And that's the way the cookie crumbles

-Tom
-Yes Godfather
-You know I've been wondering.......how can people be so stupid?
-You're right godfather...I'm as surprised as you are.
-Tom...I've made so much money from the stupidity of these people, that sometimes I feel guilty, I feel like I didn't deserve it.
-No godfather....these people didn't deserve the money.....it was rightfully your's from the very beginning...I know you'll put it to a much better use than they were going to......Anyways... how did this all start?

See Tom, sometime back ....and not so long back...companies used to raise funds, just like they do nowadays. So a young company would normally be setup with the founders own capital...subsequently as and when the need for more funds arose the company would either take out a bank loan, or borrow from private lenders. With time as the company grew, it would establish a credit rating, it would get cheaper funds from banks, it may even raise debt from the public. Over time when the company was significantly large and most importantly profitable, it would tap the equity markets. See, in those times, people would invest in companies that would eventually pay them regular dividends for their investment.

Then came the smart guys and invented a whole range of financial products, some call them "Investment Bankers", I prefer to call them "Dumb Asses". The problem with these guys is that they make everything look good. Another breed of financiers emerged over time, the Venture Capitalists. They did some really good work in funding start-up companies, which basically allowed these small companies to get financing at much cheaper rates than what banks would lend them. 

All was going according to plan, when eventually greed set in. And you know what happened.....These VC's were no longer interested in nurturing companies, they were now in the firm grasp of a new addictive drug...."Exit Multiple".

Now since these VC's wanted to exit from their investments and make huge amounts of money, they did what most people would do, they called in the Investment Bankers. Now these investment bankers developed exorbitant "Valuations" for the companies and marketed them to the public in the form of an IPO. And the public being stupid, as mentioned, readily subscribed to the IPO. 

Now markets are big levelers, and can quickly sniff out hype. No sooner had these companies gone public, the market beat them back to their true value, which was way below the IPO listing price. Well, by now the VC's were gone with  their fancy "multiple", the banker were gone with their underwriting fees, leaving behind the lone investor with a piece of junk.

Mind you, all this time, Hedge Funds like us were watching this drama fold out, and we shorted these companies the day they were allowed to go short (some SEC crap apparently prevents us from doing this one day 0). 

And that's how we made a lot of money.

Bottom line: "Never underestimate the predictability of human stupidity"

Caveat Emptor Brutus !

Here’s one great quote by Warren Buffet which pretty much sums up what I’m trying to say. “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

I guess somewhere between exorbitant salaries, big business names, fancy designations and pride (lots of it!), our beloved Wall Street guys forgot Finance 101. Finance 101 tells us that the amount of money I am paying for something should equal to the present value of benefits I will receive in the future. So far so good….and then things got complicated. We devised ingeniously complex ways of valuing things, we invented the concept of “Free Cash Flows”, “Weighted Average Cost of Capital” and all sorts of valuation techniques that can pretty much give you any value you want for any business, because we now have something known as “Analysts Discretion”.

Earlier people invested in businesses, now they just invest in accounting numbers. And IMHO (for those not used to using chat language, In My Honest Opinion)….well…accounting is just one big bitch. We’ve gotten so hooked-up to these fancy figures that we’ve failed to look at the core business behind these figures.  So much so that companies like Groupon, Angie’s List, Pandora and even Facebook have had to create fancy accounting to justify their business models. . A good photographer will capture good photographs, no matter what camera he has.

All I’m trying to say is don’t get carried away by accounting figures, analysts’ reports and estimates.  Look at the business behind this entire charade.

“You can be the best actor in the world, but you’re still acting and everybody knows that”

I Should be a CFO

And by CFO, I do mean the Chief Financial Officer.

Note: I prefer to think of myself not as a person, but as a giant business conglomerate. It's actually pretty easy if you think about it. If you own a house, that's your real estate business, you cell phone is your telecom business, your vehicle is your automotive business, so on and so forth, and of-course your bank account and your credit cards is your banking business.

So why I would make a good CFO ?

1. I have managed to support all my businesses with minimum cash outflows whilst maintaining acceptable levels of profitability.
2. I have raised debt on multiple occasions ,in multiple currencies, conducted cross border transactions at minimal transaction costs and repaid debt in multiple currencies all whilst maintaining an excellent credit rating.
3. I have been successfully able to roll-over debt on several occasions (Refer to older posts on why rolling over of debt is a good strategy)
4. I have purchased assets far beyond what my cash flows would allows me by convincing my lenders that the returns from those assets would far exceed the cost of debt (all this without a PPT)
5. In the past few years, my financial reporting of all my business segments has been good enough to meet analysts expectations. Although the other day I could relate to how the CFO of Enron would have felt in his prime.

In times of adversity, nothing beats a good credit rating.

"It's not just about the money, It's ALL about the money"

Load em up....!!!

I have always been a proponent of debt and this is another one of my observations ....and why I love debt so much. Now, this might irk Mr. Warren Buffet and his philosophy on debt and credit. But then, I have the right to an opinion and unless proved otherwise, I'm correct.

Please note: The words "debt" and "credit" used in the following paragraphs refer to unsecured debt only.

Let us analyze debt from an NPV (Net Present Value) perspective of an individual and let each transaction involving debt/credit represent a project. It might sound weird that eating pizza is a project, but if you look at through my eyes, it's not that hard to imagine. Basic corporate finance tells us that we should only take up those projects which have a positive NPV. So, if I buy a pizza for say $10 using a credit card, I consume goods worth $10 and I have to make a payment after I get my credit card bill. So essentially I paid less than $10 in NPV terms on a $10 pizza. If you pay by cash the NPV is zero. Sounds simple enough...right.

