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Archives for September 2012

Wit, Wisdom, Warren (Issue #3): The Valuation Junkyard

Image Source: Rediff

Last week, I reviewed lessons from Warren Buffett’s 1958 letter to partners of Buffett Partnerships.

Lest you forget, here is a summary of the key lessons we discussed in that review:

  1. In rising markets, there’s a rise in the ratio of mercurially tempered people – those with rapid and unpredictable changeableness of mood. The overall mood is of exuberance. People invest in stocks for any and every reason. These combine together to further stimulate rising stock prices. Whenever you find such a deadly combination next time, simply run for cover…because such exuberance will always leads to eventual trouble – stock market crashes.
  2. Be very careful while buying illiquid stocks – The impact cost of a large sell order can be huge in case the stock surges and a large investor wants to cash out.
  3. Illiquidity of a great stock can work to your advantage as a small investor. You can buy it over a period of time without impacting the price materially. Then, when big investors come to know the story and take a bite of it, you would’ve already made your money.
  4. Avoid extrapolating short term performance into long term performance. A 30-40% return from your stocks in one year doesn’t mean you will retire a rich investor in 10 years. It never happens!
  5. Use intrinsic value as a reference point to sell stocks – Sell when a stock reaches close to intrinsic value, and also when intrinsic value reaches close to stock price.
  6. Sell a stock (but only when you don’t have any investible cash left) if you can find a better opportunity – one with a greater margin of safety.
  7. Beware of permanent loss of capital…and then when you identify businesses that won’t impair your capital permanently, buy them and be willing to wait for even 10-15 years to create tremendous wealth from them.

Today, I review the letter for 1959.

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Wit, Wisdom, Charlie: Elementary Worldly Wisdom from Charlie Munger

There are only two ways of clearing an exam. The first involves rigorous reading of the books and understanding the fundamental concepts which a subject is trying to teach, and develop a framework.

Once you have a framework, you then assimilate additional information (either via theory or via practical in labs) on that framework to see whether it makes sense or not.

If you are able to do it, the new information is understood and is stored in your knowledge repertoire to be recalled at ease and also to help you understand other things in future.

If you are not able to do it, you improve upon the framework.

The second way, which if not everyone, at least 90% of engineers will agree upon is as follows.

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Dear Me

As adults, we all nurture the secret wish to go back in time and change a few things here and there, so that our life gets better than it is now, in the present.

“Ah, I wish I had studied harder during my masters!” some might resent.

“Only if I had chosen Commerce over Engineering!” is another common wish.

Some would say, “I would have been richer only if I had behaved better as an investor when I was just starting out.”

And then, “I wish I had started saving and investing 15 years back!”

Well, imagine you are given a chance to flip a switch to go back in time when you were young. What would you do?

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Wit, Wisdom, Warren (Issue #2): Avoiding Permanent Loss of Capital

Image Source: Rediff

Last week, we studied lessons from Warren Buffett’s 1957 letter to partners of Buffett Partnerships.

Lest you forget, here is a summary of the key lessons we discussed in the previous review:

  1. Give due importance to intrinsic value while making your investment decisions.
  2. Over time, stock prices generally revert to intrinsic value.
  3. Ignore the Sensex (what it is doing, where it is going) except to check the pulse of the “general investing environment”.
  4. Ignore short term movements in stock prices, even if they are sharp. You must only be concerned with comparing stock prices with intrinsic values, and that’s it.
  5. Give luck its due credit (but luck, like love, is a verb…so practice hard to get lucky, like Buffett did).
  6. Humility is one of the most important attributes of a value investor.
  7. Over the long term, if you can do your work properly, expect to outperform the broader market at just a reasonable rate. Never expect a big outperformance, for such an expectation might lead you to commit grave errors of commission.
  8. Being a value investor, expect to perform better in a bear market than in a bull market.
  9. Patience is a virtue, and especially if you are a stock market investor.
  10. It’s important to set a proper asset allocation strategy before you start to invest…and then it’s equally important to follow that strategy in stock market ups and downs.

