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.
If you wish to receive this post – apart from others I write regularly on investing, decision making, behavioral finance – please sign up below.
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.