To FY13, 14......& beyond

FY 2013 has been a remarkable year in stock markets, like every other year!!


There were the usual ups and downs, the usual spectacular rise and equally dramatic fall.

For me though the standout part was that i felt Mr. Market was exceptionally right this time.

We know by definition stocks mean "A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings"  and if one observes that stocks that have lost most of their value actually had issues on their earnings or assets.

This makes me realise that Mr.Market is getting increasingly good in his work and  we will need to think of newer ways to beat him ( Can i see the exotic options, intra-intra day traders clapping their hands? ).

Sorry to spoil the party guys, but we don’t need newer ways. What we do need to do is re-learn the old ways (I know its boring, but Buffet,Munger, Graham still work) and more importantly practice what we learn.

So here is what I am trying re-learn and practice for next few years

1) Quoting Munger, " All i want to know is where I'm going to die so I'll never go there" and here are the places i don't want to go

• Companies with high Debt/Equity
• Consistent -ve cash flow from operations
• Continuous equity dilution, except in case of Banks and NBFC's
• Companies having high number of pledged shares

2) All business are either cyclical or non- cyclical- Take your pick!!

I learnt the lesson hard way, when I convinced myself few cyclical businesses as growth or value buys.

Therefore, going forward the first question to hence ask would be what determines the demand of the product which company makes. Hopefully that will give the clue to whether the business is cyclical or not.


3) All business either posses a competitive advantage or they don't

Its the hard truth of our capitalist world. Most companies function because their functioning ensures that value chain keeps moving.  I have often confused this with competitive advantage to my regret and loss.

There is no perfect tool to evaluate this but endeavour would be to use Porter's 5 forces model, Moats suggested by Pat Dorsey etc to try and atleast give a shot at this.

4) All stocks which crash/our cheap don't automatically  become great investments

There is a famous saying in poker, that if in fist 30 minutes you don't know who the sucker is then you are the sucker.

Similarly, when a stock falls dramatically and you buy it just because it has fallen so sharply,  pat yourself because you have become the sucker.

I patted myself quite a few times last year and don't intend to ever get myself patted in that manner.

That's it for now. Here's wishing all of you a superlative FY14.

Regards,
Saurabh

Sporty Investment Insights

I am a huge sports fan, courtesy my school days and watch almost every sport ( much to the annoyance of most people around me).

To me sports brings out the raw human traits and those excel in sports are ones who are able to master these traits. Also, it is the best way to learn taking losses on the chin and looking ahead.

Buffet in his famous baseball example and Howard Marks in his Tennis example have spoke about the correlation between sports and investing.

In the paras below, I try to capture the essence of my favorite teams/players and try to see how they can be metaphors to investing.

Football: FC Barcelona: There philosophy is simple, if opponent doesn't have the ball they can't score. So they keep the possession ( usually in high 60's) and wait and wait for the right opportunity to attack. Similarly, when they lose the ball they work double hard to get the ball back in their possession

Similar to Barca style, one needs to wait patiently for the right moment to attack the market quickly and decisively. In case we make an error in investing, we need to rectify it at double speed to regain control of our investing field.

Tennis: Roger Federer: Arguably the greatest player in Tennis ( arguably, since i dont want to start a debate on tennis here :P ).  He has a complete game with great serve, good ground strokes and one of the best net players. In my limited knowledge he is the complete player.

Drawing an analogy here would mean that if one really wants to succeed in investing then we need to improve our all round investing game. If we are good in stock picking, but poor in capital allocation then success in long term will elude us.

Cricket: Rahul Dravid & Steve  Waugh: Both players though have had a fantastic career and are legends of the game. There determination, hunger for runs, and ability to stand tall when things were not working out both for team or for them individuality is exemplary.Both these batsmen built there games on strong defense and had ability to leave a lot of balls.

We can inculcate the same concept that in investing it is not necessary to chase every stock idea. Another thing to learn from them was their focus on process of batting and their ability to cut noise surrounding them. Similarly our focus should be on the process of investing (using checklists, limiting number of stocks etc)

MotoGP: Valentino Rossi: In his case, unarguably Rossi is the best Moto GP racer of all time. His ability to win races in worst of circumstances is unparalleled. While he was a very agreesive rider, his ability to win came from his ability to master braking or deacceleration. In high speed races where almost all bikes are equally fast the ability to slow at a lower rate than other riders ensures your victory.

In investing Rossi teaches us to invert. He won most races not only because he was faster, but also because he deaccelerated at a rate slower than other riders. Similarly, when we invest it is imperative to look at why and in what circumstances will your stock hypothesis not stand true and take a call based on that.

Apart from the above a common trait in these teams/sportsperson is that all of them are extremely humble and realize that there is life beyond sports.
I think Seth Klarman had commented that any buy/sell decision in stock market is by de-facto an arrogant decision since you are telling the person on other side of trade that he is wrong.

