Blog on Value Investing | Safal Niveshak

Safal Niveshak is 2 Years Old!

Yes, it’s time to put on the big boy pants…Safal Niveshak is two years old today. 🙂

A lot has happened in these quick two years, but as with any 2-year-old, I’m just getting started.

Most of all, I want to thank each and every one of you for “raising” this initiative to this point — it truly could not have happened without you, dear tribesman.

I know I’ve said it before, but it bears repeating – Thank you so much for reading, for commenting, for your interest and support and intelligent criticism, for keeping me honest, for helping this entire movement of creating smarter and independent stock market investors become greater and spread wider.

You are magnificent, and I am supremely grateful for your time and attention.

Here are some numbers that might interest you.

In these two years, I have written 400 posts, have 6,000+ subscribers for The Safal Niveshak Post, and have seen 100,500 unique visitors visit the website from 151 countries.

Most importantly, not only are people coming to Safal Niveshak, they are staying here for more than 5 minutes per visit. Now that’s encouraging in the age of Twitter and widespread attention deficit disorders! 🙂

Here are the five most-read posts on the site over these two years…

I get a lot of emails every week from readers telling me that something I wrote kept them out of trouble or helped them make sense of their personal financial life. These letters serve a great sense of achievement and provide a consistent motivation to carry on doing my work.

Here’s one such letter I received recently…

Your articles are like lampposts in unknown land. Every time I am confused about which way to go I try to look at the lampposts and I get the way. I know at the end I have to find the way myself but a guide who traveled this road can tell about the possible precautions and dangers as well as pleasures in travelling by this route. Thank you for what you are doing. ~ Dr. Umesh Lad

I want to finish this post by saying that I’m really humbled that you take the time to read what I write down here…especially when I write the exact same thing 200 times a year in such a way that you never think I am repeating myself. 🙂

Here’s something that resonates so much with what I am feeling as Safal Niveshak completes two years.

I read this on one of the few blogs I read consistently…that of Mr. Amitabh Bachchan, who wrote this after completing five years at his own blog…

“I am simply amazed at the most intricate and valuable information that has come through these posts…on matters personal, on matters of conflict, on matters of worldly wisdom, of care and consideration for the other, of the connections made with unknowns, of bondings, friendships that never existed but do now with a flourish, our concerns for each other, our greetings to those, oceans and worlds apart, of discovering incredible talent…all through the medium of a few words.

Thank you dear tribesman for your patience, and for bearing with me!

Special thanks to Mr. Sudhir Bhargava for being the most prolific commentator on Safal Niveshak so far, with his 253 comments. Here’s a special gift I just sent him.

Finally, I have a request to make – If Safal Niveshak has touched your life, as an investor or otherwise, I would be happy and honoured to know in the Comments below.

I am waiting to get motivated for another two years. 🙂

Safal Niveshak StockTalk: TCS

Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.

Note: This StockTalk analysis has been written by Nishanth Muralidhar.

About TCS
Tata Consultancy Services (TCS) is one of India’s leading IT services companies, with the backing of one of the most valuable brands of India – the Tata Group. It is India’s biggest IT service company by employee headcount, as well as the biggest by revenues currently. TCS was also the first IT company in India to achieve revenues of US$ 10 billion.

Poke the Box: Look at the Sky…but Please Ask Why

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…

Released StockTalk 2.0 report on leading oil and gas exploration and production company Cairn India. See some interesting discussion in the Comments section of the report.
Shared Charlie Munger’s wisdom on living a happy life and getting rich.

Mental Model of the Week: Social Proof

Have you ever been in a situation when you looked at the sky, or at something, just because someone else was staring there? Like in this image below…

I remember playing a few of such pranks during school days, when a group of us friends started looking at the sky and then giggling at passers-by following us in doing so.

It’s another matter that I did not realize then that I was getting the passers-by to indulge in what psychologists call as “social proof”.

As per Wikipedia, social proof is – …a psychological phenomenon where people assume the actions of others in an attempt to reflect correct behavior for a given situation. This effect is prominent in ambiguous social situations where people are unable to determine the appropriate mode of behavior, and is driven by the assumption that surrounding people possess more knowledge about the situation.

In simple words, social proof is all about ‘what-you-think-I-think…what-you-do-I-do”.

Social proof is what is at work in canned laughter – what you hear in comedy shows. The reason such laughter exists is because it causes the audience to laugh longer and more often when humorous material is presented and to rate the material as funnier.

In fact, you will hear the laughter even when there’s nothing to laugh about. I propose they add such laughter to business channels as well, so that people stressed hearing the experts can get a few laughs. 🙂

Social proof applies especially to the way we decide what constitutes correct behaviour. We view a behaviour as more correct in a given situation to the degree that we see others performing it.

Whether the question is what to do with an empty popcorn box in a movie theatre, how fast to drive on a certain stretch of highway, or what to put on the plate at a dinner party, the actions of those around us will be important in defining the answer.

Social proof works to both our advantage and disadvantage. When someone shouts “Bomb!” at a packed theatre, it pays to run with others for safety without being analytical.

It also helps us find books we’ll like (Amazon reviews), restaurants to eat at (Zomato, Burrp), and places to travel (TripAdvisor). We don’t make our decisions in a choice vacuum. Our social circles influence our actions and our purchases, and that’s normal.

Anyways, social proof also works in stock market investing.

Why do you think most of us are always on the lookout for others’ opinions on the stocks we own or want to own?

