The hardest thing in life and investing is waiting. Some people just cannot wait and that is where the oppurtunity lies. The more volatile it gets the more better it is. The rule is not to let emotions rule you, rather opposite. What i mean by that is be greedy when others are fearful and fearful when others are greedy. There is a price at which it becomes a no brainer, at that price some buy a lot, some buy like its once in a lifetime oppurtunity.
The more you play that more chances of you loosing. There are layers of stupidity on on all of us(no one knows that more than me). The question to ask how do i remove this. Ideally some 80 or 90 old man comes into your life and tells about his process and tells you about his life, mistakes and behavioral patterns people follow in extreme times. You will not get 100 ideas in your life, you only need 1. In my view in investing and life the one who gets ahead is not an above average IQ guy but the one handles his emotions, has patience and wisdom.
If it is close don’t play. In terms of cricket(sorry to all american audience as this might sound greek but its similar to baseball) analogy, I dont have to swing my bat as no one is forcing me to swing. Look for a ball that is above waist full toss(no ball an illegal delivery) and then time the ball out of the park. Now remember that you can get run out on such a delivery. By that i mean if you are getting lazy,complacent or hubris.
I tend to judge a compounding machines by numbers of factors. Don’t worry its not going to be long.
Firstly the company has to have great ROCE( i look at roce more than roe because roe does not include debt). Most of the times when a company has great roce it has very very low or no debt. There is a reason to that the business the company is in is generating so much cash it does not need debt and believe me debt is the enemy of returns. Leverage can screw things up terribly fast.
Another thing would be how sticky is the product, is it habbit forming, does the customer really have a picture of brand in mind. Diffrent people have diffrent names for it.
When the company has great roce, it would have lot of cash on the balance sheet. Now how the companys uses that catch can effect the company’s earnings. There is only so much money you can put back in business as the returns on the incremental capital invested are not the same. Suppose you own a showroom and it cost you 7 crores($1 million) and it generates a profit of 21000000 crores($300000). Now the sharp enterpreneur we think we are and we think lets buy the adjacent property for another 7 crores by financing 6 crores @10% from the bank and putting in 1 crore equity. Now the return on that 7 crores(6+1) would be 21000000 -6000000=1.5 crores. As the money and company gets bigger it slowly starts to effect the returns(these numbers might appear small to some people they can up the figure to 100 million or 1 billion).
Now when you find such a company the trick is how to value it and when to go in. Here is where the most important thing in life and investing comes… PATIENCE. When there is bad news, market correction and doom and gloom enviroment. This is the time when your might or steel is determined.
note- When you find such a company in a market correction and if your turnings all rocks over and finding companies you would like to buy . Divide EV and earning before taxes.You will find numbers like 3,2 1, and even 0. The thing you say is why me,why me god. Now here comes that word again . PATIENCE. You know what is going to happen but don’t know when.
Do you remember that time when you were in high school and you asked a girl out. She did not say Yes, She did not say No. If you remember that feeling, it sinks you,drains you and finally you do something stupid. Fast forward 20 years and you think we have changed, not a lot. Markets are throwing stock prices down and down and down(specially mid and small cap). The environment is uncertain about the general elections 2019. There is this thing about democracy it has and will always have CHAOS. When things look bad, Uncertain or gloomy, separate yourself from the crowd(easily said than done) and chances are you will do better than the crowd.
If you are in the business of analyzing companies, this is the time to show your skill. There is one of my favorite poems, Some of my fav lines :
If you can keep your head when all about you
are loosing theirs and blaming it on you,
If you can trust yourself when all men doubt you
But make allowance for their doubting too
If you wait and not be tired of waiting.
If you can talk with the crowds and keep your virtue
Or walk with kings and not lose your common touch
If you can fill the unforgiving minute
With sixty seconds worth of distance run
Yours is the earth and everything in it
And which is more you will be a man my son
There will be chaos, there will be uncertainty but be sure as other things in life there will be light across the tunnel. Remember a very powerful concept of reversion to the mean. When markets go up they will come back to average and go down and then back to average. Have emotional stability and do what needs to be done.
Books i am reading
Art of learning by Josh Waitzkin ( you should read it)
Think twice by Micheal Mauboussin
The Rebel allocator (5 stars are not enough for this book)
Uncertainty is not liked by the markets. No price is too high for the bull and no price is too low for the bear. If you want to pick the bottom, good luck to you as only god and a liar can do that. All we can do is: think what would we pay for the whole business and understand the economics of the business. For example a company with a market cap of 1000 crores, no debt(long-term) and 375 cores of cash on the balance sheet, earnings 375 crores before taxes. The roce and roce for the last 5 years is around 33-35(consistently not just one year thing). And did i mention low p/e,1.2 book value and with a margin of safety.
Some say gumption, some say truck loads. I don’t know what to say but will sign out by quoting George Soros.”When you have conviction in your analysis, Go for the Jugular.
