Weekly Reading - Some Interesting Stuff

A beautiful glimpse into the Bombay Plan, a powerful planning document created by the most powerful businessmen and technocrats of India in 1944, and what it wanted to achieve.

The Bombay Plan’s targets were overwhelmingly more ambitious than anything the Planning Commission of the government of India ever attempted. It had envisaged the doubling of per capita income over fifteen years and proposed appropriate sources of finance for that ambitious target. 

https://qz.com/india/1464869/the-story-of-jrd-tata-gd-birlas-bombay-plan-for-india/

Brian Acton, the founder of WhatsApp, walked away from $850m when he resigned and moved out of Facebook. He speaks at length about that and other aspects. Paints a very poor picture of Facebook as a company. Fascinating read.

http://www.forbesindia.com/article/cross-border/whats-up-with-brian-acton/51841/1

Google employees have renewed their public protests against “Project Dragonfly,” a censored and surveillance-enabling search app that Google is reportedly building for the Chinese market.  oogle has said little about Dragonfly, but numerous reports have detailed its planned features, which reportedly range from blocking specific keywords like “human rights” to linking searches with users’ phone numbers.

https://www.theverge.com/2018/11/27/18114285/google-employee-china-censorship-protest-project-dragonfly-search-engine-letter

Verily Life Sciences, a research organisation run by Alphabet, Google's parent company, plans to infect thousands of male Aedes aegypti mosquitoes with Wolbachia, a common bacterium, and release them out in the open. This breed of genetically altered male mosquitoes, which don't bite humans, would then mate with the females, and pass on Wolbachia. Now, if the female mosquitoes lay eggs, those eggs will not hatch!

https://www.businesstoday.in/technology/news/google-plans-to-wipe-mosquitoes-off-the-face-of-the-earth/story/295671.html

Food-delivery sites can, in the long run, switch customer loyalty from restaurants to the platform itself. A Swiggy user, for instance, may go for the cheapest or closest option rather than picking a restaurant deliberately. “Once the platforms have enough clout, they can dictate prices or even set up their own kitchens".

https://qz.com/india/1476477/keralas-restaurants-oppose-zomato-swiggy-foodpanda-uber-eats/

This is something which is very concerning and scary for the country, and unfortunately is not getting the importance it deserves from both policymakers and the media.

Employability across education domains are less than 50% across board.

https://qz.com/india/1473437/indian-mba-graduates-get-less-employable-engineers-improving/

Tribute to a legend - Marty Whitman

Martin Whitman, a legendary value investor, passed away on 16th April. He was the founder of  Third Avenue Management. Marty, as he was better known as, was a passionate value investor and a teacher. He was associated and took classes at Syracuse University’s Whitman School of Management, named after him. He was a distinguished Management Fellow at the Yale School of Management and served as an adjunct professor at Columbia University Business School.

I first became aware of him about 15 years back, from a talk given by Seth Klarman, where Seth suggested reading Marty's book "The Aggressive Conservative Investor". I read the book and it was packed with a lot of good and simple insights. Two ideas that stuck with me were, i) buying companies with low margins because of low competitive intensity and ii) mean reversion of sectors.

Here are some links to help you know the man from his works:

Dear Fellow Shareholders - (online book) )https://mjwhitman.pressbooks.com/

https://25iq.com/2013/12/15/a-dozen-things-ive-learned-from-marty-whitmanthird-avenue-about-investing/

Marty Whitman Boston College Presentation on October 15th, 2015

https://brianlangis.files.wordpress.com/2018/04/having-the-last-laugh-barrons.pdf

Highlights from Book - Common Stocks and Common Sense - Edgar Wachenheim

Common Stocks and Common Sense by Edgar Wachenheim is a case-study based book on investing. In structure it is similar to Beating the Street by Peter Lynch. Edgar used to run Greenhaven Associates with an excellent long term track record. In the book, he goes through some of his picks, the rationale of why he bought them, his process of stock selection and the emotions that goes with investing. It is a good book dealing with real-life examples of a good value investor. 

Below are the key points I noted from the book.



The strategy is to try to purchase deeply undervalued securities of strong and growing companies that hopefully will appreciate sharply as the result of positive developments that already have not been largely discounted into the prices of the securities.

I do my best to make decisions that make sense given everything I know, and I do not worry about the outcomes.

