Some thoughts of Amit Wadhwaney of Third Avenue

1. Some Businesses come with Liabilities. Then there are other liabilities that are off the balance sheet,  things that the company’s committed to spend, the company’s required to spend, needs to spend just to stay in the business.

2. We try to buy Businesses which have survivability, which have staying power, staying power in the face of adversity of elements.

Reviwing our last performance

Copied from Oldschool.

The stock analysis today is not all about forward thinking analysis. The premise of this article is looking back at the initial investment thesis and seeing how it turned out along with some additional thoughts about the future.

What I really like about this is that it reminded me of a money management fund where analysts did not receive performance bonuses based on the last 3-6 month performance. Instead, this fund paid analysts on how well their picks did 2-5 years AFTER they had purchased it.

If a stock shot up 30% in one year and then fell 30% in year two, that performance was considered to be worth 0%.

Just something that popped into my head while reading this article and thought it was interesting enough to share 

Articles like this, which revisits an investment 20 months later, or even 4 years later, is a process that we all should be in the habit of practicing.

Source:http://www.oldschoolvalue.com/blog/stock-analysis/calm-20-months-later-still-going-strong/

 

Retained Earnings!!!

 

How do we calculate Retained Earnings and why do we use Retained earnings???

+Retained earnings of of the previous year.
+Net Income of the current year.
-Dividend distributed in current year.
= Retained Earnings

For Ex: Retained Earnings of the last year is Rs.2,00,000, Net Income is Rs. 50,000 & Dividend is Rs. 25,000.

So, Retained Earnings will be  = Rs. 2,00,000 + Rs. 50,000 – Rs. 25,000=Rs. 2,25,000.

Retained Earnings is very a important tool in evaluating the company. Retained Earnings shows how the company have done/used money in the previous years. Retained earnings can teach us whether the company is making money or is it destroying capital?

This will be my first criteria in evaluating a company…

Warren Buffet criteria

Business Tenets:
•The business the company is in should be simple and understandable.
•The firm should have a consistent operating history, manifested in operating earnings that are stable and predictable.
•The firm should be in a business with favorable long term prospects.

Management Tenets:
•The managers of the company should be candid. As evidenced by the way he treated his own stockholders, Buffett put a premium on managers he trusted. •
The managers of the company should be leaders and not followers.

Financial Tenets:
• The company should have a high return on equity. Buffett used a modified version of what he called owner earnings
Owner Earnings = Net income + Depreciation & Amortization – Capital Expenditures
• The company should have high and stable profit margins.

Market Tenets:
•Use conservative estimates of earnings and the riskless rate as the discount rate.
• In keeping with his view of Mr. Market as capricious and moody, even valuable companies can be bought at attractive prices when investors turn away from them.

http://pages.stern.nyu.edu/~adamodar/pdfiles/invphiloh/valinv.pdf

Ben Graham screen

Ben Graham’ Screens
1. PE of the stock has to be less than the inverse of the yield on AAA Corporate
Bonds:
2. PE of the stock has to less than 40% of the average PE over the last 5 years.
3. Dividend Yield > Two-thirds of the AAA Corporate Bond Yield
4. Price < Two-thirds of Book Value
5. Price < Two-thirds of Net Current Assets
6. Debt-Equity Ratio (Book Value) has to be less than one.
7. Current Assets > Twice Current Liabilities
8. Debt < Twice Net Current Assets
9. Historical Growth in EPS (over last 10 years) > 7%
10. No more than two years of negative earnings over the previous ten years.

Overly protecting!!!

 

 

When i see parents, they are so protected about their kids. Well i should say they are over protected by their parents. “Beta yeh mat karo, gir jaaoge”, “no cricket” n stuff like that. In the name of protection, we are spoiling our kids. Earlier kids used to play on ground or on road. But nowadays, kids never leave their PC/Laptop. They are addicted to these Gadgets is because of their parents. Parents want their kids to be in front of their eyes.

My point today here is to teach our kids Non cognitive skills (persistence, self-control, curiosity, conscientiousness, grit and self-confidence.)  and not to dump all the textbooks in the world to our kids. What is important in life is how he handles life with pressure. If a kid doesn’t have confidence in himself, he will not be able to express himself.

