Blog on Value Investing | Safal Niveshak

What I Learnt from the World’s Most Arrogant Investor

I was reading through fund letters from The Baupost Group, managed by value investor Seth Klarman.

Here is something very interesting that I came across in his year-end 1996 shareholder letter. Klarman wrote…

We regard investing as an arrogant act; an investor who buys is effectively saying that he or she knows more than the seller and the same or more than other prospective buyers.

This statement contains a big truth that I, as an investor, ignored all these years.

So I bought a stock because I thought my analysis was right. I thought my calculation of the stock’s intrinsic value was right. I thought my decision to buy the stock was right even when I always wondered what could be the reason someone else was selling the same stock.

All in all, my arrogance – of being right – made me buy several stocks over these years. While I’m satisfied with my long term returns, I consider my performance more a result of luck than my own aptitude of picking up the right stocks.

Safal Niveshak Classroom: How to Read a Balance Sheet

You might remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the money!”

That’s what financial statements do for investors – show the money that companies earn, own, and owe.

These statements appear in a company’s annual report, and are broadly classified into three categories:

Balance Sheet
Profit & Loss Account
Cash Flow Statement

Over the next few weeks, we will discuss these key financial statements that companies use to communicate their performance with investors, and how you can use them to identify the best long-term investment opportunities.

Let’s start with the Balance Sheet, also known as the ‘Statement of Financial Position’ of a company.

3 Quotes to Change the Way You Think about Money

Image Source: The Street

Most of us have a love-hate relationship with money.

We usually resent those who have a lot of it, but spend our entire lives attempting to get it for ourselves.

We struggle, speculate, and squander during our prime wealth-building years, and then suffocate for the lack of ‘good enough’ money in our golden years.

You see, the biggest reason a vast majority of people never accumulate a substantial nest egg is because they don’t understand the nature of money or how it works.

Cash, like a person, is a living thing. When you wake up in the morning and go to work, you are selling a product to earn yourself a living. That product is ‘you’…your labour or hard work.

But it’s only when you realize that every morning your cash also wakes up and has the same potential to work as you do, you unlock a powerful key in your life.

The 1-Minute Secret to Finding Good Stocks

In an interview with Warren Buffett in 1993, Adam Smith, author of Supermoney, asked how the small investor can find good investment ideas.

Warren Buffett: I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities, and that bank of knowledge will do him or her terrific good over time.

Adam Smith: But there are 27,000 public companies.

Warren Buffett: Well, start with the A’s.

Everybody knows that Warren Buffett gets his investment ideas largely from annual reports.

Of course, now he has become so influential that companies call him to share their own ideas. But, fifty years ago, Buffett was not the go-to guy if you wanted to sell your company or raise capital for your failing bank.

He was a small investor who was clawing his way up the investing street by reading whatever annual report came his way, and then finding his investment ideas that worked wonders in the subsequent years.

You are probably at the same stage Buffett was fifty years ago. But there’s a big advantage you have over the early day Buffett.

Infosys’s Crime…Unearthed Again!

First, here is a short analysis of the latest quarterly result announced by Infosys early today morning.

Source: Infosys, Safal Niveshak Research; * EBITDA-Earnings Before Interest, Tax, Depreciation & Amortization (Also known as Operating Profit);
** Volume-Number of man-hours billed during the quarter
As you can see from the above chart, sales growth has come in at a strong 31% YoY during the quarter ended December 2011 (3QFY12).

This is a much faster pace of growth than what Infosys had recorded during the previous quarter ended September 2011 (2QFY12).

How Can You Differentiate between Good and Bad Managements?

Good versus Bad A reader of The Safal Niveshak Post asked this question after reading yesterday’s post on companies taking minority investors for granted – “How can we (retail investors) differentiate between good and bad managements?”

This is a very important question, because assessing management quality isn’t an easy thing to do as compared to studying a company’s past financial performance and concluding whether it has been good or bad.

