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It was sometime during late 1999 through early 2000, near the peak of the dot-com bubble, the legendary George Soros and his hedge-fund team were working on how to prepare for the inevitable sell-off in technology stocks.

The man in charge of Soros’ high profile technology funds was Stanley Druckenmiller – one of the best-performing hedge fund managers of all time, till date – and he was busy warning his team that the sell-off could be near and could be brutal.

As the markets soared further in March 2000, Druckenmiller was quoted as saying, “I don’t like this market. I think we should probably lighten up.” Soros himself would regularly warn his team that tech stocks were a bubble set to burst.

Despite this, when the sell-off finally did begin in mid-March 2000, Soros Fund Management wasn’t ready for it. His funds were still loaded with high-tech and biotech stocks. Just in five days, starting 15th March, Soros’s flagship Quantum Fund saw what had been a 2% year-to-date gain turn into an 11% loss. By the end of April, the Quantum Fund was down 22% since the start of the year, and the smaller Quota Fund was down 32%.

Post that, in April 2000, Soros said at a conference, “Maybe I don’t understand the market. Maybe the music has stopped, but people are still dancing.”

Same month, at another conference, Druckenmiller confessed, “It would have been nice to go out on top, like Michael Jordan. But I overplayed my hand.”

Here is how Druckenmiller summarized his experience of 2000 in an interview late last year (Nov. 2013) –

I bought the top of the tech market in March of 2000 [after quickly making money in the same space in mid-late 1999] in an emotional fit I had because I couldn’t stand the fact that it was going up so much and it violated every rule I learned in 25 years.

I bought the tech market very well in mid-1999 and sold everything out in January and was sitting pretty; and I had two internal managers who were making about 5% a day and I just couldn’t stand it. And I put billions of dollars in within hours of the top. And, boy, did I get killed the next couple months.

How to Get Killed at the Top, the Newton Way
Let’s cut across to the middle of 1720 in Great Britain. Sir Isaac Newton – the inventor of calculus (the branch of mathematics that describes change over time), and the man who framed the laws of motion and set physics on its modern trajectory, put a sizable chunk of his personal fortune into shares of the South Sea Company.

The company had then pursued a new and increasingly risky banking deal – and as insiders began to talk up the trading profits (that turned out fictitious) the company expected from another venture, the stock began to leap, starting January 1720.

The bubble burst that September. Newton lost 90% of his stake, which was a large portion of his total net worth.

Here is how MIT professor Thomas Levinson described Newton’s and South Sea’s antics in a 2009 article…

Newton…made his first investment in the South Sea issue early, in 1713, and held it for several years, marking a modest paper profit. He held on through early 1720…That got the desired result, a sudden leap in stock prices. Starting at £128 in January, the price for South Sea securities rose to £175 in February and then £330 in March.

…Newton sold in April, content with his (quite spectacular) gains to date. But then, between April and June, share prices tripled, reaching over £1,000…which is precisely when he could stand it no longer.

Having “lost” two-thirds of his potential gain, Newton bought again at the very top and bought more after a slight decline in July.

The South Sea stock price held up through August 1720, and then the bubble led by over-expectations of huge returns was pricked in September.

…South Sea share prices collapsed to roughly their pre-bubble level. Newton’s losses totalled as much as £20,000, between $4 million and $5 million in 21st century terms…It was a terrific blow for Newton.


What Brought Druckenmiller and Newton Down?
You know the answer, I believe.

Most people get in during rising markets, or when bubbles are building up because they desire to earn money fast because they are envious of seeing others doing so.

“If he could make money fast in stocks,” one would normally ask during such times, “So why couldn’t I?”

If geniuses like Druckenmiller and Newton couldn’t stand to watch as others made money, and they carried on with full knowledge that they were purely speculating (re-read Druckenmiller’s confession mentioned above), what chance do we non-geniuses have to survive a bubble and its subsequent and certain burst?

The Real Tragedy of Our Life
Charlie Munger says…

If you are comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what? Someone will always be getting richer faster than you. This is not a tragedy.

You see, the real tragedy of our life is not that someone else is getting richer or healthier than us, but that he is getting there faster than us.

Another tragedy is that when we fall into this comparison trap, it’s hard to stop.

Look at fund managers. Most of them have similar stocks in their portfolios, and most still claim to have the skills to outperform others.

Read stock forums. Most of them are filled with the noise of people comparing their portfolios with others’.

Why do you think any mention of “5 stocks to buy” or “best stocks to buy now” raises your brain’s antennae? This is because you want to compare those best stocks to your existing portfolio and buy whatever you don’t have already.

This habit of unintelligently buying things because someone else is making fast money on them comes to the fore when the markets have been rising for some time.

Here is what Citigroup’s boss Chuck Prince said to a newspaper in July 2007, shortly before the subprime bubble burst…

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

So, even as people know that things are not right around them, they keep dancing to the bubble’s music because everyone else is dancing and making merry.

After all, not dancing to the rising market’s tune is same as underperforming. Isn’t it terrible to sit quietly, doing nothing, when some people are predicting the Sensex to touch six-figures soon, and others are dancing to their tunes? Of course, it’s terrible!

But if you can’t ignore and avoid the temptation that comes from watching other people get rich due to a sharp rise in stock prices, it’s best to know sooner than later that that’s often a path to destruction.

You can “get killed”, like Druckenmiller in 2000 and Newton 280 years prior to that.

Of course, like Druckenmiller did so perfectly, no one can predict when the sell-off is near and how bad it could get, but it’s very important to learn from what Druckenmiller didn’t do – listen to his gut instead of following the herd.

That, I believe, is one of the best lessons you can learn on how and why not to speculate, especially when all others are speculating.

Getting Rich Vs Staying Rich
Morgan Housel of Collaborative Fund has written a wonderful article on getting rich versus staying rich, where he suggested how getting rich can be the biggest impediment to staying rich…

It goes like this. The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time.

There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place.

A couple of years ago, I attended a lecture from the legendary Howard Marks, where he talked about these points on the subject of ‘humility’ –

  • Very few investors have the nerve to say, “I don’t know.” But that’s how you build integrity in your investment process.
  • If you start with “I don’t know,” then you are unlikely to act so boldly as to get into trouble.
  • Our business is full of people who got famous for being right once in a row.
  • One of the reasons why the future is unknowable is randomness. Events often fail to materialize as we think they should. Improbable things happen all the time.
  • Anytime you think you know something others don’t, you should examine the basis. Ask yourself – Who doesn’t know better? Why should I be privy to exceptional information? How do I know this that nobody else knows? Am I really that smart, or am I just wrong? Am I certain that I am right and everyone else is wrong? If it’s an advice from some else, ask – Why would somebody give me potentially valuable information? And why would he give it to me? And why is he still working for a living if he knows the future so well? I am always skeptical of people who will tell you the future for five dollars.
  • The concept of market efficiency – that price of each asset accurately reflects its underlying intrinsic value, or that the market price is fair – must not be ignored. You can know something and it’s possible to know more than others. But the going in presumption should be that everybody is well-informed, and if you think you know something they don’t, you should be able to express the reason for that. It’s not easy because everyone is trying just as hard as you are.

In dealing with a complex adaptive system that the stock market is, humility is your best protection. Being tentative in your decision making, changing your mind when the facts change, diversifying adequately and not going around boasting about your recent successes are all signs of such humility.

However, when we’re repeatedly or massively successful – like Druckenmiller and Newton – we’re tempted to believe that we’ve found the formula for success and are no longer subject to human fallibility. This is devastating, especially in a world that is continually changing, and where every right idea is eventually the wrong one.

Beware the Madness
After the South Sea disaster, Newton could not bear to hear the phrase “South Sea” mentioned in his presence. But just once he admitted that while he knew how to predict the motions of the cosmos, he could not calculate the madness of the people.

We still can’t, so please be very careful.


Also Read:
1. Speculating In Bubbles With Stan Druckenmiller And Sir Isaac Newton
2. Even a Genius Can Get Suckered

The post The Risks of Speculating During Rising Markets appeared first on Safal Niveshak.

