VALUE INVESTING: BUY A BUSINESS NOT THE SHARES

VALUE INVESTING: BUY A BUSINESS NOT THE SHARES

Dr. Tejinder Singh Rawal

Chartered Accountant

tsrawal@tsrawal.com

A value investor should look upon share investment as buying a part of a business. Investors should take the same approach to buying shares as they would if they were buying a business. The only difference is that instead of buying the whole of the business, they are only buying a tiny share.

A first year student of accountancy can tell us that when you buy shares of a company, you become part owner of the business to the extent of your shareholding in the company. We know all too well that this principle is at best a theoretical reality, and a minority shareholder may not have much right in a company’s management. We thus tend to treat this piece of law as ineffective piece of legislation. However, the fact that a shareholder is a part owner of business should not be ignored when valuing a business, since what an investor gets in lieu of the money he pays to buy a share is essentially a proportionate piece of the corporate ownership cake. And if you treat a share as a security existing in isolation, and not a proportional piece of the corporate cake, you would be doing so at your peril.

I have seen many , with finance professionals and Chartered Accountants being no exception, falling in the trap of thinking of shares as a piece of investment to be looked at independently without any reference to the fundamental business of which the share is a miniscule representation. Individual investors assume the research is beyond their level of competence and the professional investor is more keen to ride on the momentum rather than probe into the fundamentals of the company.

Finance professionals hold this view because of a firm belief embedded in their minds that the share price at any point of time is a perfect representation of its actual net worth, and the price deviation is either because of ‘noise’ or is a mere short term price discovery mechanism. These investors subscribe to what is known as Efficient Market Hypothesis, and would believe that since the market is efficient, the combined wisdom of the market determines the true market price, hence fundamental analysis has no role to play in such a market. But empirical evidence proves otherwise. Market price need not hover around the true value, and one may discover the divergence between the two in respect of many securities. It is this divergence, where the market prices a share considerably below its value, which the value investor is keenly looking at. In order to discover the divergence, you must have an ability to value the business of the company. While it is not an easy job to value even the business that you understand, it is well nigh impossible to value something that you don’t understand at all.

A prudent investor never buys a business that he does not understand. Similarly, a prudent share investor should never buy shares in a company, whose business he does not understand. Before buying shares, think of yourself as a business and find out whether you would have paid the same price per share for buying the business lock, stock and barrel.

Warren Buffett explains this concept very aptly in the following words:

“We try to stick with businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change we’re not smart enough to predict future cash flows. Incidentally that shortcoming doesn’t bother us.”

Keynes also realized the importance of the knowledge of the company you are investing in when he said the following, “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about …”

Knowing a company involves research as well as personal experience and successful investors approach share investment the way that they would the purchase of a business.

They buy a business in an industry area that they know or that they have learned about, they investigate the financials, they look at how the business operated in the past, they weigh up future potential, and they then make a reasoned decision to buy at the price offered or not buy.

One difficulty for the individual investor is getting this information. Investors can track through a series of company reports and financial and other announcements and do their own summaries and analysis. Other investors may choose to simplify their approach and get the summarised information from an investment advisory. Thanks to the Internet now information is not the prerogative of the select few, but now even an individual investor has load of information at his command by a mere click of the mouse. Most companies maintain a section in their web-sites where they keep details of the annual, half-yearly and quarterly results, and provide other information relevant for the investors. Websites such as www.capitalmarket.com , www.icicidirect.com , www.sharekhan.com www.myiris.com , www.kotakstreet.com and www.moneycontrol.com also contain summarised financial information of the listed companies. Websites of BSE and NSE also contain invaluable information for investors.

Anecdotal evidence and personal experience can also be useful to an investor. There are investors who would not buy shares in a company unless they have visited the company facilities, and are personally satisfied with the credentials of the company. Some would even meet the key management personnel to ascertain their outlook and decide upon the quality of management. While this method may be impractical for most of the investors, at least researching into the published information, and enquiring about the company credentials from people who know the industry should help.

Phil Fisher calls this ‘the scuttlebutt method”. He likes to interview the people who may have first hand information about the company. He thus likes to talk to the employees, vendors, customers, and even people living in the local community of a company’s manufacturing facilities.

