Thursday, December 30, 2010

Ahead of the Curve, Book by Hilary Kramer

I did not like the book. I found it full of self trumpeting, 'mayic illusions' and 'look at me now' fallacies that women are more prone to than men, and tiny bets on 100s of stocks. Failures are not mentioned, only success is broadcast. She could grow money to only 10 million $ calling it wildly successful career, while she earned a couple million $ from salary alone. She lacks conviction and follows other successful investors. Wharton MBA by the way.

We can still pick up a few noteworthy points from her book.

Her style is spotting trend, surfing wave. Important in spotting trend like biotech, nanotech, alternative energy etc is that most of the time is spent in spotting trend, being one with nature, being news junkie and not in surfing wave.

A reference to a game "Six Degrees of Making Bacon", every one in world is six connections away from most remote person. Similary a stock trend in one industry impact other industries. Corn industry impacted by Ethanol trend can be played not only through corn but by fertilzer, agri equipment and other crops that corn is outcrowding.

Keep looking back for reflecting and learning, not for regretting.

Dont forget Phychology 101

We all want to live long. In future there will be new industries, products, implants, surgeries that would claim to increase your life span or look young. That would be perpetual trend. Think clothes, creams, organic foods. Males have bigger ego, cars that cater to those ego like BMW are riding those trends. An example is provided of Honda Civic vs Jaguar having equally comfortable seats, but Jaguar caresses male pride.

Distinguish FAD from Trend

Atkins diet craze to get trim did not survive.

Trends are based on consumer needs and lifestyle changes. Trends are mainstream as well.

Fads appear in one industry and do not cross over or all states in all countries. Bellbottom pants is another example.

Demand and Supply never go out of fashion

That sounds credible both in trend based and cyclical industries. Failure of TiVO and Vonage affirms the fact that technology companies can be perilous where supply can quickly surpass demand. I had considered this in 2009 but rejected, recently D-Link is recommended by well a known 'expert' in India, think over, can it grow 20% per annum for next 5 years or even 3 years ?

Demand for organic foods led to success of Whole Foods from nowhere to a 9 billion $ company. Trend for low carb diet does not impact scrumptious cakes and bread despite being starchy eg. Panera bread.

Wednesday, December 29, 2010

The TAO of Warren Buffett : By Mary Buffett & David Clark (2008 first edition) - Part 2

Progressing with other notable quotes in this post.

"Its hard to teach a young dog old tricks"

Warren finds that the business ingenuity that comes with age is next to impossible to teach young managers. In Warren's world, age and experience can be far greater virtues than youth and enthusiasm when it comes to making money the old-fashioned way.

"In looking for someone to hire, you look for three qualities: integrity, intelligence, and energy. Most important of the three is integrity, because if they don't have that, the other two will kill you" 

Warren's management style is to afford his managers tremendous operational autonomy. He couldn't give his managers this much freedom if they lacked integrity. If you have to hire people who are not honest make sure they're not hard working and dumb as bricks.

"Never ask a barber if you need a haircut"

Ask an advisor if there is a problem and he will find it - even if there isn't one. 

"A public opinion poll is not substitute for thought" 

There is a great deal of comfort when you invest with the crowd. Just like in high school, no one stays popular forever. In majority of cases there isn't much upside potential left in a stocks after it becomes really popular.

"The business schools reward difficult, complex behaviour more than simple behaviour, but simple behaviour is more effective" 

William of Ockham, medieval english philosopher and monk put forth the idea that the simplest explanation is usually the best explanation. Priests of any profession need complexity to keep laity from performing their priestly magic. If you understood the investment process, there would be no need for investment analysts and advisers, nor would we need mutual funds or priests of profession.

Another example from my personal life is, I used to select harder of two questions in mathematics or physics even in final exams, including board exams in 10th and 12th in multiple choice questions with same weightage. I don't why I had that obstinate behaviour. There was some sort of contentment in conquesting paper to smithereens.

"There seems to be some perverse human characteristic that likes to make easy things difficult"

Only when something is made difficult to understand is there a need for experts, who can charge high fees for having figured it all out. The greater the complexity, the greater the need for an expert to help guide you through the complexity.

More than two people in the past couple of days have come back to me about Cravatex etc being selected as stocks by paid tip providers.

I would say that if you can't select a couple of stocks yourself from this list then you have no business to be in stock market doing personal investments in equity. Its better to give everything to fund managers. Better still is to spend your money on a few dozen books than paid tips, so you can keep fishing all your life.

"Recommending something to be held for thirty years is a level of self-sacrifice you'll rarely see in a monastery, let alone a brokerage house"

Its true that investing in PSU Banks, ITC, HDFC couple, Axis Bank in past delivered you 20-30% compounding but you will not see that advice from a broker, adviser. They would starve to death before adopting buy and hold for decade strategy. It isn't that they don't know or believe that this style creates wealth, but it does not create wealth for them. If your broker gets more than one great idea a year, the odds are that he is delusional. If he wants to continuously get you out of recent positions, odds are that he is more than delusional - he might just be dishonest.

"If you let yourself be undisciplined on the small things, you will probably be undisciplined on the large things as well"

A disciplined approach to turn down a  50 Rs cricket bet does really matter to Buffett. Sometimes what you don't do is just as important what you do.

"I never swung at a ball while it's still in the pitcher's glove" 

Ted Williams wrote in The Science of Hitting, that to become a great hitter you have to keep yourself from swinging at bad pitches. To become a great investor you have to wait for the right opportunity. Sometimes you have to stay away from investing in equities for years. Unlike Ted, we are luckier to have more than three strikes and we can let 100s of balls go by.

"In the search for companies to acquire, we adopt the same attitude one might find appropriate in looking for a spouse; It pays to be active, interested and open minded, but it does not pay to be in a hurry"

Look for companies in recession, out of favour situations, and at amazingly cheap prices.

"When proper temperament joins up with proper intellectual framework, then you get rational behaviour" 

Twice in Warren's investment career he completely stopped buying stocks because they had gotten way too high in price. In late 60s and late 90s, these helped him from becoming a victim to crashes that soon followed. 

"A good managerial record is far more a function of what business boat you get into than it is of how effectively you row. Should you find yourself in a chronically leaking boat, energy devoted to changing the vessels is likely to be more productive than energy devoted to patching leaks"

The best jockey in the world is never going to win races riding a lame horse.

"A pin lies in wait for every bubble, and when the two eventually meet, a new wave of investors learn some very old lessons"

Bubbles happened with radio, airplane, auto, computers, real estate, biotech etc. Stock prices reflect passion in the casino. When earnings fail to appear, the hope that holds up the stock, vanishes, prices hurl earthward when gravity takes over -- often with stunning velocity.

"Stock market is a no-called-strike game. The problem when you're a money manager is that your fans keep yelling, 'Swing you bum ! ' "

Money managers are slave to quarterly and yearly results, even though best course of action may be to redeem money to investors and go on vacation from equities.

"As far as I am concerned, the stock market doesn't exist. It is only there as a reference to see if anybody is offering to do anything foolish"

I would rate it as my second favourite Buffett quote after the one, "It makes sense to invest only when a stock screams in undervaluation at you. It jumps out from the screen and slaps to wake you up from stupor" 

Tuesday, December 28, 2010

The TAO of Warren Buffett : By Mary Buffett & David Clark (2008 first edition) - Part 1

There are generous quotes by Buffett in various books and on the web. This book selects 125 wise quotations with a one page commentary on experiences that led him to form his thoughts into these quotations

I personally find many of Buffett's quotes exposing his intuitive business acumen, words summed up elegantly. They help us all who follow, in seperating good businesses from mediocre ones or carry a deep message learnt over many years of experience. He is special.

I have selected a few from this book not in any order.

"The great personal fortunes in this country weren't build on a portfolio of fifty companies. They were built by someone who identified one wonderful business"

 Buffett mentions Walton family in retailing (Walmart), Hearst family in publishing, Mars family in candy, Coors and Busch in brewing.

"It is impossible to unsign a contract, so do all your thinking before you sign" 

Warren forgot to put a noncompete clause in his contract with eighty-nine-year-old Rose Blumkin when he bought her Omaha-based Nebraska Furniture Mart. A few years later Mrs. B. got angry at the way things were being done at the store, so she quit and started up a new store across the street -- stealing tons of business from NFM. After a few years of suffering the stiff competition, Warren caved in and agreed to buy her new store for a cool $5 million. The second time he had her sign a noncompete agreement, lucky for him as she lived until 103.

"It is easier to stay out of trouble that it is to get out of trouble" 

When Warren lost nearly all of his 700 Million $ in Wall St firm Salomon Brothers.

