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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.
[Read more…] about 5 Questions on Rupee Depreciation…Answered
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.
Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…
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…
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…
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 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
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.
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…
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 🙂
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.
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.
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.
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.
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?
Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.
Read any legendary investor on his key rules of picking up great stocks, and a parameter that will stand at the top of the list will be to seek out companies that have no or less competition, and operate in an environment that allows for steady and rising sales, profits, margins, and return ratios.
Such companies are far and few to be found in a hyper-growth, hyper-competitive, and hyper-entrepreneurial market like India.
Amara Raja Batteries Ltd. (ARBL) seems like one of those companies on the face of it. But does it really pass the test of a safe, profitable business from key angles that a sensible investor would look from?
What about the valuations? After all, even if a business is good, what determines an investor’s long-term returns is the price at which he buys that good business.
Let’s try to find all this by understanding ARBL’s business, the industry it operates in, factors that are working well for the company, and ones that can go wrong.
First, the Business
ARBL is India’s leading industrial and automotive battery maker, and is a joint venture between the Galla family (26% stake) and the US battery major Johnson Controls (26% stake).
It is the second largest manufacturer (after Exide) of valve-regulated lead-acid batteries (VRLA; also known as “sealed battery”) in India, and finds companies from the automotive (~50% of total revenue) and industrial (~50% of total revenue) sectors as its key customers. Its key battery brands include Amaron, PowerStack, Quanta, and PowerSleek.
As per its FY12 annual report, ARBL had…
In order to understand ARBL’s business deeper, it’s important for us to understand the nature of the oligopoly or duopoly market, which is characterized by just 2-4 firms competing against each other…like the Indian industrial and automotive battery market where ARBL and Exide are the two dominant players.
One of the economics models that studies the duopoly market is called the “Bertrand Model”, which suggests that, in a game of two firms, each one of them will assume that the other will not change prices in response to its price cuts.
In other words, firms compete by setting prices simultaneously and consumers want to buy everything from a firm with a lower price (since the product is homogeneous – like a car battery – and the consumer does not incur any costs in searching for the products).
If two firms charge the same price, consumers demand is split evenly between them.
Now, while this is not true of the Indian industrial and automotive battery market as of now – Exide has a much greater market share than ARBL – things are definitely looking to head in that direction. If t his were to really happen, it will be great for ARBL given that its market share will increase at the cost of Exide till both companies have an almost 50% share.
A crucial assumption of the Bertrand model is that both firms have the same constant unit cost of production, so that marginal and average costs are the same and equal to the competitive price.
My analysis of operating and margins of both ARBL and Exide suggest that thing do fit into these assumptions, as both companies have almost identical average operating and net margins over the past 5-6 years (though ARBL has witnessed some weakness off late owing to higher Lead prices, which I will cover later).
Now, from duopoly, let us understand a bit about oligopoly that also characterizes a very few firms competing against each other.
Here are a few key characteristics of the oligopoly model (text in italics is as per Wikipedia), and how the Indian automotive and industrial battery market stacks up on each of them…
1. Ability to set price: Oligopolies are price setters rather than price takers.
This seems to be working for ARBL and Exide, though only to a limited extent. As I will discuss below, the companies have not been able to pass through the entire raw material price hike to customers…and especially over the past 2-3 years owing to some squeeze from its large customers, especially in the automobile industry.
2. High entry and exit barriers: The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms.
This is true for both ARBL and Exide. These two have been leading the industry for years now, with no meaningful competition from any other player.
Just ask yourself – in car batteries, you must have heard of just two brands – Exide or Amaron – and throughout the past.
3. Number of firms: “Few” – a “handful” of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.
This is also true of the Indian automotive and industrial battery market, where both ARBL and Exide seem to be tip-toeing the line, depending on what the other is doing. First ARBL caught up with Exide in terms of branding and reach…and now Exide is doing in terms of capacity expansion and technology upgradation.
4. Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.
This is great news for both ARBL and Exide. Given their relationships with leading automotive and industrial consumers, quality of their products, and the relatively low price of their products (compared to the consumer’s total product cost; a car battery costs just Rs 3,000-5,000), they are in a great position to earn good profits over the next many years.
5. Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm’s market actions and will respond appropriately.
It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his or her objectives.
For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant.
Again, this is true in case of ARBL and Exide as we will understand in the analysis below.
