Learnings from Recent History

‘Recent History’ – an oxymoron, as history is typically measured in decades if not more.

However, given that most PMS funds, hedge funds and all kinds of investors proclaiming their vision and CAGR all over the place by choosing a very convenient 2009-2011 start dates/years to calculate their CAGR, I think ‘recent history’ would serve as a good reminder for all of us that mortality (in investing, as in life) is a good idea to revisit now and then.

Take a look at this snapshot and spend some time reading through the image:


An emerging STAR fund. Or you can call it by any other name. Portfolio as of Jan 2008. The name of ICICI is not even relevant here, as most mid-cap and small cap funds (and other funds masquerading as value funds) ended up in a similar fate in the great crash of 2008.

Look at the holdings of this fund in detail and ponder. Ponder for a moment, and especially on these lines:

a) The holdings in the portfolio were THE emerging names – with ‘quality’, ‘management integrity’, ‘scale of opportunity’ written all over them – back in 2008. Like we have many names now. With all three adjectives being attached to many of the names.

b) Access to Investing wisdom is not new (already available in 2008). Even the fund managers of ICICI STAR fund had access to a lot of investing books and Buffett’s letters.

c) Scuttlebutt is not new. Fund managers have had access to managements for as long as one can remember.

d) Access to networking is not new. Fund managers have always been widely networked. Only that networking has got more democratic because of technology (and especially whatsapp). Previously, there might have been panics in bursts. These days, there is a panic every day because of costless distribution of any written word.

d) Asset heavy businesses got massacred. Oh, well. We “know” about this now – we never invest in asset heavy businesses, right? Wait till the replacement cost bull market takes over.

d) Asset light businesses also got massacred. Either because the management turned out to be fraud or their industry turned out to be irrelevant.

e) What you don’t see in the snapshot is the price multiples one might have paid for those businesses. Given that ‘infra’ was all the rage back then, the P/E multiples were also high, pretty much with similar explanations that we are attributing to some sectors these days.

There are many more points to ponder just by looking at this image, which is basically a snapshot of the investing theme/rage back then.

Now ponder:

i) Why do you think your portfolio of 2015 is not like the STAR fund portfolio of ICICI of 2008?

ii) What makes you ultra-confident (dare I say, cocky)? [I pretty much assume all of us are going to say ‘nope’ to i) above]

iii) What are the steps one might want to take/plug your learnings to not repeat i) and ii) above? [Hint: Whatsapp/Investing forums is definitely not the answer]

George Bernard Shaw made an epic statement when he said – “We learn from history that we learn nothing from history”. The history of markets is replete with same mistakes repeated over and over again, each time with a different twist (mostly unimaginable/black swan).

Given the proliferation and access to information, let us atleast attempt to learn from history this time? I started with an oxymoron, and I think I ended with one🙂

P.S: Post inspired by a conversation with a friend who chooses to be anonymous, but is bloody brilliant.

P.P.S: If you think ICICI STAR fund didn’t really tickle your senses, and you are craving for more, here is a more elaborate chart on an assortment of businesses – more varieties than you can find in a Walmart store – quality, scale of opportunity, management integrity, vision, mission, goal, rags-to-riches, first generation promoter – choose your poison – and the current market value is not even 1/10th of what it was.


, , , ,


Confusion. And then Chaos.

I admit. This is my first bull market with a substantial percentage of networth in equities. Maybe that’s why there is a lot of confusion in this chaos.

a) Prices are going up faster than you can say ‘What’s the EPS’? (Cashflow is, let’s just say, not on anybody’s mind right now). Folks are bidding up known stories, and more so the unknown. The more unknown, the better. The more known, the worse. Everybody is out there to unearth hidden diamonds, even from stones who haven’t reported profits in years. There is always an angle in the bull market.

b) Markets always rhyme, never repeat. We all ‘know’ how this will end. What we don’t know is when it will end. As they say, being too early is as good as being wrong. So, of course, we can quote Buffett for every single investing phenomenon and bring up Munger for every bit of behavioral science. We are too knowledge-able these days. Adding to the confusion. Now, there are always two angles to the story. And then there is quality. ‘Margin of Safety’, you say. Can you just hold this glass of water for me, while I laugh the shit out of you?

c) The advent of instant message technology (read: whatsapp) along with its widespread usage has obviously made this bull market different from the others. There is nothing that you write anywhere – and I mean, anywhere – that will not go viral. You actually have to expect that it will go viral. Even if it’s your colleague who has worked on common investing stories. Tremendous social proof at play. You send one message. I will send it to someone else to verify if what you said was true. And then it goes on and on, till you get back the message yourself. Not far from reality. Couple of weeks back, someone forwarded me a set of insights/questions that were supposed to be secretive (with an added masala of ‘bilkul kisi ko mat bol’). In about 4 hours, I got that message from 4 other folks and lo and behold, it was also on a forum. Social proof out of the window. This is social incest.

d) And obviously, because of all the above, the resultant price moves in stories are also very swift (upwards/downwards). But hey, you keep saying “volatility is your friend”. LOL. I meant that only if I had cash to invest. Not when I am fully invested like now.

e) A special phenomenon of this bull market, along with instant messages/whatsapp, is scuttlebutt. Fisher, who propagated scuttlebutt would probably be very happy (or be turning in his grave) because of the number of people who do scuttlebutt these days. And the kind of scuttlebutt. And the type of scuttlebutt. And how they tie in one shop/one retailer/one distributor’s conclusion to the entire story and weave a fantastic hypothesis which cannot be refuted. The butt has been scuttled in so much variety over the past 2-3 years, that it would put Arvind Kejriwal’s political gimmicks to shame.

f) These days, any and every story should atleast be 20 P/E. If it is not, it is seemingly undervalued. And best of all, this P/E thinking kicks in even more because earnings are increasing almost across the board. But you say – hey, global economy has slowed down, domestic economy hasn’t picked up – so why are the earnings increasing?. But, my question to you is, who the hell cares about sales growth anymore? It doesn’t matter if the growth in EPS has come through lower raw material costs (commodity prices at lows), or lower fuel costs (did you see the fuel expenses in P&L statements these days – thanks Piyush Goyal) or slightly better operating leverage? Who cares if it is sustainable or not? Why don’t I care about sustainability?

g) Hey boss, by now, you would have got the drift. I am not in the business of long term investing. I am in the business of giving gyaan on long term investing but actually invest based on triggers/news flow/get into the next best story and flip it in a quarter, maybe a year (if I am really in the mood). I don’t have time for any stocks who don’t perform magnificently quarter on quarter. Flip. Flip. And f’in Flip. There are charts and there are tools and there is momentum and then there are earnings. We are in the business, eventually, of finding the greater fool.