"It is not necessary to do extraordinary thing to get extraordinary results" 

We need not try to get rich overnight or in a year. Warren does not shoot for 200% returns per annum but 20% per annum

"My idea of group decision is to look in the mirror",  a similar one I recall is "With enough insider information and a million dollars, you can go broke in a year"

Warren is not seeking affirmation of his ideas from others. One has to think independently and be comfortable standing alone.

"You should invest in a business that even a fool can run, because someday a fool will" 

Coca cola, Budweiser, Wrigley's, Hershey, Walmart are dumbproof business.

"With each investment you make, you should have the courage and the conviction to place atleast 10% of youe entire net worth in that stock."

Can't agree more with him. Conviction is based on what you know will happen, belief is based on what you hope will happen. You need to know what you are doing.

"Money, to some extent , sometimes lets you be in more interesting environments. But it can't change how many people love you or how healthy you are"

Great deal of money will bring misery in your life. Your children are likely to not work, they will not develop self-esteem that work creates. They will wish your early demise, you may end up being surrounded by sycophants who will fill your life with lies to stoke your illusions of grandeur till you look like a fool to the rest of the world. Most of children that inherit lots of material wealth tend to do nothing with their lives. Warren believes a country prospers better if society is a meritocracy.

 "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact"

Mediocre businesses are struggling for cash and are loaded with debt. They usually have to rob Peter to pay Paul. Think paper, steel, textile businesses in India.

"The reaction of weak management to weak operation is often weak accounting" 

Self explanatory.

"In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen"

A business with poor economics is a slow boat to nowhere and makes a lousy long term investment. Auto companies can be lousy as they need to spend billions on retooling. Tata Motors has caught fancy. I wonder sometimes at experts like Shankar Sharma, RD etc going gaga over these scripts. Perhaps trading calls.

"You pay very high price in market for a very cheery consensus" 

If everyone agrees with you that a particular stock has a great future, you are going to have to pay a steep price. Trick is to buy stocks nobody believes in very cheap. Sometimes exceptional Walmart type stocks do create long term wealth despite being expensive.

Saturday, December 25, 2010

Be the change

Wishing you all a prosperous and Happy New Year.

At the same time I would like to apologise my fellow investors to whom I have not returned a phone call, since I do not like to discuss stocks. This is not to say I don't have an open mind but I like to build conviction in isolation.


My expectation from the likes of other mature investors who spend more than couple of hours a day is to promote a culture of partnerships in India. I expect the likes of @kudva, @rahul and others even more Senior in investing field than myself, and those who have been applying their mind and energy for years to open your own partnerships over coming months, years.

Other alternative discussed in Lynch's book also is investment clubs where everyone pools money and there isn't any controlling partner. I for one am not a good candidate for the latter.

Why ?

All PMS and Mutual Funds in India are charging 1 - 2 % fixed Management Fees. You would be doing a great service to retail investors, consequently society by wiping out intermediate charges. At the moment Management Fees (same as wholesalers charges from farm produce to retail shops) is charged irrespective of fact, whether their funds grew or shrunk.

No wonder Bufett has this bet

2% extra compounding can make a huge difference in long term returns. Its an idea whose time has come.

Next logical institution / business idea

I am not aware of similar body in the West but once we do have a few number of partnerships working on model of no fixed Management Fees, either someone who is reading this or we could ourselves over the coming years form an institution of Association of Independent Partners thus giving you a corporate form, probably buy a joint insurance and have wider reach. My motto is to save retail investors from 2% cut of fixed management fees in PMS and Mutual Funds.

While I have no plans to relocate to India for the next couple of years to actively pursue this change, I hope to see atleast many more partnerships from you. I believe it has a bright future, Walmart's success and Retail sector's potential in India is for similar reasons and we are yet to see a revolution in financial sector by cutting off middlemen.

Saturday, December 18, 2010

Valuation of Oil and Gas Exploration companies - SELAN

Someone asked me yesterday about Selan exploration.  I have not been a fan of oil industry and consequently could not convince myself to apply mind in it, due to its commodity nature, lack of pricing power for end product, too many variables outside its control.

However, I am open to learning and getting educated. As obvious, one cannot value downstream companies based on conventional metrics such as P/E, Revenue Growth, Debt/Equity, Sales/EV etc just as for mining company I wrote earlier about here.


Oil companies are valued on Proved Developed, Proved Developed Non Producing or Proved Undeveloped (PU). One can introduce a googly of Proved Probable (PP) too.

Please go through this five page valuation article before investing any money on oil exploration companies.


Following is the extract from Annual Report of Selan available at next link.

Oil sector is a high risk and high return sector. Data acquired for seismic evaluation of oilfields & reservoir modeling involves interpretation by advanced software technology and equipment which
is capital intensive in nature and therefore prone to obsolescence coupled with uncertainty in results.

However, the inherent risks of dealing with nature cannot be completely mitigated and that is why drilling activity poses a great challenge and risk. The fluctuation in international oil prices as well as in the dollar
value of the rupee is another factor which adds to the uncertainty of profits in the oil industry.

The private market for buying out of whole companies does not get as out of whack as stock market.  Private buyers of businesses act more rationally than investors at large exhibiting their emotional index on tickers.

A couple of recent deals that are done by intelligent buyers should be taken into account before putting a price tag on the company in sight.

Dana Buys

Dana Sells itself


If you do want to value the company, you have to anticipate a few extraneous factors.
  • Can the oil prices stay high
  • What are the reserves of company and what would be cost of extraction of those reserves
  • If the reserves will be extracted in possibly next 35 years, then value 200 Crores of Oil extracted in 2045 needs to be discounted adequately to todays price
  • You have to ask company for reserves report and trust in the independent valuer that estimated value of reserves
  • Stick to Proved Undeveloped resources otherwise you will go down the slipperly slope of EBIDTA rather than PAT 

There can be severe shocks on downside and likewise probability of upside. There may be 60% undervaluation on DCF or EV/PU model of Selan but I'd prefer buying companies growing at a consistent and healthy rate. I personally have faith in much stronger secular stories in Indian market. You can call me one trick pony.  That said, I will not shell out 40 PE for a 20% grower be it Nestle India Ltd (continues to be my mental block).

Again it can become a doubler, tripler like OMDC but I am happy to give it a pass. If all people were like me Soap/ Shampoo companies would stop advertising as they would see no impact of their Ad budgets, Sugar and Steel stocks would stop being so volatile as I would smoothen them out for next 20 years of cycles. Given that people act irrationally and stocks play out in emotional cycles, I would buy a luxury watch maker when rich people are cutting on expenses, a cruise ship company when people are not splurging on holidays, oil companies when something negative happens for oil industry. Those who do not have the problem of super abundant capital can avoid playing cyclicals unless ofcourse you know what you are doing. Question to ask is, will you buy more of Selan at 150 Rs or book loss at 20% drop ?

Thursday, December 16, 2010

A quick update regarding investing vehicle

I have consulted CAs and there are several options available. I want to obviously avoid SEBI's Portfolio Management Services as it involves 11 Lacs initial fee and 5 lacs every couple of years. These models are suitable for those fund managers who want to reach 100s of people, and minimum investment required by each portfolio client is 5 Lacs plus as per SEBI regulation.

I have also explored the option of registering as an FII, that also involves several thousand dollars fee every few years.

I have been advised by my CAs that the best vehicle would be a Private Limited entity, although there is more legal work, annual expenses relative to a Partnership Firm but it offers most flexibility. No matter what the legal or corporate identity, I'd run it as partnership.

If anyone of you would like to speak with me, have any queries, I am will to hear from one and all via a feedback from. I would be glad to make partner with anyone as long as our expectations match so I can aim to meet them.

Tuesday, December 14, 2010

Derivatives - An epidemic for society; and a Personal update

I will describe how derivates are a grave danger to society with an example from keen edged Munger.

WB : Warren Buffett
CM : Charlie Munger

Let alone the foregone fact that survival of those institutions is at stake which use leverage and derivatives, it also encourages a dishonest behaviour in society.

A simple Example :

Assume Cravatex Ltd outsources shoes from a manufacturer, assume Relaxo Ltd. There would be times when Cravatex is not going to pay cash instantly to the supplier i.e. Relaxo. In books of account of Cravatex if there is 5 Crores pending as in liabilities section dues to Relaxo Ltd, then in latters books there is 5 Crores in assets/ recoverables. If two auditors were to compare books of accounts it would Zero out. Therefore in toto, it balances out in society.

A non simple (Derivative) example:

When long lasting derivatives bets are undertaken that will come to fruition after 10 or 50 years, each party optimistically assumes that the likely possibility of its bet turning in favour is higher. Therefore if Party A and Party B have a bet against each other, they are likely to even out in 2030 when bet settles. But as of 2010 i.e. today if Party A is showing 1 million $ profits on derivatives contract, Party B is not showing 1 Million $ loss in book, thus overrating profits in short run. The total is not matching up. Auditors are not responsible as of today to cross check other organisations' accounts. This results in inflated profits motivated in increased commissions for those who inititated contract.

