Quarterly Update (Q1’2019)

No change in the portfolio for this quarter.

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I looked at a few things over the last 3 months but none of them excited me. For example: Record Plc, Eurofins Scientific & Be Think Solve Execute. I finally decided not to take any of the positions because I did not feel like I understand them enough.

I continue listening to Berkshire Hathaway Shareholder meeting recordings which are now available on Youtube. I started with 1995 and am now listening to 2002. They are 4-5 hours long and I enjoy them immensely.

I feel that the portfolio has a significant runaway still, even after a huge 18% run up year to date. I especially feel that Google, Facebook & Apple are still undervalued.

I do not feel that strongly about Distribution Now. But, I do not have any use for the cash. This will be the first position to go if I find a good new position to add.

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Review: 2018

This is what my portfolio looked like at the beginning of 2018.

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This is what it looks like at the end of 2018.

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A few changes that immediately jump out are:

  • I am completely invested at the end of 2018. Since I started dabbling with investments, I almost always had ~ 25% cash. I liked to keep cash because I thought of using it when the markets crashed. I was completely invested in 2012. And, crash or not, I am completely invested now.
  • I went from holding 14 stocks to only 7. I like to think that this is a by product of discipline and not buying things I do not understand. A lot of companies that I was holding at the beginning of 2018, I will never invest now. For example: Silverchef, LSL Properties, Rolls-Royce etc.

At the end of the year, I am holding the following companies.

  • GOOG: I can’t add to what has already been said many times about the significant moat Google has. In my opinion, YouTube is a significantly undervalued business and cloud/self-driving are some bets which might pay hugely. On top of this, Google sells cheaply for a cash adjusted forward PE multiple of 19 and grows at ~ 20%. If you compare Netflix & YouTube, you can ballpark how much YT is worth. People watch ~ 1b hours of YouTube per day! I estimate the value of YouTube to be at least $200b.
  • Facebook: Lots of bad news this year. The stock got hammered and I was able to correct my mistake of not buying FB at ~ $25. On the plus side, now they have a proven business model, make a lot of money, have $40b in cash and grow at ~ 40% YoY. Currently, FB sells at cash adjusted 18 times forwards PE. This is even cheaper than Google & FB grows more quickly.
  • Hikma Pharmaceuticals: I bought Hikma in March after it got kicked out of FTSE250. This is an owner operator and the family owns ~ 25% of the shares. They have three equal sized businesses: Branded Generics, Generics & Injectables. The bad news coming from the Generic segment drowned out the performance/moat they have in Injectables. The company just became too cheap to pass up. I invested big and luckily the stock appreciated by over 50% in the next few months.
  • Apple: Started buying again when the stock sold off in December. I bought it one day before the China sales warning. The thinking here is simple. They have a great eco-system. Their position wrt privacy is a source of moat which no other Software/Hardware companies offer and the products they design & sell are well thought out and a joy to use. The Watch 4 is getting rave reviews and I am not going to pass off a company like this selling for < 12 times earnings.
  • Booking: Booking has built an OK moat in hotel bookings in Europe. I started with AirBnB but have found myself using Booking more and more. One of the major reasons is that you get an immediate confirmation of your booking. Furthermore, the app/website is quite intuitive and easy to use. Unfortunately, Booking still competes on price and face significant competition from Google/AirBnB and also meta search engines like Trivago. This will never be a > 5% position for me.
  • BRK: Berkshire should be able to return 10% a year. And, I plan to keep this position as a safe holding.
  • DNOW: A well run company selling cheaply. This is the only company in the portfolio that I understand the least. But, I like the management and I like the numbers. It is a marvel to see how they manage working capital during downturns!

In order of things I would sell, if push came to shove, are: BRK, DNOW, BKNG.

The rise of Theodore Roosevelt

“I wear the chain I forged in life,” replied the Ghost. “I made it link by link, and yard by yard; I girded it on of my own free will, and of my own free will I wore it.”

Charles Dickens, A Christmas Carol

One of the best books I have read in my life. Not only because Roosevelt was an impressive, sometimes funny bordering on ridiculous. But also because of his grit and determination. The determination to be healthy. To live life on his own terms. Not minding the asthma attacks. Not minding the frequent fevers. Not minding the bouts of coughing and the weak eyesight. And not minding the express advice of doctors who kept telling him that he will die if he continues to exert himself so much.

Someone who has struggled with health problems his entire life, I had an immediate connection with Roosevelt. He was born a sickly child with congenital and debilitating asthma and a weak eyesight. The weakness of his eyesight was not recognized until much later. His father has a significant influence on him. He told Roosevelt one day “Young man, your first duty is towards your morals, then your body and only after that comes your mind.” In so many words, his father asked him to rebuild his body.