But all this sounds as if I am doing all the right things and not fall prey to all these above flaws? Of course I am.

Do I always invest in quality? Check. Do I always invest in stories with large potential and great management integrity? Check. Do I always do scuttlebutt and speak to the right guys in the business? Check. Am I not affected by P/Es and triggers and whatsapp messages? Check.

I am not confused. This is not madness in markets (neither is it Sparta). Of course this isn’t Chaos. I know everything. How, you ask?

Because, I am just as confident as a f’in fresh MBA grad who can spout relentless ‘good’ advice with all the enthusiasm and language. And all you underlings – I mean, all other investors – listen to what I say. You will be wiser for it.




Go for the Million!

If you already have a million dollars or more, this blogpost is not for you.

For all others, I’ll cut the bullshit and get to the chase. I am just mighty pissed off.

When you have less than a million dollars –

Please don’t listen to any or all the Gurus who are propagating 16% CAGR, 18% CAGR, 20% CAGR. You know the usual spiel. Say, you have 5 Lakh rupees. Gurus recommend that you should be happy be 18% CAGR or 20% CAGR and over a long period of time (40 years), you would be so rich, that even the rich would be ashamed.


For all those studies, where you read that if you had invested in quality at any price, and just held on to them for a long period of time (40 years), you would have made enough money to be proud of yourself.


You really want to know what they DON’T tell you.

By the time you are rich, you will be OLD. You will be very old. Your kids and grand kids, of course, would really appreciate all your journey, effort and all the good things that you have done for them. You will just die as a rich man without all the good things before it. That’s just a tragedy.

Since the readers of this blog are reasonably well versed with numbers, let me illustrate it with numbers.

Let me get the first and the easiest thing out of the way without the numbers. People keep doing these fancy calculations in excel about how much their salary is growing to grow, how health expenses will increase, plug in a sexy inflation number and try to arrive at a figure which they think will be enough for retirement.

Let me solve that for you. You need a million dollars (ex-Mumbai). Unless you want to live the luxurious life of Vijay Mallya ,(well, if you were Mallya, you wouldn’t do all these calculations), a million dollars would let you live and eventually die peacefully.

Ok, now for the numbers bit.

Let’s say you start investing at the age of 27 (well, how better it would be if you could start investing at the age of 15, but try convincing your teenage son or a fresh graduate not to spend on the latest smartphone and you’ll know what I mean). You start with Rs. 5 lakh (You can plug in any arbitary number).

Let’s say you manage to do 18% CAGR over a long period, say 40 years. Do you know how much money you would have by the time you are 67? 37 cr 51 lakh.

Whoa. That’s a lot of amount you say. Definitely it is.

But what would you do with so much amount at 67? You would be old, frail and not really ready to say travel widely or eat whatever you want or whatever shaukh (sic) you have.

Ok. So, how much money would you have by the time you are 57? 7 cr 16 lakh. Did you observe the difference?

Ok. So, how much money would you have by the time you are still fit, healthy and want to do what you want – say at the age of 47? 1 cr 37 lakh.

Did you see the difference? Did you really observe the beauty of compounding? You would not dream to live a reasonably luxurious life, traveling where you want, doing what you want to do with 1 cr 37 lakh.

And that’s my problem with folks preaching ‘my target is 18% cagr because the Gurus said it’, ‘I am ok with 16-20% cagr, but I don’t yet have a million dollars’.

Nobody, or rather, from whatever I have read spells out clearly on this intricate relationship between CAGR and Age. You can be rich, but you are already old.

I would rather die with 10 cr, in the process doing what I want than die with 37 cr to make my children and grand children happy.

And that brings me to my real point.

You should really not be aiming anything less than 35-40% CAGR if you are not already a millionaire. It just sucks not to aim for it.

Why did I say 35-40% at a minimum? That’s because, you can make 100x your money in 15 years with a 36% CAGR. Your 5 lakh will become 5 cr in 15 years (if you start at 27, by the time you are 42 – you are reasonably rich and an almost millionaire). This is not something that I picked up from the now famous 100-to-1 book. That never spoke of age. In fact, he talks very long time frames.

Is this the bull market in me speaking? Definitely. But why not? Look, unless you are outrageously lucky with a stock or timing the depth of a bear market, your BIG returns are going to come only in a bull market. Again, numbers. If a Rs. 20 has to become Rs. 100, you need a 400% return. That same Rs. 100 to come back to Rs. 20 requires just a 80% drop. So, you absolutely need to make killer returns in the bull market to survive the bear market.

People will try to dissaude you by quoting process will get corrupted, people will indulge in speculative stocks etc. My question is – what’s a corrupt process? Just because there is a wave of high quality, high management integrity bull market this time, everybody is on this bandwagon of the right process etc. It’s almost as if investing was just born in 2009.

And speculation. I don’t think speculation is going to net you 35-40% CAGR for 15 years. I have not met anybody yet doing this.

Is this easy? It’s obviously not meant to be easy. Just because you have some internet forums and whatsapp groups these days doesn’t mean investing is easy. There is a lot of hard work, there is a lot of luck and there is a lot of position sizing science involved before you make that million dollars. As Munger says, ‘It’s not meant to be easy. If you think it is easy, you are stupid’.

And speaking of Munger (which, in these days of the current bull market, seem to encapsulate all other Gurus), here’s what he had to say in Snowball – remember, when he was young –


So, for all those people who keep saying 18-20% CAGR, you are either already a millionaire or you are just bullshitting. Aim higher. Work harder. Enjoy the process of investing. And actually enjoy life at the right age. There is no fun in dying rich. And there is a tragedy in dying really rich without having enjoyed or doing what you really wanted to do.

