bharti shipyard;

Common sense investing series: Part one


Hi, my name is Aziz Dodhiya and I am the chief investment officer for the Valueoperations fund. Our stock market investment approach is simple, we do not bet on daily up’s and down in the market. Instead, we buy outstanding businesses with bright prospects at right price and all the other times we protect […]

Is it sinking…..?…. Or Already Sunk…

We always focus on identifying best business opportunities to invest with. Did anyone of you analysed any business that had poorly performed in the stock market? Well, if not, here are the few examples I am going to share with you in this post.

We will be looking at the following businesses that have really […]

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 […]

Is your company “Mr Perfect”?

Portfolio Point: Do you believe in the idea of investing in ‘Perfect Company’?

We started Value Operations blog on 18th April last year and our vision to get that started was to share our knowledge and idea that we have evolve on how to invest successfully in stock market.

When we started our blog, Indian equity market was almost in the sixth month of declining phase. Investors were talking about value investment opportunities available in the market. My inbox was full of investment ideas for our fund from our clients.

I was sitting tight lip and was of view, that yes there are opportunities available but not many. I found three investment opportunities out of 1565 stocks trading on National Stock Exchange (NSE) at that time which were in my radar.

Bharti Shipyard was the hot topic at that time and its stock price was travelling down from around Rs 200 to Rs 140. Today it is trading at Rs 68! We are expecting its value after third quarter results in range of Rs 50 – 60 for March 2012 and at that time too we didn’t considered as investment grade.

Few months back VIP Industries was trading at Rs 80 and travelled as far as Rs 110 in less than 10 weeks. Almost 40% jump! But the stock price landed back to Rs 80. When it was trading at Rs 80, we said that it’s trading at its fair value to its March 12 earnings and there is no discount available. Many investors had different view and few of the investors also sent email and posted their views on our blog that it is going to cross very soon Rs 100, and it did happened!

My point to long term investors to think over here is, that if your horizon for investment is for the long term like our own fund or any other fund ( I am not thinking to retire another 40 years!) then running behind the momentum is foolishness.

In short run, the father of investment Benjamin Graham observed that market tends to be a bit like a popular election (made up of operators) and prices can bear no relationship to the underlying value of the business. Fads, fashions, so-called “new paradigm” or genuine innovations like the Facebook idea or internet can all produce prices that diverge frighteningly from the true value of the business.

In July 1999, Warren Buffett added: “weight counts eventually. But votes count in the short term… unfortunately, they have no literacy tests in terms of voting qualifications…”

There are more than 1800 opportunities available to invest with, but same time not all are worth to invest with on the National Stock Exchange today. Investors are always in look for perfect opportunity to park their money. But how do we know which company is the perfect one?

We advocate looking for these five attribute and doing thorough research and follow our quality ratings and intrinsic values:

1. Less or no debts on the balance sheet

2. Surplus Cash Flows

3. Extraordinary returns on equity with sustainable competitive advantage

4. Long term prospects of the business

5. Quality management

If you do not find any one of the above attribute missing in your favourite company then just ignore that opportunity, as you will come across many more opportunities in the future to invest with.

One Fund Manager shared with me the points of Perfection which he looks for before investment:

1. The company’s Balance sheet should have Net cash rather than Net Debt.

2. The company should show profit growth in all economic conditions.

3. The business should be experiencing fast growth.

4. The business should be unique in nature and very hard to be copied.

5. The business should grow without buying other businesses.

6. The business does not exist because of government regulations.

7. Poor management is not desirable

8. The business has many customers.

9. The share registry is free of institutional shareholders.

10. The financials should be as easy to read as children’s book.

What points of perfection you look for in any business before investing? Share with us if possible with the name of the company.

By |May 14th, 2012|Research|18 Comments|

Is this right time to Sell…?

I wanted to talk on this topic long time back. But I didn’t. The only reason behind it was that I wanted that to come from you. A relationship that has a quality of ‘give and take’ lasts long and is profitable for both the parties.

We have done many presentations on when to sell and what companies investors should look for before buying. This is first time I am writing an article on one of my favourite subjects.

Within this blog I will be talking about many companies as examples. Please do not interpret them as a buy or sell call from Valueoperations and take actions as they might be not relevant for today.

Most of the analyst and brokers talk with conviction that this is the right time to buy, accumulate and hold strategies and they prepare a report of few pages to support their call. They also come out with ‘sell’ call but few research pages and that conviction is not reflected. More of it looks like a nervous call being spoken loud on loudspeaker.

