THE MONITOR

Chairmans Note

Presidents Note

The Investment Lab will teach students more

than investing in the stock market. It will be a tool
with which students will learn the value of
investing in people and maintaining strong
networks and most importantly investing in
themselves.
The main issue for me was to provide a
platform for students to develop logical ability
to be able to connect dots between seemingly
disparate data. It was also necessary to have a dynamic curriculum with
respect to the latest trends, so that students acquire skill sets attuned to the
changing industry.
I envision a day when FIL will be recognized as a global brand, when
students from other colleges and even from outside India will recognize
FIL as an opportunity for personal growth and development. In a few years
time, I wouldnt be surprised if a student is offered direct placement because of active involvement in FIL.
It was Nemish Shah who came up with the idea to start an investment
lab and currently FLAME is the only institute in India to offer something
like this. Discussions are on considering making FIL a part of the academic
calendar.

Opportunity and success are two sides of the

same coin - they go hand in hand. FIL is one such
opportunity. Embedded with unique dimensions,
it is structured to constantly keep you intellectually
alive and challenged. Should students utilize this
opportunity, it shall become a potent asset for them.
My vision for FIL is pitched at its peak. Time
will turn this vision into reality. FIL as a program
has the potential and rigor of being a School in
itself. It wouldnt be surprising for the Flame School Of Investment to
soon offer one/ two year courses to enthusiasts of the field. The Lab is a
symbol of strength. With every experience one can build a steady upward
momentum of learning.
Investment is an infinite term. Its about exploring the underlying
philosophies and thereby expanding ones horizons. It dictates the
fundamentals of multiplying ones wealth but not just monetarily. The scope
is eternal. One becomes adaptive to the changing environment by learning
from the mistakes made.
Over and above handling ones tangible assets, FIL shall facilitate
the honing of his/her intangible assets spontaneity, wit, diplomacy and
social relationships. Remember: investing is a way of thinking - an attitude.

Lehman Recapitulated
With more than a year of economic downturn, the fear caused by the collapse of financial
institutions is still fresh in the minds of many
people. Lehman Brothers Holding Inc was one
such collapse. An investment bank dealing with
equity and fixed-income sales, investments,
research, management, private banking and
private equity quickly grew into a primary dealer
in the United States Treasury securities market.
The origin of the credit crisis dates back to
another notable boom and bust: the tech bubble
of the late 1990s. When the stock market began
a steep decline in 2000 and the nation slipped
into recession the next year, the Federal Reserve
sharply lowered interest rates to limit the
economic damage. Mortgage payments became
cheaper as interest rates were lowered, leading to
rising demand for homes which in turn escalated
prices. The interest rate drop resulted in millions
of homeowners re-financing their existing
mortgages. As the industry grew, the quality of
mort gages also deteriorated. Default and
delinquency rates began to rise in 2006, but the
pace of lending did not slow. Banks had devised
complex financial instruments to slice up and
resell the mortgage backed securities to hedge
against any risks.
The first to collapse were the hedge funds
(an investment fund open to a limited range of
investors that is permitted by regulators to
undertake a wider range of investment and trading
than an ordinary investment fund) owned by Bear

Sterns in June 2007 that had invested in the subprime market. At the same time, the rising number
of foreclosures (the collateral siezed when a loan
is defaulted) helped speed the fall of housing
prices resulting in a rise in the number of prime
mortgages. Decrease in housing prices led to a
decrease in return from mortgage backed
securities.

Source: toonpool.com
In August 2007 Lehman closed its subprime
lender, BNC Mortgage, and took a $25 million
after-tax charge and a $27 million reduction in
goodwill. In 2008, Lehman faced losses due to
continuing subprime mortgage crisis. Lehman had
large positions in subprime and other lower-rated
mortgage tranches (breaking up the mortgage
assets into different categories) when securitizing
the underlying mortgages.Securitization is a
process of pooling different mortgaged assets and
converting them into a security whose value in
turn depends on the mortgaged assets.
In the second quarter of 2008, Lehman had
reported losses of $2.8 billion and was forced to

Ronak Nangalia
Bharti Rohra
Compiled from: The New York Times

sell off $6 billion in assets. With no buyers or

Treasury bailout and with stocks on a downward
slump Lehman Brothers Holdings Inc. had no
other choice but to declare bankruptcy. The
investors had lost faith in Lehman due to untrue
disclosure of its losses. At the Lehman Brothers
Holdings Inc. headquarters on September 15, they
announced Chapter 11 bankruptcy. The bank
declared debt of $613 billion out of $639 billion
worth of assets! On September 18, 2008 the
Treasury announced a $700 billion proposal to
buy toxic assets from banks to restore confidence
in the financial system.
Lehmans demise set off t remors
throughout the financial system. The uncertainty
surrounding its transactions with banks and hedge
funds intensified a crisis of confidence that
contributed to credit markets freezing. This forced
governments to try and calm panicked markets.
Now, almost a year after Lehmans
bankruptcy, banks like JPMorgan Chase,
Goldman Sachs and American Express have paid
back a total of $68 billion. One of the lessons to
be learnt from Lehmans case is that strict
regulations controlling the risk a financial
institution takes need to be put in place. It is a
question of securing millions of tax payers hardearned money.
Another lesson learned is that leverage is a
double-edged sword - it multiplies returns on the
upside but has a very different impact on the
downside.