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Value Investing Workshop in Mumbai: Register now for my upcoming Value Investing Workshop in Mumbai on Sunday, 5th May 2019. Few seats remain! Click here to register.

I read a column on Forbes’ website sometime back that contained a narration from one Nancy Ortberg, who was once a nurse at a hospital emergency room in California.

In her story, Nancy described something astonishing that she witnessed in the emergency room.

“It was about 10.30 pm,” she said. “The room was a mess. I was finishing up some work on the chart before going home. The doctor with whom I loved working was debriefing a new doctor, who had done a very respectable, competent job, telling him what he’d done well and what he could have done differently.

“Then he put his hand on the young doctor’s shoulder and said, ‘When you finished, did you notice the young man from housekeeping who came in to clean the room?’ There was a completely blank look on the young doctor’s face.

“The older doctor said, ‘His name is Carlos. He’s been here for three years. He does a fabulous job. When he comes in, he gets the room turned around so fast that you and I can get our next patients in quickly. His wife’s name is Maria. They have four children.’ Then he named each of the four children and gave each child’s age.

“The older doctor went on to say, ‘He lives in a rented house about three blocks from here, in Santa Ana. They’ve been up from Mexico for about five years. His name is Carlos,’ he repeated.

“Then he said, ‘Next week I would like you to tell me something about Carlos that I don’t already know. Okay? Now, let’s go check on the rest of the patients.'”

Ortberg recalls – “I remember standing there writing my nursing notes – stunned – and thinking, I have just witnessed breathtaking leadership.”

The Intangibles That Matter
In my earlier role as a stock analyst, I met hundreds of top managers while researching and reporting on their companies.

One of the ideas to meet those managers, apart from seeking information about their businesses, was to gauge what kind of people they were based on how they answered their questions, their tone of voice, and also how they dealt with people around them, including the secretaries and office boys.

Of course, just one interaction isn’t enough to tell you the true nature of the other person, but I was simply hoping for some incidental insights on the nature of the people managing businesses I was researching.

And during a few such meetings, there appeared some insights into the managers’ behaviour – both good and bad. Like a few managers scolding office boys for the delay in getting us water, to a few others who took us around their factories and who seemed to know the names and family details of almost all the people working on the floor.

We all look at tangibles like business growth, margins, return on capital, debt/equity, broader balance sheet and cash flow performances, compensation, etc. to measure management quality. And these are certainly a few important parameters to watch out for.

But, in my career as an investor, it has sometimes been the intangibles – like managers’ behaviour with lesser people around them, their soft-spoken nature, their calm appearance, consistency in their spoken words and actions – that has played a big role in the final decision-making process. And things have worked out pretty well when I made such decisions.

Now such intangibles cannot be quantified (because they are intangibles). Any value you put on the business because of such things like leadership qualities, integrity, kindness in dealing with other people, etc. is always going to be highly subjective.

But like it’s not a good idea to marry someone who just has good looks, good bank balance and good brains, but lacks good nature, it would be an unhappy proposition investing with such managers too.

So, please choose very carefully the people you want to bet on with your hard-earned savings. Look at their experience and abilities in running the business, but also look at their behaviour in dealing with people. This is because people behave the same way in all aspects of life. Like they deal with people, so they drive on roads, and so they manage businesses.

You may go wrong in your assessment of the first (experience and abilities), because that is where you will use your brain. But you may rarely go wrong in your assessment of the second (behaviour), because that is where your gut will play a key role.

And the gut, as Peter Lynch said, is the key organ in investment decision making. It’s not the brain.

Also Read:

The post The Intangibles of Assessing Management Quality appeared first on Safal Niveshak.

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Safal Niveshak by Vishal Khandelwal - 1M ago

Value Investing Workshop in Mumbai: Register now for my upcoming Value Investing Workshop in Mumbai on Sunday, 5th May 2019. Few early bird seats remain! Click here to register.

It was sometime in early 2009 that, as I was running my screeners to find investment-worthy businesses, I came across a Delhi based packaging firm Uflex Ltd.

The company was involved in the flexible packaging business, was doing well in terms of growth, and expanding globally. What’s more, the stock was available at a single-digit P/E.

In all, it sounded like a great investment that was available cheap. Anyways, while I was busy preparing my rosy predictions for the business and the stock, I was warned by an analyst friend about some shady land dealings he had heard of about the company’s promoters. What is more, the promoters had pledged a large amount of their shareholding.

I had made up my mind on this being a great investment, and thus nothing in the world could have shaken my thesis. And so, I invested in the stock at around Rs 75 in mid-2009. Over the next fifteen months, the stock touched Rs 275. My thesis seemed correct, especially because I was in the money.

Or so I thought, because just as I was rejoicing at my intelligence in picking up a great business, news broke that Uflex’s Chairman and Managing Director was sent behind bars for a land scam. The stock cracked around 30% in no time.

I managed to sell my holding around Rs 200, a near 165% gain in eighteen months, which was not a bad deal at that time.

As I look back at my investment in Uflex and the profit I managed to eke out of the stock, I credit my entire gain to luck. This wasn’t the case when the stock was going great guns before the news of the scam broke out. I then thought it was my skill, not luck, that had caused me such large gains in quick time.

Anyways, Uflex was just one of the few such embarrassing jewels I had owned during those years. Embarrassing now in hindsight because I did not deserve to earn profits on such businesses that either suffered from bad economics, or bad managements, or overvaluation.

Investing’s False Positives
The field of medicine has a term called “false positive.” It is an erroneous result that indicates that a given condition is present when it is not. An example of a false positive would be if a medical test designed to detect cancer returns a positive result (that the person has cancer) when, in reality, the person does not have cancer.

While medicine’s false positives often create panic about things that turn out to be nothing to worry about, investing’s false positives create euphoria about things that should have been worrisome in the first place (like my gains in Uflex did to me).

And the underlying reason is that most people out there in the stock market judge the quality of their investment decisions by one single factor – the short-term price movement of the underlying security. And that’s exactly what they are looking forward to while making the investment, even while talking about the virtues of long-term investing and the need to ignore short-term price movements.

Noted French writer and philosopher Voltaire said –

It is dangerous to be right in matters where established men are wrong.

Probably nobody understood the risks of going against time-tested fundamental truths better than Voltaire. I had not heard much of him during my adventures with Uflex and the likes. But I got lucky to have learned it over years without paying much in tuition fee to Mr. Market. Now the situation is that I won’t enter a kitchen (business/stock) even if I see just a single cockroach in there. And questionable managements are a completely no-go area for me, for years and experiences have taught me that people, of all things, rarely change.

Now the biggest problem with a false positive in investing is that it encourages the investor and reinforces risky behaviour (which is accepted only later). This ultimately leads to even more reckless behavior, till the going remains good.

It’s important to remember that you can be wrong (in your underlying thesis about a business) and yet markets can make you look right in the short term. But such a false positive is a foundation for dreadful losses in the future.

This is where the important aspect of investing, that is discipline, comes into the picture.

German writer and playwright Carl Zuckmayer said –

Half of life is luck; the other half is discipline – and that’s the important half, for without discipline you wouldn’t know what to do with luck.

Discipline is the backbone of successful investing. But such is the perversity of a quick but undeserved and risky gain in the stock market that it charms even the most disciplined and intelligent of investors. Even such investors, knowingly, surrender to this temptation at times.

With new and inexperienced investors, a false positive usually extracts a price that is not merely the monetary losses they incur when the falsity comes to fore, but it also leaves a deep scar on their psychology. This scares them away from investing in an intelligent and positive way thereafter.

Someone wise once said that real heroes are made by the paths they choose, not the powers they are graced with. This is true in investing as well.

Imprudent risk-taking may lead you to one-off success, but the consequence of failure could be huge.

The idea is to never bet against the fundamental, time-tested rules of intelligent investing. The idea is to never rejoice on or indulge in investing’s false positives simply because, by nature, they are false.

The post Investing’s False Positives appeared first on Safal Niveshak.

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Safal Niveshak by Vishal Khandelwal - 1M ago

Whenever I feel uninspired, I look to a collection of my favorite quotes and passages I keep in a document on my computer or marked in my books (my idea bank). Today was one of those days.