6. Non-Price Competition: Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition.
True again for ARBL and Exide. Both these companies have maintained prices close to each other’s products and largely compete on branding and special schemes for distributors and direct consumers.
Now, while this is great for ARBL because Exide will not be able to outperform it in terms of margins and growth in the long run, the negative side is that even ARBL won’t be able to lead the changes in the market for long, and neither outperform Exide on profitability on a sustainable basis.
In fact, despite the big difference in their respective revenues (ARBL is 50% of Exide’s sales), their margins are almost similar and return ratios also tend to move in tandem.
Overall, being in an oligopolistic market can turn out to be a huge positive for ARBL in the long term, but with the limitation that its only competitor Exide is not going to sit quietly.
Anyways, let’s now turn to how things are going specifically for ARBL as of now.
What Looks Good?
Here are a few factors that are working out fine for the company as of now…
1. Sales & profit growth: The duopoly nature of the market has benefited ARBL as it just has one competitor to fight, which it has done bravely over the past five years. This is given that, while Exide has grown its sales and profits at average annual rates of 16% and 34% respectively over the past five years, the growth for ARBL has stood at 22% and 61% (though on a lower base).
Rising earnings serve as a good catalyst for stock prices, which has been highly true in the case of ARBL. So it’s important to seek companies with strong, consistent, and expanding profits. Also, more important than the rate of growth is the consistency in such growth. While ARBL’s profit has grown in spikes over the past few years, I won’t consider it too volatile for discomfort.
As per some estimates, the Indian battery market is worth Rs 100 billion, with the automotive battery segment accounting for over 65% of the overall market value. While VRLA batteries have a 25-30% share, lead acid batteries dominate the market with a 70-75% share.
The market is growing at an average annual rate of around 15%, which I believe is going to provide enough growth opportunities to ARBL. The company has set its eyes on Rs 40 billion in sales by FY16, which seems quite achievable as it needs to grow at just 10% to achieve that.
Unless raw material prices don’t play spoilsport, I don’t see any issues in ARBL also growing its profits at a decent pace during this period.
2. Moat: While both ARBL and Exide have moats around them – brand recognition, stickiness in demand, distribution, and steady client relationships – ARBL has done better to grow its moat over the past few years.
This is clearly seen from the company’s steady gross and net margins (at 32% and 10% respectively in FY13), even in the face of rising cost of raw materials – which is Lead in this case.
Lead is the biggest raw material for battery companies, and forms around 85% of ARBL’s total operating costs…and 60% of sales. The rising prices of this commodity has been a tad negative for the company in the past as it has been unable to pass on the entire cost hike to customers given the slowdown in overall demand, and steady competition from Exide.
Exide is better placed on the raw material front. Lead forms less than 70% of its total operating costs and 45% of sales. This is given the company’s secures a part of its lead requirement from its captive smelters, which ultimately help it benefit on the cost front.
Anyways, the reason ARBL has not seen a major dent in its margins despite higher raw material prices is because of a steady decline in its sales and marketing costs, which stand at under 7% of sales currently, down from 11% a few years back. A declining sales and marketing as percentage of sales also gives an indication of expanding moat as the company is spending less to not just cover its turf but also grow its business steadily.
Finally, I did some scuttlebutt among my friends, a few car dealers, and on the Internet on ARBL vs Exide. The former (ARBL) seems to be winning hands-down in terms of user experience, and price versus value equation.
So the brand moat certainly seems to be working for ARBL, as seen from the faster growth in its sales volumes – 25% average annual growth in units sold during FY08 to FY11 – as compared to just 10% for Exide, though the latter’s volume sales are three times of the former.
3. Capital efficiency: ARBL’s deepening moat is also visible from its steady and marginally higher return on equity, which stood at 27% in FY13, up from less than 20% six years back. During the same period, Exide has seen its return on equity decline from 20% to 18%.
Overall, the capital allocation track record of ARBL has been good in the past, with steady and high return on equity, no acquisitions, and reasonable dividends (payout has averaged 15% over the last five years).
When assessing companies on these parameters, especially RoE, it pays to look at consistency. ARBL scores well on this test, plus its RoE is now better than the industry (Exide).
The low capital intensity of the battery industry has also helped ARBL in earning good returns in the past. The company, for instance, spent a total of Rs 460 crore as capital expenditure during the six year period of FY06 and FY12. Against this, it earned revenue of Rs 2,360 crore in FY12.
