23 Jul 2016

5 Laws of Wealth and Investment, 7 Golden Rules of Lending and other Highlights from the book – The Richest Man in Babylon:

 Note: All text marked in italics is quoted from the book.

First Law of Wealth
Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
"Any man who will put by one-tenth of his earnings consistently and invest it wisely will surely create a valuable estate that will provide an income for him in the future and further guarantee safety for his family in case the gods call him to the world of darkness. This law always sayeth that gold cometh gladly to such a man. I can truly certify this in my own life. The more gold I accumulate, the more readily it comes to me and in increased quantities. The gold which I save earns more, even as yours will, and its earnings earn more, and this is the working out of the first law."
Wealth comes to those who save regularly. This wealth keeps accumulating consistently and provides a valuable stream of income to the saver over the long term.

Second Law of Wealth
Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
"Gold, indeed, is a willing worker. It is ever eager to multiply when opportunity presents itself. To every man who hath a store of gold set by, opportunity comes for its most profitable use. As the years pass, it multiplies itself in surprising fashion."
Wealth keeps accumulating consistently for those who invest it with caution and care. It accumulates at a faster pace when presented itself with a worthwhile investment opportunity. It compounds over a longer term.

16 Jul 2016

7 Rules to Become Rich And Stay Rich

The following post draws heavily from the personal finance classic ‘The Richest Man in Babylon” written by George S. Clason. The book was first published in 1926, but is as relevant today as it was then. The book highlights various methods to enjoy life and yet achieve financial success by following easy to follow steps.

Following are the steps which can help us achieve financial success:

1.      Start Saving Now
Each of us in the working age starts earning an income as soon as we complete our education or become an entrepreneur and start a business. The moment we get our first cheque of earning (salary or profit) the first thought that comes to mind is ‘Let me throw a grand party to celebrate my start of career’. How many of us continue to crave for new gadgets, clothes once we start earning an income?
Its important to realize that while we need to spend to feel happy, its equally important to save. Make a rule to spend only 90% of what you earn, and save the rest 10%.

"This, my students, was the first cure I did discover for my lean purse: 'For each ten coins I put in, to spend but nine.” – Quote from the book

23 Oct 2015

Nifty Fifty Stock Bubble of the Seventies – Is There a Similarity with Today’s Market

What can we learn from this post:

. What was the Nifty Fifty Stock Bubble all about
. Reasons for the bubble buildup
. Investor behavior during the bubble
. How did the bubble collapse
. Comments of Warren Buffett during the bubble

. Lessons from the bubble

The Nifty Fifty stocks captivated investors for the significant part of a decade prior to its demise in 1973. It revived the high-risk investing style that had been out of vogue since the Crash of '29. The era of stock investing during that period was also popularly known as the Go-Go era.

Constituents of the Bubble:
The 50 stocks identified by Morgan Guaranty Trust represented some of the fastest-growing high quality large sized companies in existence in the latter half of the 1960s. Their popularity among institutional and individual investors sparked a radical shift from "value" investing to a "growth at any price" style of investing.
Some of Nifty Fifty constituents indeed went on to become dominant companies of today like the innovation driven 3M, cosmetics major Revlon, Consumer giants like Procter & Gamble and Philip Morris (now called Altria),Food and Beverage behemoth Pepsi, Pharmaceutical heavy-weights like Pfizer, Merck & Co and Eli Lilly and Company.
Some companies received a significant investment from legendary investor Warren Buffett including the likes of Coca Cola, IBM, Gillette, Wal-Mart, Disney and Lubrizol (Chemical manufacturer which was acquired lock, stock and barrel by Buffett),
The group also contained market leaders whose fortunes vastly faded a few decades later. They included Eastman-Kodak and Polaroid, massacred by digital photography; Simplicity Pattern, whose business slumped along with home sewing-machine sales, and S.S. Kresge, a retail chain founded in 1897 that in the 1970s morphed into now-struggling Kmart.

22 Oct 2015

What is a MOAT?

What will you learn in this post:
.What is a moat
.Why bother with a ‘moat’
.What are different types of ‘moats’
.How to identify a ‘moat’

Recently, anyone even remotely familiar with investing would have been continuously bombarded with phrases like – this is a great business with ‘moat’; I love this business because I think it has a moat which is deep and wide, etc. So much so that the term ‘moat’ has become the most abused investing term during the years 2014-15.

What is a ‘MOAT’ you beg to ask. Well Wikipedia defines a Moat as follows:-
A moat is a deep, broad ditch, either dry or filled with water that surrounds a castle, fortification, building or town, historically to provide it with a preliminary line of defense. In some places moats evolved into more extensive water defenses, including natural or artificial lakes, dams and sluices.

However, the Moat which we as investors are concerned with is an “Economic Moat”, which is the competitive advantage of a business.

In the words of legendary investor Warren Buffett (who incidentally coined the term and made it famous), following is the characteristic of a good business– “I want a business with a moat around it. I want a very valuable castle in the middle and then I want the Duke who is in charge of that castle to be very honest and hard working and able. Then I want a moat around that castle.” He has highlighted that he wants a big moat with piranhas and crocodiles. He wants his managers (which he refers to as Duke of the Castle) to widen and deepen this moat over time.

