Company and Promoter Quality Check

Pic by Stuart Miles /freedigitalphotos.net

While making any investment, the common pitfall that investors fall in is just to focus on the size of returns they get without checking how much of risk they are bearing to get that return.  If the probability of losing is higher, then the expected outcome would  be lower even if the absolute return looks higher.  To put it in simple terms, you are more likely to invest in a bank Fixed Deposit offering 8% return if you are confident about the bank than giving it to an individual who offers you say 24% return on the same amount.  Reason for that is that the risk that individual does not pay you is higher than the risk that they bank would not pay back.  The biggest risk in this case is not return on principle but return of principle. When we invest in a company FD or in a company stock or its other debt products like debentures etc.  it is important that we check the leverage level of that company and also its credit rating before choosing to invest.  In addition to checking the company it is also important to check if the promoters/managers have ever had any other governance issues before.

With the power of Internet, it has now become a manageable exercise and given below are some of the ways to check the company and management quality.

• Check the watchoutinvestors.com site.  This is a free website sponsored by NSE and BSE which is a great place to search for any relevant issues in connection with the Company or Promoter.  As per the site, they cover individuals/companies who
• Have been indicted for economic default and/or
• Have been non compliant of laws/guidelines and/or
• Are no longer in specified activity
• www.consumercourt.in is a good source to check on all the court issues with that company or individual.  If they defaulted on deposits before and some one reported it would be there.
• Also you can check some of the consumer complaint forums like http://consumercomplaints.in/ and others to check if the company has any relevant complaints reported by customers.

If you find that there are records in any of these sites  that suggests that the company or the management quality if questionable, avoid investing in equity or debt related instruments with that company.  This would save you a lot of money and emotional trauma.  In Charlie Munger's words 'All I want to know is where I would die, so I don't go there'.

Warning Signs To Look For In Annual Reports

freedigitalphotos.net/David Castillo Dominici

Warning Signs serve a very important role in our lives.  They caution is in advance about the imminent dangers if we do not follow the guidelines or rules. We come across warning signs everywhere and they provide the information through signs so you immediately recognize them and take appropriate precautions.  So, what does this have to do anything with investing?  Just like any other activity investing is also filled with lot of dangers for the reckless investor.
Corporate governance is still a big concern in India and it is found to be lacking in both small as well as large companies.

How The Economic Machine Works

This is an informative video on how the economic machine works as explained by great hedge fund manager Ray Dalio.  This will give us an understanding on the economic cycles and productivity.  There is something for us all to learn

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.

Investment Checklist - Part2

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In my previous post on Checklists here, I provided an overview on the checklists and the benefits of using them.  In this part, I have listed the checklists I follow while analyzing a security for potential investment.  As I mentioned, every investor may have a long or small checklist based on their need and its more of an individual preference.  Indian companies are notorious for corporate governance and one needs to be very diligent in their evaluation exercise.  As I mentioned before, it is the safety of the investment and its downside  that is more important than the upside.  Our idea is to reduce the errors of commission than committing errors of omission.

Investment Checklist - Part 1

Picture courtesy 1shots/freedigitalpohotos.net

Checklists are basically tasks/checks that are jotted down in orderly way to make sure that all the items mentioned have been done or covered.  Checklists are used for managing very complex systems or procedures where things are not left to the memory of the person that is executing the task or following the procedure.  Checklists are very commonly used by pilots while flying aircraft and now checklists are slowly being used by health care industry as well during surgical procedures as well as in ICUs.  Checklists have not only helped in saving many human lives but also has helped in cutting down cost and improving quality.  

Open Ended Questions to Management

Picture Courtesy pakorn / freedigitalphotos.net

While reading the Investment Checklist written by Michael Shearn,  I came across an interesting list of open ended questions that can be asked to the management of a business. He recommends asking open ended questions to the management than asking close ended ones as open ended ones tend to give more insight about how the manager takes decisions.  Also he recommends that hypothetical questions should be avoided as they do not guarantee how the manager will actually act when such situation come.  