4. Balance sheet strength: ARBL, like Exide, also has a clean balance sheet with negligible debt. The entire capacity expansion over the past few years has been funded through cash generated internally, plus the company has also been left with steady positive free cash flows (at least over the last five years).
The batteries industry also has a small working capital cycle, which is seen in case of both ARBL and Exide. ARBL’s average receivable and inventory days have stood at 56 and 47 over the past five years (as compared to 30 and 75 respectively for Exide).
So, if you were to go by Warren Buffett’s rule of seeking out companies with conservative financing, ARBL will clear the test – on both fronts of clean balance sheet, and steady positive FCF.
What Can Go Wrong?
1. Overconfidence in its abilities: The biases that we individuals suffer are also imminent at group and corporate levels. This can especially be said of companies that have witnessed a recent spurt in growth and that too against the tide of slowdown in its consumer industries.
I see ARBL sailing in this boat, and it comes our clearly from the company’s FY12 annual report (the latest available), where the management writes – “We have created a business plan with stretch targets. We are confident that we will be able to catalyse growth and meet aggressive targets through stronger capabilities.”
While there’s no doubt that the company finds itself in a good position as of now as far as its capacities and future demand assumptions are concerned. But if the slowdown in automobile and telecom industries were to persist for some more time, it can create some problems for the ARBL.
We already saw some hints of that in the just concluded FY13, when margins came under some pressure as the company was not able to pass on the hike in Lead prices to consumers, owing to slowdown in demand plus increased competitive pressure from Exide.
2. High Lead prices can play spoilsport: A large part of ARBL’s sales and profit growth over the past few years have been driven by volumes – more batteries sold – than better prices.
So, between FY04 and FY11 for which data is available, while ARBL’s volume sales grew at 36% per annum, selling prices improved by just 3% per annum. This is despite that Lead prices rose by 18% per annum during the same period (FY04 to FY11).
So a clear-cut pricing power is not seen for the company, which is largely the case of competition from Exide, which sails in the same boat.
Anyways, a sharp rise in Lead prices can negatively impact ARBL’s profits and margins going forward, especially given that Lead forms around 80% of the company’s total operating costs and thus has a great bearing on margins.
What is more, the impact of higher Lead prices will be greater on ARBL than Exide, as the latter has its captive smelter capacities at its service that help it absorb some of the price hike.
What about the Management?
Given ARBL’s performance over the past few years, and especially the stability in its margins and return ratios, I am comfortable with the management’s execution capabilities and capital allocation skills.
However, there are two things worth mentioning about here…
Read through the Comments sections below for some more risks associated with ARBL, and a few corporate governance issues that cast doubts on the management.
Valuations?
I find it easy to value companies that have simple businesses and simple balance sheets.
Of course, there is a great probability that whatever valuations I work up won’t come out right (that’s the most interesting part about valuations :-)), but still I’ve tried to assess ARBL’s valuations.
I am not explaining how I arrive at these different valuations, as the calculations are all there in the excel sheet I shared earlier…just that I have done some slight modifications here and there in my valuation calculations to adjust for the sound business quality and competitive moat of ARBL.
So here are my valuations for ARBL based on different methods…
Some assumptions I have used for DCF calculations are:
Based on this, my fair value estimates for the stock stand at Rs 250 to Rs 290.
On the face of it, ARBL looks fairly valued at this point in time, unless and until you want to be brave and buy the stock without any consideration for what Ben Graham said were the three most important words in investing – MARGIN OF SAFETY. That could be dangerous!
Anyways, just one more thing about ARBL’s valuations – the stock is currently trading at a price-to-earnings (P/E) multiple of 15x as compared to Exide’s 20x. In fact, ARBL has always traded at a discount to Exide largely on the back of the latter’s better-established presence in the industry.
However, if you were to consider the last few years’ P/E charts for both the companies, the discount is reducing. This is not just because Exide now commands a lower P/E multiple as compared to its past, but also because ARBL’s base P/E multiple has also risen to cover the gap.
Till ARBL does not do something really foolish, continues to be a simple business like it is now, and maintains a good growth record and clean balance sheet, I see the gap reducing even further. This could provide a fillip to the stock’s long-term returns, but only if you buy it after taking into account sufficient margin of safety.