Social proof is the reason you will find most fund managers owing similar stocks in their portfolios. The thinking is – “If I outperform, I will be a star…but if I underperform, I will be like others!”

But then, Somerset Maugham said, “If 40 million people say a foolish thing, it does not become a wise one.”

You will scold your child who misbehaves and then says, “But everybody else is doing it.” Have you ever scolded yourself for investing like everyone else is doing?

Social proof also works at a bigger level…inside companies. That is what drives most CEOs to act like their peers. So they will acquire companies just because a competitor is doing so. And they will conduct accounting frauds just because many others are doing so!

Warren Buffett on Social Proof
Here is what Warren Buffett wrote to his managers in September 2006, when his peers in corporate America were all under the spell of social proof to justify their misdoings…

The five most dangerous words in business may be “Everybody else is doing it.” A lot of banks and insurance companies have suffered earnings disasters after relying on that rationale.

Even worse have been the consequences from using that phrase to justify the morality of proposed actions. More than 100 companies so far have been drawn into the stock option backdating scandal and the number is sure to go higher. My guess is that a great many of the people involved would not have behaved in the manner they did except for the fact that they felt others were doing so as well. The same goes for all of the accounting gimmicks to manipulate earnings – and deceive investors – that has taken place in recent years.

You would have been happy to have as an executor of your will or your son-in-law most of the people who engaged in these ill-conceived activities. But somewhere along the line they picked up the notion – perhaps suggested to them by their auditor or consultant – that a number of well-respected managers were engaging in such practices and therefore it must be OK to do so. It’s a seductive argument.

But it couldn’t be more wrong. In fact, every time you hear the phrase “Everybody else is doing it” it should raise a huge red flag. Why would somebody offer such a rationale for an act if there were a good reason available? Clearly the advocate harbors at least a small doubt about the act if he utilizes this verbal crutch.

Avoiding Social Proof
How to get over the social proof tendency? Here is some advice from Peter Bevelin’s Seeking Wisdom…

The 19th Century American poet Ralph Waldo Emerson said: “It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.”
What is popular is not always right. If you don’t like what other people are doing, don’t do it. Warren Buffett says: “We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don’t.”
Disregard what others are doing and think for yourself. Ask: Does this make sense? Remember the advice from Benjamin Graham, the dean of financial analysis – “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

It takes years to build a reputation, but a few moments to destroy it. Ask Rajat Gupta, the poster boy of what was right with Indians, and now, what is wrong with Indians.
Daniel Kahneman shares some wonderful insights on how your brain leads you astray, and how you can make sense of this senseless world. Watch the video or read the transcript.
Was Einstein the world’s worst husband? Wife ordered to keep room tidy, serve three meals a day – but expect NO affection… and she must stop talking when he demands it!
Why hotels don’t offer you toothpastes? Here’s the resolved mystery.
The world’s largest democracy is preparing to snoop on its citizens. Watch out for what you talk on phone or browse on the Internet!

Poke of the Week – Ask “Why?”

“Why can’t I buy that toy, papa?” “You already have another one like that.” “But why can’t I buy one more?” “You won’t like playing with two similar toys. Isn’t it?”

“Why are you saying this?” “I know that dear, because I was a kid myself!” “Why have you grown up, papa? If you were still small, you could have played and enjoyed with me and my toys!”

“Everyone has to grow up, my baby!” “Why papa?”

Why? Why? Why?

If you’re a parent of a small child, you most likely hear this question several times during a day – “Why?”

While all children are inquisitive, there are some who love to prick your brain by asking questions until they find a satisfactory reply from you. My 8-year old daughter falls in this very category of hyper-inquisitives.

I find myself bombarded with her questions every now and then. There are some questions that I have replies for. And then there are many for which I have no replies.

But I enjoy her questions as they most often force me to think beyond the obvious to pull out the answers that satisfied her inquisitiveness.

There is a reason a child asks so many ‘Why?’ questions. And this is something most of us adults don’t understand.

The reason is that when a child asks a question on a subject she is not familiar with, she has no point of reference. She’s coming from nowhere in her inquisitiveness regarding her question.

It’s same as you walking into a space scientists convention. Would you be able to understand the intelligent discussion that’s going on, or even ask a simple question that didn’t give the scientists the hint that that you don’t fit in with the crowd?

I bet most of us couldn’t, because most of us have no point of reference regarding space science. Similarly, a child will continue to ask questions till the time she gets something that she understands and appreciates.

So ask questions. Don’t be afraid to show your ignorance!

Give yourself a license to expose your lack of knowledge about a particular subject, and ask “why is that?”

That’s the fastest way to get a little wiser each day.

By the way, can you please tell me if we call oranges ‘oranges,’ why don’t we call bananas ‘yellows,’ or apples ‘reds’? 🙂

If you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Friday mornings.

Keep poking.

Look at the cloudy sky.

Keep asking why.

Till next Friday…

Vishal Khandelwal
Chief Poker – Poke the Box

How to Be Happy and Get Rich

I have been re-reading Poor Charlie’s Almanack over the past few days in preparation of my upcoming Mastermind course.

This is my fifth reading of this wonderful book, and it seems I am going through it for the very first time.

Unlike what many people think, this book is not a ready reckoner on how to become a successful investor. In fact, it’s much more than that.

It’s a book on how to live a happy, sensible and rich life and in the process become a better thinker and investor.

As you read through the book, some of Munger’s ideas will inspire you, and some will make you uncomfortable. But all will challenge you to think outside the box.

