The Last Attendant

Happy New Year

2019-01-06T03:16:00.002-08:00

I am writing this with immense gratitude to all the followers of Value Investing India, who kept on questioning me about the different aspects of investing and help me improve. I wish you a happy new year and my apologies that I missed it by a week.

The year 2018 was an eventful year where I did some big investments in India and few in Australia and USA. The portfolio took a huge leap especially in the private equity vertical, while businesses and stocks remain slow movers. All in all, I would call it a year of "Big Learnings", where I was being admonished, taught and made learn many important - life and investing lessons. All in all the year improved my pilot checklist, which I always refer before taking off. I have been getting 34% plus returns since the GFC, that's when I actively started investing and the checklist has helped me, even when I am copying someone. You should have one for yourself.

The followers(Value Hackers) understand how important is wealth accumulation and that's the reason they are following the page. So I dedicate this post to the core principles, which are like the laws of nature (refer Magnetism, Newtons Law etc) and applying which, have given any individual investors, better results than others in the same quartile.

Without wasting any time here is the list :

1) Speculation is dangerous

First of all, your thinking that you can bet the market consistently with favourable odds and positive results is a lie. It may be easy enough to digest a ream of statistics and figures about past and present market conditions, but your research or technical research per se may have no predictive value for future and can burn you down. You might be lucky for some time, but sooner or later your performance will be average or below average because you cannot possibly know every important fact about the market movements especially when there are better algorithms working overtime to beat you in the game. It's a dangerous game, avoid it.

"It's better to be a little Warren Buffet than a failed Soros."

2) It's more than just mere numbers

I am good with numbers and off late have started churning numbers in excel a lot as well. Good very good, but here is the catch - Numbers do not tell the complete picture. A company might be very good on papers and has performed well in the past year and the current year, but deep down it's meeting with trouble in near future for e.g due to technology disruption or user behaviour change. Understand the long-term advantages of any business and how customer behaviour and investing behaviour is changing it.

3) Focus on Value and take advantage of the panic

In 2008 when markets were tumbling, I started investing in companies with huge intrinsic value in India e.g. Jockey India, Piramal Enterprise, Indraprastha Gas, Rajesh Exports, United Breweries and few troubled ones like Tech Mahindra and ICICI Bank ( They said it will go broke). I was focusing on how much it's worth (Sum of parts), it's a competitive advantage, what would generate profit in the future. It was a no-brainer and I was ready to hold the stock for more than10 years. Look for companies retained earnings, Price/ Earnings, Book Value, compare these with peers. Check if it's eating itself, make your self familiar with the manager by reading management discussions, reading conference calls answers.
Buffet talks about moat while Elon Musk disregards the value of moat stating that constant technological evolution creates a big moat. Two different perspectives but true. Amazon will fit Buffets definition while Tesla will fit Musk definition, although I will follow Buffets definition, due to a lot of uncertainty in technology.

4) Overtime Stocks will beat many asset class like bonds, real estate, bullion

Although this is not always true (it depends on the time period that is being studied) but it's generally true. Why is that? Well, that's because of retained earnings and dividends. When times are good, companies can boost their dividend payments and investors will bid up share prices, they can also grow in net value and expand (with less debt) and investors will flock to these companies stocks. That does not happen with other asset classes. Your real estate investment cannot expand at the same pace, these companies can and investors are rewarded.

5) Probability (Uncertainty) is not the same as certainty

You may have some excellent analysts' estimates on earning predictions or the latest technical charts on various cycles. That kind of data abounds in the information economy but it won't protect you from the market uncertainty. When there is uncertainty there is fear and doubt about the future economic conditions. If you cannot quantify uncertainty you are preparing for disaster. Antidote would be to balance your portfolio with a higher per cent allocation of certainty and a lesser percentage allocation for uncertainty. Investing passively into an index fund, or investing in an average yield corporate bond would be ideal (Certainty) .

6) Be contrarian but with a better sense of direction

Being a contrarian pays off but you should have a better sense of direction. Don't try to mine the market, but look for opportunities to buy companies/assets at a discount. Most of the time good deals will come to you during the panic. If you can go against the grain, you can boost your long-term total returns.

7) Invest for long-term and use cost averaging to your benefit
Do not forget rule number 3 and buy your stocks on dips

8) Make informed connections and grow your circle of trust

This is one the most important one. Using the internet you can grow your circle of trust slowly and start sharing ideas. People call these mastermind groups and you can learn more about the power of the mastermind from Napolean Hill. Still, use your checklist before taking off. Mastermind also give you the confidence to allocate money.

9) Keep learning
Know your limitation and learn new skills based on that. You might be passionate about cricket but if you know you that you cannot be Virat Kohli, there is no point putting constant effort. Understand your circle of competence and learn a new skill in that area.

Enjoy your win, the objective is to ensure prosperity but not to be obsessed with it. Remember to give back 1% of your win.