Ben Graham disliked the idea of interviewing the management. He felt that most of the presentations made by the management would consist of nothing more than a sales talk. Graham preferred to rely more on the published information that the interaction with the management.

Peter Lynch advises the investors to develop a childlike inquisitiveness to enquire about the companies that you come across in your day to day life, and build a story around those companies. He says that he would pay a close attention to the shopping bag that his wife brings home from the supermarket to judge the changing consumer tastes and preferences. This way, his research is more relevant and faster than that being done by any other research organisation, because his starting point is the consumer loyalty and preferences, something that is not easy for professional research organisations to focus on with so much confidence.

Lynch goes a step further to advice investors to filter out such companies from their list, as the investor cannot relate to on hearing the name of the company. He says that if the theme of a company cannot be explained with crayons, it is not worth investing in.

Whatever method suits your attitude and professional expertise, the message of all the experts is clear: don’t invest in a company unless you know the business well.

In conclusion, it may be said that, since your area of competence is different from my area of competence, the confidence that I have about a particular business may not be at the same level as you. Hence, it is quite logical that I concentrate on businesses that I understand, and apply the ownership principle while evaluating and valuing it.

Dr. Tejinder Singh Rawal

M.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhD

Chartered Accountant

E 13, Anjuman Complex, Sadar,

Nagpur 440 001 India

Ph: +91 712 2582923 Fax +91 712 2583522

Email: tsrawal@tsrawal.com

What is Freemasonry

What is Freemasonry

A paper addressed to non-masons

by Bro. Tejinder Singh Rawal

Master, Lodge Corinth 1122 EC Nagpur, India

What did George Washington, Winston Churchill and Benjamin Franklin have in common with Goethe, Mozart, and Voltaire? And with Motilal Nehru and Swami Vivekanand? They all belonged to the biggest and the oldest fraternal organisation in the world. . And so did Edwin E. Aldrin, the first astronaut to land on moon, Sir Author Conan Doyle, the celebrated writer of “Sherlock Holmes” fame, Edward VII - King of England, George VI - King of England, Sir Alexander Fleming who invented Penicillin, many of the Presidents and Vice-presidents of America, many prime ministers of Canada, Henry Ford, pioneer automobile manufacturer, King C. Gillett of the Gillett Razor Co., Rudyard Kipling, the famous writer who lived in India, Sir Thomas Lipton, the Tea Man.

Churchill and Roosevelt both were freemasons

Freemasonry, spread across four corners of the globe, has thousands of men who are of rank and opulence. Monarchs and kings have always taken keen interest in Freemasonry, and have with great enthusiasm worked for furtherance of its objectives. Did you know that Royal Society was started as a virtually a Masonic Lodge subsidiary, before becoming an independent body? Those of you who know Masonic symbolism will never fail to notice them on the USA $1 bill.

Without any doubt included in the list of Masons have been people who changed the course of history. However, the organisation they all belonged to remains the least understood organisation among public. It has always perplexed outsiders, and has always been an organisation shrouded in mystery. People lack even the rudimentary knowledge about Masonry, and ignorance results in confused ideas and spread of misinformation. It has a fair share of critics, and detractors, and baseless allegations have often levelled against it. Freemasonry has a long history of not answering to the critics, and this has been the reason why so many misconceptions exist about Freemasonry.

Speak of Freemasonry to a common man, and you find his mind is filled with many unanswered questions: Is Freemasonry a religion? Is it a political organisation? Isn’t Masonic Lodge a Secret organisation? How can one become a Mason? In this short article, I have tried to explain what Freemasonry is, what are its objectives, what do Masons do, and have tried to deal with some misconceptions that surround Freemasonry.

Freemasonry is a society of men concerned with moral and spiritual values. Its members are taught its precepts by a series of ritual dramas, which follow ancient forms and use stonemasons' customs and tools as allegorical guides. The fundamental ritual consists of a drama of building of King Solomon’s Temple, and the fate of its master architect. Using this allegory, moral lessons are taught. Since the story concerns building of a temple, Masonic rituals are replete with the tools of masons like level, plumb-rule, square, compasses and so on. Some of the Masonic terminology has found its way to the dictionary, and ‘on the level’ and ‘on the square’ are no longer exclusive Masonic clichés.

