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Sunday 26 February 2017

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 5

Being attentive to cycles
• Just about everything is cyclical. Cycles always prevail eventually. Nothing goes in one direction forever.

Awareness of the pendulum
• There are a few things of which we can be sure, and this is one: extreme market behaviour will reverse. Those who believe that the pendulum will move in one direction forever - or reside at an extreme forever - will eventually lose huge sums. Those who understand the pendulum's behaviour can benefit enormously.
This is one of my core beliefs. In sports, we call this by "law of averages" or "rub of the green". Mean reversion works, but in some cases, you may need to have a suitable long term time frame to judge its impact.
Combating negative influences
• Many people will reach similar cognitive conclusions from their analysis, but what they do with those conclusions varies all over the lot because psychology influences them differently. The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.
• From time to time greed drives investors to throw in their lot with the crowd in pursuit of profit, and eventually they pay the price. We must constantly be on the lookout for things that can't work in real life. In short, the process of investing requires a strong dose of disbelief. Inadequate skepticism contributes to investment losses.

Again, something very very core to my belief system. Temperament is what differentiates the good investor from the bad. And the ability to say "No" to things or stories that don't make sense regardless of who is saying it.
Contrarianism
• You must do things not just because they are the opposite of what the crowd is doing, but because you know why the crowd is wrong.
• Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortable idiosyncratic portfolios, which frequently appear imprudent in the eyes of conventional wisdom.
• Only a skeptic can separate the things that sound good and are from the things that sound good and aren't. The best investors I know exemplify this trait. Skepticism and pessimism aren't synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.

Taking a view that is different from the majority is a psychologically difficult thing to do. But the best results are obtained by people who are able to stand apart from the crowd.

Tuesday 31 January 2017

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 4

Howard Marks has written extensively on risk and its management.
The riskiest things: the most dangerous investment conditions generally stem from psychology that's too positive. For this reason, fundamentals don't have to deteriorate in order for losses to occur; a downgrading of investor opinion will suffice. High prices often collapse of their own weight.

The greatest risk doesn't come from high quality or high volatility. It comes from paying prices that are too high. This isn't a theoretical risk; it's very real.

Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe.

Risk is inherent in the price you pay for stocks. The higher price you pay, the higher risk there is. Irrespective of the quality of the business.


The possibility of a variety of outcomes means we mustn't think of the future in terms of a single result but rather as a range of possibilities.

No one knows the future, so deterministic projections make little sense. It is better to think in terms of a range of outcomes that covers the most likely future scenarios.


Invariably things can get worse than people expect. Maybe "worst case" means "the worst we've seen in the past". But that doesn't mean things can't be worse in the future.

Careful risk controllers know they don't know the future. They know it can include some negative outcomes, not how bad they might be, or exactly what their probabilities are.

Case in point, 2008, was much worse that what most investors had expected.
 

I'm very happy with the phrase "perversity of risk". When investors feel risk is high, their actions serve to reduce risk. But when investors believe risk is low, they create dangerous conditions. The market is dynamic rather than static, and it behaves in ways that are counter-intuitive.

My core investment assumption is that the market is a complex adaptive system and is auto-correcting in nature. we cannot determine outcomes from a linear thought process.

The road to long-term investment success runs through risk control more than through aggressiveness. Over a full career, most investors' results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners.

If you minimize your losers, the winners will take of itself!

Friday 27 January 2017

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 3

There are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that belief strongly enough to be able to hang in and buy as price decline suggests you are wrong. Oh yes, there's a third:you have to be right.

This will only come from experience of being right about your view.

For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can't become a bad investment if bought at too high a price. And there are a few assets so bad that they can't be a good investment when bought cheap enough.
There's no such thing as a good or bad idea regardless of price!

This is a critical point that people miss in their quest for "quality" stocks!! **Quality is not irrespective of price.**

Investing is a popularity content, and most dangerous thing is to buy something at the peak of popularity. At that point, all favourable facts and opinions are already factored into its price, and no new buyers are left to emerge.

There is no easy way of identifying when the peak of popularity is reached. But one should have a general sense of when prices have gone up way beyond their worth. And then the trick is to have the emotional fortitude of getting out of the position.

The safest and potentially mist profitable thing to do is to buy something when no one likes it. Given time, it's popularity, and thus it's price, can only go one way: up.

This requires a certain mindset of contrarianism and ability to sit through extended period of non-performance of stock price. This may specially be difficult when other stocks are running up consistently.