More addition to Psychology of Human Misjudgement

2012-09-10T23:22:00.000-07:00

Here I'm collating few of the issues mentioned in Charlie Munger's talk on Psychology of Human Misjudgement . I have tried to present few of them for example and they are seriously from educational purposes . References for the text are Seeking Wisdom and Poor Charlie's Almanack

Status quo where we take one stand and stick to it , just like if we are presented with two choices of action and inaction and most of the time its driven by our social status , where we think what people are going to think if I do this or that . So we try to avoid the most obvious scenario by sticking to inaction . As Warren Buffet took the example of Noah's ark -
It took Noah 20 years to build an ark. And people said he was being silly because the skies were beautiful. And of course, the whole time, he looked stupid -until it started raining. You can spend a long time building an ark while everybody else is out there enjoying the sun.

Thomas Henry Huxley said: "Perhaps the most valuable result of all education is the ability to make yourself do the thing you have to do when it ought to be done whether you like it or not. It is the first lesson that ought to be learned and however early a person's training begins, it is probably the last lesson a person learns thoroughly

Envy:-
Aristotle said: "Envy is pain at the good fortune of others." We evaluate our own situation by comparing what we have with what others have. Aristotle continues: "We envy those who are near us in time, place, age or reputation." It is people similar to us we envy most. Financial historian Charles P. Kindleberger says in Manias, Panics, and Crashes: "There is nothing so disturbing to one's well-being and judgment as to see a friend get rich." For example, studies show that how happy we are is partly determined by where we stand in relation to similar others. The 19th Century German philosopher Arthur Schopenhauer said: ''As Hobbes observes, all mental pleasure consists in being able to compare oneselfwith others to one's own advantage." We are jealous when we perceive a threat to a valued relationship. Studies show that jealousy is ranked among the top three motives for murder

Bertrand Russell said that envy is one of the fundamental causes of human suffering. The 18th Century French philosopher and mathematician Marquis de Condorcet said: "Enjoy your own life without comparing it with that of another." As long as you achieve your goals, it shouldn't matter if someone else does better. • Studies show that it matters whether we believe that others deserve their success. Aristotle said: "The best way to avoid envy is to deserve the success you get." • On the other hand, the 18th Century Dutch physician Bernard de Mandeville said that vices such as greed, envy, and vanity all lead to public benefits by encouraging enterprise.

Contrast Comparison:-
A hotel has been renting rooms for $100 a night. The day after a hurricane, the hotel raises its prices to $150. Studies show that we consider this unfair. We determine what is fair or not in reference to what we have been used to. This means that policies that have habit-forming consequences may be hard to reverse if they are seen as a loss.

In one experiment, a group of people was asked to choose between $6 and an elegant pen. Most choose the cash. Another group of people was asked to choose between $6, the elegant pen, or an inferior pen. Most choose the elegant pen. By adding an inferior option, another option seemed more attractive. Mary is looking at houses. The real estate broker knows that the house he is trying to sell Mary is in poor shape and a bad area. He starts by showing Mary bad properties in an ugly neighborhood. Afterwards, he takes her to the house he wanted to sell all along. Suddenly this house and the area seem great in comparison to the other houses she saw.

Anchoring :-

A hotel has been renting rooms for $100 a night. The day after a hurricane, the hotel raises its prices to $150. Studies show that we consider this unfair. We determine what is fair or not in reference to what we have been used to. This means that policies that have habit-forming consequences may be hard to reverse if they are seen as a loss.

The Whistle - from Benjamin Franklin's Biography

2012-04-30T23:33:00.001-07:00

II. The Whistle

Benjamin Franklin (1706–1790)

To Madame Brillon

Click Image to buy book from amazon.com

Reference : Autobiography of Benjamin Franklin

I RECEIVED my dear friend’s two letters, one for Wednesday and one for Saturday. This is again Wednesday. I do not deserve one for to-day, because I have not answered the former. But, indolent as I am, and averse to writing, the fear of having no more of your pleasing epistles, if I do not contribute to the correspondence, obliges me to take up my pen; and as Mr. B. has kindly sent me word that he sets out to-morrow to see you, instead of spending this Wednesday evening, as I have done its namesakes, in your delightful company, I sit down to spend it in thinking of you, in writing to you, and in reading over and over again your letters.

I am charmed with your description of Paradise, and with your plan of living there; and I approve much of your conclusion, that, in the meantime, we should draw all the good we can from this world. In my opinion we might all draw more good from it than we do, and suffer less evil, if we would take care not to give too much for whistles. For to me it seems that most of the unhappy people we meet with are become so by neglect of that caution.

You ask what I mean? You love stories, and will excuse my telling one of myself.

