What ails the Airline Sector - and what should the government do about it?

What ails the Airline Sector - and what should the government do about it?

There has been a major hue and cry over whether or not to bailout Kingfisher.

There are two parts to the entire Kingfisher saga:

• Macro issues pertaining to the airlines sector

Obviously, there is much that ails the sector - not just locally, but globally. After all, other than a rare Southwest Airlines, virtually no airline across the globe makes profits consistently, year after year. This can only be due to two reasons:

• Improper pricing - If all the players of the industry choose a suicidal pricing strategy which makes their business model unviable, there's little that can be done about it
• Cost management - Considering the glamorous nature of the industry, the players don't focus enough on the cost structure.

Considering the above, every government across the world has to take a call on whether the sector is a strategically important one for their respective country. If it is deemed to be strategically important, the concerned government should either provide enough fiscal incentives, subsidies, etc. to keep their airlines alive. Or they should nationalise their local airlines and run it themselves. If airlines are viewed as just another business which is not strategically critical, they should simply let go of any idea of micro management. Instead, they should encourage free entry of all global airlines into their country and enjoy the fruits of crazy undercutting by all the players. Just restrict their own roles to collecting reasonable taxes, ensuring passenger safety, enforcing rules for connectivity for the entire country in lieu of licences for operating in key business centres, etc.

• Micro issues pertaining to Kingfisher

We must remember (and insist on remembering) that nobody forced Mallyas to start Kingfisher Airlines. If Vijay Mallya wanted to spend his money on running an airline, that's his choice. If shareholders chose to invest (or punt) in Kingfisher shares, that's their funeral. If banks have chosen to lend money, that's their headache.

If PSU banks have been "pushed" to lend, however, the government may consider protecting the banks in a manner that would be appropriate without any element of a moral hazard. For this purpose, the government may perhaps appoint an independent panel led by a banker of impeccable repute like a Deepak Parekh or KV Kamath. Ideas and recommendations generated by this panel could perhaps be used for protecting the interest of the PSU banks - to the limited extent of safeguarding loans that were given to Kingfisher under duress.

So far as Kingfisher is concerned, there should obviously be no bailout of Vijay Mallya. All shares belonging to the promoters should be taken over by the lenders at a mutually agreed valuation as part/full repayment of their debts. A professional management directly reporting to an independent board should run the new Kingfisher. The lenders should get a veto power on

• Top managment compensation including variable pay
• Dividend declaration by Kingfisher Airlines

Employees of Kingfisher should not be artificially protected or "propped up" in any way whatsoever. We must realise that unlike landless labourers working in farms or construction workers employed in the unorganised sector, at least 98% of Kingfisher employees will be well-educated employees who have consciously chosen to be employed by the airline. Kingfisher employees are obviously reasonably well-paid white collar employees. They are not innocent victims by any stretch of imagination. They will all have a well-studied employment contract which will provide the terms of their employment and termination. Any emloyee who is terminated should simply be "taken care of" in accordance with his/her employment contract. No tears should be shed for them beyond this. We must remember that we are not living in the days where the maximum corporate salaries are pegged at artificially low levels. If the employees have chosen to be part of Kingfisher, just like they enjoyed the benefits of a "full-sized life" during its heydays, they must bear the brunt of the logical downside when the company goes under. Sad, but that's the reality of life in a market economy.

The government's role??? Certainly not to protect Vijay Mallya. Just ensure that the law of the land prevails, as the laws exist today. If at all any laws are being changed to accommodate Kingfisher, the changes should be applied only prospectively and should be applicable for the entire sector. In fact for all other sectors as well. I'm sure that people like employees of all BIFR cases would gladly join the queue for a bailout.

We must certainly not have a situation that encourages private profit and let the taxpayer bear the losses. Not even once.

Regards,

N

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A Collector of Gems - Views of Charles T Akre

A Collector of Gems - Views of Charles T Akre

Came across an interesting interview with Charles T Akre ... ... ...

• Collector of Gems (Source - Value Resarch Online)

A brief excerpt from the above interview:

 

Charles T Akre on trading in and out of stocks to catch the peaks and bottoms: Will I be better off if I sold them at the top and bought them at the bottom? Of course! Am I able to tell when that is going to be? No. My life experience is that if the stock is at $40 and I think it is worth $25 and I sell it at $40 because I want to buy it back at $25, my experience is that it trades down to $25.05 and then goes to $300 and I don't ever get my position back. Therefore, we are always trying to make sure that we own the compounders.

Charles Akre may very well be a great investor, but in the Indian context, I'm forced to disagree. And disagree strongly. Perhaps if I knew about other markets, I may disagree about those markets as well.

