Monday, January 31, 2011

Result Season

What we learn from history is that we don't learn from history. It reaffirms the short term institutional derby, the way some stocks lost 50% ground in 10 trading days.

Some of the stocks that I have mentioned, and obligated to update on.

Relaxo: Doubly horrible results, only 13% growth in topline, bottoline was expected. Final product prices have not been raised and cost not passed on. This should decimate the huge unorganised market in north India, good for long term, but who cares about long term. Wont add right now.

Photoquip: Raw materials / Oil seems to have eaten into all the good companies this quarter including Hawkins Cooker and Gillette. Nice topline growth though atleast. Still a Buy, can be added.

Cera Sanitaryware: Came out unscathed with 30%+ growth in revenues and PAT. I am not exactly sure how raw materials did not affect it, possibly they had inventory or prior contracts. Interest rate rise, degrowth of new housing starts can affect it in short run.

PSU Banks offering 3-4% yields with low NPAs can be considered for safety. Some commodity stocks showing high growth this quarter both topline and bottomline can be bought for opportunistic trade for next 3-6 months of upwards commodity price cycle. This year looks more like sideways for investors from index perspective. There can be excellent trading opportunities though.

I am positive on India story as always and where there is growth, crowd must come.

Brilliant analogy to extrapolation on Page 8 of this PDF

How one bad quarter or great quarter is projected far into future in minds and hearts of investors and reflected in prices.

Thursday, January 13, 2011

Investors guide to picking stocks

 Below is a checklist which provides a general guidance for selecting stocks for the long term.

  • Business must possess a durable competitive advantage, this is relatively easy to find out. What is difficult is to agree on a combination of great price and good business 
  • Follow Michael Porter's (MP) competitive strategy on forces of competition models
  1. Rivalry among existing firms 

     - Industry growth rate. MP prefers fast growing industries. I believe Micheal Porters model is incomplete for investing success. One needs to be early in fast growing industry and prefer slow or non growing industry, or strongest player in fast growing industry as a general rule.

     - Concentration and balance of industry

     - Is there customer stickiness to product

     - Is there steep learning curve in industry, economies of scale

     - Is there excess capacity in industry

     - Can industry customer base change rapidly

     - Product differentiation

  2. Threat of new competitors

     - Are economies of scale relevant

     - How easy is it for new competitors to enter

     - Do existing players have hard to replicate service / product

     - What is the moat, network effect, low cost, brand, high switching cost

     - Legal barriers or patents

  3. Threat of substitute products

  4. Bargaining power of buyers

  5. Bargaining power of suppliers

One needs to answer above questions to hold stocks for long term.  

Industry does not matter

An important lesson unlikely to be well learnt by most investors is, that in picking stocks, it isn't important to assess how much an industry is going to change society, or how big the industry would grow. Its important to know how a company scored over its competitors and how long it can maintain this advantage.

Economics of the business matters

We need to look for business with good tailwinds and companies that require non linear capital input to grow sales. Nebraska Furniture Mart is lowest cost producer Louis Vuitton is premium brand, both possess moats.

ROE is important, so is Net Income / Sales

No company can grow net profits faster than its ROE over long period without debt, equity dilution or window dressing. ROE in future matters more than what it has been in past, which is a hint.

High profit percentage to sales can attract competition, low signifies poor fundamentals or commodity nature. 


An ideal management team should be strong advocate of company's shareholders. There are no corporate raiders to talk of in India yet, so one is at mercy of controlling family.

Do the owners only reward themselves with high salaries?

Has the management bought shares from open market?

Have they paid rational prices for acquisitions made?

Is there an event risk to businees upon demise of key management personnel?

Intrinsic Value

Discounted value of future cash flows

Rational price a private buyer would pay

Psychology towards investing

Availaibility Bias : Humans tend to have stronger recollection of information recently obtained or information that has had strong impression. An example is when someone tries to bring up a stock on news channel.

Representativeness: If a stock has gone up several years then it is bound to come down the next year, or market is likely to decline simply because it has gone up for the last 6 years.

Gamblers fallacy: Gamblers tend to believe that if a coin has landed on heads five times then it is likely to land on tails the sixth time.  Markets behave a lot like tosses of coin. Interesting patterns provide little guidance on how to predict patterns of the future.

Over confidence: Everyone thinks they are smarter than others and have more faith in their capabilities.

Anchoring: We tend to stay on a course of action once its been decided.

Illusion of Validity: Investors tend to ignore evidence that goes against their conclusions and place too high a value on evidence that conforms to their conclusions.

Hindsight bias:  False extrapolation of past trends into future. Frame dependence is another area where investor's perceptions of risk and return and thought processing abilities break down. Loss aversion and loss realisation from poor idea, mental accounting (free shares or free money) and regret complex are three examples of frame dependence.

Loss results in 2.5 times the emotional impact of an equivalent gain. People are not able to take losses, this is the reason why many people sell stocks at worst moment. Lotteries are popular because amount of loss is less.  Investors sell their winners too early and hold their losers too long.

We should admit errors and book loss.

When investors lose 70% of their portfolio they would regret having invested anything at all in equity market.