When I was a child of seven years old, my friends, on a holiday, filled my pocket with coppers. I went directly to a shop where they sold toys for children; and being charmed with the sound of a whistle, that I met by the way in the hands of another boy, I voluntarily offered and gave all my money for one. I then came home, and went whistling all over the house, much pleased with my whistle, but disturbing all the family. My brothers, and sisters, and cousins, understanding the bargain I had made, told me I had given four times as much for it as it was worth; put me in mind what good things I might have bought with the rest of the money; and laughed at me so much for my folly, that I cried with vexation; and the reflection gave me more chagrin than the whistle gave me pleasure.

This, however, was afterwards of use to me, the impression continuing on my mind; so that often, when I was tempted to buy some unnecessary thing, I said to myself, Don’t give too much for the whistle; and I saved my money.

As I grew up, came into the world, and observed the actions of men, I thought I met with many, very many, who gave too much for the whistle.

When I saw one too ambitious of court favor, sacrificing his time in attendance on levees, his repose, his liberty, his virtue, and perhaps his friends, to attain it, I have said to myself, This man gives too much for his whistle.

When I saw another fond of popularity, constantly employing himself in political bustles, neglecting his own affairs, and ruining them by that neglect, He pays, indeed, said I, too much for his whistle.

If I knew a miser, who gave up every kind of comfortable living, all the pleasure of doing good to others, all the esteem of his fellow-citizens, and the joys of benevolent friendship, for the sake of accumulating wealth, Poor man, said I, you pay too much for your whistle.

When I met with a man of pleasure, sacrificing every laudable improvement of the mind, or of his fortune, to mere corporeal sensations, and ruining his health in their pursuit, Mistaken man,said I, you are providing pain for yourself, instead of pleasure; you give too much for your whistle.

If I see one fond of appearance, or fine clothes, fine houses, fine furniture, fine equipages, all above his fortune, for which he contracts debts, and ends his career in a prison, Alas! say I, he has paid dear, very dear, for his whistle.

When I see a beautiful sweet-tempered girl married to an ill-natured brute of a husband,What a pity, say I, that she should pay so much for a whistle!

In short, I conceive that great part of the miseries of mankind are brought upon them by the false estimates they have made of the value of things, and by their giving too much for their whistles.

Yet I ought to have charity for these unhappy people, when I consider that, with all this wisdom of which I am boasting, there are certain things in the world so tempting, for example, the apples of King John, which happily are not to be bought; for if they were put to sale by auction, I might very easily be led to ruin myself in the purchase, and find that I had once more given too much for the whistle.

Adieu, my dear friend, and believe me ever yours very sincerely and with unalterable affection.

The Gita: Chapter 3

2012-03-31T11:21:00.001-07:00

The Gita: Chapter 3: "yajnarthat karmano ’nyatra
loko ’yam karma-bandhanah
tad-artham karma kaunteya
mukta-sangah samacara

"Work done as a sacrifice for Vishnu has to be performed, otherwise work causes bondage in this material world. Therefore, O son of Kunti, perform your prescribed duties for His satisfaction, and in that way you will always remain free from bondage.""

'via Blog this'

Munger on deserved trust

2011-10-01T02:40:00.000-07:00

Charlie Munger attributes Berkshire Hathaway’s enormous success to this idea. “When you get a seamless web of deserved trust,” he once said, “you get enormous efficiencies. It’s what the Japanese did to beat our brains out in manufacturing: suppliers, employers, the purchasing company, management – all created a seamless web of deserved trust. It’s the same with good football teams. We are trying to live in a seamless web of deserved trust. It has worked for us, and it is the ideal way to live. How can Berkshire Hathaway work with only 15 people at headquarters? Nobody can operate this way. But we do.”

Ajay Piramal's view

2011-10-01T02:25:00.000-07:00

Never look for a perfect asset. If you are going to acquire a perfect asset then the whole world is going to bid for it and its a very easy calculation to understand value and then you have to keep outbidding the next bidder. So there has to be some chink.That asymmetry which you can recognize that is there today — an inefficiency perhaps, or something wrong which you can correct — that is where the value is created.

Buffet on Personal Finance

2011-08-21T00:30:00.000-07:00

A small but effective for youngsters:--

Article from Outlook Profit August 2011

2011-08-10T04:55:00.001-07:00

Investing in the Unknown and Unknowable

2011-04-04T04:09:00.000-07:00

http://www.hks.harvard.edu/fs/rzeckhau/InvestinginUnknownandUnknowable.pdf

Fundamental Analysis | Value Investing | Best Stock

2010-11-09T01:11:00.000-08:00

Fundamental Analysis | Value Investing | Best Stock

Much like value line

Few words from Chetan Sehgal

2010-09-26T21:26:00.000-07:00

How do you manage Temple- ton India Growth Fund (TIGF)?