I think above skills are more important to be out of rat race and face the world with self confidence.

 

Ben Franklin’s 13 Virtues

 

Ben Franklin’s 13 Virtues

1. Temperance: Eat not to dullness and drink not to elevation.
2. Silence: Speak not but what may benefit others or yourself. Avoid trifling conversation.
3. Order: Let all your things have their places. Let each part of your business have its time.
4. Resolution: Resolve to perform what you ought. Perform without fail what you resolve.
5. Frugality: Make no expense but to do good to others or yourself: i.e. Waste nothing.
6. Industry: Lose no time. Be always employed in something useful. Cut off all unnecessary actions.
7. Sincerity: Use no hurtful deceit. Think innocently and justly; and, if you speak, speak accordingly.
8. Justice: Wrong none, by doing injuries or omitting the benefits that are your duty.
9. Moderation: Avoid extremes. Forebear resenting injuries so much as you think they deserve.
10. Cleanliness: Tolerate no uncleanness in body, clothes or habitation.
11. Chastity: Rarely use venery but for health or offspring; Never to dullness, weakness, or the injury of your own or another’s peace or reputation.
12. Tranquility: Be not disturbed at trifles, or at accidents common or unavoidable.
13. Humility: Imitate Jesus and Socrates.

 

He committed to giving strict attention to one virtue each week so after 13 weeks he moved through all 13. After 13 weeks he would start the process over again so in one year he would complete the course a total of 4 times.

He tracked his progress by using a little book of 13 charts. At the top of each chart was one of the virtues. The charts had a column for each day of the week and thirteen rows marked with the first letter of each of the 13 virtues. Every evening he would review the day and put a mark (dot) next to each virtue for each fault committed with respect to that virtue for that day.

Naturally, his goal was to live his days and weeks without having to put any marks on his chart. Initially he found himself putting more marks on these pages than he ever imagined, but in time he enjoyed seeing them diminish. After awhile he went through the series only once per year and then only once in several years until finally omitting them entirely. But he always carried the little book with him as a reminder.

Source:http://boingboing.net/2006/02/27/benjamin-franklins-1.html

Feynman Technique to learn faster

Step 1. Choose the concept you want to understand.
Take a blank piece of paper and write that concept at the top of the page.

Step 2. Pretend you’re teaching the idea to someone else. 
Write out an explanation of the topic, as if you were trying to teach it to a new student. When you explain the idea this way you get a better idea of what you understand and where you might have some gaps.

Step 3. If you get stuck, go back to the book.
Whenever you get stuck, go back to the source material and re-learn that part of the material until you get it enough that you can explain it on paper.

Step 4. Simplify your language.
The goal is to use your words, not the words of the source material. If your explanation is wordy or confusing, that’s an indication that you might not understand the idea as well as you thought – try to simplify the language or create an analogy to better understand it.

Fantastic Video of Feynman Technique on youtube – http://www.youtube.com/watch?v=FrNqSLPaZLc

Soure of above writing – http://www.scotthyoung.com/learnonsteroids/grab/TranscriptFeynman.pdf

This technique has made my life easy…

Some thoughts of Safalniveshak

1.Investing in times is like catching a falling knife. When you catch a falling knife, to avoid getting hurt, you must bring your hand down a bit while catching the knife. It;s the same in stocks. If your calculations show that the stock has fallen to a good comfortable price even after assuming say a 30-40% margin of safety, it makes sense to buy it. It may still fall further, but then that would make it even more attractive and you must double up. That’s the beauty of buying in bits and pieces and not committing a big capital at one go. When you do this (buy in bits), you may get a few best prices instead of just one…and that is fine till the company has an excellent business that can turn up when things get better.

2. A movie ticket can be a small thing. But if I watch an evening show, I spend Rs 600 for 3 people. I recently watched Avengers’ morning show at Rs 200 for 3 people (Big Cinemas)…or a saving

of Rs 400 per movie. For 12 movies in an year, I can save around Rs 5000. Compounded over 20 years, that would be a big sum. On the other hand, generating an extra income would also work wonders.

