About

The first finance related book that I read was The Richest Man in Babylon. It had a profound effect on my life plans. Saving at a high rate and compounding for a long time has a phenomenal effect on one’s wealth. For example, at 14.8% compounded growth after tax, you double your money in 5 years. If you manage it for 25 years then your money grows 32 fold ! If instead, you compound at 20% then in 25 years your money will grow 95 fold !

After some early mistaken during 2009-2011, I settled on the investing philosophy which is loosely termed as “value” investing a la Graham & Buffett. I have a strong inclination towards “owner operators” i.e., management who hold high equity interests. I am a strong believer in the power of incentives and how they drive human behavior. I pay particular attention to the compensation of the management and its structure. The second important aspect is “margin of safety”. I only buy if I can justify a double in 3-4 years i.e., a minimum of 20% compounded growth. This raises the question of intrinsic value and valuing the business. I do so on a case by case basis. Some of my favorite metrics are EV/EBITDA, FCF and RoIC. The third and last important aspect is the balance sheet of the company.

This blog is a personal investment diary of sorts. My aim is to improve my investment process.

We have no control over outcomes, but we can control the process. Of course, outcomes matter, but by focusing our attention on process we maximize our chances of good outcomes. – James Montier

The correctness of a decision cannot be judged from the outcome. Because of the randomness at work in the world and the unpredictability of the future, lots of bad decisions lead to good results, and lots of good decisions end in failure. – Howard Marks

Filter #1: Honest, trustworthy (+able) management

Understanding the management of a company is a very worthy task. Most of human behavior boils down to the role incentives play and business is no different. If the management is awarded on sales, more often than not, they will end up improving sales — even at the expense of cash flows, profitability and margins.

Shareholder letters are a great source of gauging the honest of the management. Look at the capital allocation decisions for measuring the ability.

Filter #2: Margin of safety

It is patently impossible to calculate the intrinsic value of the business with reasonable certainty. The role of luck and the uncertainties of the future play a significant role in determining how much the business is worth. Aim to buy the business at a price which is clearly much below the “value” of the company. The minimum I look for is a possible double.

Filter #3: Business I can understand

This is a difficult filter. One of favorite biases is the “Dunning Kruger Effect”. It says that “unskilled individuals” suffer from an “illusory superiority”. In other words, they think they are better than they actually are. This plays a crucial role in this filter.

Filter #4: Durability

The business should not be at the risk of going obsolete soon. There is also the financial aspect i.e., the company may be wildly profitable but goes out of business because of financial problems. The test of durability is asking if the business or part of it, will be around for decades to come.

When the facts change, I change my mind. What do you do, sir ? – John Maynard Keynes

 

Following are timeless lessons from Jeremy Grantham of GMO. Reproduced via Frank Viosin.

1. Believe in history
“All bubbles break; all investment frenzies pass. The market is gloriously inefficient and wanders far from fair price, but eventually, after breaking your heart and your patience … it will go back to fair value. Your task is to survive until that happens.”

2. ‘Neither a lender nor a borrower be’
“Leverage reduces the investor’s critical asset: patience. It encourages financial aggressiveness, recklessness and greed.”

3. Don’t put all of your treasure in one boat
“The more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you.”

4. Be patient and focus on the long term
“Wait for the good cards this will be your margin of safety.”

5. Recognize your advantages over the professionals
“The individual is far better positioned to wait patiently for the right pitch while paying no regard to what others are doing.”

6. Try to contain natural optimism
“Optimism is a lousy investment strategy”

7. On rare occasions, try hard to be brave
“If the numbers tell you it’s a real outlier of a mispriced market, grit your teeth and go for it.”

8. Resist the crowd; cherish numbers only
“Ignore especially the short-term news. The ebb and flow of economic and political news is irrelevant. Do your own simple measurements of value or find a reliable source.”

9. In the end it’s quite simple. really
“[GMO] estimates are not about nuances or Ph.D.s. They are about ignoring the crowd, working out simple ratios and being patient.”

10. ‘This above all: To thine own self be true’
“It is utterly imperative that you know your limitations as well as your strengths and weaknesses. You must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely must not manage your own money.”

I admire and follow Longleaf, Third Avenue, FPA Crescent, Sequoia, and Wedgewood.