The third chapter of Poor Charlie’s Almanack captures “Mungerisms”, where Munger dispels hundreds of ideas on subjects ranging from life, investing, academia, financial engineering, accounting, money management business, and managements.

Safal Niveshak StockTalk: Cairn India

Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.

Note: This StockTalk analysis has been written by Sridhar V. Sridhar owns the stock, so the following analysis may be biased. Be careful!

Cairn India is one of the largest independent oil and gas exploration and production companies in India. It, along with its joint venture partners, account for more than 20% of India’s domestic crude oil production.

The company is primarily engaged in the business of oil and gas exploration, production and transportation. Its average daily gross operated production was 205,323 BOE (barrels of oil equivalents) in FY12-13. The company sells its oil to major refineries in India and its gas to both PSU and private buyers.

Business overview
The oil exploration and production business is a high-risk venture globally, and investors need to be aware of this.

The business involves bidding for projects based on initial assessment of potential resources, which may or may not materialize or get fully exploited.

In layman terms, it is difficult to assess with precision as to exactly how much oil exists below the ground. However, players having the right skills and technical know-how have a reasonable estimate of the resource potential, and how they can exploit it.

Further, it’s a highly-capital intensive activity, where the gestation period of a project can range anywhere between 7-12 years or more.

Nature of industry
As mentioned above, the business itself is challenging because it’s a long-gestation activity, highly capital intensive, requires high technical skills & project experience, etc.

Further, revenues are subject to two factors – the amount of output and oil price.

The government may have certain restrictions on the amount of output, and it may also impose royalties on the producer.

Further, oil prices are benchmarked to international oil prices, hence there is oil price risk plus foreign exchange conversion risk in a company’s dealings with customers.

In simple terms, revenues are linked to international oil prices quoted in US dollar per barrel, and gets converted into Indian rupees, thereby getting exposed to oil price and forex risks.

Key players: ONGC is the leader in the Indian oil & gas exploration and production industry. Then, there are companies like Oil India, Reliance Industries, Essar Oil and several other players.

Cairn is not an oil marketing or distribution company, hence we are not discussing about HPCL, BPCL, etc. here, though these companies also might have exploration arms/units.

Exploration and production companies are also referred to as upstream oil companies, and marketing/distribution companies are known as downstream. (I tried my best not to use such complex terms -but if you read them elsewhere, this might be of help :-)).

Competition: Competition comes from large players such as ONGC, RIL, etc. However, crude oil being an essential commodity with more demand and limited supply in India, these companies can be expected to have a stable pricing.

Petrol, diesel, LPG and kerosene are subsidized in India, and the subsidy burden is taken up by ONGC, the largest exploration and production behemoth in India.

Private players are not affected by this subsidy burden, hence those including Cairn, RIL, etc. have a significant edge over PSU players.

Cairn is contributing to about 25% of the domestic consumption as per recent estimates.

A major portion of our oil supply is from imports and predominantly from Middle Eastern countries such as Iraq, Saudi, Qatar, and Kuwait.

Paying for oil increases the import burden and also widens the Current Account Deficit. The situation worsens when the payment has to be made in US dollars because the rupee deprecation increases the outflow of foreign exchange.

Hence, the Indian government is taking steps to encourage domestic production and aiming to have a better energy security for the country. This is a positive for players such as Cairn, ONGC, and RIL.

Entry barriers: The industry has high entry barriers given the huge upfront costs required (that run into billions of dollars), uncertainty about reserve potential and actual results, environmental and social impact, permissions or approvals from Govt., royalty to Govt., etc. Some point are discussed below under the “Moat” heading.

Cairn’s financial performance
1. Growth in Revenue, Profits: Before you start questioning the numbers, remember that Cairn is relatively a new player in the oil and gas space. And this business takes several years to break even, and profits come in after this stage.

This is the cause for the change from negative to positive numbers during 2006, 2007 and later periods.

All figures in Rs Crore except %; FY change in 2008 has been incorporated in FY09
As the business has gained stability and with steady growth in the number of wells and output in Rajasthan, the potential for growth is high.

Cairn’s sales and profit growth have been excellent over the past 2-3 years, and we can expect moderation in future. But I hope the consistency would remain.

I don’t want to paint a rosy picture, but if some new production happens, and if government gives approvals for higher output in future, we can expect accelerated growth for the company.

Even if we take a conservative 15-20% annual growth in sales, it would add consistent earnings to the company’s cash reserves.

The company’s margins are pretty high, since the project is now commercialized and is in a steady growth state.

2. Returns on Equity/Capital: Cairn’s ROE and ROCE during FY12 were 16.4% and 18.1% respectively. I did some calculation based on March 2013 results and the ROE comes to around 25% for FY13.

We still need to wait for the annual report to get a better insight into this. However, looking at the past trends, I see improvements though it may not confirm the rule book.

The opportunity for returns to improve is high, and if you understand this business, Cairn has crossed the introductory, exploration stage and is in the production and commercialization mode in many wells across Rajasthan Block.

Given the long-term nature of the business, the growth will continue for several years until it reaches a saturation point.

3. Moat: You might think that a moat is irrelevant here given that this is a commodity-oriented business.

Of course, Cairn deals with a commodity, but think of it as a toll-bridge, or a company selling products that must be purchased for essential needs. If you want to use petrol, diesel, LPG, kerosene, petrochemical products/byproducts, etc…you will somehow end up buying this commodity which is short is supply.

