Super Read - Source: Valueandopportunity.com

As I did not find historical P/Es for the Dax in 1987/1988, let’s look at this table of historic P/Es for the S&P 500:

	P/E
31.12.1973	12,3
31.12.1974	7,3
31.12.1975	11,7
31.12.1976	11,0
30.12.1977	8,8
29.12.1978	8,3
31.12.1979	7,4
31.12.1980	9,1
31.12.1981	8,1
31.12.1982	10,2
30.12.1983	12,4
31.12.1984	9,9
31.12.1985	13,5
31.12.1986	16,3
31.12.1987	15,6
avg	10,8

Someone like John Hussmann might have said that stocks have nowhere to go as the P/E even after the 1987 crash was ~50% higher than the preceeding 15 year average. At the and of 1987, 10 30 year US Treasuries were yielding around 9%, another argument why stocks didn’t look that “apetizing” at that point in time. Why bother with stocks if you can earn double digits with corporate bonds any time ?

What followed

Looking back, it is easy to point out some of the events which led to this remarkable run especially for the DAX over the last 26 years:

- Communism broke down (“Peace dividend”)
- the Eurozone was created, stimulating cross border trading, increasing competition
- technology change (PC, Internet, Mobile)
- Corporate taxes in Germany went down form >50% to ~30%
- interest rates declined for now 25 years in a row
- old crossholding structure (“Deutschland AG”) dissolved, more professional management, foreign investors
- the BRIC story unfolded, further possibilities to export “core competency” goods like machinery and cars

In 1987/1988, few market pundits did even predict a single one of those factors. That’s why I think that just looking into the rearview (valuation) mirror should not be the only tool in the investing toolbox. Past P/Es will not predict future seismic shifts. On the other hand, one should not rely on such evcents happening over and over again and boosting share prices further. Clearly, interest rates and taxes will not fall that much lower and the effect of the end of Communism will not repeat itself.

For me the major conclusion is the following: Do not rely on any one system which tries to predict the future and/or future returns. Keep an open eye on everything, from valuations to macro economic factors and political shifts. Be prepared for surprises. Inthe long term, many surprises turned out to be positive for the economy and stock return.

Some musings on the Dax constituents

Just for fun, I created a table with the long term performance of the 15 “surviving” Dax constituents. Unfortunately I only got performance numbers back to 1992, but the p.a. Performance of the DAX was quite similar. lets look at those 15:

1987	Still in DAX	Comment	LT Perf (08/1992)	p.a.
DAX			545,14%	8,95%
Allianz *	1		177,55%	4,80%
BASF *	1		3650,23%	18,12%
Bayer *	1		1598,15%	13,90%
BMW *	1		1723,82%	14,28%
Commerzbank *	1		-70,14%	-5,40%
Continental	1		1962,28%	14,92%
Daimler-Benz (*)	1		90,50%	4,22%
Deutsche Bank *	1		89,57%	2,98%
Deutsche Lufthansa *	1		615,84%	9,47%
Henkel *	1		1200,08%	12,51%
Linde *	1		699,66%	10,03%
RWE *	1		308,71%	6,68%
Siemens *	1		742,92%	10,29%
Thyssen (*)	1		89,98%	4,32%
Volkswagen *	1		1690,10%	14,18%

Not surprisingly, financial stocks do not look good here. Overall, companies which are considered “well managed” did quite well such as Henkel, Bayer, BMW, Linde. Surprising for me is the fact that Lufthansa actually outperformed the DAX as well as Siemens.

Now let’s take a quick look at the new stocks. If I didn’t have returns from 1992, I made a comment:

			Total	p.a.	Perf. Since
Adidas	1		896,84%	13,23%	1995
Beiersdorf	1		1658,99%	14,09%
Deutsche Börse	1		335,79%	11,74%	2001
Deutsche Post	1		103,80%	5,41%	2000
Deutsche Telekom	1		62,22%	2,80%	1996
EON	1		485,63%	8,46%
Fresenius	1		4651,42%	19,42%
Fresenius Medical Care	1		174,05%	5,90%	1996
HeidelCement	1		242,80%	5,83%
Infineon	1		-80,66%	-10,95%	2000
K&S	1		3084,30%	17,24%
Lanxess	1		302,98%	16,11%
Merck	1		555,53%	10,64%	1995
Munich Re	1		300,42%	7,24%	1994
SAP	1		3502,32%	19,98%

Not surprisingly, the best “newcomers” also lead the total Dax performance. Smaller companies which grow big are always the best investments, although it is often hard to identify them before.

