Book Review: The Education of a Value Investor by Guy Spier

I just finished reading Guy Spier's The Education of a Value Investor. Guy is a well-known value investor who runs the Aquamarine Funds and is based out of Zurich. He has been educated at some of the most renowned educational institutions like Oxford and Harvard Business School. In his book he goes over his career as an investor and money manager and shares his wisdom. 

This is not a how-to book. It has very little in terms of the author's investment process. He does not even talk much about his stock picks and the rationale behind investing in them. As the subtitle in the name of the book suggests, this book truly ties to capture the author's quest for wisdom, enlightenment and through them, wealth. This book is more about getting wiser through self-reflection than about investing.

The book starts with his joining a Wall Street investment banking company D H Blair. His disillusionment with his education starts then. He starts to question the efficacy of an education which cannot help him make the right choices in life. He starts to hate his job and sometime during this period discovers Warren Buffett through a book (Buffett: The Making of an American Capitalist by Roger Lowenstein). This opens up a new world for him. A world of ethical living and value investing. He then goes ahead and makes dramatic lifestyle changes to "bring in Buffett into his life". 

During this period, he met Mohnish Pabrai, an event which again transformed and changed the course of his life. They developed a deep bond of friendship which amongst other things led them to jointly bid for a charity lunch with Buffett.

The book chronicles multiple things that he did to lead a life that was congruent to his beliefs. He moved away from the competitive madness of New York and settled in Zurich, stopped subscribing to his Bloomberg terminal. He started writing thank you notes to people everyday and other such things.

The book is fascinatingly intimate and authentic. Spier talks about his thought processes, his doubts, his shortcomings very openly. This is what drew me to the book. I could identify myself personally with a lot of it. I had, and continue to have similar questions, doubts and dilemmas, both in my life and in investing.

My biggest takeaway from the book is that it seeded the thought of transforming my life, one step at a time, by making small changes which can compound over a long time, by surrounding myself with the people I like, admire and respect, caring for people and doing small things everyday to help others and most importantly, setting up myself in an ecosystem which suits my inner self and helps me to lead a life congruent to my core beliefs. Just for this, this book is a must read.

Stock Update - Sintex Industries

Sintex has been part of my portfolio before and suffered a lot due to untimely acquisitions and foreign borrowings. They are still paying the price for that through  equity dilutions because of conversion of bonds to equity. The reason I started taking a re-look at the company is that it is uniquely placed to gain from the Narendra Modi government's thrust on Swacch Bharat and Clean Ganga projects. Additionally, the new mandate for CSR activities and the resultant push from corporates in making toilets and classrooms in rural areas will create a demand for the companies products.

Swacch Bharat, Clean Ganga & CSR thrust:
Sintex is a market leader in pre-fabricated toilets (90%-95% marketshare) where they manufacture and install toilets with water tank, soak-pit or bio-gas chamber. The total cost outlay by GoI for Swacch Bharat has been put around Rs 62,000 cr of which Rs 14,600 will be provided by the Central Government. Clean Ganga  proposes to spend Rs 51,000 cr to completely stop  discharge  of  untreated  sewer  and  waste  water  from small and medium industries and urban habitations into the Ganges. Under the mission, all villages along the river is to be made free from open defecation. This represents a huge opportunity for toilet blocks, waste management and package treatment  plants. Sintex is a market leader in this space.


Custom Moulding & Textiles to add to growth:
With a revival in the industrial activity, the custom moulding division has started picking up and is expected to improve its performance in the future. This quarter the growth was 24%. 

Textile is starting to get benefits of the capacity expansion that the compnay had undertaken. 100,000 spindles will start every quarter next year 2015-16. Incremental 200-250 cr of revenue will come in at 50-60% capacity utilization. At full capacity, the new capacity is likely to add 1700-2400 cr to the topline.

Negatives:

• The company has outstanding FCCBs which will result in equity dilution to the tune of 25-33% which will be a dampener for EPS growth.
• The company has been investing a lot on capex and is currently running a negative cashflow, though it has positive cash flow.
• Govt projects typically mean delayed payments and high working capital requirements.

My expectations of growth

FY15 - expecting EPS range of 11-12. At a PE of 12, price can be 132 - 144.

FY16 - Expecting growth of 30%. EPS 15-16. PE of 15-20. Price can be 225 - 320.

Disclosure: I am not an investment analyst. Stocks discussed in the blog should not be construed as buy / sell recommendations. This blog is a chronicle of my actions and thoughts in the markets. Please consult an accredited financial advisor before investing yourself.