As I was re-reading some of these and remembering why I love writing, reading, and the power of words, I thought perhaps someone somewhere out there might be feeling the same as me before I started writing this post.

So, here are 20 of the most beautiful passages (in no particular order) I have ever read on life and related subjects, and which have helped me become a better version of myself over the years. These exclude everything I have learned from Warren Buffett and Charlie Munger (there’s anyways an overdose of these two wise men on this blog).

Hope you find these passages of some help, and worth your time. Ready? Let’s go.

1. Steve Jobs on Having Courage to Follow Your Heart and Intuition
Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure — these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary. (Source)

2. Naval Ravikant on Life Being a Single Player Game
Socially, we’re told, “Go work out. Go look good.” That’s a multi-player competitive game. Other people can see if I’m doing a good job or not. We’re told, “Go make money. Go buy a big house.” Again, external monkey-player competitive game. When it comes to learn to be happy, train yourself to be happy, completely internal, no external progress, no external validation, 100% you’re competing against yourself, single-player game.

We are such social creatures, we’re more like bees or ants, that we’re externally programmed and driven, that we just don’t know how to play and win at these single-player games anymore. We compete purely on multi-player games.

The reality is life is a single-player game. You’re born alone. You’re going to die alone. All of your interpretations are alone. All your memories are alone. You’re gone in three generations and nobody cares. Before you showed up, nobody cared. It’s all single-player. (Source)

3. Eknath Easwaran on Fighting the War Within
The battlefield is a perfect backdrop, but the Gita’s subject is the war within, the struggle for self-mastery that every human being must wage if he or she is to emerge from life victorious.

Scholars can debate the point forever, but when the Gita is practiced, I think, it becomes clear that the struggle the Gita is concerned with is the struggle for self-mastery. It was Vyasa’s genius to take the whole great Mahabharata epic and see it as metaphor for the perennial war between the forces of light and the forces of darkness in every human heart. Arjuna and Krishna are then no longer merely characters in a literary masterpiece. Arjuna becomes Everyman, asking the Lord himself, Sri Krishna, the perennial questions about life and death – not as a philosopher, but as the quintessential man of action. Thus read, the Gita is not an external dialogue but an internal one: between the ordinary human personality, full of questions about the meaning of life, and our deepest Self, which is divine.

There is, in fact, no other way to read the Gita and grasp it as spiritual instruction. If I could offer only one key to understanding this divine dialogue, it would be to remember that it takes place in the depths of consciousness and that Krishna is not some external being, human or superhuman, but the spark of divinity that lies at the core of the human personality. (Source)

4. Carl Sagan on Being Kind and Compassionate
The Earth is a very small stage in a vast cosmic arena. Think of the rivers of blood spilled by all those generals and emperors so that in glory and in triumph they could become the momentary masters of a fraction of a dot. Think of the endless cruelties visited by the inhabitants of one corner of the dot on scarcely distinguishable inhabitants of some other corner of the dot. How frequent their misunderstandings, how eager they are to kill one another, how fervent their hatreds.

Our posturings, our imagined self-importance, the delusion that we have some privileged position in the universe, are challenged by this point of pale light. Our planet is a lonely speck in the great enveloping cosmic dark. In our obscurity – in all this vastness – there is no hint that help will come from elsewhere to save us from ourselves.

It is up to us. It’s been said that astronomy is a humbling, and I might add, a character-building experience. To my mind, there is perhaps no better demonstration of the folly of human conceits than this distant image of our tiny world. To me, it underscores our responsibility to deal more kindly and compassionately with one another and to preserve and cherish that pale blue dot, the only home we’ve ever known. (Source)

5. Seneca on the Shortness of Life
It is not that we have a short time to live, but that we waste a lot of it. Life is long enough, and a sufficiently generous amount has been given to us for the highest achievements if it were all well invested. But when it is wasted in heedless luxury and spent on no good activity, we are forced at last by death’s final constraint to realize that it has passed away before we knew it was passing. So it is: we are not given a short life but we make it short, and we are not ill-supplied but wasteful of it… Life is long if you know how to use it. (Source)

6. Marcus Aurelius on the Unnaturalness of Anger
When you wake up in the morning, tell yourself: the people I deal with today will be meddling, ungrateful, arrogant, dishonest, jealous and surly. They are like this because they can’t tell good from evil. But I have seen the beauty of good, and the ugliness of evil, and have recognized that the wrongdoer has a nature related to my own – not of the same blood and birth, but the same mind, and possessing a share of the divine. And so none of them can hurt me. No one can implicate me in ugliness. Nor can I feel angry at my relative, or hate him. We were born to work together like feet, hands and eyes, like the two rows of teeth, upper and lower. To obstruct each other is unnatural. To feel anger at someone, to turn your back on him: these are unnatural. (Source)

7. Haruki Murakami on Weathering Life’s Storms
Sometimes fate is like a small sandstorm that keeps changing directions. You change direction but the sandstorm chases you. You turn again, but the storm adjusts. Over and over you play this out, like some ominous dance with death just before dawn. Why? Because this storm isn’t something that blew in from far away, something that has nothing to do with you. This storm is you. Something inside of you. So all you can do is give in to it, step right inside the storm, closing your eyes and plugging up your ears so the sand doesn’t get in, and walk through it, step by step. There’s no sun there, no moon, no direction, no sense of time. Just fine white sand swirling up into the sky like pulverized bones. That’s the kind of sandstorm you need to imagine.

And you really will have to make it through that violent, metaphysical, symbolic storm. No matter how metaphysical or symbolic it might be, make no mistake about it: it will cut through flesh like a thousand razor blades. People will bleed there, and you will bleed too. Hot, red blood. You’ll catch that blood in your hands, your own blood and the blood of others.

And once the storm is over you won’t remember how you made it through, how you managed to survive. You won’t even be sure, in fact, whether the storm is really over. But one thing is certain. When you come out of the storm you won’t be the same person who walked in. That’s what this storm’s all about. (Source)

8. Dale Carnegie on Living One Day at a Time
You and I are standing this very second at the meeting place of two eternities: the vast past that has endured forever, and the future that is plunging on to the last syllable of recorded time. We can’t possibly live on either of those eternities – no, not even for one split second. But, by trying to do so, we can wreck both our bodies and our minds. So let’s be content to live the only time we can possibly live: from now until bedtime.

“Anyone can carry his burden, however hard, until nightfall,” wrote Robert Louis Stevenson. “Anyone can do his work, however hard, for one day. Anyone can live sweetly, patiently, lovingly, purely, till the sun goes down. And this is all that life really means.” (Source)

9. Kahlil Gibran on Children
Your children are not your children.
They are the sons and daughters of Life’s longing for itself.
They come through you but not from you,
And though they are with you yet they belong not to you.

You may give them your love but not your thoughts,
For they have their own thoughts.
You may house their bodies but not their souls,
For their souls dwell in the house of tomorrow,
which you cannot visit, not even in your dreams.
You may strive to be like them,
but seek not to make them like you.
For life goes not backward nor tarries with yesterday.

You are the bows from which your children
as living arrows are sent forth.
The archer sees the mark upon the path of the infinite,
and He bends you with His might
that His arrows may go swift and far.
Let your bending in the archer’s hand be for gladness;
For even as He loves the arrow that flies,
so He loves also the bow that is stable. (Source)

10. Viktor Frankl on Dealing with Success
Don’t aim at success. The more you aim at it and make it a target, the more you are going to miss it. For success, like happiness, cannot be pursued; it must ensue, and it only does so as the unintended side effect of one’s personal dedication to a cause greater than oneself or as the by-product of one’s surrender to a person other than oneself. Happiness must happen, and the same holds for success: you have to let it happen by not caring about it. I want you to listen to what your conscience commands you to do and go on to carry it out to the best of your knowledge. Then you will live to see that in the long-run—in the long-run, I say! — success will follow you precisely because you had forgotten to think about it. (Source)

11. Dostoevsky on Not Lying to Ourselves
Above all, don’t lie to yourself. The man who lies to himself and listens to his own lie comes to a point that he cannot distinguish the truth within him, or around him, and so loses all respect for himself and for others. And having no respect he ceases to love. (Source)

12. Anne Frank on Seeking Solace in Nature
The best remedy for those who are afraid, lonely or unhappy is to go outside, somewhere where they can be quite alone with the heavens, nature and God. Because only then does one feel that all is as it should be and that God wishes to see people happy, amidst the simple beauty of nature. As longs as this exists, and it certainly always will, I know that then there will always be comfort for every sorrow, whatever the circumstances may be. And I firmly believe that nature brings solace in all troubles. (Source)

13. Nassim Taleb on Us Being Black Swans
I am sometimes taken aback by how people can have a miserable day or get angry because they feel cheated by a bad meal, cold coffee, a social rebuff or a rude reception…We are quick to forget that just being alive is an extraordinary piece of good luck, a remote event, a chance occurrence of monstrous proportions.