When an investor is barraged with particularly bad or good news, he can reread the memos, notes, and models he wrote before the occurrence of the news. He then can ask himself three questions: What really has changed? How have the changes affected the value of the investments under consideration? Am I sure that my appraisal of the changes is rational and is not being overly influenced by the immediacy and the severity of the news?

When we purchase a stock, we are interested in what the company will be worth two or three years

I knew that my projections of IBM’s earnings and values were nothing more than best guesses based on incomplete information. However, having the projections to work with was better than not having any projections at all, and my experience is that a surprisingly large percentage of our earnings and valuation projections eventually are achieved, although often we are far off on the timing.

I greatly admire Warren Buffett. He is one of the great investors of all time. But I strongly disagree that the shares of most wonderful businesses can be held forever because most wonderful businesses become less wonderful over time—and many eventually run into difficulties.

My job would be a lot easier and much more relaxing if I could fill a portfolio with outstanding companies that I never would sell. But our ambitions lead us to seek shares that are temporarily deeply undervalued and then sell the shares when they become fully valued. This is an approach to investing that is less relaxing and that requires considerable effort and time, but that has worked for us.

I almost always start my analysis of a company by studying its balance sheet. It is said that a shareholder makes money off the income statement, but survives off the balance sheet, and I agree.

When studying a balance sheet, I look for signs of financial and accounting strengths. Debt-equity ratios, liquidity, depreciation rates, accounting practices, pension and health care liabilities, and “hidden” assets and liabilities all are among common considerations, with their relative importance depending on the situation. If I find fault with a company’s balance sheet, especially with the level of debt relative to the assets or cash flows, I will abort our analysis, unless there is a compelling reason to do otherwise.

If a company’s balance sheet passes muster, I then try to get a handle on management. The competence, motivation, and character of management often are critical to the success or failure of a company. To form an opinion on management, I normally pay careful attention to the management’s general reputation, read what the management has said in the past, assess whether the management’s stated strategies and goals make sense, and analyze whether the management has been successful carrying out its strategies and meeting its goals.

However, I am humble about my abilities to accurately assess managements. Experience shows that investors can be unduly impressed by executives who are charismatic or who purposely say what investors want to hear—who play to their audience. Also, investors frequently will undeservedly credit management for a company’s favorable results and vice versa. Favorable or unfavorable results often are fortuitous or unfortuitous.

After trying to get a handle on a company’s balance sheet and management, we usually start studying the company’s business fundamentals. We try to understand the key forces at work, including (but not limited to) quality of products and services, reputation, competition and protection from future competition, technological and other possible changes, cost structure, growth opportunities, pricing power, dependence on the economy, degree of governmental regulation, capital intensity, and return on capital.

Our models normally include earnings projections for the next two or three years. Our valuation is based on a multiple of projected earnings and cash flows.

In the stock market, it is best to be flexible and not be tied to conventions or rules.

My own policy is that no single stock should equal more than 12 percent of the total value of a portfolio and that no single industry should equal more than 25 percent of the total value. When measuring the percentages, I use the cost of the stock rather than its market price. That way, I am not forced to reduce the size of a position that appreciates faster than the portfolio as a whole.

Current fundamentals are based on known information. Future fundamentals are based on unknowns. Predicting the future from unknowns requires the efforts of thinking, assigning probabilities, and sticking ones neck out—all efforts that human beings too often prefer to avoid.

In the investment business, relatively unpredictable outlier developments sometimes can quickly derail otherwise attractive investments. It comes with the territory. So while we work hard to reduce the risks of large permanent loss, we cannot completely eliminate large risks. However, we can draw a line on how much risk we are willing to accept—a line that provides sufficient apparent protection and yet prevents us from being so risk averse that we turn down too many attractive opportunities. One should not invest with the precept that the next 100-year storm is around the corner.

I revise models frequently because my initial models rarely are close to being accurate. Usually, they are no better than directional. But they usually do lead me in the right direction, and, importantly, the process of constructing a model forces me to consider and weigh the central fundamentals of a company that will determine the company’s future value.

I strongly believe in Warren Buffett’s dictum that he never has an opinion on the stock market because, if he did, it would not be any good, and it might interfere with opinions that are good. I have monitored the short-term market predictions of many intelligent and knowledgeable investors and have found that they were correct about half the time. Thus, one would do just as well by flipping a coin.

In the end, the psychological rewards of being right can be as important as—or more important than the monetary rewards. And they are interrelated. When you feel good, you are more likely to do well.