TIGF is unique because it is one of the first emerging market funds that raise money from the local investors for the local in- vestors. We don't have too many such schemes. Other than this, all Templeton brand of schemes are managed in the same way.
We search for value. To define value, we do a four-step analysis.
First, we check whether a partic- ular stock is cheap compared with the market. We also check how cheap it is vis-à-vis the in- dustry as well as its own histori- cal prices. We also check how cheap is the stock based on its own absolute price. Once we run these tests, we do a fundamental analysis. That TIGF invests only in India is a constraint, but we manage it well. A large chunk of our investments are in compa- nies with a market capitalization in excess of $300 million.

TIGF predominantly invests in large-cap scrips. But wouldn't you find more value in small- and mid-caps scrips?

Yes, small- and mid-cap com- panies offer value too. TGIF's mandate is to veer towards large-sized companies--90-95% portfolio is invested in large-cap scrips. Also, it's tough to differ- entiate it from peers when so many analysts and fund manag- ers track the same set of stocks (large-caps). But we have managed to stay ahead in the large- cap fund race. Our portfolio turnover is probably among the lowest in the industry.

How is value philosophy dif- ferent from a contrarian ap- proach to picking stocks?

There was a philosophy called “Dogs of the Dow“, where you start buying the worst-perform- ing stocks from the bottom on a quant screen and hopefully with mean reversion, you do well at the end of the period. When stock prices are low, contrarian investors may buy such stocks.

The value investing concept is fundamentally different. In- dex funds will argue that there can't be a better indicator of the value of a stock than the present price. A value fund will attempt to differentiate value from this price. But the value can be based on the current differen- tial between the price and the perception of the current value.
We try and base our analysis on our estimate of five-year for- ward fundamentals. Then we look at the price taking at a dis- count to that future value. This is our definition of value.

Index providers classify value and growth differently. Broadly, if a stock has low price-to-earn- ings (P-E) or price-to-book (PB) value compared with the index, it is classified as value or else growth. High current PB value in growth stocks implies that growth expectations from these stocks are higher.

Usually well-managed value funds outperform growth funds when markets fall. In volatile markets, why do value funds pick such stocks?

One set of investment phi- losophy is to bet on companies that are doing well in the belief that since they have been suc- cessful, they would continue to do so. In rising markets, some investors use this philosophy and buy stocks that are per- forming well (some of these are real long-term winners).
When markets fall or growth disappoints, these stocks fall the most as they are owned by a majority of investors.

The second set, or value inves- tors, believe that most business- es tend to go in cycles and there is a period of expansion of busi- ness, heightened capacity ex- pansion, followed by increased competition, drop in margins and an unfavourable environ- ment. A majority of investors may blindly shun beaten down or ignored stocks as they don't expect growth from them and this exacerbates the decline.
Those invested in beaten-down stocks of companies with good medium- to long-term potential tend to do relatively well than those who had invested in growth stocks, when the markets turn as they are under-owned. Why haven't value funds picked up in India? Why ha- ven't we seen other fund hous- es focusing on value strategy?

There are some important things for a value strategy. If a stock price is different from its intrinsic value, there is an up- side in the stock you buy. The only thing that limits this up- side is corporate governance.
For example, if a company has a land asset and the value of the land is far more than the market capitalization of the stock of this company, then there is value. But if somebody surreptitiously takes away this asset in one way or another, the investment case is lost.

The point is unless corporate governance norms are fully in force, value investors are at the mercy of company manage- ments. Because if I know that there is value, I am sure the pro- moter also knows that there is a value. So it becomes a bit of an issue as to how does one enforce corporate governance. Unlike in the West, where shareholders are fragmented and investors can actually influence the way companies run (company sell- outs, mergers and so on), that does not happen in India. Here, the promoters of companies take key decisions. For value invest- ing to truly succeed, corporate governance should be enforced.

BBC NEWS Business Charlie Munger Boom and Bust Is Normal

2010-01-17T11:22:00.000-08:00

I'm Back after a long time...

2009-12-28T08:52:00.000-08:00

Well well well , finally I found time to write.. yes after a long time, and why not, I was getting married , so I ought to take a break. Ceremony was fine and everything went fine. But that's true, a lot has happened over the past few months. We will see how keep and hold strategy is holding my portfolio strong (this includes profits made in all the special situations with which I was comfortable). We will also see how Our Gurus investing trend is changing and which sector they are concentrating right now.
We will also see how I made investment in Bharti Airtel although I was not sure about business and how it will pan out in the future.
First lets start with the markets ,which are rallying like there is no ending.With a PE of 23.07 and earnings showing signs of improvement, although for few companies in nifty , this is quit a handsome proposition(sorry for being sarcastic about the circumstances),but the best opportunities comes under all these uncertainties . Two of which I capitalize on include IL&FS buying Maytas Infra and Bharti beaten up due to price war.I cannot recommend about Bharti but I'm certain about Maytas , yes even at current price levels.Although it's at 161 but it has immense potential , sector is battered , and you should never under estimate the potential of IL&FS management in handling Infra projects . Seriously speaking I was never thinking about Maytas Infra but when IL&FS made a buy offer it came into limelite,prices shot up and prices became very high , but instead of repenting the decision I entered into it. At that time I was still learning the ways how Infra business works (More on it in my next post where I'll try to plug the pieces), what are boo and bot projects, special purpose vehicles etc. and what is the profit proposition in these two.
My second big investment was Bharti Airtel which I'm not sure why I made although I kept myself away from any technology stock since last two years(Sorry to Mr.Buffet).