You see, sensible investing is always about using “folly and discipline” – the discipline to identify excellent businesses, and wait for the folly of the market to drive down the value of these businesses to attractive levels.
You will have little trouble understanding this philosophy. However, its successful implementation is dependent upon your dedication to learn and follow the principles, and apply them to pick stocks successfully.
Never forget that, as an investor, it’s important to focus on decisions and not outcomes.
When I combine ARBL’s business quality with its valuations, I get a good business at fair valuations, which leads me to wait for a lower price before I can own the stock.
You don’t have to agree! 🙂
In the Comments section below, let the tribe know of your own analysis of ARBL…and also share your feedback, if any, on my report.
I have received an amazing response from tribesmen for the proposal to collaborate to write StockTalk.
Based on the responses I have received and with a view to cover companies from diverse sectors, here is the list of upcoming StockTalk coverage so that you are prepared with your own analysis to participate in the discussion. This covers the next six months’ coverage…
If you chose to write a StockTalk but don’t find your name in the list above, please don’t feel bad as I will include you in the next list after this six months period is over.
Here’s the first issue of Poke the Box, Safal Niveshak’s new e-letter on money, investing, and human behaviour, which will be delivered to your mailbox every Saturday morning.
Sign up here to receive the newsletter in your email, and get ready for stimulating Saturday mornings.
In other words, all things being equal, the best solution to a problem is usually the simplest one.
In investing, simplicity is the way to long term success. As Warren Buffett says – “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”
While analyzing stocks, it pays to avoid businesses where a lot of hypothetical situations must go right for future success. Thus, search for simpler business that require fewer assumptions and hypothetical scenarios to work out for them.
I often wonder why does our society appear to be increasingly embracing the complex way of life, when “the simple way” clearly leads to awesome wealth and happiness?
As an investor, I am pretty sure if you can avoid complexity, you would do wonders. In fact, the principle of Occam’s Razor is an intelligent investor’s best friend. Having a simple investment philosophy would mean more time for life outside of investing!
If you need inspiration, here’s something from the world’s best behavioural scientist, Professor Daniel Kahneman, who follows a simple financial plan for himself – “Keep it simple and aim to beat inflation. Don’t try to beat the market. When it comes to investing, less is more. And if you try to do more, you’ll often end up with less.”
Leonardo Da Vinci said, “Simplicity is the ultimate sophistication.”
Anyways, while Occam Razor is very useful, it should not be seen as a substitute for good empirical testing. It relies on subjective assessment of simplicity, rather than an objective tests in evaluating arguments.
So, as Newton said, try to make things simple, but not simpler. 🙂
Book Worm
I am re-reading Seth Klarman’s “Margin of Safety”, and here’s an important part I touched upon again…
Warren Buffett likes to say that the first rule of investing is “Don’t lose money,” and the second rule is, “Never forget the first rule.”
I too believe that avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t lose money” means that over several years an investment portfolio should not be exposed to appreciable loss of principal.
While no one wishes to incur losses, you couldn’t prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of a free lunch can be compelling, especially when others have already seemingly partaken.
It can be hard to concentrate on potential losses while others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome.
Stimulate Your Mind
Here’s some amazing content I read during the week gone by…
When we explore for ideas and information, sometimes we find things that are better or more exciting than what we were originally looking for. Thus, we need to keep our minds open to unsought-for possibilities.
Think of the times in your own life when one thing has led to something entirely different. How did you get interested in your line of work?
How about the times you’ve opened a particular book in search of a specific idea, and then found something even better in the inside pages?
As noted author Franklin Adams wrote – “I find that a great part of the information I have was acquired by looking up something and finding something else on the way.”
Inventor Charles Kettering said, “There will always be a frontier where there is an open mind and a willing hand.”
So, the next time you meet something unexpected, don’t ignore it. Instead, pay special attention to it. It may be a better idea God might have for you.
Idea Source: Roger von Oech’s Creative Whack Pack
Sign up here to receive Poke the Box in your email, and get ready for stimulating Saturday mornings.
Keep poking.
Get drenched in the rain.
Make time for yourself.
Be happy.
Till next weekend…
Vishal Khandelwal
Chief Poker – Poke the Box
I usually write on Safal Niveshak thrice a week, and on alternate days. So hearing from me two days back-to-back may seem odd to you.
