Highlights from 25th MOS Wealth Creation Study

There are two annual publications hat I eagerly await - Buffett's annual letter and Raamdeo Agarwal's (Motilal Oswal) Wealth Creation Study (MOSWCS). And to be fair, their quality has been going in divergent directions in the last few years. Buffett's letters have become increasingly boring and repetitive and the MOSWCS have come more and more elaborate and engaging. 

This year's study is a treat. Not only has the time horizon been increased from 5 years to 25 years for the base study but the focus on creating a detailed QGLP checklist is a great help to the investment community. As I have said many times, QGLP  is an primary investment framework that I use very often and think is one of the best and since I am also a checklist driven investor, it would help  me personally immensely. I also have 3 separate checklists and I would try to integrate all of them into 1 sometime.

My Highlights

- Stock returns are slaves of earnings power and growth. In the very long run, valuations matter less.

- Most businesses are cyclical in character. As is said, a rising tide lifts all boats. Most sectors do well when the economy is on the upswing. Thus, at the peak of the economic boom in 2007, 29 of 37 sectors recorded RoE>13%. However, for the last 7 years, that number is down to between 7 and 11.

- Only 3 sectors – Consumer/Retail, IT and Paints – maintained RoE>13% for each of the last 25 years.

- Corporate Profit to GDP has stagnated for the last 5 years. This is similar to 1999 to 2003, after which corporate profits took off for the next 5 years. 

- Permanent change in long-term interest rate band (from 12-14% to 6-8%) is leading to change in valuation expectations. Current valuations are supported by expected PAT revival after 5 years of stagnation and high liquidity led by low interest rates.

- Valuations are frothy with market cap around 100% of GDP. 

- Characteristics of wealth creators of last 5 years

○ Were small to mid in size in the base year 1995

○ Were consumer-facing, bestowing them a secular business model

○ Were very profitable (average base RoE was a robust 17%)

○ Grew to emerge as market leaders (among top 3) in their respective business

○ Had management with high integrity and competence. 

The QGLP Checklist

BUSINESS CHECKLIST

Q#1 What is the history of the company and management?

Q#2 Is the company’s business model understandable? How does it make money?

Q#3 Is the company profitable? If not, is it expected to emerge?

Q#4 Are the company’s terms of trade favorable? Is Cash flow healthy?

Q#5 What is the company’s cost and margin structure? How has it changed in the past?

Q#6 How’s the Du Pont Analysis for the company?

Q#7 What is the competitive landscape? What is the role of regulation in the business?

Q#8 Does the company enjoy an Economic Moat? What are its sources?

GROWTH CHECKLIST

Q#9 What is the addressable market opportunity and its key drivers?

Q#10 What is the company's growth plan? How sustainable is the growth?

MANAGEMENT CHECKLIST

Q#11 Is the management high on Integrity & transparency?

Q#12 Is the management competent?

Q#13 Does the management have passion / growth mindset?

Q#14 Does the company have a rational capital allocation policy?

Q#15 Does the company have a suitable organization structure and depth of management?

Q#16 What is the organization culture?

Q#17 Does the company have a sound succession plan?

Q#18 Do the owners have enough skin in the game?

Q#19 Have the promoters pledged a large portion of their holding?

PRICE CHECKLIST

Q#20 Has the financial modeling been done with earnings estimates for at least 3 years?

Q#21 Is it a QGL stock?

Q#22 Is valuation reasonable?

Q#23 Is there enough Margin of Safety?

Q#24 Is the stock reasonably liquid?

RISK CHECKLIST

Q#25 What can go wrong with the company narrative & numbers? 

 

I would strongly recommend all serious investors to read the checklist section of the MOSWCS - page 39 to 87 if they are short of time and can't go through the entire document.

Some Interesting Technical Charts

 

Here are this week's interesting technical charts. You can download the document from here

Disclaimer: These charts are for educational purposes only. It could be used to idea generation for both trading and investing purposes.

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.

 

AI is coming to your home

Last week researchers showed it is possible to squeeze a powerful AI vision algorithm onto a simple, low-power computer chip that can run for months on a battery. The trick could help bring more advanced AI capabilities, like image and voice recognition, to home appliances and wearable devices, along with medical gadgets and industrial sensors.