16 Oct 2015

Seth Klarman – Anatomy of a Stock Market Bubble

What will you learn from this post:
. Bubbles are always born with a perfectly rational reason
. It is usually associated with a sector or a concept which is taken too far
. Stocks move in only one direction – up
. Existence of a bipolar market
. Fundamentals don’t seem to ‘work’
. Future is valued richly compared to present
. Lessons from bubble

During the Internet Bubble during late 1990’s, US market witnessed steady up move from 6th January 1995 to 14th January 2000. The Dow Jones climbed 205%, while the NASDAQ composite index climbed 423% during this period. The period was characterized by multi-bagger returns in stocks belonging to few sectors like telecom, media and technology. In fact Seth Klarman quoted Buffett highlighting that bubbles are always born with a perfect rational reason. It is only an irrational extrapolation of that reason that can lead to a bubble.
Quote from December 8, 1995
Warren Buffett has pointed out that legitimate theories frequently lie at the root of financial excesses; good ideas are simply carried too far.

In 1996, Seth highlights how companies operating in or using internet for their business were getting high valuations, irrespective of their business model or quality of business.
Quote from June 21, 1996
The Fund's exposure to the U.S. stock market totaled only 29% of net assets at April 30, a level that reflects our opinion of the frothiness now present in U.S. share prices. Even the slightest association with the Internet is cause for an upward thrust in a company's share price. We know the current mania will end badly; we do not know when.

Seth Klarman – Value Investing in Bull Market.

What will you learn from this post:
. Aim for absolute, not relative return
. Contrarian Investing – What, Why and How
. Never capitulate at the worst moment
. Leverage is a two-edged sword

In this post, we learn from Seth Klarman - a renowned value investor - experiences during the great bull market prevailing during 1995-2000. Note that the text in italics is quoted from Baupost group’s letters to shareholders.

1. Aim for absolute, not relative return:
Seth Klarman has been investing money belonging primarily to him and his friends and families. Hence he has always emphasized on earning a return above US treasury with a reasonably degree of safety.

Quote from December 8, 1995
“The Baupost Fund is managed with the intention of earning good absolute returns regardless of how any particular financial market performs”

Value Investors should not be trapped in the mad horse race of relative returns, where losing money is fine, only condition is that you should lose lesser than your competitor.

2. Contrarian Investing 101:
It is well said that the four most dangerous words in investing are “its different this time”. Contrarian investors believe in mean reversion. Thus, according to a contrarian investor, good times will be followed by bad times and vice-versa with almost certainty over a period of time. Only an investor cannot predict when the cycle will turn from bull to bear and from bear to bull. A contrarian investor hence invests in companies at low multiples when sentiments and cycle is bad and sells those investments when multiples are high and cycles are good.
Quote from December 8, 1995
Bulls will patiently explain that "it is different this time", pointing to low inflation, high corporate profits, increased productivity, world peace (sort of), reductions in government spending, and the like. Of course, any contrarian knows that just as a grim present is usually precursor to a better future, a rosy present may be precursor to a bleaker tomorrow. Without me listing all the things that could go wrong, simply consider that none of these virtuous factors are cast in stone. Just as seeds are sown during the seven lean years that allow the seven fat years to ensue, so does the reverse hold true.

3 Oct 2015

How to Invest in Stocks – A Complete Guide to Basics

What will you learn in this post:
. What are stocks
. Why invest in stocks
. Types of Analysis
. Which stock should you buy
. When should you sell a stock
. How much should I Invest
. How can you buy stocks
. Books to Read
. How to formulate your own investment strategy
. Learn the investment strategies of Great Investors
. Learn about various tools of investing
. Practicals (Homework)

What are stocks?
Stocks (or Shares or Equity) represents a part ownership in a company which entitles you to a part of that company’s earnings and assets.
Suppose you own 100 shares in a company ABC which has total 10,000 shares issued. Thus you end up owning 1% (100 shares which you own / 10000 total shares issued by ABC company). Thus suppose ABC company has Rs.100 crore profit, you are effectively earning Rs.1 crore of profits ‘through’ your investment in ABC company’s shares. If the same ABC company owns a building worth Rs.1000 crore, you are effectively owning Rs.10 crore of that building ‘through’ your investment in ABC company’s shares.
Common stock gives shareholders voting rights but no guarantee of dividend payments. Whether to pay dividends or to keep the profits with the company is decided by the company’s board of directors.
Before you buy your first stock, you should master the basics of stock investing. This won't make you a great investor overnight, but only when you understand the fundamentals of investing can you learn how to invest in stocks with confidence.

Why Invest in Stocks?
The reason is simply that over a long period of time, well chosen portfolio of stocks have provided the highest potential returns amongst all asset classes. And over the long term, no other type of investment tends to perform better.