Finally one other table. Let’s look at some of the best performers and their historical P/Es:

	FRE	SAP	HEN3	BEI	BAS
31.12.1992	28,6	24,4	19,6	18,9	11,4
31.12.1993	35,2	25,8	25,7	22,8	28,0
30.12.1994	19,4	36,7	15,0	20,6	14,6
29.12.1995	33,0	55,2	18,4	18,9	7,8
31.12.1996	64,4	52,1	25,9	28,7	14,4
30.12.1997	49,2	61,1	29,5	46,8	12,0
30.12.1998	30,8	71,5	32,8	30,4	11,8
30.12.1999	27,1	83,7	26,2	32,5	25,3
29.12.2000	37,7	60,0	21,7	41,9	23,6
28.12.2001	183,3	78,5	18,3	38,1	20,7
30.12.2002	10,8	46,3	20,0	31,3	13,9
30.12.2003	23,0	38,1	17,1	27,3	27,5
30.12.2004	18,2	30,9	5,3	21,9	14,5
30.12.2005	20,1	31,5	16,2	23,7	11,3
29.12.2006	23,5	26,2	18,9	16,7	11,6
28.12.2007	21,5	22,3	18,1	27,2	12,1
30.12.2008	21,2	15,5	54,7	16,8	8,9
30.12.2009	14,2	22,3	26,4	27,8	28,2
30.12.2010	16,3	24,9	18,1	29,7	12,0
30.12.2011	16,9	14,0	16,7	39,8	8,0
28.12.2012	16,3	25,8	18,3	31,6	13,6
30.12.2013	19,7	22,3	23,1	31,3	14,7

We can easily see that quality and growth NEVER is cheap. I am not sure if that Henkel 2004 P/E of 5 is incorrect data, but the solid “quality stocks” always traded “richly” and nevertheless delivered outstanding long term performance. Only BASF, as a “quality cyclical” company has been available at single digit P/Es at some years.

So after all, this is wat Warren B. likes to tell us: In the long term, quality does seem to beat anything else, especially if you factor in taxes, trading costs etc.

Summary:

So what does this all tell us ? I am afraid that I cannot come up with some “Magic Formula” to identify future winners. Nevertheless, I think the look back emphasizes three of Warren Buffet’s main points:

1) over the long term, stocks have been a unbeatable compounding machine. A return 10 times the original inevstment in 26 years despite several devasting crashes speaks for itself

2) over such a long time horizon, it seems that “quality buy and hold” seems to be at an advantage at least for large caps. Yes, introducing a backtested system (market timing, EV/anything) could generate fantastic returns as well, but just buying and holding well managed companies did produce spectacular returns

3) Just buying the index and sitting on one’s ass would have beaten almost all active strategies. To be fair although, the first DAX index funds were available mid/end 90ties…..

Infeeee, Infy; Infeeee Infy

Is this right time to invest in Infosys ? Can Infosys gain its past glory ? Many have these question in mind. This is a classic dilemma whether to buy a transformation at a reasonable valuation or to buy a well oiled company at a premium valuation.

Now let us examine few points here. Indian IT services is primarily a labour arbitrage. In very few cases we can find a company which is in innovation like a google or primarily a product company like SAP or primarily a consulting. Now indian IT companies have sustained their business models on back of labour arbitrage till now. They had first mover advantage but over the period even global giants like IBM have added a huge headcount in India, hence cost advantage of Indian IT companies is no more available. 

At this juncture has the time come to revisit the indian IT companies business model ? Yes in my view. It has been widely recognised. Even infosys version 3.0 has some detail on this. They had acquired a consulting company and has got higher proportion of consulting revenues but have they embarked a journey on innovation or products ? Not so much.

At this backdrop Mr. Vishal Sikka who is known for his role in resurrecting SAP for his domain expertise and thinking ahead of others has Infosys has thought ahead of Indian peer group ? I think so. 


But what is reality is a company which was pioneer in IT outsourcing in India, which lost its way in last few years due to some tactical / strategic errors in the last few years led to lower growth and margin squeeze available at inferior valution multiples. This company is trying to script a second journey for Indian IT industry and the founder member team handed over baton to professional management.I would bet on this turnaround!

Leonardo

The first is an intense curiosity and great enthusiasm for discovery and understanding. This was indeed an outstanding quality of Leonardo, whom Kenneth Clark called “the most relentlessly curious
man in history.”

Another striking sign of genius is an extraordinary capacity for intense concentration over long periods of time. Isaac Newton apparently was able to hold a mathematical problem in his mind for weeks until it surrendered to his mental powers. When asked how he made his remarkable discoveries, Newton is reported to have replied, “I keep the subject constantly before me and wait until the first dawnings open little by little into the full light.”

Siddhartha

that there is nothing to be learned! There is indeed no such thing, so I believe, as what we refer to as `learning'. There is, oh my friend, just one knowledge, this is everywhere, this is Atman, this is within me and within you and within every creature. And so I'm starting to believe that this knowledge has no worser enemy than the desire to know it, than learning."