Fundamental Analysis: Steel Sector

Bharti Rohra
Compiled from: worldsteel.org
economywatch.com

consumption like that of

S t e e l
consumption
is
developed countries. (Per
dependent on GDP
capita consumption of steel
denotes how many kg of
per capita, growth in
steel is consumed by the
automobile sector
and construction
population. GDP per capita
sector. In 2005,
is t he GDP divided by
population). Indias per
developed countries
capita steel consumption
like USA had per
capita
steel
continues to be low at 46
consumption of 450
kg as against the global
average of 198 kg. This
kg with GDP per
further strengthens the
capita of $40,000
(PPP basis) while
belief that the potential
China had per capita
ahead for India to raise its
steel consumption is high.
steel consumption of
250 kg with GDP per capita of $7,000 (PPP basis). $1,000 (PPP basis).This shows steel Growth in Indias GDP is 8.1%, 9.6%, 8.7% and
India on the other hand had per capita steel consumptions dependence on GDP and potential 6.7% for the fiscal years 2005-06 to 2008-09
consumption of 10 kg with GDP per capita of of developing countries to achieve steel respectively. The expected GDP for fiscal year
2009-10 is 7 %.

Indian Steel Industry

The Indian steel industry can be divided into
two distinct producer groups: Integrated Steel
Producers (ISP) with over 1 MT of capacity and
smaller stand-alone steel plants that include
producers and processors of steel. The ISPs
include SAIL, Tata Steel, JSW Steel and Ispat
Industries. They account for most of the mild steel
production in the country and produce most of
the flat steel products including Hot Rolled, Cold
Rolled and Galvanized steel. The smaller standalone steel plants account for a majority of long
products being produced in the country. The
potential demand for steel in India is vast with
the per capita steel consumption. Long steel (coils
and sheets used in ship building, automobile
manufacture, electronic equipment like fridges
and in construction) prices have been reduced due
to slow-down in construction activity and there
has been an increase in flat steel (bars, rods and
wires used in housing, heavy engineering and
railway tracks) prices by Rs 500-Rs 1000 a ton
(August 09 prices). Steel prices are currently
hovering around Rs 30,000 a ton.
With new budget measures like allocation to
Housing, Railways etc and a decrease in excise
duty for petrol driven trucks/lorries from 20% to over the previous year, the future outlook of the
18%, steel consumption is bound to increase. Add domestic industry looks bright
to this the proposal of IIFCL to refinance 60% of
In 2007, the top three steel producing
commercial bank loans for PPP projects in critical countries were China (489.0 mmt), Japan (120.2
sectors and a plan expenditure increase of 34% mmt), and the US (97.2 mmt). In 2008, the top

Global Steel Industry

Global Steel Industry

World crude steel production reached

1,329.7 million metric tons (mmt) for the year of
2008. This is a decrease of 1.2% compared to
2007.
The World Steel Association is forecasting
that apparent steel use will contract worldwide
by 8.6% to 1,104 million metric tons (mmt) in

2009. It also claimed that China

will be the critical factor driving
the world steel demand in the
near future primarily owing to
China accounting for more than
35% of the steel produced in the
world today.

three steel producing countries remained China

(500.5 mmt), Japan (118.7 mmt), and the United
States (91.4 mmt). India ranks fifth in world steel
production after Russia in 2008 with a manifold
scope for improvement.

Equity Analysis 101

There are many ways to go about equity
research. My methodology is just one of them.
As I sat down with Hemendra Singh, an ex-equity analyst who has to his credit a large private
equity placement deal and a full time faculty at
FLAME, to request a couple of articles from him,
a talk on equity research was the last thing on my
mind. This was my first interaction with him, and
it was going to be an interesting one.
In his methodology, there is only one word
- Research. One starts from scratch, which in this
case is the sector wise analysis by using the PEST
model. One chooses a sector by its attractiveness
(Retail, Telecom, Financial Services, insurance
et c) and t hen identifies the growth and
opportunities within these sectors. One then
proceeds to identify the leading companies within
these sectors who not only have the capability to
fill the gaps in the market, but also provide value.
Once these companies are demarcated, do a cross
comparison. Research, evaluate and analyze the
data, work out the discounted cash flows and
forecast the future. Dont follow the market,

Vikas Menon

predict it. That is what an equity analyst does.