What the two young men have to say ?

Your opinion on derivatives?

WB : Charlie and I think that there is a low but not insignificant probability that at some time -- I don't know when; it could be three years, it could be 20 years -- derivatives could lead to a major problem. The problem grows as derivatives get more complex. We hoped to give a mild wakeup call to the financial world that there's a problem. In the energy sector, derivatives destroyed or almost destroyed institutions that shouldn't have been destroyed. [He mentioned Enron.]
Charlie and I would not know how to regulate it. We have some experience seeing specific dangers in that field and some insight into systemic problems that can arise. People don't want to think about it until it happens, but it is best thought about before it happens.
It's a low probability, but we think a lot about low probability events. We have some experience with Salomon and Gen Re. Charlie saw some things on Salomon's audit committee [that were very risky/questionable].

[CM: In engineering, people have a big margin of safety. But in the financial world, people don't give a damn about safety. They let it balloon and balloon and balloon. It's aided by false accounting. I'm more pessimistic than Warren. I'll be amazed if we don't have some kind of significant blowup in next 5-10 years.

Derivatives are advertised as shedding risk for the system, but they have long crossed the point of decreasing risk and now increase risk.

The truth is that Coca Cola could handle risk (currency exposure)[I think he was talking about currency exposure], but now with every company transferring risk to very few players, they are all hugely interdependent. Central banks are exposed to weaknesses. If Salomon had failed, the problems for the rest of the system could have been quite significant. When you start concentrating risk in institutions that are highly leveraged, [watch out]. They have big trading departments with people who make a lot of money.
It's not a prediction, it's a warning.
  • Source: BRK Annual Meeting 2003 Tilson Notes
  • Time: 2003
It’s fascinating to look at a company like Freddie Mac: an institution that dozens of financial analysts were looking at; that had an oversight office; that was created by Congress with committees to oversee it; that had two smart, exceptional board members, Marty Leibowitz and Henry Kaufman; and that had auditors present – yet Freddie misstated earnings by $6 billion in a short time. That’s big money. And a large part of it was facilitated by derivatives. You can go back and read the footnotes, listen to the conference calls, etc. and you wouldn’t have known. In the end, it was $6 billion, but it could have been $12 billion if they’d wanted.
Derivatives can lead to a lot of mischief. When you have a complicated derivative transaction, and a trader with investment house A on one side and investment house B on the other side, and on the day the deal is done, both record a profit, this can lead to mischief – and the scale is getting bigger every day.
I know the managements of many large financial institutions and they don’t have their minds around this. We tried at Gen Re [where we had a small derivative book] and couldn’t.
Whatever problems there were at Salomon [during its crisis years ago], they’re far, far worse now [systemwide].

In 1991, if the government hadn’t reversed himself [in its plans to take actions that would have put Salomon out of business], we were preparing documents [to file for bankruptcy. Had this happened,] We had $1.2 trillion [notional value] of derivative contracts that others were counting on, that would have gone bad. All sorts of securities transactions wouldn’t have settled, accounts in Japan and the UK would have been affected, etc. For instance, Salomon had a relationship with a bank in Germany which took large deposits in Germany and lent the money to Salomon. All kinds of things would have come out. You don’t need to put these strains on a system that’s already highly leveraged.

When you get huge amounts of transactions, which not many people understand, you create a huge problem that may be triggered by an exogenous event.

We use derivatives – we get them collateralized – and we’ve made money on them. But I predict that sometime in the next 10 years, we will have a big problem caused by or exaggerated by derivatives.

[CM: People don’t think about the consequences of the consequences. People start by trying to hedge against interest rate changes, which is very difficult and complicated. Then, the hedges made the results [reported profits] lumpy. So then they use new derivatives to smooth this. Well, now you’ve morphed into lying. This turns into a Mad Hatter’s Party. This happens to vast, sophisticated corporations.
Somebody has to step in and say, “We’re not going to do it -- it’s just too hard.”

If you want to have a little fun, go to the annual meeting of a big financial company and ask about the details of a complex transaction. They won’t know – but you can be sure the trader who did it will be well paid for it.

Any time you have situation where smart people can make money by taking risk, you’ll get it.

Q - How dangerous are derivatives to the financial system and what can be done to mitigate potential damage from them?

We’ve tried to mitigate it [raise warning flags about the dangers of derivatives] a little by talking about it, but realize there is nothing inherently evil about derivatives. We have at least 60 of them and will be discussing them at our upcoming Berkshire board meeting.

Derivatives are expanding rapidly, in more and more imaginative ways. They introduce invisible leverage into the system. In the 1930s, after the crash, the government concluded that leverage contributed to the crash and that it was dangerous. So the U.S. government empowered regulators to deal with this. For decades, they policed it and it was taken seriously when the Fed increased or decreased margin requirements.
But the introduction of derivatives has made any regulation of margin requirements a joke. The regulation still exists, but it’s an anachronism.

I believe that we may not know when it becomes a super danger or when it will end precisely, but I believe it will go on and increase until very unpleasant things happen because of it.
You saw one example of what can happen under forced sales in October 1987. It was driven by portfolio insurance, which was a joke. It was a bunch of stop/loss orders, but done automatically, and it was merchandized. People paid a lot of money for people to teach them how to put in a stop/loss order. When a lot of institutions do this, the effect is pouring gas on a fire. They created a doomsday machine that kept selling and selling.

You can have the same thing today because you have fund operators with billions of dollars – in aggregate, trillions of dollars – who will all respond to the same stimulus. It’s a crowded trade, but they don’t know it and it’s not formal. They will sell for the same reasons. Someday, you will get a very chaotic situation.
As for what could trigger this and when, who knows? Who had any idea that shooting an archduke would start Word War I?

CM: The accounting being enormously deficient contributes to the risk. If you get paid enormous bonuses based on profits that don’t exist, you’ll keep going. What makes it difficult [to stop] is that most of the accounting profession doesn’t realize how stupidly it’s behaving. One person told me the accounting is better because positions are marked to market and said, “Don’t you want real-time information?” I replied that if you can mark to market to report any level of profits you want, you’ll get terrible human behavior. The person replied, “You just don’t understand accounting.”

WB: When we went to close out Gen Re’s derivatives book, we took a $400 million loss on a portfolio that was “marked to market” by the prior management and auditors – and I’m not criticizing our auditor. Any auditor would have said the same. I wish I could have sold to the auditors instead!
Take a dry cleaning business that owes $15. Their books show a $15 accounts payable and the other company shows an offsetting $15 accounts receivable. But there are only four big auditing firms, so in many cases, if they’re auditing my side, the same firm may be valuing or attesting to the value of what’s on the books of the person on the other side. I will guarantee you that if you add up the marks on both sides, they don’t add up to zero. We have 60 or more derivative contracts, and I’ll bet the other side isn’t valuing them like we are. I have no reason to mark the value up – we don’t get paid for that. If I value it at $1 million on our side, the other side should be marking it at minus $1 million, but I guarantee the numbers are widely different. Auditors should check both sides of derivative trades and the “marks” should sum to about zero. They don’t.

CM: As sure as God made little green apples, this will cause a lot of trouble. This will go on and on, but eventually will cause a big denouement.
  • Source: BRK Annual Meeting 2007 Tilson Notes
  • Time: 2007

Q: What useful function do derivatives serve? Why aren’t derivatives illegal?

WB: Charlie may have more to comment.

CM: The usefulness of derivatives is overstated. We’d still have oats and wheat if we didn’t have derivative markets. The test is not ‘is there any benefit’, but is the NET benefit or disadvantage useful or better without. My own view is that if we had only [exchange traded] [Ed: another notetaker heard: agriculture and metals] and banned the rest – the world would be better place.

WB: BNSF has diesel contracts. If I was running the place, I wouldn’t hedge - unless you are smarter than the market in diesel fuel. If you are you shouldn’t be running a railroad, you should be run a diesel trading business. If you have someone in charge of running that hedge, they will hedge it. If he thinks that will make him a better manager of railroads, then fine, let him do it, but I will hold CEO responsible for running it over time. I wouldn’t condemn anyone for hedging diesel fuel. But I do think if you put up (slide4) – from Chapter 12 of Keynes General Theory – it is by far the best description of the way capital markets function. It is descriptive and prescriptive. Usually only the first two sentences are quoted, but it is better as a whole paragraph:

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism – which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.