Now let's see about Guru's Investing trend chart.

Warren Buffet sector / industry trend :- http://www.gurufocus.com/gurutrac/guru_trend_industry.php?guru=7

Ending up now as I've to do something really important , yes you are right I'm going for a good nice 8 hour sleep..you should also.....bye for now.

Thanks,

Ashutosh

Telecome Tussle

2009-10-07T03:19:00.000-07:00

So much fuss about a simple issue over call charges.!!!
Well we all are aware of the so many things happening in telecom space. First Bharti lost MTN deal and then Tata Docomo came up with one super cheap scheme and then TRAI trying to make a pay per second a mandatory stuff in every service provider's portfolio. But is there any scope for this price war in already ultra low tariff scenario? If we go with Mr. Mittal then there is no such scope left because according to him the deal should have some economic viability and also it should not be a shocker to the customer. I might not know the nitty-gritties of the telecom sector but I know that telecom has become an essential commodity in our lives and this part cannot be ruled out for decades to come, may be the format of services change but not the need for the service.
If I call this a commoditization of telecom sector then I think I'm not wrong (there may be chances that I'm wrong though). And that's also true that in a commodity type business where profit margins are low then scale play its role. And scale can only be built if SP's can provided better customer support system and also better options for customers.
Our fund had invested on Bharti Airtel in the hey days of October 2008 and it’s constitute 9% of our portfolio. Although it was way beyond Buffet style of investing, but being a technical guy I can understand the difference in the services of different SP's and also the price/value scenario was in our favor at that time. I put that as a bond equity kind of investment where I was suppose to get 25% annual return. My time line if infinite till Airtel is giving me an earning with a coupon of around 5-8% . The whole idea was on the basis that Bharti is still the market leader and it’s like a shark ready to eat others. One good strategy about Airtel is Grow consolidate and then back to the Growth cycle and the spiral continues . Check this out:--

1) Bharti Airtel has 24.3% customer market share and 33.8% revenue market share.
2) Vodafone India has 18.8% customer market share and 20.7% revenue market share.
3) Idea Cellular has 11.2% subscribers market share and 12.1% revenue market share
4) BSNL has subscriber share of 12.7% and mere 10.2% of revenue share
5) Reliance Communications is the worst performer with 18.9% customer market share and pathetic 11.5% revenue market share.

Now if you prefer scuttle butt approach then ask any airtel mobil/broadband customer/employee and customers/employees of other SP’s.All have one fear factor and that is “AIRTEL”. This is one part and enough for an auspicious start.Moreover PM of Bharti is greater than anyother SP , the same is true with average ROE. Also Bharti is sitting on a solid cash base and has stable cash flow.

Second, It’s kind of physiological that once you subscribe to a service provider you are least likely to change that until unless service deteriorates which is not with airtel, because my family members and colleagues are satisfied with the hassle free service, although there may be many dissatisfied customers also, satisfaction outnumbers dissatisfaction.

Mr. Sanjay Kapoor President, Mobile Services at Bharti Airtel said,
We will not have a knee jerk reaction. No free minutes models are sustainable. Reliance will eventually withdraw after sometime. Airtel will remain competitive with excellent QoS. Since Reliance GSM launch in the past few weeks, we have not seen any impact nor there is any such caution to be noticed.

And I think he is right , because in the only economic viable model will survive and these short term subscriber oriented schemes will be outdated by better services and support.

Warren Buffet said:-
“If you don’t know jewelry, know the jeweler.”
And I think Mr. Mittal and Mr. Kohli are better jewelers in Telecom space. So I’m not going to sell Airtel that easily!!!!!

Saludos,
Ashutosh

Important Matrix data

2009-09-30T22:04:00.001-07:00

Date :- 30th September 2009
P/E :- 22.90
P/B :- 3.76
Dividen Yield :- 1.00

India Vix :- 25.27

(Please click the image below to get full preview)

Remember to go against the crowd.I know you know what I mean. As Mr. Buffet has once said:-
"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

Thanks,
Ashutosh

Nifty Stats

2009-09-17T11:47:00.000-07:00

Date :-14-Sep-2009
P/E :- 21.66
P/B :- 3.78
Div Yield :- 1.06

Few Important charts....

2009-09-07T23:46:00.001-07:00

Please Click the chart to view details....

An Insight From Joe Ponzio....

2009-09-05T10:20:00.001-07:00

Well this is a real great explanation of Inventory Turn and Profit Marging and I don't want to miss it by any means, that's why I'm adding it in my blog just for educational purpose.

