PJM

Thanks for making an effort to translate the speech. A good, inspiring read.

Looks like Pabrai Fund has now picked up a stake of more than 1% in another bank - Jammu Kashmir bank in India.

Mr.Tepper says that his fears have been alleviated http://blogs.wsj.com/moneybeat/2014/06/05/david-tepper-my-fears-have-been-alleviated/

HDFC Bank continue to do extremely well. The financial results combined with positive momentum on Indian stocks gave HDFC stock a huge boast. ADR up 32% ytd. Latest FY 2014 results Deposits up by 24.0% to INR3,673 Bn Gross advances increased by 26.4% to INR3,050 Bn Net Interest Margin at 4.4% Cost-to-income ratio at 45.7% Profit before tax up by 31.2% to INR34.9 Bn Net profit up by 23.1% to INR23.3 Bn Gross NPA / gross advances at 1.0% Net NPA / net advances at 0.3% Capital adequacy ratio (CAR)** - Total 16.1% of which Tier I at 11.8%

Has to be? Not so much when the shares are bought back above intrinsic value. You are then spending a dollar of company cash to buy something worth less than a dollar in value. Thinking all buybacks are good is not much different from thinking all dividends are good. Totally agree on your point that buy backs should be done at below intrinsic value. Unfortunately very very few firms do opportunistic buy backs and most firms opt for regular buy backs that is spread over a long period of time, so I'd hope it will average out the price near its intrinsic value. Nevertheless I do take back my words "has to be" :)

Irrespective of the management's rationale, diluted share outstanding reduction has to be good for the shareholders. It may not suggest that the shares are undervalued, but the portion of income for each share definitely goes up.

Thanks for posting. Extremely good read. "Ultimately, people are motivated by human-interest stories about somebody who did something amazing because those stories are more resonant, they create a sense of envy and competitiveness. If I've heard stories about someone who bought condos or houses and flipped them and made a huge amount of money, and I think to myself I could have done that, it generates emotional turmoil that drives you to do it. So I'm thinking that's kind of what was happening in the housing market in the early 2000s and in the stock market in the 1990s" We can see this particular human behaviour even on this forum.

First of all, i'm looking at the books of the company in local currency, so valuation is in local currency because HDFC is a domestic bank. Secondly I'm not looking just as expanding BV, but also growth in revenues, net profits and ROE. Some important metrics • 10 years (2004-2013) CAGR Net Income – 34% • 5 years (2008-2013) CAGR Net Income – 18% • ROE greater than 15% consistently for last 10 years • NPA (Non-Performing assets) less than 1% of gross advances • NIM (Net Interest Margin) greater than 4% consistently over the last 10 years • Retail deposits and net interest income has increased consistently over the last 10 years • CASA (Current and Savings Account) ratio greater than 40% consistently, meaning the company is able to get capital at a cheap rate • A very strong and reliable management On Inflation - Rising rates acts as a monetary constraint that slows both the economy and loan demand. Rising inflation puts more pressure on bank earnings and valuations given declining NIM and no offset to higher operating costs. So for a bank to be able to increase its deposit base, loan book, increase NIM and keep NPA low is extremely positive in an inflationary environment.

To be honest I've never understood how inflation impacts stock prices and returns, especially for banking and financial services industry. Yes growth in GDP will foster faster credit growth and higher interest rates should help interest margins for all banks, but beyond that ROE and underlying profits is a factor of good management, operating/lending practices and competitive advantage of the company. Higher input costs should net off higher revenues due to inflation. A high CASA ratio, extremely low NPA, increasing interest margins and growth even during crisis is a clear sign that HDFC bank has sustainable moat versus peers, and most of that is attributed to a very strong management and really good business practices.

I read just one article on HDFC bank on this blog and it is interesting the blog echoes the same aspect of rich valuations for HDFC Bank as common investors. The interesting part is that I've been talking to people for years and it was the same concern 10 years ago, 5 years ago and now. I dont see any reason for the valuations to come down given the extraordinary performance of this bank. It is one of the only 10 companies that has consistently been ranked as the top 10 largest wealth creators (in terms of the increase in stock prices and market cap) every year for last 10 years. Uncommon profits in companies = uncommon wealth creation in stock markets. The average ROE from 2003-2013 is 18% and the price CAGR is 26%.The bank has one of the highest CASA and lowest NPA as a percentage of total loans. It is the second largest private bank, national footprint and ample room to grow. Given the strong management and growth potential of this company (operating in a country which is growing at >5%), I've no doubt that it will continue to grow at a very healthy rate. So why should it trade at lower valuations?