Go for 35-40% CAGR (atleast). Become a millionaire. Live comfortably.

P.S – Cynical folks may obviously point out that 5 lakh is only a starting capital and people will add as and when they grow in life. You know, if people were so disciplined in investing, we’d have a lot more people active in 10 year and 15 year SIPs.

P.P.S – Other folks might point out CAGR is not important but how much, as a % of your networth, is more important to overall gains. Absolutely agree. Convince your friend in a bear market to put 90% of his networth in equities. % of networth is very important, but even with smaller sums of money (and I do think Rs. 5 lakh is a smaller amount of money these days, with freshers from IIMs earning Rs.20 lakh), CAGR at the right levels covers a lot of ground.

, , ,


Intense Learning…

Earlier this week, I had the privilege to be a part of an intense, immersive and absolutely enlightening investor conference in Goa. It was an invite-only and unfortunately, I am not at liberty to disclose either the names of participants in the conference, nor the name/theme. Participants were amazing. It was such an intensely collaborative conference that the time spent on the beach in 2.5 days of the conference was about 2.5 hours🙂 But Goa, being the place it is, relaxes you completely in those 2.5 hours.

Anyway, enough about the background. I think I do have the liberty to compile a list of learning that I had from this conference. This is more like a list that I wrote down on paper, so there might have been a zillion other things that I missed. Papers get lost but Internet is forever (or something like that) and hence this attempt:

1) Owner’s View: Look at every business from the owner’s standpoint. What motivates the owner? What are 1 or 2 key factors that the owner  understands that bring value to the business? How will the owner react in adverse conditions? That’s absolutely critical to value the business. (Book recommendation for this point: “Creating Shareholder Value”)

2) Crossing the Chasm. An excellent mental model to think about businesses, especially emerging businesses. There are two critical strategies for listed markets based on this mental model. a) Initially, follow a basket strategy in an emerging theme (bowling alley phase) and b) More critically (and this was the key learning), the leader usually gets a disproportionate share of the market and hence move capital from basket strategy to the leader once data/analysis points to who would be a leader.

3) Invest in Leaders: Try investing in large, proven and addressable markets (companies trying to create a market usually face a lot of headwinds and probably will not be successful). A further refinement would be to always invest in leaders in pull-based (demand) businesses.

4) What’s the DNA?: Understand the company’s DNA. Look for greatness DNA. The strengths and weaknesses of promoter/owner/leadership gets amplified in the company (and thereby earnings).

5) Write it down: Try and write down core investment thesis before investing in any stock (or selling a stock, for that matter). This would serve as a record to check against reality.

6) Sell a bit: Sell a bit of your most favorite/loved stock and check if the love holds (selling will trigger rationality in a much loved stock in your portfolio). Especially, sell a bit if numbers get disappointing to get rational.

7) Growth, growth, growth: The weightage for growth (usually, sales and then profits) in the Indian stock markets is 50%.

8) What’s your insight?: Decent opportunity size, difficult to dislodge and high predictability are critical factors for any business and in all markets (bull and bear). What requires more effort, insight and is more important to returns is the evaluation of a visible gap between performance and perception (especially, in bullish times like these).

9) Successful patterns: Some of the successful patterns in the Indian stock market have been Growth + Deep undervaluation, Operating leverage + reducing debt, maiden dividend, industries with a reform tailwind, demand businesses + oligopoly and small equity + illiquidity

10) Leverage Darwin: Buy shares (in tracking quantity) of all businesses that you like. Else, it’s usually ‘out of sight, out of mind’. And Darwin theory will force you to forget those stocks even though you seem to be hearing good news (since you don’t even own a share)

11) Read, Read, Read: I found that most good investors in that forum read, at a minimum, 500 annual reports a year (may not be 500 different companies; may be 5-7 annual reports of every company that one likes). And as Munger says, it adds up over a lifetime.

 12) Psychological Denial: One of the bigger mistakes that bright investors usually make is psychological denial. It’s not that they fail to recognize that the business is deteriorating. It is that they don’t act upon it. There would be plenty of time to recognize deterioration of a business and act upon it (sell). But psychological denial comes into play and these bright investors are left holding the bag.

13) Are you screwed yet?: If you are not screwed by the markets in 2 years (consecutively), then watch out. Screwing is just round the corner (not just a bull to bear, but due to transition from confidence to overconfidence, mistakes are bound to happen)

14) Don’t take the lollipop: Many a bright investor with wonderful track records for 5, 7, 10 years get lulled by the market and their analysis. Market, at some point in time, gives a wonderful, sweet (but dangerously poisonous) lollipop which these investors partook and then got rogered. Sometimes, they don’t recover financially and worse, are broken in confidence too. The key always is to be watchful.

15) My observation/contribution in the conference: Be absolutely obsessive about working capital (and detailed components). Working capital is a leading indicator of competitive advantage. If working capital (days) is increasing for all businesses in your portfolio, either you have a shitty portfolio or the economy is going in a tailspin.

P.S: As I mentioned earlier, these are the ones that I wrote down (the essence as such. Detailed discussions on these points obviously were a killer). Such was the intensity of the conference and discussions that there were a zillion other things which I couldn’t/didn’t note down. My biggest takeaway from this conference was the humility and down-to-earth behavior of these brilliant investors who have seen the ups and downs of the market for more than 10-15 years and also have made a lot of money still looking to learn, still looking to share and in general, being absolutely stellar. Lot to learn. And as Frost lingers on, ‘miles to go before I sleep, miles to go before I sleep’.

, , ,


ISGEC Stock Story

ISGEC has been one of the very good winners in 2014 in my portfolio. Due to multiple requests to expand on this story, I have prepared a quick presentation to detail the story.

Contrary to public opinion on twitter and whatsapp, identifying and working on this business was a complete collaborative effort. Om and Dhruvesh – two very good friends of mine worked on this story along with me and were critical in various thought processes, scenario analysis and tons of brainstorming. Due to these two people and two people alone was the reason why I had the confidence to take a bigger position than usual on a Capital Goods story. We traveled to Yamunanagar from Mumbai, Hyderabad and Bangalore for the AGM in August 1st week. It was a fantastic learning experience along with being a super fun trip.

