyajit Singh

    Portfolio Manager

    Singh Investment Funds

    (singh-funds.com)

    Nov 04 1:33 AM | Link | Comment!
  • Corporate Structure...

    Financial / Investment analysts tend to look deep into numbers of a company but most investors tend to be soft hearted when it comes to analyzing the management and the corporate structure. This is a slippery slope.

    There are basically three corporate structures:

    1) The promoter / owner is also the CEO of the company.

    In this form of corporate structure the CEO has every incentive to pay himself a big salary, corporate jets and every luxury possible. The investors should watch out for such CEOs. History is full of events where the CEO (and the promoter) has squandered all the wealth at the cost of minority holders.

    2) No majority stakeholder.

    This is a heaven for the CEOs. No one is there to ask for the results. No one cares how the company performs. No one voices for a different CEO. Unfortunately the institutional investors such as pension funds or mutual funds tend to be passive in spite of being a majority holder. A minority investor should watch for two things:

    a) Is there any activist investor pushing for reforms ? If yes, its a good sign.

    b) Has the management performed really well ? Look at ROE or even better (FCF/Book Value of Equity)

    3) There is a majority holder who is a long term investor.

    This is the best structure for a minority investor. The majority holder has every reason and power to align the management.

    Just watch out and invest carefully. Its your hard earned money.

    Aug 15 11:51 AM | Link | Comment!
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