Tuesday 24 January 2017

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 2

Since other investors may be smart, well-informed and highly computerized, you must find and edge they don't have. You must think of something they haven't thought of, see things they missed bring insight they don't possess. You have to react differently and behave differently.
Out of the main four edges that an investor can have, namely i) information, ii) analytical, iii) knowledge and iv) time, here Marks is talking about the analytical or insights edge. With the same set of information, can you have better or different insights which will result in a differentiated result for your portfolio.
To achieve superior investment results, you have to nonconsensus views regarding value, and they have to be accurate.
For your performance to diverge from the the norm, your expectations - and thus your portfolio - have to diverge from the norm, and you have to be more right than the consensus. Different and better: that's a pretty good description of second-level thinking.
I think this is the simplest yet most overlooked part. You cannot get superior results by doing what everyone around you is doing. Some investors I know of surround themselves only with people who have very similar viewpoints about life and markets. To me, they are living in an echo chamber. To really have a nonconsensus view, you have to actively look for disconfirming evidence. That is, an idea which is exactly opposite to the one you hold.

As Charlie Munger has said, " It's bad to have an opinion that you are proud of if you can't state the arguments for the other side better than your opponents."

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 1

Over the years, I have come to the conclusion that the most critical aspect in investing is to be able to build the right temperament. To me this is the secret sauce that separates the men from the boys and enable some to consistently outperform others, and their benchmarks.

Temperament is something that needs to be learnt through experience. We can augment it by taking a leaf out of the book of the masters. Over the last 15 years, I have tried to read as much as possible about experiences of great investors and fund managers, to try to understand how to improve my temperament.

Let me start a series of posts on this topic over the next few days, with the writings of a great investor who I have followed for the last decade. Not only is he a great investor but he is a fantastic communicator and has that rare gift of making complex subjects appear simple. He also is extremely generous in sharing his knowledge and experience with the general public. He is Howard Marks.
You can read his book "The Most Important Thing Illuminated"


His memos are available at https://www.oaktreecapital.com/insights/howard-marks-memos


Here are some excerpts from his book and some commentary where it is necessary:
To me, risk is the most interesting, challenging and essential aspect of investing.
The real test of investing is not getting returns but ensuring the downside is always protected. As Buffett has said famously, "Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."
You must be aware of what's taking place in the world and of what results those events lead to. Only in this way can you put the lessons to work when similar circumstances materialize again. Failing to do this - more than anything else - is what dooms most investors to being victimized repeatedly by cycles of boom and bust.
History, of markets and in general, is essential to know. You need to understand the causality of consequences of events. Those who do not know history are condemned to repeat it. Which basically means you need to have some mechanism of capturing your past mistakes for posterity and are able to ensure that they are not repeated again.

ACTIONABLE - A checklist of past mistakes and the reason those occurred is a good starting point.

Thursday 29 December 2016

Techno Electric: Q2 Concall Summary

Q2 Concall Summary
  • Order book as on 30th September 2016 stands at Rs.2,500 crores, which includes our L1 position in 765 kV Substation Package at Raigarh, Indore and Itarsi and the package value is about Rs.150 crores.
  • For PGCIL, the ratio of investment between line and substation has undergone change from 80:20 to 65:35.
  • In Wind segment the related challenges have eased, we are witnessing improvement in grid availability in State of Tamil Nadu and the overall wind flow has been positive.
  • Revenue from EPC almost jumped by 47% from Rs.202 crores to Rs.297 crores. Consolidated revenue for the quarter also grew by 34% to Rs.368 crores against Rs.253 crores achieved during the same quarter of the previous year.
  • Operating profit for the EPC segment for the quarter stood at Rs.45.88 crores as against Rs.33 crores, showing a jump of 38.56%. Operating profit margin for the quarter stood at 15.46%.
  • The PAT on standalone basis for the quarter stood at Rs.44.79 crores as against Rs.34.07 crores last year, showing a growth of 31.46%. On consolidated basis, the PAT has jumped by 58% for the quarter at Rs.70 crores against Rs.44.5 crores.
  • Able to manage the receivables within 100-days cycle which is one of the best in the industry.
  • Outlook is very positive. States are now coming more ahead of the Power Grid also in building their own networks particularly the states having more of renewable power with them as well as some transmission networks with the other states. Seeing a strong momentum in the State of MP, Rajasthan, Chhattisgarh, Andhra, Telengana, Tamil Nadu, all are becoming fairly active.
  • There is no impact on margins with more orders from state electricity board
  • Payments are received directly from the funding agencies like REC/PFC/ADB
  • Domonetization has not adversely impacted operations. On the contrary, it has helped. Construction material cost is now 10% to 15% lower.
  • Consolidated debt is 300cr (275 cr in Simran and 25cr in Techno). Practically, short term debt free (5 cr)
  • Cash balance is 225 cr
  • Expect PAT margin over consolidated top line to be around 14.5-15% this year as against 11-11.5%