Category Archives: Human Capital

Time after Time

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I know, I know, the title of this blogpost is also a hit-song by Cyndi Lauper from the ’80s. As a kid and entering my teens, a rainbow-coloured Cyndi made an impression.

So, as fragile Miss Lauper with her multi-coloured hair was crooning the song to the top of the pops, the world was coming to terms with the aftermaths of the Iran hostage crisis, the Falklands war etc. etc.

Cyndi didn’t know it at the time, but the track “Time after Time” would go on to become a huge, huge hit, appearing in the sound-tracks of many movies and basically becoming an all-time song.

World makets recovered to the dotcom boom of the 90s. Investors were making the mistake of greed, again, time after time. Scrips with no earnings were selling for hundreds of times the book-value.

Bubbles burst. That’s what bubbles do. In the ensuing mayhem and the fear that engulfed investors, the share prices of capital-gains generating zero-debt companies with regularly increasing dividends and impeccable managements fell drastically too. That’s what fear does, time after time.

As time passes, investors forget their old mistakes. A horde of newbies joins the fray, ready to make the same mistakes of human nature, again, time after time.

Cyndi’s was a love song. It had nothing to do with finance cycles.

It’s title is so compelling though. And, of course, I just love the song.

Pieces of the Pie

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When profits are made, everybody involved wants a piece of the pie.

That’s ok, human nature.

And what’s wrong in distributing profits proportional to efforts?

Well, it’s not an ideal world. In today’s real world, investment banks have started billing clients for research and have used the money for prostitution and other recreation instead (see the docufilm “Inside Job”).

Your private equity executive will travel business or first class. He or she will stay in the executive suite. Hmmm, borderline, but still bearable if the fund generates an above market-average profit for you.

What’s unbearable is the high-roller life exhibited by disgraced Lehman ex CEO Fuld for example. You know, as in fool the public, eat their pie, and pull out personal funds before the ship sinks with an overload of public stake. Inexcusable behaviour. Deserving of extremely deterring punishment.

If a listed company regularly raises its dividend and generates steady capital gains for its share-holders, I frankly couldn’t care less if the CEO zips around in a company jet, pitches his tent in the presidential suite and orders in from the most expensive restaurant in town.

On the other hand, I do take serious exception to above behaviour on company expense if the company dishes out a meagre dividend and generates no capital gains. If I’m invested in such a company by mistake, with above CEO behaviour, I’d seriously look to exit at the next opportunity. If I see the CEO downsizing on lifestyle and if I still believe in the prospects of the company, I might still stay invested, but first I want to see some humility in the CEO’s living habits.

An exit is an ultimate thumbs-down a long-term investor can give to a loser CEO and his listed company. If a business is not generating profits and the management is living it up, such a business deserves the boot from its investors.

A Strong Case for Equity (Part 3)

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What intrigues me most about the asset-class “Equity” can be described in two words.

Human Capital.

The human being: capable of the highest but also the lowest.

So, while pinpointing which scrip to purchase, one avoids flawed human capital.

Humans have many flaws which one’s antennae are scanning for here. Some are corrupt. Some are bad planners. Some lack management skills. It’s a big list.

What one’s looking for is integrity. Also the power to anticipate in advance. Alone this trait in the management of a company can make it grow beyond inflation and slow-down. Managers with good anticipatory powers hedge against loss in the future. For example, a company that uses Silver in its manufacturing process could use up its yearly profit to buy Silver in bulk @ 40 $ an ounce rather than buy it one year later @ 80 $ an ounce.

Honest human capital is transparent. Share-holder friendly. And if you can see any intelligence along with such characteristics, just go for the scrip at a decent valuation.

A Strong Case for Equity (Part 2)

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Scams bother us. We panic, and then start cashing out of our Equities.

Can we stop and reflect?

There was some Jeep scam in ’57. Then Bofors. Fodder. Harshad Mehta scam in the ’90s. Dot cum bust. This century has been chockerblock with scams.

Let’s see how some holdings have performed over all these years. Reliance, ABB, Infosys, Wipro…these companies were microcaps at some stage in their lives. The long-term holders of these shares have raked it in big-time. Wipro has been a 300,000+ bagger over the last 31 years. The other three companies have been 1000+baggers. That’s BIG.

Some of today’s microcaps will make it as big or bigger over the very long term. They will be tomorrow’s blue-chips.

All of us want to set something aside for our kids. It’s human nature. So why can’t we think of holding equity for the very long-term, especially for our children?

What makes equity so special? Behind every scrip is human capital, which, if not involved in Scamonomics, fights inflation through innovation. The power to fight inflation is not inherent in other asset classes.

So let’s think seriously about very long-term equity holding.

What remains is the criteria for stock selection. That’s a deep topic, and we’ll delve into it some other day…

The Thing with Gold

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Equity has a human face behind it. Gold does not.

The human face with its human mind is capable of the best and the worst, the highest and the lowest.

The intelligent investor selects Equity with benevolent and diligent human faces and minds behind it to garner multibagger returns.

Gold is a metal. Period. It doesn’t have a brain. It is not able to find a way around inflation. Its prices fluctuate as per demand and supply. In times of uncertainty, it goes up and up. In times of economic and financial stability, it goes down and down. The net result of Gold’s price fluctuations over the past 100 years has been a 1% annually compounded return, adjusted for inflation.

What you should not expect from Gold is more than a 2- or 3-bagger return over the medium term. If things go really sour for world economy, you might get a 5- or even a 10 bagger return (looking at a kind of a doomsday scenario). If you are hoping for anything more from Gold, dream on.

2-, 3-, 5- and even 10-bagger returns are quite common in Equity over the medium term, and over the long-term, there’s no limit. Wipro’s been a 300,000-bagger over 25 years. There are hundreds of examples of 1000-baggers, and thousands of examples of 20+-baggers in Equity. Meanwhile, over the long-term, Gold goes back to the median.

Why Equity behaves like this is because of the human capital behind Equity. We’ll go into the details of this some other time.

Bottomline remains that, realistically speaking, Gold functions best as a hedge. In case 80% of our portfolio goes for a toss, that 20% which is in Gold for example can save the portfolio with its 5-bagger return.

If we enter Gold with the desire to make a killing, we either have unrealistic expectations, or we need to play Gold futures or Gold Equity. These have their own nuances, about which, again, we’ll talk another day.