Moreover, this is not like other commodities which can be recycled and reused.

Once you use it, it’s exhausted – it’s a non-renewable resource. Whether you drive a car or two wheeler, you will be paying for fuel. And similarly for cooking gas, inverters, generators, and machinery (factories), you will be using fuel that is derived from crude oil.

We cannot go back to “bull and cart” era and neither can we do without fossil fuels, as solar, wind and other forms may not replace traditional fuel so quickly. So there is a demand and it is durable and sustainable.

Secondly, not every company can get in to oil and gas exploration. The Rajasthan block that is explored by Cairn and ONGC in a 70-30 Joint Venture is one of the biggest resources in India (probably KG basin might get closer to it).

How many companies in India can set up a block like Rajasthan or the KG basin, which requires enormous investments that are in the range of billions of dollars?

Finding a block itself is not easy, and if you found one you need multiple approvals, environmental clearances, huge capital, employee base, etc. So there is a hurdle/wall which makes it difficult for several competitors to enter.

4. Potential: The Rajasthan basin is estimated to have over 7 billion barrels of oil per day, and Cairn is currently producing roughly 200,000 barrels per day. So there’s a huge growth potential ahead for the company.

5. Debt/Leverage: Cairn is debt free and is capable of generating a stream of free cash flows in future.

How’s the management?
Cairn’s management quality is sound and consists of a strong team of technical and managerial personnel.

Last year there was some news on management changes when Rahul Dhir left Cairn to pursue another assignment. However, with the entry of Vedanta, the results have been positive as they retained the same brand, experts, technicians, and managerial personnel.

So, despite the entry of a new promoter, the business model and its functioning are running well.

If you are not a great Vedanta fan, you don’t have to agree with me, but Cairn’s functioning style is completely different from those of Sterlite, Hindustan Zinc, Sesa Goa, etc.

What’s the valuation?
A. DCF (using free cash flows): Rs 385

Historical Cash Flows: This is just to understand the past trends and have a base to start with.

Note: The year 2008 has been left blank because due to the FY change in 2008, the numbers are incorporated in year 2009. For example the financial year ending in 2008 December has been extended to March 2009 and has been incorporated in 2009 figures. Prior to 2008, the company’s financial year ended in December. The cash flows in the past have been inconsistent due to the development stage of the projects.

A brief of my assumptions are below.

Free cash flow (or Owners Earnings) from 2013 (estimated) till 2022 have been considered. Stage 1 Growth: 15% (for years 1-5). Stage 2 Growth: 10% (for years 6-10) – based on production growth trends
Discount rate: 15%
Terminal growth rate: 5% (after 10 years)

Here are the FCF estimates for the next ten years…

The present value of future cash flows and terminal value comes to Rs 385.

B. Dividend Discounting & Terminal Book Value Method: Rs 330

Key assumptions:

Book Value Growth: 7.3% (average of last 6 years)
Current Book Value: Rs 253 (consolidated for 2011-12)
Estimated Book Value as of Year 10 is based on 7.3% growth over 10 years.
Risk Free Rate: 7.3% (10 year govt bond yield as on June 14, 2013)
Dividend: Based on dividend for 2012-13 being taken as a conservative figure for future years. Not a good estimate, but on a conservative basis we can expect dividends to remain constant or grow gradually

All figures in Rs Crore except %
C. Relative Valuation method: Rs 570
Production assumptions under this method are:

Rajasthan – 180,000 barrels of oil per day (bpd)
Ravva – 21,000 bpd
Cambay – 4,500 bpd

Other assumptions:

Oil Price: $80 (Cairn sells at 10-15% discount to brent, and a lower price to account for commodity cycle risk)
No of production days: 300 (assuming lower working hours, holidays, etc)
US-INR Rate: Rs.54

Disclaimer: Most of the above analysis involves estimates about future business environment, which may or may not materialize, hence readers are requested to do their own due diligence.

Final Intrinsic Value
In summary, here are the approx. intrinsic valuations calculated as per various methods…

Discounted free cash flow – Rs 385
Dividend discount & terminal book value – Rs 330
Relative valuation – Rs 570

Based on these, the fair value range for Cairn’s stock comes to around Rs 365 to Rs 425 per share.

Assuming a margin of safety of 30% to the average of this range, the safe purchase price for Cairn is Rs 275.

Don’t ignore the risks!
Crude oil price dependence: Cairn’s revenue is based on crude oil prices, and any decline in oil prices can impact the revenues.

Foreign currency risk (Rs. Vs $ rates)

High cost of exploration: This can be a challenge if there are unexpected costs that add up making the project less profitable.

Judgment of reserve estimate: The approach taken by Cairn in judging estimate has been reasonable or on the conservative side.

Govt. approvals/permissions: This is an integral part of the business, and also serves as a Barrier to Entry. Given that we are an energy-deficient country the Government realizes the importance of exploration and has been encouraging the sector. However, getting timely approvals can be a challenge. If the business plans and execution is good then getting these approvals in place should not be an issue though it can be time consuming.

Potential shale oil supplies: Recently the US as well as other countries have initiatives shale gas exploration, which is a different method of exploration that is expected to bring in new supplies. Sale exploration involves fracturing from rocks below the surface. If there is a bumper output from shale production, oil prices can decline, and competition may arise. However, the above is mitigated to an extent because shale exploration process is highly complex, expensive and the costs involved will motivate suppliers to price oil higher, because the process is currently more expensive than conventional exploration. (I’m not an expert in this – someone from oil industry can comment on this.)