I think an interesting second part of the article would be "The Berkshire's of tomorrow"

His interview last year highlights some of his holdings http://www.givernycapital.com/assets/documents/179/TWST_04_15_13_Giverny_Capital_.pdf?1386962107 Wells Fargo & Company (WFC); M&T Bank (MTB); Bank of the Ozarks (OZRK); Fastenal (FAST); CarMax (KMX); The Walt Disney Company (DIS); Union Pacific (UNP); Berkshire Hathaway (BRK-A) and JPMorgan Chase & Co. (JPM).

There is only reason to become full-time investor - is to satisfy your entrepreneurial spirit and if you have passion to be an entrepreneur. Any other reason would only bring grief, unhappiness, stress and envy. I can bet that everyone who has been successful as an investor has done so because they enjoyed the process of finding undervalued businesses and betting on the same. Becoming full-time investor or being employed has its plus and minus, so I don't see how you can compare either. You will be successful and happy in either if you have passion for it and you are able to work with people who are smarter than you. Naturally other things such as family, financial obligations, risk aversion, life style etc play a part in every decision we make, but I think everything else falls in place if you have made peace with your inner self and taken the path that provides you with maximum happiness. I left my job giving up a 7 digit pay package, promising career ahead, great life style etc to be an investor because I'm passionate about investing and wanted to take it full time. I don't think I'll be able to make up the opportunity cost of the job I had and my family had to adjust to new lifestyle but it is worth it. Only time will tell if it was a right decision but irrespective of the outcome I'll have enjoyed the journey and made worth of it.

Something similar occurred in England during the Industrial Revolution. Changing technologies and practices in the agriculture sector freed up significant labour that migrated to towns and cities to fuel the IR. The scale of agriculture in China would suggest that there will be ample opportunity for the agriculture sector to shed labour over coming years. SJ They need city jobs to afford housing. Unless the city parks are large enough for their tents. But what jobs? I get the fact that the past migrants to the cities took factory jobs -- all that stuff at Walmart is made in China. But have we saturated the demand for Chinese factory labor? Is there untapped demand for manufactured goods from China? Chinese markets are not understood properly because a lot of reports/stats are very biased to show exuberance. No denying that there may be oversupply of credit/cheap money which has lead to speculation on real estate, however Chinese problems can be fixed and I think the NPC is taking some really strategic steps which is not properly understood as people are so focussed on short-term numbers such as PMI, CPI etc Here is an article from Andy Xie (one of the most reputed Chinese economist) who had a reputation of openly criticising the Chinese policies, but lately he has been sounding positive especially in highlighting the fact that slowing economy is a good thing for China which will help it over the long run. http://english.caixin.com/2014-03-06/100647590.html (When the transition to market-based resource allocation is complete, the country's per capita income will rise quickly, to US$ 20,000 from the present US$ 7,000. That is the grand prize that the country should focus on.)

One way to force these companies to become more active is by imposing undistributed profit tax (just like US did in 1936). This will force the companies to distribute the retained cash/earnings and put money into the hands of the investors giving them more purchasing power (and more tax revenues for the govt). It will be win-win situation for the govt in terms of getting more tax revenue and reducing its budget deficit. Since the companies wont have any retained earnings for future investment, it will be forced to raise capital/credit, expanding the debt market and creating velocity for the newly printed money. Alternatively the companies may actively start doing capex instead of distributing earnings, which will again inflate the economy.

I hear you and you raise a very good point. If income flows back to private sector, it should lead to increased wages and more spending, more investment at higher yields and in turn more tax revenues. But the broken piece is that when Japanese people get more money, they just put it under the rugs as savings. The key reason is that the Japanese don't trust the banks or the government. This morning on front page of WSJ, there is an article in which people were asked if they spending the winter bonuses which was higher for the first time in 5 years. The response "I'm not spending because I'm concerned that they may go down". I know many people who think every penny given to banks and govt will be lost in future. When i lived in japan until a few years ago we literally got free money into our bank account by the govt but all that money disappeared from the banks or the economy. As for private sector and pensions, I think that they ain't investing in JGBs because they think its great investment but they are forced by the govt, just like recently Abe has been pushing pension funds to invest more in equities to inflate asset prices. Even if yields went up, would you be investing in debt that you think is unlikely to be repaid or some other assets, especially if the yield returns are going to be paid back as taxes? Japanese corporates should be able to take advantage of the cheap/free money (BOJ just announced increase in lending to banks at zero rates) for more capex, expand overseas and pick up good assets, but Japanese corporates are very poorly managed. They don't have confidence in domestic economy and always land up paying inflated prices for overseas acquisition. Even post-acquisition they are unable to integrate it properly and reap its benefit. It is unfortunate that its the same country that built fantastic companies only few decades ago. People like Matsushita and Morita would have been very sad to see the plight of Japanese corporates today.

