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Archives for September 2013

The Analyst Who Sold His Ferrari

Imagine a stock market analyst appearing on CNBC advising traders to “stay long on L&T”, “short M&M”, and “buy IRB on dips”.

Given enough of dirt we may have thrown at such analysts in the past, I am sure what kind of a person you may be imagining. Someone dressed in a crisp, formal shirt and tie, and sharing his expertise on accumulating stocks.

Maybe someone like this…

Now, imagine seeing the same person clad in a loose khadi kurta, sporting a French beard, wearing a hearty smile, and advising you to give all your stocks away.

I am sure you may not be able to imagine that, given that there’s a negligible probability of a stock market analyst appearing in this second avatar.

[Read more…]

Value Investing, the Rohit Chauhan Way

If you have been a reader of Safal Niveshak for long, you know how I have been greatly inspired by investors and value investing teachers like Graham, Buffett, Munger, Howard Marks, and Prof. Sanjay Bakshi.

But if there is one “value investor-cum-blogger” who inspired me to start putting my thoughts on investing out to the world, it was Rohit Chauhan.

Rohit is a self-taught value investor who has been investing for the last 13+ years and blogging for the last nine.

If you do a Google search on “value investing in India”, Rohit’s blog stands right up there, which suggests his preeminence among all Indian value investing bloggers.

Anyways, I was a bit nervous writing to him asking for his interview for Safal Niveshak. But Rohit eased all my nervousness and agreed to share his thoughts and also his amazing investment checklist, which I present to you today.

So, here’s Rohit and his simple yet amazing thoughts on the art and science of becoming a successful value investor.

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A Smart, Thoughtful Investor in the Making

After profiling Dev Ashish of Stable Investor the second issue of Safal Niveshak TribeStar, I bring to you another brilliant, thoughtful investor in the making, Neeraj Marathe.

While I have met Neeraj just once, I have come to respect his investing acumen via whatever little discussions we’ve had and also through his writings on his blog – Thoughts on Thoughts.

In this interview with Safal Niveshak, Neeraj lays bare his investment philosophy for us to learn.

[Read more…]

It’s a Trap! It’s a Trap!

Let’s face it. Not a day goes by that you’re not tempted to glance to the left and to the right to see how you measure up to the people around you.

But it doesn’t stop there, does it?

You’re tempted to compare your children to other children, your spouse to other spouses, your salary to others’ salaries, your car to others’ cars…and your stocks to others’ stocks.

It’s frustrating.

It’s exhausting.

It’s a TRAP!

How to Lose 80% Savings
I got to talk to a college friend yesterday who was completely disappointed with his stock portfolio. For the purpose of this post I’ll call him PJ.

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Wit, Wisdom, Warren (Issue #10): Businesses – The Good and Gruesome

In my previous post on analyzing Warren Buffett’s letters, I covered the part on how Buffett defines a great business.

Here is a checklist to serve you a reminder. As per Buffett, a great business is one that…

  • Generates much more cash than it consumes.
  • Has “moats” — a metaphor for the superiorities they possess that make life difficult for their competitors and helps the business earn high returns.
  • Operates in a stable industry.
  • Requires little incremental investment to grow.
  • Has an ability to increase prices rather easily without fear of significant loss of either market share or unit volume

In today’s post, I cover Buffett’s description of “good” and “gruesome” businesses.

First, the Good Business
Buffett writes that while a great business earns a “great” return on invested capital that creates a moat around itself, a good business earns a “good” return on capital.

So what is the core difference here?

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How Companies Create Value, the EVA Way

If you have been a reader of Prof. Sanjay Bakshi’s blog, you know how he has laid open his classes for non-students like us. He is doing this by way of sharing the transcripts of his lectures at this year’s classes in MDI, Gurgaon.

So in his latest post, he shared the assignment that he has given his students – that of analyzing the business of Relaxo Footwear.

In the initial part of the assignment, he mentions the concept of “economic profit”, which seems like a difficult term to understand for many investors, as we have grown up on a dose of accounting profits – profits that are reported in the financial statements.

[Read more…]

Yes, Even Good Companies Go Bad

If you have read management books in the past, you would have realized that most of them exhort companies to go from good to great.

Regrettably most companies, in reality, move in the opposite direction – from good to great to good…and then they slip into mediocrity, and limp as pale shadows of their former glory.

These companies, despite being market leaders in their respective industries, see their performance take a turn for the worse.