Demand: Some industry experts view that demand may reduce or saturate, and there are talks about shale boom leading to high supply-low demand situation. But if we look at India itself, which is within our Circle of Competence, the demand for fuel is very high – be it for petrol, diesel, gas variants, etc. I recently heard from local autowala that CNG prices have been increased on various occasions. And they still have to use it as CNG has fitted vehicles are becoming common.

Challenges and barriers mentioned above such as high cost, uncertainty, environmental or social issues, royalty fees, etc. are sometimes discouraging many global players in to venture in to this space. Nevertheless Cairn, BP and several other are exploring select pockets of opportunity.

Recent developments
The company’s Chief Executive P. Elango recently said, We plan to drill more than 450 wells in Rajasthan block over a three year period, a significant increase from the current rate of 25 wells drilled in FY2013.

“The Rajasthan block’s current production is at around 175,000 bpd (barrel’s per day). We expect to exit FY2014 with a production in the range of 200,000-215,000 bpd.”

Cairn’s current production comes from five fields – Mangala, Bhagyam, Aishwariya, Raageshwari and Saraswati. The Mangala field, the management has said, is producing at plateau rates of 150,000 bpd.

Aishwariya commenced production in March and is expected to ramp up to approved rate of 10,000 bpd over the next few months.

Bhagyam, the second biggest oilfield behind Mangala, is expected to ramp up to the approved rate of 40,000 bpd by the second half of current fiscal.

Disclosure & Disclaimer: I, Sridhar V, hold Cairn as part of my personal portfolio and may have recommended to others. Readers are advised to do their own independent assessment and take professional advice before taking any decision. You can expect some errors or forward looking statements, so do your own research as well.

Attention: Safal Niveshak RSS Subscribers
In case you haven’t heard, Google Reader has shut down today onwards.

If you’re a Google Reader user, that means you’ll need a new tool to read your subscriptions.

Option 1 — Subscribe by email
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Click here to subscribe by email.

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You’ll need to pick a new reader. Feedly seems to be doing well and they have a one-click Google Reader import.

Whatever your choice, please keep reading Safal Niveshak. 🙂

Poke the Box: Believe in Yourself…and Please Like Me

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…

Released second StockTalk 2.0 report…on India’s leading commodities exchange, MCX. See some interesting discussion in the Comments section of the report.
Answered five key questions on rupee’s depreciation, and whether things can get worse.

Mental Model of the Week: Liking

“The deepest principle in human nature is the craving to be appreciated.” ~ William James

We want to be liked and accepted. We believe, trust and agree with people we know and like. We do things for people we like. We like the people who like us (check your Facebook now! :-)) And if we feel that a person likes us, we tend to like them back.

Now, likability comes in many forms – people might be similar or familiar to us, they might give us compliments, or we may just simply trust them.

Companies that use sales agents from within the community employ this principle with huge success. People are more likely to buy from people like themselves, from friends, and from people they know and respect.

Also, we like those who are physically attractive, popular, or those we have positive associations with. We also like and trust anything familiar.

Aristotle said – “Personal beauty is a greater recommendation than any letter of introduction.”

Studies show that we believe that physically attractive people have a more desirable personality than average-looking or unattractive people. Experiments show that attractive criminals are seen as less aggressive and get a milder punishment than ugly criminals.

But like the 6th Century Greek writer Aesop wrote, “Appearances often are deceiving.”

The best con artists always behave as though they are not acting in their best interest. The 16th Century Italian political philosopher Niccolo Machiavelli said in The Prince – “Princes who have achieved great things have been those who have given their word lightly, who have known how to trick men with their cunning, and who, in the end, have overcome those abiding by honest principles.”

Look at stock market investing. Most often, we like a stock after it has run up sharply (Titan, Asian Paints, Page), while we hate things that have dropped in price.

We are attracted to fast-growing companies and fast-rising CEOs, as we see our own aspirations in them, want to become like them, and want to associate with them. All this without worrying what that fast growth may lead to, which is often a rapid decline!

Now, while the “liking” tendency is deeply ingrained in our minds, to avoid falling deep into it, it’s important to…

Concentrate on the issue and what you want to achieve, not on appearances.
Not depend on the encouragement of others.
Not automatically mistake people’s appearance for reality. It may be a social mask!
Not automatically mistake fast-growing companies or fast-rising investments with great returns. They may turn out to be WMDs for your portfolio.

Better, seek an enemy or devil’s advocate who may dislike what you are doing and tell you exactly why he/she things so.

As Benjamin Franklin wrote, “Love your enemies, for they tell you your faults.”

Anyways, despite often reading nonsense on Safal Niveshak, I hope you would continue to like me! 🙂

At least, I wish you continue to like me on Facebook! 🙂

Book Worm
Seeking Wisdom from Peter Bevelin is one of the most amazing books I’ve ever come across on human behaviour and mental models. Here is an excerpt that Bevelin carries in this book where Warren Buffett is talking to analysts at the New York Society in 1995, about the three timeless ideas for investing…

His [Benjamin Graham] three basic ideas – and none of them are complicated or require any mathematical talent or anything of that sort – are:

that you should look at stocks as part ownership of a business,
that you should look at market fluctuations in terms of his “Mr. Market” example and make them your friend rather than your enemy by essentially profiting from folly rather participating in it, and finally,
the three most important words in investing are “margin of safety” – always building a 15,000 pound bridge if you’re going to be driving 10,000 pound truck across it …

So I think that it comes down to those ideas – although they sound so simple and commonplace that it kind of seems like a waste to go to school and get a Ph.D. in Economics and have it all come back to that. It’s a little like spending eight years in divinity school and having somebody tell you that the ten commandments were all that counted. There is a certain natural tendency to overlook anything that simple and important.

