How To

Introducing: The DCF Calculator

First things first. I had a wonderful workshop in Pune last Sunday. And here are the amazing tribe members who attended it…

Safal Niveshak Value Investing Workshop - Pune 2015

My upcoming Workshops would be in Chennai, Delhi, and Mumbai, and you will get an update on the same soon.

Anyways, let me now focus on today’s topic. Ever since I shared my stock analysis excel a couple of years back, I have received innumerable questions from people who’ve found it difficult to handle the excel. 🙂

If you have been facing a similar problem, don’t worry, because I’m working on a few simple online calculators – like the one on DCF or discounted cash flow method below – that can help you analyze the financials of businesses and also value them.

Now, before you praise me for my tech skills which I don’t have, let me share that this calculator has been developed by my good friend and tribe member Anshul Khare, who is also working with me on other such calculators. Thanks Anshul!

Before you work on the calculator below, read this post I did on how to value stocks using DCF to understand the basics of sensible DCF usage, and how to avoid its misuse.

How to Master Analyzing the Cash Flow Statement

A wise man once said, “If your outgo exceeds your inflow, then your upkeep will be your downfall.”

That says a lot about the importance of cash flow in a person’s life. In fact, if your cash flow is healthy, it will cover a lot of sins. 🙂

A company is no different. You will find businesses that generate a lot of cash flows, even when they may not be earning profits.

I have a friend who runs a company that did not make profit for five years in a row. But my friend never missed his yearly trip to the US, and he bought a high end car every two years. His employees were also paid well.

You may wonder, “But how he did it?”

The answer is – Great cash flow.

One Big Lesson I Learned Seeing Warren Buffett Make Mistakes

IBM and Coke represent two of Berkshire Hathaway’s three biggest investments (the biggest being Wells Fargo).

However, disappointing earnings announcements at these companies cost Warren Buffett around US$ 2.5 billion in the week gone by.

These losses add to a recent rough patch for Buffett, who slashed Berkshire Hathaway’s stake in British retailer Tesco recently. He has described buying into the stock as a “huge mistake” after the company announced another earnings disappointment and, over that, a £ 250 m accounting scandal.

Few seats remain at my Value Investing Workshop in Bangalore on 1st Nov. (Saturday). To join, please register here – https://t.co/VoXkYaHm9q

— Vishal Khandelwal (@safalniveshak) October 27, 2014

The media is rife with these big “mistakes”, especially Tesco, and is surprised how the world’s best investor could commit them. But then, Tesco isn’t Buffett first mistake and it won’t be his last mistake either.

Charlie Munger’s Six Secrets to Winning Big in Investing

Charlie Munger, business partner of Warren Buffett and vice chairman of Berkshire Hathaway, recently did an interview with Jason Zweig published by the Wall Street Journal. You can read Zweig’s notes from the interview here.

Here are the six simple but big-big ideas I’ve pulled out from WSJ’s interview of Charlie Munger – these are all you need to become a smarter investor, if you can ingrain these in your investment philosophy and practice them while making your decisions.

Over to Charlie!

10 Investing Gems from Peter Lynch’s One Up on Wall Street

This article was originally published in June 2012. I was re-reading Lynch’s book and thought of re-publishing these amazing lessons again.

Peter Lynch's One Up on Wall Street Apart from Benjamin Graham’s The Intelligent Investor, there is no better book to get started for beginners than Peter Lynch’s One Up On Wall Street.

The easy-going and simplistic stock picking style discussed in this book brought Lynch great success in his profession as a fund manager at the US mutual fund company, Fidelity.

The best part about this book is that it’s low on number crunching but high on anecdotal stories. Moreover, readers are given a clear picture on how to get off to a good start in the stock market.

One Up On Wall Street offers insight into the mind of one of the greatest money managers of all times.

Lynch helps you discover that he is a normal guy (like you and me) who thinks rationally, believes in doing his own independent research on companies, asks plenty of questions, and gets caught off guard by the market at times, just like anyone else.

Anyone thinking about buying individual stocks must read this book before they ever make their first stock purchase.

Industry Analysis: Banking – Part 1

First a warning – Banking is not within my circle of competence. This post is an attempt to put forward whatever little I have studied and know about this industry. It’s now upon you to build on the same and learn more about how this industry works.

About Banking
Wikipedia defines a bank as…

…a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links together customers that have capital deficits and customers with capital surpluses.

Banks have come a long way from the temples of the ancient world, but their basic business practices have not changed.

50% of the "early bird seats" for my Kolkata Value #Investing Workshop are gone! Register now if you wish to attend – https://t.co/dVRV8D4bmd

— Vishal Khandelwal (@safalniveshak) August 1, 2014

Banks issue credit to people who need it, but demand interest on top of the repayment of the loan. Although history has altered the fine points of the business model, a bank’s purpose is to make loans and protect depositors’ money. Even if the future takes banks completely off your street corner and onto the internet, or has you shopping for loans across the globe, the banks will still exist to perform this primary function.

