Wit. Wisdom. Value Investing.
Jaideep has been part of the Indian equity markets for more than two decades. He has worked in Fund Management, Equity Research, and Dealing. He is managing portfolios at Janak Merchant Securities Pvt. Ltd., a company promoted by his family, for the past 14 years. Jaideep is a member of the Institute of Chartered Accountants of India and is also a CFA Charter holder.
Disclaimer: Stocks/Examples quoted below should not be construed as recommendations.
Every Saturday, I plan to send out this special post with a few ideas I am reading and thinking about. Plus, a question I am meditating on.
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Book I’m Reading – A More Beautiful Question
Since early childhood, most of us learned that our parents did not like us asking many questions and that only authority figures – most grown-ups – had the right to ask them. The result was that we stopped questioning things and accepted what we saw, heard, and were told with meek acceptance.
Sadly, this approach worked well in the industrial era, but proves futile in the knowledge era, because it compromises our ability to think and understand deeply.
The company WeWork has been in the recent news for a lot of reasons — many of them not so comforting for the company’s private investors. Those who haven’t heard of WeWork or don’t know much about it, here’s a primer on Wework’s business model.
In one line, WeWork leases out large office spaces, upgrades them, makes them look cool and upscale, and rents them out on per seat basis to either individuals or other companies. In case you’ve heard of the term coworking spaces, WeWork is that.
[Read more…] about Of Good Stories and Bad Businesses
The bulls may want you to believe this, but no stock is safe.
There are businesses that may remain good (earning return on capital greater than cost of capital) for some time, maybe a long time, but you must not attach infinite values to them.
This is because high returns attract competition, generally causing return on capital to move towards the cost of capital. While such companies may still earn excess returns, but the return trajectory is down.
The good thing about high-quality stocks is that you can pay up for them (never overpay), expensive looking prices, and still do well till the underlying businesses remain good.
With poor quality, most probably, you have no hope.
As Charlie Munger says –
Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.
Businesses die, like we do.
However, in contrast to us (I mean, humans…because some bots and aliens may also be reading this post) gradually increasing our average life expectancy over decades, more businesses are dying faster than any time in history.
While there is no real research done on Indian businesses, as per Credit Suisse, the average life span of S&P 500 companies in the US, which stood at 60 years in the 1950s, has now fallen to under 20 years.
The biggest culprit for this is the disruptive force of technology, which is killing off older companies earlier and at a much faster rate than decades ago.
Anyways, today’s post is not about what businesses can do to stave off their deaths, which is mostly inevitable in these rapidly changing times.
I wrote yesterday about five ways to destroy wealth in the stock market.
As an antidote, and especially as you may be sailing through the vicissitudes of ecstasy (after seeing your stocks surge yesterday) and, at the same time, misery (for not buying more stocks before yesterday), today I share with you one way to win at the game of investing, or at anything in life.
That way, my dear friend, is of equanimity, which is calmness and composure, especially in a difficult situation.
Indian scriptures define it better as samabhaav, which means “sameness of things” or samatvam, which means “evenness of mind.”
[Read more…] about How to Win At Investing (And At Anything in Life)
It’s common if you are wealthy to worry about losing your fortune due to forces beyond your control. Like market meltdowns or economic stagnation.
But what many of us don’t realize is that our own behavior may be the root of significant losses.
Warren Buffett in his 2012 annual letter to investors, recommended William Thorndike’s book The Outsiders. Buffett called it an outstanding book about CEOs who excelled at capital allocation. The eight terrific CEOs that featured in the book have generated exceptional results across a wide variety of industries and market conditions. We had written about Outsiders in April 2016 as part of VIA bookworm series.
Saurabh Mukherjea’s book is the answer to The Outsiders. Mukherjea writes —
The book [The Outsiders] changed the way I perceived and analysed companies which have been successful over long periods of time (we are talking decades here). What Thorndike helped me grasp was that the truly great companies take the surplus cash flows created by their sustainable competitive advantages and then either return those to shareholders or reinvest those in their core franchise, or — and this is the litmus test of greatness — reinvest those successfully in new activities or markets. It is in those latter set of investments outside the core franchise that a great company assures its future regardless of how economic circumstances and customers’ tastes pan out. Without that insight from The Outsiders, there would be no The Unusual Billionaires.
How much weightage would you give to the advice dispensed by an entrepreneur who is known to have successfully built a multi-million dollar business?
If you understand the role of skill and luck in the field of human endeavours, you’d question me back, “First tell me, if that entrepreneur was successful because of his skills or was it just luck?”
Fair enough. So here’s another piece of information for you. That entrepreneur has built multiple successful businesses so the odds are high that his success is the result of his knowledge, skill, and experience than pure luck. So tell me, would you take his advice seriously?
At this point, you might be a little suspicious of the way I am framing my questions. I know you’re suspecting that I want to make you say yes and then reveal the reasons why you’re wrong.
[Read more…] about Behaviouronomics: The Shoe Button Complex
Jack Schwager, the author of Market Wizards series, when answering a question on whether value investing works, turned to the wisdom of Joel Greenblatt, one of the foremost experts on the subject.
Schwager quoted this from his interview with Greenblatt –
Value investing doesn’t always work. The market doesn’t always agree with you. Over time, value is roughly the way the market prices stocks, but over the short term, which sometimes can be as long as two or three years, there are periods when it doesn’t work. And that is a very good thing.
The fact that the value approach doesn’t work over periods of time is precisely the reason why it continues to work over the long term.