But I believe that investors sometimes need to be open to new ideas that challenge previous convictions. In the investment business, as in life, one becomes disadvantaged if one develops tunnel vision.

Often, when I am in a quandary about whether to sell one of our holdings, I sell half or some other fraction that makes sense under the circumstances.

Occasionally, a black swan adverse event does derail one or more of our investments. When this happens, we must be ready to unemotionally rethink the economics of continuing to hold the investments—and, if necessary, sell.

When we are wrong or when fundamentals turn against us, we readily admit we are wrong and we reverse our course. We do not seek new theories that will justify our original decision. We do not let errors fester and consume our attention. We sell and move on.

Our central strategy is to purchase deeply undervalued securities of strong and growing companies that likely will appreciate sharply as the result of positive developments.

To successfully assess probabilities and make good investment decisions, an investor should hold considerable amounts of information about the companies and industries he is investing in. Having superior information (both quantity and quality) can give an investor a competitive edge. To obtain information, we spend a large percentage of our time researching the fundamentals of companies.

Pay more attention to what managements do than to what they say. Remember, managements, like most other people, tend to act in their self-interest.


Favor managements who are highly incentivized to achieve higher prices for their shares.

Learning from Security Analysis - Part 1

I have started re-reading Security Analysis, 6th edition, (also will add on things from the 5th ed). I have been putting it on the backburner for sometime, but since the last time I read this was about 14 years back, decided that I have changed too much not to re-read this once more. Hoping to learn a lot more the second time around.

From the preface to the 6th edition by Seth Klarman

Value investing is not a paint-by-numbers exercise. Skepticism and judgment are always required. For one thing, not all elements affecting value are captured in a company’s financial statements—inventories can grow obsolete and receivables uncollectable; liabilities are sometimes unrecorded and property values over - or understated. Second, valuation is an art, not a science. Because the value of a business depends on numerous variables, it can typically be assessed only within a range. Third, the outcomes of all investments depend to some extent on the future, which cannot be predicted with certainty; for this reason, even some carefully analyzed investments fail to achieve profitable outcomes.

It is not enough just to number crunch. A business participates in a complex adaptive system, which is continuously in a flux. We need to be able to understand businesses and their operating environments; political, economic and social environments are also important to be understood.

While bargains still occasionally hide in plain sight, securities today are most likely to become mispriced when they are either accidentally overlooked or deliberately avoided. 

Before buying, it is important to ask the question, why is this cheap?

When bargains are scarce, value investors must be patient; compromising standards is a slippery slope to disaster. New opportunities will emerge, even if we don’t know when or where. In the absence of compelling opportunity, holding at least a portion of one’s portfolio in cash equivalents (for example, U.S. Treasury bills) awaiting future deployment will sometimes be the most sensible option. -- This is a difficult thing to do emotionally, especially in a rising market.

Like Klarman says, this is a very very difficult thing to practice. In a rising market, most value investors get out too early, which in itself is not a bad thing, but tests ones patience and fortitude immensely, to see ones friends keep making money when one is out of the market, sitting on cash.

Even in an expensive market, value investors must keep analyzing securities and assessing businesses, gaining knowledge and experience that will be useful in the future. 

Keep sharpening your saw or as Peter Lynch has said, keep turning over as many rocks as possible. I think it is important to study business in a pattern to get the most benefit. I like to look at a particular industry and multiple stocks within it.

Selling is more difficult because it involves securities that are closer to fully priced. As with buying, investors need a discipline for selling. **First, sell targets, once set, should be regularly adjusted to reflect all currently available information.** Second, individual investors must consider tax consequences. Third, whether or not an investor is fully invested may influence the urgency of raising cash from a stockholding as it approaches full valuation. The availability of better bargains might also make one a more eager seller. Finally, value investors should completely exit a security by the time it reaches full value; owning overvalued securities is the realm of speculators. 

For stocks which are compounding machines, we need to keep updating the intrinsic value, so that we do not get out of them too early. On the other hand, a sense of what a stock is worth is a must at all times for all stocks in one's portfolio.

Don't Build Noah's Ark

We have been witnessing a very strong market sentiment that started with the run up to the general elections and then continued with the once-in-thirty-years win of a single majority by any political party in India. With a pro-reform mindset, the BJP government led by Narendra Modi has promised "acche din" to the people.

