How to identify good company and value them…

Markets are at all time high and it is tough for any value investors to allocate its money in any business. But as we are long term player we are focused on quality and to companies that are trading at discount to its intrinsic values. If we don’t find any good companies to invest […]

Greek exit …. should it be a concern?

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Euro banks on the brinks, Harvard university professor Mr Ferguson talks in little detail.

By |May 28th, 2012|Treasure|0 Comments|

“What is it that goes up but never comes down…?”

“What is it that goes up but never comes down?” this was a riddle that was asked to me by 21 year old boy. My answer to him was, “definitely not the stock market!” We started this year around 4650 and rallied to 5400 levels and today we are close to 4900 levels.

Does it really matters where markets are heading for you to take your investment decision? If your answer is ‘yes’, then my advice is to re look at your strategy and it is time to re-write it again.

Warren Buffett once said that invest in equities thinking stock market will close down for next 10 years. My understanding to his insight on this subject is to focus on quality stocks (Companies) rather then studying the behaviour of stock market. Finding out quality stock is far easy then investing just looking at price and volume charts or any other technical charts.

The European financial crisis and specially Greece is being taking the centre stage from last one year in financial world. The last weekend G8 meeting at Camp David Maryland USA addressed European crisis by their leaders, but nothing new emerged from that.

A very reputed hedge fund founder Ray Dalio said in the interview with Barrons last weekend that, “At the moment, there is a tipping toward slowing growth and a question of whether there will be a negative European shock, and that will favor low-risk assets. But to whatever extent we have negative conditions, central banks will respond by printing more money. There will be a big spurt of printing of money, and that will cause a rally and an improvement in the stock markets around the world. It’s like a shot of adrenaline: The heart starts pumping again and then it fades. Then there is another shot of adrenaline. Everybody is asking, “Are we going to have a bull market or a bear market?” I expect we will have both with no big trend. Typically, in these up and down cycles, the upswing will last about twice as long as a down swing. We are now in the higher range of the up-cycle.”

 

You can read the whole interview here:

 

http://online.barrons.com/article/SB50001424053111904370004577390023566415282.html#articleTabs_article%3D1

What are your views in regards to the above interview? Share with us.

Also do let me know which company you want me to cover for my next week post. Leave maximum 5 names of the companies in the comment and we will choose the most popular ones.

By |May 23rd, 2012|Treasure|4 Comments|

The Buffett Munger show of 2012

 

One of our broker sent us a copy of notes taken at 2012 Berkshire Annual general meeting. It has really gone viral in the media, have a read on it and share your thoughts on it with us.

2012 Berkshire Hathway notes

By |May 16th, 2012|Treasure|2 Comments|

What makes investors successful in investing business?

This is the personal note that I thought to share with you after reading your emails.

The ability and skills required to become successful investor is achievable by everyone. The most important two requirements required in this profession are loads of commonsense and your judgement skills.

There is no institute in the world which teaches you how to invest in the market. In my profession, I have seen people coming from different fields of education (accounts, economics, law, engineers etc) and involve themselves professionally in managing others money. The very close to share market education available academically in the world is CFA (Chartered Financial Analyst) for the analyst and fund manager, which requires a serious amount of work, but completing it reflects the persons ability to apply for themselves to a task than to his or her ability to invest.

What I will be sharing in this post is the basic requirement anyone needs to start with investing. These are not hard and fast rules that you need all of those qualities, but if you miss any, you can work on it to build them consciously.

Confidence

‘All you need is ignorance and confidence and the success is sure’ – Mark Twain

As an investor in share market, what you subconsciously do is take decisions, the decisions to buy and sell any stock. It is vital to understand that generically these decisions are not white and black in nature.
Market is like flowing river and changes continuously its nature. Few times it will look like calm running water and same can change itself as a killing machine. You need to draw lines when to swim and not in those conditions.

You might come in the situation where a streak of decisions you take turn against you. This can dampen your confidence of taking right decisions. The only way to keep your confidence running is to identify and accept your mistakes and rectify them. Even professionals make mistakes including me. Let me give you an example, if you are a regular reader on my blog then you would have noticed that last year I was pitching a lot on ONGC and was arguing that it is trading at bargain.