What he had said to Gotama: his, the Buddha's, treasure and secret was not the teachings, but the unexpressable and not teachable, which he had experienced in the hour of his enlightenment—it was nothing but this very thing which he had now gone to experience, what he now began to experience. Now, he had to experience his self. It is true that he had already known for a long time that his self was Atman, in its essence bearing the same eternal characteristics as Brahman. But never, he had really found this self, because he had wanted to capture it in the net of thought. With the body definitely not being the self, and not the spectacle of the senses, so it also was not the thought, not the rational mind, not the learned wisdom, not the learned ability to draw conclusions and to develop previous thoughts in to new ones. No, this world of thought was also still on this side, and nothing could be achieved by killing the random self of the senses, if the random self of thoughts and learned knowledge was fattened on the other hand. Both, the thoughts as well as the senses, were pretty things, the ultimate meaning was hidden behind both of them, both had to be listened to, both had to be played with, both neither had to be scorned nor overestimated, from both the secret voices of the innermost truth had to be attentively perceived. He wanted to strive for nothing, except for what the voice commanded him to strive for, dwell on nothing, except where the voice would advise him to do so. Why had Gotama, at that time, in the hour of all hours, sat down under the bo-tree, where the enlightenment hit him? He had heard a voice, a voice in his own heart, which had commanded him to seek rest under this tree, and he had neither preferred self-castigation, offerings, ablutions, nor prayer, neither food nor drink, neither sleep nor dream, he had obeyed the voice. To obey like this, not to an external command, only to the voice, to be ready like this, this was good, this was necessary, nothing else was necessary.

When you throw a rock into the water, it will speed on the fastest course to the bottom of the water. This is how it is when Siddhartha has a goal, a resolution. Siddhartha does nothing, he waits, he thinks, he fasts, but he passes through the things of the world like a rock through water, without doing anything, without stirring; he is drawn, he lets himself fall. His goal attracts him, because he doesn't let anything enter his soul which might oppose the goal. This is what Siddhartha has learned among the Samanas. This is what fools call magic and of which they think it would be effected by means of the daemons. Nothing is effected by daemons, there are no daemons. Everyone can perform magic, everyone can reach his goals, if he is able to think, if he is able to wait, if he is able to fast

Siddhartha looked upon all of this as if it was a game, the rules of which he tried hard to learn precisely, but the contents of which did not touch his heart

But he has that mysterious quality of those people to whom success comes all by itself, whether this may be a good star of his birth, magic, or something he has learned among Samanas. He always seems to be merely playing with out business-affairs, they never fully become a part of him, they never rule over him, he is never afraid of failure, he is never upset by a loss

I believe you, my dear Govinda. But now, today, you've met a pilgrim just like this, wearing such shoes, such a garment. Remember, my dear: Not eternal is the world of appearances, not eternal, anything but eternal are our garments and the style of our hair, and our hair and bodies themselves. I'm wearing a rich man's clothes, you've seen this quite right. I'm wearing them, because I have been a rich man, and I'm wearing my hair like the worldly and lustful people, for I have been one of them

Water is Life!
But out of all secrets of the river, he today only saw one, this one touched his soul. He saw: this water ran and ran, incessantly it ran, and was nevertheless always there, was always at all times the same and yet new in every moment! Great be he who would grasp this, understand this! He understood and grasped it not, only felt some idea of it stirring, a distant memory, divine voices

Vasudeva listened with great attention. Listening carefully, he let everything enter his mind, birthplace and childhood, all that learning, all that searching, all joy, all distress. This was among the ferryman's virtues one of the greatest: like only a few, he knew how to listen. Without him having spoken a word, the speaker sensed how Vasudeva let his words enter his mind, quiet, open, waiting, how he did not lose a single one, awaited not a single one with impatience, did not add his praise or rebuke, was just listening. Siddhartha felt, what a happy fortune it is, to confess to such a listener, to burry in his heart his own life, his own search, his own suffering

Time is an illusion very few conquer
"Yes, Siddhartha," he spoke. "It is this what you mean, isn't it: that the river is everywhere at once, at the source and at the mouth, at the waterfall, at the ferry, at the rapids, in the sea, in the mountains, everywhere at once, and that there is only the present time for it, not the shadow of the past, not the shadow of the future?"

"This it is," said Siddhartha. "And when I had learned it, I looked at my life, and it was also a river, and the boy Siddhartha was only separated from the man Siddhartha and from the old man Siddhartha by a shadow, not by something real. Also, Siddhartha's previous births were no past, and his death and his return to Brahma was no future. Nothing was, nothing will be; everything is, everything has existence and is present."