The researchers essentially devised a way to pare down deep learning algorithms, large neural network programs that loosely mimic the way neurons connect and fire in the brain. Over the past decade, deep learning has propelled huge advances in AI, and it is the bedrock of the current AI boom.

Deep learning algorithms typically run on specialized computer chips that divide the parallel computations needed to train and run the network more effectively.

https://www.wired.com/story/ai-algorithms-slimming-fit-fridge/

 

The Cold War version 2

Regarding the trade talks themselves, what really riles both the Trumpsters and the Democrats (moderates and progressives alike) is the very way China does business: stealing intellectual property, acquiring sensitive technology through business buyouts, fusing public and private sectors so that their companies have an unfair advantage (at least by the mores of a global capitalistic trading system), currency manipulation, and so on. Trade talks, however successful, will never be able to change those fundamentals. China can adjust its business model only at the margins.

What we really have to fear is not a rising China but a declining one. A China whose economy is slowing, on the heels of the creation of a sizable middle class with a whole new category of needs and demands, is a China that may experience more social and political tensions in the following decade.

https://foreignpolicy.com/2019/01/07/a-new-cold-war-has-begun/

 

Tech retailing gets into luxury retail

Traditionally, high-end brands have been cautious about selling online. While they were growing rapidly, digital transactions were a relatively low 12% of global luxury sales in 2019. They are expected to hit 23% in 2020 and up to one-third by the middle of the decade, according to Bain & Co. projections.

Boundaries between store and website sales also blurred in new ways this year. With boutiques closed, shop assistants resorted to contacting customers through messaging apps or arranged digital consultations to drive business. Gucci’s parent company, Kering, expects these so-called “distance sales” to stick. In the future, store workers may log on during quiet times and interact with online shoppers to improve the low sales conversion rates that afflict many luxury-brand websites.

Big brands that have already poured cash into their e-commerce businesses are in the best position to control what happens next. The ideal setup for a luxury brand is to sell mostly on its own website, where margins are highest. Roughly 75% of LVMH’s e-commerce sales flow through this channel, for example. The company only works with outside platforms that give it full control over the presentation and pricing of its products.

Tech companies have spotted the opportunity. Amazon launched a new luxury store in September. Social-media platforms, too, have ambitions to turn themselves into e-commerce sites. Instagram, where many luxury shoppers already go for inspiration about what to buy, recently introduced a checkout button in the U.S. that allows them to purchase goods without leaving the app. Terms are very attractive: Instagram will take a 5% cut of transactions, compared with the 30% average charged by online luxury retailer Farfetch.

https://www.wsj.com/articles/to-sell-luxury-online-deep-pockets-matter-more-than-ever-11607682603

 

The key to a successful business is its people

Successful businesses have strong management teams which value and empower their people, they promote innovation and risk taking, encourage ownership, and adopt appropriate incentives through the full rank and file of the organisation. It’s little wonder the world’s top CEO’s and the investment industry’s sharpest minds focus on people and culture.

Even a business with product differentiation, valuable intellectual property or patents must evolve; competitors innovate, patents expire and technological advantages become redundant. The necessary process of constant evolution is ultimately driven by people.

Finding the historical financial numbers to fill a spreadsheet isn’t hard. Discovering the qualitative aspects of the business which will determine the future numbers is a little more challenging. In large part, these numbers will be determined by the people.

http://mastersinvest.com/newblog/2018/10/4/people

 

What comes after the smartphone?

We’ve spent the last few decades getting to the point that we can now give everyone on earth a cheap, reliable, easy-to-use pocket computer with access to a global information network. But so far, though over 4bn people have one of these things, we’ve only just scratched the surface of what we can do with them. There’s an old saying that the first fifty years of the car industry were about creating car companies and working out what cars should look like, and the second fifty years were about what happened once everyone had a car - they were about McDonalds and Walmart, suburbs and the remaking of the world around the car, for good and of course bad. The innovation in cars became everything around the car. One could suggest the same today about smartphones - now the innovation comes from everything else that happens around them.

https://www.ben-evans.com/benedictevans/2020/12/13/what-comes-after-smartphones

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.

