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Friday 23 February 2018

Guest Presentation to the CFA Society Kolkata Chapter

Yesterday, I made a guest presentation to the CFA Society Kolkata chapter. It was very heartening to see a lot of young students and investors interested in the process of wealth creation for the long term.

Friday 9 February 2018

Standing on the shoulders of giants

Yesterday Economic Times profiled me in an article. You can read it here - 

Sir Isaac Newton once said, If I have seen further, it is by standing on the shoulders of giants. I completely echo his sentiments. Coming from a typical middle-class background,  investing started off as a means of becoming financially stable and free, and over the years has become a passion and a way of life for me. I have learnt many things by sitting and spending time with some of the best thinkers of all times through their written words in books. Investing is on vocation which fulfils my passion and love for reading on myriad topics. 

Buffett and Munger are role models, gurus for me. I have learnt more than investing from them. I have learnt how to lead life. Over the journey of the last 17-18 years, I have had the privilege of learning from a lot of people. I cannot name all of them for some are very private persons and do not want to come into the limelight. I received a fair number of questions and comments on twitter (I have lately reduced drastically my usage of Facebook, so if there are some questions or comments there, I may have missed them). I have tried to group them and put one question for every group and will try to address here. 

Q. Could you guide me where to start to learn about investing?

One of the easiest books to start with is Peter Lynch's "One Up on Wall Street". Not only is it easy to read but it covers enough ground to make it worthwhile for beginners and also intermediate investors. Follow that up with reading a business daily like Economic Times, Business Standard or Mint daily. Also, a couple of business magazines from Outlook Business, Forbes India, Business Today etc. For those who are comfortable reading at length on a computer can take a magzter subscription. Keep at it and gradually you will start understanding about businesses and what drives them. 

You can get basic and advanced tutorials from http://www.investopedia.com/university/all/basics/
You can do them in the following order:
1. Investing 101: A Tutorial For Beginner Investors 
2. Stock Basics Tutorial
3. The Greatest Investors 
4. Understanding The P/E Ratio
5. Become Your Own Financial Advisor
6. Ratio Analysis Tutorial
7. Discounted Cash Flow Analysis

Investing is like any other vocation. You have to put in years of effort to become an "overnight success" :-)

Q. So far i have not invested anything in stock market.I would like to start it from tomorrow.Can you please suggest me some good company shares, and your valuable suggestions are welcome.

You need to do your own research and build your conviction. If not, even a small fall, and you will run towards the exit door. Taking someone else's stock picks will not help you get better as an investor. Even if you make mistakes in the beginning, they need to be your own mistakes. And you need to take the learnings in your own way from them.

Q. Only thing I was looking into article which seems missing is how do you prepare the very first list of companies out of thousands out there? 

The process of idea generation is not fixed. I can get ideas from reading newspaper or magazine articles, observing actual businesses or from financial screens. I also get a great deal of ideas from valuepickr posts and by speaking to fellow investors. Valuepickr, by far, is the best resource for serious investors in India.

Q. Wouldn't it be better if one were a bit more patient, based on qualitative parameters and the ability of the management as suggested by their history in handling tough times, rather than taking a decision based on price performance of the stock ?

The way I see it is to make money in a stock I need to be right in a few things - i) get the business correct, ii) get the valuation correct and iii) get the market mood correct. If any one of the three is completely wrong, then there is a major possibility of losing a large part of the capital. When a stock falls significantly (say more than 20-25% after I have bought), then one thing is for sure - I have made a mistake in understanding the market mood. I could be wrong on the other two aspects as well. So, I have found it useful to sell, book my losses and then evaluate with a fresh mind later. That way I will not get tied up with endowment bias. This has worked for me. People have to figure out what works for them and follow that path.

Q. Any book recommendations specifically for valuations? 

There are lots of books of valuations. And I have read a fair number of them. The honest answer is most of them are practically worthless :-) So, if you know the basic DCF and PE ratio analysis then you can cover 80-90% of stocks. Just make sure that you focus more on the process of valuation and the assumptions you are making than too much on the precision. 