There is an old saying that you do not make money in stock market unless you have sold them. What do you think? Let’s go one year back in the past, how many of you owned SBI shares during that time. In late October and early November 2010 SBI was trading at Rs 3,400. Today it is trading at almost half of its price and it still looks like will go further down.

What if I say to you that it will take another 3 or maybe 5 years for SBI to reach back to those levels? Imagine people who have bought them at Rs 3,400 levels and they have not sold it yet, do you think they have lost any money? If you ask me, yes they have lost money. They have or will loose money by either booking losses or by waiting for the right time sell.

What I think is that you actually make money when you buy. The five strategies about when to sell, that I will disclose here will only make sense if you have bought the shares at right time. And when I say right time, I mean at great discounts to its intrinsic values.

Many of us believe that holding a company for few years is good or I have noticed that people talk about giving some time (3 years and 5 years) for company to outperform or turn their losses into profits. Warren Buffett quoted once that time is only your good friend if you have invested in good company or else is the biggest enemy if you have not.

1. The performance of the business declines

I have mentioned it before too that an extraordinary businesses are the one with competitive advantage, high rate of returns, little or no debt, strong cash flow and bright prospects.

These are the variables that every investor needs to keep an eye on in which they have invested. If you see any variables decline then it is time to move on from that company to something better.

Look at the table below:

Reliance Industries

Year 2007

Year 2011

Contributed Equity

63,967 Crore

151,540 Crore


11,943 Crore

20,286 Crore


27,826 Crore

67,396 Crore




Reliance Industries is considered as a blue chip company but as per Valueoperations definition, it is not. We rate this company as B1. In last 5 years, one third of its profitability has been lost. If you would have invested in this stock 5 years back (1st December 2007) then on absolute terms you would have made only 11% return factoring split. It is far ordinary return even compare to bank rates.

So avoid the companies whose performance is at decline, who are less profitable then they were before.

2. When value of any business declines

If you have read my article, “Ben Graham, Warren Buffett, Charlie Munger and Valueoperations” and if you believe in Ben Graham theory that in short run market is like voting machine but in long run it is weighing machine, then you would also believe when we say that “price always follows value sooner or later”.

So when you believe in that theory and if you just keep focus on the value then is it not worthwhile to invest in only those companies whose value is increasing?

Bharti Shipyard


The graph above is of Bharti Shipyard (B2) and the red line is the actual intrinsic value of the company in those years. After 2007, every single year the value has fallen down still within that 5 year period we can show you list of analyst and brokerage houses have given a buy call for this company.

Avoid the stocks where you evidence value is depreciating. As price always follows value, you won’t get healthy returns from depreciating value assets.

3. When price rises well above the value

The deviation or flip and flop of the price are sometimes too big. Again if you believe in the Market allegory of Ben Graham you would understand what I am saying. If price of any company is trading at expected future value in three years of the company we liquidate all of our positions in that and book profits and look for another opportunity.

Siemens India

Siemens India is rated as A1 Company by Valueoperations. For the last one year as per our model the company price was trading at premium and around forecasted 3 years value.

The performance of business is declining because management is retaining profit and investing at low rate of return and that is damaging its profitability. That is impacting straight away to its value and its value has declined from last consecutive 2 years without impacting much to its price.

In 2003 annual report to shareholder Buffett wrote:

“… I made a big mistake in not selling several of our larger holdings during the Great Bubble. If these stocks are fully priced now, you may wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I.”


In 2006 Buffett sold its investment in PetroChina for $4 billion. He purchased 1.3 percent of PetroChina shares for $488 million and remained invested in this company for just three to four years. In 2007 annual chairman’s letter to shareholder he mentioned that he sold it because he thinks that the market value had risen to what he thought it was worth. In this case he didn’t even wait for premiums.

So it is unto you when to sell and what appropriate time you feel to sell. It all depends on your goal and ambition to sell at intrinsic value or at 10% or 20% or at premium of 3 years intrinsic value.

4. When value of business is not rising at satisfactory rate

As a value investor we want you to concentrate on value of any business. If value of the business is not rising sufficiently then it is better to sell that and move to something better opportunity available. Let me give you example, if the shares of ‘ABC’ company are trading at Rs 130 and intrinsic value is Rs 100 and next years intrinsic value is expected to be Rs 110, followed by Rs 122 then the decision to sell at Rs 130 is simple one. You would have to wait another two years for your value to reach at those levels.

There is no enthusiasm to stay invested in company whose intrinsic value is not rising substantially to keep you invested, specially when it is trading at premiums to 3 year forecasted values.