Now, due to their importance in the financial system and influence on national economies, banks are highly regulated in most countries.

How to Identify Managers Who Can Run Away With Your Money

One of the first written codes of law in recorded history come from Hammurabi, who ruled the kingdom of Babylon 1,750 years before Jesus walked the earth.

He is known for the set of laws called Hammurabi’s Code, which were written almost 3,800 years ago, and were inscribed on stone tablets standing over eight feet tall. Owing to his reputation in modern times as an ancient law-giver, Hammurabi’s portrait is in many government buildings throughout the world.

Here is one of the several laws that Hammurabi formulated in his times…

If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.

Well, if Hammurabi’s Code was to be implemented in today’s times, we would have seen a lot of corporate managers being taken to task in the ways the law suggested.

How to Analyze Any Industry

This is Lesson #18 of my Mastermind Value Investing Course. I am sharing it here given a lot of request from readers.

One of the legendary investors, Peter Lynch, who successfully ran Fidelity’s Magellan mutual fund for more than a decade, has often mentioned that investors are well advised to buy a business that’s so good that an idiot can run it, because sooner or later an idiot will run it.

Now, Lynch’s comment begs an important question – What dictates a company’s economic returns?

I am not asking what determines a company’s share price performance or what determines stock price returns for shareholders. Instead, it’s more important to know what drives a company’s economic profitability and sustainable value creation.

Industry Analysis: Cement – Part 2

Click here to read Part 1

7. Competition and Consolidation

Although the Indian cement industry has some multinational cement giants, like Holcim and Lafarge, which have interests such as ACC and Ambuja Cement, the Indian cement industry is broadly home-grown.
Ultratech Cement, the country’s largest firm in terms of cement capacity, holds over 18% of the domestic market, with ACC (50%-owned by Holcim) and Ambuja (50%-owned by Holcim) having 10% and 9% shares respectively (as per FY13 capacity numbers). Many of the remaining dozen top players are India Cements, Shree Cements, Ramco Cements, Lafarge, Birla Cement and Binani Cement.
Between them, the top 6 and top 12 cement firms have around 50% and 70% respectively of the domestic market. Around 100 other smaller companies produce and grind cement on a wide range of scales but are often confined to small areas.
The industry has seen some consolidation in the past, and the same is going to be the mantra for most large payers in the years to come. With larger capacities, companies enjoy a better cost structure driven by significant vertical integration and location advantage with respect to sourcing of raw materials and market access. Most small companies, because of lack of one or more of these factors, have a weaker competitive position.
The industry economics and the regulatory actions exhibited by the Competition Commission of India (see here and here) may push marginal players to consolidate. However, not all marginal companies would be attracting acquirers. Companies with either access to resources (raw material and power/fuel) or proximity to relatively underserved markets or both are most likely to be targeted for consolidation.
A few compelling reasons why Indian and foreign cement majors appear to be gung-ho about acquiring cement capacities in India include a). Excess capacity of the existing players which can be used to fulfil the global demand at lower cost of production; b) Rising cost of greenfield/new projects which also tend to have longer gestation period.

Industry Analysis: Cement – Part 1

As part of my initiative to help you enhance your “circle of competence”, I am starting on a new series on analyzing key industries that can offer you profitable, long-term investment opportunities. I start this series by analyzing the Cement industry.

1. About Cement
Wikipedia defines ‘cement’ as…

…a binder, a substance that sets and hardens as the cement dries and also reacts with carbon dioxide in the air dependently, and can bind other materials together. The word “cement” traces to the Romans, who used the term opus caementicium to describe masonry resembling modern concrete that was made from crushed rock with burnt lime as binder. The volcanic ash and pulverized brick additives that were added to the burnt lime to obtain a hydraulic binder were later referred to as cementum, cimentum, cäment, and cement.

At the basic level, cement is a binding substance that is intended for use in building or construction material and can withstand varying environmental conditions. The four elements necessary for its creation are iron, aluminum, silicon, and calcium.

These elements are burned together in a kiln and are finely pulverized to create the powder and used as an ingredient of mortar and concrete we then call cement. This powder hardens once it is mixed with water but water does not break the bond once it is formed.

The manufacturing process of cement consists of mixing, drying, and grinding or limestone, clay, and silica into a composite mass. The mixture is then heated and burnt in a pre-heater and kiln to be cooled in an air-cooling system to form clinker. This is the semi-finished form of cement. This clinker is cooled by air and subsequently ground with gypsum to form cement.