I have been bullish on the Indian market since last year and believe that this is just the beginning of a bull market in India. And it has a long way to go. I hear a lot of market players talking about steep corrections in the near future. As long as there is such healthy scepticism in the market, there is unlikely to be any major reversal. Also, intermediate corrections are healthy in a bull market and usually gives the opportunity to investors to get into good stocks of their choice.

A bull-market brings with its in-built  challenges for investors. Sell side analysts and brokerages start aggressively pushing their stock recommendations. Investors get such "multibagger ideas" daily in the inbox, whatsapp, facebook and other such groups & forums. Suddenly, "investment experts" come out of the woodwork and start making recommendations and touting up their "fantastic past records". And people get lured by the easy gains in the market and start "collecting" stocks. Their portfolio starts looking like what I call the Noah's Ark - having two of everything!! Stop. Think. And then only buy those companies which as an investor you are comfortable with; those stocks which are within your circle of competence.

And always remember sometimes the existing stocks in your portfolio and are as good (if not better) than the latest hot stock you are pursuing. So, focus on businesses, moderate return expectations (most errors occur when people try to chase incrementally higher returns) and cut out the noise.

A poem for value investors!!

For a change, I am posting a poem that was written by Rudyard Kipling in 1895. It is for all and not just value investors, but it reflects stoicism at its best. One of my favourite poems in the English language :-)

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too:
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated don’t give way to hating,
And yet don’t look too good, nor talk too wise;

If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim,
If you can meet with Triumph and Disaster
And treat those two impostors just the same:
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build ’em up with worn-out tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss:
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: ‘Hold on!’

If you can talk with crowds and keep your virtue,
Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much:
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a man, my son! 

Buffet Partnership Letters (1957 to1970) - Key Takeaways and Learnings - Part I

Reading Warren Buffet is always fascinating and instructive. So, yesterday I started re-reading the Buffet Partnership Letters that he wrote between 1957 to1970 with the express desire to brush up on some of his wisdom when he was in his "formative" years as an investor. Also, another factor I want to understand is how his thought process changed over the years, so I am planning to read all his letters till date sequentially. So, expect a few more posts on this topic in the future.
 
I start off from 1957 onwards.

On his investment philosophy:

Obviously during any acquisition period, our primary interest is to have the stock do nothing or decline rather than advance. Therefore, at any given time, a fair proportion of our portfolio may be in the sterile stage. This policy, while requiring patience, should maximize long term profits.

I would consider a year in which we declined 15% and the (Dow Jones) Average 30% to be much superior to a year when both we and the Average advanced 20%. Over a period of time there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur. The important thing is to be beating par; a four on a par three hole is not as good as a five on a par five hole and it is unrealistic to assume we are not going to have our share of both par three's and par five's.

On the exuberant market levels:

During the past year almost any reason has been seized upon to justify “Investing” in the market. There are undoubtedly more mercurially-tempered people in the stock market now than for a good many years and the duration of their stay will be limited to how long they think profits can be made quickly and
effortlessly. While it is impossible to determine how long they will continue to add numbers to their ranks and thereby stimulate rising prices, I believe it is valid to say that the longer their visit, the greater the reaction from it.

Most of you know I have been very apprehensive about general stock market levels for several years. To date, this caution has been unnecessary. By previous standards, the present level of "blue chip" security prices contains a substantial speculative component with a corresponding risk of loss. Perhaps other standards of valuation are evolving which will permanently replace the old standard. I don't think so. I may very well be wrong; however, I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss, resulting from the adoption of a "New Era" philosophy where trees really do grow to the sky.

Want to be a better investor? Chuck your online portfolio

There are many things which you can do to evolve as better investors. Multidisciplinary learning, reading annual reports, deep knowledge in some business areas, asset allocation, position sizing, concentration vs diversification, portfolio management etc. In this post, I want to share one area which subtly pushes you to becoming a better investor.

These days nearly everyone maintains an online portfolio. These portfolios provide real-time (or delayed by a few minutes) portfolio value. It maintains your buy price, number of stocks, current market price and total current market price of holding.

Now let me come to why you should NOT maintain an online portfolio. It is important to know and understand what action we are taking based on the information I possess. Having an online portfolio does not help in taking any action. For example, if the market value of your portfolio rises 0.5% on a day, do you start thinking that "Wow, I am 0.5% richer, let me sell all my holdings!!". You don't. You mostly stare blankly at the computer/mobile/tablet screen and feel happy (if the portfolio is up), sad (if it is down), very happy (if it is up more than the index) or very sad (if it is down more than the index). So, if you don't really do anything productive with your online portfolio, isn't it time to question why you need it in the first place?

