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Value Investing, the Chetan Parikh Way – Part 3

I recently had the privilege of meeting one of the highly regarded value investors in India, Mr. Chetan Parikh in his office in Mumbai.

After publishing Part 1 and Part 2 of his interview recently, here is Part 3.

Safal Niveshak: Do you think it’s important to do historical research looking back at companies in different circumstances and understanding or trying to draw conclusions about why they succeeded or failed in a particular decade or period of an economic cycle or change in leadership? Is historical research an important part of your investment methodology or not so much?

Mr. Parikh: In trying to answer the question, I’m reminded of George Bernard Shaw’s remark that when an historian had to rely on one document he was safe, but if there were two to be considered he was in difficulty, and if three were available his position was hopeless.

Analyzing Crompton Greaves, the Ben Graham Way

Ben Graham, the Father of Value Investing, writes the following at the start of Chapter 37 of Security Analysis…

In the last six chapters, our attention was devoted to a critical examination of the income account for the purpose of arriving at a fair and informing statement of the results for the period covered.

The second main question confronting the analyst is concerned with the utility of this past record as an indicator of future earnings.

This is at once the most important and the least satisfactory aspect of security analysis. It is the most important because the sole practical value of our laborious study of the past lies in the clue it may offer to the future; it is the least satisfactory because this clue is never thoroughly reliable and it frequently turns out to be quite valueless.

These shortcomings detract seriously from the value of the analyst’s work, but they do not destroy it. The past exhibit remains a sufficiently dependable guide, in a sufficient proportion of cases, to warrant its continued use as the chief point of departure in the valuation and selection of securities.

Work Less = Earn Less = Spend Less = Live More

“How can you be so kanjoos (miser) to be wearing a t-shirt worth just Rs 250?” a friend ridiculed me recently, while showing off his latest Van Heusen shirt worth Rs 2,000.

“Think whatever you want of me, but I am like that only,” I told him. “If I can get a t-shirt worth Rs 250 that I can use for a year, why should I buy anything expensive that would last almost the same time?”

“Wow, and you call this cheapness as enjoying life. Huh!” he continued.

How to Master Analyzing the Balance Sheet – Part 2

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.

Howard Marks on How to Identify Investment Opportunities

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.

Wit, Wisdom, Charlie: Elementary Worldly Wisdom from Charlie Munger (Issue #8)

This post is authored by Puneet Khurana, a Safal Niveshak tribesman.

“Authority, authority!” they shout
Whose minds, not large enough to hold a doubt,
Some chance opinion ever entertain,
By dogma billeted upon their brain.
~ Ambroce Bierce

There is one thing we all have been taught from very beginning and that is to accept what our elders tell us; to accept their authority.

To do otherwise was considered to be an act of indiscipline and something that needs to be corrected.

The reason is well understood. At a young age, when our minds are not fully developed and we are not well-informed, relying on elderly wisdom served us extremely well.

How to Master Analyzing the Balance Sheet – Part 1

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.

What Do You Want Me to Write About?

I have been sharing my thoughts via Safal Niveshak for almost 1.5 years now.

I have strived to cover a very diverse set of ideas around investing, personal finance, and experiments I am conducting in my own life.

Whenever I sit down to write, I usually choose a topic based on…

What I think you would like to learn
What I think would be useful for you to learn
My own experiences that I think you will find useful

So whatever I write on Safal Niveshak is for you. And I want it to be useful to you.

Now here’s what I’m asking.

Post topics of interest to you in the Comments section below – topics related to investing, stock market, and financial life…which you want me to cover on Safal Niveshak.

Based on the requests I receive, I’ll line up the topics I think are particularly interesting and important and will benefit a wide audience, and write on them over the next few days and weeks.

I look forward to hear from you.

Note: I have opened registrations for Safal Niveshak’s Art of Investing Workshop in Mumbai and New Delhi. Click here to register to attend the Workshop in any of these cities. Few seats remain, so please hurry!

What to do with Opto Circuits 2.0

I have written three posts on Opto Circuits (OCIL) so far – two in June 2012, followed by one in August.

The reason for the first post was requests from a lot of readers who wanted me to research the company.

The second post was my research report on OCIL.

The reason for the third post was requests from a lot of readers who were worried after seeing a 10% fall in the stock from the time I wrote my research on the company.

Now, I’m writing a fourth post on the OCIL…after requests from a lot of readers who want my view on the stock after it has fallen 52% since my second post and 46% since the third one.

“Too much of the past Vishal,” you might be thinking. “Tell me straight what I must do with Opto Circuits. I’m already sitting on a big loss!”

EPS EPS, Where Have You Been?

We are in the midst of the “earnings season” and the barrage of company press releases, conference calls, and analyst meets.

Stock market analysts all over the country currently have their noses buried in quarterly statements, hoping to get a sense of company-specific and industry trends.

If their habit hasn’t changed since I left the industry two years back, most of them will be taking up management teams’ time by questions that serve no other purpose than to help them (the analysts) forecast the next quarter’s earnings per share…or EPS.

Old habit die hard. So even I’m trying to get back my focus on my old friend EPS, that continues to act oddly amidst slowdown across industries.