Market Sense — 024 (Feb 2018)

It is two years since I started writing Market Sense, it is the 2nd Anniversary of Market Sense. Time seems to have moved amazingly fast. I have come a long way and learned with you over the last 2 years. Hope all of you have enjoyed my articles. Am extremely thankful and express my gratitude to all the readers for your constructive feedback and suggestions. Am very much grateful to Maddy and the Happy Times Team for giving me this wonderful Opportunity. It all started with a request from Maddy to have a single article on Stock Market. As I started writing the first article it turned out to be about 3 pages and was eventually published across 3 editions of Happy Times, and the story continues.

During the first year I found it quite difficult to get the themes for each of the editions. In a short time I realised that it was a high level of responsibility when you write for others. Started doing a lot of research, more deeper reading, watching insightful videos to ensure that the articles are factual and had to be doubly sure that there are no serious errors. Though have been reading and practicing investments for over 25 years, writing market sense was reflection on my own strengths and weakness. Really enjoyed the process and over the last 2 years realised the change this brought to my own investment process and philosophy.

By the time of the 12th edition, I had gained enough confidence and noticed that my own writing style and insights had improved a lot. My personal investment process and ideas have become more refined.

I am now understanding the power of teaching others. From an passive learner I seems to have moved to a higher level of active learning. This is the power of teaching others.

Market Sense has helped me immensely to

· clarify my own investment thinking,

· explore fresh ideas,

· ask deeper questions,

· reflect on own learning and experiences,

· search for connections between theory and practice.

As they say, writing aids self-reflection, forces you to be more in-depth, thorough and thoughtful with the subject or theme. Writing also helps us learn more, because we remember more when we write our thoughts and learning’s. I went through this process. Suggest all readers to start writing a blog on their passion.

Learning to Earn

Life is full of ups and downs. There are no quick or easy wins. A person has to go through the hard way. The best learnings come from your own mistakes. Most of my learnings have been reflections from losing money. Other learnings came from analyzing the price falls during market crashes. We can also learn from the mistakes made by other investors or from other incidents. I have learned from each of the scams which occurred.

The best learnings are not from our own success, but from our own & others failures and even from scandals.

The Satyam scam taught me the importance of looking out for Promoter Shareholding. In Satyam the promoters where continuously reducing the stake while the company seems to have been making higher and higher profits. Along the way the Promoter Family was busy investing in Real Estate in a Big Way (Maytas). Now a days I get a bit jittery if the promoter shareholding is either not high or is on a continuous decline.

The Enron Scandal taught me about the difference between Profits, Cash flow and Inventory Turnover. Understood why Cash Flow is very important. Profits can be an accounting entry. But poor cash-flow can be an inkling for disaster. If the company pays handsome dividends then even better. You don’t pay others out of imaginary profits. The company’s debtors position can keep on increasing and one fine day shall run out of cash. Today one of my data point before selection of a company for investing is finding out the Cash Flow and the level of Debtors more than 6 months and write offs.

Manish Pabrai, a US based Value Investor of Indian Origin has this advice to investors.

The learnings are the strongest from your own mistakes. So please be adventurous and make your mistakes before you start learning.

Learning’s from Market Cycles

Have been through 3 bear cycles starting from the 1992 Harshad Mehta Scam to the Dotcom Bust of 2000 and finally to the 2008 Crash due to the Lehman Brothers Bankrupcy and Sub Prime Lending Crisis. Each Market Crash was a huge learning. Each of the Bull Market preceding the Crash has their own themes

· 1992 — Embedded value

· 2000 — Eyeballs & Cash Burn

· 2008 — Sub Prime Lending

In the period from 2005–2007 didnot invest much since the valuations were quite high. People used to talk about India decoupling from the Globe and why India is different from America and blah blah blah……. Got carried away and made the mistake of investing at the fag end of the Bull market. Markets crashed and I lost quite a tidy sum. Learning from the 2008 Crash, was that there is no such thing as Decoupling in a Globalised World.

The Bull Market of 2017~18 in India is powered by Banks and NBFCs. Many NBFCs are being valued at very high PE Multiples. Much Higher than Banks with much higher businesses and profits. Is it time to get out of Highly Valued NBFCs. We know that only in hindsight. The excesses of the all the Bull Markets are known only after the Market Crashes. Some Market veterans are predicting a crash in the Valuations of NBFCs. Let us wait and watch, The best lesson for me from all the stock market crashes is a simple one.

Only Bottom Line Matters, Nothing else. An investor should go by Numbers. Numbers cannot cheat. Embedded value or Eyeballs or Growth in Sales Number alone cannot sustain the valuations.

Focus on what you know

The problem with many investors is that the try to predict the stock prices or returns. This is impossible in the real world. An investor should focus on what he knows. He should increase his knowledge in an incremental way. An investor should learn about the business of the company he is to buy. He should try to understand the business environment, the competitive intensity, what factors influence the business and profits,. and so on. On the flip side donot buy any share if you donot understand the business model or you personally donot like the company’s products as a consumer. You need to be fully convinced.

Great Investors call it as Compounding of Knowledge. It is said that Mr. Buffet made 99% of his wealth, yes 99% after he crossed 50 years of age. The man has compounded his knowledge and his wealth. This is the most interesting facet of Compounding.

Try to read as much as you can. To be a better investor a person should increase his knowledge every day. Most of the Great Investors are active learners. In the Stock Market there are only learnings and no Regrets. I conclude this article with the quote from Mr. Buffet.

“Knowledge — Its Builds up like Compound Interest”

Happy Investing…………………..