5. You found something superior

As you build your portfolio, you will generate additional funds to invest further. The first opportunity that you had invested might not be that attractive now. The price at which they are trading might not justify you to even sell those stocks. Over a time you will have a portfolio were you are fully invested and some of those investments might be inferior to new opportunity available. Normally in that scenario I would prefer to sell the least attractive holdings and get into new opportunity.

This strategy was demonstrated by no other than Buffett when he sold shares in Johnson & Johnson to raise funds to participate in the recapitalisations of Goldman Sachs and General Electric.

But be careful that you don’t fall in the trap that Peter Lynch, fund manager and author of ‘Beating the street’ described as ‘pulling out the flowers and watering the weeds’.

If you follow our approach of stock selection as to invest only in A1 companies and only those A1 companies whose intrinsic values are increasing every year and are trading at great discounts then you won’t miss any great quality stock to own and avoid weeds as Peter Lynch described.

The above five list of reasons to sell is offcourse, not exhaustive. There are many other reasons for selling and you can adopt your own rule while considering selling. For example, Benjamin Graham advocated selling when the share price rose by 50% or two years after purchasing, whichever came first. Adopt your own strategy and rules for selling as suited to you.

Many people prefer the approach of Buffett to buy and own shares for long years. Outside Berkshire Hathaway, Buffetts buying and selling is far more frequent, and I have noted him saying it was a mistake not to sell some holdings under certain circumstances.

If any of the factors listed above are evident in your portfolio, then it might be a time to call your broker and sell the shares to someone who disagrees with you. In all circumstances proceeds are safest when deposited in the bank rather than invested in inferior stock.

By |December 4th, 2011|Treasure|8 Comments|
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    Ben Graham, Warren Buffett, Charlie Munger and Valueoperations

Ben Graham, Warren Buffett, Charlie Munger and Valueoperations

I want you all to read this blog when you are relaxed and have sufficient time to reflect on what I am saying and share your thoughts. So get a cup of coffee or tea and let me take you on ride to the history of value investing. It is more about how we at Valueoperations have evolved as one of the powerful tool in value investing.

I know there are many value bloggers and others who are a big fan of Ben Graham. Many of you might also be practising Ben Graham model to calculate intrinsic value. But we don’t. Let me explain you why.

I am feeling little nervous to write this blog as we are advocating against the strict approach of Ben Graham’s investment theory. I know there are many who are big fan of Ben Graham as we are, so we will use a reference and our understanding of quotes said by Ben Graham and present our plot.

In the 1940 Ben Graham (who passed away in 1976) was regarded “as a sort of intellectual dean of Wall Street, (and) was one of the most successful and best known money manager in the country” [1].

Warren Buffett regarded Ben Graham book ‘security analysis’ as the best text book ever written on stock market and was always found recommending that book to all the investors. The other great piece by Ben Graham was ‘the interpretation of financial statements’ which is one of my favourite.

Buffett always advocates Ben Graham’s ‘market allegory’ and ‘margin of safety’. We will talk in detail about both the concept later. The first person to raise questions against strict approach of Ben Graham that I am aware of was Charlie Munger, partner of Buffett and Berkshire Hathaway.

To find bargains in market, Ben Graham always advocated mostly or purely to use quantitative approach. He always asked to buy businesses trading at discount to its net current asset values. Later this concept was referred as ‘net-nets’. You will find many articles by analyst written on such concept. I recently found one written here.

This method was very successful for Graham and also for his students. The tradition of this approach was taken further by Buffett, Walter Scholas and Tom Knapp. But this approach didn’t attracted Charlie Munger. Ignorance of quality and future prospects of business by Graham as per Charlie Munger was “where just madness”, as “they ignored relevant facts” [2].

But Munger agreed to the basics of Graham that buying and selling should be motivated by intrinsic values and not by price momentum. But he noted, “ Ben Graham had blind spots; he had too low of an appreciation of the fact that some businesses were worth paying big premiums for” and “ the trick is to get more quality than you pay for in price”. [3] The reference to quality by Munger in above quote was likely to what today sophisticated investors or analyst talk about company’s assessment of its strategic position to proper estimation of intrinsic value.

In 1972 we had evidence that Buffett left using net-nets approach with the help of Munger when they bought ‘See’s candies’ by paying price 3 times to its book value.

Buffett noted, “Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me. This was the real impact he had on me. It took powerful force to move me on from Graham limiting view. It was the power of Charlie’s mind. He expanded my horizon”[4] and “ … my guess is the last big time to do it Ben’s way was in ’73 or ’74, when you could have done it quite easily.” [5]

It was during that time it was confirmed for all those investors who were advocating Ben Graham approach that there is a superior method exist to invest and that was with Buffett, “boy, if I had listened only to Ben, would I ever be a lot poorer.”[6]

Time in the US was changing and investors who were investing for decades have to evolve as Charlie and Buffett did during those times. In twentieth century manufacturing sector dominated, example textile and steel making in USA. These businesses were loaded with hard asset that can be valued easily by what trade buyer might pay for whole business or for its assets.