3.”Buy and hold” doesn’t mean “buy and forget”. It means “Buy…review…and hold”. So for those writing that “Buy and Hold” has lost its relevance are probably knocking at the wrong door. As for the definition of long term, generally it is any period above 5 years. But then, the question is – Stocks have not done well in the last 5 years? That’s right, but this is like a one-off case. A research done in the US suggests that, over rolling 5 year period for the past 100 years, stocks have outperformed bonds 70% of the time. And over rolling 10 year periods, stocks have beaten bonds 80% of the time. So the longer your horizon, the greater is the probability of of your stocks/equity funds beating bonds. And that is all what you want, right? So ignore the negativity around…and as I often say, whenever there is fear or euphoria running across the market, don’t run with it. Instead do the opposite and you will do well in the long term (>5 years).

4. RoE is calculated as Net Profit/Equity. Alternatively, it can be calculated as – ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity). Thus suggests 3 things: 1. Operating efficiency, which is measured by profit margin; 2. Asset use efficiency, which is measured by total asset turnover; 3. Financial leverage, which is measured by the equity multiplier. These are great indicators whether a management is employing capital efficiently or not.

5. If the company’s intrinsic value is Rs 100, I will buy the stock only if the price is less than Rs 60.

6. Q.I had asked this question earlier too. NPV = CFi / (1+k) + CF2 / (1+k)2 + … [TCF / (k – g)] / (1+k)n-1The cash flows which you consider: where do you source them from?

A. The cash flows (or free cash flows) are calculated from the cash flow statement of a company’s annual report. The formula is = Net cash from operating activities (minus) Purchase of fixed assets.

7.starting the year the ESOPs/FCCBs come into the picture for that company. What I do is that if I know that the company might have to issue 100 new shares on FCCB redemption 5 years down the line, I include those number of shares in my current denominator to calculate per share values. This provides me the margin of safety.

8.After all, good investing is all about being able to sleep well at night. You don’t want to wake up at the middle of the night to reassure yourself that the analysis of that pharma/banking stock you bought was right.

9.Definition of Value Investing –   “buy when the price is below intrinsic value” is “investing”. But when you are “sure enough” that you are buying when the price is below intrinsic value (because you are using margin of safety), that’s when it is “value investing”

10.Warren quite often sees Market Cap to GDP Ratio. Above 150% is very expensive and below 70% is very cheap.

11.One way to calculate the value of a franchise/brand is by comparing the IV calculated by DCF and by EPV. Then EPV “minus” DCF will be the franchise value.

12.Goodwill isn’t brand vale. Goodwill = CEO’s ego and the excess price he has paid to make an acquisition.

13.well any payment towards goodwill i have taken it has a negative…..business should try to buy out distressed asset….somewhere in an interview when questioned by the interviewer to a business man that “Sir right now you are selling your business,when the markets are good,what will you do now”.The business man replied…”I will go fishing,trekking,cycling and enjoy the life and after four years i will come back and buy back my business at half the price”

14.value investors would always want to get growth for free. So calculate accordingly. Ignore the growth and include the capital allocation. I have seen 95 of 100 young, fast growing companies going into oblivion in 5-10 years and losing everything they created over the previous 5-10 years.

source: safalniveshak.com facebook jam

Uses of Cash…

A corporation has only three uses of cash:

1) Expand assets
2) Reduce liabilities
3) Make distributions to shareholders
a) Pay dividends
b) Repurchase outstanding equity securities

source:http://www.safalniveshak.com/forum/value-investing/martin-whitmans-third-avenue-management-3q12-letter-excerpts/#p150

There are few companies which raises capital from primary market regularly and at the same time Companies gives dividend. For ex: Moser Baer regularly takes capital from market and gives dividend. This is surely a red flag for the investors. Small investors need to watch out for these kind of companies. They should ask a simple question if the company is giving dividend, then why is it raising capital. If it doesn’t have capital to do Business, then why is it giving out in Dividend. Why do companies give Dividend when they don’t have capital.The idea is simple Companies give dividend regularly to keep their market share. I would be staying away from these companies.