Tata Steel to evaluate divestment of Tata Steel UK, in whole or in part

Tata Steel has informed the stock exchanges about the decision taken in their board meeting. In the meeting, the issue discussed was related to the European operations of Tata Steel. The company is struggling due to various global factors, including falling commodity prices.

At this stage, it is important to take a look at when the acquisition was made.

In the period prior to the crisis of 2008-09, the global economy was booming and rising stock prices exhibited the confidence of global investors in the risk assets.

It was around this time, when India was one of the fastest growing economies, there was a lot happening. Indian companies also went on an acquisition spree. One of those multi-billion dollar acquisition was that of Corus by Tata Steel.

Well, I am not going to analyse whether the decision was right or wrong. I am also not going to analyse if the current decision of getting out of the business is right or wrong.

What I want to highlight is something we keep witnessing in the market cycles. It is in the boom times that large-ticket acquisitions become commonplace. We see many announcements of big acquisitions – the amounts are large not just because the companies acquired are large, but also due to the valuations they fetch.

As I have written in my book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” in the chapter on Valuation: “If one happens to buy at the top of the respective market, the time to recovery was quite long.”

In case of the Tatas, they waited for almost a decade before they decided in the board meeting to consider the exit option.

Some things do not change.

#RidingTheRollerCoaster – 113

 

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Common sense

Common sense is not common, after all.

Various episodes in financial markets, especially at the extremes, indicate that common sense is not so common. In fact, it seems quite common that large number of people can lose common sense so regularly.

Read such episodes in “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

#RidingTheRollerCoaster – 112

Market crash or reputation crash?

If you want to see what market booms and busts can do to one’s reputation, Professor Irving Fisher’s statement in October 1929 would be a most appropriate example

Read more in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

#RidingTheRollerCoaster – 111

This is what Aneesh Kothare writes

As George Santayana wrote “Those who cannot remember the past are condemned to repeat it”. This book lucidly illustrates the relevance of historical investor failings in our present/ future investment decisions. Presented in a clear & interesting manner, which holds the attention of experienced as well as new comers to the financial markets.

Aneesh Kothare wrote on Facebook

Who is this book for?

This is what Dr. Uma Shashikant wrote in the foreword to the book: “Whether you are an amateur investor or a veteran watcher of financial markets, you will find this book engaging and useful.”

 

 

 

How fortunes changed

During the Tulipomania in Holland

Those who believed that there couldn’t be such a thing as poverty in Holland found themselves holding tulips that nobody else was ready to buy. Suddenly, like in many more such episodes to follow, the once rich found themselves poor.

#RidingTheRollerCoaster – 110

Understand the risk you are taking

Recently, we came across this news item involving two cricketers’ and their investment in a “assured return” real estate scheme. Yes, we are talking about the news involving the Pathan (Irfan and Yusuf) brothers. (Read the news article here).

We will not get into the specific case of what happened here. However, there is a clear lesson to be learnt. The Pathan brothers and many other cricketers have seen a lot of money through their cricketing skills – thanks to their success at the international stage as well as the IPL. When so much money becomes available, the question is, “Where to invest?” This is the time to exercise caution (Too much money, where to invest? Don’t invite the Pied Piper), but usually we tend to become more aggressive as the amount of money makes us feel comfortable and safe.

Some numbers from the said article give us some wonderful insights. Read the last two paragraphs about the price at which Irfan Pathan was picked up by various IPL franchises.

Year              IPL franchisee                       Price for Irfan Pathan

2011              Delhi Daredevils                                  Rs. 8.74 cr

2014             Sunrisers Hyderabad                          Rs. 2.40 cr

2015             Chennai Super Kings                          Rs. 1.50 cr

2016             Rising Pune Supergiants                   Rs. 1.00 cr

As you can see, this is a case of falling income. Some things happen (though I do not know for sure if that was the case; I am only assuming) in such cases:

  1. You anchor your earnings at the highest level and assume continuation of the same. So if Irfan Pathan might have thought in 2011-12 that his base price would keep going up or at least stay there. Did not happen, at least in this case.
  2. When you see the fall in income or anticipate the same, you want to take some chances to increase the income through some other source. This could be the possible thinking in 2013 when the investment was considered.

Whatever the reason behind the thinking, 12% assured return must have looked a mouthwatering opportunity in 2013, especially considering what all happened in that year. (Read our article as a reminder of what happened in that year:  Here are events that shook world in 2013). This was a very interesting combination – a lot of money at hand and the world looked scarier than ever. We seek guarantees in such cases. However, is the guarantee good enough?

Please understand the investment these brothers made was a credit risk taken on the builders. When someone guarantees some return, we are taking credit risk – we are taking the risk that the guarantees would be honoured. We are assuming that both the ability and the willingness are sound. However, we tend to forget the word “risk” when we hear the word “guarantee”.

Be careful. Understand the risk that you are taking. There is nothing wrong in taking risks, but everything wrong in taking it without understanding it.

#RidingTheRollerCoaster – 109