But somewhere between 1960 and 1980 many retail and service industries emerged, that instead of buying assets preferred to lease them. Had fewer hard tangible assets than intangibles like brand and distribution network and systems.

To stay world beating, the investor had to evolve, Valueoperations did. Buffett again, “I evolved … I didn’t go from ape to human or human to ape in a nice even manner.”[7]

Many investors cling to Graham approach to investing even when Graham’s best students have moved on decades ago.

If you are still reading it and want to take an approach of value investing, I am pretty sure that your examination of various approaches will take you to the traditional Graham approach to value investing.

We support Ben Graham’s revered status on what he says on a subject of investment. But we also believe that, if he had access to a computer and would have got a chance to test his all ideas then he may not have reached the entire same conclusion.

There are many things that Ben Graham said makes sense but is also a great contribution to investment thinking. Indeed they have become seminal investment principles. These are the things Valueoperations holds firm and recommends all investors who believe in our idea and investment philosophy.

Ben Graham authored the Mr Market allegory and also left three important words in value investing Margin of safety. These are the two concepts that value investor hold dear and which have, in many different ways have become formal part of Valueoperations investing framework.

Here is the speech made by Warren Buffett about Ben Graham on both the subject:

“You should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains…

“Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow.

Transactions are strictly at your option…But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you.

“It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.”

There is also third important lesson to be learned from Ben Graham. His observation which is fascinating and equally important to the above two lessons. His lesson was paraphrased by Buffett in 1993:

In the short run the market is a voting machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long run, the market is a weighing machine

With the help of computers and information available we can show you that this piece of advice still is relevant in today’s world.

As a professional investor I have observed that in short run market is a popularity contest which is also fuelled by media by talking about them every time and also price diverge is significant by the economic performance of the business. But in long term, prices eventually converge with intrinsic values which by themselves follow business performance.

Let me prove you that here that it even works for Indian markets:

Reliance Industries

The red line in above table is intrinsic value of business based on economic performance. Reliance Industries is rated as B1 Company in regards to quality and performance rating.

Now sit back and look at the chart very closely. In the year 2009 before split it was trading in range of Rs 1200 and Rs 1000. Before split the intrinsic value of the business was Rs1192. After split it was Rs 596. For March 2011 intrinsic value for Reliance was Rs 825 and it was trading around Rs1000 levels. People were talking about 1200 and 1500 figure very soon to be achieved. Today when I am writing this it is trading at Rs 786 and forecast intrinsic value for 2012 is Rs 850. The margin of safety in this business is 8%.


What does this chart tells you? Infosys is rated as A1 company in its quality and performance rating done by Valueoperations. The best time to buy Infy was in mid of 2008 up to almost end of 2009. Recently when it was trading at 2190 was a good chance to buy. There was margin of safety of 12%. Today it is trading at 8% premium to its forecast March 2012 intrinsic value.

Bharti Shipyard

Bharti Shipyard is rated as B2 Company. From last 4 years companies’ performance as well as quality is deteriorating. Many brokerage firms and analyst talk about buying opportunity within this stock. It is trading at below net asset value as mentioned by Ben Graham but is missing the quality as mentioned by Charlie Munger.

We acknowledge that there are critics of the approach to intrinsic value we follow. But like me, you should be delighted there are. The critics are necessary. Not only they help to refine our ideas but without them how would we be able to buy Infy at 2190, ONGC at 250 and how would have we avoided Bharti Shipyard, Reliance Industries and many other stocks.

We took all the good things of all the three legendary investors and designed our model based on them.

Our model tells to invest only in best quality businesses (A1 Businesses) when you see sufficient margin of safety. Our model updates intrinsic value of nearly 1500 companies trading on National stock exchange and also forecast intrinsic value of businesses for next 3 years (A1 service). It will change the way people invest in stock market. It is simple, amazing and fascinating. If you have not registered as blogger then please do it and you will get a chance to become the founding member of that service and will gain all the benefits of founding member.