Roosevelt was a man of incredible discipline. He managed to do so much in his life and this book only covers the part until he becomes the president of the United States after McKinley is shot dead.

He was a man with a vast range of interests. A taxidermist. A Zoologist. A rancher. A hunter. A biographer. A historian. And a damn good politician.

Apart from the interesting subject, the book is quite well written. I enjoyed listening to it on Audible. It is narrated by Mark Deakins. He is a joy to listen to. The voice makes or breaks an audiobook and especially for a book which is near 27 hours long, you have to like the narrator.

I enjoyed the book immensely and recommend it wholeheartedly.

 

Quality of Earnings by Thornton L. O’glove

The book starts by making a case for not trusting analysts. One of the main reasons offered is their incentives are aligned towards the corporations, brokers and the banks — not the individual investors. The book is not very kind to auditors and the accountants either. They get paid by the company and may be inclined to get away with as much as possible “legally”.

He moves on to the shareholder letters. Although written by the media relations, it still gives a color to the bland legal language of the rest of the reports. It is possible to find inconsistencies here, compared to the rest of the report. In such cases, one should tread carefully.

Differential disclosure refers to finding contradictory information or different information in different documents. Legally the management is required to provide all the relevant information. They do so by hiding across documents and in the footnotes. Investors must be wary of such situations and behave accordingly.

Then there is the case of non-operating/non-recurring income. Many a times, a high EPS is a result of non-recurring incomes like tax benefits, sale of assets, favorable exchange rates etc. Unless careful attention is paid, one may classify non-recurring income as income and face the consequences by paying higher for the company than what is safe. Investors should also pay particular attention to increasing expenses, tax reporting, inventories, accounts receivable. and accounting changes. Each of these are dealt in a different chapter.

Of particular interest to me was the inventory and account receivable chapter. Inventory management may have significant short term effects on the stock. For example, if the revenues rise, the company builds up inventory in anticipation of rising sales. But if overdone, the inventory will have to be written down — decreasing earnings in later quarters. The is especially relevant in case of companies who are involved in fashion, computers, or products which become out of fashion pretty fast. Particular attention must also be paid to accounts receivable. Increasing accounts receivable means that the company is extending payments to the dealers — not a good sign for the business.

Similarly, attention must also be paid to accounting changes. Is the depreciation used is straight line (less conservative) or accelerated (more conservative) ? Is the inventory practice LIFO or FIFO ? Pensions and incentives also make noticeable changes in the earnings of the company. Special attention must be paid if the company changes its policies. This generally does not bode well for the shareholders.

All in all, a very informative and enjoying read.

Think Twice by Michael J. Mauboussin

A much better book than More than you know — which I fell asleep reading. But this might be because the subject matter of Think Twice interests me more.

Whenever I read one of these book — books where our biases are laid bare for us to see — I riddle the reasons. Most of the time I get them right. But here there were two interesting ones which are a keeper.

The first one is what he calls “the outside view”. Crudely, this is when people don’t recognize that their situation — as much as they find different — is not unique. Many people before them have had to make similar decisions or predict the success or failure of their enterprise with similar kind and amount of data. It is imperative that one switches its view from “inside” to “outside” and recognize that something can be learned from thinking about the problem as if you are not participating in it.

The second is how playing accordion music boosts sales of Burgundy. This amazingly is because of what Kahneman calls “priming” in his excellent book “Thinking fast and slow”.

All in all, a very enjoyable book. Definitely one of those which are going into my to-buy list.

How we decide by Jonah Lehrer

If the game is simple or obvious, then you’ve made a mistake. The game is never simple. You’ve always got to wonder: what am I missing ? – Binger

Instead of cursorily  looking at *all* the wisdom this book imparts, I will like to mention an amazing experiment described in the book.

The experiment was done by a Dutch psychologist Dijksterhuis. While considering a new car for himself, he realised that the amount of information given to him was overwhelming and his conscious brain was not able to come up with a decision. He came up with an experiment to show how our conscious brain is incapable of making the correct choice in such a situation.

The first experiment started by collecting a group of Dutch car shoppers. They were given a description of four different used cars. Each car was rated on four different categories – for example mileage, transmission, sound system etc. The experiment was designed in such a way that one car was objectively ideal with “predominately positive” aspects. After showing them the cars, Dijksterhuis split them into two groups. The first group was given time to consider the pros and cons while the second group was distracted by word puzzles. While playing the games the second group was suddenly asked to make a choice. The result was that the first group performed significantly better than the second. A little rational analysis is better.

In the second version of the experiment, with the same cars but rated them on 12 different categories – resulting in 48 different information pieces. In this case, the first group chose the ideal car less than 25% of the time while the second group did it more than 60% of the time.

A heartily enjoyable and interesting read. Highly recommended.