[Read more…]

Poke the Box: Please Don’t Deny…but See the Positive

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…

  • Restarted my analysis of Warren Buffett’s letters to shareholders…this time covering his views on what makes a business great.
  • Launched a new section on the website, titled “Mental Models”, which is aimed to become a repository from which you can create your own latticework of mental models and reframe your investment thought process.
  • Shared the secrets of the world’s best business, and how can you also start one of your own.
  • Nokia got sold to Microsoft, and here are 10 lessons from the mobile giant’s fall.
  • Manish Sharma wrote a comprehensive StockTalk analysis on Bata India, explaining why the business is good but the stock isn’t.
Mental Model of the Week: Self Deception and Denial

“Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.” ~ Demosthenes

Denial, as the old joke goes, is not just a river in Egypt. It’s proof of modern society’s deepest sins like irrationality and cynicism.

Eric Beinhocker in ‘The Origin of Wealth’ writes – “People have a general bias toward spinning their reality in positive ways and ignoring uncomfortable facts. It takes a real jolt to make them see that everything is not OK.

Jack Welch was infamous for popping the unduly optimistic bubbles of his people, and one of his dicta was that managers must ‘face reality [and] see things as they are…not the way they wished it would be.”

But most of us live a life of constant denial, which is a failure on our part to be able to tell fact from fiction, and, worse, the devastating failure to know ourselves.

In his famous 1974 commencement address at Caltech, American physicist Richard Feynman warned against self-deception: “The first principle is that you must not fool yourself – and you are the easiest person to fool.”

Austrian philosopher Ludwig Wittgenstein said in ‘Culture and Value’: “Nothing is so difficult as not deceiving oneself.”

You see, we have to see the world as it is. Not for what it was or for what we want it to be. Refusing to look at unpleasant facts doesn’t make them disappear.

Often, bad news that is true (like you have lost money on a bad business) is better than good news that is wrong (like you have made money on a bad business that you think is a good business).

So please get over your denial…and stop deceiving yourself!

Book Worm
I am currently reading Daniel Kahneman’s amazing book Thinking, Fast and Slow, and came across his thoughts on Availability Bias…

People tend to assess the relative importance of issues by the ease with which they are retrieved from memory – and this is largely determined by the extent of coverage in the media. Frequently mentioned topics populate the mind even as others slip away from awareness.

In turn, what the media choose to report corresponds to their view of what is currently on the public’s mind. It is no accident that authoritarian regimes exert substantial pressure on independent media. Because public interest is most easily aroused by dramatic events and by celebrities, media feeding frenzies are common.

For several weeks after Michael Jackson’s death, for example, it was virtually impossible to find a television channel reporting on another topic. In contrast, there is little coverage of critical but unexciting issues that provide less drama, such as declining educational standards or overinvestment of medical resources in the last year of life. (As I write this, I notice that my choice of “little-covered” examples was guided by availability. The topics I chose as examples are mentioned often; equally important issues that are less available did not come to my mind.)

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

Poke of the Week – See the Positive

“The Mind is its own place, and in itself can make a heaven of hell, a hell of heaven.” ~ John Milton

I’m a pretty positive person — I consider it one of the keys to the modest success I’ve had in creating new habits and achieving things in the last few years.

Without seeing the positives in my actions, I couldn’t have begun on my journey of living my passion. I couldn’t have eliminated my debt, or quit my job.

So, I don’t feel that I’m particularly “incredible” – just lucky that I live with a positive attitude towards my life and actions.

Here is what Roger von Oech writes in one of his creative whack pack cards…

Most people have a warning device in their minds to alert them to new ideas. Unless the idea cleanly dovetails into what they’re doing, they’ll react by saying:

“It won’t work.”
“It’s dumb.”
“I don’t get it.”

When you evaluate new ideas, however, remember that your purpose is to help get good ideas produced — not to revel in the beauty of your criticism.

Thus, when you judge new ideas, focus initially on their positive and interesting features. This will counteract a natural negative bias, and help you to develop more ideas.

When you start feeling like the idea of being a positive person is hard to achieve, remind yourself that all it takes is one small step in the right direction to move yourself toward a more positive attitude.

Believe in yourself and remember the most important lesson of all: A positive outlook is a choice that you can always make.

Finally, Herm Albright said – “A positive attitude may not solve all your problems, but it will annoy enough people to make it worth the effort.” 🙂

Well, if you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.

Keep poking.

Stop denying the obvious.

Stop deceiving yourself.

See the positive.

Be kind to your heart.

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box