Here are some distinct benefits of NOT having an online portfolio:

• You don't waste time on tracking prices on a daily (or hourly) basis
• You actually do something productive with your time (like reading annual reports, sector reports or getting your day-job completed)
• Your time horizon for investing increases as you are not on a minute-by-minute tracking mode
• You maintain an offline (paper or simple spreadsheet) and update the prices once-a-quarter (or more infrequently if you like). Simple fact of having to look up individual prices will deter you from updating frequently!!
• You will limit the number of stocks in your portfolio from 100s to a much lower number if you have to track prices manually!!

This is one easy way to inculcate a good investing practice. (Apart from stopping to listen to the chatteratti on CNBC). Try it and see if it works for you.

Tide Water Oil Ltd

I was recently looking at an interesting company - Tide Water Oil Ltd (TWOL). 


The major product brands of TWOL are “Veedol” and “Nippon Mitsubishi”.The product range includes automotive lubricants (engine oils, gear oils, transmission oils), industrial lubricants (hydraulic oils, superclean hydraulic oils, gear oils, specialty lubricants) and automotive and industrial greases.

It has also invested in wind power (which a lot of companies have done primarily for tax benefits) but the revenues (2 cr) is negligible in the overall scheme of things. 


What is interesting is that this year the company aquired Veedol International Ltd from BP plc and has gained access to the Veedol brand in over 120 countries of the world. The company has established a subsidiary in Dubai, Veedol International DMCC, to cater to Middle East and North Africa.


Now some numbers:-

P&L Statement	FY12	FY11	FY10	FY9	FY8	FY7
Sales	1004.47	861.42	751.58	610.48	504.83	420.58
Other Income	1.98	4.72	3.51	0.05	4.35	2.39
Op Profit	75.65	99.06	91.66	47.7	35.97	15.8
EBDIT	75.65	103.78	95.17	47.75	40.32	18.19
Interest	1.1	1.89	1.93	3.1	2.59	3.52
Depreciation	9.26	9.71	6.18	3.39	2.5	1.76
PBT	86.13	92.18	87.06	41.26	35.23	12.91
Tax	27.11	30.3	31.54	18.23	12.14	3.98
PAT	57.92	64.16	57.79	27.55	23.18	8.97
EPS	664.86	736.46	663.34	316.23	266.04	102.96

Num of shares	871,200	871,200	871,200	871,200	871,200	871,200
Dividend per share	120	60	50	30	20	15
Dividend Yield	1.78%	0.89%	0.74%	0.45%	0.30%	0.22%

Dupont Analysis
OPM(%)	7.53%	11.50%	12.20%	7.81%	7.13%	3.76%
NPM(%) -- (A)	5.77%	7.45%	7.69%	4.51%	4.59%	2.13%
Asset turnover(avg) -- (B)	2.16	3.29	3.69	3.96	3.81	3.51
RoA(%)	12.45%	24.53%	28.38%	17.88%	17.48%	7.48%
Financial Leverage -- ( C)	1.51	1.00	1.00	1.02	1.05	1.13
RoE(%) -- (=A*B*C)	18.85%	24.53%	28.38%	18.24%	18.30%	8.49%

Key Risks:

• A lot depends on crude prices. 
• The company is owned by Andrew Yule (a PSU),  United India Insurance Company Limited and Life Insurance Corporation of India, so there is possibly some amount of government control or "inefficiency" built in.

Valuation:-

It trades at a PE of roughly 10 times earnings and 1.9 times Price/Book. It has been a regular dividend payer and is likely to continue to do so. Also, the company is available at a much cheaper valuation as compared to its peer - Castrol, although it is much smaller in size.

Catalyst for Valuation Trigger

The Dept of Divestment, Ministry of Finance, is planning to sell Andrew Yule's, United Insurance's and LIC's stake in TWOL to a strategic investor. 

Please refer to http://www.divest.nic.in/PIM_TWOL(19April).asp for further details. 

If the sale goes through, and we don't see any push back from political front (read Mamata Banerjee, as this is a Calcutta headquartered company), then this can act as a trigger for the stock price.

Disclosure:-

Please  consult your financial advisor for your investments. This post is not an investment advice and I do not take any responsibility for your gains or losses!