Friday 19 January 2018

Weekly Reading: Some interesting stuff

• An interview with Prashant Jain of HDFC Mutual Fund - http://www.morningstar.in/posts/44081/conversation-prashant-jain.aspx

• Read a very interesting article on building the 10,000 experiment mindset instead of 10,000 hrs of deliberate practice - https://medium.com/the-mission/forget-about-the-10-000-hour-rule-7b7a39343523
Following the 10,000-experiment rule means starting your day with not just a to-do list but a “to-test” list like Leonardo Da Vinci. According to Walter Isaacson, one of Da Vinci’s biographers, “Every morning his life hack was: make a list of what he wants to know. Why do people yawn? What does the tongue of a woodpecker look like?”
As you go through your day, following the 10,000-experiment rule means constantly looking for opportunities to collect data rather than just doing what you need to do. It means adding a deliberate reflection process based on reviewing data before the day ends.

• The idea that restaurant prices can vary based on the day of the week and time of day is an interesting one -  https://www.bloomberg.com/news/articles/2018-01-11/bob-bob-ricard-restaurant-plans-to-revolutionize-the-way-you-pay-to-eat-out

• General Motors takes away the steering wheel and floor pedals from the new Chevy Bolt autonomous car - https://www.bloomberg.com/news/articles/2018-01-12/gm-drops-the-steering-wheel-and-gives-the-robot-driver-control

• But in the background, one company solidified itself as a stalwart contender for winning the year: Nvidia. The company announced that it had a new chip custom-built for self-driving cars, and that it was working with more than 320 partners who would use the technology to power their vehicles. It also announced a gaming monitor the size of a television, creating a new class of large-screen devices with the refresh speed required for professional gaming - https://qz.com/1179116/best-of-ces-2018-nvidias-chips-googles-thirst-razers-project-linda-riding-modobag/

• The intriguing story of how Shapoorji Pallonji bought into Tata Sons - https://www.bloombergquint.com/law-and-policy/2018/01/16/the-mistrys-acquired-stake-in-tata-sons-from-jrd-tatas-siblings

• Taking a break improves performance as Roger Federer will testify - https://amp.scroll.in/article/844329/the-most-important-lesson-roger-federers-wimbledon-win-has-taught-us-has-nothing-to-do-with-tennis

• The online streaming video channels are creating micro-niches for themselves across genres and demographics - https://qz.com/1180832/people-are-using-netflix-hulu-and-amazon-prime-in-very-different-ways/

Wednesday 17 January 2018

Royal Orchid Hotels - Good times are checking in

Industry Overview
Tourism in India accounts for 9.6 per cent of the GDP and is the 3rd largest foreign exchange earner for the country. It is expected to grow at 16% CAGR to reach INR 2,800 thousand crores in 2022.There are multiple growth drivers in the tourism and thereby in the hotels industry. The government has allowed 100 per cent FDI under the automatic route in the tourism and hospitality sector, including tourism construction projects such as development of hotels, resorts and recreational facilities.

International hotel brands are targeting India. Carlson group is aiming to increase the number of its hotels in India to 170 by 2020. Hospitality majors are entering into tie ups to penetrate deeper into the market, such as Taj & Shangri-La entered into a strategic alliance to improve their reach & market share by launching loyalty program aimed at integrating reward program customers of both hotels. Berggruen Hotels is planning to add around 20 properties under its midmarket segment 'Keys Hotels' brand across India by 2018. Hilton plans to add 18 hotels pan India by 2021, along with 15 operational hotels under its brands namely Hampton, Hilton Garden Inn, Conrad, Hilton Hotels & Resorts & DoubleTree by Hilton. Marriott International plans to open 30 new luxury hotels. As of November 2017, the company operated 93 hotels in India.

In June 2016, the Indian government approved 150 countries under the Visa on Arrival scheme to attract additional foreign tourists. During Jan-Sept 2017, a total of 10.67 lakh tourist arrived on e-tourist Visa as compared to 6.75 lakh during the months of Jan-Sept 2016, registering a growth of 71.0%. Foreign tourist arrivals (FTAs) in India increased 15.5% to 71.20 lakhs compared to 61.63 lakh in the same period.

Medical tourism is another major area of growth. The country is witnessing 22-25% growth in medical tourism. Indian government has also released a fresh category of visa – the medical visa or M visa, to encourage medical tourism in India. Indian medical tourism is expected to reach USD8 billion by 2020.