Markets are getting volatile. In January 2018 the markets were getting wild and I was getting worried that is it going into bubble territory. Now the mayhem has ended to the other direction. In mid and small cap the prices are cheap and discounts are available. If anyone has patience and reasonable intellect he can make some serious money in 3-5 years. Markets hate uncertainty and as we know that it is an election year, things are getting volatile.
When you buy a company (shares in it) for 30 cents on the dollar. Why should you not buy more if now it is at 20 cents on the dollar. There is a lot of intellect, gumption and psychology to be successful in equity investments . All there is to market is GREED and FEAR. You don’t need to be Nobel laureate to know this. I agree with Seth Klarman when he says Value Investing is a Gene, you have it or your don’t. I was listening to a very wise(believe me you need to be more wise than smart in this profession) guy named Durgesh Shah and he said when the pendulum is at fear and you buy at that time, you know your chances of loosing money are very minimal. After that whenever the pendulum swings it will not swing to fair valued, it will swing to overvalued.
I think all Value Investors get worried a bit in bull markets and hope it does not get into bubble territory and when they buy(supposedly in uncertain times and bear markets) they are often reminded of Baron Rothschild quote
“Time to buy is when there is blood on the streets and specially your own blood”
World is full of conformists and needs someone who knows all the answers. Intelligent question to ask is when the pendulum will swing to fair or even over valued. The answer is I don’t know. A very well known stoic Marcus Aurelius once said
All i can do is buy a good or great company at a discount to what a buyer would pay for the whole company and then sit on my ass.
Books i am reading.
Collapse by Jared Diamond (Excellent book)
There is always something to do christopher risso (rather i should say rereading)
Whole act of investing is put up in the header. When you are buying a stock it is a pure act of arrogance. When you are buying a stock at say 300 and it goes 200, you buy even more(as much as your pocket allows) and in my view buying a stock is a pure act of arrogance, some might say skill, some might say it is a no brainer now, some might say i cannot lose. In my view the most arrogant act is buying a falling stock, after doing that all you have to do is sit quietly and on your butt. After that some might say price what i am paying is less than cash per share, some might say the goodwill of the company is such that it will be a compounding machine for a decade or two.
What one should not forget is that we are like a dog underneath the chariot. Someone else taught us (in my case Buffett, Munger and Fisher) and someone else is doing the work(Promoter). All we do is we learn, read and try to reduce our failure rate by reading about other great investors, autobiographies, history, psychology and acquire their knowledge and wisdom. Arrogance is the name of the game in investing but as soon as you buy the stock you wait sometimes 2 months sometimes 3 years. So leave your arrogance in buying the stock and be humble about it after the buying as all value investors are no geniuses but good in spots and try to remain around those spots( No points for guessing who says this a lot). Seth klarman says that value investing is a gene. Whatever you might call it, I call it a gift. And when you have a gift, use it with Equanimity(combination of humility and arrogance).
There is a concept in life that says you have to grab big opportunities, because they don’t come around often. Anyone one of you who has played poker(it’s okay even if you have not) know the probability of a royal flush is 649379:1(.000154%), Straight flush is 72192:1(.0015%), four of a kind is 4164:1(.0256%). Now if you look closely into the probabilities,poker and value investing it is the hands you have to say NO to. As a investor/analyst your primary job is look at the scene and say no its too close, there is not enough margin of safety,its too hard or am not capable of analyzing this. Now if you look at the example above your probability of getting a royal flush is .000154%, that means if you play poker out of 649739 hands you will get this hand once. If you look closely the other 99.999846% times you have…
Now where do we start with this. It actually depends upon how much time you have. So let’s start
There is a company called Soril infra and it passed all the tests which I run through. The company had great ROCE, low debt, book value growth and sales growth in last 5 years. In 2015- 16 the stock was trading around 30 and I don’t know what I was thinking and finally I bought it @ 90( hold on please there is much more excitement and stupidity to follow) . Fast forward a year or so it went to 200 and it became it little volatile. I gave in to volatility and sold at around 160( excitement starts for you now and folly for me )
The stock went to 800 in a year. Now a fool would say I should have sold at 800 as no one can catch a top. But I should have bought at 30 and sold around 300 at least. As great ones say I was sucking my thumb.
Another one ( you bet) . From all the great ones I have learnt that don’t cover your wounds but apply salt on it. There is a company called REC. In 2016 I became a father and I was thinking of my daughter and security for her future needs ( so Dividends come to mind). I have been taught from the great ones like Philip Fisher that last thing to look after is DIVIDENDS, if you want to make big money. From 2016-2017 end or 2018 beginning. I compounded money at around 20 percent. Now you would say I made 20 percent money but in my view I lost 2 years but nonetheless I got a lesson. There are behavioral issues in investing which you have to fight. I will keep making such mistakes(not the same ones and am pretty sure they will be of omission) in the future but even then it is going to be one fine result.
So keep learning, keep reading and enjoy the ride.
Notes: Books to read.
The Prize Epic quest for oil By Daniel Yergin:. Even 5 stars are less.
