"Condoms aren't completely safe. My friend
was wearing one and got hit by a bus". For many years, I couldn't
understand the meaning of this quote by Robert Rubin, ex-Secretary of
Treasury of United States. It means that while thinking about risk
factors- a new and
potentially unthinkable lethal risk can emerge from nowhere and take one
down. It's the black swan risk or risk of the "unknown unknown".
For the first time, I understood it when Ramalinga Raju of Satyam spoke "Satya" and informed the world about ghost cash in his company and how he had taken everybody for a ride - independent directors included. Coupled with global recession, markets went into a tailspin with this news and a lot of stocks fell down 50-70% in a matter of weeks. There were a lot of companies selling below cash because people stopped believing in cash held by companies.
However, if asked to point with certainty now, the month and year of the Satyam crisis, a lot of us might make a wrong guess. If you are guessing it right now, let me give you the answer : Satyam scandal broke out in January, 2009. So, in a span of 7 years, market has shrugged off the crisis of confidence in Indian companies and has come out with newer highs. That's just one example- there have been many such global and domestic challenges which surfaced and subsided with time. It point towards another concept that problems get solved as they always have as they always do. So, no matter how grave the issue, it will get solved given enough time.
In the last few days, some major upheavals have happened. The issue of corporate governance at the House of Tatas, election of Mr Trump as the President of US and demonetization of Rs 500 and Rs 1000 notes in India. The black swan or should I say a "fleet of black swans".
For the first time, I understood it when Ramalinga Raju of Satyam spoke "Satya" and informed the world about ghost cash in his company and how he had taken everybody for a ride - independent directors included. Coupled with global recession, markets went into a tailspin with this news and a lot of stocks fell down 50-70% in a matter of weeks. There were a lot of companies selling below cash because people stopped believing in cash held by companies.
However, if asked to point with certainty now, the month and year of the Satyam crisis, a lot of us might make a wrong guess. If you are guessing it right now, let me give you the answer : Satyam scandal broke out in January, 2009. So, in a span of 7 years, market has shrugged off the crisis of confidence in Indian companies and has come out with newer highs. That's just one example- there have been many such global and domestic challenges which surfaced and subsided with time. It point towards another concept that problems get solved as they always have as they always do. So, no matter how grave the issue, it will get solved given enough time.
In the last few days, some major upheavals have happened. The issue of corporate governance at the House of Tatas, election of Mr Trump as the President of US and demonetization of Rs 500 and Rs 1000 notes in India. The black swan or should I say a "fleet of black swans".
First lets talk about the Tata Group. There are accusations flying thick and fast from both sides.
There are many versions of the same story. We don't know and will never
know what's the correct version. So, there's no point spending time
reading and thinking about that. However, there is lesson to be learnt.
Business comes first always and every time, management comes second
always and every time.
The
second issue is about Mr. Trump. The world is in a shock. I think
people are more shocked about their own assessment going wrong (of
Hillary becoming the President) rather than Trump becoming the
President. The world's best experts, commentators, political readers,
investors, reporters, big data analysts : all have gone wrong and wrong
by a wide margin. That reminds me of Niels Bohr quote "Prediction is
very difficult especially if it's about the future". We need to remember
this and remind ourselves, whenever in doubt.
I don't think it matters a lot as to who is the President of the United States. The only thing that I think matters is "Is there a President ?". As long as the answer is yes, it's alright. As history teaches us again and again, a bad government is better than no government. So, as long as there is a democratically elected president in the world's largest economy, things will work out fine. Some policies will be good, some would not be so good but things will be okay on a wholesome basis.
I don't think it matters a lot as to who is the President of the United States. The only thing that I think matters is "Is there a President ?". As long as the answer is yes, it's alright. As history teaches us again and again, a bad government is better than no government. So, as long as there is a democratically elected president in the world's largest economy, things will work out fine. Some policies will be good, some would not be so good but things will be okay on a wholesome basis.
The third and the most important issue is the demonetization of the existing high currency notes in India. The first effect is that
people now are cashless and clueless. Over time, people will have cash
in their pockets to spend so that's not a big problem. The second more
important thing is that people are clueless. A large part of Indian
economy is informal cash economy. Some of the businesses have a mix of A
business (formal accounted business) and B business (informal
unaccounted business). A large number of businesses are completely in B.
There is no trail of money in the whole value chain. Those businesses
will be the hardest hit. They don't have much clue whatsoever to dispose
off the cash that they already have and also as to when and how will
they resume their businesses. As of now, everyone and everything seems
shocked and frozen. It may take time for cash and people to come back.
We
don't know how much time it might take ? It might be a few months or a
few quarters or even more. Nobody knows. By the time the dust settles, a
lot of businesses might get massively hit and lot of businesses might
shine.
What do we investors
need to do ? One thing we need to do is to focus on the businesses we
own and see if the recent events have reduced the strengths of those
businesses. The cash flows would surely become volatile given the
external factors but if the businesses are inherently strong, the cash
flows would come back even if with a delay.
And if businesses are strong and managements are good and we have not bought stocks with debt, we just need to remind ourselves to :
And if businesses are strong and managements are good and we have not bought stocks with debt, we just need to remind ourselves to :
(i) hold on to our nerves
And
(ii) hold on to our stocks
