Guru Speak: Tenets for Value Investing by James Montier

I am just beginning to read James Montier's extremely acclaimed book Value Investing: Tools and Techniques for Intelligent Investment, so thought would share some of his thoughts that I had read in 2010. Important to note that how he has adapted his views on investing after 2008.


Tenet I : Value, Value, Value - Value investing is the only safety first approach I have come across.By puttig the margin of safety concept at the heart of the process, the value approach minimizes the risk of overpaying for the hope of growth.


Tenet II : Be Contrarion - Sir John Templeton once said that "It is impossible to produce superior performance unless you do something different from the majority".


Tenet III : Be Patient - Patience is integral to value approach on many levels, for waiting for the fat pitch, to dealing with the value manager's curse of being too early.


Tenet IV : Be Unconstrained - While pigeon-holing and labelling are fashionable, I am far from convinced that they aid investment. Surely, I should be free to exploit value opportunities wherever they may occur.


Tenet V : Don't Forecast - We have to find a better way of investing than relying upon our seriously flawed ability to soothsay.


Tenet VI : Cycles Matter - As Howard Marks puts it, we can't predict but we can prepare. An awareness of the economic, credit and sentiment cycles can help with investment.


Tenet VII : History Matters - The four most dangerous words in investing are "This time its different". A knowledge of history and context can help avoid blunders of the past.


Tenet VIII : Be Skeptical - One of my heroes said "Blind faith in anything will get you killed". Learning to question what you are told and developing critical thinking skills are vital to long-term success and survival.


Tenet IX : Be top-down and bottom-up - One of the key lessons from the last year (2008) is that both top-down and bottom-up viewpoints matter. Neither has a monopoly on insight.

Guru Speak: Lessons from Bruce Berkowitz

Here is a list (highlights are from me) from Bruce Berkowitz, a very prominent value investor and owner of Fairholme Capital and judged as the best fund manager of the decade in 2010 by Morningstar.

• You always have to have cash, especially when no one else has it. 
• No free lunch- it’s not free, or it’s not lunch.
• You can’t change people! You can change yourself, but not others.
• You only see reality under extreme stress- you want to get to know someone, you need to see them under extreme stress.
• Volatility is not risk!
• Always assume you will have bad luck.
• Few variables to win. Once you have to think about more than 3 variables, your odds of winning are low.
• If you have to use more than 6th grade math, you’re in trouble.

Dark clouds on the economic horizon

Let me make a confession. The last few years I have not read a single pre-budget article nor watched any pre-budget shows on TV. I have shied away from these as I have seen that the budget has been hyped up by the TRP/ratings hungry media into something which it is not. So, inevitably the budget disappoints and after a couple of days people forget about it completely.

This time looking at the macro economic scenario after the budget, I see two dark clouds on the horizon. The first is the huge market borrowing planned by the central government to the tune of 5.8 lakh crore. The second is the rupee depreciation.

The net impact of the huge government borrowing would mean that the interest rate is unlikely to come down in the near term. Even if it does, it will not be more than 0.5% to maximum of 1.0%. It will also make corporate borrowing more difficult and may push more and more companies towards ECB (external commercial borrowing). Both of this is likely to be a major dampener for corporate earnings growth.

FII net inflows into India in 2012 has been $7.16 billion as per SEBI. To put that in perspective, the FII net outflow in 2011 was $358 million. However, in the euphoria of such large doses of FII liquidity, an important point is being missed. The fact is that even with this huge inflow, the rupee has not appreciated at all. In fact, it continues to hover around the Rs 50 mark with respect to the US dollar. This means if the FII inflows weaken, the rupee can take another dive towards the 55-57 to the dollar mark.

Macro economic forecasting is a fool's endeavour and I engage only to amuse myself :-) Sometimes, though it can give some insights into the headwinds and tailwinds of the economy. At this time, I am a little bit more skeptical than six months back on the immediate economic future. I think I will have to relook at those stocks which have high FCCB/ECB borrowings and maybe shed some weight there. Good buying opportunities may be there in export oriented companies.

Portfolio Query: What to do with my portfolio?

A reader sent a query on an older post "My Rules for Investing":

Great Post!!.

A generic query. Even after repeated warnings a lot of us have bought a few stocks based on TV channel/CNBC/Guru's tips etc..which results in
a) Too many stocks in portfolio around 35
b) Some are down around 25% & unfortunately i have no investment thesis & hence no plan on what to do with them.

What can be plan of action here, should i sell them at a loss, build a thesis and then accordingly hold or sell the stock or finally keep them in cold storage and hope that after 3 years they have appreciated :) 

Here is my response. I am putting it up here so that others who may have a similar predicament, can benefit and if anyone has a better idea, can share it with me :-)

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Firstly, stop listening to all "gurus" on TV for your financial health :-) If they knew which stock would do well, they would reverse mortgage their houses and buy those stocks :-)

For your current holdings, the only option you have is to build conviction. Here is a quick and dirty process that you can follow:-

1. Take one or two stocks a day and go through their financial numbers and basic business (what it does)
2. Check on debt levels
3. Check if company pays regular dividends
4. Check if sales and profits are either constant or growing over the last 5 years (atleast) - the growth need not be every year but on a average 3 out of 5 years there should be reasonable growth.
5. Check the RoE & ROCE. Take a real hard look if they are below 15%
6. Check if there is +ve operational cash flow for atleast last 3 out of 5 years

If you do this, it wont take more than 30-60 mins each and you will get a much better idea of each company. Do this for every company in your portfolio. If you find ones which you do not understand or the numbers don't look good at all, just go ahead and sell. Those where you are not sure, dig a bit deeper.
Also, remember once you have a set of companies that you like and understand, it may be a better bet to keep buying into those than always looking for stocks not in your portfolio.

"I measure any new purchase against what I like least in portfolio now and unless it meets the  test, I'll just buy more of something in the portfolio." -- Warren Buffet

Guru Speak: Warren Buffet's 3 hour talk on CNBC

CNBC Transcript Ask Warren Buffett February 27 2012

Why it is nearly impossible to be as good as Warren Buffet

 I got this speech by Mark Sellers on the internet. Absolutely fabulous and a must-read.Sellers 24102004

Concentration or diversification - For a midcap or smallcap portfolio

I was talking to a friend. Like me he invests typically in midcap and smallcap stocks. The interesting fact he mentioned was that invests only in 4-5 stocks at a time. That is, he has about 20-25% in each stock of his portfolio. His argument was that Buffet and Munger continue to advocate high concentration in stocks and also followed their own advice and had a large concentrated portfolio. I think he is taking on unnecessary wipeout risk.

My friend is like me, a purely small retail investor and makes investment decisions based on publicly available information with no recourse to management. I agree that Buffet and Munger advice a concentrated portfolio, but only if you understand the businesses very well. For a purely external investor it is very difficult to understand a small or mid sized business so well that they can bet a very large portion of their networth on it. Also, it is important to understand that for mid and small cap investing it is likely that some of your picks will go wrong. And when it happens stock prices can go down 80-90%. It is important to diversify adequately to ensure that you don't get wiped out when, inevitably, some of your picks go bad. I think it is important to have around 10-15 stocks in your portfolio and preferably not all from the same industry sector!