Key Metrics on 25 Industries by Forbes

This is a very useful slide presentation provided by Forbes on metrics on 25 industries.  While this may not list all the metrics, they could be useful to analyze where the company you analyze stands with respect to the industry.

http://www.forbes.com/2010/06/29/best-in-class-financial-metrics-entrepreneurs-finance-sageworks_slide.html

Paid For The Wait

Image Courtesy of Stuart Miles / FreeDigitalPhotos.net

Today’s life is all about instant gratification.   Even though we all have heard about the saying ‘Patience is a virtue’ the world is moving towards instant gratification.  The product life cycles are getting shorter and shorter and all corporates wants to get to the D-Day in the shortest time possible to get the outcome they are waiting for.  For most of the folks in the current generation,  it is all about ‘what can I get and enjoy today’ which is very important.  No one is willing to wait for a long time to enjoy more benefits.  That is the reason we have all these FMCG companies exploiting this bias by introducing all instant XXX in their products ranging from instant Noodles to Coffee.  Life is moving fast and no one has time to even time to smell the roses, (forget about growing rose plants).

Does this kind of instant gratification work in investing?  Answer is a clear no.  Investing is all about patience and being a sloth.  Investing works best for people that are lazy and hate action.  

Image Courtesy Anekoho / FreeDigitalPhotos.net

 As Mr. Pascal said and I quote,  “All human evil comes from a single cause, man's inability to sit still in a room”.  We somehow associate action to being productive.  I do not want to get into the details but I can cite one example that I like the most.  There was a study which was conducted to analyze the penalty kicks by the shooter.  They found that it was equally disbursed by 1/3 towards middle, left and right.  So if you are a Goal Keeper, you have almost the same probability or chance of saving a goal just by standing in the middle and doing nothing.  But, you will be surprised to know that almost none of the goal keepers would stay in the middle but would either dive to the left or right despite knowing this probability.  Why would they do it?  Simple, they are influenced by action bias.  They are okay to have dived left or right and lose than to stand there and make other feel that they did nothing.  Most of the investment managers and investors feel the same.   They get fidgety when they are not actively engaged in stock market.

As I see it, the only profession that really pays you handsomely for doing nothing and being a sloth is investing.  You are almost paid for being lazy.  All you need to do is overcome the bias of doing something.  We go through lot of desperation in deploying cash or removing it in short times.   We may have a windfall or some profits we want to immediately invest in or we may want to quickly book profits on something that went up in a jiffy (even though we may do better holding it for long run). On the contrary, we want to exit from investments that have lagged or dragged your returns down in the short run of say past 1 year.

Investment is like gardening or parenting.  You cannot expect a seed to give you fruits or vegetable right from day one or you cannot expect your kids to be productive on day one.  They become productive over a period of time.   We need to approach investing like that.  All we need is to water or nurture them and understand them better and wait until they bloom.  In fact, we are paid to wait and we will be paid handsomely. 

If we find a golden goose and we have bought it, all we need to do is wait until it lays its next golden egg.  We should not try to cut open its belly to find all the gold (instant gratification) , neither should we try to sell the goose and try to buy a crow that is painted golden.  Be patient and always act only when there is a need to.

Wisdom from Charles Munger

I came across this wonderful pearls of wisdom from Charlie Munger which he delivered in USC Business School in 1994.

Worldly Wisdom As It Relates to Investing

 

30 Big Ideas from Seth Klarman's Margin of Safety

Recently read this very good article from safalniveshak.com which is a site I visit very often. One needs to read and re-read these to get these ideas into our system for this thinking to come intuitively

Seth Klarman's 30 big ideas from Margin of Safety

Bonus and Splits – Slices of the Same Pizza

Picture Courtesy: Wikimedia Commons

I received a postal ballot to approve bonus shares for a company I hold.  Generally March quarter is the quarter when bonuses and splits are announced by companies to improve investor sentiment.  It is believed by most of the investing public that Bonus and Splits are like free checks that have been given to them by companies which enhance shareholder value.  In fact most of the companies report this (in their annual report) as if these are shareholder value enhancing.  Is this just a myth or is the value creation real?  To answer this, let us go through some basics.

Fantasy Business Team (Portfolio)

Picture Courtesy : Puriwaves

Fantasy  or dream teams exist in all forms of game like Baseball, Football, Cricket etc.  Everyone gets to choose their best players from various teams and bet on it.  If someone asks me to pick my fantasy team of business on similar lines,  I would pick these 11 businesses which forms my Fantasy Business Team.  These businesses would be evergreen with each member having longevity like Sachin Tendulkar.

