Author: Vivek Bothra

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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Industry Map

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

How Inflation kills investing returns

Inflation and investing , I often revisit this quote when I am reviewing my portfolio

Inflation is a tax one has to bear irrespective of whether one is investing or not.
The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income taxes during years of 5 percent inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax but doesn’t seem to notice that 5 percent inflation is the economic equivalent  ~ Warren Buffet

 

I had an opportunity to visit India after almost a year and I took this opportunity to do a dip stick test on inflation

Cautionary Note : I was in Kolkata for 15 days and my experiences may be totally irrelevant and … Read the rest

Learn how to Dissect RoE

There is almost a unanimous agreement in investment community that RoE is an important indicator of health of a company, High sustainable ROE implies sustainable competitive advantages and hence investment attractiveness of the company

Sustainable is a key word here so always execute ROE analysis for at least 5 years if not 10 years to arrive at a conclusion

DuPont comes in handy to break down ROE, I will not go into details of DuPont , you can read this article to get yourselves accustomed to DuPont

You can use Tankrich Valuation Tool to do DuPont analysis in 5 mins, post analysis how do you dissect RoE ?

This will be largely dependent on how familiar you are with operations of the company and industry, We will take a case today and see if we can put together a generic framework for dissecting RoE

Friends this is going to be a long post so take out your pen, paper, food and time and lets dig in. The company that we will use as case is Ajanta Pharma

The RoE for last 5 years has been ..

roe-1

Fantastic improving from 16% to 41%

The frame-work that we are going to use … Read the rest

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Did the Peter Lynch Screener worked ?

Did the Peter Lynch Screener worked ?

In June 2014, I created a stock screener after re reading ‘One up on wall street’ by Peter lynch. You can read the old post here now lets review how those stocks performed vis a vis broader markets

1 Tata Consultancy Services Ltd. 2213.55 2696 21.80%
2 Lupin Ltd. 983.4 1838 86.90%
3 Amara Raja Batteries Ltd. 491.45 902 83.54%
4 MindTree Ltd. 807.65 1466 81.51%
5 DB Corp Ltd. 299.7 391 30.46%
6 CMC Ltd. 1689.2 2023 19.76%
7 Persistent Systems Ltd. 1060.75 1870 76.29%
8 Lakshmi Machine Works Ltd. 3697.35 3794 2.61%
9 Monsanto India Ltd. 2131.5 3282 53.98%
10 eClerx Services Ltd. 1169.15 1572 34.46%
11 NIIT Technologies Ltd. 427.5 417 -2.46%
12 Finolex Cables Ltd. 162.1 279 72.12%
13 Dhanuka Agritech Ltd. 380.35 642 68.79%
14 Zensar Technologies Ltd. 394.65 731 85.23%
15 VST Tillers Tractors Ltd. 1818.15 1592 -12.44%
Average return (equal weight portfolio) 46.84%
CNX Midcap 25.36%
BSE Small Cap 18.42%
Sensex 16.73%

The screener outperformed broader markets by some distance. Now as with any good screen based trading strategies you need replace the old guard with new performers, I am doing it after nine months you … Read the rest

An investor’s dilemma

An investor’s dilemma is perfectly captured in below lines

To be, or not to be, that is the question Whether ’tis nobler in the mind to suffer, The slings and arrows of outrageous fortune, Or to take arms against a sea of troubles

Shakespeare would have never thought that centuries later lines from Hamlet will truly reflect the state of Indian investors.

Re read [ Interpretation Mine 🙂]

To be, or not to be: that is the question Whether ’tis nobler in the mind to suffer [Notional loss of having missed the biggest bull run in Indian equities in last 5 years], The slings and arrows of outrageous fortune [Envious pain of neighbours making baggers overnight], Or to take arms against a sea of troubles [Jumping and buying companies touching 52-week highs every day and selling winners]

During a bull run (read now) an investor is trapped in various dilemmas, on one hand he is reluctant to buy  businesses making sequential 52-week highs, I did a post on why it is not a very smart idea to overlook stocks hitting 52-week highs, however the bigger dilemma is right under his nose his very own portfolio

Imagine this,

As … Read the rest

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How accountants can trick quality of earnings

Quality of earnings is very difficult to assess as swindlers have so many tricks up their sleeve,One of techniques that I personally use to separate good from odinary business is by using Earnings Power Box, I have done a detailed post on it you can read it here

This post is an extension to that post equipping retail investors to assess quality of earnings.

There are two simple ratios using accruals not often reported or put on financial websites but they do explain the state of quality of earnings, they are calculated by using two different approaches

Balance sheet approach

Calculate Accruals which is difference between beginning and ending NOA (Net operating assets)

Here, NOA = Net operating assets = {(Total assets – cash and equivalents and investments) – (Total liabilities – Total debt)}

Accruals BS = NOA END – NOA BEG

The Accruals ratio is    = Accruals BS / Average NOA

Lower the ratio, better the earnings of the company (Remember this)

The second approach is Cash flow approach

Accruals CF = Net Income – Cash Flow Operations – Cash Flow from Investing

Accruals RatioCF = NI-CFO-CFI / Average NOA

Again, lower the ratio, better the earnings … Read the rest

Trend Investing – Second Take

On 25th may 2014 we wrote about how traders can ride the Modi momentum in large cap companies, we created a management and momentum box, read the old post here

After 9 months, let’s look at some of the interesting data, all the quadrant has been labelled as Q1,Q2,Q3 & Q4 as per below for ease of understanding

Momentum and Mangement box_editedThis is the average returns made by all four quadrant

 

Modified-1

We wrote in May ,

“The underlying theory is simple good companies with capable management will be able to leverage the modified environment to their advantage much faster than good companies with shallow management “

It did came out true as well with Q2 having highest return to date, both Q3 and Q4 on an average were not able to beat return to date market (Sensex) returns

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How using only excel as a tool to invest can make you really poor !

The operative word here is only , I have seen far too many causalities where the projected numbers have looked fantastic and people invested without bothering to understand business and the story have had miserable returns

What to do when you are really optimistic about future of the company want your customers to buy ?

Take out an excel and start to put fancy projections, numbers never lie and when given an ascending pat they present a rosy picture to gullible investors

Don’t believe me ?

See the below extract from a brokerage report on Phoenix Lamps, obviously the brokerage house was gung-ho about sales projections and profit projections.

Excel work

Excel -1

Actual results were not as rosy as excel and the stock predictably nosedived

Excel -2

As an investor how can you avoid it ?

Should you stop using any tool for financial projections ? I would not recommend that but use excel or for that matter any tool as an aid and not as decision maker.

Make investing process a little simple, write these simple questions and answer them in writing before making any long term investment

  • What does the company do and how it creates value (earns money) ?
  • What
… Read the rest

How to read annual reports

“When asked how he became so successful in investing, Buffett answered: ‘we read hundreds and hundreds of annual reports every year.”

An annual report in many cases is a voluminous 100+ page boring document and even the best of minds would find concentrating tough. So how to make it an interesting read ? one way to do it would to be read it like a story book and then it would becomes a story of the business. This technique has helped me over years to pore through pages after pages

Let me share an example

First download the annual reports of the company that you want to study from BSE website at least for five years, Now there are many sections in an annual reports and each of them is very important however to understand business and learn from management commentary cut the Management discussion and analysis section and the directors review of operations section

Then paste those sections in a word document in a chronological order, now the fun begins.

Print those sections

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