Every Freemason believes in God, and asserts this belief. His way of worshipping may be different, and it is never discussed in a Masonic Lodge (“ Lodge” is the place where Masons meet). What is important is the belief in God. Freemasonry is a brotherhood, and the basic premise for the brotherhood of men is the fatherhood of God. In order to agree to the fatherhood of God, one must agree that there is one Supreme Being controlling our thoughts and actions. It is this philosophy that makes it a prerequisite that Masons have a firm belief in the Supreme Being.

How a man worships God is purely his private affair. Masonry is not a religion, but it certainly is about God, since it wants you to affirm your belief in the Almighty. Since it does not interfere with the way you worship, it stands firmly for the freedom of religions. On the sacred pedestal in the Lodges in India it is customary to place with reverences the Holy Books of all the faith members subscribe to.

However Masonry is not a substitute for religion. Its essential qualification opens it to men of many religions and it expects them to continue to follow their own faith. It does not allow religion to be discussed at its meetings. Since Masonry is not a religion, it does not offer a pathway to salvation. That is the area of religion. It constantly reminds you of the duty that you owe to the Almighty and to your fellow-men, and expects you to follow the path shown by your religion to attain that. Because religion and politics often drive people apart, they are never discussed in a Masonic Lodge. Masonry also provides an avenue for charity, since Masonic Lodges do a great deal of Charity, it being one of the three tenets of Freemasonry.

While freemasonry expects a member (“brother”) to be active, it also makes it explicitly clear to him that a Mason must never put his duties and responsibilities to Freemasonry ahead of his duties to his family, to his God and to his country.

Freemasonry tries to induct good men into its Order, and strives to make better men out of them, by constantly reminding them of the duty they own to their family, friends, neighbours, to people in distress, and to the Almighty.

There is only one essential qualification for admission into and continuing membership of a Masonic Lodge: Belief in a Supreme Being. Membership is open to men of the age of 21 and above, of any race or religion who can fulfil this essential qualification and are of good repute. The greatest condition, the belief in Supreme Being, is asserted before one is initiated into the Lodge, and before one takes the Masonic Oath. It is required to be asserted much before that, at the time when one applies for the membership of a Lodge. How to become a Freemason? Traditionally, a Mason would not invite a friend to join, but would wait for the friend to ask "of his own free will". If you want to join Freemasonry, you may contact another Freemason, of may get in touch with the Masonic Lodge in your city. Freemasonry in India is firmly established and has been there for 275 years.

For many years Freemasons have followed three great principles: Brotherly Love, Relief and Truth. Every true Freemason will show tolerance and respect for the opinions of others and behave with kindness and understanding to his fellow creatures, pouring his brotherly love over him. By relief Masons mean relief to the community from their sufferings. When a candidate is initiated in the Lodge, he is reminded of this duty he is expected to fulfil to those who need his help. Freemasons are taught to practise charity, and to care, not only for their own, but also for the community as a whole, both by charitable giving, and by voluntary efforts and works as individuals. Moreover, charity need not be a financial charity alone; a Mason is expected to practice charity of thought. Needless to say the charity expected of a Mason is an absolutely voluntary contribution. Freemasonry has seldom publicised its charitable activities, though Masons do a great deal of charity through its institutions spread all over the world. From its earliest days, Freemasonry has been concerned with the care of orphans, the sick and the aged. This work continues today. In addition, large sums are given to national and local charities. Freemasons strive for truth, requiring high moral standards and aiming to achieve them in their own lives. Freemasons believe that these principles represent a way of achieving higher standards in life.

Freemasonry demands from its members a respect for the law of the country in which a man works and lives. Its principles do not in any way conflict with its members' duties as citizens, but should strengthen them in fulfilling their public and private responsibilities.

The use by a Freemason of his membership to promote his own or anyone else's business, professional or personal interests is condemned, and is contrary to the conditions on which he sought admission to Freemasonry. His duty as a citizen must always prevail over any obligation to other Freemasons, and any attempt to shield a Freemason who has acted dishonourably or unlawfully is contrary to this prime duty.