Wall Street is mix of casino and a very important social operation – and once academia got behind derivatives and schools taught more about how to price a derivative instead of valuing a business, the trouble began. In 1982 Wall Street allowed speculation in SP500 futures. I wrote letter to Congressman Dingle which was published in Fortune Magazine. What I forecasted occurred then it got squared, with new ways to gamble.

CM: Warren wrote the only letter saying the idea is insane. Only difference is then not very many people listened to him.

WB: It doesn’t make any sense that the tax treatment on gambling on S&P 500 contracts is better (partial long term capital gains treatment) than buying and holding individual stocks for less than a year (SP500 contract is taxed 60% long-term gain and 40% short term, even if you hold it for 60 seconds). This distortion came about as a result of the power of a small group of lobbyists. Charlie do you know why this is?

CM: It is neither fair nor sensible. The idea that the tax treatment on something that is held for 3 seconds is different than something that is held for less than a year (some long term gains treatment for the former and none for the latter) is insane. If someone with money and interest cares a lot and others are indifferent, that someone wins in front of the legislative bodies. As Bismarck said, don’t watch sausage making or law making.
  • Source: BRK Annual Meeting 2010 Boodell & Claremon Notes
  • Time: 2010

What are your views on derivatives and how do you think they have affected the global market?

In my 2002 letter to shareholders I referred to them as “weapons of mass destruction.” Derivatives are really just a way to create a product with a very long fuse, for example, 100 years, as opposed to stocks which settle in 3 days. That kind of system allows claims to be built up. AIG called me in September and told me they were about to get downgraded which would have required higher posting requirements. Now this is an enterprise that has been built up over decades and was effectively destroyed in 48 hours by these products. With derivatives, you’re exposed to counterparties and thus reliant on others. These claims built up over time to the tune of billions of dollars and when one falls, the whole system falls. Derivatives are not evil by themselves but rather everyone needs to be able to handle them. System wide, they’re rat poison. Berkshire holds many derivatives but we always hold the money at Berkshire. 
  • Source: Q&A with 6 Business Schools
  • Time: Feb 2009
Personal Update

I have been putting in over 40 hours a week on equity research besides the day job for the last few years now and its become my pet mania. Actually I believe I have been putting in more hours than that. It does not feel like work since I have enjoyed the process and learning, consequences of the process often pleasant and sometime painful were welcome too.

I realize than 95%+ of you who read blogs actively must enjoy the process of investing and I hope to continue to inspire those who enjoy the freedom that material wealth brings. However, there are those of us who do not like investing process or like to delegate that work to others have alternative of funds or investing partnerships.

Personally, I am tired of logging into Kotak, Indiainfoline, other Brokerages accounts of my relatives, in laws, close friends who are passive investors and have left everything for me to manage. I manage my personal money separate from theirs, infact they all have separate brokerage, bank, trading accounts and it has reached a stage where I cannot manage all accounts effectively.

I am consulting a CA to open partnership to consolidate all holdings for any new money. Once I am happy in next few weeks/months and have sorted out details and modus operandi, I would like to extend this to a handful of other people, since this is what I intend to do for next few years. Currently I have way too many ideas relative to funds, fortunately I am not in Buffetts position whose idea pool is starved relative to fund size.

I do realize that people feel more comfortable to invest their hard earned money with established fund houses or squander a few thousand bucks at tipsters for offering stock advice rather than parting their money to potential fly by night operators or Ponzi mafias. This is why I want to continue with a select coterie of friends who trust me and I do not want to belong to either mentioned category earlier. I'd be happy with accepting only a couple prospective friends per year or none at all, it suits me since I do not want the model to be scalable. 

Another reason is that I do not want to bite more than I can chew. Third reason is that excess capital can weigh down returns. I only want to attract a select few who do not want to touch the money for 3-5 years and redeem money once a year. I would accept interest in partnership only once a year. Needless to say, there is no entry or exit load unlike mutual funds. I would charge fee based on performance and high watermark only on returns in excess of certain threshold per annum, it would be same for my uncles, friends or parents in law.

This also implies that historically any stock that I have so far mentioned to everyone including relatives has been done so at same day and time would no longer be done so. Since my personal funds would be invested in partnership I'd like to buy before declaring publicly. Thus, I would have a vested interest in every stock I mention. I would choose to not disclose parts of holding publicly or to partners as well. I would be open for annual Audits and surprise Audits including those by any one at all including Big Four should my partners choose to. 

As always anyone who likes investing is encouraged to do personal research before making purchase decision and also ignore my opinion, everyone has one !  I would typically invest depending on opportunities, 15% in Microcaps like the ones I have mentioned on this blog for the past one year, 25% in Mid Caps and 50% or in Large Caps and some cash.  The ratio can change in extremely wild swings and mass available opportunities. Hence, please do your due diligence before making purchase decision. My fortunes should swing with yours and I would like to avoid any conflict of interest by putting my 100% of my holding in partnership unlike Fund Managers do, they all have personal account which is often front run before fund account. There would be no personal account after a year once I get out of taxation on existing positions.

Anything I say should be cross checked, neither my partnership nor I take any personal guarantee on authenticity of what is said. I or my partnership will have no liability for what is written and published on this blog. More details later. 

Saturday, December 4, 2010

FD vs Shares, Poor vs Rich, Middle Class thinking vs Entrepreneurship

Figure: Middle class suckers, click on image to magnify their folly

I wanted to show you visually what I learnt from Peter Lynch. You don't want to be guy on the left, poor person having some spare change for Bank. Bank has expenses, employees, overheads etc also dividends for shareholders ! They forward your money to businesses or other individuals in need.

Your job as an investor is to find the business on right hand side that will not only avoid going bankrupt, but infact is strong ! That strong business is earning more than 20-30% per annum on invested capital. If you cannot find that business or are afraid that stock market volatility reduces the share price of business to 50% or 40% then continue to be the guy on left.

Wednesday, December 1, 2010

How your family can own 70% of India, thats right 70% of all listed and unlisted companies

I recently read about an entry on Kudva's blog here and reminded me of Jeremy Siegel's book here which has the most publicised record on stocks over past two centuries. In a nutshell, "If one had invested 1 million US $ in 1830s or so in Dow Jones Index/ equivalent index and held on until 2002" that money would be 8 trillion $ or about 70% of US market cap at the time or thereabouts.

Plenty of business people had that kind of money. It would be roughtly equivalent of 50 Crores in today's value which many individuals possess.

I have an entry on the case for how much one needs to retire from job one would like to leave here (5 Crores only for those who have 10 lacs INR annual expenses, increasing expenses by inflation will be taken care of by underlying businesses). I hope no wise person would waste all their life and energies on wealth aggrandisation for the lack of any other ambition.

As per following calculation, whether you want it or not, if we become a half decent, average stock picker, even index replicating like SENSEX, then there is a very high probability that we will end up with over 200 Crore INR over next 40 years. (10,000 Rs savings per month at 20% compounding per annum ). Sensex has done better than that over past 30 years. I won't go into how much your children may end up with if they continue with your investments.

If you can convince your four to five generations to keep money in Nifty fifty/ BSE sensex  and eventually in top 500 companies, you will control major holding in it in couple of hundred years. One could argue the merit in it or fact that if five families tried to do it in parallel then they all will end up with only 15% of India's material wealth.

Summary on this topic from Jeremy Siegel's book:

The returns are computed by investing in the whole market, i.e. all listed stocks,
in weightage of their market caps, whether they survive or not. If one had invested in all listed stocks in proportion of their market cap, certainly not the best way, returns by equities would eclipse every other asset class.

Years of return computed : 1802 through 2001 for US markets

Real post inflation yield on stocks 6.7% to 7% over this 200 year period

Its dramatic if you factor in changes that happened, agri to industrial, to service to technology based economy. Change from gold to paper money standard, world wars..

Rate of real rise between 1946-1965 - 10%
Rate of real rise between 1966-1981 - -0.4%
Rate of real rise between 1982-1999 - 13.6%
Rate of real rise between 1982-2001 - 10.5%

Stocks have taken on average 10 years to double your purchasing power compared to 100 years for T Bills.

LT Govt. bonds have 3.5% real returns from 1802 - 2001.

In 1958 yields for the first time in 60 years were lower in stocks than LT Govt. bonds and stayed that way for next 50 years, person who wanted to be conservative would have just waited.

Above is true for German, US, Japan and UK market in terms of returns in Govt Bonds vs. Stocks from 1920s

In 1871 two actively traded stocks were Bank of New York and Bank of United States, Alexander Hamilton and his secretary at Treasury manipulated the price, thus was born antecedent to NYSE circa 1892.

By 1802, 300 companies had listed stock but less than 10 had frequent trading. Initial listings being transportation, canals, wharves, bridges, then financial companies.

Stocks always beat bonds if holding period is more than 20 years even if you buy at peak.

