Month: April 2015

April 24, 2015

Why you should not mix emotions and investing

I love the below quote related to emotion and investing

Emotions can be a great asset in life, but when it comes to investing, they may be a liability

Very important line and one needs tremendous patience and practice to avoid mixing emotions with acumen when making an investing decision

Let me tell you story of Anil, a retail investor,and how his emotions cost him dearly

Few years ago his friend told him about an established NBFC Bajaj Finance as a stock tip, he looked at the company’s ticker it was INR 88, he added stock to his watch list and waited for price to drop so that he can buy

A year went by and one day while browsing prices of his watch list he was stuck, Why ?

The stock suggested by his friend has moved almost 50% up, there was huge guilt in him on having missed 50% returns but then he consoles himself by saying ‘We can’t make money on every stock in markets’

He thought this would be end of his story with Bajaj finance, but almost a … Read the rest

April 17, 2015

Don’t apply scuttlebutt like this

My mistakes have been one of most important sources of my learning, See some stuff here

Today let me give you another example from my personal experience for you

In year 2010, I learned about this technique and in a minute you will know where it came from

The scuttlebutt technique is inquiring and asking questions to various people with mutual interest or are involved with a certain company or industry. Asking suppliers, vendors, customers, competition, trade association executives, research scientist from universities or in government and previous employees may all be intangible sources of qualitative information.

Phillip Fisher had first coined the “scuttlebutt” technique when he wrote Common Stocks and Uncommon Profits

Now eager to use this technique, I went ahead and started applying this on HDFC bank,

Context

Our family business had recently started dealing with a new branch of the bank and our industry is famous for squeezing the last dime out of bank in terms of service. I thought it was a perfect opportunity for me to find about culture of the bank and how it operates through its employee and fellow customers. What unfolded over next few months really surprised me; I was a … Read the rest

April 11, 2015

Few takeaways from study of wide moat companies

I started with wide moat ratings of morningstar and selected 10 companies randomly as below

Asian Paints Bajaj Auto Colgate India Dabur Cummins HUL Infosys ITC Nestle Lupin

Then I collected 10 year data on above companies from 2005 to 2014, collecting 10 year data will ensure that you can avoid sampling errors although I want to clearly point that selecting 10 companies and trying to interpret patterns in itself will have sampling errors

If you have gone through our previous posts on competitive analysis , ROE dissection or Earnings framework you know I like to understand a concept through key metrics and examples , I have selected 3 important metrics and plotted on how have they performed for 10 companies in last 10 years

Lets take them one by one

Understand this first you get rated as improved if a particular company is able to beat its own average over last 10 years in year 2014. So if year 2014 was extremely bad/good year for the company than data interpretation below could be erroneous

Gross Margin – My reason to select – this indicates pricing power

8 out 10 companies were able to improve their gross margins

Cash … Read the rest

April 5, 2015

Why I maintain a free subscriber only Model Portfolio ?

After my last monthly newsletter to blog readers, I got few questions on Model Portfolio. I am penning this post to answer most of those broad questions that came my way

What is Model portfolio ?

Model portfolio is a collection of businesses at a point in time which in my humble opinion has ability to deliver superior returns over a three to five year time frame over benchmark indices (mid cap / small cap). The operating word here is ‘ability’ (not promise)

Investors should very carefully decide his/her risk appetite and the returns expectations, as not everyone’s situations is same. As a prudent investor first

Determine your willingness to take risk – Are you an emotionally a person who can handle risk ?
Ability to take risk – Does you economic situation allows you take risk by investing in equity

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April 4, 2015

Industry Map and Profit pool analysis – Indian Auto Ancilliary industry

Did it occur to you some companies in an industry continue to make money while others barely survive. The classic case is that of airline industry where large airlines are accumulating huge losses whereas airline component manufacturers are earning above average returns on capital for last 4 decades

Can we find great investments in lousy industries or industry sub segments?

To answer above one has to construct an Industry map and do a profit pool analysis, let’s take help of Michael J. Mauboussin & Dan Callahan to understand these terms

From their ground-breaking paper on Measuring the Moat

The goal of an industry map is to understand the current and potential interactions that ultimately shape the sustainable value creation prospects for the whole industry as well as for the individual companies within the industry

A profit pool shows how an industry’s value creation is distributed at a particular point in time. The horizontal axis is the percentage of the industry, typically measured as invested capital or sales, and the vertical axis is a measure of economic profitability

Like always we will learn to create them by using an Indian example – In this post we would try to create an … Read the rest