For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in

For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in

Some Interesting Technical Charts

Here are this week's interesting technical charts. You can download the document from here

Disclaimer: These charts are for educational purposes only. It could be used to idea generation for both trading and investing purposes.

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 it.

Bio-manufactured material Hyaline can change our gadgets

Biology is the most advanced manufacturing technology on the planet. Hyaline may be the first fermented electronic products and is already in use in flexible circuits, display touch sensors, and printable electronics. The product merges the benefits of advanced bio-fabrication with traditionally manufactured materials.

Increasingly, companies are demonstrating fermentation can be used to make things like jet fuel, vanilla, nylon, beauty products, and other items that ordinarily depend on petrochemicals. In addition, the petrochemical toolbox is limited, expensive and is running up against manufacturing bottlenecks.

Hyaline can be used to create thinner films that are foldable, flexible, and more durable. It can be used to develop full-screen touch sensors with new mechanical, physical, and optical properties.

Performance-wise, Hyaline has high-temperature features that enable faster processing times in manufacturing. As a printed circuit board, Hyaline can be printed and used at high temperatures, while eliminating epoxy and acrylic adhesive layers to create systems that are thinner and more flexible.

https://www.forbes.com/sites/johncumbers/2020/04/12/inspired-by-nature-zymergen-brews-high-performance-bio-electronics

 

After meatless meat, here is fishless fish

Many of the most popular seafoods now suddenly face direct competition from dozens of startups offering animal-free alternatives. The industry is still tiny, but sales of plant-based foods have surged 29 percent in the past two years, compared with just 4 percent overall for U.S. retail foods, and many expect the category to follow the arc of plant-based milks, which now account for 14 percent of all retail milk sales.

Fish-Free Tuna was made using a blend of six legumes—soybeans, peas, chickpeas, fava beans, lentils, and navy beans—with some algal oil and seaweed powder mixed in for “Real Seafood Taste.”

https://www.outsideonline.com/2419099/plant-based-fish-seafood-good-catch

 

Distraction is not about tech

Plato complained about how distracting the world was 2,500 years ago. Clearly Plato never struggled with an iPhone, so I take issue with the current narrative that technology is hijacking your brain and that it’s addictive. It promotes learned helplessness: We stop trying to change something because we think there’s nothing we can do.

Most people don’t want to acknowledge the uncomfortable truth that distraction is always an unhealthy escape from reality; the drive to relieve that discomfort is at the root of all our behavior. So instead of blaming technology, look for the discomfort that precedes it. By identifying an uncomfortable internal trigger — for example, loneliness, boredom, anxiety, or discontentment — and exploring the sensation with curiosity, we can more easily disarm it.

https://www.gsb.stanford.edu/insights/super-power-tomorrow-being-indistractable

 

 

Of business longevity

Japan is an old-business superpower. The country is home to more than 33,000 with at least 100 years of history — over 40 percent of the world’s total, according to a study by the Tokyo-based Research Institute of Centennial Management. Over 3,100 have been running for at least two centuries. Around 140 have existed for more than 500 years. And at least 19 claim to have been continuously operating since the first millennium.

Most of these old businesses are, like Ichiwa, small, family-run enterprises that deal in traditional goods and services. To survive for a millennium, Ms. Hasegawa said, a business cannot just chase profits. It has to have a higher purpose.Those kinds of core values, known as “kakun,” or family precepts, have guided many companies’ business decisions through the generations. They look after their employees, support the community and strive to make a product that inspires pride.

The Japanese companies that have endured the longest have often been defined by an aversion to risk — shaped in part by past crises — and an accumulation of large cash reserves.

https://www.nytimes.com/2020/12/02/business/japan-old-companies.html

 

You’re only as good as your worst day

We tend to measure performance by what happens when things are going well. Yet how people, organizations, companies, leaders, and other things do on their best day isn’t all that instructive. To find the truth, we need to look at what happens on the worst day.

