The reading dose -3

Here’s another one in this series:

1. The “Bubble” in quality (Click here): This one is really insightful, it makes you think about what kind of expectations are built into the stock price and what returns you are willing to settle for as an investor

2. Holding companies (Click here): Interesting article from Neeraj, whose blog I follow regularly, this one throws light on how one can go about investing in holding companies

3. Conviction to hold (Click Here): This one is a must read, it gives a very good insight into how one can and should develop conviction to hold companies they own

4. Jealousy & Envy: (Click here): This one is a very good read written by Vishal at Safal Niveshak, do make it a point to read this

 

Investing Framework

The information overload we face can be quite overwhelming, I find it really important to have a framework in place to filter and crystallize ideas, it enforces discipline.

Below, I have tried to consolidate my process to make an investing decision ( Seasoned and brilliant investors have helped me in this process through their selfless sharing of knowledge )

BUSINESS MODEL & INDUSTRY ANALYSIS:
  1. General intro about the company  ( Brief background, no. of production facilities, employees, etc )
  2. What is the business model? do you understand it? ( If you don’t understand it that well and if you still want to buy it, make sure the price you pay is really less compared to value )
  3. Is the business scalable? Can the products find a large number of customers? ( This is important, however again, if not scalable make sure you are buying with lots of operating leverage on the upside and current utilization is low )
  4. Where does majority of the business come from? ( Geography, clientèle ) ( It helps when client profile is well spread out and diversified in numbers as well as across geographies )
  5. Existing market share? expected 5 years out? ( Better if increasing, at least it must be stable, very difficult to make money of declining market share companies )
  6. Is the business capital intensive? ( Lesser the capital intensity the better it is, if you must buy a capital intensive company make sure, CFO, interest coverage is high and debt as low as possible and not to forget make sure you don’t pay a bomb to acquire it )
  7. Is the business heavily regulated? ( This is a good thing and a bad thing, good thing as it acts a entry barrier, bad thing because recurring interference is a pain, think airlines, alcohol, oil & gas etc)
  8. Name, Nature ( cyclical, secular ), size of industry? ( Own cyclicals when they are ugly and malnourished, not when they are fat and plump )
  9. Business ecosystem ( This is important, don’t be lazy, it’s going to throw useful insights into the business, preferable do this at the last just before the expected returns module )
FINANCIAL ANALYSIS:
  1. Growth in sales, profits, production capacity, realizations? ( Growth in all is very important, again if currently there is no growth make sure there is good build in operating leverage built in )
  2. Operating efficiency? ( check for margins, receivable, inventory, payable days, this is a good indicator to identify if the company has some edge over its competition  )
  3. Investing efficiency? ( check for ROE, fixed asset turnover , again its a good sign of competitive advantage )
  4. Capital structure? frequent debt & capital raising? ( raising too much debt is very risky and diluting equity too often is not a healthy sign, avoid both unless compelling reasons are there )
  5. Cash flow generation, free cash? ( very important, avoid companies that do not generate cash flows from its operations, free cash is a boon, market will always provide rich valuations for FCF + companies, also a sign of competitive advantage )
  6. Funding for growth? ( Substantial funding for growth should ideally happen through internal accruals, avoid companies which only rely on external sources )
  7. Red flags, concerns, contingent liabilities ( Read notes to account carefully )
  8. Other important observations from KPI ( Key performance indicators ) sheet
MANAGEMENT ANALYSIS:
  1. Key people in the management, promoter holding? ( Do some back ground check on key managerial personnel, promoter group ideally should have reasonable amount of their wealth tied to the company )
  2. Project execution & business expansion history? ( Timely execution of projects and expansion activities says a lot about the management, also check how management has tackled recession and problems in the past)
  3. Any deliberate adverse action against minority shareholders? Related party transactions? ( Watch out for amalgamation of subsidiaries, preferential share allotments to promoter group, too many related party transactions etc,)
  4. Compensation? ( 3-5 % is fine, don’t fuss too much about this unless there is something obviously alarming, think sun tv network )
  5. Ambitious? pursuing profitable growth? any diworseifications in the past? bad acquisitions? ( Beware of management getting carried away by growth, eventually many end up in a mess, think DLF, suzlon, ADAG companies, having said that also avoid companies with no ambition at all, think GM breweries,  )
  6. Management / promoters buying / selling shares? ( Naturally, you want them buying and not selling )
EXPECTED RETURNS:
  1. Brief note on why you want to buy / sell / hold ( If all / some of the above segments are in bad shape, there better be a really good reason for you to buy this company, for eg if a company is facing some temporary headwinds and has a strong probability of recovering think wockhardt, mcx, )
  2. What kind of upside is probable in future? Expectde returns? Approx time frame? ( if <100% in 3-4 years forget about it, look for something else, again there are always exceptions )
  3. Things which have to go right for you to make money on this idea ( fewer the better )
  4. Major risks?
  5. Under what circumstances would you sell? ( This is perhaps one of the most critical aspects of investing, risk is not only loss of capital but also loss of opportunity )

