Tag Archives: indian

Maximizing Shareholder Value: A Dumb Idea?

Sometime in 2007, I called the Investor Relations head of a leading Indian power company. “I request for a meeting with your CFO,” I said. “Where are you calling from?” she asked back. “I work for an independent research company working for retail investors, and we are looking to initiate coverage on your stock,” I replied. “I had some questions before writing the report, and thus wanted to meet your CFO.” “Are you writing a Buy or a Sell report on our stock?” she asked. “How can I tell you that now?” I said. “I need to finish my research, and only then will I make a judgement on whether the stock is a Buy or a Sell.” “Wait, you are from a retail research organization, right?” she asked. “Sorry, we do not have a policy to meet companies focused on retail investors. We only meet the institutional guys because they can help up increase our market cap, not the retail guys. We want to maximize shareholders’ wealth, you see.” I loved her honesty, but was shocked to hear such a response from a public company, which had a policy of maximizing shareholder wealth, and fast, and by excluding a large set of its shareholders. What a Dumb Idea! Peter Drucker said in 1973: The only valid purpose of a firm is to create a customer. Drucker’s perspective was that the goal of a firm isn’t fundamentally about creating profits or maximizing shareholder value. Profits and shareholder value are the results of adding value to customers, not the goal. Even the legendary Jack Welch has come to see that maximizing shareholder value is “the dumbest idea in the world.” “On the face of it, shareholder value is the dumbest idea in the world,” Welch said, “Shareholder value is a result, not a strategy…your main constituencies are your employees, your customers and your products.” Seth Godin wrote in a recent post – The purpose of a company is to serve its customers. Its obligation is to not harm everyone else. And its opportunity is to enrich the lives of its employees. Somewhere along the way, people got the idea that maximizing investor return was the point. It shouldn’t be. That’s not what democracies ought to seek in chartering corporations to participate in our society. The great corporations of a generation ago, the ones that built key elements of our culture, were run by individuals who had more on their mind than driving the value of their options up. Contrast this with what most companies and their managers do, i.e., focus on short-term profits and stock price maximization, because this is an easy thing to do. Look at what the DCB Bank did recently. Some days back, the management announced that the bank’s profits would take a knock as it tries to double its branch network in the next one year. On this news, the stock price crashed 30% in quick time. Shattered by this crash in the stock, the management revised its plan saying that, “after consultations with analysts and its chairman,” it would now not rush with the opening of new branches. Instead of setting up 150 branches over the next one year, it will do this over two years. While I have no view on the bank or how this branch expansion would have helped or hurt it, the questions that arise are: How can a management change its corporate plan while keeping an eye on the stock price? How on earth can you consult stock market analysts on what you want to do as corporate managers? The answer, again, seems to be – focus on short-term profit and stock price maximization versus long-term goals. All CEOs and corporate managers appearing on business channels talking about their profits and next quarter’s or year’s performance are focused on just that – maximizing their company’s stock prices in the short term. Companies that never organize analyst meets or conference calls and become active when their stock price is rising are also focused on that – further maximizing their stock prices in the short term. Companies that pay dividends out of borrowed money are also doing the same. Steve Denning wrote this in his 2011 article on Forbes: CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services. The real market is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. That is the world that executives control-at least to some extent. The expectations market is the world in which shares in companies are traded between investors-in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future. The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company. Roger Martin wrote this in his book ” Fixing the Game “: What would lead [a CEO] to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level. Invest with People Focused on Customers, Not Stock Prices The problem with short-term stock price maximization is that it’s not particularly difficult. If a company has a big market share, or if it’s difficult for the customer to switch away from the company’s product, or if the customer lacks the knowledge of better options, it’s easy for the company to hurt its customers on the way to boosting what the shareholders say they want. So, it’s not difficult for Nestle ( OTCPK:NSRGY , OTCPK:NSRGF ) to be casual about what its super-branded food products contain (thanks to its large market share), or for Indian Railways to provide sub-standard travel experience (customers don’t easily switch), or for financial services companies to mis-sell bad products (customers lack knowledge about good products). But just because it works doesn’t mean that they should be doing it to maximize short-term profits, and in many cases, their stock prices. Contrast this with what Jeff Bezos and Larry Page are doing at Amazon (NASDAQ: AMZN ) and Alphabet ( GOOG , GOOGL ) respectively – focusing only, and only, on the customer. The reason they have created so much wealth for their shareholders is because they never cared about shareholder value maximization, but only about customer satisfaction. Consider the Purpose Statement of Procter & Gamble (NYSE: PG ) (emphasis mine) : We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come. As a result , consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders and the communities in which we live and work to prosper. For P&G, consumers come first and shareholder value naturally follows. As per the statement of purpose, if P&G gets things right for consumers, shareholders will be rewarded as a result. This, I am sure, has also been the mantra of India’s biggest long-term wealth creators like HDFC (NYSE: HDB ), Asian Paints ( OTC:ASNQY ), Sun Pharma ( OTC:SMPQY ), Infosys (NYSE: INFY ), and Wipro (NYSE: WIT ). They have created tremendous shareholder wealth as a result of their focus on their customers and building their business for the long term, and not the other way round. This is how you can also find a few of the future wealth creators – businesses where managements are not focused on shareholder wealth creation, but treat it just as a byproduct of delighting its customers, employees, and the society at large. Such are the businesses where you will find long-term sustainable moats. Every other moat – especially if it appears a lot on business television, is worshipped by everyone around, and where the management often touts its shareholder-friendliness – is often fleeting. “Mr. Market suffers from incurable emotional problems,” Ben Graham wrote while describing the daily madness of stock price movements. Why would you want to partner with business managers who focus on managing these incurable problems of Mr. Market, rather than minding their business?