Imagine a speck of dust next to a planet a billion times the size of the earth. The speck of dust represents the odds in favour of your being born; the huge planet would be the odds against it. So stop sweating the small stuff. Don’t be like the ingrate who got a castle as a present and worried about the mildew in the bathroom. Stop looking the gift horse in the mouth – remember that you are a Black Swan. (Source)

14. Yuval Noah Harari on the Power of Meditation
According to Buddhism, the root of suffering is neither the feeling of pain nor of sadness nor even of meaninglessness. Rather, the real root of suffering is this never-ending and pointless pursuit of ephemeral feelings, which causes us to be in a constant state of tension, restlessness and dissatisfaction. Due to this pursuit, the mind is never satisfied. Even when experiencing pleasure, it is not content, because it fears this feeling might soon disappear, and craves that this feeling should stay and intensify.

People are liberated from suffering not when they experience this or that fleeting pleasure, but rather when they understand the impermanent nature of all their feelings, and stop craving them. This is the aim of Buddhist meditation practices. In meditation, you are supposed to closely observe your mind and body, witness the ceaseless arising and passing of all your feelings, and realise how pointless it is to pursue them. When the pursuit stops, the mind becomes very relaxed, clear and satisfied. All kinds of feelings go on arising and passing – joy, anger, boredom, lust – but once you stop craving particular feelings, you can just accept them for what they are. You live in the present moment instead of fantasising about what might have been. The resulting serenity is so profound that those who spend their lives in the frenzied pursuit of pleasant feelings can hardly imagine it. It is like a man standing for decades on the seashore, embracing certain ‘good’ waves and trying to prevent them from disintegrating, while simultaneously pushing back ‘bad’ waves to prevent them from getting near him. Day in, day out, the man stands on the beach, driving himself crazy with this fruitless exercise. Eventually, he sits down on the sand and just allows the waves to come and go as they please. How peaceful! (Source)

15. Ed Viesturs on Karma
Although I remain uncertain about God or any particular religion, I believe in karma. What goes around, comes around. How you live your life, the respect that you give others and the mountain, and how you treat people in general will come back to you in kindred fashion. I like to talk about what I call the Karma National Bank. If you give up the summit to help rescue someone who’s in trouble, you’ve put a deposit in that bank. And sometime down the road, you may need to make a big withdrawal. (Source)

16. Albert Einstein on Widening Our Circles of Compassion
A human being is part of a whole, called by us the “Universe,” a part limited in time and space. He experiences himself, his thoughts and feelings, as something separated from the rest — a kind of optical delusion of his consciousness. This delusion is a kind of prison for us, restricting us to our personal desires and to affection for a few persons nearest us. Our task must be to free ourselves from this prison by widening our circles of compassion to embrace all living creatures and the whole of nature in its beauty. (Source)

17. Daily Stoic on Dealing with the Scary World
In Aaron Thier’s wonderful new novel, The World Is A Narrow Bridge, there is a scene where Eva and Murphy, the two young prophets of the god Yahweh, are sent on a mission that terrifies them. As they begin the mission, Eva and Murphy are approached by Satan, who has been sent by Yahweh, to give them their final instructions. After Satan gives the instructions, he begins to leave for his next mission:

“You have to go so soon?” says Eva. “Right away?”

She looks devastated. Murphy, too, is unhappy. Satan frowns and chews on his lip. He doesn’t like to leave them like this.

“I’ll teach you a trick,” he says. “I’ll teach you an incantation that will protect against despair. If things are dark, and I’m not around to help, you can repeat it a few times and it’ll help.

It would go something like this: ‘The world is a narrow bridge, and the most important thing is not to be afraid.’”

Murphy and Eva both repeat this very slowly. Eva says, “That’s lovely.”

Satan nods. “Just repeat it to yourself when things are bad. You could try different translations too. ‘Do not make yourself afraid, the whole world is a narrow bridge.’

The point is this life we’re living—this world we inhabit—is a scary place. If you peer over the side of a narrow bridge, you can lose your heart to continue. You freeze up. You sit down. So too with life. If we think too much about the journey we have to make, the one that begins with the trauma of birth and ends with the tragedy of death, the one that is so perilous and unpredictable, we’ll never make it.

The important thing is that we are not afraid. That we don’t overthink things. That we don’t give way to fear, as the Stoics tell us over and over again. Just repeat it to yourself—The world is a narrow bridge and I will not be afraid—and keep going. Like the thousands of generations who have come before you. (Source)

18. Morrie Schwartz on Life’s Purpose and Meaning
So many people walk around with a meaningless life. They seem half-asleep, even when they’re busy doing things they think are important. This is because they’re chasing the wrong things. The way you get meaning into your life is to devote yourself to loving others, devote yourself to your community around you, and devote yourself to creating something that gives you purpose and meaning. (Source)

19. Seneca on Hope and Fear
Limiting one’s desires actually helps to cure one of fear. ‘Cease to hope … and you will cease to fear.’ … Widely different [as fear and hope] are, the two of them march in unison like a prisoner and the escort he is handcuffed to. Fear keeps pace with hope … both belong to a mind in suspense, to a mind in a state of anxiety through looking into the future. Both are mainly due to projecting our thoughts far ahead of us instead of adapting ourselves to the present. (Source)

20. Courtney Peppernell on Living Our Stories Well
You can’t skip chapters, that’s not how life works. You have to read every line, meet every character. You won’t enjoy all of it. Hell, some chapters will make you cry for weeks. You will read things you don’t want to read, you will have moments when you don’t want the pages to end. But you have to keep going. Stories keep the world evolving. Live yours, don’t miss out. (Source)

What Inspires You in Life?
Please share in the (no investing stuff please, and no quotes, but only passages on life and living, with name/link to the original source).

Happy living!

The post 20 Ideas That Changed My Life appeared first on Safal Niveshak.

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Safal Niveshak by Vishal Khandelwal - 1M ago

Whenever I feel uninspired, I look to a collection of my favorite quotes and passages I keep in a document on my computer or marked in my books. Today was one of those days.

As I was re-reading some of these and remembering why I love writing, reading, and the power of words, I thought perhaps someone somewhere out there might be feeling the same as me before I started writing this post.

So, here are 20 of the most beautiful passages (in no particular order) I have ever read on life and related subjects. These exclude everything I have learned from Warren Buffett and Charlie Munger (there’s anyways an overdose of these two wise men on this blog).

Hope you find these passages of some help, and worth your time. Ready? Let’s go.

1. Steve Jobs on Having Courage to Follow Your Heart and Intuition
Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure — these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary. (Source)

2. Naval Ravikant on Life Being a Single Player Game
Socially, we’re told, “Go work out. Go look good.” That’s a multi-player competitive game. Other people can see if I’m doing a good job or not. We’re told, “Go make money. Go buy a big house.” Again, external monkey-player competitive game. When it comes to learn to be happy, train yourself to be happy, completely internal, no external progress, no external validation, 100% you’re competing against yourself, single-player game.

We are such social creatures, we’re more like bees or ants, that we’re externally programmed and driven, that we just don’t know how to play and win at these single-player games anymore. We compete purely on multi-player games.

