R3V

Wealth destruction Faster than Wealth Creation

2010-09-25T10:00:00.000-07:00

You may think that it is true in general sense but i can prove in mathematically.

Say for example you invested 100 rupees and you lost 25 rupees

Now you loss is 25% and the net available amount is 75 rupees

Now to grow 75 rupees to 100 rupees, you need to grow it at the rate 33.33%.

So if your Portfolio is down by 25% don’t think that ~~you need to grow by 25%~~ but you need to grow by 33 %

Now this is even more important if you are paying Fees for managing Funds(Mutual Funds, ULIPs, etc.). Below is a table given computing the returns taken just as fees over a period of time(assumed managing fee of 2%)

years	% return required
1	2.03
2	4.09
3	6.19
4	8.34
5	10.53
6	12.76
7	15.05
8	17.37
9	19.75
10	22.17

Simple way of Index Investing

2010-09-19T00:48:00.000-07:00

Lots of experts agree that Investing in Index is better for naive investors but fail to look in to aspects of fine tuning their investment plan. We have earlier discussed that Dow Jones over a period of 106 years has yielded better return for investors who have invested at lower p/e (Read that post here). I have used the same principle.

This is a rough table for those who do not have time to check markets every day. Since Index Investing is the best way for an Passive Investor. The logic behind this idea is to invest more when price is low but low prices don't come often so using simple mathematics. I have combined both historical chances of level occurred and probability of Higher valuation

// *This system is based on PE Investing theory applied for NSE - NIFTY 50 - Not to be applied on individual stocks or other indices * //

P/E/ Range	Allocation%
10.5-11.5	3.866561
11.5-12.5	12.64531
12.5-13.5	14.16665
13.5-14.5	23.1729
14.5-15.5	14.63966
15.5-16.5	7.574571
16.5-17.5	8.781656
17.5-18.5	7.956251
18.5-19.5	7.196429

Inferences:
The return in Buy and hold on index gave an return of 20.7% with index raising from 890 to 5884 i.e. about 6.6 time in 11 years. but returns in the above method in the above period were 29.71%. it might seem as not a great return because of compounding but the raise was 13.48 times i.e more than twice the buy and hold method another positive for this method is for example the index has fallen after 6 years i assumed equal halves of money to be invested in 2nd case and i didn't add the bank interest you would earn for six years (atleast 3.5%). So total return would raise by few more % points but let us assume it as transaction costs.

you can check NSE p/e daily

Foot Note:
1)Data calculated for periods 1st January 1999 to 1st September 2010.
2)Changes in table might occur over a long period of time i.e. more than 11 years. The changes in last 5 year period was observed to be small changes in % due to rise in expectation and higher valuation of Indian stocks
3) Practically a few % point might me shaved of as transaction costs of buying Nifty Bees(Index ETF) and their maintainance charges

Related threads
1) http://www.inditraders.com/beginners-section/3825-index-investing.html
2) http://www.traderji.com/exchange-traded-funds/45009-index-investing.html
3) http://www.theequitydesk.com/forum/forum_posts.asp?TID=2993

Portfoilo performance

2010-09-09T10:17:00.000-07:00

We have summarized the performance from the past 1 year where we have exceeded the Benchmark S&P CNX Nifty 15 points. The performance is discounted by 3 points to account for approximate dividends which these companies would have given. Portfolio Management companies do not discount this valuation which could cost you about 20%(overall compounded).

Please Note: Do not consider the performance of monthly or lower time periods

Performance till 1st September 2010

Present Market Scenario

2010-09-04T02:50:00.000-07:00

They say that a picture says 100 words. Read the market yourself

P.S. Note Data as on 1st Sep 2010

Equity funds lag own benchmarks

2010-09-02T05:04:00.000-07:00

CRISIL, India's largest ratings agency has observed that over a five year period majority of equity funds underperformed the benchmark index. Similar studies have been done in the US as well. And they have come to the same conclusion. Related Link

After all Fund Managers, Research Analysts, support staff with superior educational backgrounds are expected to exceed the benchmarks but 2/3 of Funds have failed. Don't blame them it is the fault of system. We see lot of Ads showing that funds give excessive returns then who is to be believed ?

You would be surprised that both are true. We see advertisements of specific schemes but rarely a fund house declares results of all its schemes. So chances are that you won't find aggregate results and the top 1/3 keep changing the probability that you reap returns above average are remote. We at least won't add schemes. So we believe that our task of continuously beating index is not easy but a lot tougher.

Taxes on Investing

2010-08-24T07:05:00.000-07:00

short-term capital gain:

If the investment is in the form of mutual funds/company shares, the time duration is one year. But if the transaction was levied with Securities Transaction Tax (STT), your gain will be taxed 10%.