You can visit this article at http://www.fwallstreet.com/blog/189.htm

Understanding the True Profit Margin

By Joe Ponzio on August 7, 2009

On the heels of yesterday's article, I received an e-mail from a friend this afternoon asking me about my thoughts on inventory turns and profit margins. To paraphrase: The math doesn't work right, as the inventory turns don't affect the profit margins each year.

I didn't do a good job of explaining it properly; so, let's look at the "true" profit margin of a company.

The Low Cost Business

We all know that it's better to have a low-cost business than a high-cost business. Companies with relatively small capital expenditures and fat profit margins should be chosen over those with high capital expenditures and thin margins, assuming all other things are equal.

If you can find good companies that generate tons of cash on a relatively small amount of invested capital, and you can buy those companies at a discount to their intrinsic value, you'll probably find that your long-term investment results are quite satisfactory.

Profit Margin on One Inventory Turn

So...we turn to two businesses, each of which has a thin profit margin, to see how inventory turns can give us some insight into the economics of the company. Let's first look at the economics of the business from a single sale perspective to show that they're the same:

(Note: The number of "inventory turns" refers to the number of times a company must replenish its inventory throughout the year. If Walgreens orders one case of Coca-Cola each month, and sells one case each month, it will have "turned" its Coca-Cola inventory twelve times that year.)

	Company A	Company B
Revenue	$ 100	$ 100
Cost of goods sold	98	98
Other expenses and taxes	—	—
Net income / Cash flow	$ 2	$ 2
Profit margin	2%	2%

In this case, both businesses earned $2 on $100 of revenue. Their profit margins were 2% ($2 divided by $100). Fortunately, they lived in the land of Tina's Family Therapy; so, no taxes or any other costs.

Both companies invested $98 in inventory (cost of goods sold), sold it for $100, and made a $2 profit.Simple enough.

Conventional wisdom would say that both businesses should be avoided. We're supposed to look for businesses with wonderful economics, and a 2% profit margin is anything but "wonderful." Then again, we're all about being non-conventional around here.

Profit Margin on Multiple Inventory Turns

Same companies, but factoring one year of inventory turns into the mix:

	Company A	Company B
Inventory turns	12	2
Revenue	$ 1,200	$ 200
Cost of goods sold	1,176	196
Other expenses and taxes	—	—
Net income / Cash flow	$ 24	$ 4
Profit margin	2%	2%

Right off the bat, these companies may still look similar. Though Company A has greater sales and revenues than Company B, they both boast 2% profit margins and seemingly terrible economics.

Then again, these are businesses, not just numbers on a piece of paper. And the business of Company A is far superior to that of Company B from an owner's perspective.

What Each Business Invested to Earn Their Income

Let's first look at Company B. To generate $4 in income, it invested $196 in inventory (cost of goods sold), right? Wrong. Because it had two inventory turns, it invested $98 in inventory to generate $100 in sales, took the profit from that, reinvested the $98 in more inventory, and then turned another sale.

Essentially, Company B invested the same $98 twice to earn $4. Already see where this is going?

Company A invested $98 in inventory to earn $2, but was able to reinvest that $98 eleven more times to generate a total of $24.

Both companies invested $98 to earn $2, but Company A was able to reinvest it faster, thus generating six times more than Company B.

The "true" profit margin of Company A was not 2%, but 24%. The "true" profit margin of Company B was not 2%, but 4%. Here's how it works:

True Profit Margins...as Bonds

Think of the true profit margin as a bond with a fixed interest rate. Would you rather have a bond paying 24% or a bond paying 4%? The answer is clear.

Company A and Company B both invested $98 into their business through the purchase of inventory. In essence, each purchased a $98 bond (the inventory), and that bond generates a certain amount of profit ($2). Except that Company A's "bond" pays that $2 monthly while Company B's "bond" pays $2 every six months.

Which company has better economics? They both have terrible profit margins from an accounting standpoint, but then again — accounting numbers are for the IRS. Business owners and investors follow the cash.

Which Company Will Grow Faster?

It's pretty clear in the above example that Company A will have a better chance to grow faster than Company B. It generates more in sales, and it generates more cash. Let's level the playing field. Instead of selling products for $100, Company B is selling higher priced goods. It buys products for $588 and sells them for $600. Both companies have the same revenues, cost of goods, net income, and profit margins:

	Company A	Company B
Inventory turns	12	2
Revenue	$ 1,200	$ 1,200
Cost of goods sold	1,176	1,176
Other expenses and taxes	—	—
Net income / Cash flow	$ 24	$ 24
Profit margin	2%	2%

So...which is the better investment?

Though it looks like we've leveled the playing field, we really haven't. These are two very different businesses. To understand this, we have to work backwards.