The reality is life is a single-player game. You’re born alone. You’re going to die alone. All of your interpretations are alone. All your memories are alone. You’re gone in three generations and nobody cares. Before you showed up, nobody cared. It’s all single-player. (Source)

3. Eknath Easwaran on Fighting the War Within
The battlefield is a perfect backdrop, but the Gita’s subject is the war within, the struggle for self-mastery that every human being must wage if he or she is to emerge from life victorious.

Scholars can debate the point forever, but when the Gita is practiced, I think, it becomes clear that the struggle the Gita is concerned with is the struggle for self-mastery. It was Vyasa’s genius to take the whole great Mahabharata epic and see it as metaphor for the perennial war between the forces of light and the forces of darkness in every human heart. Arjuna and Krishna are then no longer merely characters in a literary masterpiece. Arjuna becomes Everyman, asking the Lord himself, Sri Krishna, the perennial questions about life and death – not as a philosopher, but as the quintessential man of action. Thus read, the Gita is not an external dialogue but an internal one: between the ordinary human personality, full of questions about the meaning of life, and our deepest Self, which is divine.

There is, in fact, no other way to read the Gita and grasp it as spiritual instruction. If I could offer only one key to understanding this divine dialogue, it would be to remember that it takes place in the depths of consciousness and that Krishna is not some external being, human or superhuman, but the spark of divinity that lies at the core of the human personality. (Source)

4. Carl Sagan on Being Kind and Compassionate
The Earth is a very small stage in a vast cosmic arena. Think of the rivers of blood spilled by all those generals and emperors so that in glory and in triumph they could become the momentary masters of a fraction of a dot. Think of the endless cruelties visited by the inhabitants of one corner of the dot on scarcely distinguishable inhabitants of some other corner of the dot. How frequent their misunderstandings, how eager they are to kill one another, how fervent their hatreds.

Our posturings, our imagined self-importance, the delusion that we have some privileged position in the universe, are challenged by this point of pale light. Our planet is a lonely speck in the great enveloping cosmic dark. In our obscurity – in all this vastness – there is no hint that help will come from elsewhere to save us from ourselves.

It is up to us. It’s been said that astronomy is a humbling, and I might add, a character-building experience. To my mind, there is perhaps no better demonstration of the folly of human conceits than this distant image of our tiny world. To me, it underscores our responsibility to deal more kindly and compassionately with one another and to preserve and cherish that pale blue dot, the only home we’ve ever known. (Source)

5. Seneca on the Shortness of Life
It is not that we have a short time to live, but that we waste a lot of it. Life is long enough, and a sufficiently generous amount has been given to us for the highest achievements if it were all well invested. But when it is wasted in heedless luxury and spent on no good activity, we are forced at last by death’s final constraint to realize that it has passed away before we knew it was passing. So it is: we are not given a short life but we make it short, and we are not ill-supplied but wasteful of it… Life is long if you know how to use it. (Source)

6. Marcus Aurelius on the Unnaturalness of Anger
When you wake up in the morning, tell yourself: the people I deal with today will be meddling, ungrateful, arrogant, dishonest, jealous and surly. They are like this because they can’t tell good from evil. But I have seen the beauty of good, and the ugliness of evil, and have recognized that the wrongdoer has a nature related to my own – not of the same blood and birth, but the same mind, and possessing a share of the divine. And so none of them can hurt me. No one can implicate me in ugliness. Nor can I feel angry at my relative, or hate him. We were born to work together like feet, hands and eyes, like the two rows of teeth, upper and lower. To obstruct each other is unnatural. To feel anger at someone, to turn your back on him: these are unnatural. (Source)

7. Haruki Murakami on Weathering Life’s Storms
Sometimes fate is like a small sandstorm that keeps changing directions. You change direction but the sandstorm chases you. You turn again, but the storm adjusts. Over and over you play this out, like some ominous dance with death just before dawn. Why? Because this storm isn’t something that blew in from far away, something that has nothing to do with you. This storm is you. Something inside of you. So all you can do is give in to it, step right inside the storm, closing your eyes and plugging up your ears so the sand doesn’t get in, and walk through it, step by step. There’s no sun there, no moon, no direction, no sense of time. Just fine white sand swirling up into the sky like pulverized bones. That’s the kind of sandstorm you need to imagine.

And you really will have to make it through that violent, metaphysical, symbolic storm. No matter how metaphysical or symbolic it might be, make no mistake about it: it will cut through flesh like a thousand razor blades. People will bleed there, and you will bleed too. Hot, red blood. You’ll catch that blood in your hands, your own blood and the blood of others.

And once the storm is over you won’t remember how you made it through, how you managed to survive. You won’t even be sure, in fact, whether the storm is really over. But one thing is certain. When you come out of the storm you won’t be the same person who walked in. That’s what this storm’s all about. (Source)

8. Dale Carnegie on Living One Day at a Time
You and I are standing this very second at the meeting place of two eternities: the vast past that has endured forever, and the future that is plunging on to the last syllable of recorded time. We can’t possibly live on either of those eternities – no, not even for one split second. But, by trying to do so, we can wreck both our bodies and our minds. So let’s be content to live the only time we can possibly live: from now until bedtime.

“Anyone can carry his burden, however hard, until nightfall,” wrote Robert Louis Stevenson. “Anyone can do his work, however hard, for one day. Anyone can live sweetly, patiently, lovingly, purely, till the sun goes down. And this is all that life really means.” (Source)

9. Kahlil Gibran on Children
Your children are not your children.
They are the sons and daughters of Life’s longing for itself.
They come through you but not from you,
And though they are with you yet they belong not to you.

You may give them your love but not your thoughts,
For they have their own thoughts.
You may house their bodies but not their souls,
For their souls dwell in the house of tomorrow,
which you cannot visit, not even in your dreams.
You may strive to be like them,
but seek not to make them like you.
For life goes not backward nor tarries with yesterday.

You are the bows from which your children
as living arrows are sent forth.
The archer sees the mark upon the path of the infinite,
and He bends you with His might
that His arrows may go swift and far.
Let your bending in the archer’s hand be for gladness;
For even as He loves the arrow that flies,
so He loves also the bow that is stable. (Source)

10. Viktor Frankl on Dealing with Success
Don’t aim at success. The more you aim at it and make it a target, the more you are going to miss it. For success, like happiness, cannot be pursued; it must ensue, and it only does so as the unintended side effect of one’s personal dedication to a cause greater than oneself or as the by-product of one’s surrender to a person other than oneself. Happiness must happen, and the same holds for success: you have to let it happen by not caring about it. I want you to listen to what your conscience commands you to do and go on to carry it out to the best of your knowledge. Then you will live to see that in the long-run—in the long-run, I say! — success will follow you precisely because you had forgotten to think about it. (Source)

11. Dostoevsky on Not Lying to Ourselves
Above all, don’t lie to yourself. The man who lies to himself and listens to his own lie comes to a point that he cannot distinguish the truth within him, or around him, and so loses all respect for himself and for others. And having no respect he ceases to love. (Source)

12. Anne Frank on Seeking Solace in Nature
The best remedy for those who are afraid, lonely or unhappy is to go outside, somewhere where they can be quite alone with the heavens, nature and God. Because only then does one feel that all is as it should be and that God wishes to see people happy, amidst the simple beauty of nature. As longs as this exists, and it certainly always will, I know that then there will always be comfort for every sorrow, whatever the circumstances may be. And I firmly believe that nature brings solace in all troubles. (Source)

13. Nassim Taleb on Us Being Black Swans
I am sometimes taken aback by how people can have a miserable day or get angry because they feel cheated by a bad meal, cold coffee, a social rebuff or a rude reception…We are quick to forget that just being alive is an extraordinary piece of good luck, a remote event, a chance occurrence of monstrous proportions.