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

Next time I speak in public, I’ll hire a few dummy clappers! Why? Clapping is contagious, and the length of an ovation is influenced by how other members of the crowd behave. 🙂
Can Murthy 2.0 save Infosys 3.0? Forbes India tries to find the answer by asking five close Infy watchers.
Failure can hurt. If you’re feeling it deep within your heart, here’s Leo Babauta of Zen Habits on how to deal with failures.
Fear is an unavoidable part of being human. It’s a daily reality. But is fear our real enemy? Is fearlessness the way to go? Seth Godin answers.
You still haven’t read Cialdini’s amazing book called “Influence: The Psychology of Persuasion”? Spend the next 12 minutes watching this video to learn about the six universals that guide human behavior that Cialdini has written about in his book.

If you can’t see the video above, click here.

Poke of the Week – Believe in Yourself

“When you doubt your power, you give power to your doubt.” ~ Honore de Balzac

Remember that voice you often hear in your head?

The voice that says – “You can’t do it! You’ll never be good enough! You’re going to fail!”

This voice scoffs at you whenever you set out to achieve something. It criticizes you when life gets difficult and you are down in the dumps. It holds you down when you struggle to get up after a fall.

You see, self-doubt not only bothers you when you have it, often it slips past your barriers and gets over you. And when you let it loose, it destroys your confidence, strips logic and reason from your mind, and steals happiness from your heart.

In return, it leaves you with only fear and insecurity.

I have faced such situations several times in the past, and continue to face them day in and day out. The more I fight my self-doubt, the more it fights back.

However, I have also realized that with self-knowledge and understanding, I can use self-doubt for my benefit…and I am learning to do just that.

Most often, in life, what should concern us is not the way things are, but rather the way we think things are.

If I think I can’t do a thing, I will act in such a way that I will never be able to do that thing.

It’s a self-fulfilling prophecy: As I think, so I am.

You must have found yourself in similar situations in the past when you realized that you were not able to achieve some things because you believed from the very start that those things were unachievable.

When it comes to investing, despite the fact that Benjamin Graham and Warren Buffett’s amazing ideas have been with us for decades, the reason most people don’t invest sensibly is because they think they can’t.

So we will remain in the comfort of the crowd, buy what others are buying, look for signals on forums, blindly trust others with their money, and rarely get down to do the independent homework of finding great investments.

Again the reason is that we would believe the world but ourselves, negating what Graham said years ago – “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

The critic in your head or outside of you won’t let you believe yourself…but you have no option but to believe in yourself if you really wish to live a life on your own terms.

Watch this video and you will know that anything is possible if you believe in yourself…

If you can’t see the video above, click here.

If you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.

Keep poking.

Believe in yourself.

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box

5 Questions on Rupee Depreciation…Answered

The past few months have seen a sharp depreciation in the value of Indian Rupee against the US Dollar (US$). From about Rs 53 per US dollar in early-May 2013, the rate now stands around Rs 60.

Data Source: Yahoo Finance
I have been facing a lot of questions from friends and readers of The Safal Niveshak Post asking for explanation of rupee’s depreciation and its impact on their investments.

Safal Niveshak StockTalk: MCX

Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.

Note: This StockTalk analysis has been written by Sunny Gupta.

Most tribesmen reading this would know about the business moat (read how a business moat looks like) and its importance, and how identifying businesses with strong and durable economic moat is key to investment success (when properly combined with other important ingredients like margin of safety).

It is also evident that businesses that possess strong and durable economic moat tend to have little competition, high margins (or return on invested capital, ROIC), low working capital needs and low to zero debt.

Poke the Box: Focus on Process, Get Worldly Wisdom, and Buy Happiness

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…

Released first StockTalk 2.0 report…on India’s leading automotive battery maker, Amara Raja Batteries. See some interesting discussion in the Comments section of the report.
Here’s the Safal Niveshak Investor Manifesto that I shared recently on my Facebook Wall. Print it. Stick it. Follow it. Or simply junk it.
Can money buy happiness? A tribesman, Jana Vembunarayanan, writes that it can…and explains how to get more happiness when spending your money. On a side note, given that Jana resides in the US and the rupee has touched 60 to a US dollar, he certainly seems to be happier sending money home. 🙂

Mental Model of the Week: Process vs Outcome

“Individual decisions can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision making can be encouraged by evaluating decisions on how well they were made rather than on outcome.” ~ Robert Rubin, American economist.

Research has identified a common trait amongst successful performers in fields where probabilities play a big role – they all emphasize process over outcome.

Look at investing, and look around you. Most investment experts selling their services always highlight the outcome – so much return in so many months or years – and never the process they used to get this outcome. This is simply because, while the outcome is there for everyone to see (availability bias), investors rarely ask the question whether that outcome was due to the skill of the expert (a proper investment process) or merely luck!

This is not to say that results don’t matter; obviously they are extremely important in measuring success. But if the results have been largely thanks to luck, they may not come in as expected in the future.

What is more, if you focus only on the outcome, you are less likely to achieve it. Instead, if you focus on the process, the outcome will take care of itself.