But after time passed and the fog got cleared in understanding the plans of Government of India, we found it was a bad investment decision for our fund. The very next day we offloaded our entire position from our portfolio and were lucky this time that we didn’t incurred any losses.

That does not mean that ONGC is a bad investment for everyone. Our expectations were not inclining to its future growth in its values. Our judgement in this decision has worked for us for a while, but time will tell if we were right or wrong in regards to long term.

Competitiveness

There is a cat and mouse race within professionals in the market. Everyone wants to be first in this race. Like professionals, retail investors also need that spirit to beat the market. This is the only profession where your performance can be tracked every minute. My personal suggestion would be not to participate or evaluate your performance in this race for short term. In the bull market, you will notice lots of food is on table. But you can only outperform in long run against market if you know how to beat them in bear market.

Very few fund managers reported over all performance for previous year in positive territory. The same rule applies to you, how did you perform last and previous year? Don’t slack on your underperformance. Try to identify what you are doing wrong or where did you make mistake. Don’t let that fire of beating the market in all the trends extinguish. If you lack this competitiveness then it is better to search professional manager who can take care of your investments.

Curiosity

All the successful investors are always hungry of information. Investing in share market is all about coming across ideas that lead you to investigate further before you take any decisions.

A quality company is the one who does its business efficiently. Where, the management understands how much capital to allocate on inventory and how much to invest in any new factory or plant etc. The financial statements reflect those qualities of business. This is where our quality ratings help us to identify business.

But not all A1 companies could be always worth investing blindly. But it is a good start to investigate further about business with those quality ratings. As soon as quality ratings change (which do not so
often), I become curious and try to dig more information about the company and try to find if it’s worth investing.

You do not need to know everything about the company. Instead of understanding their day to day activity, I would prefer understanding business. Try to put effort in understanding how profits are generated by the business.

Independent thinking

Value Operations punch line for any investors are to think independently. In the bull market everyone outperforms with the market. But very few people are able to extend their performance in long run because they think independently.

Few of the great investors I have met in my life behave in quirky way. They have their own style, not just as investors but also in their personality. The best quality that I like about them is that they have enormous ability to absorb in various forms and uniquely process that to come to their conclusions.

In this jungle of information, it is important that investors absorb and process that information independently rather then the way journalist or management wants shareholders or investors to absorb in certain way.

I still remember an interview of Mr Jhunjunwala previous year when one of the journalists questioned him about the Titan Industry and was pointing out on various hurdles like gold rates and dampness in revenues that company is facing and raised doubts of its future prospects. Mr Jhunjunwala very modestly replied to them that he is not worried about all those issues as long as management is generating returns in range of 27-30% on its equity.

Modest

This is more to do with human’s personality. Be modest and register when you have picked up a bad company for investments. Everyone makes mistake. In search of extraordinary business, my personal stats tell me that I find one out of four companies that I stay invested for long time (7-10 years). There is no harm in accepting your mistakes. You will learn most from your mistakes.

Patience

If your performance is best in stock market then I am pretty sure you have very little to do in the market. This is unlike virtually with any vocation in life, whether it be medical, political, legal, business or education, where the harder you work the better you should perform.

If you have done your homework and chosen your stocks carefully then you will enjoy extended periods of profitable investment where you have to do very little to invest. In these circumstances stay alert and focus on new ideas and keep your ongoing research and investigations on them. Sometimes you just don’t need to buy and sell to make money.

The fourth quarter and yearly financial results season has just started and I will do my best to cover as many stocks as possible. Meanwhile if you have anything in your mind or want to share your research work with all the other readers, feel free to email me or post your comment on company you want me to talk about below. I will do my best to cover them in future.

By |April 10th, 2012|Treasure|3 Comments|

Mergers & Acquisitions

“Acquisition is like entering in marriage…” said by one of the very reputed fund manager. According to him most CEO’s don’t need any encouragement to acquire. They are predisposed to it already. There is only one compelling reason to make an acquisition. You are receiving more than you are
giving away. Only then does a company add value for its shareholders.