 

P.S : I am learning and evolving as an investor, constantly trying to improve, hence this framework is subject to changes. 

The Reading Dose – 1

Just a small compilation of some very good articles and posts I have read over the week :

1.  What happens when you lose sight of prudent risk management  – Disastrous story of a fund manager who lost close to a $100 million in a matter of weeks.

2.  Another brilliant post from Prof. Sanjay Bakshi – This time its an idea from the e-commerce sector, it’s a brilliant read.

3.  How to spot a 100 bagger – Raamdeo Agrawal on how to spot large trends and companies with huge potential,  make sure you read this over the weekend.

4.  Keeping things simple – Immensely insightful post from on of my favourite investing blogs, more often than not,one needs to weed out all the clutter and keep things simple and straightforward.

Idea generation

I have come to realise, there are 4 pillars to the investment process:

1. Idea generation

2. Analysis

3. Buying & allocation

4. Selling
Today’s post is about the first!

There are over 4000 listed companies in India alone, picking investments which can give you decent returns can by itself be a challenge, I have listed some ways you can pick quality companies from the available universe.

1. Quantitative screens : This can be a great starting tool to find interesting companies, you are very likely to tumble on great small / mid-cap ideas which are otherwise ignored and not followed widely by mainstream financial press the best screener for Indian markets is screener.in. you can also use the screener on the edelweiss website

2. Blogs : These are like gold mines, you will chance upon some of the best companies to invest in. The best part is that most of the initial research is already done for you, it’s an excellent starting point to dig deeper. I follow a multitude of blogs and really depend on them for generating new ideas.

3. Paid subscriptions : There are many paid online portals and blogs offering subscription based recommendations, this is money well spent. Some of the ones which are really good are blog.rcfunds.com, theequitydesk.com, equitymaster.com, katalystwealth.com etc. In addition to this there are also magazines one can subscribe to, I subscribe to capital mind, often it has decent ideas to offer.

4. News & exchange filings : Often mainstream news and exchange filings, can throw up interesting ideas. One can get a good idea of future plans of the company, buybacks, splits etc.

5. Industry sources : Sometimes you may have industry network which could lead you to discovering interesting ideas often these can give you very good insights to the business model of the company and its management

6. Observation : This is the most underrated source to generate ideas, there are so many products we use on a daily basis whose companies are listed, Peter Lynch, the legendary fund manager made some of his best investments this way

By no means is the above list an end, ideas can come from all kinds of sources, however this can serve as a decent starting point.

Happy Investing!

Investing Resources & Books – 2

This is the 2nd part of the series, you can read the first part Here

Books:

1. The little book that ( still ) beats the market ~ Joel Greenblatt

If you are just starting out, this is should probably be one of the first books that you read, it’s like a foundation course on investing and business. The central theme of the book revolves around the fact that one should buy high quality companies at discounted valuations, as the author says frequently throughout the book ” Find out what the company is worth and pay a lot less for it ”

The Dhandho Investor ~ Mohnish Pabrai

This book is another gem, the main idea the author tries to convey is how to differentiate between risk and uncertainty. I remember one of its quotes very clearly ” Heads I win, Tails I don’t lose much “. It also talks about the power and magic of compounding.