Thus, judge decisions – especially yours – not only on results, but also on how they were made. This matrix may be of some help to you…

Book Worm
Seeking Wisdom from Peter Bevelin is one of the most amazing books I’ve ever come across on human behaviour and mental models. Here is an excerpt that Bevelin carries in this book where Charlie Munger is talking to students of Stanford Law School in 1997, about how to get worldly wisdom…

I’ve long believed that a certain system – which almost any intelligent person can learn – works way better than the systems that most people use. What you need is a latticework of mental models in your head. And you hang your actual experience and your vicarious experience (that you get from reading and so forth) on this latticework of powerful models. And, with that system, things gradually get to fit together in a way that enhances cognition.

And you need the models – not just from one or two disciplines, but from all the important disciplines. You need the best 100 or so models from microeconomics, physiology, psychology particularly, elementary mathematics, hard science and engineering [and so on].

You don’t have to be a huge expert in any of those fields. All you’ve got to do is take the really big ideas and learn them early and well. You can’t learn those 100 big ideas you really need the way many students do – where you learn ’em well enough to bang ’em back to the professor and get your grade and then you empty them out as though you were emptying a bathtub so you can take in more water next time.

If that’s the way you learn the 100 big models you’re going to need, [you’ll be] an “also ran” in the game of life. You have to learn the models so that they become part of your everused repertoire.

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

Coffee did not boost my creativity, so I opened a coffee shop that does. (Keep your speakers on)
Bill Gates writes about three things he has learned from Warren Buffett…things that are not just about investing but more important in life, like time.
Charlie Munger has long talked about the importance of knowing where you are going to die so that you don’t go there. Here’s another proof that eliminating stupidity is easier than creating brilliance.
In order to find success as an investor, the question you must ask isn’t “Am I smart enough to be a good investor?” but rather “Am I rational enough to be a good investor?” Why? Here’s a framework from Daniel Kahneman, one of the best thinkers of our times, that will help you condition your brain (hopefully!) for a better investment behaviour it the future.
Email seems pervasive in your lives. You check email on the bus. You check it first thing in the morning, and last thing at night. You even check it while reading Safal Niveshak’s posts. 🙂 In short, you suffer the tyranny of email, but here are a few simple yet effective ways to save you.
Amartya Sen writes a hard-hitting piece on why India trails China. Things are just getting worse here, he says.
Stop giving excuses for not exercising for the lack of time. Here’s a 4-minute workout for you.

Poke of the Week – Reverse

Often in life, when you are seeking solution to a challenge or problem, it pays to reverse your perspective, and look at things from a different angle.

Like in investing, when you are searching for successful businesses, it pays to study what makes business fail.

In his book “A Whack on the Side of the Head”, Roger Von Oech advocates that “reversing your perspective” is an effective technique for expanding your thinking. He provides the following example…

“For many years, 19th century English physician Edward Jenner worked to find a cure for small pox. After studying many cases, he reached an impasse in his thinking. Then he reversed his perception of the problem. Instead of focusing on people who had small pox, he switched his attention to people who never had small pox. He found that dairy maids rarely got the disease. It turned out that most dairy maids had had cow pox, a similar but usually nonfatal affliction. Cow pox had served to ‘vaccinate’ its victims against the more dangerous small pox. This led to Jenner’s concept of ‘vaccinating’ people.”

Von Oech then shares a wonderful quote by innovator Andrew Mercer – “You can’t see the good ideas behind you by looking twice as hard at what’s in front of you.”

You would relate to what Charlie Munger says when he quotes Carl Jacobi – “Invert, always invert.”

For Munger as an investor, this means stacking up all the reasons you like a stock. But then, before considering purchase, invert i.e., list all the reasons to dislike that same stock.

In a 1986 speech, Munger elaborated, “It is in the nature of things, as Jacobi knew, that many hard problems are best solved only when they are addressed backwards.”

Like the Greek philosopher Heraclitus said, “It is disease that makes health pleasant, hunger that makes fullness good, and weariness that makes rest sweet.”

You see, there is real value in “reverse experiences,” that is, we don’t fully appreciate something until we have thought about or experienced its opposite.

For example, just pull out experiences from your life and you would realize that…

Success is sweeter after you’ve tasted defeat.
Life seems more precious after having a near-death experience.
You love someone more after you lose him/her and then regain him/her.

If you are married, here’s a way to use the ‘reverse’ strategy to bring peace to your household. Spend a minute describing a current problem. If you’re the husband, describe it from your wife’s viewpoint. If you’re the wife, do the reverse. From my personal experience, it’s a great way to live happily ever after. 🙂

Watch this small video for how reverse thinking can completely change your perspective in life…

If you can’t see the video above, see here.

If you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.

Keep poking.

Exercise for four minutes.

Buy some happiness.

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box

Can Money Buy Happiness? Yes!

This post has been written by Janardhanan Vembunarayanan (Jana), the lucky tribesman 🙂 who recently attended Warren Buffett’s 2013 shareholder meeting in Omaha.

Dan Ariely recommended the book, “Happy Money-The Science of Smarter Spending“. I went to the public library and got the book. It is a very good read and here are my notes.