How will Company A and Company B generate additional cash? With no other expenses, they each have three choices:

raise the price of their products (e.g., from $100 to $105, from $600 to $630),
lower their cost of inventory (e.g., find cheaper inventory at, say, $90 and $500), or
sell more of their products.

If they can't raise prices and they can't find any cheaper suppliers, their only option is to sell more of their product. While that is great in theory, it ain't so simple in the real world. Unless they have some magic formula for making cash appear out of thin air, how will they purchase additional inventory so that they can sell more of their finished product?

Assuming neither has cash in the bank or access to outside financing, they have one of two choices:

require payment upfront, and then use the customer's money to purchase inventory, or
save up enough cash to purchase more inventory, using the funds of the business.

Some businesses can do the former; but, let's assume that these two companies are retailers, and that their customers aren't paying for clothes today, but willing to take delivery in sixty days. To get more inventory which will lead to more sales, the company's must use the funds of the business.

But wait — neither company has cash in the bank! Okay — how long will it take before the companies can expand? That is...which company will grow faster?

	Company A	Company B
Profits	$ 24	$ 24
Cost to purchase more inventory	$ 98	$588
Years until company can handle double sales volume	4.1	24.5

In 4.1 years, Company A will have saved $98 from its $24 of profits — enough to purchase another unit of inventory. With two units of inventory both being sold concurrently, the company is generating twice as much cash.

It will take Company B 24.5 years to save up $588, if saving just $24 per year. As such, Company B will have to wait 24.5 years before it can double its cash flow.

Again — which company has the better economics: the one that can double every four years or the one that doubles every 25?

The Race is Over Before it Begins

If we fast forward and look at these two companies in 25 years, assuming that each tried to beef up their inventory at the end of the year (not 0.1 years into year 4), Company B has finally purchased another unit of inventory and will begin generating $48 a year in excess cash. Company A, on the other hand, has 465 units of inventory and is generating $11,160 in excess cash.

And while Company B has finally beefed up sales to $2,400 ($600 times 2 inventory turns times 2 units of inventory), Company A is generating $558,000 in sales — 233 times the amount of sales!

High Profit Margin/Low Turnover

Finally, consider this: A high profit margin business may have a very low "true" profit margin, and may be a candidate to avoid. When comparing a 2% profit margin business to a 10% profit margin business, many investors automatically assume that the 10% business is better.

That's not necessarily true.

Everything else being equal, the 10% margin business with one inventory turn is no better or worse than the 2% margin business with five turns a year.

Perception......Something to think about

2009-08-26T01:15:00.000-07:00

Washington, DC Metro Station on a cold January morning in 2007. The man with a violin played six Bach pieces for about 45 minutes. During that time approx. 2 thousand people went through the station, most of them on their way to work. After 3 minutes a middle aged man noticed there was a musician playing. He slowed his pace and stopped for a few seconds and then hurried to meet his schedule.

4 minutes later:

the violinist received his first dollar: a woman threw the money in the hat and, without stopping, continued to walk...

6 minutes:

A young man leaned against the wall to listen to him, then looked at his watch and started to walk again.

10 minutes:

A 3-year old boy stopped but his mother tugged him along hurriedly. The kid stopped to look at the violinist again, but the mother pushed hard and the child continued to walk, turning his head all the time. This action was repeated by several other children. Every parent, without exception, forced their children to move on quickly.

45 minutes:

The musician played continuously. Only 6 people stopped and listened for a short while. About 20 gave money but continued to walk at their normal pace. The man collected a total of $32.

1 hour:

He finished playing and silence took over. No one noticed. No one applauded, nor was there any recognition.

No one knew this, but the violinist was Joshua Bell, one of the greatest musicians in the world. He played one of the most intricate pieces ever written, with a violin worth $3.5 million dollars. Two days before Joshua Bell sold out a theater in Boston where the seats averaged $100.

This is a true story. Joshua Bell playing incognito in the metro station was organized by the Washington Post as part of a social experiment about perception, taste and people's priorities. The questions raised: in a common place environment at an inappropriate hour, do we perceive beauty? Do we stop to appreciate it? Do we recognize talent in an unexpected context?

One possible conclusion reached from this experiment could be this: If we do not have a moment to stop and listen to one of the best musicians in the world, playing some of the finest music ever written, with one of the most beautiful instruments ever made.... How many other things are we missing?

Confused....

2009-08-20T12:29:00.001-07:00

C.K. Prahalad speaks.....

2009-08-02T08:28:00.000-07:00

http://www.isb.edu/ISBWEB/ISBCMS/File/CK%20Prahlad%20Speech.pdf

Something about PE level....

2009-07-15T10:40:00.000-07:00

Average P/E of Nifty from 01-Jan-99 till today is 17.66 and this one is one of the most important factor which we all should take into account while deciding to sell your holding. During the peaks of 2001 and 2008 Nifty P/E was more than 28 and market crashed after that. Currently P/E is hovering around 18-20 which are cautious levels.