I have heard many Great investors say that if you cannot control your emotions, you cannot control your money. Our brains have 2 parts, one is called the Amygdala and the other is called PFC(prefrontal cortex). The first part, lets call it primitive brain(Amygdala) is the part of the brain which was developed first and whose reaction is as old as the earth: FIGHT or FLIGHT. These 2 reactions are almost always associated with people who cannot control their emotions. Now the second part of the brain, the thinking brain(PFC) is the part of the brain which gets a hold of the first part and says why should i get worked up and not remain calm. To go a bit further it says why not i take advantage of people who cannot remain calm.
Any student of capitalism or history should be familiar with bubbles. In 1600’s in Netherlands there was a flower called tulip which arrived in the country. In 1593 tulips were brought from Turkey and introduced to the Dutch. The novelty of the new flower made it widely sought after and therefore fairly pricey. After a time, the tulips contracted a non-fatal virus known as mosaic, which didn’t kill the tulip population but altered them causing “flames” of color to appear upon the petals. The color patterns came in a wide variety, increasing the rarity of an already unique flower. Thus, tulips, which were already selling at a premium, began to rise in price according to how their virus alterations were valued, or desired. Everyone began to deal in bulbs, essentially speculating on the tulip market, which was believed to have no limits.
People sold their houses to buy these flowers, believe me when i say this that women sold themselves to buy these flowers. I am often reminded what Newton said when he lost his money in South Seas Bubble. “I can calculate the movement of stars but cannot calculate the madness of crowds”.
Do not think we humans have gotten any smarter. Time after time we get into bubble territory be it South seas, California gold Rush, more recently the housing bubble of 2006 in USA and very recently the Bitcoins. You and me cannot control the masses but if we can act with Equanimity and as the greatest investor(no points for guessing his name) says ” Be Greedy when others are Fearful and Fearful when others are Greedy”.
Lets get into numbers and investing. Suppose there is a company with a market cap of 140 crores, when the market falls the market cap(share price* outstanding shares) goes down to 130, sometimes 126 crores. The current assets section on the balance sheet says cash and cash equivalents of around 122 crores. The company is profit-making and everything( To the value investors, it is called a no brainer). When you get such a company why would you want the price to go up, you should activate the PFC and say the price should go down, so that you can buy more because the bet is becoming risk free as the price is going down.
Will sign off by saying that you cannot control the world but you can control how you react to it. Your test begins when the market goes down and your facts are right and you know sooner or later market will price it the way it should or when the market goes up to crazy levels and you are up but not as up as the speculative side of the market is. At that time you should become a philosopher and say this too shall pass.
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Recently I read biography of the great man and absorbed a lot. There is so much to learn from, be it the way he handled business, the way he handled his family and the way he gave away his money to charity. So lets start with John D Rockefeller
They say it’s not what happens to you but how you react to it defines you. Having a father with questionable character, any other boy would have sobbed and gone down in life of poverty and misery. The situation toughened him up and made him undoubtedly the richest man ever to live.
Century earlier and even now in some parts of the world. Anyone who is super rich is looked down upon and is thought of like a crook. John D Rockefeller was the grand daddy of oil, he controlled around 90% of market in his prime and remaining 10% was left just so as to not let everyone think it is pure monopoly. At the start of his journey of his company Standard oil there were a lot of players who founded oil companies and price of oil was extremely volatile( .50 cents to $5-7 a barrel). John D Rockefeller slowly and gradually bought these companies from people who were letting the prices be very volatile. To people with limited vision this might look devilish but at the end of day the customer gets the lowest price possible. Among those whose(mostly loss making) company John D Rockefeller bought was of Ida Tarbell’s Father. She was the one who made life difficult for John d Rockefeller by projecting him as Devilish and a Greedy man. I hope you understand there was a conflict of interest in her writing of Rockafeller’s company.
Now let’s go on to his family. He took care of them as every wise man does. The one thing that stood out was how he dealt with his brother Frank Rockefeller. His brother repeatedly cheated him by sometimes making rival oil companies, sometimes joining rival, running huge debts, ego problems with his brother. Time after time he saved his brother sometimes giving him a job, sometimes clearing his debt. There were times he cleared his debt but not letting him know it was he who cleared his debt. I think there is lesson here to see how he never was in talking terms with him but helped his brother
There are a lot of people who speculate in commodities. Now here is a man who is by far the grand daddy of oil. He once said the most stupid thing to do is to speculate in oil. I am not as smart as the so-called great traders but I think you can comprehend with what he is trying to say.
They say tell me about your heroes and I will tell you about your future. There is a lesson in frugality i get from great men. Being pompous will hurt you and never give you inner happiness. John d Rockefeller was a very frugal men. His son once gave him an expensive jacket, he told his son i could never afford such an expensive jacket but am glad my son can afford it. He gave it back to his son.
To the way he gave his money away was just mind-boggling. The impact had been second to none. He single-handedly made entire University of Chicago with no bearing of his name plate on any stone or building. Most places he gave his money to never saw him more than once or twice in total. Be it giving money to poor black children for education or helping women get educated. He eradicated the hookworm disease from Southern side. The impact he made on health and education was unbelievable.
I hope you learnt from him as much as I did. For further quest i recommend you read Titan by Ron Chernow.