Best % / Worst % returns if Holding Period is 1 Year
Stocks 66 / -38
Bonds 35 / -21
T Bills 23 / -15

Best % / Worst % returns if Holding Period is 2 Year
Stocks 41 / -31
Bonds 24 / -15
T Bills 21 / -15

Best % / Worst % returns if Holding Period is 5 Year
Stocks 26 / -11
Bonds 17 / -10
T Bills 15 / -8

Best % / Worst % returns if Holding Period is 10 Year
Stocks 17 / -4.1
Bonds 12 / -5.4
T Bills 11.6 / -5

Best % / Worst % returns if Holding Period is 20 Year
Stocks 12.6 / +1
Bonds 8.8 / -3.1
T Bills 8.3 / -3.0

Best % / Worst % returns if Holding Period is 30 Year
Stocks 10.6 / + 2.6
Bonds 7.4 / -2.0
T Bills 7.6 / -1.8

Coming to original answer:

Investing in whole market from 1802 to 2001

Stocks 1 $ ==> 8.8 Million $
Bonds 1 $ ==> 13,975 $
Bills 1 $ ==> 4,455 $
Gold 1 $ ==> 14.6 $

Thus, 1 million $ is equal to 8.8 trillion $ i.e. 70% of entire market cap of US.

1 million $ in 1802 is equivalent to 15 Million $ in 2001 US money buying power.

Dow Jones does not include dividends.  Wilshire 5000 is broadest index available with 6200 firm (NYSE has 10,000 stocks if you exclude 20,000 penny stocks)

S & P 500 has 84% of market cap of WILSHIRE 5000

S & P 500 in 1957 had roughly 90% value of all NYSE shares

S & P 500 in 2001 had roughly 80% value of all NYSE shares

Conclusion: Stocks are more conservative than bonds, person investing in bond is speculating with purchasing power of money. Stocks have power to turn 1$ into millions by forbearance of generations.

Gold is a sure fire formula for buy and hold investor to get poor unless one is using dangerous leverage. This is what Buffett has to say about Gold

"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

You can make an impact on the world with your will through this avenue, you can make India, USA, World take the direction of your desire in a few hundred years from now, hoping that your family will continue to uphold your wish. Certainly it would be idiotic to accumulate so much suffocating wealth. Let us also not forget that all this material wealth is on that small particle of dust on cosmic scale.


Friday, November 26, 2010

Black Swan by Nassim Nicholas Taleb

Extreme events are more likely than we think. Taleb calls these "Black Swans" after the certainty, based on northern hemisphere experience, that all swans were white. Black swan events are high impact, surprising, and post occurrence appear expected.

Many examples he discusses are the start of World War I, the sales of the Harry Potter novels, and a turkey who spends a thousand days being well fed before being killed on the thousand-and-first day, rise of google. Negative black swans occur suddenly and positive relatively far longer. Same as destruction vs construction.

Taleb looks at some of the features of human psychology that make us poor at evaluating uncertainties and risks: confirmation biases, attraction to narrative explanations, epistemic arrogance, and tunneling. Other fundamental difficulties come from silent evidence, the general "problem of induction", and the nature of historical causation.

Taleb presents his ideas largely through narrative, anecdotes, and even a few fictional stories. This is a reasonable approach to presenting what is essentially a pragmatic way of looking at the world rather than any kind of formal system. One wonders, however, whether Taleb himself hasn't fallen victim to some of the very problems he raises — confirmation bias, attraction to narrative, and so forth. He also draws on the scientific and philosophical literature, drawing on a range of disciplines and sources, but doesn't go into any of it in depth.

Taleb is a quantitative analyst or "quant" himself and a hedge-fund manager, but he doesn't focus on finance in this book. His brief investment suggestion is a "barbell" portfolio, with 85 or 90 percent in Treasury Bills, as a defence against extreme negative events, and the rest spread across highly speculative investments such as small biotech companies, to try to catch a few extreme positive events.I have also learnt that he like to buy put options at the cusp of major changes.

In his opening example of a Black Swan, is the civil war in Lebanon which disrupted his childhood, and most of his other anecdotes are also taken from his own experiences. Taleb has a high opinion of himself and a few other figures such as Hayek, Popper, Montaigne and Sextus Empiricus come in for praise. He loves a lot of people and institutions cop a hammering at his hands, from individual philosophers, bureaucrats and politicians to institutions, governments and academia generally. He dislikes Nobel Prizes and the Nobel Committee.

Taleb has very strong opinions and some people may not like that fact. I would recommend that the book is read for entertainment with learned stories.

The book also covers examples of banks losing out everything they built for the past 100s of years in 1982 due to loans to bankrupt latin american economies, yet again in 1980 to early 1990s in Savings and Loan crisis. We have fresh memories of 2008. In all instances Govt. had to step in with tax payers money. I have personally lost 100% of my equity portfolio in banking crisis, which makes me believe now that Banks are an absolute SUCKERS BUSINESS. With no possibility of forecasting, complex structures, un ascertainable loans. On the face of it banks can grow for 20%+ for very very long periods of time unlike a shoe manufacturer for example, but they can go to Zero any fine day without giving a hint.

Every 10-15 years banks have to be bailed out under too big to fail pretext. You know that 'too big to fail' excuse is pulled off since Roman empire. Nevertheless, investors' memories are very shortlived and they would go back again "when everything is normal".

In my opinion Black Swan should be a foregone conclusion and a naturally accepted principle as we have neither understood an Atom, nor do we know everything about principles of working of a DNA, or even a small thing like insect. The forces that shape the world, rise and fall of technological landscape based on same fabric should itself be un predictable. Infact what we do know is that rate of change is increasing, therefore we are likely to have more positive and negative Black Swans in the years ahead that in the past. I agree with Taleb on the part the we are blinded with epistemic arrogance, I have heard people talk about 'We know so much about the body, only brain remains to be explored'. Thats bunkum, absolutely rubbish. I do accept the advancement is being made, will be made more and more in years to come. But in no way can we put a finger on percentage of how much we know, while we are unaware of the scope of unknown. We may be only knowing 0.000000000000001% of all their is to know just in the field of biology but most people may be thinking around 40-80% range.

Person who acknowledges the thought 'Human race is ignorant, and there is 99.99% unknown and so much more to know, that our knowledge is very limited', is likely to explore and continue learning. Avoiding big mistakes is the only thing we need to do as successful investors, very little otherwise. Holding slightly above average companies for couple of decades snowballs into a very big fortune. There is no need to read science fiction, when reality itself is so interesting and mysterious.

Videos of Taleb

Taleb angry in 2008

Friday, November 19, 2010

Investing Strategies from Peter Lynch and Philip Caret

I was asked recently by azmath, a follower on this blog to provide an opinion on Jindal Polyfilms. My first reaction was lack of knowledge in this industry. I looked up its competitors and players in similar industry like Polyplex Ltd, I realised yet again that I have missed out a whole cyclical turnaround of polyfilm and allied industry.

I was tuned into radio station of sub 30 crore market caps for the past few months and I would have missed out TTKs and Relaxos if there were in the making even now. Likewise, I have no grip on sugar, steel, oil, cement industries. Playing cyclical stocks can be very very rewarding if one is at top of their game, best part is that its repetitive. While there are secular growth stories in India right now and for a while to come, perhaps after few years, I might cultivate interest in keeping tabs on cyclical stories.

Peter Lynch is a strong advocate of buying stocks in Industries where 'you' are a leading sensor by virtue of your employment/association in that industry. If you were an employee of Jindal Polyfilms, you could have made 5X the money in last four months, ditto for Polyplex. Or if you were in trading, shopkeeping, wholesaling business, you'd know when this industry is turning around and finished goods prices are soaring. There is an interesting story of Buffett sitting outside a factory and counting train bogies entering a factory with raw material to predict turnaround.

Second learning is, patience. After investing in solid 6 growth companies, there is nothing left to do for the next one year, other than reading quarterly results. One has to follow one's hobbies and interests outside investing or reading related to investing, unless one indulges and enjoys trading.

Three months back I was prepared Photoquip may not move an inch for a year, I was cool with it. When I think now, is it possible for Photoquip to earn 10 Crores in net profits in two years from today (20 Rs EPS) ? Is it possible to get re-rated to 20 PE since it is a consumer brand ? Multiplication of previous two numbers results in eight times possibility of upside from 50 Rs price available today, so if one's brain is convinced, then what is left to do, unless one finds something even more seductive.

I will probably not be updating the blog frequently unless something too exciting happens, will keep adding to existing three positions (Photoquip, Relaxo, Cravatex) until proven wrong.

Both lessons remind me of this video

Tuesday, November 16, 2010

Some tips for Healthy Living

Other than things we cannot control in our life, what we can - are, what we eat and what we can avoid.

