Wit. Wisdom. Value Investing.
One of the oft-asked questions in my Art of Investing Workshops is…
“How can a small investor create his circle of competence?”
This is a very important question, because “circle of competence” is in itself one of the most important facets of successful investing.
[Read more…] about How to Create Your Circle of Incompetence
It’s been exactly two years since I quit my job to start on my own. A lot of people I meet now think I am lucky to be living a life of my own choice – following my passion…doing what I love doing.
But it hasn’t been hunky dory all the way. Living without an “almost certain” paycheque has been a difficult transition for me. But then, it’s a choice that I made, and thus have no regrets.
In fact, I find myself blessed and very lucky to be able to see this day, when I am writing to you about how I have been living happily, prosperously, and without a paycheque.
Nah, it’s no secret! It’s just the way I have started to define prosperity.
[Read more…] about How to Live Prosperously Without the Paycheque (A Personal Experiment)
A few days back, I had posted a video on how to analyze the balance sheet on the Equities and Liabilities side.
In continuation of that series, here are two videos on how to analyze the Assets side of the balance sheet.
Given my habit of speaking too much when no one is listening :-), I have divided the explanation in two parts.
[Read more…] about How to Master Analyzing the Balance Sheet – Part 2
One of the questions I am asked often via emails or before my Workshops is – “How to identify the right stocks for investment?”
I have explained the thought process in my value investing course, through my posts, and also do so in the Workshop.
The core steps are well-known – look for simple businesses that fall under your circle of competence and avoid everything else, read their financial statements to assess their strength and also vis-a-vis their competitors, and then value them using a few intrinsic value methods.
This process covers a large part of the “action” as far as identifying sound investment opportunities is concerned.
But there is a step prior to this process as well – a step where you create the right mental framework required to identify the right investment opportunities.
[Read more…] about Howard Marks on How to Identify Investment Opportunities
Here is what Mr. LS Chauhan, a tribesman, wrote as a comment on my latest post on Opto Circuits – “Could you please consider taking OCIL balance sheet as an illustration while you post your next lesson on ‘How to read a balance sheet’.”
So here is a video I have prepared to help you understand the Balance Sheet, and through the example of OCIL’s balance sheet. 🙂
Since explaining how to analyze a complete balance sheet would have taken a lot of time, in this video I explain how to look at the “Equity & Liabilities” side of a balance sheet. I will take up the rest of the analysis – of the Assets side – in a subsequent video.
Anyways, as they say, to know how good a job a manager did, you have to have a good idea how much risk he took.
In the same way, to know how good a business a company is doing, you have to have a good idea how much risk it carries on its balance sheet.
The “Equity & Liabilities” side tells you exactly that.
[Read more…] about How to Master Analyzing the Balance Sheet – Part 1
Ever since I wrote posts on the importance of reading annual reports and how to read annual reports, I’ve received a lot of emails from readers on a post on analyzing financial statements.
In a classic case of procrastination, I did not write that post so far.
But my guilt has got the better of me, and the result is this video that will help you with the basics of financial statements and how you can study the inter-linkages between the three – P&L account, balance sheet, and cash flow statement.
[Read more…] about How to Read Financial Statements – Part 1
In 1949, when asked what it means to be an “intelligent” investor, Benjamin Graham, the father of Value Investing, said…
The word “intelligent”…will be used…as meaning “endowed with the capacity for knowledge and understanding.” It will not be taken to be “smart” or “shrewd”, or gifted with unusual foresight or insight. Actually the intelligence here presupposed is a trait more of the character than the brain.
Then, in 1976, he summed up “investing” with these words…
The main point is to have the right general principles and the character to stick with them.
[Read more…] about How to Become Graham’s “Intelligent” Investor
A company’s financial statements can be an investor’s best friend, or biggest foe.
If read carefully, an investor can gain valuable insights into the company – like finding durable sustainable moats a la Buffett.
However if these statements are read without care, and one acts upon his hunch, thinking – “Let me buy the stock since it’s rising! I’ll read the annual report later.” – he or she can lose his/her entire investment.
Like it happened in the case of Deccan Chronicle recently, or for that matter, Suzlon. Of course there are hundreds of other companies that come to mind, but then that’s not the point here.
The point is that some financial statements shout out to be read – and carefully – by investors who are buying into these stocks without looking into the deep mess the balance sheet and cash flows are hinting at.
If you have been a buyer of such messy businesses in the past, and have now vowed to find out the red flags that lie within a company’s financial statements, there is one book you must read right away.
Warren Buffett wrote in his 1992 letter to shareholders of Berkshire Hathaway…
In the Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset.
What Buffett defines here is essentially what we know as the discounted cash flow or DCF, a key method to calculate intrinsic value of companies.
The interesting thing to note here is that no one knows whether Buffett has ever used DCF himself!
Even Buffett’s business partner and alter ego Charlie Munger has occasionally said that he has never seen Buffett doing any DCF calculations.
[Read more…] about How to Value Stocks using DCF…and the Dangers of Doing So
“How can this be possible?” you must be wondering.
Indeed there’s a way – and you can get a lot of hints from this on whether to junk the annual report, or to explore it deeper.
Well, let me have this video do the talking.
In this video, I also talk about 8 warning signs you must watch out for while glancing through an annual report.
[Read more…] about How to “Read” an Annual Report in 5 Minutes