26 Sep 2015

Rakesh Jhunjhunwala Interview Summary

Rakesh Jhunjhunwala is one of India’s renowned investor who has built a fortune from scratch over last three decades. He was interviewed on his life, his investing style, his views on market etc by Ramesh Damani in a show hosted on CNBC TV18 called ‘Wizards of Dalal Street’.
Following is a summary of the interview:

Early years in the stock market:
Born in 1960, and he first dabbled in the markets when he was aged 15 years. He was interested in markets due to daily fluctuations in stock prices and due to investments in markets by his father. When Rakesh decided to make a career in investing by being a broker, he was instructed by his father that he can go ahead, provided he fulfilled a few conditions – a) don’t go to any of his father’s friends for money, b) don’t ask him (Rakesh’ss father) for any money and c) that Rakesh should always keep his promises

He started investing in 1985 by borrowing Rs.750,000 @18% to 24% interest from two people. He subsequently earned Rs.8-10 lakhs on this capital over next three years. He then brought shares in a utility company, where the dividend yield was closer to the interest he paid on borrowed capital. The reason was that there was an expectation of an increase in its guaranteed RoE, which could be linked to its power generation efficiency. He always invested based on company fundamentals and did not speculate in his early years in the stock market.

25 Sep 2015

Summary of Sanjay Bakshi Interview With Farnam Street

Recently Farnam Street blog interviewed Professor Sanjay Bakshi in New York.
The entire interview can be downloaded by clicking here
Equity School has summarized the entire interview for the benefit of students of value investing.
Please visit the Farnam Street blog for a wealth of knowledge on investing.

Summary of the Interview:

Learning, Synthesizing and Collating Knowledge
Prof Bakshi discusses that he now mainly uses Amazon Kindle to read books instead of paper books because:  
a) It allows him to search through all the books for any particular phrase or thought, which is impossible with a physical paper book and
b) It allows him to underline important portions of text from the book. These underlined paragraphs (which at times can run into pages) can be synced on the cloud, from where it can be copied and pasted to any other document for further future reference.

How to read books:
Prof Bakshi usually reads 3-4 books at a time as it helps multi disciplinary thinking. One can associate thoughts from one book with other. He takes notes by underlining on the fly on Kindle.  After finishing the book, he syncs the kindle and then copies the notes from the cloud to a separate file for future reference. He maintains a master document of all the notes from different books which have been read. Software used for note taking – Evernote and Thebrain.

According to Prof. Bakshi best way to think is by using multi-disciplinary thinking. We need to ask the question that ‘Why did this happen’ for various events to get the answer using multi-disciplinary thinking. Always try to answer any question with multiple different reasons.

Investing – Early Years:
Started investing in 1994. He was mainly concentrating on Financial Statement Analysis and was influenced largely by teachings of Benjamin Graham. His focus was on bankruptcy investing, risk arbitrage, cash bargains and statistically cheap stocks using Graham’s Screens. Then he discovered in June 2004 Charlie Munger’s teachings on multi disciplinary thinking, mental models and how to distinguish between different types of businesses. This changed his style of investing completely.

13 Sep 2015

Tracking Indian Value Investors – Ajay Piramal

Billionaire Ajay Piramal runs a successful listed company in India. He has generated massive 26% returns for his shareholders over the long term – 28 years to be precise. In the latest annual report of his operating company, he talks about his thoughts of generating long term value for shareholders in the future.
Following are the key takeaways for investors from his latest annual report:
1.      Virtual Companies: Mr.Piramal’s operating company is currently in three businesses – pharmaceuticals, information management and financial services. According to him, they have now grouped these three businesses as three virtual companies. This mindset has helped in a) execution discipline in the form of focus on achieving near term goals, milestones and budgets in each of these virtual companies, and b) Prioritization in use of available capital.

2.      Efficient Capital Allocation: The cornerstone of value creation is efficient capital allocation . Piramal is committed to efficiently allocating capital while undertaking controlled risk, to consistently generate higher profitability and deliver superior shareholder returns. The company has undertaken various steps during the year towards this like a) bolt-on acquisitions in different businesses, b) enhanced minority stake in Shriram Group, c) Deleveraged balance sheet, d) Returned capital to shareholders and e) Significantly scaled down the high-risk high-reward New Chemical Entity Research Programme.

3.      Partnerships: Piramal highlights that he company is the first port of call for global majors for partnerships in various businesses and co-investments. He highlights that since its inception, they have practiced and maintained the highest standards of ethics, integrity and corporate governance in each of its business dealings. The result is that the company has forged relationships with global partners like CPPIB (for co-investment in real estate funding), APG Asset Management (co-investment in Infrastructure funding), Vodafone (historically invested in Vodafone India), Abbott (sold pharma business to Abbott) and Allergan (has a local JV for pharmaceutical business).

4.      Minority but ‘Strategic’ Investments: While Mr.Piramal’s about $700mn minority investments in the Shriram Group appear passive, they have been repeatedly been referred to as ‘Strategic’, along with the mention that Mr.Piramal is now the non-executive chairman of Shriram Capital, the financial services holding company of Shriram Group. Thus, there may be an intention to take active participation in these minority investments in future.