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Thursday 29 October 2020

Weekend Reading

Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. 

I especially try to not post Corona related articles as that is all one gets to read in all traditional media.

If you like this collection, consider forwarding it to someone who you think will appreciate.

What makes companies great

It’s a safe bet that high organic asset growth is the primary characteristic of great companies. But growth in the company’s cash balance was the most significant. Which is not surprising.

A true compounder is financially strong. It makes cash hand over fist. Which gives good management optionality. It can be reinvested to grow the business, paid out in a steadily increasing dividend, used to buy back stock, pay down debt, or set aside for tough times. All five options show up in the tables below.

The other safe bet is multiple expansion. Investors paid a much higher Price/Book at the end of the decade than at the beginning. The multiple was two to four times higher, on average, compared to the prior decade.

The combination of those two — a growing company and investors that will pay more and more money for said growth — produces unbelievable returns.


Holding two opposing views

Step one is figuring out what your main goal is. 

Is it to make the best return possible? Is it to get a good return with minimal risk? Or something else?

Step two is discerning what the best identity would be that aligns with your goal. 

If the goal is to make the best return possible, an ideal identity would be: I am a money-maker. 

This shocks you out of the inability to sell a stock. If the best decision is to sell, then you will, if your identity supports it. Obviously this is simplistic, but the main idea remains: identity plays a bigger role than we think.

Most of the time we don't specifically realize what our identities are. Instead, they subconsciously affect our choices. If we aren't aware of them, we will resort to making emotional decisions. 


The resetting of retail

Physical retail itself has been a ‘boiling frog’ for 20 years. Every year ecommerce gets a little bigger and the problem gets a little worse, but the growth in any given year was never big enough for people to panic, and you could always tell yourself that sure, people would buy that other industry’s product online, but not yours. I think we all now understand that anyone will buy anything online, given the right experience, and if your retail model is based on being an end-point to a logistics chain then you have an existential problem. 


Permanent assumptions

You can build a business strategy around the things that are stable in time. It’s impossible to imagine a future 10 years from now where a customer comes up and says, “Jeff I love Amazon, I just wish the prices were a little higher.” Or, “I love Amazon, I just wish you’d deliver a little slower.” Impossible.

So we know the energy we put into these things today will still be paying off dividends 10 years from now. When you have something you know is true, you can afford to put a lot of energy into it.


The great silver short squeeze

If you want to know what happens when multiple long positions demand physical delivery of a commodity all at once, you need to look no further than the Hunt brothers silver saga of 1979-1980. They did nothing illegal, the Chicago Board of Trade (CBOT) and COMEX changed the rules in the middle of the game, the Commodity Futures Trading Commission (CFTC) implemented new regulations, and the Hunts were bankrupted, unjustly. All they really did was simply request the delivery of the physical metal for which they held valid, legal contracts. The shorts were unable to meet the delivery at any price because enough deliverable silver did not exist - a classic short squeeze and the panic was on.

This is their story.


Disclaimer: Abhishek Basumallick is the Head of the equity advisory www.intelsense.in for long term wealth creation and a pure quant focused newsletter at www.quantamental.in. The blog posts should not be construed as investment advice. Please do your own due diligence before investing.

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