Almanack

[Read more…] about StockTalk (May 2015)

Jae Jun is the founder of Old School Value, a deep fundamental analysis tool that helps value investors make speeds up the analysis process and make better investment decisions.

Safal Niveshak (SN): Could you tell us a little about your background, and also about your wonderful blog Old School Value?

Jae Jun (JJ): I believe my path to investing is very similar to most people. I met a life insurance salesman who convinced me that I needed life insurance that also acted as an “investment” account. A 2-in-1 deal which I blindly agreed to without doing any homework.

The reason for my poor decision was because I saw friends and colleagues making money in stocks and I wanted to do the same. I also believed that anyone in the financial industry knew a lot more than I ever would. After I started Old School Value, I realized it was the opposite. Most people in the finance industry don’t know a thing about finance.

After several months, I would check my shiny new “investment” account, but things didn’t look right. The market was up 10%, but my account was doing nothing and a lot of the insurance premium were deducted as fees. After some digging around, the veil fell from my eyes and I saw the sucker I was. I immediately cancelled the life insurance, forfeited all the money and locked in my first 100% investment loss.

I figured that, if I wanted to lose money, I could do it myself and at least have some fun doing it. That’s when I started digging into articles, magazines and books and documented my learning through Old School Value.

I thoroughly enjoy sharing and educating people and the blog is an outlet for me so that I don’t have to bore my wife or friends to death about balance sheet analysis and how to value stocks.

Coming from a telecommunications engineering background, I grew up with tunnel vision. I never considered the possibility that I would enjoy business or finance. So my entire schooling years was dedicated to math, physics and other engineering courses. I never took a course in accounting, business or economics. Investing and starting Old School Value really opened my eyes to a new world.

SN: What got you interested in investing, and how you’ve evolved over time as an investor?

JJ: My dad is a trader and I witnessed the emotional highs and lows he experienced from making and losing a huge amount of money. At an early age, I concluded that investing in the stock market was equivalent to gambling.

After having lost everything that I put into the life insurance investment account, the initial anger was a huge motivator for me to put aside my biases about the stock market and to really learn how it worked.

My wife (girlfriend at the time) had a book called “The Intelligent Investor” which was recommended to her because she too wanted to become a life insurance saleswoman.
[Read more…] about InvestorInsights: Jae Jun, Old School Value

In the last fifty years, Warren Buffett has recommended quite a few books in his lectures and writings. But there is one book that can boldly claim to have found its way to Warren Buffett’s reading desk. And that book is The Success Equation, authored by Michael Mauboussin.

Michael belongs to the breed of those rare investment strategists who have spent their life puzzling over the really crucial questions in the world of decision making. He is an expert in one of the most debatable topic in the field of business strategy i.e., role of luck in defining the success for an individual as well as an organization.

Apart from being a successful investor, Michael also teaches at Columbia Graduate School of Business. He has authored three other books out of which I have read two and found both of them equally insightful.

Let’s dive straight into the book first.

Many of us have heard the biblical story of David and Goliath. It tells how David, a young shepherd was pitted against a ferocious warrior named Goliath. David accepted the challenge when Goliath invited him for one to one fight. David was clearly an underdog. However, everybody was stunned when David killed the giant Goliath with a slingshot.

The truth is that it’s not easy to recognize the remarkable war strategy hidden inside the story. What strategy?

I’ll let you live with the curiosity for few more minutes and reveal the secret little later in this article.

The world we live in today has become terribly interconnected. This introduces a high degree of complexity which in turn leads to lot of randomness and unpredictability in the outcomes of events. When this randomness operates at an individual level, it translates to either good or bad luck.
[Read more…] about BookWorm: The Success Equation

Imagine you are in Las Vegas with your friend. While walking on the Las Vegas Boulevard you find a US$ 10 bill sticking out from the side of the pavement, as if it’s telling you “Pick me!” You pick up the note and feel happy about your moderately good fortune.

“Wait a minute! Is that a sign from the universe?” you whisper to yourself. Perhaps Lady Fortuna is nudging you to try out your luck using this US$ 10 totem. After all it’s Las Vegas…the gambler’s paradise.

Your friend however is tired and heads back to the hotel. But you just can’t ignore the sign from above. Taking this as an omen, you enter the first casino and head straight to the roulette table. You want to bet on your lucky number i.e., 7. Sure enough, the roulette ball hits 7 and 35-1 bet wins you US$ 350. You let your winnings ride and the ball lands on 7 again, paying you US$ 12,250. And so it goes. Within an hour you are a multimillionaire with US$ 50 million in your kitty.

Feeling like Daniel Ocean from Ocean’s Eleven, you intend to bring the house down with your raging streak of luck. Being just one step away from becoming a billionaire you bet all your money on number 7 one last time – only to lose it all this time. Broke, dejected and little flabbergasted you walk down several miles to join your friend in the hotel room.

“Where were you man?” asks your friend as you enter the room.

“Playing roulette.” You’re still feeling a little shaken.

“How did you do?”

You cut the story short and tell him, “Not bad. I lost ten dollars.”

My question to you is – “Did you really just lose $10?”