My rationale and line of thinking:

• Ordinary investors like you and me are likely to have a reasonably diversified portfolio and if we miss the Jilebi, we'll catch the Laddoo.
• There is a broad range of Market PE within which the indices tend to move over a long period of time. In the Indian context, it tends to move between a PE band of 15-25 on a trailing basis. Hence, when the Index PE approaches 15, we ought to start accumulating and start getting out when the same PE reaches around 25. Just check out the Top & bottom of Harshad Mehta's time, Dot-com time, Lehman Brothers time, etc.
• Even during the long period of consolidation in between, individual stocks tend to swing wildly within a very broad range.
  • We just need to have
    • a broad basket of shares - say, 8-10 shares
    • identify the broad range for each share within the overall index range
    • and keep going in and out of pretty much the same set of 8-10 shares
  • And ensure that we stick to our broad "Asset Allocation" at all points of time.

Listen to all the masters, learn their "style of operations", "line of thinking", etc. Finally arrive at your own individual strategy that suits you. And execute that strategy meticulously.

Happy investing!

Regards,

N

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Evaluating a stock based on different perspectives

Evaluating a stock based on different perspectives

Different people evaluate a stock using different parameters. After all, if there is only one model of evaluating a company, the share prices would not fluctuate on a daily basis. At best, it will keep changing once in a few weeks or months.

While browsing the net, I came across this wonderful write up illustrating the extent to which valuation differs based on one's perspective.

Take a look:

• 8 Points of view for evaluating a stock - by Sanjay Bakshi

What's impressive is that the author has described things in a language that's easy to understand for anyone with a basic understanding of finance.

Thanks, Sanjay Bakshi. What's important for you is to actually take a look at all those balance sheets that you'll start receiving in a few weeks from now - Perhaps you'll find some gems among them. And some junk. You'll be far better off by dumping the junk and deploying any surplus funds in the gems.

Take care!

Regards,

N

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Why we ought to be wary about Investing in Mutual Funds through distributors ...

Why we ought to be wary about

Investing in Mutual Funds through distributors ...

Personally, I've always been wary about investing in mutual funds through distributors. It was a basic, simple, selfish allergy to parting with any form of commissions, especially on a long-term basis for comparitively limited value addition.

Of course, this has been driven by my own personal financial literacy levels, which I feel are adequate to satisfy my own needs.

Indeed, I have used distributors before (and may perhaps continue to use them in the future) for reasons of convenience and personal laziness. However, this was done in a fully conscious manner by me. I knew the kind of direct and indirect costs that I was incurring while investing in mutual funds through distributors.

I would like you to become equally conscious of the kind of direct and indirect costs that you are incurring by using distributors for investing in mutual funds.

To aid this process, I'd like you to read this wonderful piece that I picked up from the Quantum Mutual Fund website:

• Quantum Mutual Fund Philosophy on Commissions

What's interesting is that the above write-up doesn't even bother to focus much on the active and rampant mis-selling that goes on in the world of investing in mutual funds through distributors.

Well ... .... ..... ...... ....... As the saying goes, "Let the buyer beware"!

Regards,

N

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Why I love Warren Buffett

Why I love Warren Buffett

It is very easy for investors to be enamoured by the returns generated by Berkshire Hathaway over the past several years. Despite Buffett's sage advice, it is even easy to envy him for all his wealth and for his fan following.

However, the reason why I love Warren Buffett is simple:

• His simplicity in thinking
• His clarity of expression
• His sound logic
• His ability to communicate fairly complex things in a very easy-to-understand manner.

Take a look at this gem from him:

• Warren Buffett - "Why stocks beat Gold & Bonds" - Fortune Magazine

In the above wonderfully written piece, he demolishes common myths about the perceived "safety" of fixed income products as well as gold.

The problem with Buffett, however, is to follow his advice.

Will I be able to follow his advice? I'm certain that I won't. Here are a couple of key reasons:

• Partially due to ignorance (of which businesses will do well).
• Partially due to fear - What if the businesses that I buy go down in value? What if the market as a whole crashes?

Precisely due to the above two factors, I'll go back to the text book theory of "Asset Allocation" and of "Diversification". This is nothing but a simple case of hedging one's bets.

After all, the simple truth is

• "If you know that XYZ limited is going to be the best performing stock over the next 3 years, I'll simply dump everything else and load up my net worth with shares of XYZ Limited."

Unfortunately, we don't know that. None of us do. Hence, we take a call on two key issues:

• How much of money can be deployed in shares?
• Within that quantum, how much can be deployed in any individual company?

The above decision is obviously going to be based on a wide range of factors such as asset allocation, risk appetite, time horizon, reliability of future cash flows, financial commitments, etc. And the decision would have to be taken separately by each individual based on his/her own "ground realities".

Just remember the lessons from the Oracle of Omaha. And proceed with care! 

Regards,

N

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