Domestic expenditure on tourism has grown significantly. Indians are travelling much more frequently for both business and leisure and has been aided by much better connectivity of Tier-II cities by the low-cost airlines. Meetings, Incentives, Conferences and Exhibitions (MICE) segment is another key growth segment.

Company Overview
Royal Orchid Hotels Ltd (ROHL) is a 31-year-old company which owns and operates hotels in India. It is promoted by Mr Chander Baljee, who is a IIM Ahmedabad alumnus with over 40 years of experience in the hotel industry. Key brands include Royal Orchid (five-star), Royal Orchid Central (four-star), Regenta Hotels (four-star), Royal Orchid Suites (service apartments) and Regenta Inn (budget hotel). It currently operates 47 hotels across India with plans of reaching 50 in FY18.

ROHL operates in 33 cities with a 1.4 lakh loyalty members. Management is planning to grow more by management contracts which is an asset light business model. It requires no upfront capex and can break even at operating level within 1 year.

GST for hotels with room rates between INR 2501-7500 has been reduced from 21% to 18% which is expected to provide a boost by increasing overall affordability.

Currently, the company manages 3269 rooms and is operating at a utilization of 76% in Q2FY18. It expects to add 300 rooms this year and another 1000 rooms in FY19.

The company signed a pact with UK's Bespoke Hotels recently. Under the agreement, Royal Orchid will now offer its guests hundreds of hotel options across multiple global markets and Bespoke will promote the Indian hospitality firm to its guests.
ROHL has two land parcels that it may dispose off – one in Tanzania and another in Mumbai. If it can do so, it may reduce its debt significantly.

What is Changing?
The hotel industry is slowly turning around after many years of sluggish or negative growth. New supply has been low, and demand is inching up. This is causing significant uptick in occupancy rates across the industry. Given that new properties take between 2-3 years to come up, the next phase will see hardening of ARR (average room rates). Hotels with a good brand name with pan India presence and in the affordable luxury segment (3-5 star) would be in great demand.

Lack of revival in domestic growth can hinder growth. Increase in supply through formal or informal channels (like Airbnb, oyo rooms etc) can keep a lid on ARRs. Any geopolitical incident can severely impact foreign tourist inflow. Large and foreign brands coming into India can provide stiff competition.

Screener Link: https://www.screener.in/company/ROHLTD/consolidated/

The company seems to be in the initial stages of an industry turnaround. It was loss making between 2012 and 2016 at both PBT and PAT levels. Debt has been reducing over the years and management is focused on reducing it further. In 2017, it has made a turnaround and posted a profit. With better times for the industry, fortunes for the company seems to be looking up.

DISCLOSURE: INVESTED from lower levels. This post is for discussion purposes only. Please do your own due diligence or consult an approved investment advisor before investing in any stocks.

Tuesday 16 January 2018

Portfolio Sizing - Prof Bakshi's pointers on having a good process

I was going through my notes of a discussion I had with Prof Bakshi (you can reach the goldmine of investment writing here) on portfolio sizing - a topic which I think has been very less explored in financial writing and books.

Here are some of the pointers he had said. Re-reading them again reinforces the right way to think about this topic.

1. Learn what NOT to do. For example, Kelly Formula, which is widely used in betting systems is not a reliable mechanism in investing. Because you cannot predict definitive probabilities in the market, and hence cannot know the computable odds of winning or losing.

2. It is reasonable to start with similar weights, but one can think of allocating higher to higher conviction bets. 

3. Portfolio sizing depends on investment style. If you follow Munger, Phil Fisher then a concentrated approach is possible. Read Phil Fisher's chapter on when to sell

4. Regret analysis - understand how much you will regret if the worst case scenario plays out in the stock with high allocation. Do you have the wherewithal to withstand a major catastrophe in the stock? Determine your sleeping level.

5. Think across disciplines (horizontally) on what can be the risks of stocks in your portfolio. There may be a portfolio level concentration of a single factor which if plays out can mean a lot of problems. e.g. if you have stocks in different sectors but with a common factor of market/ factory in Maharashtra and the state has a major earthquake. Diversify thoughtfully.