The bonds being mostly held by Japanese, then most of the interest paid goes back to their tax base. So while it's true that all (current level of) tax revenues would be used just to service the debt, the private sector would see a massive surge in govt bond interest income cash flow. The government could tax this increase of interest income, and put it back into the programs it currently spends money on. So the private sector would in theory see no change in cash flow. Bond holders would get the same as they get today, as would the beneficiaries of government programs. So it would in effect be defaulting on interest payments to it's domestic bond holders, but foreign bond holders wouldn't get hurt (there are so few of them). And it's private bondholders would just keep on seeing the same level of bond income that they see today. Net of tax. I'm not convinced this wouldn't lead to some sort of dumping of bonds by the Japanese. It's just that it appears if you are increasing payments to your own people, that seems to open a door to raising taxes. Just brainstorming. In short, if you pay too much interest to your own people, take it back! Otherwise, it would be somewhat like an economy without taxation if all the money taken in taxes were given right back again. Taxes in Japan are already high, for both individuals (40% for income above $180K) and corporates (around 38%). On top of that there is service tax (which will be increased to 8% in April) and a special surcharge of around 3% for rebuilding program post 2011-earthquake. Interest income is already taxed at around 22%, so increasing it would naturally put off investors investing into bonds. Govt can only tax and take back a certain portion of the interest income, so the deficit will keep growing if the government is using all of its tax revenues to service the interest. Rising interest rates will have a massive impact on the book values of banks(e.g. below) and pension funds (which is already running a deficit due to ageing population and life expectancy rate of 80+). So the choice for pension funds is to sell the existing bonds at a big loss to pick up new bonds at higher yields or hold the existing bonds until maturity with a negative real yield creating bigger hole in the deficit. The country's second-largest bank, Mizuho Financial Group Inc., 8411.TO +0.95% said in May 2013 that a one-percentage-point rise in the yield of the 10-year bond would result in paper losses of ¥100 billion-¥200 billion ($1.1 billion-$2.1 billion) on its loan portfolio

Yet your actions speak louder than your words. If this is truly at Japan's doorstep why are you still living there? If their collapse is as bad as everyone predicts I would be moving now to secure a job somewhere else to beat the wave of Japanese emigrants. Or do you think some sort of debt restricting will happen but it won't be that bad? I'm curious at the disconnect. Who said I'm living in Japan now? :) My brain knows that it will all collapse but my heart wants to believe otherwise. Of course they can still work their way out of the problem. That needs large structural changes but the biggest problem of Japanese society is rigidity and they just don't want to change.

Very good point Packer. It may sound ridiculous but Japanese society works like a fraternity. You watch out my back and I watch out yours, so 75% of the debt is held by Japanese banks and pension fund and 8% by central bank. Most Japanese don't even trust banks, so almost more than 50% of savings is held as cash under the mattress (literally). Inflation is a double-edged sword for Japanese society. If you break down the components of eroding debt by inflation, you have to look at budget surplus/deficit, real/nominal interest rates, debt composition and GDP growth. Out of these, the Japanese are facing slow/no GDP growth and budget deficit because of structural problems such as aging population, incompetent corporates, lack of confidence in the economy etc. If the real rates become negative, then investors (especially Pension fund that invests almost all its money in debt) will demand higher returns on the bond which will again hit the Japanese debt. Of course the government will be cushioned for a while as inflation erodes debt, but with average debt maturity of 6 years, the Japanese government will have to continuously fund the budget deficit and maturing debt until increasing tax revenues can fill the deficit. If they default the biggest loser will be Japanese people as all their pension money is invested in Japanese debt. One of the biggest reason of deflation in Japan is not falling prices but contracting wages because there is no growth for companies. If you take the regional banks that are not allowed to invest overseas, the loan to deposit ratio is below 50% because there are no takers. Most of the money that is printed is finding its way out of Japan as carry trades mostly by the large Japanese banks such as MUFJ, SMBC, Mizuho etc. That is the reason they are snapping up all sort of loan/lease portfolios overseas. Abe has been pushing Japanese pension and insisting Japanese individuals to invest more in Japanese equity market but there are no takers. Abe naturally wants to inflate asset prices which should stir consumption, growth and more tax revenues, but again a failed attempt.

