A good post on sanjay bakshi’s blog on one of the physcological tendencies described by charlie munger.
A good post really worth reading
Good post by sanjay Bakshi
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New section on Investment related spreadsheets
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Over the years, to get a grip on various elements of investing, I have developed several spreadsheets. Some of these spreadsheets are for screening investment ideas. Some are for carrying out the valuation of a company using various mental models such as DCF (discounted cash flow, Porter’s five factor model etc).
In addition I have some spreadsheets where I try to value the entire market (Sensex or Nifty). I have loaded one such spreadsheet in the new section I have created ‘Quantitative analysis’
In addition to get my arms around various valuation parameters such as ROE, PE, Cash flow, Competitive advantage period and how these parameters work for cyclical, growth and other kinds of companies, I have developed a separate spread sheet which has been added to the same section. This spread sheet titled ‘ROE and PE’ is more of an analysis spread sheet and throws up some obvious and some interesting conclusions.
These spreadsheets and several more which I would be posting are entirely based on my personal understanding of investment concepts and may contain errors. Please feel free to download them, read them and critique them if required. I would be glad if anyone could point out some errors in my thinking as it would help me in refining my understanding of various concepts
The world is Flat
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I have been reading the book ‘The world is flat’ from Thomas L Friedman. Tom is a New York times columnist who has also written ‘Lexus and the Olive tree’. Both these books are about globalization.
His latest book ‘The world is flat’ is about how the world is changing (he uses the word flattening) due to various trends. I have just completed the first section, which discusses about the various factors, which are driving this trend. The ten key factors, which are driving the world, are below
- Berlin wall : The fall of the Berlin wall was a key event as it a precursor to the fall of communism and moving these countries from communism and socialism (India ) to a capitalistic system. This event brought down the barriers between the countries and accelerated globalization
- Netscape IPO : Netscape introduced the first commercial browser and brought Internet to the masses. Internet no longer was some geeky technology used by a few.
- Work flow software : Here he talks of how the workflow technology has enabled the various applications across companies and countries to talk to each other and has reduced the friction in global commerce
- Open sourcing : Basically the free software , open collaboration movement between individuals. Ex : Linux, Apache server and now blogging and podcasting
- Outsourcing : Companies giving out various functions to specialized vendors
- Offshoring : No need for me to say anything
- Supply Chaining : Gives the example of how Wal-Mart has developed this extremely efficient global supply chain and driven down costs across the value chain
- Insourcing : Outside vendor getting into your company and taking over non core functions such as logistics etc
- Informing : Empowerment of the individual . Example : Google has enabled anyone with a computer and net connection to have access to all possible information (well almost )
- Steroids : Talks about how wireless technology is accelerating the above trends
Tom mentions India a lot in his book. India has definitely got impacted big time. Even individuals like us have benefited. As a personal example – before the net , It was a pain getting financial information on a company. One had to go to a broker, ask for the annual report. The whole research would take days. Now I can Google any company and pull all the data I want.
The transaction costs were high prior to the net. Now the same are below 1 %.
Of course all the information , does not mean that investing is any easier. It still requires interpreting the information. At the same time, the minute-by-minute stock quotes and information (noise ??) are only distracting
My Investing mistakes
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It is well documented and known that the pain of loss is much higher than the joy of gain. I have had my share of losses (some due to greed, some due to ignorance). However, as buffet and munger have repeatedly reminded, one should try analyzing one’s mistakes and learn from it.
I am listing some of the errors I have made , and the lessons learnt. My typical holding is 4-5 years and so if I am wrong in analyzing an investment, the impact is much higher for me.
An error of commission
I started investing actively 6 years ago. While reading a magazine, I come across a recommendation for SSI ltd. This was (is ??) a company in the computer education business competing with the likes of Aptech and NIIT. The key differentiator for the company was its short term courses in Java and other technologies which were useful for IT professionals to land a good job. It was selling at a PE of 50 at that time.
The balance sheet was strong , with low debt and the company had recently made an acquisition in the US using its stock (@ a price of 2200 rs / share). The acquisition enabled the company to get into IT services and would have served as a good additional revenue stream.
Shortly after I bought the stock, the Dotcom bubble burst. Recruitments by IT companies slowed down and the IT services market dried up. As a result SSI got hit by a double whammy. Their education business suffered big time and also their IT services company never scaled up in the tough environment. I bailed out of the stock after losing more than 90 %.
My learnings
- Never buy a richly valued stock. The companies future seemed bright, however the stock was more than reflecting it. So when the downturn came, there was no margin of safety to cushion the blow
- Do not invest in a company whose economics you cannot foresee with reasonable probability
- Do not invest in a company whose management you don’t trust. SSI’ s management seemed to be involved with Ketan parekh in boosting the stock. This should have been a red flag for me
An error of understanding a catalyst event in unlocking value
My next big mistake did not result in my losing money. But more so, I lost out on a huge gain. The stock is L&T. I bought the stock back in 1998. The company had mediocre performance till then. Post 1998, the performance nosedived. The cement division was doing badly due to the demand supply mismatch and the engineering division was doing average due to a recession in the capital goods market.
On top of that the management, stubbornly kept diverting capital from a high return business (capital goods) to Cement (commodity with low returns). There were media reports that the management would spin off the cement division (but I think it was just a ruse played by the management). Eventually I got disgusted with the management and sold off at minor profit.
A few months later, the Kumarmangalam birla group , after a corporate battle , bought out the cement division. The management (as expected) went ahead and allocated 10% of the equity to the employees and added a poison pill to prevent a repeat takeover attempt (The management is still anti shareholder and I have not changed my mind on that). However with the cement division out of the way, and the capital goods market doing well, the performance improved and the stock has gone up by 8-9 times.
My learning
- I should have done a sum of part valuation. I should have valued the engineering goods and the cement division separately and calculated the intrinsic value based on the sum
- Patience – The takeover bid had started. I simply got disgusted with the management and bailed out. Should have been more patient.
I will keep listing more of my investing miscues (which I have many) and share my learnings. Please feel free to share yours …