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Archives for March 2015

My Email Exchange with Prof. Sanjay Bakshi on Valuations

In the March 2015 issue of my premium newsletter Value Investing Almanack, I wrote on the topic of Valuations as the cover story.

My idea was to bring forth varied thoughts on valuing stocks and especially from the angle of drawing the line between paying up and overpaying for high-quality businesses.

I showed the draft of my note to Prof. Sanjay Bakshi, and he was kind enough as always to share his thoughts on how investors must look at valuations, especially when they are looking at expensive-looking, high P/E stocks in their portfolios.

What follows below is our email exchange on the subject. I am sharing it here so that a wider audience benefits from Prof. Bakshi’s thoughts on the important subject of valuations.

In the meanwhile, if you wish to read the complete March 2015 issue of Value Investing Almanack, and my detailed take on valuations and a lot of other ideas, please click here to subscribe.

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Investing and the Art of Due Diligence

In the 2008 shareholder meeting of Berkshire Hathaway, a shareholder asked Warren Buffett and Charlie Munger –

“If you could not talk with management, could not read the annual report, and did not know the stock price of the company, but were only allowed to look at its financial statements, what metric would you look at to help you determine whether you should buy the company?”

They replied –

Buffett: Well, what we’re doing in investment – and what everybody does – is we’re laying out money now to get more money back later on.

Now, let’s leave the market aspect of the asset out of it. When you buy a farm, you really aren’t thinking about what the market on it is going to be tomorrow, next week, or next month. You’re thinking about how many bushels of beans or corn per acre you can get, and what the price is likely to be. You’re looking to the asset itself.

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The Painful Decision to Hold Cash

One of the many investing mistakes I made during the early part of my investing career was to be rash with cash.

One salary hike, one bonus, or one big inflow of money (family gifts etc.) and I would invest the same into stocks I liked, irrespective of what the stock markets were doing.

Cash in bank was considered a wasted opportunity and every chance to “let-me-buy-stocks-now” was grabbed upon.

The question I used to ask myself was – “Why should I hold cash when it is paying nothing while stocks can grow my money much faster?”

However, over the years and after learning my lessons (from not holding cash) the hard way, I’ve found several reasons to ‘hold cash’.

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What to Do With Losing Stocks in Your Portfolio

I had my Investing Workshop in Chennai yesterday, and here are the seemingly happy tribe members at the end of it…

I met a gentleman at the Workshop who owns 115+ stocks in his portfolio, most of which are bad businesses – he realizes that – and are deep into losses despite the great run in the stock market over the last one year.

“What should I do with these stocks?” he asked me. And he is not the only one who’s asked me this question in the past. I have met numerous people over the past 2-3 years who have held on to bad businesses and losing stocks in their portfolios, and not knowing what to do with them.

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But the Future is Bright!

Consider this financial statement of a company…

If I were a promoter of this company and asked you to invest your money in it – and you did not know me personally – would you invest?

Okay, to sweeten the deal, I lower my asking price by 10%, would you invest now?

I share with you my optimistic view on the company’s future, and how you are going to earn great returns in the future. But would you still budge?

“Okay, what are you going to do with my money?” you ask me.

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How to Think About the Stock Market

First things first. I had a wonderful workshop in New Delhi last Sunday. Here are the amazing tribe members who attended it…

My next Workshop is in Chennai on 15th March (this Sunday). If you are willing to attend, please click here to register now.

Anyways, coming back to the main topic of this post, I was recently having a conversation with a friend who owns an automobile components business. He mentioned how he was looking to invest Rs 2 crore to purchase a new piece of equipment for his manufacturing unit and why he thought this investment would pay fruits over the next 10 years.

During the conversation, it struck me that most investors don’t think the same way business owners do. It isn’t unusual for a business owner to buy a new machine, or upgrade the fixtures in his retail store with an eye on the long term.

Also, it isn’t unheard of for a business owner to invest large sums of his own money to expand a factory or spend money installing energy efficient lights to lower costs and increase profits. That is because the mindset of a business owner is on putting money out today in order to earn a return over time.

Many investors don’t think this way. Warren Buffett often says that he is a better investor because he is a business owner and a better business owner because he is an investor. It is valuable to think from both perspectives.

Anyways, that was about how to think from a business owner’s perspective while investing in the stock market.

But the first question is – How to think about the stock market and the entire art of picking stocks?

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Important Update: Value Investing Almanack (Free Course Inside)

I had recently launched my premium newsletter called Value Investing Almanack (VIA), through which I aim to bring you the best ideas in value investing, human behaviour, and business analysis.

While I have received a great response for the newsletter, a lot of tribe members have also sent emails about what they would receive through their subscription to VIA.

So, one member asks, “Would I receive just 12 issues of the newsletter or is there something else lined up as well?”

My answer is – “No, it’s not just 12 issues of VIA that you would receive through this subscription.”

A typical issue of VIA will include the following broad topics –

  1. Spotlight: Big ideas from Value Investing and why applying them in your investment decision making will be a great deal
  2. Behaviouronomics: Deep analysis of human behaviour and how it impacts investment decision making
  3. StockTalk: Thorough analysis of business models of companies (without any recommendations)
  4. Business Snapshots: Quick snapshots of great and gruesome businesses
  5. BookWorm: Reviews of the best books on Value Investing and related subjects
  6. InvestorInsights: Interviews with experienced and upcoming value investors
  7. Corporate Governance: Thoughts on what companies do in terms of good and bad corporate governance and how you can separate the two
  8. Ethical Analyst: Thoughts on loose ideals of the investment industry and why ethical practices are of great importance now than ever before
  9. Life 2.0: Practical and effective ideas on living a simple, sensible life
  10. What We’re Reading: Links to a great external sources we’re reading

In short, there’s a great amount of learning packed in just one newsletter!

And this is not all!

Apart from these monthly issues, subscribers would also receive one Special Report at the end of every month, which may include a view (without any prediction) on the stock market, or a company analysis, or an additional book review, or any such special analysis that would benefit investment decision making.

And here’s something very special that I am deciding to give away FREE with a 1-year subscription to VIA…

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18 Lessons for Investors and Managers from Warren Buffett’s 2014 Letter to Shareholders

Warren Buffett recently released his 2014 letter to shareholders of Berkshire Hathaway. For the first time, he included the historical stock price in his annual letter, which has increased by, hold your breath, 1,826,163% in the last 50 years. That’s same as a 14,512-bagger!

The big idea worth noting here is that the annualized return Berkshire’s stock has earned for its shareholders to achieve such magnificent result over 50 years is 21.6% – something people basking in the limelight of current bull run would discard as too less!

Anyways, the 2014 letter is special not just because it marked the completion of 50 years of Buffett being at helm at Berkshire, but also because it contains a bonus – Charlie Munger’s words of wisdom and vision for Berkshire over the next 50 years.

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