Portfolio Update - 2014

Another year comes to an end - one which has been an eventful year for India, with a new government at the center, one which has a majority in the Lok Sabha, after decades of coalition politics. The stock markets have run up a lot on partly fuelled by overall global equity market rallies and partly by the hope of an economic revival in India under the new government.

2014 was also a great year from a return perspective. My portfolio returned 135% gains during the year as opposed to a 30.75% rise in the Sensex and 81.67% of the HDFC Equity Fund. (As I have explained above, I try to see my performance with respect to this fund just to make sure that I am not wasting my time picking stocks!!)

Most of the great return came from just sitting out on the picks that I had in the portfolio. That is the beauty of having a long term portfolio with good and stable businesses. I continue to hold on to nearly all my long term picks and remain convinced about their growth prospects in the future. 

During the year, some notable changes in the portfolio were as follows:
New additions - CCL Products, Sintex, Symphony 
Reduced holding - Mayur, Cera
Completely booked profits / losses - Selan Exploration, Finolex Cables, Page Industries

I have also updated the Portfolio page.

The case for Mayur was very interesting and I had to spend a lot of time to think through. It continues to be a business which I am most confident about in the long term and the stock performance over the years has been a 100+ bagger for me, so endowment effect was very strongly present. The only reason to sell was I decided to book some profits as it had grown above 25% of my portfolio and was creating risk that I was unwilling to take.

I wish all my friends a great, prosperous and rewarding 2015. 

May the Force be with you in 2015!

Disclosure: I am not an investment analyst. Stocks discussed in the blog should not be construed as buy / sell recommendations. This blog is a chronicle of my actions and thoughts in the markets. Please consult an accredited financial advisor for financial advice.

Weekend Reading - Curated Links of Interesting Articles - Dec 6-7th

Excellent compilation of Bharat Shah's investment philosophy

http://contrarianvalueedge.com/2014/11/28/bharat-shah-buy-quality-only-quality-at-fair-price-and-hold-for-lt/

How See's Candy changed the way Buffett invested in businesses

http://www.nasdaq.com/article/the-surprising-lessons-warren-buffett-learned-from-a-candy-company-cm418297

How to Dramatically Improve Your Investment Performance with Behavioural Economics
http://time.com/money/3604960/daniel-kahneman-thinking-fast-and-slow/

Snippets on the future of Indian markets from the Gurus

http://firstbiz.firstpost.com/money/wisdom-from-indias-wealth-masters-from-jhunjhunwala-to-other-stock-mavens-111452.html

Software product development with the help from business leaders and not by sitting and dreaming up great products

http://knowledge.wharton.upenn.edu/article/creating-great-software-is-about-taking-blockbusters-a-step-further/

James Montier talks about excessive valuations in the US markets and the need to hold cash during these times

http://www.fuw.ch/article/the-stock-market-is-hideously-expensive/

Weekend Reading - Curated Links of Interesting Articles

Here are my piled up list of weekend reading :-)

An interesting (and contrarian) take on short term view of markets from one of the best investment thinkers of our time, Michael Mauboussin - http://cdn1.valuewalk.com/wp-content/uploads/2014/11/document-1040753371.pdf

Dan Ariely's tips on managing time & being effecient - http://www.bakadesuyo.com/2014/10/how-to-be-efficient/

An interesting view of Snapdeal and the Indian ecommerce space - 

http://knowledge.wharton.upenn.edu/article/how-snapdeal-is-connecting-dots-between-supply-and-demand-in-india/

How IBM's Watson is changing the computing paradigm - http://knowledge.wharton.upenn.edu/article/ibms-brad-becker-on-the-promise-of-cognitive-computing/

Using leverage in a bull-market

In a bull market, a lot of people get enticed to use leverage to enhance their portfolio returns. Leverage comes in many forms, loans using existing stock as collateral, top-ups on home loans and using them to buy stocks, punting on stock futures etc. 

“Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbours get envious.

But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as well learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.” - Warren Buffett, Berkshire Annual Report, 2010

In this context, let me recount the story of Rick Guerin - Buffett's contemporary and acknowledged by him as "Superinvestor of Grahamville". Guerin lost significantly and dropped out of the investment landscape after the steep crash of 1974 when he received margin calls because he was highly levered. He had to liquidate some of his best investments including Berkshire Hathaway stock. Today, everyone knows of Buffett and Munger but hardly anyone has heard of Guerin. (In fact, to be honest I was also not aware of Guerin's history before reading about it in one of Mohnish Pabrai's interviews).

As Buffett said in the quote above some people can become rich but in an alternate history (Taleb's definition) of events can become a pauper. So, keep away from leverage.

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.