Is Sugar The Best Commodity ETF Right Now?

2015 has been a bad year for both soft and hard commodities. Notably, S&P GSCI Total Return – the benchmark for commodity market performance – nosedived about 19.3% in the third quarter, representing the fifth worst quarter and the third worst third quarter since 1970. With this, the index is on the verge of recording the sixth worst year after 2008. The blame is largely heaped on the stronger dollar, global growth worries, plunging oil prices and weakening demand that have dampened the appeal for commodities. Economic slowdown in China is a major setback for the commodities market, as the world’s second-largest economy is also the world’s largest buyer of raw materials. However, there seems to be a torchbearer in this commodity market blackout. This is sugar, as its price has recovered as much as 30% since touching its seven-year nadir on August 24. Last week, sugar was the only commodity (except steel) that registered a double-digit rise of around 10%. The upsurge was mainly driven by the appreciation of the Brazilian real against the U.S. dollar, and Brazil’s decision to hike fuel prices. Sugar is greenback-priced in Brazil, the largest producer of the agricultural commodity in the world. Therefore, a weaker dollar discourages sugar exports from the country, lifting up its prices in the world market. Shortage of production is another issue that is playing on the bullish trend in sugar prices. As per International Sugar Organization , sugar cane processed this season in Brazil declined 2.1% to 412,624 million tons, while sugar output in the country is down 11% from the prior year, as mills are converting more cane to ethanol in response to a possible hike in gasoline prices. India, the world’s second-largest sugar producer, is also expected to experience a 5% fall in sugar output to 28.3 million tons in 2015, as per Indian Sugar Mills Association, thanks to the El Nino weather condition that is causing insufficient rainfall in the region. According to a note by Morgan Stanley, sugar consumption is expected to exceed demand for the first time in six years. The firm expects consumption to outdo demand by 3.7 million metric tons in the marketing year that began on October 1. Riding on the bullish trend in sugar prices, ETFs that are exposed to this soft commodity have been experiencing handsome gains (some double digits as well) over the past one month. Below, we highlight three of those ETFs that investors should definitely consider in this otherwise bearish commodity market (see all Agricultural ETFs here ). iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (NYSEARCA: SGG ) SGG tracks the Dow Jones-UBS Sugar Subindex Total Return Index, which provides the returns that are seen in an investment in the futures contracts on the commodity of sugar. The note has garnered nearly $56 million in assets, and trades in a daily volume of 48,000 shares, on average. It charges 75 bps in annual fees. The note was up 15.2% in the past one month, and has a Zacks ETF Rank #3 (Hold) with a High risk outlook. Teucrium Sugar Fund (NYSEARCA: CANE ) This ETF tracks the Sugar Futures index, which reflects the daily changes of a weighted average of the closing prices for three futures contracts for sugar that are traded on ICE Futures US. The fund is nearly overlooked, as it has gathered nearly $4 million in assets and trades in a paltry volume of around 5,000 shares. However, the ETF is expensive, charging a hefty 176 bps in fees from investors per year. It was up 9.8% over the last one month, and carries a Zacks ETF Rank #3 with a High risk outlook. iPath Pure Beta Sugar ETN (NYSEARCA: SGAR ) This is another sugar ETN by iPath, and follows the Barclays Capital Sugar Pure Beta TR Index. The index consists of a single futures contract, but it has a unique roll structure which selects contracts using the Pure Beta Series 2 Methodology. SGAR is also neglected, with only $1.4 million in AUM, and is thinly traded, with average volume of nearly 2,000 shares. The note charges 75 bps in annual fees, and was up 12.5% in the past one month. It also carries a Zacks ETF Rank #3 with a High risk outlook. Original Post

Investors Have Been Selling But Haven’t Yet Decided What To Buy

“The stock market is almost magical because it always leads the economy. It goes down long before the economy drops and then heads higher long before the economy rebounds. It always has.” -Kenneth L. Fisher If you look at the details of fund flows during the last several months, then you will discover that there have been net outflows from many funds of U.S. risk assets. This includes most U.S. equity and U.S. bond funds. As more and more time passes from the all-time peaks for many U.S. equity indices, investors are progressively realizing that the likelihood for additional gains is less than the probability that we have begun what could eventually become a full-fledged bear market. The S&P 500 reached its highest point of 2134.72 on May 20, 2015, which was