Author: Vivek Bothra

Why Paying up can cost you – Analysis using payback box

Motilal Oswal wealth studies are great source of learnings for any investor, They adopt a unique approach of taking up a theoretical concept every year and then explain it through numbers.

In year 2000, they introduced a concept called payback period, this is what the study said

Focus on payback period

As the legendary Warren Buffett says, “Investing is laying out money now to get more money back in the future in real terms, after taking inflation into account”

Generally, it is observed that market price is often based on the assumption that earnings will grow at their current rate for another five or more years and then remains constant

P/E is a very useful tool of valuation but does not reflect growth assumption upfront

PEG is another useful tool but assumes stable growth rate for a long time. It also relies too much on current growth rates. But the reality is that new economy companies record high growth rates in the initial stages, but are unable to sustain for a long period. This leads to mis-pricing

Keeping the above shortcomings and market wisdom in mind, we decided to examine the concept of “pay-back ratio” or “purchase price recovery in

… Read the rest

In Investing numbers are starting point

Years back, I was amazed at the claim made by Joel Greenblatt’s book The Little Book That Still Beats the Market

[Emphasis Mine]

Can you spare three hours to learn how to beat the market? As unlikely as it may seem, hedge fund manager and professor Joel Greenblatt, whose investment firm has averaged 40% annual returns for over twenty years, can teach you how. You can achieve investment returns that beat the pants off even the best investment professionals and the top academics. In fact, you can learn how it’s possible to more than double the annual returns of the stock market averages.

But there’s more. You can do it all by yourself. You can do it with low risk. You can do it without making any predictions, and you can do it by following, step by step, a time-tested, proven “magic formula” that uses only common sense and two simple concepts. Best of all, once you are convinced that it really works you can choose to do it for the rest of your life.

 

Obviously I bought the book, who doesn’t want to become a stock market genius in three hours, The book made everything easy to understand. … Read the rest

What drives value of a business – Part 2

You can read the part 1 of this two part series here on what drives value

Lets review balance variables which impact valuation models

Past Prices

For a lot of cyclical companies – How they have been valued in past can help us guide on the band of multiples they can trade. However using a valuation model just based on past prices and multiples can be flawed, see the below diagram

value-6

As you can see past prices and even current prices are influenced by many factors, as long as business performance is driving prices up and down we can use past price in building current valuation model but that’s rarely the case

Apart from business performance, the stock price would be affected by

  • Economic /business cycle
  • Demand and supply (Mr Market’s mood)
  • Perception of company and its promoters

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What drives value of a business – Part 1

Here is one page snapshot on what drives value of company (and its ownership parts called shares)

Value-1

In this post I am not going to dig into those valuation parameters as I have detailed post on these parameters in past, you can read them here and here

We are going on spend some time today on inputs that drives these valuation parameters to draw some conclusion to refine at the process on how we approach on valuing business

Given we are dealing with 7 input factors this post would be in two parts

Free Cash flows

Value-2

Let’s draw some inferences

  • A company which converts its revenue to cash flows higher in proportion to other companies in similar industry should be valued more
  • A company which has relatively less cash expense (better credit terms, tax advantage, deferred expenses) compared to other companies in similar industry should be valued more
  • A company which has lower capital and maintenance expenses compared to other companies in similar industry should be valued more

The roadway surface of the bridge has been built and designed to behave as an antagonist to the activities and functions of this body enzyme that cialis cost 20mg plays front role … Read the rest

The edges of being a salaried Investor

Bored with your job ? Sick of taking orders all day ? You are not the only one who is thinking of becoming full time investor, but before you take the plunge, I want to persuade you to remain in your job and continue as salaried investor (SI)

A salaried investor has tremendous edge over a full time participant in market, What are those edges ? Let explore them

Your bread is not dependent on returns from markets

This is an obvious edge, bear market or bull market, you take home a salary thereby ensuring basic necessities of you and your family is taken care of, you don’t have to sell your shares in distress to pay bills.