The life of a successful analyst revolves
around four cornerstones - honing ones analysis,
developing a nature of inquisitiveness, raising the
competency levels and accessing and sharing vital
information. To conduct constructive research, the
entire economic activity can be divided among
various sectors with a team leader elected for each
sector. Sectoral presentations can be made weekly
by using the CMIE package or by tracking any
secondary data published or even by meeting key
people from the industry. Everyone wants to eat
the ice cream, but no one wants to go through the
trouble of making it.
He left me with some questions he felt
equity analysts should know the answer to:
1. Does there exist any correlation between
ROCE and P/E multiple?
2.Why does HUL, Colgate have a higher P/E in
the FMCG sector?
3.Why is technical analysis relevant in 8,50017,000 index swing in _____ months?
4. Is the real estate sector over-priced?

Tata Steel & The Credit Crisis

The prices of stocks constantly fluctuate
as buyers and sellers haggle towards a mutually
agreeable price to buy or sell at any point of time.
But can it be that the fundamental worth of each
of those companies is actually changing every
minute? Is the fundamental worth the only thing
that determines the changes in the prices of
stocks?
What better case study than Indias
premier steel company - Tata Steel to answer these
questions.Its price over the last one year or so
has been nothing short of a rollercoaster ride, with
some very extreme fluctuations in either direction.
It touched just about Rs 1,000 in October 2007.
Astonishingly, within a span of just one year, by
December 2008 it had fallen to a low of Rs 149.
A company that was being valued at Rs 603
billion in the market was suddenly being valued
at only Rs 108 billion within the matter of a year,
a fall of over 80%.
Corus was performing badly and the future
didnt look bright for steel companies. The
economic outlook was uncertain and most major
economies were forecasted to perform badly for
the next year or so. It was the same company,
with the same management, and the same
business, but was now being valued at
dramatically low levels.
The fall in price that ostensibly seemed due
to a grim outlook, actually had many more layers
to it. One of them was the heavy selling activity
from FIIs (foreign institutional investors) in a very
short period of time. These instit utions
presumably had to meet many commitments back
home. Redemption pressure from their own
investors and an extreme liquidity crunch in their
home countries could be two such reasons why

Brain Teasers
a) X dropped out of college in 1928 and
worked as second assistant to Benjamin Graham
at the Columbia Business School. X, at the age
of 94 was quoted as saying Im at the stage in
life where I get a lot of pleasure out of finding a
cheap stock. At 103, he is still the chairman of
the firm he founded in 1978. Identify X.
b) She was built in 1980 at a cost of $100
million for a Saudi billionaire. She featured as
the The Flying Saucer in the movie Never Say
Never Again and was bought by X. Xs activities
as an investor became prominent when he bought
a substantial tranche of Citicorp shares in the
1990s. He is also ranked by Forbes as the 22nd
richest person in the world. What are we talking
about, and who is X.
c)He was awarded the Padma Bhushan in
2008 and famously stated to his BOD, My salary
should be $1 per year with no bonus until we
return to profitability.

equitymaster.com

Note: The price of Tata Steel has been divided by 30for the sake of appropriate graphical presentation
with the theme of the article.Data Source: CMIE Prowess
they had no option but to sell, even if that meant
receiving very bad valuations for their stock.
And so began the distressed selling where
FIIs reduced their shareholding in the company
from 20.55% at the end December 2007 to a low
of 12.98% at December end 2008, causing
companys share price to get beaten down to some
very irrationally low levels.
What is also interesting to note is how the
momentum of buying and selling by FIIs caused
a momentum in the share price that lasted much
after the buying and selling by these entities
st opped. For example, when FIIs were
aggressively buying between March 2007 and
June 2007, the rise in the shares price lasted much
after the buying stopped. The story is somewhat
similar on the downside. An explanation for that
could be that when the price of a stock is seen
rising or falling in a big way for an extended

period of time, speculation becomes rife in the

stock, with speculators trying to cash in on the
momentum.
However, after a cert ain point, t he
speculators themselves start affecting the stocks
price in what can be called a self-fulfilling
prophecy, until the time that such a price (either
too high or too low compared to fundamentals)
is no longer sustainable.
This had nothing to do with Tata Steels
business and it didnt stop it from affecting its
share price.
The moral of the story is that the price
quotes of a stock you see everyday does not
always reflect the fundamental worth of the
company. An intelligent investor should take
advantage of these differences from fundamentals
by either buying or selling the stock when the
price gets way out of sync with its fundamentals.