3. The little book that builds wealth ~ Pat Dorsey

This book is all about the various forms of competitive advantages a firm can enjoy which enables it to achieve super-normal profitability for an extended period of time. It provides a good insight into how to identify a business with superior fundamentals

4. The 5 rules of successful stock investing ~ Pat Dorsey

This is slightly more detailed and elaborate and covers a more broader scope of topics, it takes the reader right from the fundamentals of investing to the valuation of companies, all in 1 book. It’s a great book for people to get their basics right and develop a sound investment process

5. One up on Wall Street ~ Peter Lynch

It’s one of my favorite books, I have read this one multiple times, it often reminds me to keep things simple. It emphasizes on investing in companies you know and can understand. There are no complex jargon here. Highly recommended for everybody, no matter what stage of your investing career you are in, this is one book you simply cannot miss

6. The black swan ~ Nasim Taleb

I must confess that I haven’t read the whole book, It proved too heavy and complex for my understanding, however there was one key insight I was able to pick up from the book which also happens to be its main theme ~ The role and impact of highly improbable and unlikely events on our lives. As far as investing is concerned, it has helped me remain skeptical and alert for any potential black swans lurking around

By no means is this list complete and as they say learning never ends, reading is to an investor what water is to life.
Keep reading
Cheers

Investing Resources & Books -1

As the title suggests this post discusses briefly the various books and resources which have helped me in my investing journey

Disclaimer: I am not paid to write this and it’s not promotional material

Blogs & websites :

1. Rohit Chauhan’s blog( blog.rcfunds.com)
What I really like about this blog is its originality and the logic in the ideas it tries to convey, material is very engaging and forces you to think. Posts are tagged into variety of categories and it’s a treasure for anyone who’s seriously wanting to learn.

Must Read: Rohit used to share his investing template, you can still check if it’s there on the blog it’s the best thing you can lay your hands on. It just shows how hard a person is willing to work to generate market beating returns, there is no complex financial modelling here, it’s simple enough for anybody to understand and follow.

2. Prof. Sanjay Bakshi ( fundooprofessor.wordpress.com ) 

If you don’t already know, he is the father of value investing in India, inspired by Warren buffet and Charlie Munger, some of his lectures which he graciously shares through his blog are for a lack of a better word mind-blowing.

Must Read: Relaxo lecture series is the most profound material I have read on investing yet. It should form as compulsory reading material at every Post graduate course in management.

3. Ayush Mittal & Family ( www.dalal-street.in & www.screener.in ) 

Screener.in is probably the most useful tool for any investor focused on Indian markets, I can’t even imagine the kind of effort which has gone into creating something like that. Yes and it’s available for free ( well at least for now 😉 )
Dalal-street.in is my go to destination when I am looking for new ideas. These guys have a great knack for identifying beautifully simple businesses which have indeed proven to be very successful.

Must Read: There is a small tab called “talks” on screener.in, it’s a hidden gem, they compile articles and interesting posts from around the web.

4. Safal Niveshak ( www.safalniveshak.com )

Having personally attended his investing workshop, I have greatly benefited from Vishal’s ideas and his investment process.
It is a treasure trove of information and insights into the world of Warren Buffet and many other value investors. What really appeals to me is that it can be followed and understood by everybody.

Must Read: There are interviews which he has conducted of many brilliant investors out there. It will require some patience in finding them, however one should read all of them, in addition to that you can subscribe to the value investing course, it is money well spent.

5. Basant Maheshwari ( www.theequitydesk.com ) 

Although I don’t subscribe to his paid service yet, the website is by itself a brilliant learning experience, it has one of the largest and the most communicative forum, lots of new ideas to pick up.

Must Read: Basant Maheshwari has written a book called “The Thoughtful Investor” , it’s a good read.

6. Base hit investing ( www.basehitinvesting.com )

Although this blog doesn’t discuss stocks of the Indian markets, it has one of the most insightful material on investing.

Must read : Read the articles tagged “Investment process “.

What I really like about all of them is that they don’t advocate short cuts, they have been in this business long enough to understand that it requires just as much effort, patience and perseverance as any other line of work.
Every time I read through these blogs I come out wiser and inch towards being a better investor.