Poor India, the old stomping grounds of the great Hindu kings, the playground of the Mughal Empire, had a rough year in 2008. India has had such a good run – five years of nearly 9% economic growth and a booming stock market – that it had reason to feel it was Fate’s spoiled darling. But in a long and checkered life, a good many things come unstuck. And so India has.

In 2008, it stock market lost 60% of its value. The rupee lost 20% against the dollar. Foreign investors pulled out in record numbers. India’s best companies struggle. The global economic freeze walloped India hard.

So the question is should you buy India or forget it?

India is a place of staggering contradictions. On the one hand, there is “the Indian miracle.” There are the booming companies and spotless IT campuses. The many millionaires minted daily. Yet there is also awful poverty. The World Bank estimates some 420 million people live below the poverty line. That statistic doesn’t capture the awfulness of it at all.

I’ll never forget the train station in Agra. The mass of poor people lying on the ground in blankets, the beggars and human misery in that place. Yet it has been this way for eons. Mark Twain wrote about the squatters in Following the Equator (1897), about the crowds with their “humble bundles and baskets and small household gear.” Twain would probably still recognize the place.

In India, you’ll see a man in a suit chatting away on a cell phone and on the ground next to him a snake charmer. You’ll see elephants pottering down roads in Rajasthan alongside buses and scooters and hand-pulled carts. You’ll see beautiful buildings right next to absolute squalor.

In Paul Theroux’s new book Ghost Train to the Eastern Star, he retraces a route he took 33 years ago, when he was 33 years old. Part of that trip goes through India. And so Theroux, now 67, is in a good position to judge the changes in India. He is mostly unimpressed. “We drove through the streets of Mumbai, past the slums, the sidewalk sleepers, the lame and the halt. Was the miracle, I wonder, just an illusion?”

Theroux writes about the constant presence of the poor. “Unlike the poor in Europe or America or even China, the poor in India are a constant presence. Where else do people put up with plastic huts on the sidewalk of a main road – not one or two, but an entire subdivision of humpies and pup tents? They inhabit train stations, sleep in doorways, crouch under bridges and railway trestles.”

The biggest slum in all of Asia, Dharavi, lies right in the heart of India’s Manhattan, Bombay. Over some 520 acres live 600,000 people, with one public toilet per 800 people. It is a place of unbelievable filth.

Yet many people in India seem to ignore such slums. I remember sitting in a presentation in which some official from Bangalore showed us slides of new buildings and smooth, functioning roads – a modern city – as he talked up the investment potential of his rapidly changing city. Yet right outside was a completely contrary view: dusty, uneven roads; derelict buildings; and extreme poverty.

Yet there is a lot of good in India. These episodes recount how much more there is to do.

It doesn’t neglect all the progress. And the promise of India, even now, is still enormous.

Consider that even as growth forecasts come down from 9% to 5%, India is still one of the world’s fastest-growing economies. Its people are young and hungry for a better life, unlikely to unbutton the old waistcoat and put their feet up. Half of India’s population is under 25 years old. There are many English speakers. The savings rate is near China’s lofty levels. “The crowning reason for optimism,” opines The Economist “is the savings rate.” Unlike the U.S., India is a nation of savers.

What to Buy in India

And there are many needs and opportunities. India’s road network is the world’s second largest, but in need of further upgrades. Power outages are common in Indian cities, too. India plans to spend nearly $500 billion on infrastructure over the next five years. Power generation alone should increase 14% annually over that span.

There are good companies here available on the cheap. The economic deepfreeze won’t last forever. If you can sit on Indian investments for a few years, my guess is you will be amply rewarded.

If you believe in the long-term growth of India, as I do, then now is not the time to overlook it. The sun dipped behind some clouds in 2008. It won’t always look so dark. Stick with the survivors, build low-cost positions and be patient.

Sincerely,
Chris Mayer

January 21, 2009

Investing in India in 2009 was originally featured in the Penny Sleuth.

Tom Siebel was that entrepreneur, and Siebel Systems was the venture he started back in July 1993. Because of the recent layoffs, Siebel was able to recruit experienced engineers at a discount. He also acquired some cheap office space in Palo Alto and scooped up office equipment at auctions held by failing companies nearby.

Siebel managed to buy up assets at a time when most were selling. He managed to add experienced employees at a severely reduced price, and the payoff was enormous…

After spending less than $1 million on overhead, his product was ready for release in 1995.