Compiled From:
Forbes
smartmoney.com

On Display: Walter Schloss

Schloss, like Kahn, started his career working for
Ben Graham or you could note that during its 47year lifetime, Walter J. Schloss Associates
generated in excess of 20% gross annualized
returns and netted to its partners more than 15%
per year, while the S&P 500 gained slightly more
than 10%. An investor with $100,000 in the S&P
500 from January 1, 1956, to December 31, 2002,
would have made $9.3 million. That same
$100,000 invested in the Schloss partnership
would have generated over $78 million.
But really, the avuncular 92-year-old with
the big smile came to appreciate the merits of a
well-chosen stock much earlier; it was a dividend
stockthat helped ease the strains of the Great
Depression. All it took was 100 shares in AT&T
to improve his familys experience of the 1930s.
AT&Ts annual dividend of $9 a share went a long
way at a time when rents in the neighborhood were
$32 a month.
Schloss always had an affinity for
numbers, though he didnt dedicate himself to
Wall Street immediately. He enlisted in the army
right after Pearl Harbor and was tasked with
decoding messages (Schloss received a belated
letter of thanks from the Russian government in
the 1990s.) It wasnt until he returned to New York

Walter Schloss is considered one of the

investment greats, a value investor in the same
league as Warren Buffet. For a brief while in the
1950s, Schloss and Buffet even shared the same
office. He says of himself, Im not very bright.
He didnt go to college and started out as a Wall
Street runner in the 1930s. Today he sits in his
Manhattan apartment minding his own capital
and enjoying the simple pleasures of life.
In a 1984 speech at Columbia Business
School, Warren Buffett called Walter Schloss a
superinvestor with a singular knack for finding
undervaluedstocks.Heknowshowtoidentify
securities that sell at considerably less than their
value to a private owner: And thats all he does.
He owns many more stocks that I do and is far
less interested in the underlying nature of the
business.
The root of Buffetts admiration may seem in 1946 that he took a job as a stock analyst. He
clear enough: You could point to the fact that and his son, Edwin folded up the fund in 2002.

Dilbert

Scott Adams

Schloss now manages his own multimilliondollar portfolio.

Im not very good at judging people. So I
found that it was much better to look at figures
rather than people. I didnt go to many meetings
unless they were relatively nearby. I like the idea
of company-paid dividends, because I think it
makes management a little more aware of
stockholders.
He prefers to buy assets rather than
earnings. Most people say, What is it going to
earn next year? I focus on assets. If you dont
have a lot of debt, its worth something.
So Schloss, who has about half his portfolio
in stocks, is still keeping an eye out for companies
like International Paper, which he bought because
it was trading at a fraction of recent highs, paid a
dividend and had little debt. Debt bothers me,
he says. The companies in trouble are usually the
ones that owe a lot of money.

Schloss doesnt profess to understand a

companys operations intimately and almost never
talks to management. Youve got to get a feel of
a company their history, background,
ownership, what its done, the business theyre
in, dividend payments, where earnings are
headed. Youve just got to get a general feel of a
company. Although he feels, you never know
all about a stock until you own it.

The Team
Editor-in-Chief

Vikas Menon

Editor/ Designer

Abijit Vivek

Writers

Aalisha Sheth
Bharti Rohra
Ronak Nangalia

Masque
Apart from being remarkably pretty for
stock brokers for a hard on for greenery, Charlie
Sheen (Bud Fox) and Michael Douglas (Gordon
Gekko) do little to ham out a remarkably shallow
and predictable script. If spoiler alerts werent
bad enough we have clues strewn throughout the
early filmscape. Case in point Sheens campy
Doing any better would be a sin.
Oliver Stone does a remarkably B-grade job
of slotting brokers and investors as money hungry
heartless sharks that recognise good cuisine as
well-tossed penny salads with their names
watermarked. Douglas weakly ascribes to the
adage of love being a rumour that prevents
people from jumping out windows. A
resurrection show of the downtrodden Gekkoo
awaits in the Shia LaBeouf led sequel Wall Street
2: Money Never Sleeps.
Source: Google

Abijit Vivek
Charlies father (real-life daddy Martin
Sheen) joins in the dramarama to further enforce
stereotype with his own footer quote: Create
instead of living off the buying and selling of
others. Investment labbers, especially, should not
take such idealistic advice to heart.
Wall Street may have won an Oscar favour
for Douglas but his reprisal of similar villainy in
Basic Instinct (1992) and A Perfect Murder (1998)
disfavour him in the eyes of an impartial observer
cynic enough to spot him as easily guilty with his
slicked back hair and smug grins and archaic view
on profit as the end all be all. It may have worked
in 1987 but two decades hence its time for a
Michael Learns To Act keeping in mind the
imminent next instalment. For thorough sellyourself tutorials Glengarry Glen Ross comes
highly recommended.