Hope the story becomes more clear with this presentation. Let me know if you have any questions on the business (and not the current price and prospective future price, as I don’t have ANY clue where the price will go in the near or distant future).

Link to the presentation below:

Isgec_Stock Story

Disclosure: This is NOT a Buy/Sell/Hold recommendation discussion. This blog is only for educational purposes. Om, Dhruvesh or me are neither research analysts nor do we have any fancy sounding certifications. All three of us are still invested in the story. Please contact your financial adviser before taking any decisions.

, , , ,


Welcome 2015!

After what seems to be a fabulous year for the stock markets in the hope of ‘acche din’, we seem to be headed for a confusing year in 2015. More on that later.

Massive year for the stock markets. I am yet to come across any person in my circle of investors who have not made atleast a 100%+ gain on their portfolio. The extreme I have heard is a 600%+ gain. Multiple nuances to these claims obviously. Suffice it to say that all the hard work on investing in 2011, 2012 and 2013 paid off in 2014 in my personal portfolio too with 300%+ gain (and obviously, the CAGR will automatically get bumped up). Let’s see how it goes from here.

More than the monetary gains, which are no doubt important, I have made some highly knowledgeable, highly networked and yet very humble friends in the bargain and I immensely thank God for this blessing. Markets and studying about Markets have taught me way more than I could ever imagine – useful stuff not just for Markets but in personal and corporate life. The role of luck is hugely understated in every success is one of my most important learning. Stellar stuff in finance, behavior, management, logic, probability, luck, black swans – I mean, the range of thought processes that I was exposed to, thanks to friends, well-wishers and various social networks, has made life that much more richer (and more unsure of?). They say that Ignorance has the highest courage and the more you know about something, the more you realize you know less about that something. I guess that’s true across all aspects of life, including markets. And also perhaps the reason why older folks are more circumspect than the young folks about any decision they make/take.

Since multiple blogs have been talking about successes, I want to go a bit contrarian. What I want to do in this post is not to talk about successes, which obviously involve luck too, but talk about failures. Failures in thought processes than any price action per se (as it was very difficult to lose money in the 2014 bull market even with a faulty thought process).

As the Prof says, there are two types of mistakes – mistakes of omission and mistakes of commission. I committed both types of mistakes in this year. My selfish effort in documenting these mistakes on the blog is to publicly put pressure on myself to minimize these mistakes to re-occur again (and a bear market is very unforgiving).

Mistake of Omission: This is a easier form of mistake, as opportunity cost doesn’t get reflected in numbers or CAGRs. But opportunity cost is a cost and it needs to be accounted for. So, in this year, I missed two stocks – Symphony and Eicher Motors.

Of course, it’s easier to say that in Bull markets all stocks go up, so what if you missed a couple of them? The point is, there was a flaw in the thought process which led me to not invest in any of the two.

Symphony – It’s a little strange as to how much time I spent studying this stock, business, management, listening to their concalls, doing localized scuttlebutt etc. The price was around Rs.325. My logic of not buying this stock hinged on two reasons –

a) Historically, the management of Symphony was known to give very aggressive targets that they were not able to fulfill. Classic case of overpromising and under-delivering.

b) The Sales growth year on year (unless you took the low of 2009 and calculated CAGR) was not encouraging at all. In all stocks I invest, I try to check the historical sales growth and see if the management had the capability to ramp up sales and if there was a temporary industry/global issue. Symphony sales growth was left wanting. \

And then, the Prof also wrote a great blogpost on Symphony and its business. Q2FY14 results came in very well. I bought a token position of 1% at around Rs.370 post Q2 results. However, I was not convinced that Symphony was a stock I wanted to invest (I am usually a concentrated investor, with no more than 7-9 bets). Inspite of all these good indicators, I sold out the stock at Rs.450 and moved on to something else.

You may call it price anchoring. You may call it wrong judgment of business. Or maybe – and this might be my learning –  I underestimated the market’s power of re-rating a stock with an asset-light model, good dividends and a demonstrated quarter-on-quarter sales growth for two consecutive quarters. I really should have bought a chunk post Q2FY14 results. But I didn’t.

Of course, I never expected the stock to go from a 20 PE to a 60 PE to the current price of Rs.2000. But, at a bare minimum, I missed a 3-4 bagger from Rs.370 levels in a easy to understand asset-light business with high dividend payouts coming up the curve on sales growth.

Similar mistake of omission occurred on Eicher Motors. Saw it at Rs.1000. Never expected the RE division to contribute so heavily. Was always thinking that CV division is the one that will turn around Eicher. Totally under-estimated Siddharth Lal’s vision, inspite of seeing a rapid increase in Royal Enfield’s on the roads. The learning – Reading all those Peter Lynch’s books over and over again came to nought. Absolute zero understanding and implementation of Lynch’s statements and thereby losing out on a massive gain (my view has always been, if you can’t implement even such simple things, why read at all?). Of course, never expected this to go to 85 PE. Even at 40PE, I missed a 4-8 bagger from Rs.1000-2000 levels. At current levels, the margin of safety seems quite less, although every analyst and his friends think this is a Rs. 1 lakh stock price business as the CV business is also turning around. If it does go to Rs.1L, I’ll probably write another mistake of a mistake, a meta-mistake blogpost🙂

Mistake of Commission: A more grave mistake, and probably a bear market would have destroyed my CAGR. I got out unscathed, with some decent returns, but the thought process was pretty sub-standard.

So, I bought this auto-component stock owned by a private equity player as I thought it was highly undervalued at Rs.110 bucks and kept buying till Rs. 120. Nothing wrong with that. But greed overtook me. What I did, since I didn’t have any surplus cash, I sold out most of a artificial leather company, a cpvc company and a three-wheeler company for buying this stock. The thought process was – I will sell these three -> invest in the auto-component story as I saw private equity triggers coming through -> once it becomes fairly valued, I will sell that –> get back into these stories yet again.

The reason why I called such a thought process pedestrian is because I was betting on a series of probabilities rather than a decision or two. I was selling three very good compounding stories, which had given me stellar returns to buy a stock which was only undervalued but not really as great as those three stories with a hope of getting back into those three stories. I was basically trying to time the market, as I thought those three stories were fairly/over valued and this one was undervalued. I got out once I realized the gravity of this mistake (and thanks to the bull market, sold out at Rs.160 in about 2-3 months I think).