Long-term capital gains:
If shares are held by the tax payer for more than 12 months, then gains arising from their sale/transfer are treated as long term capital gains. If the period of holding is lower, then such gain is treated as short term capital gains. But if the transaction was levied with Securities Transaction Tax (STT), your gain will be taxed 10%.

All stocks you buy on exchanges are levied STT

Smartest !!

2010-08-15T02:54:00.000-07:00

**** NOT JUST A JOKE IMPORTANT FOR INVESTING ***

There once lived a great mathematician in a village outside Ujjain . He was often called by the local king to advice on matters related to the economy. His reputation had spread as far as Taxila in the North and Kanchi in the South. So it hurt him very much when the village headman told him, "You may be a great mathematician who advises the king on economic matters but your son does not know the value of gold or silver."

The mathematician called his son and asked, "What is more valuable - gold or silver?" "Gold," said the son. "That is correct. Why is it then that the village headman makes fun of you, claims you do not know the value of gold or silver? He teases me every day. He mocks me before other village elders as a father who neglects his son. This hurts me. I feel everyone in the village is laughing behind my back because you do not know what is more valuable, gold or silver. Explain this to me, son."

So the son of the mathematician told his father the reason why the village headman carried this impression. "Every day on my way to school, the village headman calls me to his house. There, in front of all village elders, he holds out a silver coin in one hand and a gold coin in other. He asks me to pick up the more valuable coin. I pick the silver coin. He laughs, the elders jeer, everyone makes fun of me. And then I go to school. This happens every day. That is why they tell you I do not know the value of gold or silver."

The father was confused. His son knew the value of gold and silver, and yet when asked to choose between a gold coin and silver coin always picked the silver coin. "Why don't you pick up the gold coin?" he asked. In response, the son took the father to his room and showed him a box. In the box were at least a hundred silver coins. Turning to his father, the mathematician' s son said, "The day I pick up the gold coin the game will stop. They will stop having fun and I will stop making money."

The bottom line is...

Sometimes in life, we have to play the fool because our seniors and our peers, and sometimes even our juniors like it. That does not mean we lose in the game of life. It just means allowing others to win in one arena of the game, while we win in the other arena of the game. We have to choose which arena matters to us and which arenas do not.

Abrasives

2010-07-23T11:32:00.000-07:00

As per Wikipedia "An abrasive is a material, often a mineral, that is used to shape or finish a workpiece through rubbing which leads to part of the workpiece being worn away".

Fundamentally speaking as long as you are in business you have to use your work tools- abrasives are not like steel hammers and are worn out, so you have to change them frequently which means constant business the entry barriers are not high and the un organised sector is big but if you are a regular user you know how frequently abrasives get worn out so you develop a relationship with products that are less wornout i.e. their USP

Abrasive industry in India caters more to the industrial sector. There are 4 major companies in Abrasive listed space

Carborundum Universal (CUMI)
Grindwell Norton
Orient Abrasive
Wendt

All the 4 in Listed space cater to different industries because of variation in products though CUMI and Grindwell have some products in common.

Carborundum Universal is part of Murugappa Group. As far as I understand Carborundum people are making tons of cash but the problem is they can not scale up their business so they are making acquisitions when we acquire something we pay more than its actual value and there is added risk of lack of integration. So growth rates can't be positive.

Grindwell Norton is an partnership of Saint Gobain and some Indian partners. It is also well diversified in abrasives.

Orient Abrasive's name is deceptive they are a leader in manufacture of refractories which are used in lining of different industries to protect from heat. their margins are low hence lowest pe in this abrasive space.I am not particularly bullish about orient abrasives though it is the cheapest of the 4 because they are increasing assets @ 19% where as their sales are growing @ 13%. So the PE is justified

Wendt is the best of all of them they are mainly concentrated in diamond cutting blades. Their business is predictable unless either women stop buying diamonds(no chance in near term) or diamond cutting business goes out of india(more probable). Wendt is a partnership between wendt(mnc) and CUMI (the first one)

The above 3 except CUMI are fairly valued may be the reason for high price of CUMI is cheery consensus of MF managers. At present prices all of them are on the overvalued side. But in case of falls/slides abrasive business can be useful if you are a very long term player

Written by a pessimist and sometimes humorist

P.S. I couldn't find much about grindwell. I am an ECE grad so couldn't find much on technical details
Please share your views

Regards
Brijwanth

You can follow the topic here

Equity Analysts too Bullish

2010-07-23T10:45:00.000-07:00

Usually Prediction is the most difficult thing to do but Equity Analysts world wide have been making bread and butter by predicting, it is now proven that Prediction of results by Analysts has failed by a margin of 100%. A report by Mc Kinsey recently proves it Click it here(You need to register). Many Forums and websites have made a similar point. My feeling is that companies with good underlying economies with more odds in their favour are the most likely winners

Geodesic - is it cheapest stock or is it worth it

2010-07-23T00:26:00.000-07:00

I don't mend to offend any one but has any one tried this product Mundu. It seems expensive. This stock has High ROCE and lowest PE in my test but the problem is the product.