But like a five-year old kid who wants to share with the world his new toy, I wanted to share with you a video I stumbled upon last night and could not wait to do that till Wednesday.
I couldn’t be patient like I try to be in my investing, so here I go! 🙂
[Read more…] about Legacy of Benjamin Graham: A Video Tribute
In an interview with Warren Buffett in 1993, Adam Smith, author of Supermoney, asked how the small investor can find good investment ideas.
Buffett said, “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.”
Smith asked, “But there are 27,000 public companies! Where should one start?”
Buffett replied, “Well, start with the A’s.”
Fifty years ago, when Buffett was starting out as a new investor, he was not the go-to guy if you wanted to sell your company or raise capital for your failing bank.
It has been quite some time since I have sparked opinions to my posts.
There used to be many comments and opinions on my posts till a few months back, and now, there’re just four or five here and there.
Either you have learned everything you wanted to learn here, or you find me out of good ideas worth reading.
Either you are busy with the holidays, or I am one boring writer.
You have to be busy with the holidays…because I know it’s not me! 😉
In fulfilling a dream I have seen ever since I saw Pete Sampras hitting those aces, graciously walking to the other side while bowing his head, and then hitting another ace, I started learning to play lawn tennis recently.
Then, while I was reading Howard Marks’ The Most Important Thing, I came across the three major influences on his thinking, which includes two books (one of them Nassim Nicholas Taleb’s Fooled By Randomness), and a 1975 article in The Financial Analysts Journal written by Charles D. Ellis.
I searched for this article, and found a masterpiece, not just for the insights but also because it instantly related to the kind of (terrible) tennis I am playing these days.
Titled “The Loser’s Game“, this article mostly concerns the game of tennis. It talks about how the approach taken by good and bad tennis players is also seen in investing.
In this article, Ellis cites a study done in a book called Extraordinary Tennis for the Ordinary Tennis Player written by Simon Ramo.
The study shows, and as Ellis had written in his article, that…
Professionals win points, amateurs lose points. Professional tennis players stroke the ball with strong, well-aimed shots, through long and often exciting rallies, until one player is able to drive the ball just beyond the reach of his opponent.
Amateur tennis is almost entirely different… the ball is fairly often hit into the net or out of bounds, and double faults at service are not uncommon. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor… gets a higher score because his opponent is losing even more points.
The part on amateur tennis sounds so similar to how small investors invest.
Most wealth destruction happens owing to those unforced errors – hitting into the net or out of bounds, and repeating double faults at service (while making buying decisions).
So, not anyone else but the small investor beats himself all the time!
Hey, you loser!
I imagine my tennis partner saying this every time I hit an easy ball into the net or out of the line.
But then, he needs to understand that I, being an amateur in amateur tennis, will mostly hit unforced errors till I learn to play better.
You don’t have such an excuse when it comes to investing your money.
You will purely lose the plot due to your own unforced errors – mistakes in stock picking – than due to your bad luck.
That’s exactly what Charlie Munger meant while saying, “All I want to know is where I’m going to die so I’ll never go there.”
That’s exactly what Ben Graham meant through his concept of “margin of safety”.
And that’s exactly what Seth Klarman meant when he wrote this in “Margin of Safety“…
Warren Buffett likes to say that the first rule of investing is “Don’t lose money,” and the second rule is, “Never forget the first rule.”
I too believe that avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t lose money” means that over several years an investment portfolio should not be exposed to appreciable loss of principal.
While no one wishes to incur losses, you couldn’t prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of a free lunch can be compelling, especially when others have already seemingly partaken.
It can be hard to concentrate on potential losses while others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome.
You can win
Investing can become a winner’s game for you only if you work towards reducing those unforced errors – errors in picking up stocks, and misbehaving.
Of course that will come only after you start playing the game, learn to play the right shots, and keep playing them for some time.
Remember that your opponent Mr. Market can get you to be overly optimistic by showering you with good news and promises, and then scare you with bad news and threats – all leading you to making those unforced errors!
But you can learn to win, as Ellis write in his follow-up article in 2003, this time called “The Winner’s Game”.
One way to do that is to learn to hit the first shot (making the first investment decision) so nicely that it makes the next shot easy.
The other is to avoid those unforced errors.
What do you say? Is your investment philosophy and checklist geared to reduce those unforced errors?