Blog on Value Investing | Safal Niveshak

The ‘Willpower Trick’ to Become a Smarter Investor

January is the month of broken resolutions. The jogging tracks are packed for a week and working desks are cleaned for the first time in ages, and meetings start and end on time.

We pledge to finally become the person we want to be: slim, neat and punctual.

Alas, it doesn’t take long before the jogging tracks are once again empty, the working desks start to crumble under the weight of unwanted junk, and meetings occupy more time than actual work.

Just into the third week of the month, we forget about that pledge to become a saner, kinder, and gentler person.

You see, human habits are stubborn things. We make resolutions without realizing whether we have the necessary willpower to achieve them.

This explains why almost 90% of all resolutions end in failure, as per a 2007 survey of over 3,000 people conducted by the British psychologist Richard Wiseman.

So what’s the reason our resolutions end in such dismal fashion?

How to Get Rich, Stay Rich…and Die Poor

First, how do you get rich?

Work hard…and earn a lot.

Second, how do you stay rich?

Save a lot…invest a lot…and get smart about your finances so that you are never the target of scamming financial advisors.

Okay, you now know how to get rich and stay rich.

But how do still die poor?

It’s even simpler than getting rich and staying rich.

I’ll tell you the answer, but before that…

Infosys Vs TCS: The Fight Continues

The Big Fight Tata Consultancy Services (TCS) and Infosys are two of the strongest pillars of the Indian IT sector. One is India’s largest IT services company, and the other the most respected.

However, since they are the ‘poster boys’ of Indian IT, and are keenly looked up by stock markets, industry and job seekers, the rivalry too runs deep between them.

So whether it is the fight for talent, clients, deals or stock market valuations, the two companies are at each other’s neck all the time.

In this post, I present a graphical comparison of the two companies based on their performance over the past 20 quarters (5 years).

Let’s start right here.

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