After Siebel’s IPO in June 1996, the company became one of the year’s biggest gainers. Siebel quickly become one of the richest people in the country. “It was a great time to start a company,” Siebel told Wired.

With the economy now in complete disarray, many companies may shift their focus to creating and innovating. In addition to the availability of cheap labor, small businesses and startups have an advantage that Siebel didn’t 15 years ago.

With the growing prominence of cloud computing and open source software, new tech companies are able to get off the ground with limited funding. No longer do programmers have to shell out hundreds of thousands of dollars for servers and office space — they can now work from home and simply rent the processing power needed to get the ball rolling and later expand as their business grows.

Take as an example of this new entrepreneurship the story of Steve Demeter. Silicon Alley Insider recently told the story of the programmer who developed the iPhone puzzle game Trism as a side project, but quit his job after making $250,000 in profits after he started selling the game on iTunes for $4.99 this past summer. Demeter’s initial investment in the game’s development was only $5,000. The Trism game is by no means a life-changing innovation, but Demeter’s story does illustrate how much easier it is these days for small companies to get their foot in the door with limited capital.

It’s not just startups however, that look toward innovation during hard times. When the economy is weak, many large companies will look for new sources of revenue. Take as an example some of the famous inventions created during the Great Depression…

December’s Wired magazine notes that in 1935, after being told by DuPont to leave basic research behind in favor of new product development, Wallace Carothers invented nylon. As his competitors were cutting their R&D budgets, IBM’s founder, Thomas Watson, was building a new research center. Douglas Aircraft unveiled the new DC-3 in 1935. Within four years, it was transporting 90% of commercial airline passengers.

In the wake of the current financial crisis, many companies, large and small, are being forced in new directions. If revenue drops, or if funding for an anticipated project falls through, companies will seek out new products and methods in hopes of bolstering their bottom line.

Best Regards,
Greg Guenthner

December 15, 2008

Innovation Investments Pay Dividends During Recessions was originally featured in the Penny Sleuth.

“Yesterday is history. Tomorrow is a mystery. But today is a gift. That is why it is called the present.”— Old saying, recently revived in Kung Fu Panda

I watched Kung Fu Panda last weekend as part of my son’s 10-year birthday party. There were some good quotes in it, including the one above. Another one I liked, also from the wise old turtle Master Oogway: “Your mind is like water. When it’s agitated you can barely see clearly. But once you become quiet and are in peace, then everything becomes clear…”

Certainly, the market’s recent dramatic swings have scrambled the heads of many investors. Mostly, it’s been a nasty slide down — a history-making drop. And that will make a lot of people give up. (From the November 24 issue of Wall Street Journal, “‘I just don’t have the stomach for it anymore,’ says [semiretired computer programmer Eugene] Hibbs, 66 years old… Now, Mr. Hibbs is sitting on Treasury bills.”) But now is the time to really pay attention. It’s been a history-making drop, and it may also seed some equally breathtaking opportunities.

Last week’s rally notwithstanding, this bear market has few precedents. Really, you have to look back to the 1930s. According to Barron’s, at the low on November 20, the S&P 500 has given back a decade worth of gains. Even after surge on Friday, November 21, 2008 would still be the worst year for stocks since 1931, when they dropped 53%. In the whole of the 20th century, no decline has exceeded 50%, save for the 1929-32 bear market. The S&P 500 is off 45% from its October 2007 high — that’s after last week’s rally.

Whether our bear market looks ultimately more like 1929-32 or 1937-38 is an open question, of course. The former went on to post a total loss of 86% top to bottom. The latter, though, rallied and made up 50% of the losses in the next six months. Another hopeful message: The average time to recoup a bear market loss has been 22 months, excluding the 1929-32 collapse. As with the big crash, so with the rebound — it will come when people least expect it.

Resource stocks look like they’ve already had their 1929-32 style crash in just the last few months. Many resource names are already down 80% or worse from top to bottom. It’s incredibly ugly out there. Even companies that looked like they were in decent financial shape only a few months are now scrambling to raise liquidity and stave off a financial crisis.

A strong balance sheet means that financially, you are in control of your own destiny. It means you don’t need to raise money, nor do you have a looming debt coming due soon. It means you’re going to be a survivor.

It’s going to come down to the survivors. The upside could be spectacular on the other side for them.

Regards,
Chris Mayer
December 1, 2008

Bear Market 2008: What the Crashes of the 1930s Reveal about the Present was originally featured in the Penny Sleuth.