These are companies that operate in various industries and operate with considerable moat.  When I have this fantasy team, I can just stop looking at the market and go on a cruise without worrying what would happen to them.  I will know for sure that in 10 years or 20 years, they would have added significant value than most of the investments.

Stock Does Not Know That You Own It

By Amcilrick (Own work)  via Wikimedia Commons

Most of us would have come across many instances during our investment career when the stocks we buy do not go up in price after we have bought it.  Ironically, in many cases it generally goes down after we buy.  In the reverse, the stock we sell is the one that goes high after we sell.  It has happened countless number of times in my investing career. I always wondered if it is the stock that is at fault or us.  I am sure you know the answer but I would like to explain it a bit.

When we buy a stock based on our own calculations, we know how much effort we put to discover this particular stock and also to analyze it after we discovered it before we decided to buy.  We know the pain that we took and whenever we take this pain, we feel that we should be rewarded.

The Sellers Dilemma

By Marcimarc at de.wikipedia  from Wikimedia Commons

There has been a long debate on which is the most toughest decision for an investor - Buying or Selling?  It is always said that investing is simple but not easy.  Actually investing is easier said than done because it looks simple just like the sixers that Gayle hits during IPL but it is not easy like the way he hits it. In any investing there is a buy, and there is  a sell action.  In between these two actions we hold.  If there is contest on which is the most difficult decision, buy or sell, I would always vote for sell.  I do not know about majority of the people but from what I have observed or read from many well known investors, it has always been very clear that while many investors have very clear criteria on what to buy, not many people have very clear sell guidelines.  To support our buy guidelines, there are lot criteria set forth by many investors.

Thoughts on Engineers India and BHEL

I frequently visit Vishal's blog named safalniveshak.com which is a very good site with lot of great information. Recently Vishal had posted about 6 questions for investors about BHEL, Engineers India and SAIL and I replied to those questions in his site. I do not hold SAIL, so my reply was only for BHEL and EIL. I am posting my reply below as well. This will service as a good reference for me few years from now to see if things pan out the way, I have replied. Please feel to post your comments.


1.Are these companies (BHEL, Engineers India) really going to die?

I do not think so because of the three reasons

• They both have very long operating history and they have survived all kinds of business and macro cycles that happened in the past 
• Both are considered as the best in trade as far as the business they operate in goes. There are very few companies that match their ability and scale. Most of them are price takers. 
• Strong Balance sheet with insignificant or zero debt 

Is Gold an Investment or Insurance ?

Picture Courtesy: digitalmoneyworld at flickr.com

Recently we have gold making big headlines  in both print and digital media.  There has always been big debate on whether gold is an investment or just a barbaric relic. While many big investors like Warren Buffett are against investing in gold as it is not a productive asset unlike say a real estate or any other business, there are other gold bugs who claim its supremacy.  I think both sides are taking very extreme positions and I am kind of somewhere in the middle.  As far as I am concerned, gold is not an investment, gold is a currency.  It should be only compared with anything that is considered a currency and should not be compared with any income producing asset.  If you keep your money under the mattress, it will not be productive and so is gold.

Basics of Money Creation And How Bankers Control The World

Eye opening videos about how money is created and the way bankers rule the masses by controlling money creation.  Watch this to understand how the game is played so you can be in the winning side in your life

Part1

Part 2

Part3

Secret Millionaires Club Videos for Kids

I came across this wonderful source for kids called Secret Millionaires Club.  Mr. Warren Buffett has rendered his voice for his cartoon avatar which covers finance in a way that kids can understand.  To be honest there is a lot of information that adults can learn as well because when it comes to investing, there is a lot to learn from Buffett.
What I like the best about these episodes are the teachings he has for kids about moral values. I think they are invaluable.  He applies all business principles to individual values which is great.
Tested the acceptability of these videos with my daughter and she simply loved it.

Click here to watch all Episodes of SMC

Buy Stocks Like Groceries

Image Courtesy: The Consumerist

It is our natural tendency to avoid any losses and we all like prices to go up the moment we buy something.  We expect this to happen to any type of investment we make like Gold, Real Estate, and Stocks etc.  You can see this tendency every time the petrol prices are hiked by the oil companies.  If you filled up the petrol just the day before and then the price went up last night, we feel very happy that we filled it before the price went up.  While this provides short term happiness, very soon we would be filling up the gas at a higher price when it runs out.