Category: Investing resources

Download an ebook on Warren buffett partnership letters

Jim Rohn famously said,

You are the average of the five people you spend the most time with

As a young investor starting out it would serve you well if you can spent time with Warren Buffet (vicariously) by reading his fantastic letters

At Tankrich – We have taken an initiative to share his learnings through our video channel

This week having finished the partnership letters I thought it would be good if I could document those learnings in a single place

After few weeks of editing here is the final copy for you on Learnings from Warren buffett partnership letters

Below is Table of content of this ebook

Download a copy by sharing any of the above social links (I do this so that this reaches maximum people through your social networks)

If you are reading this in your inbox go to this link to download a copy

Building blocks

  1. What should be focus of long term investor
  2. Surest means of profit is value investing
  3. Think long term to evaluate performance
  4. Beating index is very tough
  5. True conservatism
  6. Magic of Compounding
  7. Price is everything aka Margin of Safety
  8. Cigar butt as a group works out to be a good

… Read the rest

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How using earnings power box lets you ask right questions ?

Over my limited experience in equity markets, I have come to conclusion that earnings power box is a powerful tool to analyse authenticity of corporate earnings. While I am not going to repeat much of much I have written earlier, you can go through it here and here

One of first things I do after getting annual reports of the companies I hold is to update their earnings power box (EPB)

Updating it sets me in right frame of mind to query annual reports, let me run through an example to elucidate my point

In 2014 this is how Kitex ‘s  EPB looked like

kitex-14

A company in wealth maximizing quadrant 2, the more number of years it continues its advance in this quadrant the more it will continue to create value for owners

2015 EPB will blow your mind away

kitex-15

The company made a significant advance in quadrant 2, no wonder stock market rewarded the stock in the bull market

Kitex-3

This is where we start our investigation

First let’s look at raw data for per share earnings

Kitex-4

The accrual EPS (one which is reported as diluted EPS in Profit and loss account) had a significant jump from INR 12.08 /Share … Read the rest

Create an Investing checklist

Invest in creating an Investing checklist as it can save you from making fatal investment mistakes in life

Charlie munger said,

“You need a different checklist and different mental models for different companies. I can never make
it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life

Checklists in aviation and medicine aim to eliminate errors completely. They are critical since they deal with life and death situations—a minor mistake in a flight may lead to a fatal crash, In investing checklist slows down investing process thus taking impulse out of decision making. See how Harvard have developed this checklist for CEOs for big corporate decisions

Daniel Kaheman wrote

Form a checklist of criteria to consider before making a strategic decision. This can help to protect against overconfidence. For example, you might want to know the quality of the information given, whether or not there is a strong possibility of “group think” influencing this information, have any influential team members had a chance to persuade other team members, and also whether the chief decision-maker already has a strong stance on this issue. These

… 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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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

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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Use earnings framework to find great business

One quote is copy pasted on my desktop as a sticky note and I read it every time I look at new investment opportunity

What to look for in a great business?

A high return on capital (not contributed by a very low margin operation where margins could fall) which is sustainable – pricing power, low cost advantage etc. Ability to deploy incremental capital at high rates of returns i.e. growth prospects. Ability to self-fund growth – Prof Sanjay Bakshi

A useful way to start would be to create a framework that can help us identify great businesses. Let’s try to build a framework by analysing earnings of company as in long run it is earnings which drive stock prices

But how do we analyse earnings of the company? I use a triangular approach

Determine the authenticity of Earnings – To ensure an accountant is not cooking the books and accrual earnings reported by company are authentic

Composition of Earnings – A simple DuPont break down of ROE to determine sources of a company’s return on equity. This would help us understand what contributes to high or low return on capital

Source of growth of Earnings – Understanding what factors … Read the rest

Porter

Get a template to analyse companies using five forces

Porter’s Five Forces Model is very qualitative in nature. It does incorporate some quantitative factors but for the most part, it is a very subjective approach. This post attempts to set quantitative assessment of Porter’s five forces.

A general check point before you begin Porter five force quantitative analysis, one should be able to clearly articulate and understand the economics behind the business of the firm which you are evaluating

Use the below template to analyse five forces

Porter Force How to Analyse
Threat of Entry Economies of Scale See if the per unit / tonne cost is going down with capacity expansion
Check if company can outsource non core operations, that should improve gross margins
Check average capex requirements, this should be trending down
Product differentiation Check competitor prices of products, Is it a price maker or taker in the industry
Look at EBIDTA margin, A company with EBIDTA margin is likely to have differentiated product
Check Sales price per piece if applicable and compare it to competitor
Cost advantages Compare net profit margin with peers, stack the competitors from high to low in terms of net margin
Distribution Channels For consumer goods company or companies selling through agents,
… Read the rest

All about CAP – Competitive advantage period

I am sure value investors would detest the idea of listening to What Mr Market is telling , however I think sometimes it does help to understand what Mr Market is telling us

All of last fortnight I have been engrossed in understanding few concepts ,this is my attempt to pen thoughts on them any meaningful consumption of them would require some work on your side so let’s start

Note this work is largely based on reading and understanding of this paper by Michael Mauboussin & Paul Johnson

First up is

CAP – Competitive advantage period

 

Competitive advantage period (CAP) is the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital

 

To understand a company’s competitive advantages go through this

 

Now coming back to CAP.

 

A company’s CAP is determined by a multitude of factors, both internal and external.On a company-specific basis, considerations such as industry structure, the company’s  competitive position within that industry, and management strategies define the length of CAP

What interested us was the use of CAP for security analysis , Michael Mauboussin & Paul Johnson slightly modified it and called it as … Read the rest

Learn to create an earnings line

Peter Lynch in his famous book “Beating the Street” talked about buying stocks when they are below earnings line and avoiding to buy when they are above earnings line.

No Indian website provides this information readily like US websites. However with some work you would be able to create this on your own

  1. Go to Screener to get the ten yearly annual profit and loss , copy paste data it an excel

EL-1

  1. Now get the total number of outstanding shares from latest quarterly fillings or from money control – Calculate diluted EPS , make sure you take latest outstanding shares
  2. Calculate 10 years , 5 year and 3 year EPS CAGR growth
  3. Now choose a fair PE based on EPS growth for page we have taken PE of 38
  4. Create an earnings line by multiplying fair PE and Diluted EPS
  5. Plot actual share price as on 1st may ( to avoid bias) for every financial year to compare earnings line with actual price

EL-2

  1. Convert this into graph to get an idea when to buy

 

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