Imagine a speck of dust next to a planet a billion times the size of the earth. The speck of dust represents the odds in favour of your being born; the huge planet would be the odds against it. So stop sweating the small stuff. Don’t be like the ingrate who got a castle as a present and worried about the mildew in the bathroom. Stop looking the gift horse in the mouth – remember that you are a Black Swan. (Source)

14. Yuval Noah Harari on the Power of Meditation
According to Buddhism, the root of suffering is neither the feeling of pain nor of sadness nor even of meaninglessness. Rather, the real root of suffering is this never-ending and pointless pursuit of ephemeral feelings, which causes us to be in a constant state of tension, restlessness and dissatisfaction. Due to this pursuit, the mind is never satisfied. Even when experiencing pleasure, it is not content, because it fears this feeling might soon disappear, and craves that this feeling should stay and intensify.

People are liberated from suffering not when they experience this or that fleeting pleasure, but rather when they understand the impermanent nature of all their feelings, and stop craving them. This is the aim of Buddhist meditation practices. In meditation, you are supposed to closely observe your mind and body, witness the ceaseless arising and passing of all your feelings, and realise how pointless it is to pursue them. When the pursuit stops, the mind becomes very relaxed, clear and satisfied. All kinds of feelings go on arising and passing – joy, anger, boredom, lust – but once you stop craving particular feelings, you can just accept them for what they are. You live in the present moment instead of fantasising about what might have been. The resulting serenity is so profound that those who spend their lives in the frenzied pursuit of pleasant feelings can hardly imagine it. It is like a man standing for decades on the seashore, embracing certain ‘good’ waves and trying to prevent them from disintegrating, while simultaneously pushing back ‘bad’ waves to prevent them from getting near him. Day in, day out, the man stands on the beach, driving himself crazy with this fruitless exercise. Eventually, he sits down on the sand and just allows the waves to come and go as they please. How peaceful! (Source)

15. Ed Viesturs on Karma
Although I remain uncertain about God or any particular religion, I believe in karma. What goes around, comes around. How you live your life, the respect that you give others and the mountain, and how you treat people in general will come back to you in kindred fashion. I like to talk about what I call the Karma National Bank. If you give up the summit to help rescue someone who’s in trouble, you’ve put a deposit in that bank. And sometime down the road, you may need to make a big withdrawal. (Source)

16. Albert Einstein on Widening Our Circles of Compassion
A human being is part of a whole, called by us the “Universe,” a part limited in time and space. He experiences himself, his thoughts and feelings, as something separated from the rest — a kind of optical delusion of his consciousness. This delusion is a kind of prison for us, restricting us to our personal desires and to affection for a few persons nearest us. Our task must be to free ourselves from this prison by widening our circles of compassion to embrace all living creatures and the whole of nature in its beauty. (Source)

17. Daily Stoic on Dealing with the Scary World
In Aaron Thier’s wonderful new novel, The World Is A Narrow Bridge, there is a scene where Eva and Murphy, the two young prophets of the god Yahweh, are sent on a mission that terrifies them. As they begin the mission, Eva and Murphy are approached by Satan, who has been sent by Yahweh, to give them their final instructions. After Satan gives the instructions, he begins to leave for his next mission:

“You have to go so soon?” says Eva. “Right away?”

She looks devastated. Murphy, too, is unhappy. Satan frowns and chews on his lip. He doesn’t like to leave them like this.

“I’ll teach you a trick,” he says. “I’ll teach you an incantation that will protect against despair. If things are dark, and I’m not around to help, you can repeat it a few times and it’ll help.

It would go something like this: ‘The world is a narrow bridge, and the most important thing is not to be afraid.’”

Murphy and Eva both repeat this very slowly. Eva says, “That’s lovely.”

Satan nods. “Just repeat it to yourself when things are bad. You could try different translations too. ‘Do not make yourself afraid, the whole world is a narrow bridge.’

The point is this life we’re living—this world we inhabit—is a scary place. If you peer over the side of a narrow bridge, you can lose your heart to continue. You freeze up. You sit down. So too with life. If we think too much about the journey we have to make, the one that begins with the trauma of birth and ends with the tragedy of death, the one that is so perilous and unpredictable, we’ll never make it.

The important thing is that we are not afraid. That we don’t overthink things. That we don’t give way to fear, as the Stoics tell us over and over again. Just repeat it to yourself—The world is a narrow bridge and I will not be afraid—and keep going. Like the thousands of generations who have come before you. (Source)

18. Morrie Schwartz on Life’s Purpose and Meaning
So many people walk around with a meaningless life. They seem half-asleep, even when they’re busy doing things they think are important. This is because they’re chasing the wrong things. The way you get meaning into your life is to devote yourself to loving others, devote yourself to your community around you, and devote yourself to creating something that gives you purpose and meaning. (Source)

19. Seneca on Hope and Fear
Limiting one’s desires actually helps to cure one of fear. ‘Cease to hope … and you will cease to fear.’ … Widely different [as fear and hope] are, the two of them march in unison like a prisoner and the escort he is handcuffed to. Fear keeps pace with hope … both belong to a mind in suspense, to a mind in a state of anxiety through looking into the future. Both are mainly due to projecting our thoughts far ahead of us instead of adapting ourselves to the present. (Source)

20. Courtney Peppernell on Living Our Stories Well
You can’t skip chapters, that’s not how life works. You have to read every line, meet every character. You won’t enjoy all of it. Hell, some chapters will make you cry for weeks. You will read things you don’t want to read, you will have moments when you don’t want the pages to end. But you have to keep going. Stories keep the world evolving. Live yours, don’t miss out. (Source)

What Inspires You in Life?
Please share in the (no investing stuff please, and no quotes, but only passages on life and living, with name/link to the original source).

Happy living!

The post 20 Life Changing Ideas appeared first on Safal Niveshak.

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One of the most important parameters to judge a business’s quality is its ability to generate a return on the money it employs on fixed and working capital. It is also one of the key metrics, which when measured over years, can help you assess a management’s quality.

Return on capital employed or ROCE also indicates a business’s ability to set prices that enables it to earn adequate margins, which when better than competitors also suggests the presence of moat.

Simply defined, ROCE shows how a company uses its capital efficiently by examining the profit it earns in relation to the capital it uses during a given year.

The formula commonly used to calculate ROCE is – Profit before Interest and Tax (PBIT) divided by Capital Employed (Equity and Debt).

Let’s understand with an example. Say Company A earns PBIT of Rs 500 on sales of Rs 2,500, and Company B earns Rs 750 on Rs 2,500 of sales. In terms of profitability, B, having a 30% profit margin, looks like a better business than A, which has a 20% margin.

But let’s say A employs Rs 2,000 of capital and B employs Rs 10,000. Company A has ROCE of 25% (500/2000) while B has ROCE of only 7.5% (750/10,000). The ROCE measurements show us that Company A makes better use of its capital, given that it can squeeze more earnings out of every rupee of capital it employs.

Now, capital intensive businesses generally have poor economics. They must ‘certainly’ spend a large amount of capital in the present, to ‘potentially’ generate revenue and profits in the future. And if the fundamental realities change for the worse after the capital has been employed, such businesses take a hit. Revenues may be difficult to come by, but they must necessarily pay, say, the interest on the debt they had borrowed earlier.

Airlines, textiles, infrastructure, power, retail, oil exploration, and hotels are such industries that suffer from the evil of continuous high capital intensity. So, when you see empty theatre seats, or empty aisles in a retail outlet, or empty seats in an aircraft, or a hotel operating on low occupancy, you know what I am talking about.

Anyways, just like all profit-making companies or those that see good profit growth are not good businesses and don’t necessarily create value, just looking at the capital intensity isn’t a good idea till you see the company’s capital’s efficiency. That is, how well that capital is being utilized (which is what the ROCE tells us).

If a capital-intensive business – which manages a lot of this capital through its own resources like operating cash flows, without resorting to too much debt – can earn high ROCE over years, it can still create value for shareholders. These are, however, rare businesses, and thus your role as a shareholder must be to find businesses that are not high on capital intensity (fixed and/or working capital) and high on capital efficiency (high ROCE). This is where you have a great probability of hitting upon a future wealth creator.

Now, a high ROCE indicates that the company can reinvest a larger part of its profit back into the business. When this reinvested capital is employed again at a higher rate of return, it helps produce an even higher profit growth. A high ROCE is, therefore, also an indicator of high earnings growth.