Thanks.

I'm Into Underwears.....

2009-07-14T09:27:00.000-07:00

Well after a long break I'm here again to post an entry, actually the times were not good and they were demanding great courage, focus and patience from me . I some how managed to save my ass from getting into negative territory.Yes the fund which I started in 2007 is still in green although with meager return of 8%, on the other side BSE sensex is -27% down from it's value on august when I started.But it's not a great time to rejoice because I felt just lucky enough to save myself. The times are tough and these times demand consolidation in all respects, may be your learning , your approach towards investing , your approach towards managing your money.
With the approach of investing in simple businesses,which I can understand I started investing in Page Industries (yes the makers of Jockey brand in india) not a very well known name then what is your idea worth if it's known to everyone.Although stock was not doing great and was keeping low in volumes, the spark came when outlook profit gave an analysis about the company and it's stock soared. Page Industries constitute around 9% of my portfolio although the plan was to make it up to 15-20% , but sudden rise in prices took it out of my buying range.I'm not sure if I'm going to regret later , but I can't risk my and my family's money at this price.With great brand and changing mindset of the Indian Consumer ,while choosing under garment ,this is a sure shot winner.It has high ROE and ROTC and is maintaining good profit margins with good earning growth of around 33% CA.
Visit www.jockeyindia.com and find yourself some boxers or undergarments.

Thanks

Joe Koster's summary of Poor Charlie's Almanac

2009-05-22T13:47:00.000-07:00

Thanks to Joe For the Summary.I had missed so many points listed in the summary during this current fall but atleast I'm proud that most of them I have already inculcated in me. Well I have never read the book because it's not available in India , I'm trying hard to get it from somewhere but let's see when will I get the Munger Neeti(like Chanakya neeti) in my hand to relish.

Joe Koster's summary of Charlie Munger's Investing Principles Checklist, according to Poor Charlie's Almanack. Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness.

Risk - All investment evaluations should begin by measuring risk, especially reputational

Incorporate an appropriate margin of safety
Avoid dealing with people of questionable character
Insist upon proper compensation for risk assumed
Always beware of inflation and interest rate exposures
Avoid big mistakes; shun permanent capital loss

Independence - "Only in fairy tales are emperors told they are naked"

Objectivity and rationality require independence of thought
Remember that just because other people agree or disagree with you doesn’t make you right or wrong - the only thing that matters is the correctness of your analysis and judgment
Mimicking the herd invites regression to the mean (merely average performance)

Preparation - "The only way to win is to work, work, work, work, and hope to have a few insights"

Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
More important than the will to win is the will to prepare
Develop fluency in mental models from the major academic disciplines
If you want to get smart, the question you have to keep asking is "why, why, why?"

Intellectual humility - Acknowledging what you don’t know is the dawning of wisdom

Stay within a well-defined circle of competence
Identify and reconcile disconfirming evidence
Resist the craving for false precision, false certainties, etc.
Above all, never fool yourself, and remember that you are the easiest person to fool

"Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things."

Analytic rigor - Use of the scientific method and effective checklists minimizes errors and omissions

Determine value apart from price; progress apart from activity; wealth apart from size
It is better to remember the obvious than to grasp the esoteric
Be a business analyst, not a market, macroeconomic, or security analyst
Consider totality of risk and effect; look always at potential second order and higher level impacts
Think forwards and backwards - Invert, always invert

Allocation - Proper allocation of capital is an investor’s number one job

Remember that highest and best use is always measured by the next best use (opportunity cost)
Good ideas are rare - when the odds are greatly in your favor, bet (allocate) heavily
Don’t "fall in love" with an investment - be situation-dependent and opportunity-driven

Patience - Resist the natural human bias to act

"Compound interest is the eighth wonder of the world" (Einstein); never interrupt it unnecessarily
Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
Be alert for the arrival of luck
Enjoy the process along with the proceeds, because the process is where you live

Decisiveness - When proper circumstances present themselves, act with decisiveness and conviction

Be fearful when others are greedy, and greedy when others are fearful
Opportunity doesn’t come often, so seize it when it comes
Opportunity meeting the prepared mind; that’s the game

Change - Live with change and accept unremovable complexity

Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
Continually challenge and willingly amend your "best-loved ideas"
Recognize reality even when you don’t like it - especially when you don’t like it

Focus - Keep things simple and remember what you set out to do

Remember that reputation and integrity are your most valuable assets - and can be lost in a heartbeat
Guard against the effects of hubris (arrogance) and boredom
Don’t overlook the obvious by drowning in minutiae (the small details)
Be careful to exclude unneeded information or slop: "A small leak can sink a great ship"
Face your big troubles; don’t sweep them under the rug

In the end, it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life:Preparation. Discipline. Patience. Decisiveness.

BSE Groups

2009-05-08T10:59:00.000-07:00

Noting the group division among bse securities for my reference:--

Groups