From Graham:
" Now, let me close with a few words of counsel from an 80-year-old veteran of many a bull and many a bear market. Do those things as analyst that you know you can do well, and only those things. If you're really good at picking stocks most likely to succeed in the next 12 months, base your work on that. If you can foretell the next important development in the technology, or in economy, or in consumer's preferences, then concentrate on that activity, But in each case, you must prove yourself by honest, no-bluffing self examination and by continuous testing of performance that you have what it takes to produce worthwhile results."

Tuesday, January 4, 2011

Photoquip (Elinchrom) update : Photofair 2011

If there is anyone from Delhi visiting Photofair 2011 from 6th to 9th January 2011 ? I would be glad to hear on who the competition is.

I noticed there are couple of studio shooting scenes in this video that use Rotalux softboxes

Also, Mr J P Soni founder of Photoquip is VP of this industry body somewhere in middle of this video.

I have been thinking of Photoquip with intensity.

New products that have been introduced in 2010 or that will be in 2011 are hardly with 1% Photogs. Therefore as the lineup of new product increases their consumption isn't going up immediately. Upgrades will take time. As it takes 5-10-20 years to exhaust old products, the latent demand will continue to catch up. Thus, we should see similar results as we see for a toothpaste company / FMCG company i.e. 10% growth for many years once the explosive growth tapers off, just from existing business. What we observed was Digitial Photography rub off during the last 5 years as more people opted for Photography field and less companies survived analog to digital shift. Rise of DSLR. The dynamic of new products, new competitors etc is unseen and better unsaid.

I believe if some company can make economical robotic array softboxes that can be remotely controlled by iPad / iPhone, it would be a killer app. For that robotics have to become cheap enough to commercialise. I believe the need for light source would continue even in 3D immersive TV of future.

It appears to me that Indian consumer would buy # 4 or #5 brand i.e. cheap products where chappal / slippers are concerned, hence the continued liking for Relaxo, it will be devoured by lower income strata too (its bottomline may continue to suffer in coming quarters due to rubber ), but consumer will not compromise when buying a durable product that may last a decade. Lets see how the game plays out.

Damn Right ! Biography of Charlie Munger by Janet Lowe

Biography of Munger, pretty much the only biography out there, is an opportunity to know sharp, idiosyncratic, wise, sincere and all rounder Munger. 

Janet reveals a lot about his family, his upbringing, struggle of bringing up 8 children, breaking away from legal profession into electronics and construction business and later investing.  It leaves a lot to desire behind the scenes decisions that I was looking for, Munger's decision making process is not well covered. 

Anyone who has done great deal of reading on Munger may not learn about investing but more about him as a person. A couple of stories strike about him. Nobody at bridge table understands why Munger makes certain moves, he has his own internal thought process and a reason behind. 

Charlie grew out of working for a living damned loatheful job of lawyer by grit and hard work in a household of several children. I am sure we are in much luckier position with wisdom generously shared. For a decade Charlie dabbled with construction business alongside day job and made his first million dollars.

It is interesting to note that 200 billion $ empire started with less than 40 million $, when SEC investigation into Blue Chip Stamps led to consolidation of all companies into what is known as Berkshire Hathway Inc to us today. Most interesting is to note that they took fewer than one decision every three years to create this much material wealth.

I personally do not feel great or have a sense of accomplishment about investing money and moving money into companies passively. I personally feel like a pimp by buying and selling shares rather than building companies or working with entrepreneurs actively. I consider teachers, software builders, masons as being more beneficial to society. However,  in my opinion pimp style investing has two short term immediate gains, a) our financial freedom from undesirable work or working with undesirable people b) money being energy can be directed at any other cause. Charlie voices similar opinions in this book when he writes "I am not in favour of social system that throws huge rewards to people who don't improve the factories, improve systems and process and so forth. Of course, you can argue that I'm condemning myself. All I can say is it's almost intentional".

I also believe we need to pick our role models carefully. Ben Graham has a brilliant mind, great personality and a sense of humour, but for all practical purposes had a despicable social life. He lacked self discipline in social matters.

Charlie and Buffett are as good and as sincere as they get in investing world. Charlie is also referred as an "abominable no man", who says no to any idea. But he refuses by retorting, "No, no, I'm not negative, I jump like a trout out of water if it's a good idea".

Munger is a biography nut himself and claims that if you make Adam Smith your friend, you are likely to do better in economics and learn more. Its better to make friends with eminent dead who had right ideas, it will work better in education and better in life.

I vaguely remember a thought from Vivekanda something on the lines, "I would first sharpen and train my mind with all sorts of discipline for 25 years and then I can feed all the content of all libraries in it over next few days".

Munger wasn't born great but he kept one foot ahead of the other, that simple. They wouldn't have paid 100,000 $ extra for 25 million $ See's Candy acquisition which they now tout as the best. In his own words Munger calls himself dumb for not waking up to quality far sooner. That was the first time they paid 3 times book value, veering away from Graham's Book Value based one puffs. That led them to buy high quality companies later like Coca Cola. There is hope for all of us. 

Charlie is gregarious but also at times absorbed and introverted. He reminds me of Leon Levy, whose biography I read last year, and would  recommended  Mind of Wall Street. 


Re-read the line one decision in three years, less than 10 decisions in life can make you billionaire !