ROCE + Earnings Growth = Potential Wealth Creation
One of the best theories I have read on the importance of high ROCE and good earnings growth, which make a great combination for value creation, comes from Bharat Shah of ASK Group, who has written a book (sad, it’s not available publicly) titled “Of Long Term Value and Wealth Creation from Equity Investing.”

In the chapter titled “Quality of Business: Capital Intensity and Capital Efficiency,” he has suggested a matrix, which I have illustrated below –

(Click on the image to open a larger version)
He basically categorizes businesses into six buckets –

1. Winner: High ROCE (>20%) + High earnings growth (>15%) – Will create the highest value as these show superb capital efficiency and outstanding earnings growth; fertile territory for finding multi-year compounding machines and yet offering great safety during tough market conditions.

2. Aspirer: High ROCE (>20%) + Moderate earnings growth (5-15%) – Provide safety with reasonable value creation due to superior capital efficiency but moderate earnings growth rate; should compound at a rate closer to earnings growth; largely a recipe for capital preservation with reasonable appreciation, though unlikely to be rewarded substantially due to moderate growth.

3. Gentry: High ROCE (>20%) + Low earnings growth (15%) – Value creation is difficult and unpredictable for these businesses; value creation generally tracks higher of ROCE and growth in good market conditions and lower of the two in bad times; buying at cheap prices could help create returns higher than earnings growth for some time, but that may be unsustainable.

5. Struggler: Moderate ROCE (10-20%) + Moderate to low earnings growth (5-15%) – It’s never easy for the business or shareholders in them; value creation is low and irregular; not ideal candidates in a portfolio from a value creation perspective; buying at cheap prices could help create returns higher than earnings growth for some time, but that may be unsustainable.

6. Value Obliterator/ Sweatshop: Low ROCE (

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I recently came across a video* of Warren Buffett talking to a few B-School students on his trip to India in 2011.

The host asked him this question – What exactly goes through your mind when you’re actually making an investment?

Buffett’s reply to this question was brilliant for it contained the crux of everything he has said over the years about how to evaluate a certain business and it’s future economic potential (text in bold and brackets are mine) –

Well, if I drive by a McDonald’s stand or a Kentucky Fried Chicken stand I will automatically think to myself “What is this business worth?”

You know, how many customers can walk in the door (demand, scalability, growth potential)? What kind of gross margins (profitability, pricing power) can they have? How many people do they need (scalability)? How likely is it that another chicken stand opens across the street (competition, entry barriers, moat)?

I mean, all of those things. And that’s true of the chicken stand and it’s true of Google or you name the business. I mean, it’s all about evaluating the economic potential, the economic future of a given business. And most of them you don’t know the answer on (say no to most businesses, because you really don’t understand them).

But every now and then you run into one where you know the answer (simple businesses). But that’s all business is.

It’s what Aesop said a long time ago: “A bird in the hand is worth two in the bush.” (well, that’s the definition of discounted cash flow) You know, that was said in 600 BC and that’s now what’s called discounted cash flow and all that sort of thing. But he saw that and figured it out, you know, twenty-six hundred years ago. And all I’m trying to figure out is if I could take that dollar in my hand: When do I get the two dollars out of the bush (timing of future cash flows)? How sure am I of getting it out of the bush (certainty of future cash flows)? Is there some other bush where I can get three dollars out of it instead (opportunity costs, better alternatives)?

I mean, it’s very basic stuff (investing is simple, you see, but only if you keep it simple). And a lot of times you look at it and you say “I don’t know how many birds there will be in the bush.” (complex businesses, or those that undergo a lot of changes due to nature of industry, competition, etc.) So you go in to the next one until you find the answer (you just need a few good ideas in a lifetime).

Buffett, once more, makes it clear that rather than obsessing with the bewildering fusion of news and noise, you should concentrate on a few key elements in stock selection.

If I were to list down the most important questions on business/stock analysis based on what Buffett mentioned above and a simple checklist I maintain, they would be –

  1. Is the business simple to understand and run? (Complex businesses often face complexities difficult for its managers to get over)
  2. Has the company grown its sales and EPS consistently over the past 5-10 years? (Consistency is more important than speed of growth)
  3. How much are the company’s products in demand? Is there a long runway of growth for these products over the next 10 years? Could they be disrupted badly? (Past may have been good, but how good, sustainable the business could be in the future is of paramount importance; look at simple products/services that have low probability of getting disrupted)
  4. Has the company been able to scale up its business in the past? Can it scale up well in the future? (Check if a business is too capital and/or labour intensive, for that may cause difficulties in scaling up without big side effects of doing so; historical track record of the management is a nice indicator of its future capabilities, but again if you expect the nature of the industry to not change much)
  5. Will the company be around and profitably better in 10 years? (Suggests continuity in demand for and profitability of the company’s products/services)
  6. How competitive is the industry in which the company operates? How has it done against its key competitors? Does the company have a sustainable competitive moat? (Pricing power, profit margins, lead over competitors, entry barriers for new players)
  7. How good is the management given the hand it has been dealt? (Capital allocation, return on equity, corporate governance, performance against competition over 8-10 years)
  8. Does the company require consistent capex and working capital expenditure to grow its business? (Companies that have to spend continuously on such areas are like running on treadmills, which is not a good situation to have; they may have or are likely to have stretched balance sheets that are detrimental to equity shareholders’ value creation)
  9. Does the company generate more cash than it consumes? (Cash generators have a higher probability of surviving and prospering during bad economic situations)
  10. Have the cash flows shown some stability in the past? (Good indicator of future certainty and timing of cash flows, which is a necessary aspect, not just to assess the continuity of a business but also to assess its valuations with some reasonable degree of success)
  11. What are the opportunity costs of investing in this business? What would I compromise on if I invest in this business? (Check the next best alternative. Maybe that alternative is better than this business, so check for it)

Information, you see, generally follows the well-known 80/20 rule: the first 80% of the available information is gathered in the first 20% of the time spent. These above questions should help you in this aspect i.e., getting you 80% understanding about the business you are analyzing without spending a lot of time on that.

Anyways, especially on the point about competitive analysis, I have done some number crunching for the three Indian 2-wheeler majors – Hero Motorcorp, Bajaj Auto and TVS Motor (based on numbers from Screener.in) – to give you some ideas on how you can do it for the company you are analyzing and its competitors (remember opportunity costs?).

The analysis, along with my observations, lie in this financial analysis excel document of Hero Motocorp in the sheet “Competitive Analysis.” Also, download the respective excels for Bajaj Auto and TVS Motor if you wish to extend your analysis using more numbers.

Keep It Simple, Please!
In stock investing, often we focus so much on trying too hard that either we never start working on the process of picking up great businesses (seeing the enormity of the task), or we start believing that our immense hard work and knowledge gives us great control over the future of stocks we own.

The reality is that, no matter how hard we try to analyze the intricacies of business, we may not be as important to the results as we’d like to think we are.

Like Seth Klarman wrote in Margin of Safety

Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty.

The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information.

And like Buffett explains to B-School students, please keep it simple!

* Watch 56:50 minutes onwards in this video for this particular discussion

Statutory Warning: Nothing I’ve written above must be construed as investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. My analysis may be biased, and wrong. I have been wrong many times in the past. I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).

The post Stock Analysis: The Most Important Things (Plus, A Case Study) appeared first on Safal Niveshak.

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This issue of Outside the Box newsletter is authored by Jatin Khemani. Jatin shares his key observations from analyzing market leaders across industries in India.

One common advice I find veteran investors passing on to next-generation investors is to look for companies dominating their industry and enjoying entry barriers ensuring their profit pool share is protected.

Now, ideally, we may think that the top 3-4 players by market share in any category should be qualified as ‘dominant players’ even if their respective market share is in single digit. However, for the purpose of this research, I have restricted my analysis to only those companies that enjoy at least a 35% share in their respective categories.

You must be thinking that it is quite a stringent filter and there would only be a handful of companies that will make it to the list – after all, we are a free economy with enormous capital chasing opportunities on one side and ever-tightening regulations in the form of competition commission etc., on the other.