Allegations have often been levelled on Masonry that is a secretive organisation. Let me clarify, it is not a secret society, but is a society with secrets. The secrets of Freemasonry are concerned with its traditional modes of recognition. It is not a secret society, since all members are free to acknowledge their membership and will do so in response to inquiries for respectable reasons. Its constitutions and rules are available to the public. There is no secret about any of its aims and principles. Thousands of books have been written about various aspects of Masonry by both Freemasons and non-Masons, and they are easily accessible to the general public. Search the Internet and you will find thousands of pages giving all the information about different aspects of Freemasonry. People are often invited to visit the Masonic Lodge buildings to see the place where Masons meet. Like many other societies, it does regard some of its internal affairs as private matters for its members. A visit to the United Grand Lodge of England is a treat for the Masons as well as non-Masons, and they welcome you to a guided tour. How can an organisation with so much public presence be called a Secret Organisation?

A Freemason is encouraged to do his duty first to his God (by whatever name He is known) through his faith and religious practice; and then, without detriment to his family and those dependent on him, to his neighbour through charity and service. While none of the ideas Masons follow are exclusive to Freemasonry, and there may be many organisations which have similar objectives, what is however, unique about Freemasonry is the allegorical drama in which the principles are presented to the members, and the constant reminders that the Masonic rituals give to the members to help them remember the duties that people often tend to forget.

A Critical Study of What India Gains from WTO Hong Kong Ministerial Meeting

A Critical Study of What India Gains from WTO Hong Kong Ministerial Meeting

Dr. Tejinder Singh Rawal

Chartered Accountant

tsrawal@tsrawal.com

We are living in a world today where lemonade is made from artificial flavours and furniture polish is made from real lemons.

Alfred Newman

India and other developing countries have secured significant gains in the Hong Kong Ministerial meeting of the World Trade Organisation (WTO). Agreement on duty free and quota free market access for 97 per cent of exports produced by the world's poorest nations and developed countries eliminating all forms of export subsidies in agriculture by 2013 could be considered to be the major achievements of the six-day meeting that concluded on December 15, 2005.

That developing countries were able to forge groupings such as G-20, G-33 and the much larger G-110 has been considered a great achievement at Hong Kong. What is of greater relevance is the fact that these groupings seem to have been held in the face of some intense negotiations and counter proposals from the developed countries. India proved its importance by assuming leadership of the developing world.

However, some members of G-110 and some anti-WTO campaigners have alleged that what could not be achieved in earlier rounds of negotiations by the US and EU , could be pushed through this time by them by winning India and Brazil to their side by way of doling out goodies to them and playing a typical divide and rule policy. India and Brazil played a large role in pressuring other developing countries to go along with what is essentially the US and EU’s agenda.

In this article an attempt is made to critically examine where we stand after the Hong Kong meet.

Down ,Down, WTO! : The meeting was held in the background of protests coming from many quarters. On December 11th, thousands of locals organized by the Hong Kong People’s Alliance marched along Causeway Bay carrying signs like “Migrants are Not For Sale,” “WTO Means Death for Thai Farmers” and “Down, Down, WTO!” In spite of a local media campaign designed to instill fear of foreign anti-WTO protesters, groups like the Indonesian Migrants Workers Union, the Philippines Domestic Helpers General Union, and the Hong Kong Confederation of Trade Unions still managed to recruit thousands of marchers for a colorful and joyous trek.

Right in the middle of WTO Director General Pascal Lamy’s opening speech two days later, dozens of people associated with the global Our World Is Not For Sale network – sporting a giant orange banner that read “No Deal Is Better Than a Bad Deal” in 10 different languages – jumped up and chanted “No More Lies, Lamy!”

Also on the opening day, a group of about 100 Korean fishermen jumped into the freezing Hong Kong bay, bobbing their message that the WTO’s negotiations on fisheries would devastate family fisher-folk in favour of giant-scale corporate fishing.

Water activists from Bolivia, Canada, the Philippines, Uruguay, and others unfurled a giant Water Out of the WTO banner in the main conference lobby. At a press conference launching an international campaign of the same name, leaders of the African Trade Network revealed how private companies in Ghana continued to cut drinking water service during a cholera epidemic that killed hundreds of people in his country, sighting this as the cruel outcome of rampant globalisation.