The learning, really was, and I keep repeating this to myself over and over – is to never sell a longer term story for a shorter term story. Sell a longer term story for another longer term story. Once in a while, like in 2014, you escape unscathed (with decent returns for a bad process). But in a bear market, such mistakes are going to cost me a lot.

Anyway, those were my mistakes. I may have committed more, but I have probably not yet realized them🙂

Back to the initial statement about confusing state of affairs in 2015. The markets seem fairly to over valued depending on who you ask. Nobody in the market is saying that markets are undervalued at this point in time. There are a lot of discussions (maybe more than necessary), across all channels of communication, about raising cash to prepare for a crash.

This blogpost should hopefully clarify matters – http://calculatedwagers.blogspot.com/2015/01/when-to-sell-and-when-not-to.html

But my personal view on cash is this – Given that Nifty is not over-valued by traditional means (TTM PE < 24-25 PE) and given most stocks in my portfolio are fairly to slightly over-valued, there is no hurry to get into cash. Cash gets built over time. Of course, there might be minor crashes (10-15%), but that’s the nature of equity markets and you probably shouldn’t be in the markets if you are not ready for such corrections. My view is either be in 0% cash (and expect these minor corrections, and if the businesses you have bought are good, there is only going to be a temporary loss) or be in 30-40-50% cash (which is really like preparing for a crash). Having a 10% cash for example, is only satisfiying the psychological urge to assume you are in control than help you in any sort of corrections. Past corrections in this bull market have led me to believe that quality is not going to correct much – so a 10% cash may not really help in minor corrections. In major corrections, everything’s going to fall and a 10% is no respite.

Disclosure: I am not a financial analyst nor a research analyst. All posts on this blog are only for my documentation and educational purposes. Please contact your financial adviser before taking any decisions.

, , , ,


This time is different…

Hola and long time no see on this blog. Apologies for not posting regularly (of course, I doubt anyone in the world noticed). Caught between work, investing and a bull market, things have been quite busy.

All right then. With SEBI rules and all that, I will obviously not even venture into mentioning any stock names, much less recommend them anymore on this blog. And given that I post so infrequently, I again doubt my recommendations (if I had any) would have been taken seriously by anybody.

But I do want to point out some unique things that are happening in this market and especially focus on some tidbits of conversation around this bull market:

1) Everybody wants to quit their job and get into full-time investing: With people making 2x, 3x of their portfolios in the last 1 year, a very common theme has emerged – that of quitting job and doing full time investing. Sounds very sexy. Sounds very carefree. Nobody to report to. No more appraisals. No more HR mails. Pure meritocracy (and no bicker politics) in the sense that Market will reward you if your reasoning is right and punish if the reasoning is wrong. Very liberating. The idea in itself is so magnetic, that it can leave best of the folks high and dry. I am highly tempted to do this too, no doubt. I don’t think it’s a bad step if a) you know that you have enough assets and income to back you even if your portfolio tanks 50% from here b) you have a fair idea of what to do in your spare time as investing in general is very boring and would require only short bursts of massive activity (unlike trading) and c) you are actually passionate about investing and learning its million nuances than just being attracted to the idea of not having to report to anybody/hierarchy.

2) 80% of story in 20% of time: Since our memories weigh the recent events more highly, this quote will be attributed to Basant sir, but I can assure you that many senior and legendary investors have said the same thing. I have massive respect for Basant sir (and the education he provides constantly) along with other legendary investors but this is precisely the wrong time (start or middle of a raging bull market) for such utterances. People remember quotes and not entire interviews and thought process. What is 20% of time? What is 80% of story? How much time should I spend so that the 20% of time is actually useful to learn 80% of story? My read is that legendary investors have sifted through so many stories, so many stocks, been through multiple cycles that they have various heuristics to understand which story may run well and which story may not (and still be only 60% right). Investors who are on the learning curve, in my opinion (and that includes me), need to spend as much time as it takes to know everything about a stock as possible. They need to have an illusion of control, atleast thinking that they know everything about a stock before clicking the ‘Buy’ button. When they have sifted through enough stories, and been through one bull-bear-sideway market cycle is probably when they would know and really understand the meaning of ‘80% of story in 20% of time’. Till then, using such statements to justify a thesis would be a recipe for disaster.

3)  This is a stock picker’s market: This is an all-time favorite. I really don’t know what the statement means as it is used in every type of market (bull/bear/sideways). I had already shot off a warning on twitter for anyone who wants to use such statements. For the sake of brevity, will avoid repeating that threat.

4) Is it 2005 or 2007: This thought has been running through many investors’ heads (including mine, evidenced by my twitter thread). Stocks have been moving up so fast that everybody has started estimating FY17 and FY18 earnings. Portfolios have moved up 2x, 3x or more depending on the stocks and portfolio allocations you have done. People are scared if there would be a massive correction from here and equally excited about another massive run from here to say 35000 on the Sensex. Which one is it then? 2005? or 2007? Or does it matter at all that even in massive bull runs, there are routine corrections of 20% in due course. Or that your CAGR will be quite healthy even if you don’t score big over the next 3 years?

2013 2014 2015 2016 2017 2018 CAGR
100 125 250 275 302.5 332.75 27%

Above is an illustration of any investor who started with Rs.100 in 2013 and ended up with Rs.250 by end of this year. Even if this investor takes this money and puts it in a fixed deposit giving 10% returns (well, take 7% in case you are tax-sensitive), 3 years down the line, with a risk of zero capital loss, he/she is going to end up with a healthy 27% CAGR. Legendary investors will tell you that a 27% CAGR is an absolutely great number to have. What they may not ask you of course, for the risk of sounding rude, is how much of your net worth was in equities before you put it in fixed deposits. We all know the math. We all seem to know the trick. But what do we do?

Bah, who cares about data. Is it like 2005 so that I can buy more? Or is it like 2007 that I need to sell? Tell me that first.