Products and services are only as good as they are when they break, not when everything is functioning fine. From a financial standpoint, companies prove their worth when they show how they cope when something fundamental changes in the market or there’s a financial crisis.

https://fs.blog/2020/12/worst-day/

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.

 

For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in

 

For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in

Some Interesting Charts

We started a new learning initiative for ourselves and our subscribers in Hitpicks, our technofunda advisory. Here the focus is on looking at some interesting medium to long term technical charts to identify interesting ideas for further exploration.

You can download a copy of the weekly report here: Download (intelsense.in)

For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in

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.

Amazon spies on its own staff

Dozens of leaked documents from Amazon’s Global Security Operations Center reveal the company’s reliance on Pinkerton operatives to spy on warehouse workers and the extensive monitoring of labor unions, environmental activists, and other social movements.

The documents offer an unprecedented look inside the internal security and surveillance apparatus of a company that has vigorously attempted to tamp down employee dissent and has previously been caught smearing employees who attempted to organize their colleagues. Amazon's approach of dealing with its own workforce, labor unions, and social and environmental movements as a threat has grave implications for its workers' privacy and ability to join labor unions and collectively bargain.

Amazon intelligence analysts appear to gather information on labor organizing and social movements to prevent any disruptions to order fulfillment operations. 

https://www.vice.com/en/article/5dp3yn/amazon-leaked-reports-expose-spying-warehouse-workers-labor-union-environmental-groups-social-movements

How to think differently

It's not enough for a public market investor to predict correctly how a company will do. If a lot of other people make the same prediction, the stock price will already reflect it, and there's no room to make money. The only valuable insights are the ones most other investors don't share.

You see this pattern with startup founders too. You don't want to start a startup to do something that everyone agrees is a good idea, or there will already be other companies doing it. You have to do something that sounds to most other people like a bad idea, but that you know isn't — like writing software for a tiny computer used by a few thousand hobbyists, or starting a site to let people rent airbeds on strangers' floors.

http://paulgraham.com/think.html

Some Business & Leadership Lessons From Past US Presidents

• Temperament is the great separator. 
• Strong opinions, weakly held.
• Storytelling is more important than statistics. 
• Simple is better than complex.
• Patience is key.
• Timing and luck will always play a role.

All of the above are equally true for investors.

https://awealthofcommonsense.com/2020/11/some-business-leadership-lessons-from-past-presidents/

All that is wrong with VC funding

In 2008, Jeremy Neuner and Ryan Coonerty, two city-hall employees in Santa Cruz, California, decided to open a co-working space. They named their company NextSpace Coworking. But their company faced a big challenge, finding a venture capitalist (VC) to invest in their firm. All the VCs wanted to have a share of WeWork. When Jeremy Neuner began having meetings with venture capitalists, he said, “their first question was ‘How do you compete with WeWork? Why should we invest with you instead of them?’ ” WeWork was reportedly losing millions of dollars each month, but it was expanding to new locations at a feverish pace. Neumann’s promises to VCs were so wildly optimistic, bordering on ridiculous, that Neuner was convinced WeWork had to be a scam.

Mr. Neuner was building a solid business, but the VCs wanted fantasy. “All we needed was five million dollars a year in revenues, and we would have made money for everyone,” he told me. “That’s enough to earn a living and buy a house and put your kids through school. But no one wanted something that just made a healthy living. They all wanted to find the next Zuckerberg.” Critics of the venture-capital industry have observed that, lately, it has given one dubious startup after another gigantic infusions of money. Increasingly, the venture-capital industry has become fixated on creating “unicorns”: startups whose valuations exceed a billion dollars.

https://www.newyorker.com/magazine/2020/11/30/how-venture-capitalists-are-deforming-capitalism

Using Biology to create new materials

We are now looking to biological materials to solve challenges that were once thought to be engineering problems – for example, developing cellular processes to desalinate water more efficiently; creating biological molecules that will help us build more comfortable medical prosthetics; and engineering microbes that could clean up underwater oil spills. From this year, we will find the building blocks for these materials not in petroleum-based technologies, but in biology.

https://www.wired.co.uk/article/biological-molecules

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.

For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in

For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in