Thus, being humble and realizing that investing is just a part of life and not the whole life is critical to we being happy and doing well.

In the end wishing all of you a to have a Sporty and fantastic New Year. 

cheers,

PS- My new year resolution for last quite a few years is too start playing a sport, but no success there :(. Pointers to improve this will be much appreciated.

Weekend Learning

Last weekend I had a chance to meet some fantastic investors (Gaurav , Ayush , Neeraj, Ashish, Puneet, Suhail) and also got a mail from a friend of friend who attended Valuex (An investor conference in Mumbai held last Saturday). Basis these interactions i have tried to capture the learning i had and highlighted one's which I personally find of key importance

Investment Philosophy:

1. In India Statistical Bargains remain cheap for a very long time, due to limited catalysts. These catalysts such as form of investor activism, minority stockholders doing some corporate action etc are usually inactive. Statistical Bargains originated in US, where there are means to induce these catalysts. Also, lack of growth in US companies has led to investments moving to these ideas.
2. India, we all agree is a growing economy, and hence the best bets are the ones which have a growth component attached. Buy stocks at reasonable valuation( Margin of Safety) which show signs of growth and then ride the growth. Also, in such stocks be mentally prepared for horizon of 3-5 years and also ups and downs in between. If one is able to ride the growth they can be the big winners.
3. Their are 3 segments to broadly classify businesses B2C , B2B & B2G (Business to Government)  and clearly B2G is most frowned upon
4. People are scared of investing in illiquid stocks because they are scared of working hard --> Stocks are usually illiquid because they have not yet been discovered. Infosys used to trade less than 1,000 shares / day in 1994.
5. In an Indian context Price is what you pay, Value is what the promoter allows you to make. Cash, real estate, assets should be taken with a grain of salt as most likely a promoter will not allow you to realize its value.

Investment Methodology:

1. Promoter integrity is the top thing too look. Indian promoters find ways to take out money and hence it is key to be associated with right kind of people. Meeting distributors, creditors, end-users is one way to see how involved the management is in the business. Attending AGM's is another way to get a feeler on the company and also to understand the outlook and future plans of promoters.
2. RoE is the holy grail. If RoE is less than cost of capital creating sustainable wealth is almost impossible. 
3. Also evaluate company on asset turnover and margins. These are the 2 levers which company has to increase RoE
4. Double Counting creates bubbles: During periods of boom margins are the highest to which we apply high valuation multiples. Margins are mean reverting, thereby in your analysis it is important to adjust for this factor
5. Don't mix your investment themes. Example, Special Situations with bargains or with long term ideas.
6. Even if stock is up 100% from your purchase,but if you find growth story intact and valuations cheap keep adding.  Its all about buying well, rather than selling well.
7. Have an exclusion list. If any company falls in that sector/ concept don't waste time. For example, most of us agreed that B2G is an example of ideas to avoid.
8. Dumbest thing to do is forecast. Be comfortable with the idea that you don't know the future. It is very difficult to comes to term with this.
9. In bear markets don't use relative valuations but use your judgement on absolute valuations. In bull-markets use relative valuations to make selling decisions.

Psychological Biases and other thoughts

1. Use Anchoring bias as a tool to take decisions. If you find a stock good, buy it then you will be anchored to that price rather than waiting for price to come down.
2. Assuming that all stocks which you have will be a 10 bagger is living in fool's paradise, but if your process is right you will get once in a while a large bagger. 
3. Make sure your investment process does not change in good or bad periods. Good performance makes one complacent while bad performance makes one defensive
4. Differentiate between Hold-to-Maturity and Revert to Mean Ideas in your portfolio:

   Hold-To-Maturity: Great businesses which are compounding machines that have been bought at reasonable valuations. These are long-term investment ideas. 

   
   

   Revert to Mean: OK businesses at beaten down valuations because of poor performance where performance can bounce back in the foreseeable future. 

5. Markets are not efficient but they reflect current investor psychology. 
6. How do you determine in an investment decision whether you suffer from overconfidence or are just an independent thinker. Every business has certain milestones, when those milestones are not being hit by the business you must reconsider your investment 
7. Use simple scenario analysis to avoid investment pitfalls. For e.g. to Justify 2000 valuations for IT they would have to go at 75%-100% in the foreseeable future. If they did this for over 10 years, they would have become 40% of India's GDP. Even if they did manage to do this the Rs would have to go down to Rs 25 whereby margins for these companies were not sustainable. 
8. Read, read and read more. Few books recommended
1. Finding the next Starbucks
2. The Warren Buffet Way
3. Commentary of international value funds

And finally, we did discuss some stock ideas like Suprajit, GRP,Atul Auto, Magma Fincorp, Ashiana Housing, Ashok leyland, Clariant, BASF etc.

Hopefully we all will benefit from these thoughts, and incorporate the same while evaluating an idea.

cheers,

saurabh

PS- Don't consider all of us bores. We did discuss things beyond stocks and investing :)