5) The fallacy of selling 20% below the top: Which brings me to my next and favorite topic. Nobody wants to leave the party that is going on. Value investors are very famous and take great pride in laughing at the stupid statement of former executive of Citibank saying “”As long as the music is playing, you’ve got to get up and dance.” We laugh and laugh at that stupidity. We quote Buffett. We quote Munger. Why, these days, we have become more exotic and even quote Daniel Kahneman and his super book ‘Thinking, Fast and Slow’. But almost no-one wants to exit the party. These days, the hypothesis is even better. These days, investors say that ‘let the market reach the top and then correct…we’ll all get out 15%-20% from the top’. Let me explain this fallacy through a famous picture:


That’s the chart of the IT bubble – starting from 1996, all the way till 2001. All those investors who say ‘let the market reach the top and then correct……’, would they want to get out at all the points marked ‘Red’ in color? How would they know in advance? Conversely, in reality, wouldn’t most investors get out at all the points marked ‘Green’ in color? Not really. Every investor worth his salt wants to get out at the point marked in ‘Orange’. How many can do it? I seriously doubt if it would be in high single digits.

Then again, the lure and the logic is too irresistible. Combine fallacious logic with your neighbor (rather, twitter/whatsapp friends) making more money than you everyday – and you have got a dynamite waiting to blow up. We all want to dance till the last minutes, irrespective of how many times we read Buffett pleading ‘the clock has no hands’.

6) Impact of social-investing: Post the 2008 crisis, a new kind of animal took shape in the world and seems to have impacted the markets in a big way. The animal of crowd-sourced investing/social investing/forum investing/whatsapp investing. This has been a massive boon for all investors to connect themselves to superb investors across the country. I have personally benefitted, both monetarily and otherwise by picking brains and discussing stocks and worldly wisdom with some super investors and have learnt quite a lot. If one has already networked in the wave, it would hold him in good stead in the future too. Given recent SEBI rules (to circle back and tie in to the first paragraph of the post), unless clarifications come, there are hardly going to be any stock recommendations in blogs and forums henceforth. Given that most investors have caught onto the mantra of “‘scope of opportunity + management quality’ is enough to understand and invest in a story” (never mind that each parameter in the equation itself is a universe), how would the investors cope with no recommendations would be fascinating to see. In fact, I think that ‘scope of opportunity’ has been defined so widely that maybe sometimes even promoters are shocked and surprised at how wide we have defined ‘scope of opportunity’. The investor seems to say ‘aapko pata nahi aapki company scope ki taaakat’. There might be some Ph.D down the line, maybe in 2025, who would probably write a book on how SEBI rules had far reaching impacts on how investors in the millenial age behaved in the Vision 2020 age.

Prashanth has a wonderful post on investing and social media. Read, if you haven’t already.

, , , , ,


Stock Analysis: Poly Medicure

Poly Medicure is a leading supplier of Intravenous (IV) Cannulae, Safety IV Cannuale, IV infusion sets and blood bags. Safety IV devices itself is globally a $300-350 Mn annual market size today. (This was a 20 year patent granted to Braun in 1999, so is valid till 2018).

They manufacture around 95 products.

Subsidiaries in China and US. Egypt is a joint venture. China has been a major factor in reduction of raw materials.

Major RM is plastics, which is dependent on crude oil. Custom duty on medical and life saving equipment reduced by the Govt. in Feb’13 budget.

Revenue growth of 25% (approx.) and NPM of 12-13% from the past 3-4 years. See no reason why the revenue increase won’t continue at about 20% and NPMs sustain at 12-13% for the next 2-3 years. Forex derivative contracts expired in Oct 2012. Now, only simple forward hedging.

B Braun, BD, Hospitec, J&J, 3M and Poly Medicure are among the main players in this space. Poly Med won cases against B Braun in India and Germany and Malaysia but lost in Spain. They are planning to tie up with major OEMs and contract manufacture for them. No major plans to foray on its own due to huge costs involved.

Safety IV Cannuale sells at Rs. 18/- while IV Cannuale sells at Rs. 6/- even though it costs only Rs.0.5/- for safety. Currently, Poly Med sells IV Cannuale majorly and Safety IV Cannuale only in some geographies.

Has 3 plants – Faridabad, Jaipur and Haridwar. No expansions possible in the existing Faridabad and Haridwar plants. Jaipur SEZ plant to be operational by March 2014. They have got new land in HSIDC, Faridabad. Capital expenditure of Jaipur SEZ – 38 cr (21 cr loan, 17 cr internal accruals). Investing in Haridwar plant to focus more on domestic market. In FY14, domestic market contributed only 50-60 cr. Rest from exports. Got USFDA approval for its Faridabad plant in Dec 2010.

R&D as a % of sales:

They have increased R&D spend as a % of sales from the past 3 years.












a) Increase in RM costs (crude oil proxy)

b) Exchange rate fluctuations (although, it’s a net exporter)

c) Changing import duty structures (although, off late, govt. has framed favorable policies towards medical and life saving devices)

d) Medical devices heavily regulated (nature of business)

Related Party Transactions and Compensation:

They score pretty high on related party transactions and compensation as a % of sales.

Series of related party transactions with Vitromed healthcare

VitroMed txns






15 cr

11 cr

8 cr

8 cr


21.5 cr

15 cr

13 cr

10 cr

% of PolyMed Sales





MD & ED’s compensation





MD&ED’s comp

3.5 cr

3.1 cr

2.17 cr

1.73 cr

Sales of PolyMed

252 cr

209 cr

170 cr

136 cr

PAT of PolyMed

24 cr

19.2 cr

21.7 cr

16.4 cr

% of Sales





% of PAT





Valuation and Investment theme:

Polymed looks like a 20-25% compounding story with a fairly high probability from these levels. FY13 250 cr sales, 24 cr profit. FY14E 300-310 cr sales, 40 cr profit.

Next 3 years, even if sales double (and assuming NPMs would remain at 12-13% – op. leverage would be set off by increased depreciation of Jaipur SEZ) implies 72 cr profit. Assigning a 20 multiple leads us to 1400 cr marketcap. Current marketcap 750 cr. Implies a 25% CAGR from current levels

Jaipur SEZ spend is about 38 cr and expected sales is about 100-120 cr (2.5-3x asset turnover). If some OEM comes along and if Jaipur SEZ can deliver full demand, sales can double in 2 yrs, and the CAGR would jump to 40%.