[1] Damn Right. Janet Low. John Wiley & Sons 2000 pg 75

[2] Damn Right. Janet Low. John Wiley & Sons 2000 pg 77

[3] Damn Right. Janet Low. John Wiley & Sons 2000 pg 78

[4] Ibid

[5] Robert Lezner, “ Warren Buffett’s idea of Heaven” Forbes 400, October 18 1993 pg 40

[6] Carol J Loomis, “ the inside story of Warren Buffett” Fortune, April 11 1988 pg 26

[7] L.J. Davis, “Buffett takes stocks” New York Times magzine April 1 1990 pg 61

By |November 22nd, 2011|Treasure|14 Comments|

‘Time in the Market not Timing the Market’, Do you believe in such Cliche

Last weekend I attended investment session done by financial planners. I thought to share my experience with you all. The reason I attend these session is to understand what strategies investors are interested in and what their philosophy is. I am pretty sure you all might also have attended such sessions or might have interacted with your friends or family members who share their wisdom with you.

The most important reason to share my experience is, few questions got raised in my mind after chatting with few investors at the session. Many of those investors also had cliché in back of their mind while investing.

It is very dangerous to take decisions on such cliché. What I mean over here is that these cliché are many times misrepresented in front of investor. People think about them when they doubt their investment and their belief in that cliché is diminished by the noise in the market which is freely available.

Here are few cliché which comes in my mind as soon as I think about them. Some of this cliché are useless but remaining is worth to put more thought into.

‘when market is falling down stay away’, ‘don’t catch falling knife’, ‘buy the rumour, sell at the facts’, ‘buy dips’, ‘buy low sell high’, ‘only buy stocks that go up’, ‘this time is different’, ‘the trend is your friend’, ‘ you can’t go broke taking profits’ and ‘its time in the market not timing the market that counts’.

There might be many more please feel free to share with us by adding comments below this post. I would be interested to know about them and would love to understand your philosophy behind it.

The reason I am interested in talking about them is, I see a big proportion of young investors in India are entering in the market and because they are new and not experienced they have not developed that trust in those cliché. The risk I see is that these young investors before understanding them will memorize them and will blindly apply them. They are guaranteed to make same mistakes made by many who entered before them in market.


Cliché 1: You can’t go broke taking a profit

Think about this statement. A new investor will almost go broke doing that. Why? Because new investor will go out and buy shares and will notice the share price decline (how many times did this happened with you?). Buying a low quality company (not extraordinary or A1 companies I refer) or by paying too high price (above its intrinsic value) will lead the investor to a permanent loss of its capital. The new investor will be hesitant to book losses in a hope that one day share price will recover (which many of us do). Now imagine that the other investments lead to gain; do you think that this new investor will hold this share for very long? The short answer is ‘NO’. The fear of repeating the first mistake is just too great for him. This new investor will think that it is better to take such small profits now and then and avoid those losses. He will start believing in the above cliché. The end result will be that this new investor will end up with bundle of huge losses and very small profits.

You can go broke by taking profits in same way as saving to buy exceptionally costly stocks or low quality stocks that are on sale.

Cliché 2: ‘time in the market’ not ‘timing the market’ that leads to success:

Let me clear my stand on the above cliché before proceeding. I don’t believe that timing the market or share price works and same time I also believe that some time only time in the market works. And that time in the market sometime is so long that it is not worth for the return. Let me give you example of Bharti Shipyard, 5 years ago the share price was trading at Rs 390 and today it is trading at Rs 94. The shareholders in this company are still waiting for positive returns on their investment.

Time in the market is not the answer if you buy poorly performing companies or at higher price to its intrinsic value. From 1964 to 1981 (17 years) Dow Jones just rose 1/10th of one percent. Time was not a good friend of patient investor who invested in Dow Jones during that time. Nifty in 2000 to 2005 just rose from 1680 levels to 1980. A mere 3.5% compounded return per anum for that 5 year period.

The point over here is that time is only your friend if you have invested in wonderful business at large discount to its intrinsic value. Otherwise time is the enemy that steals returns.

Don’t use time as your band aid to heal your investment mistakes. Stick to A1 businesses bought at discount to its intrinsic value and time will be your friend.

So also share with me your great stocks those remained friends of yours in your investment career.

By |October 30th, 2011|Treasure|0 Comments|

How to Avoid Value Traps?

How to avoid Value Traps?   Yesterday afternoon I had a really great chat with many financial planners and fund managers, the topic of discussion was volatility and value picking in market. People behave in different ways in regards to both of these subjects. I was happy to see that financial planners were pretty […]

Is Value Investing a Trap?

Different people have different style of evaluating and doing research before investing in stock market. Technical analyst will try to capture the investor’s emotions on charts and will try to communicate with others about his findings. Fundamental analyst who makes decision on PE ratio whether the stock is cheap or costly would be sharing […]