Almanack

Valuing stocks seems like a tough task in itself and more difficult is drawing a line between paying up and overpaying. Here are some insights on this topic I draw from investing legends and their experience.

Charlie Munger said this in his landmark speech titled – A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business…

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount.

 Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.

Now, if I were to look at some of the high quality businesses in India, it surely seems that investors are taking Mr. Munger’s idea about paying an “expensive looking price” very seriously. Here are, for instance, the P/E ratios of some high quality businesses…

In Lewis Carroll’s “Through the Looking Glass”, Alice’s finds that she has to run faster and faster just to stay in place.

Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else if you run very fast for a long time, as we’ve been doing.

Here’s the advice Red Queen, an antagonist in the story, offers Alice…

A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!

In sum, the Red Queen advises Alice to exert ever more effort just to maintain her current position.
Evolutionary biologist Leigh Van Valen took inspiration from the Red Queen’s words and proposed a principle called the Red Queen Effect in 1973 to explain how, for an evolutionary system, continuing development is needed just in order to maintain its fitness relative to the systems it is co-evolving with.
In biology, this means that animals and plants don’t just disappear because of bad luck in a static and unchanging environment, like a gambler losing it all to a run of bad luck at the casino.
Instead, they face constant change – a deteriorating environment and more successful competitors and predators – that requires them to continually adapt and evolve new species just to survive.
This theory has been applied to explain the relatively high speeds of rabbits and foxes, each of which developed faster running abilities in an attempt to gain respective advantage in the predator-prey relationship between these two animals.
[Read more…] about Spotlight: The Tyranny of Valuations

The key to bringing lasting change in your life is by way of great habits. And the best way to build great habits is by starting small and building up.

I hope you would agree with me that life isn’t all about stock market investing or for that matter just about money. Making money is only a means to a greater end i.e., living a happy life.

It’s true that for many people stock market investing is a passion and they don’t do it just for money. However, it circles back to the logic that the activity of investing in stock market makes them happy. So investing is just a tool to achieve something more important – personal happiness.

The age old wisdom suggests that happiness is brought about by the right balance of financial, mental, physical and spiritual health. What financial abundance does is that it gives you an option to stop worrying about money all the time and focus your energy towards other happiness factors.

But you don’t have to wait till you are financially free to start your work on other areas of life. You can start today. Let’s pick up one area, say health and see how you can bring a change in this part of your life.

Everybody knows that to be more healthy and fit, you need to exercise and eat well. It is a common knowledge and part of everybody’s new year resolution. Problem is that these resolutions are short lived and motivation to carry on the new activity dies down rapidly after few days.
[Read more…] about Life 2.0: Habits of Life

Honesty and ethical practices are of utmost importance in any business, and especially in the investment business that remains clouded under mistrust. What’s wrong and what must be righted is what we discuss here.

The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you’re not naive enough to think we’re living in a democracy, are you buddy? It’s the free market. And you’re a part of it. You’ve got that killer instinct. Stick around pal, I’ve still got a lot to teach you.

[Read more…] about EthicalAnalyst: Ethics in Investment Business

We discuss the quality of language used by companies in their annual reports and other investor communication, and suggest why this may be a result and indicator of governance or mis-governance.

In August 1998, the US stock market regulator, Securities and Exchange Commission (SEC) released a book called A Plain English Handbook.

Now, you may wonder, “What business does a stock market regulator has to focus on plain English?”

The SEC released this handbook to show corporate managers, especially CEOs, how they could use well-established techniques for writing in plain English to create clearer and more informative disclosure documents like annual reports, while meeting all legal requirements.

The preface of the handbook was written by none other than Warren Buffett – the man who writes the world’s best shareholders letters – and this is what he wrote –

For more than forty years, I’ve studied the documents that public companies file. Too often, I’ve been unable to decipher just what is being said or, worse yet, had to conclude that nothing was being said.

There are several possible explanations as to why I and others sometimes stumble over an accounting note or indenture description. Maybe we simply don’t have the technical knowledge to grasp what the writer wishes to convey. Or perhaps the writer doesn’t understand what he or she is talking about.
[Read more…] about Corporate Governance: When Words Speak Loud

Neeraj is an investor based in Pune, Maharashtra. Investing is his passion and investing in equity is what excites him most. He has built his core competency around investing in Indian listed companies, specifically mid-caps and small-caps, using fundamental analysis and value investing principles.

By nature, Neeraj is conservative and risk-averse, and it spills over in his approach towards investing too. He is an avid reader and likes books based on value investing, behavioural finance and psychology.

While I have met Neeraj just a few times, I have come to respect his investing acumen via whatever little discussions we’ve had.

In this interview with Safal Niveshak, Neeraj lays out his investment philosophy and suggestions for how investors can do better in their investment decision making.

Over to Neeraj!

Safal Niveshak (SN): What’s your broad investment philosophy? What are the most important things for you as an investor?

Neeraj Marathe (NM): My whole philosophy rests on doing things that (I think) I understand. I do not think I can call myself as a ‘value investor’ per say, since I do not think there is a difference between value investing and growth investing. If you pay reasonably for growth, its value too! I try not to have any mind-block or stick to one type of investing and am willing to do whatever makes sense. So I am not averse to playing cyclicals which are short term (for me, 3-5 quarters is short term) or participating in special situations. I am a concentrated investor and don’t diversify much. My portfolio consists of maximum 8-10 positions.

For me, the most important things as an investor are:

• Doing things I understand and ignoring the rest, howsoever appealing they might be
• Being ethical in all aspects of investing
• Being independent in thought process and decision making
• Always recognising and acknowledging the role of luck in investing and being as grounded and humble as possible

SN: Value investors often talk about the importance of stacking the odds in their favour. How do you personally try to do that?
[Read more…] about InvestorInsights: Neeraj Marathe

[Read more…] about StockTalk (February 2015)

“Latticework”, written by Robert Hagstrom, is unlike most other investment books I have ever read. I won’t advise you to read this book if all you are looking for is magic formulas or readymade rules of sound investing.

This is a powerful book arguing for the importance of a multidisciplinary approach to investing. So if you are one amongst the many investors who have been searching out companies to invest in for a number of years and all you have learned is to plug basic financial information into excel models, this book may be worth a read.

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One peculiar but common way our brain works is that we often remember what’s easily available to us, and see what’s easily visible.

So, we conclude that the stock trader who is rich must know what he is doing. In the same way, an investor who uses leverage to increase his bets and in the process magnifies his returns is also considered a role model.

In business, a CEO who borrows a lot of money to make acquisitions and in process turns his business bigger in quick time, also seem to be doing the right things (at least when times are euphoric).

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In investing, what feels comfortable is rarely safe. Read why independence of thought and not blindly mimicking the herd is a more sensible and profitable strategy for investors.

What feels safe is often risky, and what feels risky is often safe.

If there was one of the most contradictory statements about the evolutionary instinct we possess, this must be it.

Since ages, human beings have tried to seek safety and avoid risk whenever possible (well, we’re not talking about the stock market yet!).

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