more than five months ago. Investors hate to tamper with the status quo if they are comfortable with it, so very few people sold near the spring highs. In recent weeks, there have been notable outflows especially on days when U.S. equities have been declining. The more that time passes and additional lower highs are registered for the S&P 500, the Nasdaq, the Russell 2000, and similar indices, the more that people will realize that their portfolios are losing money rather than making money. Since the losses have been modest overall, these outflows haven’t nearly approached the record withdrawals which were made during the first quarter of 2009. However, there has been a notable total decline in the money committed to U.S. risk assets, while the amount of money in safe deposits including money market funds has surged in recent months. One interesting observation is that, prior to the recent climb in the popularity of safe time deposits, these had reached all-time low levels relative to the amount of money invested in riskier assets. It is likely that, obtaining only around one percent interest or less on their bank accounts and near zero in their money market funds, many investors were encouraged to shift into far more speculative alternatives. They convinced themselves, with the able assistance of financial advisors, that they were nearly as safe in high-dividend blue chip U.S. stocks or high-yield corporate bonds as they were in the bank. In reality, they have been taking enormously greater risk, because most of these assets lost more than half their value during their respective bear markets of 2007-2009. However, most advisors politely didn’t bring up this inconvenient fact, and most people would rather not think about what is possible while focusing instead on what is ideal. Now that reality has slowly begun to reassert itself, investors have been moving back into time deposits-but haven’t yet taken more than a tiny percentage of this money and invested it in other assets. Historically, whenever there is a recent surge in safe time deposits, most of the money ends up being reallocated into securities which are perceived to contain greater upside potential. The only exception tends to be near the very end of a bear market, when risk assets are plummeting and investors are frightened into safety at any cost. Since we are far from such a situation today, asset reallocation usually means chasing after whatever has recently been climbing the most in percentage terms. If 2015 ends with a net loss for most U.S. equity and bond funds, then those funds which have enjoyed net gains will stand out noticeably among a sea of red. Other investors look for whatever has rebounded the most from its recent bottom, or for various kinds of moving average crosses and other signals. Therefore, whichever assets outperform from now through the end of 2015 are likely to be especially visible and to receive increasingly positive media, analyst, and advisor coverage. The persistence of such upbeat discussion will be accompanied by strong inflows. So far, there haven’t been any sectors which have featured many such standout assets. However, this could change soon, because there is such a huge disparity between the world’s most overpriced assets and the most undervalued ones. The list of overvalued securities includes many U.S. stocks and bonds and global real estate. The most compelling bargains can generally be found among commodity-related and emerging-market assets which in many cases have been trading at lower prices than during their worst levels of 2008-2009. Because they are so inexpensive, they can gain enormously in percentage terms and yet remain far below their respective peaks from the first half of 2008 or in many cases from April 2011. If this happens, then they will be able to continue to gain dramatically until the final months of 2016 or the early months of 2017. It is too early to say whether this kind of activity will occur or not, although historically most U.S. bull markets end with a period of rising inflationary expectations. It is rare for the economy to go into a recession without first experiencing an inflationary binge. During the most recent bear market of 2007-2009, we had a sharp and unexpected inflationary climb for roughly one year from the summer of 2007 through the summer of 2008. Since literally a hundred central banks worldwide including the U.S. Federal Reserve are eager for higher inflation, we are likely to get exactly what they want. Wage inflation has been moderately accelerating in the U.S., while prices have been generally slower to follow suit. Most investors are continuing to moderately sell their previous favorites, while sitting on the fence in indecision about what to do with the money. If you follow the fund flows during the next few months, you are likely to learn a lot about what will happen for another year or more. There are supporting clues from the media, which have become less enthusiastic about U.S. assets but continue to