InvestRationale: My 2009 approach during the middle of the crisis

Top 5 market facts as we go in for fresh round of buying

• Financial/credit crunch impact uncertain – credit card and commercial porperty still to unfold in the US so also GM outfall

• Market rally surprising (early) as US fundamentals are not rosy – probably cash on sides coming in – to not miss rally

• Emerging countries market finaly moving ahead of the US

• European markets will be the slowest to come out

• The fall of the USD has begun – the substitute is yet to be found

“Call” on the economy and the world for next 12 months as we “sputter” here in the West

• The US consumer is not coming back to the mall for another long period – and when she comes back, she is not going to spend as much so the highs of the past for the market will be a much slower road to get to in the US

• Among emerging countries, the N-11 (Pak, Bangladesh, Viet, Eastern Europe etc) and export focussed smaller Asian countries will suffer as long as the US is down. Read atleast 9 months.

• Brazil, India and China will see run-up in the stock market but India's will be the 1^st to fade; if world economy picks up, Brazil will go on else it will soften too, China will have the longest run up

• USD has begun its fall but it wont be very sudden moving beyond May for a while as the substitute is not yet firmed up (In 12 months, Yuan won't go convertible; Asian currencies will doctor themselves to come back to the exporting ways so won't raise themselves against the $, multiple currency/commodities may start replacing the USD but slowly, Euro ain't getting stronger on its own unless China or mid East support it which China won't given the huge US papers it has; plus all economies are inflating themselves to some extent); but finally after the next forecast period, I will again look for the signs of the eventual collapse of the USD against commodity currencies (CAD, Rand, AS$) and emerging currencies .... US cannot get away without big taxes or hyper-inflation both of which will drive the USD down

So how do we play in next 12 months - buying

• More aggressive portfolio – combination of equity and property

• Only ETFs for equity for this period

• Pension fund gives exposure ot industrial countries, big to US and huge to Canada – no more deliberate investment here beyond pension and existing equity linked GICs – the continued pension investment will guarantee that we don't miss out on any “surprise” upside to these markets or if these advanced markets don' rise, atlesast we would have them at relative lower valuations

• Geo exposure increased for:

1. Gulf

2. Africa

3. Lat Am (already done with Brazil, so hold off)

4. India (already done so hold off)

5. China – through East Asia or small caps (when price more attractive)

• Invest in agriculture, water (at right levels)

• Add to Telco and IT (prefer in developing), energy incrementally

• Buy commodity (mixed) if it goes a bit low

• Monitor housing REITs – US homes, China and Asia property

• Start watching for transport, shipping if real economic good news starts coming in (refer to background on detecting US economic indicators)

• If good times come back, buy Global Consumer Staple ETF when people move money out and sector gets beaten and dividend payers such as Colgate, Nestle are attractive again

• Now, we buy property in India, and look for investing property in any but the US $ denominated US propert market

So how do we play in next 12 months - selling

• Stick to old Rules of selling

Our investment rules for equity market reiterated

• Shall not pay management fees to the extent possible – Indexes, ETFs or direct stocks (very rare) only

• Investments will be made with a mid to long term perspectives, not short

• Money will be lying in easy float in e-Trade to capture any panics (e.g. temporary fall) in markets or shares we believe in even if notional loss sensed

• We will not over-diversify our portfolio but we will buy “attractive” sectors and geos and keep acculmulating – sticking to a mximum of 7 themes – we may rotate choice of investments in accordance with business cycles and sentiments there will be a maximum of 20 individual ETFs and stocks at any given point

• For individual company buys, we will buy only if

  • We know something special about it – due to sectoral knowledge through our main profession

  • Company must be profitable for the past 2 years

  • Operating cash-flows are regularly rising

  • Something unique to offer to the market

  • We understand the market, customer needs and general direction of the company

  • There are no major know litigation challenges

  • After quantitative checks (see below)

  • If Hi-tech unproven companies (additional criteria): Uniqueness of model, Mgmt background - Israel, IIT, MIT, Entrepreneurial hunger, Makes life or business easy SIGNIFICANTLY

• Quantitative factors to consider while buying individual stocks

  • Price to cash flow (income – depreciation + amortization) very well rewarded in the market

  • Large caps with low Price to Sales do well

  • Dividend yielding large caps do well

  • Low price to book rewarded, not Price to earnings

  • Is there price momentum for a year or 2

  • Conservative ratios: debt to equity <= 1.55, CR >= 2, QR >= 1 ;

  • Safety net asset value = (CA – CAL – LTD) / Number of shares below 1/3 is a steal

  • Long term earnings over 5 years; average over 5 years versus current earnings

• Smart advice to keep in mind

  • EPS, EPG Growth > inflation, payroll/ revenue

  • Qualitative (ugly duckling, spin-off with low attention, Porter analysis, defensive, lower analyst coverage, faster growth in dull industry)

• When to sell

  • 25% upside within 2 years – if still good, come back when pull back occurs; if we believe in the continued grwoth story of the security, we will still sell 50 % of the security at the 25 % rise

  • Valuation has changed completely

  • Perspective for buying initially has changed to the negative

  • Too many analysts covering it as “hot tip”

• While picking individual stocks, additional criteria, heed Zell:

  • Company should have “staying power"--in other words, that there will be continuous future demand for their product.

  • He particularly likes situations where he does not have to spend any money on marketing because consumers already have a need for what is being offered.

  • Management must be aligned with shareholder interest. At its most basic, this means that management should own large positions in the company’s stock. Still, management that is obsessed with stock price is worrisome. I want them to obsess about the business.

  • Avoiding companies that have anti-takeover devices.