You will be less stuck to the screen

In any competitive job, no company will leave you without extracting 60-80 hours a week, which means you will have limited time outside work. This is great as you will miss the daily swings in markets, as Daniel Kahneman wrote in “Thinking Fast and Slow”

Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter

… Read the rest

True Diversification

Why do we add a new security to our portfolio ?
To reduce risk and ensure not all our eggs are in same basket, the underlying thought process is if stock A doesn’t do well at least stock B will provide some returns and compensate for loss if any in stock A
This makes perfect sense if you go by what Harry M. Morkowitz said in 1950’s [emphasis mine]

The investments have different types of risk characteristics, some caused systematic and market related risks and the other called unsystematic or company related risks. Markowitz diversification involves a proper number of securities, not too few or not too many which have no correlation or negative correlation. The proper choice of companies, securities, or assets whose return are not correlated and whose risks are mutually offsetting to reduce the overall risk

It explains why investors invest in diverse spectrum of industries whose fortunes are not tied to each other
However many investors feel discomfort in adding a new company from a similar industry, At least I do. My thinking process is I already own TCS what the use of adding another IT company in the portfolio ? After all the company related … Read the rest

Periodically review your portfolio

Assessing and reviewing your portfolio is critical to be on top of your positions, While till today I have not found any structured way to go about it, What has helped me to think objectively is to focus on

  • status of key variable of business
  • risks identified
  • buying hypothesis – does it still hold good

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The next question is how often do you review ? 6 months, 12 months , 2 years ? Frankly there is no right answer – But I found 6-8 months is a good period to start with

Below is my simplistic review of two businesses in model portfolio – If would be foolish to buy … Read the rest

Understanding business Models

Over last few weeks, I have started reading an excellent book on business models – Business Model Generations – A handbook for Visionaries, Game Changers and Challengers – This book is must read for all buddying investors

The book is logically structured right from providing canvas for depicting business models of the company then moving on to patterns, design and strategy

BM-1

I will do few posts on the book as there is enormous ground to be covered, In this post focus would be on what authors call as building business model canvas using key nine building blocks

A business model describes the rationale of how an organization creates, delivers and captures value

There are nine building blocks of a business model – While at first I found this to be another fuzzy MBA thing which has lot of academic value but no practical value 🙂

However once I started practising it and drew the canvas of a business which I thought I knew, I realised that there were quite a few areas of business were I had little or no knowledge, This was truly an humbling experience

Let’s first understand what are the key nine building blocks (Note most is … Read the rest

Why sitting on your ass works in Investing

In my last month’s newsletter, I briefly touched upon deliberating on idea of selling and not holding stocks at over stretched valuation

Charlie Munger says ,

Investing is where you find a few great companies and then sit on your ass

Fisher famously stated that

the time to sell a stock is almost never if the right kind of company is purchased after extensive research and analysis

Another theory could be that I am operating under disposition effect i.e. instead of looking at the overall portfolio performance, I am looking to gain from every stock. This narrow framing leads to selling winners and holding onto losers, I partially mitigated this by always looking for performance at portfolio level rather than at individual level

Also, it’s painful to sell winners too early. If they really skyrocket

See how some of our exited positions have sky rocketed in this bull run

Sitting-1

My investing philosophy is also evolving, I liked what Buffet wrote in 1967 letter

sitting-2

My logic was that for a small portfolio, this is the best way to gain size, i.e. buy things at attractive prices and then resell them when price catches up and keep doing this till portfolio attains … Read the rest

Annual Review – La opala

La Opala is one of the prominent kitchen utensils (tableware) companies in India, The Company’s brands comprise La Opala, Diva and Solitaire. Solitaire is directed at the high-end segment, Diva caters to the mid-end while the La Opala brand addresses the first-time requirements
They are engaged in the manufacture and marketing of opal glass tableware and 24%-lead crystalware products. Their opal glassware portfolio comprises plates, bowls, dinner sets, coffee mugs, tea sets, soup sets and dessert sets. Their crystalware portfolio comprises barware,vases, bowls and stemware. They introduced the heat-resistant borosilicate range of cookware during the fiscal gone by (Outsourced)
The company had another good year in terms of numbers
Sales, Profit and CFO all went up

Laopala-1Laopala-2

Key developments during the year

  • Equity dilution via qualified institutional placement to generate about INR 55 Cr (~11 million USD)
  • The addition of tea and coffee range products to broaden glassware portfolio
  • Start of importing of glassware and then selling them with a mark up

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