What This Book Talks About…

Most of us seek professional advice on how to earn, save and invest our money. When it comes to spending money, we follow our intuitions. Research shows clearly that our intuitions are wrong most of the times. This book explains how to get more happiness when spending our money. It uses 5 principles…

Buy experiences
Make it a treat
Buy time
Pay now, consume later
Invest in others

1. Buy Experiences

In 2010, according to the U.S. Bureau of Labor Statistics, the average American household earned about $62,000 before taxes and spent a total of around $48,000. Housing costs along came to $16,500, which accounts for 27% of the cost. This clearly shows that we spend a lot of money in housing either in the form of rent or mortgage. Does buying a big beautiful house increase our happiness?

There is almost no evidence that buying a home or a newer, nicer home increases happiness.

Between 1991 and 2007, researchers tracked thousands of people in Germany who moved to a new house because there was something about their old house they didn’t like. Immediately after settling in to their new abodes, these movers reported being much more satisfied with their new homes than they’d been with their old ones. Humans are adaptable creatures, however, and research show that people often get used to whatever they’ve got. So we might expect that this initial spike in housing satisfaction would wear off, leaving people no happier with their home than they were before moving.

But that’s not what happened.

Satisfaction with the new home only were off a little bit, and in the subsequent five years, movers remained significantly more satisfied with their new home than they’d been with their old one.

Sounds promising, but there’s just one problem…

While movers satisfaction with their houses increased substantially, their satisfaction with their lives – their overall happiness – didn’t improve at all.

Long after the crash of 2008, almost 90 percent of Americans continued to describe home ownership as a central component of their dream.

In a carefully controlled study of more than six hundred women in Ohio, homeowners weren’t any happier than renters, though they were 12 pounds heavier.

Virgin Galactic, is a company which makes it possible for people to pre-book a ticket for a six minute spaceflight.

But wait it will cost $250,000 per person. Does this make any sense? Excerpt from the book…

As a child, Marcia Fiamengo, thirty-year-old nuclear engineer, dreamed of being an astronaut. When she and her husband John (also a nuclear engineer), first heard about Virgin Galactic, they talked about buying two tickets – when they were old and retired, since the six-figure fee was out of their price range as young professionals. Then in 2010, Marcia’s life change in an unexpected and devastating way. John became sick and passed away when Marcia received the money from John’s life insurance policy, she couldn’t imagine doing anything with it, and put it away while she grieved.

And then one day…

What better way to use this money than to honor their dream and buy a ticket to space? As Marcia put it, John’s death reminded her that “life is short and fragile” These amazing experiences shouldn’t be put off until a better time. You may never get the chance to experience them.

This story reminded me of the movie “Up”…

The point the authors are trying to make is…

Purchases which buy experience makes people more happier than the materialistic ones.

The happiness I got from visiting Berkshire Annual Meeting is much greater than the Laptop that I purchased. You see the difference.

I am standing in front of Buffett’s house 🙂

2. Make It a Treat

I used to drink ‘Cafe Mocha’ from Starbucks everyday. When I started drinking it used to be a treat. After sometime I did not have the same enjoyment. So why I am drinking it? It is because of the Habit. Should I spend $3.25 everyday for it, even though I do not really enjoy? Why am I not enjoying?

Because we lack mercury’s amnesia, the enjoyment of chocolate coffee typically declines over a period of time

So, what is the solution?

Switch to regular coffee at home or work. This helps to save some money. Once in a while treat myself with Starbucks Coffee and it becomes a treat for me. The point authors are making is…

Limiting our access to the things we like best may help to “re-virginze” us, renewing our capacity for pleasure. It also helps us to save money.

3. Buying Time

Today lots of professionals are making a decent amount of money. But the only problem is, most of them do not have time to do what they want to do.

At Intel an employee receives 350 emails every week. It takes 20 hours to manage them. Around 30% of the emails are unnecessary. What did Intel do?

Intel recently experimented with “email-free Tuesdays” encouraging a group of employees to spend four hours unplugged from email and phones, giving them an uninterrupted period to, you know, think.

This feeling of time affluence has important implications for happiness once these employees leave work for the day.

Google Engineers spend 20% of their time on pet projects, that are outside their day to day work. Some of the innovative products like Google Sky and Gmail came out of this.

When people at google talk about what they like, it’s one of the things they like about. It is culturally important. Knowing that it exists causes people to fee more free.

4. Pay Now, Consume Later

In today’s world most use credit cards, It follows the policy of “Consume now and pay later” The problem with this is, we overspend. American household had an average of more than $6000 in credit card debt in 2010. By doing the opposite – by paying upfront and delaying consumption we get the following.

Less spending
More happiness

Delaying consumption allows spenders to reap the pleasures of anticipation. This reminds me of my childhood days. Deepavali is a festival of lights and it is very famous in India. I anticipate its arrival one month before. The excitement I receive in the anticipation is same as the enjoyment I have during the festival.

Tripadvisor.com business runs on this pleasure of anticipation.

Barbara Messing, Chief Marketing Office at Tripadvisor.com, says: I think of tripadvisor as being in the happiness business. We are really upstream in the planning process and I believe that people derive as much pleasure from that phase as from the trip itself.

5. Invest in Others

Bill Gates and Warren Buffett asked American billionaires to pledge the majority of their wealth to charity. Buffett decided to donate 99% of his wealth to charity. He claims his happiness increased when he gave.

DonorsChoose.org is an online charity that makes it easy for anyone to help students in need. Public school teachers request what they need on the website. The requests can range from pencils to microscopes. Anyone can donate any amount to the project that most inspires them.

In all research has shown that spending money on others provides a bigger happiness boost than spending money on yourself.

Makes sense, isn’t it?