I will highly recomend following don'ts:

- Throw away all plastic bottles from your home used for drinks
- Do not buy Diet Coke, Zero Coke due to Aspartame and now Sucralose
- Do not buy any artificial sweeteners
- Do not use Micro Wave ovens as much as possible
- Check on all packets of snacks, noodles for Monosodium Glutamate, Flavor Enhancer numbers 621, 635, 637, shun them, there are dozens of tasty Indian snacks that do not have these flavour enhancers
- Needless to say avoid cigarette

All above factors with prolonged use increase risk of cancer. Best to err on side of caution. No corporation will conduct a study that takes 30 years of persistent followups on humans, their aim is to make money. Regulatory bodies are just puppets in hands of pharma companies as are policians including US politicians are stooges of rich few.


- Keep heartbeat above 100 a minute for 20 minutes a day, brisk walking or cycling
- Eat as much fruits as possible and dry fruits daily in limit (esp, walnuts and almonds)

After all we want to also enjoy the physical wealth for as long as possible.

Re iterate buy on Relaxo and Cravatex

Both are good retail stories expected to grow your money over 30% compounded per annum for every year held.

Relaxo - Latest Q2 Sales are 30% up, so are employee cost, new stores expenses, its only a matter of time before net profits catch up after gestation and establishment expenses. Patient investors will be rewarded handsomely. Downside too is limited for this robust stock. No reason why it should not command PE multiple of 20+.  Even without PE re-rating 30% compounding seems no brainer.

Story for Cravatex has only begun and one should increase allocation as it become clearer that stores are making profits.

Read this link, its now been confirmed that new retail stores that stock FILA products should add upto Cravatex Ltds accounts.

There is no doubt as per next statement:

"The brand licence was bought about a year ago by Cravatex."

This statement should make anyone's heart throb who knows enough about investing:

"Most of the stores are going to be franchised."

Both statements from this link

If any one of you can provide feedback from new FILA store at Linking Road, Mumbai, it would be very much appreciated by all.

Where there is honey, bees will come, institutions will come even though they may be late, as mammoths can be expected, almost always. I have been digging institution bashing, should slow down a bit :) -  but seriously, when was last great stock discovered by an institution in previous bear market in India ?

Useful websites:

Most importantly:

Saturday, November 13, 2010

Discuss Cravatex

Thanks to everyone for your inputs. I will try to summarise here.

First off, following business are run by Batra Group, which of them add upto financial statements of Cravatex ?

1. Proline Fitness ( - Part of Cravatex Ltd

2. Proline Apparels ( Clearly mentioned here, it is joint venture between Bombay  Dyeing and Batra Group  Also clearly mentioned here  

( Confirmed that merchandise is for Proline India Ltd and not Cravatex Ltd)

3. Fitness equipment and other sporting goods from Nissau, Dunlop, Johnson Tech ( Part of Cravatex Ltd)

4. FILA shoes (Part of Cravatex Ltd as per

5. Running of Gyms in SBI, Microsoft, Land T,  Hotels, Schools, Housing societies etc ( Part of Cravatex Ltd)

6. FILA Apparels and FILA franchise showrooms (Part of Cravatex Ltd)

Please let me know if I have captured the details correctly ?

Later, we can analyse each business segment, its model etc.

How much does one need to retire from working-for-a-living job

I wrote this in Rahul's blog earlier, but repeating.

All money, we need  for your  family's and possibly future generations is 50 times our annual expenses.

If your annual expenses are 10 Lacs then you need 5 crore Rs only for your financial freedom and also for next many generations.

How ?

If you put 5 Crore Rs in 50 good stocks that are likely to exist far into future, then you will get 2% dividend yield, which is 1/50th of your original amount i.e. 5 Crores. This is in case of growth companies, if you buy Public Sector Bank that you can also get 5-7% dividend yield on your principal.

You can keep spending 2% return on your investment every year which is 10 lacs, and companies will keep growing to take care of inflation. Dividends will also rise. Infact money will grow so much that even if you have half a dozen children, they would not need to work. Hence we don't need more than 50 times our annual expenses to be free from working-for-a-living jobs.

It involves investing in dividend paying companies, sacrificing growth a bit. We may consider 30% in FDs to protect ourselves from volatility of equities when they are historically high PE ratios on Nifty, we will also need to revise the list every year and keep tabs on companies. We may also want to invest 25% of our funds in another country (possible to invest in 24 exchanges across the world now through Kotak Securities)  to protect from wars. With active investment, returns can even be improved.

Not to forget, to protect against eventualities - health, house, car insurance is required and expenses reined within those limits.


Friday, November 12, 2010

Arbitrage opportunity - Millennium Beer

I had an eye on it for the past one year, was waiting for it to come out of BIFR. This isn't going to become a multibagger anymore, as proposal is to amalgamate Millennium Beer with United Breweries. Amalgamation may take few weeks/months.

This is only for those of you who are holding on to United Breweries and consider it as a good investment, or those who consider United Breweries to stay over 360. Its better to sell all your United Breweries shares today in exchange for Millennium Beer shares. Swap ratio agreed is 1 : 12.  Twelve shares of Millennium Beer cost 360 Rs and United Breweries share is trading @ 420, down from 480 a few weeks back. A quick 20 - 30% gain can be made in less than few months.

Disclosure: Not invested in either, dont like United Breweries.

Thursday, November 11, 2010

How one can think of money

In this conversaiton with Rahul, I 'd like to dedicate a post to how I think of money. You all also must be having different ideas about how you see money.

In school days I considered earning money to be an evil cause, so much so that I considered participating in a job interview also as evil, because you are out crowding and trampling on others desire to acquire same job by winning. Ofcourse, my thinking in teenage was flawed. If you get a job and do your job better than others, then you have done the right thing.

Money is energy for me, which can be channeled into any type of work.

More or less money is also relative like everything else.

If we compare earth's status in not Milky way galaxy but observable universe (in 1930s scientists thought that there are only 3 - 4 galaxies). We have about 100 billion galaxies, each having 100 billion stars, Sun is an ordinary sized star with 9 big rocks rotating around it. Earth being one of rocks, is insignificant.

As of today we don't know whethere that are 100 billion parallel Universes too...Physics today believes in only 1 universe and possibility of others. Imagine viewing earth form some other Universe or one of 100 billion galaxies each having 1000s of crores of stars, its insignificant. If size of India is like Milky Way galaxy, then earth is like a small speck of one of thousands floating dust/ pollen grain particle that you see in sunlight.

All wealth of past and present Fortune/Forbes Billionaires is on that particle. Very much like in Movie "Horton Hears A Who"... all universe is inside a flower. So wealth is only in relative sense because we are so small. A wise man said, "If you get an idea of how much territory you cover, then you will immediately leave everyone and everything".

Warren Buffett and Bill Gates could suddenly land in a galaxy where they are poorest people because each inhabitant there has half a dozen suns and few hundeded planets as holiday homes. I am all for big money but not for desire gratification to buy Ferraris as they are as endless as river's flow into ocean. That said, poverty is evil, as bad as cancer. So money/material wealth is a necessity and pre requisite. But working only for money both as a means and an end is becoming a slave. You should ask yourself, what will you do if you get 1000 times more money than you have today. If the answer after 10 - 20 years is to have still 100 times more money, I think life is wasted. By all means we should dream big and feature in Forbes Billionaires list and represent yourself but show some difference unlike a Cruise Ship or personal Jets.

Its bound to be a very debatable topic and some people will say, living simply is a flawed theory. I am all for living lavishly if someone wants to, you should own Lamborghini and better cars, but if you lose it, and you also lose your temper with it, money earned is not worth. It worth asking oneself, how much is more than enough, because if one can't do that you'll never know what's enough. Imagine you get that next month, then what ?

Wednesday, November 10, 2010

Cravatex is and will be a multibagger

I have not done heaps of research on this one but it does not require too much research.

Saroj Kumar Patni brought this stock into my attention on this blog. He is listed as one of the followers. I had rejected the idea because Cravatex sold one time use products like treadmills. I was also not sure of Proline brand being part of Cravatex or separate entity. There is no research report as of 11th November 2010, nor any institutional holding in it, which goes on to prove that retail investors like Saroj are miles ahead of institutions. This is why we, retail investors, have advantage over elephants which charge 1% in commissions and also front run their personal orders before buying for the fund. Funds will buy Relaxo after it crosses 1000 crores in turnover and atleast one other Mutual Fund has bought it, otherwise they risk getting fired. Our bane is,  we sell too early, have less funds but more ideas. Hippopotamuses have less ideas, more funds and greater greed and less guilt for losing other people's money.

