Category: Mental Models

How to determine size of bet ?

There are two schools of thoughts lets contemplate over them

Balanced diversification

Rohit Chauhan – On his blog [Emphasis Mine]

My bet or size of the position is generally 2% or 5 % and a max of 10% if my level of confidence is very high. However I am not into portfolio balancing. So if my best idea has done well and is now say 20% of my portfolio and I think is still undervalued, I let it run and remain in the portfolio. The only time I would sell would be if the fundamentals of the company deteriorate or the company becomes highly overvalued

Concentration

Warren Buffet – 1965 letter to Partners [Emphasis Mine]

I am willing to give up quite a bit in terms of levelling of year-to-year results (remember when I talk of “results,” I am talking of performance relative to the Dow) in order to achieve better overall long-term performance. Simply stated, this means I am willing to concentrate quite heavily in what I believe to be the best investment opportunities recognizing very well that this may cause an occasional very sour year – one somewhat more sour, probably, than if I had diversified more… Read the rest

Evaluating Moats through Floats

Firstly some disclosures the idea of evaluating moats through floats was inspired from this amazing post from Professor Sanjay Bakshi

Secondly the candidate chosen to be evaluated is borrowed from Amit Arora ‘s blog – Poddar Developers Ltd

Now lets begin, Poddar developers ltd is a small Mumbai based real estate developer interestingly the Group is focusing on the value housing segments in Mumbai, within the MMRDA region.
Value housing or Affordable housing as it commonly called has huge demand in India. Poddar developers have a significant presence in Mumbai suburban region through multiple projects, you can access details here

So much so for our candidate now lets quickly define FLOAT – It is other people’s money which company holds temporarily. Durable FLOAT is something which becomes a cost less revolving fund for the company. The common sources for FLOAT are

– Trade payables (Look for companies who buys at Credit but sell in Cash )

– Customer Advances

– Deferred taxes (Companies having advantageous tax situation – unlikely to be durable)

Durable FLOATS create higher ROE and ROCE for the companies,  reason – they are using other people’s temporary money to run their operations

How to calculate FLOAT for … Read the rest

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How high dividend pay-out sets the floor for stock price

How can high dividend payment set the floor price for stock? Let’s look through an example

Noida toll bridge Company – The Noida Toll Bridge Company Ltd (NTBCL) has been promoted by Infrastructure Leasing and Financial Services Ltd (IL & FS) and New Okhla Industrial Development Authority (NOIDA), as a special purpose vehicle (SPV) to develop, construct, operate and maintain the DND Flyway on a Build Own Operate Transfer (BOOT) basis.

What is special about this company – Being a toll bridge company operating just one toll bridge there is no capex requirements for the company, apart from regular repairs and maintenance and finance charges the balance proceeds in theory should be paid out as dividend. The company was not able to pay dividend till FY10 as it was having high debt on its books and was referred to corporate debt restructuring scheme but from FY 11 it has started paying dividends, the pay out in FY14 was more than 70% look at the chart below

Noida - 1

Source: icicidirect.com

As you can see the dividend has been steadily rising from FY 11 onwards.

Now if you are an average investor what is risk free return that you can earn today? Assuming … Read the rest

Finding Stocks with Earnings Power for Long-Term Profits

One size doesn’t fit all is often said for investments. However Hewitt Heiserman has written a remarkable book that gives you a blueprint for finding great growth stocks for the next decade without taking on a lot of risk in the process. His method can be applied to all types of companies.

According to the book there are three key factors which drive long term profits for a successful investment

a. Competitive advantages enjoyed by the firm or what Warren Buffet calls Moats that keep rivals at bay. The book doesn’t provide any tool to determine competitive advantage however it provides a quick check-list to ascertain if a firm is enjoying competitive advantage. You can read our recently posted article on understanding competitive advantage to gain more insights

b. Valuations – Great companies can become lousy investments if brought at wrong price, the book again has little on valuation front. Use our stock price calculator to get first-hand view of value of stock

c. Earnings power – Whether a company possesses authentic earnings power for long-term growth, The 2 earnings power ratios you need to calculate before making your next investment. The Enterprising EPS and Defensive EPS.

The first is … Read the rest

Avoid investing in business with poor economics

MNG - 0

  Economics matter – Manugraph

  India

 

 

 

“When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” – Warren buffet

A company with clean and transparent management running a business with bad economics is a bad investment choice. In today’s post we will try to explain this with example of Manugraph India

About Company

Established in the year 1972 by its founder Mr. S. M. Shah, Manugraph India Ltd is India’s largest manufacturer of web offset presses. In India, Manugraph ranks as Numero Uno in the manufacture of web offset presses. With a whopping 70% market share and quality presses ranging in speeds from 35,000 – 70,000 copies per hour, Manugraph presses are present in nearly all major publication houses. For more details visit their website here

Our Method – Inferring management communication to share holders via annual reports

Here goes our analysis of annual reports and persistent economic problems articlated by management

– Inability to pass rise in cost to customers

– Inability to control wage / employee benefit cost

36th Annual report (2007-08)

Read the  Management discussion and Analysis … Read the rest

Symphony – Understanding Competitive advantages

Previously I have written about how to identify stock investments

Like Peter Lynch here

Using Pause and Play here

By following smart money here

One of the pointers in Ten point investment map is to identify whether company has sustainable competitive advantages. Many of the investors have this question on how to define/find competitive advantage of company. We will try to ascertain competitive strength of  Symphony Ltd one of our top picks in Model Portfolio.  I am borrowing heavily from Warren Buffet’s letters to his shareholders.

1.  Will Company be in business for next 10 years ? Is there a big market to address – Symphony limited makes air coolers, also known as evaporative cooler, swamp cooler, desert cooler and wet air cooler, works on the evaporation technique; it uses the hot air in the room and water to generate cool air.  This is what I picked from there 2012-13 Annual report

In India,about 132 million households live in hot dry climatic regions (about 54% of the total) and about 11 million households live in moderate climatic regions. This represents an aggregate 143 million households (58% of total) of potential customers.

So we can safely assume that there is a … Read the rest