If your answer is yes, then perhaps you are unaware of the behavioural bias called Mental Accounting.
[Read more…] about Behaviouronomics: Mental Accounting

It was sometime in 2003 when, after joining my job as an equity analyst and after getting my first measly paycheque, I wanted to get my rented apartment painted. I was about to get married and welcoming my bride in a house with unpainted walls was a bad idea.

So, with the little I could afford then, I searched for the cheapest painter, and with him, went searching for the cheapest paint. But I couldn’t find one. In fact, no paint store was willing to sell me the cheapest paint, and instead, everyone seemed to nudge me to buy the most expensive of the lot.

“Sir, you would get your house painted once in five years, so why go for a cheap, low-quality paint?” one shopkeeper tried his persuasion technique, “So my suggestion is that you must go with this XYZ brand of paint.” My painter added, “This brand is really good, sir. Or why would everyone buy this one only?”

“But isn’t this expensive as compared to other brands?” I revolted.

“If you don’t buy this now and come back a year later,” a shopkeeper warned me, “it would get even more expensive!”

“How can you say that?” I retaliated. “Because this company has been raising its prices every year,” he replied, “and despite this, more and more people are buying it.”

Well, what I had heard from these paint shopkeepers was true, as I saw from the previous years’ financial statements of this XYZ company. Year after year, the company had been raising the price of its products, and year after year, its volume sales were also rising.

When I talked about this business with my senior colleague, he dismissed it as a random idea coming from a junior.

“But see the pricing power,” I told him, “And everyone is buying its products despite the constant increases in prices every year! And the company has no debt. And the management is clean.”

I tried to hard-sell this idea to my seniors, but not many took it seriously. And I, being an obedient, inexperienced junior into his very first job, stopped taking it very seriously, and did not buy the stock. What a huge mistake of omission it turned out to be!

If you have not realized by now, the XYZ company was Asian Paints, and the quoting price then was less than Rs 30 per share. Today, it’s around Rs 800, a 27-bagger in 12 years, or a 31% CAGR return.

I did not buy Asian Paints in 2003, which was otherwise a great insight then and one that was sparked off by nothing more than an observation of what people around me were buying and what people around me were hard-selling.

If I were to use the language of human psychology, Asian Paints was a business (and still is) that benefited tremendously from the biases of social proof (everyone was buying) and anchoring (high and rising price, and thus better products). And, to repeat, I got the insight out of simple observation and common sense, and no deep analysis of the business and no complex theories to support my arguments.

“My simple art,” said Sherlock Holmes in The Blanched Soldier, “is but a systematized common sense.”

Many times in life, all we need is a touch of common sense to reach a Eureka moment. And of course, we need the knowledge of separating sense from nonsense, because the latter is in great supply all around.
[Read more…] about Spotlight: Where Do Great (Investment) Ideas Come From?

I acknowledge how clichéd the title sounds. I mean who doesn’t know that being active is a good thing? But when I heard the following five words, it got my attention immediately – “Sitting is the new smoking.”

Whosoever came up with this line, understood the power of inversion.

In last seven years, I have tried four different gyms, two swimming pool memberships and started preparing for numerous marathons. Every time the initial motivation lasted only for few weeks and then life (career, family, friends, IPL) got in the way.

I am sure many of you have had the same experience. You make a plan and commit yourself to it but soon life’s randomness and uncertainties throw you off. The randomness of life, its uncertainties – I call it “the chaos monkey”.

The gym operators understand this and you would be surprised to know that they plan their capacity taking this into account. So if the gym can accommodate 50 people at a time, they would actually sign up 100 people because they know that 50% of them will just give up after some time.

I soon realized that the solution wasn’t to reduce or control the randomness of life but to come up with a system which works in spite of the uncertainty of our environment and to certain extent thrives on that uncertainty – a true anti-fragile approach. If you aren’t familiar with the concept of anti-fragility, I would strongly recommend Nassim Taleb’s book Antifragile.
[Read more…] about Life 2.0: Staying Active

The organizers of a tennis tournament needed money. They approached the CEO of a big company and asked him to sponsor the tournament.

“How much?” asked the CEO.

“One million,” said the organizer.

“That is too much money,” said the CEO.

“Not if you consider the fact that you personally can play one match, sit at the honorary stand next to a member of the presidential family and be the one that hands over the prize,” said the organizer.

“Where do I sign?” said the CEO.

That’s the power of incentives, you see. People do what they perceive as in their best interest and are biased by incentives.

Look at the brokerage business. Stock brokers have a strong incentive to get us to trade. They advise us what to buy and sell. Volume creates commissions. Investment bankers encourage overpriced acquisitions to generate fees. Investment bankers have every incentive to get initial public offerings (IPO) deals done, regardless of the company’s quality. Their compensation is tied to the revenues the deal brings in. Analysts are rewarded for helping sell the IPO. Brokers want to move the stock.

What did Groucho Marx say? “I made a killing on Wall Street a few years ago…I shot my broker.”