Of Bondage
Vasudeva's smile flourished more warmly. "Oh yes, he too is called upon, he too is of the eternal life. But do we, you and me, know what he is called upon to do, what path to take, what actions to perform, what pain to endure? Not a small one, his pain will be; after all, his heart is proud and hard, people like this have to suffer a lot, err a lot, do much injustice, burden themselves with much sin. Tell me, my dear: you're not taking control of your son's upbringing? You don't force him? You don't beat him? You don't punish him?

Which father, which teacher had been able to protect him from living his life for himself, from soiling himself with life, from burdening himself with guilt, from drinking the bitter drink for himself, from finding his path for himself? Would you think, my dear, anybody might perhaps be spared from taking this path? That perhaps your little son would be spared, because you love him, because you would like to keep him from suffering and pain and disappointment? But even if you would die ten times for him, you would not be able to take the slightest part of his destiny upon yourself."

Pollution
Many a traveller Siddhartha had to ferry across the river who was accompanied by a son or a daughter, and he saw none of them without envying him, without thinking: "So many, so many thousands possess this sweetest of good fortunes—why don't I? Even bad people, even thieves and robbers have children and love them, and are being loved by them, all except for me." Thus simply, thus without reason he now thought, thus similar to the childlike people he had become

Woah!
"When someone is searching," said Siddhartha, "then it might easily happen that the only thing his eyes still see is that what he searches for, that he is unable to find anything, to let anything enter his mind, because he always thinks of nothing but the object of his search, because he has a goal, because he is obsessed by the goal. Searching means: having a goal. But finding means: being free, being open, having no goal. You, oh venerable one, are perhaps indeed a searcher, because, striving for your goal, there are many things you don't see, which are directly in front of your eyes."

Quoth Siddhartha: "I've had thoughts, yes, and insight, again and again. Sometimes, for an hour or for an entire day, I have felt knowledge in me, as one would feel life in one's heart. There have been many thoughts, but it would be hard for me to convey them to you. Look, my dear Govinda, this is one of my thoughts, which I have found: wisdom cannot be passed on. Wisdom which a wise man tries to pass on to someone always sounds like foolishness."

V V Difficult
It says: The opposite of every truth is just as true! That's like this: any truth can only be expressed and put into words when it is one-sided. Everything is one-sided which can be thought with thoughts and said with words, it's all one-sided, all just one half, all lacks completeness, roundness, oneness. When the exalted Gotama spoke in his teachings of the world, he had to divide it into Sansara and Nirvana, into deception and truth, into suffering and salvation. It cannot be done differently, there is no other way for him who wants to teach. But the world itself, what exists around us and inside of us, is never one-sided. A person or an act is never entirely Sansara or entirely Nirvana, a person is never entirely holy or entirely sinful. It does really seem like this, because we are subject to deception, as if time was something real. Time is not real, Govinda, I have experienced this often and often again. And if time is not real, then the gap which seems to be between the world and the eternity, between suffering and blissfulness, between evil and good, is also a deception."

"Project Gutenberg"

Albert E

“The most beautiful thing we can experience is the mysterious. It is the source of all true art and science. He to whom the emotion is a stranger, who can no longer pause to wonder and stand wrapped in awe, is as good as dead —his eyes are closed." - Albert Einstein

Near term earnings visibility

Of the infinite varieties of price corrections that can happen in the market, there are two very interesting varieties:

Case 1: Stock price corrects with loss in earnings momentum; in other words, limited growth of sub 10% for the next one year
Case 2: Stock price correction with/out loss in earnings momentum - One of those events that happens out of fear on near term news

ING Vysya Bank (PCR to increase), Dr. Reddy's (no near term US pipeline), Bajaj Corp (temp. slowdown in almonds oil), VST Tillers (Big miss) and Torrent Pharma (Amortization of an acquisition) - Interestingly, all of these are strong companies with temporary issues. Also, Gateway Distriparks, in hindsight, suffered from the same issue. All of these constitute Case 1 Companies

Yes Bank (corrected 50% from the peak), Just Dial (Corrected about 40% from the peak), MT Educare (about 30% from the peak), ITC (25% from the peak), Tech pack (in anticipation of forex issue) and IPCA labs, Kaveri and Bayer (El nino prediction by the analyst brethren) etc. etc. constitute Case 2 Companies

Of course, we have to overlay valuations on top of stock price corrections to see each of them constitute growth at reasonable price. Just Dial does not pass muster given that valuations were insane prior to the fall and after the fall, notwithstanding the market leader status, bluesky growth, vc bets within the company.

Question then becomes how to bat under these two circumstances.
It seems a trader would do far better in Case 2 kind of companies while an investor with tons of patience will fare better in Case 1. Unanticipated catalysts seem like leading unanticipated windfalls - eg. GDL, somany ceramics; In other words, both these set of companies have a place in any portfolio, proportions could differ based on individual preferences.