With recent globalisation in last decade, Indian corporate has spent $129 Billion in acquisitions outside India. I was going through this article recently which explains how Indians managed their acquisitions outside India.

You will find many promoters and management talk about synergies and how these acquisitions can help them to achieve their goals and grow value for shareholders. Have you seen management or company willing to buy two times X for a company which is trading for 1.5 times X in the market?

As soon as takeover is announced, you will notice that media starts sharing its view with help of independent valuations and comparing them with historically paid price for similar size of acquisitions and most of the time trying to justify management’s quotes.

As a shareholder, it is your money and you need to really look and do the due diligence whether the management is buying at premiums or discount. Because independent valuations and going with management decision does not make any logic to me.

The drivers that influence management to take decisions are different then of shareholders. You will also notice management and advisers coming out and talking about combination of company will save lots of money. My observation to these savings is eroded more often by paying premium price or in
big cheques issued to management for successfully completing the deal.

There is a big corporate graveyard which is filled with corpses of acquisitions that made sense at the time.

Let me share recent example and have also shared my views previously while acquiring this company that it does not make sense to pay such high price for loss making entity. I am talking about JSW ISPAT Steel.

A heavily debt burdened company and is reporting losses from last 3 years and looks as if will report losses for the fourth year. Before announcement of takeover by JSW Steel, ISPAT was trading at Rs 17.50 per share. (Book Value as of June 2010: Rs 13.25 per share)

An offer of Rs 22.25 per share for loss making entity and burdened with heavy debts did not made any sense to me. By March 2011 price of stock went up to Rs 23 levels. If you were shareholder of ISPAT, then you were lucky for getting opportunity to cut down your losses.

The performance of share price of JSW steel as a separate entity also did not show any synergy in acquiring ISPAT even after 15 months. Have a look at this interview during that time by JSW management and listen to their thoughts on this acquisition.

My question to all value reader is, how do you look at M&A and what is your approach towards it. For me, a business which is making loss should not be bought at premium to its Book Value, arguably at very less. JSW Steel has destroyed value instead of creating by acquiring ISPAT. Looking forward for your input on this subject.

By |March 5th, 2012|Treasure|0 Comments|

Value Operations farewell Mr. Walter Schloss….

Bloomberg reported farewell of Mr Walter on Feb 20th 2012. To read more please click here.

By |February 21st, 2012|Treasure|3 Comments|

The Gold Rush…

 

I know, we Indians love gold. And to prove our love, we have topped as the biggest gold consuming country. Our traditions, culture and history always claim our love for ornaments and specially if they are made of gold!

Buying gold for personal consumption is understandable, but buying as an investment to me is like putting your foot on different land. In my very close social contacts, I know many who keep buying gold every month or quarter as an investment. Many of you who are reading this might be doing same and I won’t blame you. It is that price spark in last decade that have given almost 400% returns on investment.

In simple terms, on one side of the investing coin is the idea that you lay out money today to get more back later. The flip side is that by purchasing today you forgo consumption today for the ability to consume more later.

Both the ideas above are not same and specially with the latter idea we are introduced to inflation. Investing for latter idea suggest, the purpose of investing is to at-least maintain or increase our purchasing power.

To this context Buffett observes:

“Even in the US, where the wish for a stable currency is strong, the dollar has fallen staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax free institution would have needed 4.3% interest annualy from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themseleves if they thought of any portion of that interest as “ income.””

 

Who knows better than us about the ‘blow’ of high inflation. Many investors write to me that, with high interest rates available in market through various banks, we are happy with our income through that investments and would avoid investing in Equities. It is worth to rethink after reading words of wisdom from Buffett.

Recently, I was going through the excerpt of Buffett’s forthcoming letter to its shareholder which you all can read by clicking here.

The most important subject for Indian investors in that letter appears to me of gold. Melted down all the gold would amount to one 68 cubed foot of uselessness. To get better understanding of purchasing power he compares that cube with – all the agricultural land of United States, sixteen companies as valuable as Exxon and a trillion dollars in walking around money.