generally favor them because they appear to many to be the only game in town. Most news articles regarding commodities or emerging markets are gloomy, especially when there have been recent price declines for anything in these sectors. It appears that precious metals and the shares of their producers may already have bottomed, while energy producers are possibly following suit while emerging markets are mostly bringing up the rear. If all of these are able to outperform, then especially with the best-known U.S. benchmark indices continuing to struggle, investors will begin to take notice of the top-performing securities and will become increasingly eager to own them. The financial markets have always been a paradox, in which more people are eager to buy something after it has doubled than before it has done so. It is surely the same this time, so most people won’t actually participate until it is too late to enjoy the lion’s share of the potential percentage gains. If an asset goes from 10 to 50, then buying it at 20 might seem to surrender only one fourth of the profit since 20 is one fourth of the way from 10 to 50. However, the gain from 10 to 50 is 400% while the increase from 20 to 50 is 150%, so you actually give up 5/8 of the total profit instead of just 1/4. The financial markets are inherently geometric rather than arithmetic, which is why it works out this way. The key is that those who buy before a rally end up gaining far more than those who wait until a rebound has been “confirmed”. Also, there is really no such thing as confirmation; whenever something has allegedly established a new uptrend, it often first suffers a sharp short-term correction to punish those who were tardy in jumping aboard the bandwagon. Tax tip: If you own shares or funds which are trading near multi-year bottoms and you are a U.S. resident, you can take advantage of their currently depressed prices if these assets are in your 401(k), 403(b), SEP-IRA, Keogh, traditional IRA, or other non-Roth retirement account. You can convert these shares from your account to a Roth IRA and pay taxes based upon their present low valuations. As these eventually rebound, all future gains will be completely tax free. In the event that these shares don’t recover but end up retreating further in price, you can choose to undo your conversion, which is known as a recharacterization. You can then wait at least 30 days, or until the following calendar year-whichever is later-and then convert them again. There is no limit to how many times you can repeat this process and there are no income or other restrictions in making such conversions and recharacterizations, as long as each recharacterization is done on or before October 15 of the year following the date when the conversion had been done. It’s like being able to go back in time and “unbuy” something which doesn’t go up in price. It’s heads you win, and tails you also win. Unfortunately, I do not know of an equivalent strategy which is permitted in any other country besides the United States. Disclosure: In August-September 2013, and at various points during 2014-2015, I have been buying the shares of emerging-market country funds whenever they have appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares-and more recently energy shares-especially following their most extended pullbacks. I have also been accumulating HDGE whenever U.S. equity indices are near their peaks; HDGE is an actively-managed fund that sells short U.S. equities. I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own (NYSEARCA: GDXJ ), (NYSEARCA: KOL ), (NYSEARCA: XME ), (NYSEARCA: COPX ), (NYSEARCA: SIL ), (NYSEARCA: HDGE ), (NYSEARCA: GDX ), (NYSEARCA: REMX ), (NYSEARCA: EWZ ), (NYSEARCA: RSX ), (NYSEARCA: GLDX ), (NYSEARCA: URA ), (NYSEARCA: IDX ), (NYSEARCA: GXG ), (MUTF: VGPMX ), (NYSEARCA: ECH ), (NYSEARCA: FCG ), (NYSEARCA: VNM ), (MUTF: BGEIX ), (NYSEARCA: NGE ), (NASDAQ: PLTM ), (NYSEARCA: EPU ), (NYSEARCA: TUR ), (NYSEARCA: SILJ ), (NYSEARCA: SOIL ), (NYSEARCA: EPHE ), and (NYSEARCA: THD ). In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position to roughly 3% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG but I have been repurchasing it following its recent collapse because there has been intense buying by top corporate insiders of companies which produce natural gas. I expect the S&P 500 to eventually lose about two thirds of its recent peak value, with its next bear-market bottom occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM have only modestly surpassed their highs from the first week of March 2014, while the Russell Microcap Index (NYSEARCA: IWC ) marginally surpassed its zenith from March 6, 2014. The S&P 500 Index set a new all-time high on numerous occasions during the same period, and may have completed its final top for the cycle at 2134.72 on May 20, 2015. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have “forgotten” or never learned the lessons of previous bear markets are doomed to repeat their mistakes.