Management compensation seems extremely high. Related party txn with Vitromed also needs to be monitored.

However, there is a long ramp for Poly Medicure to grow at 20-25% CAGR. Medical disposable business is an evergreen huge business (unless, there is suddenly a replacement of IV Cannuale with some other tech.) And FY18-19, Poly Med can start selling Safety IV Cannuale anywhere in the world (Braun’s patent expires). Safety IV cannuale is 3-4 times more expensive than IV Cannuale. Think about the impact on revenues and margins.

Disclaimer: This is not a recommendation to buy/sell. This post is only for educational purposes. Please do your own diligence before buying/selling Poly Medicure

, , ,


Stock Analysis: Sabero Organics

I had researched on Sabero Organics about a month back but was too lazy to update on the blog. Thought would rectify it in the new year🙂

I have not yet invested in the stock. Still reading and researching. Right now, the opportunity costs of investing are pretty high.


Sabero Organics – manufactures agro-chemicals – fungicides, herbicides and insecticides. Sabero is a leading manufacturer of generic products in the agro-chemical space.

Investing theme is broadly – i) patents of major patented agro-chemical products will expire in 2014 ii) Due to increasing environmental concerns and consolidation in China (along with appreciation of yuan), there is a significant possibility of lower production from the Chinese along with better price from India iii) Significant operating leverage and synergies that can be achieved by the Coromandel group.

Their major products in each of the segments are:

1) Herbicide – Glyphosate

2) Fungicide – Mancozeb (registered in the first country in Europe (France) recently); potential of Mancozeb worldwide is $500M; current share is 10-11%; aspiration to take to 20%; it contributes 35-40% of Sabero’s sales (while other core products such as Acephate, Monocrotophos, Glyphosate each contribute 15 per cent to the total sales respectively with the balance 15 per cent coming from Chloropyriphos and others intermediates.)

3) Insecticides – Monochrotophos (main competitor: United Phosphorous)

Share of revenue of Fungicide:Insecticide:Herbicide is 40:40:20

They have subsidiaries in Australia, Europe, Brazil and Argentina.

2009 – 10 AR

Customers of Sabero Organics:

a) 30% of business from MNCs

b) 40% of business from domestic and international B2B

c) 30% of business from dealer distribution network

Sabero is setting up a plant in Dahej SEZ at a cost of Rs. 55 cr. Potential sales of 2-3 times investment. Funded from $9M in ECB debt and rest from internal accruals.

Increased capacity of Chloropyriphos by 50% by Sep 2010.

2010 – 11 AR

2 plants shutdown primarily due to project executions and EMS (environmental) objections

Started supplying to Brazil. Got technical registration for Mancozeb (Brazil is the 2nd largest customer after US in agro-chemicals)

Dahej plant will manufacture synthetic pyrethroids, which have a potential market size of $600M-$700M

Main RMs of Sabero – Ethylenediamine (suppliers are Akzo Nobel, Huntsman and BASF) and Phosphorous, Acetic Anhydride (main supplier Celanese)

Mancozeb plant working at 60% capacity

Supply to Europe has not begun as data protection gets over in June 2011 (Update: In 2013 AR, they do indicate they have registered in France)

40% marketshare in Monochrotophos, rest 60% with United Phosphorous (Cheminova exited the business, leading to a duopoly here)

The joint venture to co-venture partner Markan is under arbitration (Update: In 2012 AR, they have resolved it, taking a hit of approx. 2cr)

2011 – 12 AR

Coromandel (and its subsidiary Parry Chemicals) take 74.57% ownership; Sabero will contribute only 5% of Coromandel’s revenue.

There was a PIL (public interest litigation) filed against the company. Considerable investments were done in environmental management systesm and processes. April 2011 – they were manufacturing 0%; Dec 2011 – their capacity was ramped up to 75%

Manufacture of formulations has begun in Dahej in March 2012

Case with Brazilian company settled

Propineb, with a market potential of $150M – commercialization will begin next year

There has been a sharp fall in the number of Glyphosate herbicide manufacturers, and there can be a 30% reduction in capacity due to consolidation in China in the next 3-5 yrs

Power, fuel and utilities costs shot up to 13.6% vs 7% last year

RM costs also rose sharply

Domestic scale up didn’t happen properly because of availability of products (due to constrained capacity) and erratic monsoons

2012 – 13 AR

Many agro-chemicals going off-patent and due to GM seeds, there has been diversion of R&D funds from agrochemicals to GM seeds

Propineb has been launched (worldwide market of $110M)

Current status of registrations: 296 registrations on 16 products in over 54 countries (183 unique proudcts/country combo)

There has been a 40% increase in trade payables and 100% increase in trade receivables, while sales have grown by only 44%. The massive increase in trade receivables vis-à-vis sales is shown up as negative operating cashflow (-19cr) for the first time. (Are they pushing products on lenient terms then?)

There is absolutely no mention of the status of the Dahej plant.

There are planning to do some capital investment in utilities (drawing board stage), and are targeting EBITDA margins from current 10% to 15%. They can potentially do a 1000 cr turnover in FY15.






































Net Fixed Assets






Fixed Asset Turnover



















H1 FY14 PAT is 26 cr. Given H1 and H2 are similar for Sabero, FY14 PAT would be 52 cr. (There would be no tax impact this year because 61 cr is carried forward from FY12. 7.7 cr has been set off. This 52 cr can also be set off against 61 cr). Tax impact would be 30% from FY15 (unless we know further status of Dahej in which case, it may be a bit lower).

PAT 52 cr. Mkt cap – 492 cr. P/E of 9.5 (Even EV/EBIT (since Sabero has debt) is about 9.5). What would be a fair valuation for such a company?

For FY15, assume best case scenario:

1000 cr turnover, 15% EBITDA margins would imply 150 cr EBITDA. 30 cr interest deduction. 120 cr EBT. 30% tax – PAT would be 84 cr. On a similar 10x multiple, we are looking at 70% upsides from here.

On a realistic basis, 1000 cr turnover, 10% EBITDA, would lead to 50-55 cr of PAT. There is no growth between FY14 and FY15 in PAT (due to full taxation in 2015). Beyond that, there are too many variables.

