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..