He defends buying businesses is a superior strategy as companies throw lots of dividends to shareholder and land would have produced food. To me these remarks suggest me that he is trying to convey message that buying gold is not idle investment because ‘that just sits there’.

We, at Value operations also believe in what Buffett is trying to explain and would prefer buying available companies that produce gold rather than buying gold itself.

I believe Buffett’s take on investment landscape is correct. Bubbles are always followed up by a bust and nothing goes up forever.

“What motivates most gold purchasers is their belief that the ranks of fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.”

 

Buffett had always claimed that stocks are the best opportunity to invest to increase your purchasing power. I still remember in 1974 Buffett was very cautious proponent during high inflation time. When Forbes asked him during that time how he felt about the stock market, he replied, “like an oversexed guy in a whorehouse”. His 1979 newsletter to its shareholders serves a good reference to understand the limits of any assets to retain its purchasing power during high inflation.

“Just as the original 3% saving bond, a 5% passbook savings account or an 8% US treasurey note have, in turn, been transformed by inflation into financial instruments that chew up, rather than enhance, purchasing power over their investments lives, a business earning 20% on capital can produce a negative real return for its owner under inflationary conditions not much more severe than presently prevail.

 

If we should continue to achieve 20% compounded gain – not an easy or certain result by any means – and this gain is translated into a corrosponding increase in the market values of Berkshire Hathaway stock as it has been over the last fifteen years, you after tax purchasing power gain is likely to be very close to zero at a 14% inflation rate. Most of the remaining six percentage points will go for income tax anytime you wish to convert your twenty percentage points of nominal annual gain into cash.

 

That combination – the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gain tax on retained earnings)- can be thought of as an “investors misery index”. When this index exceeds the rate of return earned on equity by the business, the investors purchasing power (real capital) shrinks even though he consumes nothing at all. We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity.”

 

I take this wisdom as another warning for all of us to stick with high return on equity businesses…

Remember that when you buy any stocks, unlike commodities, there exists management risk, execution risk, result risk, competitor risk, economic risk etc. anything can go wrong in a business and frequently does. And while Charlie Munger has pointed out that, “almost all good businesses engage in ‘pain today, gain tomorrow’ activities”, you must know what you are doing.

I personally think indeed the best opportunity to retain and increase your purchasing power is by investing in stocks, but in good quality stocks. Knowing what you are doing and sticking to high rates of return on equity with little or no debt and to A1 and A2 businesses will increase your chances of doing better than stock index and inflation.

By |February 16th, 2012|Treasure|14 Comments|

Is this right time to clean up your portfolio?

 

We have talked over here about many headwinds like slow growth, inflation and European crisis. My prediction number one for this year is that though we had a good start this year, we will face similar or equal challenges what we did last year. Value investors should focus on the things that can impact value of any companies and growth prospects (in its value) while picking up few bargains.

The biggest challenge any investor faces today is to identify any rubbish within their portfolio. Once they do, it is in their interest to get rid off those investments before they damage further your returns.

Recently, after talking to few high net worth investors and institutions I have witnessed people throwing their towel completely from investing in equities after witnessing climatic events and are simply fed up with poor medium term performance and increased volatility.

Nifty 50 has given a return of 27% in last five years and BSE 200 has given returns of 24%. Nifty 50 and BSE 200 also contain rubbish stocks so it is no wonder index has given such pathetic returns. step one is to clean up the portfolio which are rated C1,C2, C3, C4, B3 and B4 and step two is to be ready to buy in quality stocks (A1, A2 and B1) when bargain exists.

This is just one of the many framework and scenario I am operating with and I wonder how long this heightened volatility and poor index performance will transpire. Will investors really exit from equities and will believe in all those advisors offering their own brand of ‘safe’, ‘secure’ and stable investments? On the one hand, I hope so. It would mean certain bargain.

Here is my warning to you all who are looking to give up investing in equities. The time to invest in shares and make good returns is precisely when everyone else isn’t.

