Walter Schloss passes away: His learnings remain

Superinvestor Walter Schloss passed away earlier this week. He was 95. From 1955 to 2002, by Schloss’s estimate, his investments returned 16 percent annually after fees, compared with 10 percent for the S&P 500.

Here are the golden rules as espoused by him.

1. Price is the most important factor to use in relation to value

2. Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.

3. Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock).

4. Have patience. Stocks don’t go up immediately.

5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.

6. Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for the weaknesses in your thinking. Buy on a scale down and sell on a scale up.

7. Have the courage of your convictions once you have made a decision.

8. Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.

9. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit. Before selling try to re-evaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E rations high. If the stock market historically high. Are people very optimistic etc?

10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 yeas before the stock sold at 20 which shows that there is some vulnerability in it.

11. Try to buy assets at a discount than to buy earnings. Earning can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.

12. Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money, it is hard to make it back.

13. Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with purchase and sale of stocks.

14. Remember the work compounding. For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 yrs, taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money.

15. Prefer stock over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.

16. Be careful of leverage. It can go against you. 

Model Thinking: Online Course

“The better decision maker has at his/her disposal repertoires of possible actions; checklists of things to think about before he acts; and he has mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decision arise.” (Herbert Simon, Nobel Laureate)


I recently came across an online class for Model Thinking.  I have started on it and it is very good. You can sign up for the class at the following website: http://www.modelthinking-class.org/

The class will last for ten weeks ending the last week of April. It will be covering two topics per week. Each topic will consist of a series of lectures with some embedded questions to make sure we are understanding the material as well as required and supplementary readings. Every week, starting in week two there will be a quiz. The quiz questions will vary in difficulty from basic competency questions to more challenging numerical calculations.

As you are probably aware, model thinking is critical to a serious investor's success. Without having the right (and enough number of) models in your head, it is not possible to analyze different businesses.

Need for mental models from Charlie Munger:
What is elementary, worldly wisdom? Well, the first rule is that you can't really know anything if you just remember isolated facts and try and bang 'em back. If the facts don't hang together on a latticework of theory, you don't have them in a usable form. 

You've got to have models in your head. And you've got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You've got to hang experience on a latticework of models in your head.

What are the models? Well, the first rule is that you've got to have multiple models—because if you just have one or two that you're using, the nature of human psychology is such that you'll torture reality so that it fits your models, or at least you'll think it does. You become the equivalent of a chiropractor who, of course, is the great boob in medicine.

Investing Mistakes

This post is written as a comment to the excellent post available here:- http://kiraninvestsandlearns.wordpress.com/2012/02/20/investing-mistake-and-a-list-of-value-investors/

Let me add a few points on this particular example, as I had a very very similar experience with PI. I studied PI, liked what I saw and got it. I followed it for a while and after this quarters results, I got really really bugged and sold nearly 80-90% of my holding (still holding a small fraction to keep it on my radar).

Your points about being able to value a company or business is critical to an investors success. That is one reaso why Buffet keeps harping on the "circle of competence". Pi, as a business model, is really good. It is in 2 distinctly growing markets which has a significant barrier to entry. The wildcard on this one is that the management seems to lack either integrity or brains - both of which are detrimental to a minority investor's wealth!!

Let me give two more examples from my investments, separated by 10 years!

Example 1 - In 2000, I bought Dr.Morepen (now Morepen Lab) at about Rs 100 (or thereabouts, cant remember exactly). After a few quarters, I figured that the company's powerpoint presentations and delivered results were poles apart and got rid of the stock at a small loss. I think I lost 2-3Rs per share. I checked the price today and it is Rs 3.90, so I saved about 90% capital loss in a 10 year period, in addition to the opportunity cost.

Example 2- Last year a fellow investor gave a very strong suggestion to buy Andhra Sugar. I figured that the business may do well, but was beyond my circle of competence as I had no idea what I had to do to track caustic soda and sugar prices.

It is absolutely critical to have an investment framework that one stocks to. Keep it written down so that you can go through it before you click the Buy button. Also, in my opinion, it is critical to keep a margin of error. Sir John Templeton had approximately 6 out of 10 profitable investments, and he is in the Hall of Fame of investors! So, we should be planning for a poorer average.

I am a mid and small cap investor and for someone like me, I know I will make my share of mistakes. So, what I try to relentlessly focus on is make my winners big and cut out my mistakes as quickly and ruthlessly as possible.

HSIL & Cera sanitaryware - Looking for one and finding another!

I was looking at HSIL (Hindustan Sanitaryware) and it came across as an excellent and boring business!! They make about 50% revenues from sanitaryware and the other 50% from glassware, specially colored bottles for soft drinks like Sprite, beer and industrial chemicals. It is a good solid business, run by what seems to be able management. I have bought a small initial quantity as well.

Then I stumbled upon Cera sanitaryware. It is a much smaller company but focused on only the sanitaryware segment. The basic comparison is given in the table below.

	HSIL	Cera
Sales	1073.88	254.95
PAT	87.35	26.54
EPS	13.23	20.97
Sales growth (5 yrs CAGR)	21.79%	23.39%
PATgrowth (5 yrs CAGR)	31.61%	30.79%
EPS growth (5 yrs CAGR)	25.76%	29.48%
OPM%	17.68%	19.47%
NPM%	7.21%	10.79%
Div Yield%	1.67%	1.19%
RoE%	11.66%	23.79%
RoCE%	13.38%	29.65%
Asset Turnover ratio	0.99	2.14
Debt-Equity ratio	0.59	0.34
Div payour ratio	24.49	13.85
PE	9.2	8.6
P/B	1.4	2.3
Stock returns (last 5 yrs)	63.09%	183.19%
Sensex return (last 5 yrs)	26.80%

Having looked at Cera, I think it definitely merits a closer look and probably a bigger slice of the investment pie than HSIL.

P.S: I am an interested part in these stocks as I hold HSIL and intend to buy into Cera. Please do your own due diligence before investing.

JK Lakshmi Cement - It's time may have come!

I have had JK Lakshmi Cement in my portfolio for a while. My logic of buying a cement stock which is a pure commodity and something I usually avoid, is because I keep an eye out on cement dispatches and have made a fair deal in the previous cycle on Gujarat Ambuja and India Cement stocks. My experience has been that if you can buy into cement companies when they are really really cheap and no one fancies them, you can make a 5-10 bagger in a 3-4 year cycle.

With this in mind, I had bought in JK Lakshmi Cement, as it was one of the most attractively priced, that I found. The company has announced its Q3 results and it has been excellent. Net sales has increased from 315 cr to 440 cr (39.5% growth). Net profit has increased from 4.6 cr to 49.2 cr (970.4% growth). EPS has increased from 0.4 cr to 4 cr (900% growth). Dispatches have had a healthy 12.8% yoy growth to 1.22mn tonnes and strong realization growth of 26.3% yoy to Rs. 3,359/tonne.

The management has announced an equity share buyback up to an amount of Rs 97.5cr at a maximum price of  Rs 70 per share. Assuming  that entire buyback happens at  the price range of Rs 65-70,  the paid-up equity will  reduce by somewhere around 7-8%. Currently, the stock is available at a P/B of 0.7 and EV/ton of $54 both of which are at a discount to its peers.


The stock has moved up sharply in the last few weeks,from a low of 40 in the end of Dec'11 to its current price of nearly 62. The stock is still available at a reasonably cheap price and can move up significantly from here in the next 1 year. I would not be surprised if I see a triple digit price in the next 6 months.

Note: I am invested in JK Lakshmi Cement. Please take my views as biased. Consult with your financial adviser before investing.