I read news stories in last two months that it will bring in FILA products to India. It was not known at the time when Saroj sent me message to check out Cravatex, whether FILA will go alone and sever ties with Cravatex or will stay affiliated with Cravatex for Indian market. I recall having visited Proline showroom many years back in CP, New Delhi. They are openeing shops for FILA in Mumbai and my brother informed that they have opened two shops in Inorbit mall in Hyderabad.

It now looks like it will be part of Cravatex. I am both, unhappy for myself, because I cannot buy it, my money is locked in Photoquip and other stocks that I dont want to sell and happy at the same time for you and my father who bought some yesterday, very few quantity, couple hundred. I communicated to my brother yesterday to take a big bank loan to buy this share, don't think he will.

All in all, a lovely story, I regret to have missed out on. FILA sells over 1.5 billion $ worth of merchandise globally. In next 4-5 years they will sell 150 crores of goods in India. Net profit will be around 50 Crores in next 4-5 years. EPS will be 500 Rs, share price will be between 5,000 Rs and 10,000 Rs as its a trendy retail fever story. It could even be 20K. Enjoy folks. This is what I spoke about in my previous post as "Killing the BSE index next year" in one of my previous posts.

Keep your micro cap ideas posted here...and dont forget to thank Saroj K Patni. If you make a few lacs/millions killing after reading it here, please dont forget to donate atleast 500 bucks here

I have only spoken with management once, and few google searches. I dont have these shares in my personal account. Only couple thousand would be all my family members have this. So, I am not exposed to this yet but my plan was to switch to Cravatex from Photoquip with atleast 20% porfolio weight in 2011 but I dont want to do that today. I have missed the bus due to taxation and other reasons, no reason why you should. It should outperform sensex by huge margin.

Thing to watch out may be equity dilution and too aggresive retail expansion. Get rich !

Saturday, November 6, 2010

Conviction and Approach to investing | Learning from Buffett and Munger's Checklist

How important is conviction in investing?

You didn’t have to have a high IQ or a lot of investment smarts to buy junk bonds in 2002, or certain other things after Long-Term Capital Management blew up. You just had to have the courage of your convictions and the willingness to act when everyone else was terrified and paralyzed. The lesson of following logic rather than emotion is obvious, but some people can follow it and some can’t.
[CM: When we were young, there weren’t very many smart people in the investment world. You should have seen the people in the bank trust departments. Now, there are armies of smart people at private investment funds, etc. If there were a crisis now, there would be a lot more people with a lot of money ready to take advantage.]
But in 2002, there were all these people with lots of money [and the opportunities were still there].
[CM: When you have a huge convulsion, like a fire in this auditorium right now, you do get a lot of weird behavior. If you can be wise [during such times, you’ll profit].]
Three years ago, you could find a number of companies in [South] Korea with strong balance sheets trading at three times earnings.
[CM: But there was a huge convulsion there.] Buffett: But that was 4-5 years ago. It had already passed.
[CM: You couldn’t name 20 more examples like it. [e.g., there are only a few examples in recent times of such weird behavior leading to huge, obvious bargains in entire asset classes.]]
Even if I could, I wouldn’t! [Laughter]
  • Source: BRK Annual Meeting 2006 Tilson Notes
  • Time: 2006

    How do you avoid misjudgement?

    WB said repeatedly that it doesn’t take above a 125 IQ to do fact, IQ over this amount is pretty much wasted. It’s not really about IQ. - Staying within circle of competence is paramount - When you are within the circle, keep these things in mind:
    • Don’t get in a hurry
    • You are better off not talking to others
    • Just keep looking until you find something (don’t give up)
    • Good ideas come in clumps – by time, by sector, by asset class
    • Source: Buffett Vanderbilt Notes
    • Time: Jan 2005
    CM - Charlier Munger  
    WB - Warren Buffett

    Charlie Munger's checklist from Poor Charlie’s Almanack


    – All investment evaluations should begin by measuring risk, especially reputational
     -  Incorporate an appropriate margin of safety
     -  Avoid dealing with people of questionable character
     -  Insist upon proper compensation for risk assumed
     -  Always beware of inflation and interest rate exposures
     -  Avoid big mistakes; shun permanent capital loss

    – “Only in fairy tales are emperors told they are naked”
     -  Objectivity and rationality require independence of thought
     -  Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
     -  Mimicking the herd invites regression to the mean (merely average performance)


     – “The only way to win is to work, work, work, work, and hope to have a few insights”
     -  Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
     -  More important than the will to win is the will to prepare
     -  Develop fluency in mental models from the major academic disciplines
     -  If you want to get smart, the question you have to keep asking is “why, why, why?”

    Intellectual humility

    – Acknowledging what you don’t know is the dawning of wisdom
     -  Stay within a well-defined circle of competence
     -  Identify and reconcile disconfirming evidence
     -  Resist the craving for false precision, false certainties, etc.
     -  Above all, never fool yourself, and remember that you are the easiest person to fool
    “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

    Analytic rigor

     – Use of the scientific method and effective checklists minimizes errors and omissions
     -  Determine value apart from price; progress apart from activity; wealth apart from size
     -  It is better to remember the obvious than to grasp the esoteric
     -  Be a business analyst, not a market, macroeconomic, or security analyst
     -  Consider totality of risk and effect; look always at potential second order and higher level impacts
     -  Think forwards and backwards – Invert, always invert


     – Proper allocation of capital is an investor’s number one job
     -  Remember that highest and best use is always measured by the next best use (opportunity cost)
     -  Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
     -  Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven


     – Resist the natural human bias to act
     -  “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
     -  Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
     -  Be alert for the arrival of luck
     -  Enjoy the process along with the proceeds, because the process is where you live


     – When proper circumstances present themselves, act with decisiveness and conviction
     -  Be fearful when others are greedy, and greedy when others are fearful
     -  Opportunity doesn’t come often, so seize it when it comes
     -  Opportunity meeting the prepared mind; that’s the game


     – Live with change and accept unremovable complexity
     -  Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
     -  Continually challenge and willingly amend your “best-loved ideas”
     -  Recognize reality even when you don’t like it – especially when you don’t like it


     – Keep things simple and remember what you set out to do
     -  Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
     -  Guard against the effects of hubris (arrogance) and boredom
     -  Don’t overlook the obvious by drowning in minutiae (the small details)
     -  Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
     -  Face your big troubles; don’t sweep them under the rug

    What I takeaway:

    Think independently

    No substitute for hard work

    Moderate IQ is good enough to be materially richest person in World

    Compare your new stock idea with top 5-7 ideas (opportunity cost). Stay within your top 10 ideas forver. Ensure that upside is three to four times more than downside for next 1-2 years. Can your new stock beat 30% compounding of TTK Prestige over next five years ? If investing for a decade, can you stock beat 20%+ compounding of Asian Paints ?

    Bet hard in no brainers (20% of your portfolio atleast).

    Buffett's best quote for me is something on lines of, "It makes sense to invest only when a stock screams in undervaluation at you". It kind of jumps out from the screen and slaps you to wake up from stupor. The moment you have to open excel spreadsheet or calculator, its not a cinch.

    Monday, November 1, 2010

    Further update on Elinchrom (Photoquip) in India

    I briefly mentioned in my previous post that the market size for this equipment in India is huge. There are other niches such as tripods, trolleys, bags, powerpacks where Elinchrom does not dominate at the moment. While I don't know where the company would extend over the coming years, but those are correlated expansion regions.

    I wanted to update everyone with conversation I have had with one of India's renowned Photographer, Parikshit Suri ( Thanks for your call and time Parikshit.

    There isn't anyone more unbiased to converse with, regarding a company than an independent professional source. Philip Fisher recommends speaking with employees, ex-employees, competitors and users.

     Essence of our conversation was:

    Photography is a sunrise Industry in India and future is extremely bright. Infact it sounded like Parikshit holds the stock and I was his customer. He was quite bullish on Photography as a profession in India with much better days ahead to come. Marriage is an established market and photo shoots are an integral aspect. (My pessimism in past was due to magazine and newspapers' staff employed photographers in absolute numbers having gone downhill due to internet). However, fashion, corporate, wedding, niche, pre wedding more than offsets the staff photographers in newspapers, media.

    Parikshit himself uses some Elinchrom equipment and corroborated that Elinchrom has significant mind share in India. My faith in the future of this industry is now solidified and it might actually become a growth industry in India in years ahead. I believe now it would not be fair to compare US and India and 1:5000 ratio of Photographer : Population that I extrapolated earlier may be on far pessimistic side.

    Representation of Stock Movement with significant events in Photoquip's life (Illustrated and contributed by MG (

    Please contribute with any facts and your thoughts..

    Saturday, October 30, 2010

    Photoplus Expo ( New York ) - CEO of Elinchrom Answers

    Photoplus Expo at NY took place from 28th to 30th of October 2010, got over yesterday. Have a video from that, though not the best of voice quality, background noise, one may have to listen on full volume.