Star protesters were the Korean farmers and trade unionists. Each day they organized a different colourful, vibrant action, mostly in matching outfits and with militant discipline, such as the day they dressed up in similar long robes, took three steps, bowed and prayed, took three steps, bowed and prayed, over 1,000 times. The image of hundreds of outraged Koreans that had been plastered all over the local media was suddenly transformed into a compelling portrait of grief and reverence for life, beseeching trade bureaucrats not to negotiate away their futures. But after protesting peacefully every day, the Koreans promised they would ratchet things up later in the week. On December 18th, farmers and workers from the People’s Action Against Neoliberalism and Globalization from South Korea pressed up physically against police barricades and managed to get within a few hundred feet of the Ministerial meeting.

Standing off with police for hours just outside the convention centre, a few dozen finally managed to break through and scrambled towards the doors. Suddenly, the mood shifted. Police batons quickly reasserted power over unarmed protesters. Hundreds of people were beaten, and well over a thousand people from all over the world were tear gassed while peacefully standing in an intersection. In the end, more than 1,000 people were arrested, most of them in the dead of night.

The breakthrough: The stories of negotiations and protests reveal certain lessons about the meaning of Hong Kong. United States and European Union are so invested in maintaining the current model of corporate globalization embedded in the WTO, that they were willing to do anything to get a declaration signed and prevent a “failure.”

The WTO has failed to successfully conclude even one round of negotiations since its founding in 1995. It is still in the midst of a round begun in 2001 and named after the city Doha, in Qatar, where it was launched. The “Doha Round” was to have been completed last year, but negotiators acknowledge that they have yet to finish even the general parameters or “modalities.” The WTO’s goal in Hong Kong was to complete the “modalities” – while the protesters wanted the negotiations to collapse, as they did in Cancun in 2003.

In Hong Kong, a declaration was eventually signed. While WTO proponents have admitted that the declaration does not get them much closer to concluding the round, the declaration does mandate a number of harsh concessions from developing countries that will have serious implications for the their future development. And it keeps WTO negotiations hobbling along, at a time when the entire model of corporate globalization is experiencing a serious legitimacy crisis.

The following were agreed to in Hong Kong with respect to agriculture:

1. An end-date of 2013 for European export subsidies in agriculture;

2. A Development Package on key issues such as subsidies on cotton, market access for the Least Developed Countries (LDC’s), or development aid;

3. The US and European Union give huge subsidies to their agricultural sectors, subsidies which gives their products an unfair advantage in the world market and depress global prices, wreaking havoc on farming communities worldwide. Agricultural exporters like Brazil and Argentina have been battling for a reduction in US and European domestic and export subsidies by 2010, so Brazilian and Argentine soy, citrus, sugar, and beef could be sold in the US and EU markets on a level playing field. This greatest-distorting subsidy of all should have been eliminated many years ago, and no price should have been asked for it.

4. The US made what appear to be significant offers on agriculture, and tried to shift the blame onto the Europeans. It seemed like the Ministerial was going to break down over the EU’s lack of willingness to reduce its massive export subsidies by a fixed date. But at the last hour, having extracted as much in return for it as he could, the EU Trade Commissioner Peter Mandelson agreed to a target date of 2013 for export subsidies, leaving the issue of much larger domestic subsidies undecided.

5. The G20, the group representing agriculture-exporting developing countries that opposed the US and EU offer in Cancún, took the offer rather than allow another failed Ministerial to be blamed on them. And then they helped pressure other poor countries to go along with the deal.

6. One should not forget that most developing countries are net food importers, and are more concerned about protecting their base of farmers from subsidized foreign imports than gaining access to other countries’ markets. These countries have been advocating for a designation called Special Products, which would allow them to place certain restrictions on food items based on food security, livelihoods, and rural development.

7. Another key issue for some of the poorest developing countries is cotton. US cotton subsidies to agro-industrial producers so distort the market that millions of farmers in India, Burkina Faso, Mali, Benin, and Chad lose out on billions of income because of the artificially low prices. They have demanded an end to US domestic subsidies by 2006. They got a vague promise that the US would reduce its subsidies “over a shorter period of time than generally applicable.” Nothing more than crumbs, on an issue that costs farmers their livelihoods every day.