Now lets complicate matters a little but by introducing an unknown variable into the equation, DEATH. As you might be aware that if you die, the outstanding balance on your credit card is simply "written off". The same goes for any other type of unsecured debt, such as personal loans. Yes, banks do get such loans insured, but then you still don't have to pay anything.....Considering that death can occur at any time, wouldn't it be great if you always had some sort of credit outstanding, at-least you'll leave this world with one positive NPV project..!!!!!

Now lets add another small twist to the situation, probability. The probability of you dying is directly proportional to the kind of work/activities you are involved in. So the more likely you are to die the more debt you should take on (subject of-course to some lender willing to lend you that money).

So in conclusion, always use credit cards instead of cash/ debit cards, and maintain a constant level of personal debt. I'm still working on the optimum level of debt one should have so keep checking this space for more information.

But do remember:.....

"Leverage is a fickle bitch, my friend".....

Don't shoot the messenger....!!

“The world’s most public private company will now be the world’s most private public company”. This was the headline on the website of the Washington Post that day Facebook filed for its IPO. Now, I am no expert on valuations or investments for that matter, but I can definitely say that this IPO will confirm the age old adage of “Never underestimate the predictability of human stupidity”.

Before we get into the intricacies of DCF valuations, P/E multiples and so on, let’s go back a step to basic corporate finance. Why do corporations tap the capital markets? Well, the capital markets provide sources of financing, be it debt, equity or any structured offering.

A cursory glance at the company’s financial statements will reveal that that Facebook had around $3.5bn in cash at the time of filing. So why is the company interested in raising just $5bn from the IPO? What does Facebook aim to achieve with $8.5bn which it cannot do with $3.5bn. And considering that interest rates are at an all-time low in the US, debt financing would definitely have been a cheaper option. So it’s definitely not a question of money. Then why go public? Why bring in all the hassles associated with running a public company? All the financial reporting, disclosures, conference calls etc.

I believe the only reason Facebook is going public is because its Venture Capitalists want an exit. And they want out before the social networking bubble bursts. We’ve seen this before in 2000, when every company that was even remotely associated with having a .com at the end of its name was public and was commanding exorbitant valuations. It took some time before analysts around the world figured out how to value these corporations. And, when they did, boom, we all know what happened. Some people call it the bursting of the dot-com bubble; whereas the smarter guys merely said that sanity has been restored.

It will take some time, possibly another round of bailouts by the Federal Reserve before sanity can be restored this time and mainly because the bubble is much bigger this time around. Till then LinkedIn (NYSE: LNKD), Groupon (NASDAQ: GRPN), Zynga (NASDAQ: ZNGA) and of course Facebook are all a big BUY.

Fixed Income Vs Equity

Sometimes I feel that a portfolio manager has the easiest job in the world. I know......most people would disagree with me here...after all the portfolio manager has to keep abreast of the market conditions, stay informed, make intelligent decisions etc etc.

Let's say I give you a million dollars today and tell you that you can invest it anywhere you like. What would you do ? Now don't get into complexities about my "Expected return", "Risk tolerance" and all that b/s. It's a simple question and I expect a simple answer. I'm sure your brain is already calculating the returns that you can generate by investing in fixed income or equity or a combination.

The problem with equity is that you might lose all the money and the problem with fixed income is that you'll face a what if? situation. What if I had gone with equity ? Let me put in another dilemma. Let's say the the returns from fixed income are exactly what you need. It is the perfect investment and it perfectly completes your portfolio....how strong does the lure from equity have to be to make you change your mind.

This is where my point comes in. The portfolio manager doesn't have to think so much, he has an investment mandate, an investment policy statement to guide him. So wouldn't it be so much better if we also had a similar mandate with us.

Well, apparently that is not the case. Every day we encounter situations where we need to make a choice. Some are big decisions, others are relatively insignificant, but they all boil down to the same thing: Should I go for the safety of fixed income or should I speculate with equity. Each has its own merits and weaknesses. So in essence sometimes it's just better to not have a choice, it just makes your life simpler.

"I know I'm right.......I just don't trust myself"

Wall Street Mafia..

In the movie "The Godfather"...New York City was ruled by five mafia families...We do not have the Corleone's, Tattaglias or the Barzini's anymore....at least not by the same name....We now know them as the Goldman's, JP Morgan's and the Morgan Stanley's...!!!

In of the scenes....Vito Corleone's consigliere says...."We have the judges on our payroll...it's fine.."....flash forward to present day.....Goldman's legal says..."We have the SEC on our payroll...it's fine.."..

These big guys of Investment Banking today rule Wall Street just the same was as a mafia would. Time and again they do wrong.....and get away with petty fines...yes, a few million dollars is petty when you deal in billions.

Take this as an example....one of my favorites though...Just a few weeks ago...before the markets went berserk...it was impossible to short LinkedIn...yes, one of the reasons was that they have a very small float (around 10%)....but the biggest according to me was that its price was backed by its underwriters...namely JPM, BofA and MS.... every time you sold.....they were ready to buy and jack up the price...Reality will be very different and hurtful once these guys take off their hands.....

Maybe in a few years someone at the SEC might discover that these guys were behaving in a manner called "Intentionally trying to manipulate the market"....so what...the banks will just cough up a small fine (if they even get to that stage)....and carry on with business as usual.....well, to me this looks like mafia behavior...

So essentially, the mafia is alive and well, just that now they engage in “legal” businesses……If you want to fight them…do it at your own risk…

PS: I do not intend to dispute or defend my viewpoint…just don’t shoot the messenger….