But you would be surprised to learn that having spent just a couple of days and recollecting about all the companies I have studied or read about over the last decade, I could actually pin down a list of 60 listed companies that enjoy a market share of 35% or higher.

I am sure I must have missed out on many other listed companies and so the list may get longer and even more if one were to include a few unlisted businesses like NSE, a virtual monopoly, or Amul, which boasts of a 40% share of the cheese and other value-add dairy products market.

You would see the complete list at the end of this article. But before that, let me share the top 10 observations while analyzing this distinct sub-set of dominant businesses –

India’s Market Leaders: 10 Key Observations

  1. 18 companies have sales of less than Rs 1,000 crore (Cr) despite having a lion’s share of the addressable market. This implies that these categories are small in size with limited profit pool. For companies operating in such a tiny pool but with such high market share, it is almost impossible to grow any faster than the category growth. This implies, at best, they would grow in line with the industry. And if we want to see them growing revenues at 15-20% CAGR over the next several years, we must be able to either make a case for similar growth at the industry level or they strategically increasing their addressable market. For instance, La Opala which operates in the opal ware segment has an addressable market of only Rs 500 Cr. and it has already garnered a 50% share. From here on, the category growth is extremely important to support the company’s growth. Further, if at all, the category saturates at these levels, the competitive intensity among incumbents could only increase and in fact dent margins while peers chase growth or attempt to protect market share, which is a double whammy – no topline growth with margin compression. To make it worse, markets often de-rate such stocks and investors end up losing a significant chunk of capital. Same applies for Triton Valves – annual revenues of merely Rs 227 Cr. with a market share of 65%. In the case of Zydus Wellness, whose brand Sugar-Free has a 94% market share in sugar substitute category, the company is practically the category itself but the annual revenue is only Rs 500 Cr.
  2. Second key observation is that most of these companies are pioneers – Nestle created the instant noodle category in India with its Maggie noodles, and so did Colgate in a country where otherwise everybody was using ‘daatun’ (neem sticks). Marico in the 1980s and 90s created premium edible oils category with its Saffola brand which is now being leveraged to seed newer categories like healthy breakfast (oats). To seed a new category is an extremely long and painstaking process (even loss-making initially) with little odds of success. But when successful, it is very rewarding. Pidilite Industries’ brands have been so strong for generations now, that they literally define the category – users know the product (adhesives) by the brand name (Fevicol, Fevistik, Fevikwik, Dr. Fixit), thanks to those memorable advertisements backed by the widest possible distribution. Asian Paints pioneered the involvement of households in choosing decorative paints while slowly eliminating the painters from being the decision maker. While they have been the market leader since the 1960s, the tinting machines (paint dispensers) which they installed at stores in the 1990s was perhaps the inflection point in getting dealer loyalty as well as offering far more variety to consumers.
  3. Average age of these 60 companies is about 60 years. Moreover, 18 businesses have been in existence from the pre-independence era. The oldest of the lot is United Spirits (McDowell’s) which is 193 years old, followed by United Breweries (Kingfisher) which is 162 years old. This shows that it takes an enormous amount of time for any business to scale up and attain leadership and that there is simply no shortcut. There are only three businesses that came into existence in the 21st century – MCX (2002), IEX (2006) and Interglobe Aviation (2006). The first two are exchanges which pioneered their respective segments creating virtual monopolies given winner-takes-all characteristic of the business. The unusual name, however, is Interglobe, an airline (Indigo) which came into existence just 13 years ago and today four out of 10 domestic passengers fly Indigo – this might be the only airline globally to have achieved this kind of market share and that too in such a short span of time. It surely did benefit from big incumbents going bust but it also had the ability to dream big and make sizable bets which were followed by remarkable execution.
  4. Barring a few like HUL and M&M (acquired Swaraj), most of these businesses have grown organically. It is no wonder that given the poor base rate of successful M&As, that the leaders shown in the list have earned and sustained this position through decades and centuries of effort rather than buying market share.
  5. Few of the segments are winner-takes-all kind of market: MCX (Commodity Exchange), IEX (Power Exchange) and NSE (Stock Exchange) are virtual monopolies given in this business, liquidity attracts liquidity which becomes a virtuous cycle. Some of the auto incumbents also enjoy network effects and scale advantage like Maruti (4W), Bajaj (3W) and Hero (2W) from an ecosystem of ancillaries, sales dealership, service centers and availability of spares – all culminating into trust and reliability.
  6. There are four companies from so called ‘sin’ sectors (no surprise here) – tobacco (ITC) and liquor (United Spirits, United Breweries and Radico Khaitan) where regulations make it extremely difficult for new entrants to make inroads letting incumbents enjoy high market share from customers who are addicted to their brand.
  7. In cases like Wabco and Bosch, it is the perhaps the advanced, and in some cases even patented technology which has led to such high market share.
  8. For all the companies the market shares mentioned are domestic, except Vinati Organics. It is one of the lowest-cost producer of ATBS (a highly versatile molecule used to make polymers) in the world which is why it enjoyed 40% market share globally until recently, a rare feat for any Indian manufacturing company. And then in 2018, it got lucky – Lubrizol, a key competitor with 25% global share decided to exit the industry. This has helped the company increase its market share further. Two more chemical companies make it to the list – Oriental Carbon and NOCIL, both make products that are largely used in tire manufacturing.
  9. The only PSU to appear in this list, Coal India, is a monopoly created by the Indian government as ownership of all of the country’s coal mines (India has world’s largest coal reserves) are with this entity. Also in some cases, it is very difficult to fathom the true reason behind market dominance. Take for instance Jamna Auto or Setco. Why would they command 70-80% market share in an industry with little to no entry barriers? I think it could simply be a favorable competitive scenario; a lack of interest from any major group to enter and the inability of smaller/unorganized guys to compete, may be due to the relatively small size of opportunity or the associated cyclicality as both supply to Commercial Vehicle OEMs like Tata and Ashok Leyland.
  10. Over 75% of these businesses are consumer-facing entities, enjoying some sort of brand loyalty and/or distribution advantage. Further, barring six businesses which are service and retail-oriented, rest all of them (90%) are into manufacturing. Lastly, there is no point of having only sales leadership if that doesn’t translate into above-average return on capital employed (ROCE) for the shareholders. So how has this set of companies fared on that metric? To avoid any extremes/one-offs instead of FY18, I pulled FY16-18 average ROCE for each of these businesses. The 3-year average ROCE for the entire set of these companies is an impressive 33.6%.

Overall, I believe, it is an interesting set of companies (click here to download the list) that should find a place on your watch list, which must be carefully watched for any investment opportunities that their stocks may provide going forward.

Note: Annual Revenues are segmental. Where segmental data is not available, consolidated revenues are shown with (C) to indicate the same. Market shares are estimated and sourced from annual reports, industry bodies, credit rating agencies and/or our research. Market share is based on the size of the organized market only.

Disclaimer: This is not a recommendation to Buy/Sell stocks. Rather, the sole purpose is education and information. The author and his colleagues and clients may have investments in stocks discussed.

About the Author: Jatin is the founder and CEO of Stalwart Advisors, a SEBI registered investment advisor.

The post India’s Market Leaders: My 10 Key Observations appeared first on Safal Niveshak.

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Here’s something new I have initiated to share with you stuff I am reading and thinking about in recent times.

Click here to download the document, or click on the image below.

Let me know your thoughts on the initiative, and what else you would like to see here.

Enjoy your weekend,
— Vishal

The post Dealing with Stupidity in Investing, Naval Ravikant on Wealth, and Secrets of Long and Healthy Life appeared first on Safal Niveshak.

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Warren Buffett recently released his 2018 letter to shareholders of Berkshire Hathaway.

I have prepared some notes on the letter. Click here to download my notes.

Also, I was on ET Now yesterday to share my thoughts on the letter. Here is the video of the chat (click here to watch the video, or watch below) –

Vishal Khandelwal of Safal Niveshak shares his takeaways from 'Buffet's letter' - YouTube

The post My Notes on Warren Buffett’s 2018 Letter to Shareholders appeared first on Safal Niveshak.

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