Fiat SpA [BeyondProxy]
Loews [BrooklynInvestor, BeyondProxy] – managed by the Tisch family. Diamond Offshore, CNA Financials.
Why Apple [BrooklynInvestor] is not cheap.
FLIR Systems [SaharaInvesting]
Charter Communications [BrooklynInvestor]
Spirit Brands [GuruFocus]

Here are a few businesses I have researched in the past and found interesting for various reasons.

Sodexo (SW.PA) Most of the revenue comes from on-site facility management e.g., catering, reception, concierge etc. Management owns 38% of the shares. Great cash flows and the management seems to know what it is doing. They do not make many acquisitions and so the debt and the interest expenses are quite low. They have returned cash to shareholders by increasing dividends and buying back shares. The share buyback seems to be supporting the share price in some sense.

CH Robinsons (CHRW) A non-asset based logistic and transportation service provider. It does not own the trains, trucks or the ships which it needs for the transportation. Most of the revenue comes from trucking though. Very profitable, no long term debt, stable margins, and great cash flows are few of the attractive things about the business. The company returns cash via buybacks and dividends. No significant insider holding.

Vetropack (VET.SW) A family owned Swiss bottle manufacturer with an excellent long term operating history. The Cornaz family owns 78.3% of the shares and the management is ultra-conservative. They have no long term debt, and have good cash flows. They make decisions on a very long term horizon.

GBL (GBLB.BR) Belgian holding company managed by Albert Frere and also owned by the Power Corporation Canada and very respected investor Paul Desmarais. The holding company owns GDF, Total, Lafarge, Pernod Ricard, Imerys and Suez Environment. They have extremely low turnover and a great history of dividend increases.

Schneider Electric (SU.PA) Makes delivery and usage of energy more efficient. It serves power companies, IT companies, infrastructure, buildings, and industries.  Apart from buildings, it holds #1 or #2 positions in the rest of the segments. The company’s financial situation is adequate and it continues to take on more debt and increasing its equity (ratio stands around 0.44). The company does not buyback shares but returns money via dividends. The company is very well managed but there is something fishy going on between its management and the management at AXA. This makes me a bit uncomfortable.

National Oilwell Varco (NOV) Manufactures drilling rigs, its components and services them. Highly profitable, very low debt, a net cash position, great cash flows and very well managed. Time after time the management has shown acumen while acquiring businesses even though they make quite a number of them. The share count has increased in the last decade because of aggressive acquisition strategy. Pays measly dividend, so most of the shareholder returns has to come from price appreciation of the stock.

FFP SA (FFP.PA) Owns 22.8% stake in Peugeot. The company serves as a holding company for Peugeot family and has low debt and good dividend history. Their investment track record leaves a lot to be desired but still not so bad.

Holcim (HOLN.VX) Family owned (Thomas Schmidheiny holds nearly 20% of the shares outstanding) Swiss cement and aggregate manufacturer with great emerging market exposure. Owns the management of Ambuja and ACC cement from India. Average financial strength but good management track record and history of profitability.

KSB (KSB.DE) Pump manufacturer from Germany. Eighty percent of the ordinary shares are held by the KSB foundation. Great management and very good track record of profitable growth and cash flows. Strong balance sheet.

Investor AB (INVEB.STO) Wallenberg family owned Swedish holding company. The family owns 23.3% of the shares outstanding. The company returns money to the shareholders via dividend and share buybacks. Has investments in many large swedish corporations and has been known to have a very long holding period.

ITW, BDX, MDT and AMAT are other interesting ideas.

Book Recommendations
  • 2014
    The undercover economist by Tim Harford
    Antifragile by Nassim Taleb
    Guns, germs and steel by Jared Diamond
  • 2013
    The art of profitability by Adrian Slywotzky
    Think twice by Michael Mauboussin
    How we decide by Jonah Lehrer
    Predictably irrational by Dan Ariely
    The black swan by Nassim Taleb
    Thinking, fast and slow by Daniel Kahneman
    Snowball by Alice Schroeder
    The power of habit by Charles Duhigg
    The most important thing by Howard Marks
    Bad science by Ben Goldacre
  • 2012
    How to win friends and influence people by Dale Carnegie
    Fooled by randomness by Nassim Taleb
    When genius failed by Roger Lowenstein

Fiat SpA [BeyondProxy]
Loews [BrooklynInvestorBeyondProxy] – managed by the Tisch family. Diamond Offshore, CNA Financials.
Why Apple [BrooklynInvestor] is not cheap.
FLIR Systems [SaharaInvesting]
Charter Communications [BrooklynInvestor]
Spirit Brands [GuruFocus]

 

– Krish

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