Vijay Kumar Gaba: Warren Buffet

Showing posts with label Warren Buffet. Show all posts

Thursday, October 26, 2023

Bitcoin gaining more acceptance

Last year, while discussing this subject, I mentioned, “it is a debate that will continue for many more years and no one will remain unaffected by it. Almost everyone who transacts in money or is part of the global economic system will need to deal with it at some point in time.”

I note that the debate is intensifying, widening, and deepening. Moreover, it is becoming more balanced with many conventional money managers, regulators, bankers, and administrators coming in support of digital currencies as an alternative to fiat currencies.

A few days ago, Larry Fink, the Chief Executive Officer of BlackRock, one of the most influential financial firms globally, commented in a TV interview that under the current circumstances “Crypto will play a role as flight to quality”. He was reported to have said, “Bitcoin is a hedge against the devaluation of your currency”. This comment is in total contrast to his comments in 2017 when he had emphatically condemned the idea of cryptocurrencies, saying “Crypto is an index of money laundering”.

Last month, a leading German Bank (Bank) reportedly entered into a partnership with Swiss trading firm Taurus to offer custody services for institutional clients' cryptocurrencies and tokenized assets. In 2018, Deutsche Bank's chief investment strategist Ulrich Stephan criticized crypto for being "too volatile and not regulated enough." Standard Chartered (A leading British Bank) also made a bold forecast predicting that “Bitcoin prices will climb to $100,000 by the end of 2024.”

Earlier this summer, Hong Kong’s Securities and Future Commission proposed guidelines to enable Chinese users to invest in Bitcoin and some other large-cap cryptocurrencies on registered platforms. This is in total contrast to the stance of the mainland Chinese authorities.

In the meantime, several smaller African and Latin American countries, like the Central African Republic, Uganda, Zimbabwe, El Salvadore, Paraguay, Venezuela, etc. have continued to adopt cryptocurrencies in their monetary system, some even declaring bitcoin as legal tender. Last year, even Ukraine created a ministry of digital transformation with an aim to become one of the foremost authorities on crypto. (see here) Cryptocurrencies are now legal in many countries/regions like the EU, US, Mexico, Brazil, Israel, etc.

There are speculations that the ardent crypto hater Warren Buffet may also be having a slight change of heart in recent months. In an apparent change of traditional policy, Berkshire Hathway has invested as much as US$600 in two fintech firms - PayTM of India and StoneCo of Brazil. This has led to market speculation that the firm may change its long-held stance on digital assets including crypto.

India’s regulatory thought process on crypto has also travelled a long way in the past five years. The Reserve Bank of India started with a blanket ban on the sale or purchase of cryptocurrency for entities regulated by RBI (all scheduled commercial banks and NBFCs) in 2018. The RBI governor “equated crypto trading with gambling”. The ban was declared untenable by the Supreme Court. Presently, the legal position on dealings in crypto in India is ambiguous. It is neither explicitly unlawful nor a regulated asset. However, last week RBI governor reiterated his stance on the cryptocurrency ban, saying there has been no change in the central bank’s position.

No surprise that Bitcoin has weathered all the pessimism and sharply outperformed gold and equities in the past five years. Since October 2018, Bitcoin has gained over 400%, as compared to ~63% for gold (in USD terms) and ~47% for S&P500.

Saturday, July 10, 2021

Valuation benchmarks might have to change

While discussing the present state of affairs in the markets, especially the valuations, two statistical parameters are used most often – (1) The price to earnings (PE) ratio of the benchmark (e.g., Nifty50) and (2) the market capitalization to GDP ratio (popularly known as Warren Buffet indicator).

Both these indicators may soon lose their relevance, particularly in the context of Indian markets.

In next couple of years a large number of new economy stocks may get listed. Many of the new economy stocks that listed earlier may get included in the benchmark indices. Obviously, the old economy stocks, especially PSU and cyclical commodity stocks will pave the way for these new economy stocks. The point here is that the new economy stocks are valued at multiple of revenue not profits.

For example, it is expected that in the next Nifty reshuffle Avenue Supermart (198x PE) or Info Edge (500x PE) may replace Indian Oil Corporation (5x PE). This will obviously inflate the composite valuation of Nifty in PE ratio terms. At some point in time Reliance Retail (100x PE), Reliance JIO (150x PE), Zomato (200x PE), PayTM (150x PE) Indiamart Intermesh (80x PE) etc shall find place in the benchmark index at the expense of Coal India (7x PE), BPCL (8x PE), NTPC (7x PE), Power Grid (9x PE). Assessment of market valuation through Nifty PE ratio would become totally meaningless at that point in time.