8. In the draft declaration, developed countries could decide which type of products to protect in this manner, but developing countries were going to have to allow the WTO to decide it for them, with many restrictions. They finally gained the right to “self-designation” of Special Products at Hong Kong, but this is extremely vague, as only an “appropriate number” of products – to be determined through future negotiations in Geneva – will be allowed for designation.

This may seem like a complex, insignificant detail. But when farmers from South Korea and other countries are killing themselves to protest the WTO, and farmers represent over half the population in most developing countries, it’s no small matter.

What India stands to gain?:

In spite of all the negotiation tactics employed by the US and EU to extract their pound of flesh in respect of the concessions which they were even otherwise obliged to concede; India and the developing nations do stand to gain a lot from the Hong Kong round.

In respect of agriculture, India has gained in that the deal not only ensures that there would be no restraint on the government's ability to provide domestic support for farmers, it also permits the developing nations to protect farmers against unfair competition from imports. The government could raise import duties on farm produce either because of surge in imports or because the import price was too low.

In the longer run the elimination of subsidies to farm produce from the developed world would end the artificialities of world prices. This declaration can be seen as a reversal of the perpetuation of the inequities of global trade.

India has also gained from the fact that the deal calls for intensified discussions to be completed by June this year on geographical indications and biological diversity. While the former will mean that India will be able to prevent others from using labels like Basmati rice or Darjeeling Tea, the latter will enable the government to do more to protect the rights of communities over genetic material and traditional knowledge in areas like ayurveda.

The phasing out of export subsidies on agricultural products by 2013 is claimed to be the biggest single concession wrested from the developed countries. For this to be effective, certain loopholes that allow hidden subsidies in export-credit and food aid will have to be plugged. The phase-out is a small but important step but much needs to be done in the area of domestic support, where only the broad modalities for subsequent negotiations have been arrived at.

Even the deal on cotton, expected to benefit some of the poorer African countries - is subject to an agreement being reached on eliminating all export subsidies by the end of 2006. Under this arrangement, while the U.S. will abolish export subsidies on cotton this year. India and other developing countries can retain higher tariffs to protect their farmers and ensure that food and livelihood concerns are met. Their need for a special safeguard mechanism based on price and volume trigger has been recognized.

In Non-Agriculture Market Access (NAMA), developing countries are not required to cut tariffs to the same extent as the developed countries. While the principle of "less than full reciprocity" has been recognized, there is no agreement on the exact mechanics for such reductions. Only subsequent discussions will bear out whether the developing countries have given away too much under NAMA in return for concessions in agriculture.

The EU finally agreed to do away export subsidies on agricultural products by 2013 thereby contributing to the most visible result. India and Brazil, two large countries deeply involved in agricultural issues, led the discussions on behalf of all developing countries. Again in agriculture trade, developing countries were able to ensure that a mechanism will be created to counter low priced agri-imports that can hurt the interests of their farmers. This major safeguard could not have been institutionalized, but for the widespread support from many other countries.

The smaller developing countries actually showed tremendous resistance and alliance-building efforts during the negotiations. Keep in mind, about 30 developing countries don’t even have the resources to field permanent staff in Geneva, where the WTO negotiations are ongoing – so the challenge to even know how the negotiations will affect your country can be overwhelming. A huge group of 110 countries met in Hong Kong to coordinate positions, in what is probably the largest meeting of developing countries within WTO history.

Conclusion: But a final agreement is a long ways off. And as the credibility of the entire model of corporate globalization continues to erode, based on its failure to promote growth and development, it can still be stopped.

A careful reading of the Hong Kong Ministerial text shows that despite days of hype about development being at the core of the Doha agenda, the relevant paragraph 38 literally is a “cut and paste” of language from the original 1994 WTO agreement! After ten years of negotiations at the WTO, developing countries have given enormous concessions, but in return they have gained a restatement of the WTO’s charter agreement.

This means that developing countries were pressured to trade the privatization of their services and industrial future for a 2013 target date to eliminate export subsidies that should have been abolished long ago, and a promise of future development aid, most of which is actually designed to “aid” countries in restructuring their domestic economies to accommodate the privatization of their services and the selling off of their industrial futures.