Someday, my friend Rahul will be a famous investor. I like to say he's the "future Warren Buffett of India."
I trust him so much, a year ago I gave him a substantial chunk of money to manage in Indian investments for me. It's performed extremely well (admittedly emerging markets are up big this year). Rahul is speaking at our upcoming Alliance conference on Monday, so I asked him to share a few words about what's going on right now in India. Here's what he had to say...
My friend Jim's return on capital is 35%...
Yes, that is thirty-five percent on his money in his business... and he doesn't borrow any money.
His business? Power generation. How can you make 35% on a power plant? Jim's plant is here in India...
Specifically, Jim runs a company that operates a "merchant" power plant. A merchant power plant is one which does not have a long-term sale agreement with any customer... It sells power for short durations (usually under a year) to the highest bidder.
With the economy growing at a very rapid rate, India has a chronic power deficit... While long-term power-sale agreements are made at rates between 3.5 cents to 5.5 cents per kilowatt-hour (or unit), merchant power plants are commanding rates up to 8 cents per unit. Peak power is being purchased by consumers in many cases at 20 cents per unit.
I spend most of my time researching companies and talking to businesspeople. I've found that Jim's scenario is not the exception but the norm in many smaller companies in India...
Rahul is right. I visited India a year ago... Rahul took me around to see some of his favorite investment ideas. One was a company called Seshasayee Paper. In short, the company bought a massive paper operation from the Northeastern U.S., took it apart, and moved it to rural India.
In its fiscal year ending in 2007, its return on equity was 34%. In its fiscal year ending in 2008, it had a 28% return on equity. If you annualize its latest quarter, the return on equity is down to 22% – still admirable.
You'd think a business with such a return on equity would trade at a premium to its equity value (essentially its liquidation value). Nope. It trades at a 26% discount.
The shares of this paper company have more than doubled since their October 2008 lows. So you'd think they'd be expensive. Nope. Even after that big run, shares are still only trading at five times trailing earnings.
There is no estimate for this company's future earnings... because there are basically no brokers who follow it. Just Rahul. India has thousands of small companies. Rahul picks through them to find the best opportunities, like Seshasayee.
After my trip, I was impressed with Rahul... and I was impressed with the ability entrepreneurial Indians have to turn hard work into profits. When he says the future is bright for India, I believe him.
By the way, don't think Rahul is bullish on India just because he's Indian...
He came to the U.S. and graduated from an Ivy League school, fully expecting to find his career in the States. But while in the States, he realized the REAL opportunity was back home in India – in businesses like his friend Jim's power plant and Seshasayee Paper.
While Rahul lives in India, he's in the States this week, speaking at our Stansberry Alliance Conference on Monday. We look forward to seeing many of you there.
Answer: As always, let's consult the judge, jury, and executioner of all ideas: the market.
Below, you'll find another comparison chart. This one compares the gains in the high-yield corporate bond fund (black line) to the gains made in the S&P 500 (blue line). As you can see, Porter was right: Bonds gained a bit more than stocks. The nitty-gritty total return numbers are 17.4% for bonds versus 15.6% for stocks.
How can boring bonds register such big returns in such a short time? Bonds are just like any asset... When folks get scared to death, they'll sell a dollar's worth of bonds for 60 cents. The story here is the same as any great contrarian trade: When most folks can't stand the thought of owning something, that's when you buy with both hands.
A Still-Safe 18% Dividend By Dr. Steve SjuggerudThursday, November 5, 2009
The "virtual bank" business is incredibly simple... They borrow money at a low interest rate and invest it at a higher interest rate in an ironclad safe, government-guaranteed investment. They earn the difference – the "spread."
The Best Simple Gold Indicator Around By Dr. Steve SjuggerudWednesday, November 4, 2009
As you can see, the gold indicator kept up with the price of gold in the 1970s... Then when gold went to sleep for 20 years, this indicator kept making money. And now that gold is going again, you're making big money.
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Yesterday morning, I had breakfast with one of the largest private gold bullion dealers in the world. His name is Michael Checkan.
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There just aren't a lot of people out there who still believe in 100% personal responsibility, small government, and minding your own business. I know Doug and his partners believe in these things.
