Archives for March 2016

6 Investing Lessons from the Valeant Pharmaceuticals Scandal

It’s not every day that a company with a market cap of more than US$ 70 billion (almost same as India’s largest company by market cap), and one that is favoured by a lot of savvy investors, loses 80% in nine months (65% in just last one month). But that’s what has happened with investors in the Canada-based Valeant Pharmaceuticals, where a spate of scams has been discovered over the past few months – from bad M&A accounting, to wrongful income reporting, and now the company is facing a potential default.

Valeant is a typical case of a high-growth business where people think nothing could go wrong and overpay ignoring the complexities and fuzziness, and which ultimately presents itself as a classic case on what not to do in business and investing.

Like I wrote about the Volkswagen scandal a few months back, there are several lessons one can learn from the fall from grace of Valeant. Here are just six of them.

Poke the Box: Are You a Stock or a Bond?

Let’s Start with Safal Niveshak
Here are some useful posts from Safal Niveshak archive which you might want to read again…

To index or not to index – that is the question. Here’s why we don’t invest in index funds.
When it comes to investing, Surfing is an important mental model that every investor should be thinking about for picking stocks.
Network effect is an important attribute to look for while evaluating the presence of economic moat.
We do things for people we like, because it’s a natural reciprocation to being liked. A mental model from psychology – Liking Bias.

Latticework of Mental Models: Float

About 12 years back, I first came to Bangalore to join my first job in IT industry. Known as city of lakes and the silicon valley of India, Bangalore was the place to be in.

However, the initial euphoria soon evaporated when I was told by the real estate agent that renting a house required me to deposit an advance. What added insult to the injury was the size of security deposit amount. It was supposed to be 10 months of rent.

Holy cow! That was several times more than my monthly salary at that time.

But it turned out that the practice was pretty common in Bangalore, and still is, which I suppose is not the case in other metros.

It infuriated me that the house owner would conveniently put that advance money in his bank and pocket the interest income too. So in effect he wasn’t just making money from rent, but from free deposit also.

Now here is an interesting question to puzzle over. The security deposit which in effect was a borrowing for the house owner – can we call that money as debt for him?

Yes and No. ‘Yes’ because it’s not his money and he would have to return that money sometime in future and ‘No’ because he doesn’t have to pay any interest on this borrowing.

So it’s a debt but quite different from a traditional debt. Let’s see how.

When I moved out from his house, the money which he returned to me was replenished by the new tenant. So it was a revolving fund. Effectively he would never have to return that money to his tenant, provided he doesn’t run out of tenants, which is unlikely because his house was in busy locality in Bangalore.

The deposit was an income generating asset which costed the landlord nothing. He could very well be using that money for making other investments too, like buying stocks or making down payment for another house.

So this is a very interesting type of debt. It’s called Float.

The Idea of Safal Niveshak

I recently presented at Agile India 2016, a tech conference in Bangalore. Given my tech illiteracy, I wouldn’t have spoken there but for the invitation from a long time tribe member who wanted me to share my experience in building the Safal Niveshak tribe.

Click here to download my presentation slides PDF (2 MB file).

This presentation captures the entire idea of Safal Niveshak – what we stand for and what you, as a tribe member, should expect from us in the future.

At this point, here is something I would request you to share with me in case you have been a tribe member for some time – Has Safal Niveshak benefited you in your investment journey? If yes, how? If not, how could we make your experience better in the future?

Please share your thoughts – feedback / testimonial / suggestion – in the Comments section of this post. I would love to hear from you.

Poke the Box: News is to Mind what Sugar is to Body

Let’s Start with Safal Niveshak
Here are some useful posts from Safal Niveshak archive which you might want to read again…

When I took Warren Buffett’s advice very seriously and it’s wasn’t about investing.
When I met the legends of investing – Part 4.
How to find great businesses, the Peter Lynch Way.
Investing and the art of due diligence.

Latticework of Mental Models: Surfing

In spite of having a coastline of more than 7,500 km with warm oceans and favourable conditions, surfing is not a familiar sport to Indians. It seems we are more fascinated with the swing of a cricket ball than the twists and turns of water waves.

In many western countries including the US and Australia, surfing is a popular sport as well as a recreational activity. Surfing is a surface water sport in which the wave rider, referred to as a surfer, rides on the forward or deep face of a moving wave, which is usually carrying the surfer towards the shore.