6. Read "Principles of Underwriting" by Warren Buffett which is for insurance underwriting but is equally useful to think about portfolio sizing.
The 3 points that Buffett has wrtitten as principles of underwriting in his 2001 investor letter
1) They accept only those risks that they are able to properly evaluate (staying within their circle of competence) and that, after they have evaluated all relevant factors including remote loss scenarios, carry the expectancy of profit. These insurers ignore market-share considerations and are sanguine about losing business to competitors that are offering foolish prices or policy conditions.

2) They limit the business they accept in a manner that guarantees they will suffer no aggregation of losses from a single event or from related events that will threaten their solvency. They ceaselessly search for possible correlation among seemingly-unrelated risks.

3) They avoid business involving moral risk: No matter what the rate, trying to write good contracts with bad people doesn't work. While most policyholders and clients are honorable and ethical, doing business with the few exceptions is usually expensive, sometimes extraordinarily so.
My take from an investment perspective on these 3 points are:
Point 1 - First consideration is risk management. It is alright to let go of phenomenal returns (in a roaring bull market) by keeping away from buying stocks just because others are doing so.

Point 2 - Prof Bakshi's point 5. Diversify so that one event does not have cascading and catastrophic impact on your portfolio.

Point 3 - Don't bet on companies with bad managements. It does not pay in the long run.

Thursday 28 December 2017

2017: Year in Review

2017 was an interesting year, both for the markets and for the world. India saw a major tax reform in the rollout of GST. Along with last year’s demonetization, it resulted in a definite slowdown in business performance, where companies took time to adjust themselves to the new way of doing business. Globally, tensions rode high with North Korea and US presidents taking potshots at one another.

Bitcoin became the rage this year. At the time of writing this, it has already risen more than 15 times. A lot of my friends have asked me about how to invest in them in the last one month, which gives me an impression (and I could be very wrong) that we are staring at a classical bubble. Most of the signs of a bubble are visible in the way the cryptocurrencies are trading today. The fall may not come immediately, but the story is unlikely to end well for those who are coming to the party late.
In India, Sensex has gone up about 25% over the year.

2017 was fairly challenging in identifying good companies which were available at reasonable valuations. Across global markets, valuations have been fairly high throughout the year.

As an investor, I focus on generating absolute returns with a usual time-frame of 2-3 years for an investment to work out. I try to identify businesses with good management and reasonable growth that can compound well over time. Along with that I also focus my energies on identifying turnaround sectors and companies – those where things are getting from worst to bad or from bad to good.

The focus for 2018 remains the same. I continue to look for good, well-managed, undervalued mid and small cap stocks which have a promise of above-average returns.

I am a firm believer in wealth creation through equities over the long term and I think we in India are in the midst of a multi-year bull market. Some of the reasons why I think we are in a major bull market are:

i) Global liquidity: Globally, some $9 trillion of global government debt still trades at negative rates. Investors are desperate to find avenues where they can get a positive return.

ii) Domestic participation: Participation in equity through mutual fund SIPs has gone up consistently. Just a look at the numbers shows that SIPs in the full year FY16-17 was Rs 43,921 crores and in 8-months of Apr-Nov Fy17-18 is already Rs 40,780 crores! Monthly SIPs are closing in on Rs 6,000 crores per month.

iii)TINA (There Is No Alternative): With low interest rates, real estate market in dumps after demonetization and gold prices also stagnant, common Indians are flocking to the equity markets through the SIP route.

iv) Growth: India is already more than a $2 trillion economy and GDP is growing at 6-8%. This means in the next 8-10 years India will double its economy size. Just think about the implications of it. We will be adding as much to the economy in the next 8-10 years, as we currently have! The per capita income will correspondingly double as well, bringing millions (if not billions) of people out of poverty into the consuming class.

It is not as if everything is rosy. Indian demography is both its advantage and its weak point. If as a country we are unable to provide jobs or livelihoods to the millions of young people, then we are most likely going to see increased social tensions. They may come up in different forms and may not be directly attributable to economic challenges, but the root cause will most likely point to that.

Short-term government policy, taxation rules can be risky and create uncertainties for businesses and the markets as we have seen with both the demonetization and GST exercises. Global macro factors can also result in changes in market dynamics in the short-to-medium term.

Overall, the future for Indian equities looks to be bright over the long term. Like every year, 2018 will bring with it its own set of challenges. There is no way to predict how the year will pan out. The only thing for sure is that it will be volatile.

May we live in interesting times.

Here is wishing all a very happy and prosperous New Year.