Its game over for Japan in pretty much all scenarios. The debt levels are too high that neither money printing nor inflation can save it. Currently almost 1/4th of govt revenues are spent only on servicing the debt. The issue is Japan is more structural rather than just fiscal or monetary. Tax: There are more people consuming social/pension benefits than contributing to taxes. Japanese people dont want to get married or have children. Firms like Toyota are running campaigns to push employees to go home early and create children (yes, they call it creating children), Japanese government gives monthly cash allowance for each child until 15 years old, but in vain. Japanese people dont invest their own savings into Japanese assets because they don't have any faith in its economy. A future hike in sales tax will surely bring down consumption further Debt: As someone rightly mentioned that most of the debt is held domestically in Japan. However there are no takers for new debt that Japan wants to raise every year just to service its old debt. Japanese government has been running campaigns trying to promote individuals to buy these debt but in vain (http://punitmittal.blogspot.com/2011/12/japanese-women-are-super-attracted-to.html). Japanese corporations and pension doesn't have surplus funds to invest further in Japanese bonds. Foreigners are not interested given the low yields and massive debt size. The BOJ has already exhausted interest rate weapon as rates are almost zero and 3% increase in rates would mean that all tax revenues are used just to service the debt. Yen: Trade deficit and current account deficit is on a rise. This is because Japan is increasingly becoming an importing nation rather than exporting. Its a myth that there is high demand of Japanese products and in turn the yen. Most Japanese companies such are now manufacturing the products outside Japan (and in the countries where the products are consumed) so only a certain portion of funds are repatriated back and as such tax paid on them. Labor laws, corporate cross holdings and rigid policies are making them incompetent and benefiting taiwanese, Chinese and korean companies. Rising energy costs is putting increasing burden on the yen, which should continue going forward. Inflation: Government's inflation target is only going to back fire because it will result in negative real returns, thereby investors asking higher returns on the bonds. In the past BOJ has even tried printing money and just handing it over to individuals which all disappears under the mattress or in foreign assets because the Japanese people have no confidence in its own government and/or monetary situation. To top all this, the Japanese society is very rigid and does not want to make any structural changes, just like the Japanese corporates making them extremely incompetent in this ever changing world. My two cents from my 12 years life in Japan.

Thomas Cook continues to make acquisition as hinted by Mr.Watsa http://economictimes.indiatimes.com/news/news-by-industry/services/hotels-/-restaurants/thomas-cook-sterling-merge-to-create-indias-biggest-holiday-firm/articleshow/30055143.cms

Difficult to play the India growth story with ETFs. The index weightings is skewed towards some heavyweight names that will in fact be laggards going forward. The best way to play IMO is either 1/invest with a value investor fund that is still raising capital 2/buy some ADRs. There are are some very good names that can be traded as ADR in the US.

Similar strategy to Uccmal. I keep cash (term deposits @ 1-2% scattered over a period of time) for 2-3 years of expenses and remaining in risk assets. I don't believe bonds provide lower risk compared to other risky assets, so am uncomfortable investing in bonds funds (for that matter any type of fund) given the low interest rates. Fortunately I don't have any capital gains/interest income tax in HK, so do not have to worry abt taxes :)

There are obvious reasons on why certain markets/sectors may be more inefficient compared to others, however that does not mean one can easily exploit those inefficiencies. For e.g. small caps vs. large caps, illiquid assets vs. liquid assets, regulated vs. unregulated etc. Even though small caps may provide more inefficiency it may stay that way for a very long period of time, certainly much longer than the large caps (The market can remain irrational much longer than you can remain solvent). On the contrary i feel that large caps can provide more opportunities because of the large number of investors (aka more participants that are not objective and unemotional), thereby providing more opportunities to play the weak games. I'd also expect Mr. market to become rational faster for large caps compared to small caps, so the probability of luck favouring your skills is much higher.

Can you re-post it? :) +1 Request to repost the spreadsheet