Today, I review the letter for 1958.

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Safal Niveshak StockTalk #11: Tata Investment Corp. Ltd.

Disclaimer: The opinions in this report are for “informational and educational” purposes only and should not be construed as a recommendation to buy or sell the stock(s) mentioned. I do not recommend that you act upon any investment information without first doing an independent research as to the suitability of such investment for your specific situation.

Welcome to the eleventh issue of Safal Niveshak StockTalk.

After covering Cera Sanitaryware last time, this time I’ve researched on Tata Investment Corp. Ltd. (TICL), a non-banking finance company (NBFC) involved in the business of investing in equity shares and equity-related securities (it’s like a quasi-mutual fund, except that it does not invest investors’ money, but its own).

Anyways, before we dive deeper into TICL, here is a brief overview of the sections of this report.

  1. About TICL
  2. Safal Niveshak’s 20-Point Checklist
  3. Intrinsic Value Assumptions
  4. Risk Statement
  5. Financial & Market Snapshot

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Has the Govt. Laid Ground for the Next Big Bull Run?

Today’s post is written by Sunny Gupta, a long-time Safal Niveshak tribesman from New Delhi.

Sunny posted this originally on the Forum, seeking answers from fellow tribesmen. I thought putting this as a post would bring in a greater amount of discussion.

The points Sunny has raised, plus the questions he has asked, are important points for us as ‘aam aadmi’, and also matter a lot for us as investors.

Over to you, Sunny.

While this may be a complicated topic, and renowned economists would discuss such things, I want to bring it up and see how such events affect us as investors.

The topic is related to policy paralysis of past several months, and the sudden burst of policy actions related to fuel subsidy reduction and FDI allowance in various sectors.

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Wit, Wisdom, Warren (Issue #1): Key Investing Principles

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We start this series of review of Warren Buffett’s letters with his second letter to partners of Buffett Partnerships that he wrote in 1957 (the first letter isn’t available).

Buffett was just 27 years of age when he wrote this letter to his partners. So you can imagine his level of understanding at an age when most people are clueless about the future and are instead lost in the world of revelry and merriment.

But Buffett had his priorities well set. By this time, he had already:

  • Started and closed several small businesses (like selling chewing gum, Coca-Cola, weekly magazines, golf balls and stamps) that could earn him enough money to save and invest.
  • Bought a farm using his investments.
  • Accumulated more than US$ 90,000 in savings (measured in 2009 dollars).
  • Filed his first income tax return…at the age of 14!
  • Graduated with a Bachelor of Science in Business Administration (1949).
  • Earned a Master of Science in Economics from Columbia (1951).
  • Studied “Security Analysis” under Benjamin Graham and David Dodd (and earned the only A-Grade that Graham ever gave to any of his students).
  • Read Graham’s The Intelligent Investor several times
  • Worked as a securities analyst under Graham at Graham-Newman Corp. (1954-56).

He started Buffett Partnership Ltd. in 1956 after Graham retired and closed his partnership.

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Safal Niveshak StockTalk #10: Cera Sanitaryware

Disclaimer: The opinions in this report are for “informational and educational” purposes only and should not be construed as a recommendation to buy or sell the stock(s) mentioned. I do not recommend that you act upon any investment information without first doing an independent research as to the suitability of such investment for your specific situation.

Welcome to the tenth issue of Safal Niveshak StockTalk. (Read previous issues)

After covering BHEL last time, this time I’ve researched on Cera Sanitaryware Ltd. (CSL), one of India’s leading manufacturers of sanitaryware. Before we dive deeper into CSL, here is a brief overview of the sections of this report.

  1. About CSL
  2. Safal Niveshak’s 20-Point Checklist
  3. Intrinsic Value Assumptions
  4. Risk Statement
  5. Financial & Market Snapshot
  6. “Should I Buy CSL?” Checklist

[Read more…]