In other words, you can’t put a numerical value to a company’s management. You can create any specific metric to measure its quality.

What I consider ‘good’ management might be ‘bad’ management in your eyes. So the response to the question – whether the management is good or bad – is very subjective.

Here is the fourteenth lesson of the Value Investing for Smart People Course that answers this very question.

Let me know if you have any further doubts after reading this lesson, and I’ll be happy to clarify.

When Companies Take Minority Investors for Granted…

I’ve come across countless arguments over the past few years over the relevance of quality management when it comes to picking stocks.

“Managements don’t matter!” was the powerful argument that I heard in the heydays of the pre-2008 era. And these people showed me stock market returns to prove how companies with shaky management teams could generate huge shareholder wealth.

Well, I had no words to counter them because even when I knew who was swimming naked (companies with bad managements), the fact remained that all of them were covered up by the rising tide of the stock market boom.

Cut the chase to 2012, and I’m ready with some good proof of what happens to companies who take minority investors for a ride, when the tide goes out.

These are the companies that…

Chase growth at all costs
Kill their balance sheets by taking on excessive debt
Make random and overpriced acquisitions
Secretively sell shares at discounted prices to group companies
Pay their top people big money even when all other stakeholders are facing the music
Have loud-mouthed, egomaniacal CEOs running the affairs

Have You Taken Your Investment Oath?

After years of a Wall Street-induced financial crisis, MBAs globally – especially the ones that might wind up working in the finance industry – are under a microscope. Before they get to Wall Street, though, some new business school graduates are signing onto a new professional code of conduct called the MBA Oath.

This MBA Oath is similar to the Hippocratic Oath that doctors take – which is, first, do no harm.

So, dear readers, if the MBAs and doctors or the world can take their oaths to ‘do no harm’ (to others), what stops you – as an investor – to take an oath to do not harm (to yourself)?

In fact, it’s good you take an investment oath now and promise yourself to become a better and smarter investor, come what may.

Here is an investment oath that was first published in Ben Graham’s The Intelligent Investor. I have modified it to suit an Indian investor’s requirements.

Print it, fill it, stick it in front of your work desk, read it, and practice it every day.

FDI in Indian Stock Markets: How it Impacts You…the Small Indian Investor?

The Indian government recently opened the gates for foreign individual investors to invest directly into Indian stock markets.

A reader has posted a question on the Safal Niveshak Forum whether the entry of these foreigners will have any impact on investments by small Indian investors in the long run.

Let me first talk a little about the possible impact of the entry of foreign individual investors on Indian markets.

Well, this seems more like a ‘stitch in time’ kind of an attempt by the government than anything that is going to benefit the Indian markets in the long run.

As you know, the Indian rupee has been under tremendous pressure over the past few months. From about Rs 45 per US dollar in July 2011, the rate stands at nearly Rs 53 now.

So, in order to bring some stability to the Indian Rupee, this latest move from the government seems more like an act of desperation. This is because, as the government expects, a greater inflow of dollars from these investors will stop the fall in the rupee’s value.

“But aren’t foreign individual investors already investing in Indian stocks?” you may ask. “So what’s new?”

10 Stocks That Get ‘A+’ on Warren Buffett’s Test of Good Businesses

As the world’s third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

Well, the best way to know what Buffett is thinking next and his secrets of great investments is to read his annual letter to shareholders of Berkshire Hathaway, his insurance and investment firm.

Buffett has been writing these letters for 34 years now, and each one of them carries amazing ideas on how to become a smarter investor by just following some simple rules of investing.

One of the key rules of selecting great investments that Buffett has talked about across most of his letters is that of “good return on equity”.

This is in addition to his demands of adequate size of the company, proven management, and a reasonable valuation.

What Buffett looks for are companies that earn “good returns on equity while employing little or no debt”.
[Read more…] about 10 Stocks That Get ‘A+’ on Warren Buffett’s Test of Good Businesses