Of course, increased demand for Mancozeb from Europe (if France is done, other countries can’t be far behind) may further provide tailwinds.


The major risk I see here is any PIL would lead to further pullbacks as production might be stopped. Also, GPCB has given time till mid-Feb to clear out some backlogs on environmental concerns. I think getting a clearance would be paramount (although, given Coromandel’s pedigree, don’t see much of a risk here).

Another major risk is obviously steep increase in RM prices. This is a risk on balance – as production of end product from other countries is dwindling, and as is the manufacture of phosphorous from China. We may get into a higher pricing scenario, but so would our RM cost increase. Net-net, I don’t see an asymmetric benefit of China rampdown.

Another risk is inter-party related transactions – say, if the Dahej plant production is being restructured to be a backward integrated supplier for Coromandel-Liberty merger, then the upside is going to be very limited. We need to be careful of the pricing structure here. Of course, delisting is another risk (will lead to re-investment risk)

Disclosure: I have not invested as of yet. This is not a buy/sell recommendation. This post is only for learning and posterity. Please do your own due diligence before investing

, ,


Goodbye 2013!

So, it’s that day of the year where everybody looks at the year gone by – some with happiness, some with wistfulness and some others with a tinge of sadness. Nevertheless, everyone except for the greatest of cynics look forward to the new year with hope, enthusiasm and happiness.

So, here’s wishing all of you a fantastic happy new year 2014!

From an investing standpoint, I wanted to jot down some notes for posterity –

a) Performance: At the beginning of this year, I started deploying most of my capital towards equities. Right now, except for emergency funds (and gold and real estate of the old), most of it is in equities. Maybe it’s a sign that the market top is here and it’s all downhill from here🙂 My portfolio’s return over the past 5 years is now 30.4% CAGR, helped massively by some decent investments I have made over the last year. 25% of my portfolio has been invested in HDFC Bank and that has returned 0% over the past 1 year. If I remove the best performing stock in my portfolio (which gives a slight indication of whether the portfolio is robust enough, and that you weren’t just ‘lucky’), the returns fall to about 22% CAGR. 8% CAGR difference is massive if you consider a long enough timeline – but for now, the portfolio seems robust enough, although there is a long way to go in terms of a perfect portfolio.

b) HDFC Bank: As I said above, it constitutes 25% of the entire portfolio and has returned 0% over the past 1 year.  I have an idea of what to do with most of the stocks in my portfolio except this one. This is probably the bluest of the blue chips and has been with me for the longest time (esops) and has compounded extremely well. I do understand (and have read) that the stocks don’t know you own them and you need to be un-emotional about stocks etc., but this one is slightly special. Many a time, I have come mighty close to selling a portion (or all of it) to invest in other opportunities, but have held myself back so far. Other good friends of mine have suggested to take the option of LAS (loan against securities) against this. Somehow, I am slightly averse to leverage. Anyway, this stock has been my biggest dilemma of 2013. Behavioral science is that much more tougher to implement when one stock is a runaway success.

c) Friends: To begin with, they were just acquaintances who used to interact regularly on investing forums like valuepickr and whatsapp groups. Slowly, over many conversations, and on everything under the sun, this year has been amazing in terms of getting to-gether with like-minded friends and learning a lot from them. It is my belief that incremental CAGR will come, not just by reading and working on your own but also consulting with like-minded friends who can teach you a lot about investing much faster and point out behavioral flaws in the nicest manner. This easily has been my biggest benefit of 2013 and hope to continue in 2014 and beyond.

d) Mistakes of Omission: Well, I would not call them mistakes because I had consciously avoided them after reading up  on their businesses. These businesses have gone on to becomes doublers in about 6 months or less. One of the changes that I have noticed over the past year is that I no longer feel the need to ‘catch-up’ or ‘missing out’ on a stock. Stocks like PI Industries, Acrysil, MPS etc. have doubled in the last 6 months. I had read about them but didn’t invest in them. The reasons are many – I either didn’t understand the business completely or didn’t like the management or didn’t understand the competitive landscape well and hence didn’t invest in them. I maintain a 7-10 stock portfolio most of the time and I can’t afford not understanding a business/not understanding the triggers for growth/not able to track more details on the company. I am not really too worried about mistakes of omission (and I honestly think nobody should unless their capital is massive).

e) Mistakes of Commission: This one gets my goat. Thankfully, there have not been too many of them this year. However, I did lose 0.5% of my portfolio capital on one single stock – CP labs this year. In fact, I sold the stock at a 20% loss and the stock has promptly moved up 50% from the time I sold – talk about wonderful timing🙂 This stock had all the wonderful influences of psychology while buying it and also while selling it. A story for another day perhaps. Other than that, lost tiny bits of money on APW President delisting and Cravatex (I kick myself for this investment – as it was on a whim, a bias for action than anything else). The takeaway for me from this year is to not invest on a whim and not get taken by the influences of psychology. Both are of course extremely tough to do, but that’s the challenge, ain’t it?

f) Unsatisfactory Profits: This is a strange case where I made some good profits, but am still unhappy to have take then decision to buy (and then sell). The stock case in point is Avanti Feeds. I saw massive value when the stock declared its Q1 results this year and bought quite a bit in my portfolio (at around Rs.170). The price kept increasing from then on, but I was on tenterhooks all the time – especially because there were so many variables to track. Inspite of all the assurances from various forums, I was really not comfortable holding the stock and tracking the stock on a daily basis (can’t do because of my day job). So, I sold – in the range of Rs.240-Rs.265. Decent profits but not satisfactory. I really want to get into a system of investing in stocks with not too many variables in 2014 and beyond, especially the ones that don’t keep me on tenterhooks every day.

g) Special Situations: As you would have noticed over the past year, I have not written about special situations on this blog (or actually, written on hardly anything at all). I have stopped analyzing them for multitude of reasons – a) I have realized that they are very intellectually stimulating but not very monetarily stimulating, considering effort vs return b) They don’t end up giving me the comfort of compounding and am exposed to reinvestment risks c) Too much competition chasing too few special situations, resulting in hardly any arbitrage. I may invest in special situations in the future, but they are going to be very few in number.

Hope to blog more in 2014. And wish you a very happy and prosperous new year.

, , , , , ,