    I had a doubt and seeked clarification regarding Elinchrom's manufacturing operations which was clarified by Malcom Whittle.

    Elinchrom CEO Malcom Whittle Talking about upcoming products. from Boston Wedding Photographers on Vimeo.

    Listen at 2:01 minutes, Question:
    When are we expecting the new range of RX packs ?
     "Its in the pipeline but we have a major problem. The recent expansion in our business in last few years has been so great, that we are running very fast, just to supply what we've got.Unclear.............most flash we've ever sold anytime in our life. One of the things that limits us from changing products is being loyal to people who are liking our products.... its in pipeline, we want LED in it, very powerful LED in it... LED technology is un acceptable for Videos as of now.....Its not our problem, its about LED manufacturing technology to guarantee over 5000 Kelvin"

    Listen at 7:10 minutes,
    Qs: Using Grids was an afterthought by Elinchrom, people switched to Profoto in their absence, now that you have it is great.

    "Maybe American photographers did not care about it becoming bulky to carry. Our sales have climbed every year, year on year, this year our sales are 42% higher than last year, so I don't know who is running to Profoto."


    I understand why Peter Lynch recommends smartest players in no/low growth, overlooked industries, how even in a slow growing industry one can find aces. To repeat, top three players in studio lighting system are Broncolor, Elinchrom and Profoto and the middle guy is giving  others run for their money. There also are over fifteen to twenty second rung competitors that make similar and in some cases correlated products into accessories whose markets can be penetrated and conquered eventually. Eg: FJ Wescott, an 84 year old company, based in Ohio, US ( In last 20 seconds CEO mentions that Powerpack and battery isn't one of Elinchrom's forte or strongest part of business, they are aware and are going come out with Lithium batteries soon, at the moment airlines do not allow moren than few grams of Lithium on plane, so it will be useful for local shooting. Also the new powerpacks will match those of Profoto or Broncolors. If you search in shopping sites the high end battery used for professional flashes by Profoto and Broncolor costs circa 6 lacs INR, at the moment Elinchrom's high end battery costs 2.5 lacs INR and falls slightly short in one or two aspects. "Its their (Broncolor (Also Swiss company like Elinchrom), Profoto(Swedish company)) particular speciality of short flash duration at full power and they sell it, its not difficult to do, we can do it, and our new power packs may match it".

    Thursday, October 28, 2010

    Learnings from Buffett - Find companies "way off the map" if you are not a billionaire yet

    • Benefits of not being tuned to television or terminal

    What is the benefit of being an out-of-towner as opposed to being on Wall Street?

    I worked on Wall Street for a couple of years and I have my best friends on both coasts. I like seeing them. I get ideas when I go there. But the best way to think about investments is to be in a room with no one else and just think. And if that doesn’t work, nothing else is going to work. The disadvantage of being in any type of market environment like Wall Street in the extreme is that you get over-stimulated. You think you have to do something every day. The Chandler family paid $2,000 for this company (Coke). You don’t have to do much else if you pick one of those. And the trick then is not to do anything else. Even not to sell at 1919, which the family did later on. So what you are looking for is some way to get one good idea a year. And then ride it to its full potential and that is very hard to do in an environment where people are shouting prices back and forth every five minutes and shoving reports in front of your nose and all that. Wall Street makes its money on activity. You make your money on inactivity.
    If everyone in this room trades their portfolio around every day with every other person, you will all end up broke. And the intermediary will end up with all the money. If you all own stock in a group of average businesses and just sit here for the next 50 years, you will end up with a fair amount of money and your broker will be broke. He is like the Doctor who gets paid on how often to get you to change pills. If he gave you one pill that cures you the rest of your life, he would make one sale, one transaction and that is it. But if he can convince you that changing pills every day is the way to great health, it will be great for him and the prescriptionists. You won’t be any healthier and you will be a lot worse off financially. You want to stay away from any environment that stimulates activity. And Wall Street would have the effective of doing that.
    When I went back to Omaha, I would go back with a whole list of companies I wanted to check out and I would get my money’s worth out of those trips, but then I would go back to Omaha and think about it.

    Source: Lecture at the University of Florida Business School

    • Berkshire will not be compounding over 20% anymore

    Do you ever change your investing standards?

    Did we change our standards? You know, I don’t think so, but you can’t be 100% sure. If you haven’t had a date for a month, you might say you wouldn’t have dated that girl on the first day – but I think we would have.
    It does not reflect our giving up on finding an elephant of a business to acquire. We have plenty of cash and could sell stocks if we really needed to. We’re well prepared to acquire a very large business.
    We acquired TTI in the first quarter, which is a terrific business. We wish it were five times bigger, but maybe some day it will be.
    Munger: The one thing I think we can promise you is that we won’t make the kinds of returns buying the things we are now that we earned on the stuff we bought 10-15 years ago. There’s just too much money floating around.
    Buffett: We won’t come close.
    Munger: It’s a different world with more modest expectations.
    Buffett: We hope you share them.

    Source: BRK Annual Meeting 2007 Tilson Notes

    • Reflects confidence at a very early age

    When did you know you were rich?

    I really knew I was rich when I had $10,000. I knew along time ago that I was going to be doing something I loved doing with people that I loved doing it with. In 1958, I had my dad take me out of the will, as I knew I would be rich anyway. I let my two sisters have all the estate.
    I bet we all in this room live about the same. We eat about the same and sleep about the same. We pretty much drive a car for 10 years. All this stuff doesn't make it any different. I will watch the Super Bowl on a big screen television just like you. We are living the same life. I have two luxuries: I get to do what I want to do every day and I get to travel a lot faster than you.
    You should do the job you love whether or not you are getting paid for it. Do the job you love. Know that the money will follow. I travel distances better than you do. The plane is nicer. But that is about the only thing that I do a whole lot different.
    I didn't know my salary when I went to work for Graham until I got his first paycheck. Do what you love and don't even think about the money. I will take a trip on Paul Allen's Octopus ($400M yacht), but wouldn't want one for myself. A 60 man crew is needed. They could be stealing, sleeping with each other, etc. Professional sports teams are a hassle, especially when you have as much money as him. Fans would complain that you aren't spending enough when the team loses.
    If there is a place that is warm in the winter and cool in the summer, and you do what you love doing, you will do fine. You're rich if you are working around people you like. You will make money if you are energetic and intelligent. This society lets smart people with drive earn a very good living. You will be no exception.

    Source: Student Visit 2005

    • How Buffett Would Invest with a Small Amount of Money    
      If I were working with a very small sum – you all should hope this doesn’t happen – I’d be doing almost entirely different things than I do. Your universe expands – there are thousands of times as many options if you’re investing $10,000 rather than $100 billion, other than buying entire businesses. You can earn very high returns with very small amounts of money. Everyone can’t do it, but if you know what you’re doing, you can do it. We cannot earn phenomenal returns putting $3, $4 or $5 billion in a stock. It won’t work – it’s not even close.
      If Charlie and I had $500,000 or $2 million to invest, we’d find little things we could do, not all of it in stocks.
      Munger: But there’s no point in our thinking about that now.
    Source: BRK Annual Meeting 2007 Tilson Notes                             

    According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

    Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.
    You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible.
    The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.
    I know more about business and investing today, but my returns have continued to decline since the 50's. Money gets to be an anchor on performance. At Berkshire's size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business.

    Do you believe that we'll have significant mispricings again? And if you were 26 today how would you generate the 50% returns that you said you might do with smaller amounts of capital?

    Attractive opportunities come from observing human behavior. In 1998, people behaved like frightened cavemen (referring to the Long Term Capital Management meltdown). People make their own opportunities. They will be frozen by fear, excited by greed and it doesn’t matter what their IQ, degrees etc is. Growth of 50% per year is with small capitalization, not large cap. The point is I got rich looking for stock with strong earnings.
    The last 50 years weren’t unique. It’s just capitalizing on human behavior. It’s people that make opportunities when others are frozen by fear or excited by greed. Human behavior allows for success if you are able to detach yourself emotionally.
    In 1951, I got out of school at 20 years old. At the time there were two publishers of stock information, Moody’s and Standards and Poor’s. I used Moody’s and went through every manual. I recently bought a copy of the 1951 Moody off of Amazon. On page 1433, there’s a stock you could have made some money on. The EPS was $29 and the Price Range was from $3-$21/share. On another page, there is a company that had an EPS of $29.5 and the price range was $27-28, 1x earnings. You can get rich finding things like this, things that aren’t written about.
    Essentially the gist of Buffett's knowledge is to invest/partner in business you know about, if you don't know then develop an understanding. Find one great company, get rich. There don't have to be more than 20 purchases in your entire life. One per year is more than enough.