Learning from 2013

End of any year is time to introspect and identify any mistakes committed and make a mental note to avoid those mistakes in the future. That is what we do as normal human beings in our real world.  However, when it comes to investing, it is different and we tend to repeat our mistakes.  If we do not observe, learn and change it becomes a habit which is very difficult to change.  In view of the above, I intend to document some of the learnings and observations I have had in the last year so I do not make those mistakes again.  Some of these learnings may find its way to the check list thereby making it a continuous improvement process.

Some of my significant learning from 2013 are

• Compare profit growth with EPS growth to ensure that profit growth was not achieved due to equity dilution. For example most of the banks keep showing greater profits but they continuously dilute their equity through warrant or equity issues.
• Investing in companies that provide products or services that needs to be replaced often are better than those which has long replacement cycle.   For example, Capital Goods, automobiles etc. have long replacement cycles whereas Soaps, Oils etc. are consumed and will have regular demand.
• Investing in companies that sell to the retail customer enjoy better margins than companies that sell to other businesses.  For example Amara Raja batteries is more in the replacement market than Exide and it has not yet entered into OEM supplies in a big way.  They enjoy better margins due to this.
• Investing in companies that have some value adds are better than companies that sell commodities.  For example, Marico, Pidilite etc. buys commodities and then sells at a higher price after their value adds.  Most of the FMCGs fall into this category.
• Do not invest in companies that are regulated heavily or owned by the government.  All PSUs fall in this category.  Telecom and power generation are other examples
• Do not invest in any business where the promoters have been mentioned in any of the cases now or in the past.  This applies to related or unrelated cases to the company.
• Beware of companies that show lot of cash or investment but at the same time taking on more and more debt or the promoter is continuously pledging.
• Beware of companies that has cash and it is getting into totally unrelated business or it is overpaying for acquisition putting their existing operations into jeopardy.