Similarly, in the medical field, some psychologists ensure themselves future income by telling their patients that another visit is required. And they don’t talk about the limits of their knowledge. Their careers are at stake. As American actor Walther Matthau said, “My doctor gave me six months to live. When I told him I couldn’t pay the bill, he gave me six more months.”
[Read more…] about Corporate Governance: How They Pay Themselves

[Read more…] about StockTalk (April 2015)

Highly experienced investor Shyam Sekhar shares his invaluable insights on the process and philosophy of sensible, long-term investing.

Be brave. Take risks. Nothing can substitute experience.” The words of Paul Coelho aptly summaries the journey of Shyam Sekhar. Tossing up between studying economics and engineering, he reluctantly took on the second. After completing engineering, his earlier calling returned. The hunger and curiosity of economics and business took over. Hanging around with fellow investors who shared the same passion, he spent the next few years thinking economics and stocks every waking hour. Equity research in India was an evolving discipline in the early nineties and setting up a research desk was the logical next. But, what made it unique was that he never sold his research. Research was proprietary and used by a small group of investors with shared beliefs and values.

Being an independent thinker with set values and beliefs, Shyam took a conscious decision never to work in any company. Knowing that it made sense not to work in an environment where the values mismatched, he dreamt of building a clean consulting business in investment strategy on his own. But, the nineties were early days. That left him with investing as the only option. So building a proprietary portfolio was the way to go. Researching businesses, spotting opportunities and building portfolios was all he did for a decade.

The dream of building an investment strategy business got anchored in 2003. He started Smartvalue Equisearch private limited as an investment strategy firm. Over the next eight years, he built a professional research and strategy firm with domain expertise in equity research, investment strategy, fund research and investment analytics. The firm is poised to break new ground with ithought, its wealth management division that rolled in 2008 just when the markets bottomed. The dream of building an investor centric business of scale and substance is now playing out.

In this interview with Safal Niveshak, Shyam lays bare his investment philosophy and practices and his big learning and mistakes over the past two decades.

Safal Niveshak (SN): I’ll start with a very regular question about your background, how you got interested in investing and how you evolved over time as an investor.

Shyam Sekhar (SS): I am a graduate in chemical engineering. My family had a small business in chemicals. We used to make paints. We still make paints. After my graduation, I used to spend some time with my neighbour. He was a renowned chartered accountant, M. K. Sudarshan. He got me interested in the stock market. Those days, the stock market wasn’t like these days, when you get live quotes. None of this was there. Stock market was conducted in isolation, just like the courts function. Nobody knew what was happening inside. So at the end of the day’s trade at 3:15 PM, there would be a radio bulletin which gave you the closing prices of the day. That’s all you heard. And the next morning, you had to see the papers which would give you some marker rates. No averages, no volumes, nothing. It gave you a set of trade rates/quotes which would include the low the high and two more sample rates. We got only the rate of Chennai those days. Bombay rates would come one day later, when we went and bought a financial paper which was published out of Bombay. In 1990, Chennai didn’t have a business edition of any newspaper. So we would go and buy, because my neighbour (Mr. Sudarshan) was an avid investor, and everyday he would go and buy a Bombay edition of a paper. So we would board a bus and go to some part in the CBD where these papers would be sold by just one newspaper vendor. I would accompany him during these travels because it was my vacation and I had nothing to do. During these journeys I used to pick his brains about the working of the stock market.

Mr. Sudarshan was not only a Chartered Accountant but he also understood businesses very well. So his investing was based on the understanding of the future of businesses and how it would perform. And he was an avid investor who bought and never sold. This is a rare quality. The more I am in the market, the more I realise that the quality of an investor who buys and never sells is rarest of rare.

To me, at that time, it was very amusing that he never sold actually. And even to this day, when he is no more, most of his shares are still there. His family is still retaining those shares.

Anyways, he used to explain me what each business was and what it did. This created a lot of interest in me. I was reading lot of newspapers those days and that helped me become an avid reader from a very young age. Newspaper reading was one habit which I had acquired because of my interest in politics, and in the stock market.
[Read more…] about InvestorInsights: Shyam Sekhar

Great perspectives on a book that teaches why it all starts with one belief, one thought, one word, one action, one habit, one value, and one step at a time.

Think of the last time you set out to bring about a major change in your life – like losing weight, starting a new project or business, learning how to invest on your own, starting an exercise regime, learning to break an addiction, or building a new relationship.

What did you feel? Exhaustion? Excitement? Fear?

Most people, when faced with change, get so overwhelmed with the perceived enormity of the work required to bring the change that they either don’t get started or give up very early. But there is an alternate way to circumvent our brain’s resistance. The book I am talking about here presents an idea that creates a backdoor entry, a kind of hack for your brain.

This is a small but amazing book written by Dr. Robert Maurer. It was recommended by Prof Sanjay Bakshi in his interview with Safal Niveshak in 2012. The big idea discussed in this book is of Kaizen, which is Japanese for “taking small steps to continual improvement”.

I can almost hear your mumbling, “Another big fancy jargon”. But let me assure you that Kaizen works and I am not telling you this just because I read the book. It’s a powerful idea.
[Read more…] about BookWorm: One Small Step Can Change Your Life: The Kaizen Way