The life time opportunity which comes very rare (maybe 2-4 times) to own quality stocks at very cheap price should not be swayed for 20-30% returns and expecting to buy them back when they fall down in future.

If price do fall further – and they could – you need to get ready and will need that extra cash to capitalise on that opportunity. It is not necessary that price will fall to previous lows that were experienced earlier, but the best framework to operate in such conditions is to hold your best buy and liquidate that asset which is not performing and invest them when opportunity emerges to buy quality stocks more.

Rule one: Don’t loose money

The key to slowly and successfully build a portfolio in equities is to avoid loosing money permanently. Sure, good companies will see their price swing but poor companies will see downswing more frequently.

So the easiest way to avoid loosing money is not to buy weak or expensive companies. I have avoided loosing money in my private fund by applying value investing rules that I shared with you all in my previous post.

I have seen many companies on a face value of growing revenues and earnings make large and expensive acquisitions and undertake different projects that are followed by write-downs in couple of years. Write-downs are an admission of a company that they paid too much for an Asset.

When too much is paid for acquisition, or the projects to grow businesses are undertaken, equities go up but profits do not and you can see that in the ratio that I have worked so hard to make popular, return on equity (ROE), is low.

If you look in the market you will find plenty of companies with lower returns compare to even what bank is offering on deposits which have much lower risk. Over time, if these resultant lower returns do not improve, it suggests the price company paid for acquisition was in upper circuit and business equity valuations should be questioned now. If you ask me for the examples of companies in such scenario where they are facing issues to sustain their returns then Reliance Industries and Bharti Airtel are few to name.

When return on equity is very low it suggests the business assets are overvalued on the Balance Sheet. That in turn suggests, the company has not amortised, written down or depreciated its assets fast enough. That means the past historical profits that company announced could be overstated.

These sorts of companies with low returns tend to have a very low- quality score (A3, A4, B3, B4, C1, C2, C3 and C4) by Value operations and also their performance is subdued.

If your portfolio has any shares with such characteristics then you could be at risk because these companies might be very expensive compare to its intrinsic values.

Time is not a friend of poor company. And companies that are rated by Value operations as C4 and C3 are best to avoid if you want best chance to avoid permanent losses. Take a look at the companies in your portfolio; have they issued lots of shares to make acquisition? Are they producing low and single digit returns on their equity? If the answer is yes then you might own ‘C’ Quality Company.

Cleaning up your portfolio not only lowers its risk but will produce cash that may just prove handy in coming months.

Now here is the offer from Value Operations, apart from NBFC and financial stocks, list down 5 companies of which you want to know the quality score in comments below and we will share them all together next week.

By |January 30th, 2012|Treasure|40 Comments|

The best of Value investing… From the world’s best!!

We have noticed that many new bloggers have joined our community in recent months. To all of them, with whom I have not interacted by any means, I take this opportunity to welcome you all and appreciate all of your inputs to build this blog as a knowledge bank for value investors.

If you gone through my earlier post and have studied the approach we advocate at Value operations, then let me remind you that this approach is not new to value investing. We have just designed a process to implement what all great investors have been teaching us for decades.

Value investing has worked very well for us and many others who implement on those teachings. We think you should include following 5 most important things in your research work and only invest if you tick all those boxes and if that company is offering a good Margin of Safety.

Those five things are as follows:

  1. 1.Good long-term prospects of the company.
  2. 2.Excellent Return on equity with sustainable competitive advantage to sustain those returns.
  3. 3.Less or no debts
  4. 4.Surplus cash flow
  5. 5.Quality Management

If you find all those characteristics in any company, we call them extra-ordinary businesses and they are worth to invest when they are trading at cheap.

All the above things are not new or we didn’t just come up with those ideas overnight. Many of the great value investors have advocated about those qualities. We have just refined the process which can easily be executed by retail investors and help them in their research.

What we want to share with you all is the same thing but in the voice of all those investors. There are five clips, all together of approximately 2 hours. But let me assure you that those 2 hours are worth spending listening to them if you have not before.

Part One

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Part Two

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Part Three

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Part Four

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Part Five

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By |January 24th, 2012|Treasure|9 Comments|