The Warren Buffet indicator has already become less relevant in the case of Indian markets, in my view. This indicator completely ignores the rise in private equity investments. In Indian context for example, the equity investment in self owned enterprise and home equity has risen sharply in past one decade, as compared to the decade prior to that. Besides, the size of unlisted private businesses has increased significantly. Factor in the estimated market value of Amazon India, Vodafone India, PayTM, FlipKart, Honda India, Hyundai India, LG India, Samsung India, Apple India, etc. and you will find this ratio running much higher than what the present statistic might suggest.

So the present argument that Indian market is “expensive but nowhere closer to bubble territory” based on historical PE ratio trends, may become totally redundant. The market participants might have to evolve new parameters for valuing the market that would be appropriate in the evolving scenario.

Till then, Nifty50 is trading above 1SD 12 month forward PE and GDP to market cap has crossed the threshold of 100%.

Thursday, July 9, 2020

Few more random thoughts

Two years ago, my car cleaner asked for a loan of Rs75000 for building an additional room in his one room house. He said his children are grown up and need a separate room to study and sleep. I gave him money with the condition that he will return in 1yr. In February this year, I asked him to return the money. He promised that he will give within a month. Then this lockdown happened and he was barred by the RWAs to clean the cars of the residents. No one paid him for 3months. I do not know how he survived in this period, but he handed over me a cheque of Rs75000 last week. I deposited the cheque in my account, but it was returned due to "insufficient funds". When I told him, he told me to deposit the cheque again, which I did. It returned unpaid again for the same reason.

I have not confronted this guy again. I know both his children are good at studies and a separate room to study and attend online classes will be very useful for their studies. Mentally, I have gifted this money to his children. But this is not the story. The story is that my bank has charged Rs236 (Rs100 each for two cheque returns plus 18% GST) to my account for the two instances of the cheque return. Imagine the agony of a person whose debtor has defaulted and he is being charged by his bank for the fault of his defaulter!

A recent story published in outlook money magazine (see here) alleged that the banks which suffered hugely due to defaults by the Indore based Ruchi Soya Limited, were forced to lend even more to the Patanjali Ayurveda group for acquisition of the defaulter company. The minority shareholders who have seen their investments in these banks having eroded by over 50% shall suffer even more when the company defaults again. The lenders and investors in these lenders shall have same feeling as I got when I saw the debit of Rs236 in bank statement.

A few days ago, one of the legendary investor/trader of Indian stock markets repeated his staple opinion about the Indian economy and stock markets for the n^th time. Imitating the global legends like Peter Lynch and Warren Buffet, he exuded confidence that in the "long term" blips due to these market disruptions will lose their relevance and trend growth will only matter. As usual, media highlighted his views and his ardent followers added some degrees to their confident.

I have nothing to disagree with the legend. However, at the same time, I draw nothing from his views and suggestions that will compel me to change my investment strategy or process. I formulate my strategy keeping in view my resources, needs, aptitude, limitations, risk appetite, emotional strength, access to information, and analytical ability, etc. I have always refused to read bestselling books on investments written by the legends like Benjamin Graham, Philip Fisher, Peter Lynch, Robert Kiyosaki, Warran Buffet, Charlie Munger et. al. I believe that their experiences and thoughts evolved in a different socio-economic environment and they worked in a different regulatory and legal framework. My environment, opportunities, and abilities match to none of theirs.

Besides, the current environment is very different than in which they operated. No wonder Warren Buffet led Berkshire Hathways has been one of worst performing funds in US in past one decade. I do not know about the performance of our own legend, but as per publically available information, his portfolio has also performed too well in past one decade. One decade is a reasonable "long term" in common parlance.

The Benjamin Graham would not have anticipated that investors holding US$17trn worth of bonds will be willing to pay for holding those bonds for 7-30years (negative yield); buyers of crude oil will have to Pay US$37/bbl for not taking delivery due to shortage of storage; analysts will peg "reasonable valuation" to the "average valuations" of past 3-5yr rather than DCF because the traditional valuation method cannot operate with negative or zero interest rate and zero residual value of assets; and the person (or bank) suffering from debt default will be asked to suffer more by paying charges!