A surfer not only is carried by the wave, but it gives an exceptional forward speed to its rider, provided the surfer can get on to the wave at the right time and not get thrown off in between. The second most important thing required to ride a wave is to recognize that the a wave is approaching. Which means 90 percent of the times you would find a surfer lying on his surfing board and paddling slowly, waiting for the right wave.

So why are we talking about waves and surfers in a place reserved for discussing mental models?

13 Big Ideas from Mohnish Pabrai’s Mosaic – Perspectives on Investing

Note: This book review was originally published in the March 2015 edition of our premium newsletter Value Investing Almanack. To know more and subscribe, please click here.

I am sure the author of this book needs no introduction, but for the benefit of people who don’t know much about him, I am going to start with an interesting trivia.

How much would you pay to have lunch with Warren Buffett? How about Rs 4 crore?

Don’t be surprised because that’s the amount Mohnish Pabrai (along with his friend Guy Spier) paid to have a private lunch with Warren Buffett in 2006.

Mohnish manages US$ 850+ million US based fund called Pabrai Funds and is a hardcore Buffett disciple. He has written another popular book called The Dhandho Investor. However, the book I am talking about here is a rare one.

Latticework of Mental Models: Network Effect

I clearly remember the day, it was in July 1999, when I was first introduced to the internet. I was so excited to get a brand new email address. I could now send and receive emails.

However, the excitement didn’t last very long. I quickly realized that the email address wasn’t of much use to me because none of my family or friends had any email addresses at that time. Who would I mail?

But slowly as more and more people started using internet, my email address became increasingly valuable.

Similarly, I remember the time when the social networking bug bit me and I signed up for Orkut. But within few years when all my friends had moved to Facebook, I was forced to abandon Orkut and climb on the Facebook bandwagon.

So you’d notice that the utility of certain products and services is directly proportional to its number of users. Another recent example that comes to mind is the social messaging app Whatsapp. There are quite a few other messaging services which offer better features than Whatsapp but majority of people continue to use Whatsapp because all their friends are on Whatsapp.

This is called Network Effect. Now the idea may sound very simple, but it’s actually fairly unusual.

When you board an airplane, do you get excited when you see that the flight is completely full? Or when you visit your favourite restaurant, do you prefer it to be crowded? In these cases, as a consumer you don’t get any benefit if the product or service is also being used by others.

But when it comes to social networks like Facebook, Linkedin and Twitter, members join these networks because other members are in this network.

Poke the Box: It’s a Marathon, Not a Sprint

Let’s Start with Safal Niveshak
Here are some useful posts from Safal Niveshak archive which you might want to read again…

John Templeton was the founder of the Franklin Templeton Group. His 16 rules for stock market success.
A big lesson I wish I’d learned early in my investing life.
Have you taken your investment oath? If not, here’s one to get you started. Print it, fill it, stick it in front of your work desk, read it, and practice it every day.
How to increase your savings by 9200%. A real life story.

Book Worm
Rolf Dobelli’s The Art of Thinking Clearly is one book I like going back to again and again. Dobelli has done a fine job of compiling a list of mental models especially from the field of psychology.

Winner’s curse is an interesting mental model capturing the auction phenomenon. Dobelli writes –

Latticework of Mental Models: Liking Bias

It was March 2007 and I was desperately looking for a tax saving investment product. Until that year I had been sticking to the old fashioned conservative options like tax saving FDs and LIC policies. But the stock market frenzy of 2007 was rubbing off on me.

So when I received a call from a stranger who called himself a “financial advisor” and showed a great concern for my financial well being, I couldn’t say no to his request for a meeting.

Although the young chap seemed to have just a few years of experience in the industry but his demeanor were nothing less than that of a CEO of a large company. He was well dressed, tidy, confident and articulate.

When we met he took interest in my hobbies and complimented me about my reading habits. Needless to say I took an instant liking to him.

He told me about a new financial product called ULIP (unit linked insurance plan). I had never heard of ULIP, so before committing any money to it I borrowed some time from him and did a quick research on google. The reviews on the internet weren’t very encouraging. Some even claimed of unethical mis-selling by private banks and insurance companies as far as ULIP was concerned.

But my financial advisor seemed to know what he was talking and I liked him. He even told me that one of his elder cousin was from my college. So I went ahead and (mis) invested my money.