In simple terms Mundu is and Instant Messenger for Mobile. I have an mobile Nokia e71. I and my friends tested Nimbuzz. It too is an IM that can be utilised to communicate between pc to mobile or mobile to PC or pc to pc. The best thing is it is free. I haven't used this Mundu Product but searching in Google's image search the product seems similar.

If given an option I would choose among 1000's of free IM's on net than paying for Mundu (except for the reason that it's Indian- Nimbuzz is a far better product than paying 500 bucks for Mundu)

So from what I understand the product must be for some corporates or people with high bucks who don't love free options (there are many fring, ebuddy, yahoo IM, Nokia's built in IM etc.) or it might be something like salmankhan's watch (i mean luxury brand) which can't be compared to a titan watch.

Subbuji has rightly pointed out the company to survive must either do some R&D or build websites to sustain itself. I wonder how that high ROCE, is it due to some super management of any financial gimmickry here. So folks I would recommend an exit if you are in profits.

Mazda

2010-07-20T10:20:00.000-07:00

Going to add Mazda Ltd not Swaraj Mazda

my only concern is the food business and the promoter's daughter seems to have a fancy for the business. hope she doesn't spoil the party for us

I am surprised they haven't entered the pollution control market their licensee croll reynolds is an pollution control equipment mfr. and it would have been complimentary to their business(I think they can call their bcool juice as complimentary by offering their clients).

Inspite of low promoter ownership we may not be able to convince them to sell their food - croll reynolds(11%) people if you are reading this please ask the same for us

Historical facts

2010-07-03T06:25:00.000-07:00

if you had invested $ 100 in the S & P 500 in 1926, you would have had $ 307,700 in 2006 — a pretty staggering gain. But if you had been out of the market for the best - performing 40 months of that lengthy 972 - month period, you would have had just $ 1,823 in 2006. That means that 99 percent of the gains over that 81 - year period came in just 4 percent of the months. The principle holds over shorter periods, as well. If you invested $ 100 in 1987, you ’ d have had $ 931 by the end of 2006, Sahadi noted. But if you were out of the market for the 17 best trading months of that 240 - month period, you ’ d have ended up with just $ 232. In this case, 84 percent of the gains came in 7 percent of the months. The bottom line: While the market rises substantially over time, much of its increases come on a relatively small portion of trading days.

5 Ways to Improve RoE By Sham Gad

2010-07-01T04:07:00.000-07:00

posted by Deepinsight

In my piece yesterday on understanding return on equity, I explained that companies that are able to deliver high returns on equity for a sustained period find themselves in an enviable position. Profits do matter, but the ability to redeploy those profits at above-market rates of return really excites investors.

I illustrated the straightforward cases of Microsoft (Nasdaq: MSFT) and Dell (Nasdaq: DELL), two businesses that were earning abnormally high rates of return on equity capital. For years, they were able to redeploy the excess capital at similar rates of return. Take $1 million, then compound it at 30% to 40% for eight to 10 years, and you'll have an idea of what I mean. Then consider companies that can do this with billions to appreciate what Microsoft did during its formative years.

Five ways ...
To improve returns on equity, companies need at least one of the following:

1. Higher turnover, i.e., sales
2. Cheaper leverage
3. More leverage
4. Lower taxes
5. Wider margins on sales.

Any one of the above will improve return on equity. Of the five factors, companies have the least control over tax levels, although management can certainly use creative accounting to temporarily alter the tax rate. An investor is better advised to focus on the other four. The ability to spot improved sales, prudent use of leverage, or cost-cutting initiatives can lead you to an attractive investment opportunity.

Sell more, make moreThere's no secret here. All else equal, an increase in sales should create an increase in profits. Of course, the sales quality should be examined. As sales increase, accounts receivable should naturally follow suit. However, if receivables are consistently growing much faster than sales, there may be troubles when it's time to collect. Increased sales that lead to higher profits yield higher returns on equity capital.

Oh, leverageWhen employed prudently and wisely, the use of leverage, or debt, can increase returns on equity. Similarly, if a business can lower its cost of debt, the corresponding effect is a higher return on equity. Unfortunately, most financial companies missed this lesson badly this year.

Aside from Goldman Sachs (NYSE: GS), which has so far managed to ride out the credit storm relatively unscathed, a lot of financial companies are being hurt twice. First, because liquidity is drying up; and second, because they've used leverage to increase returns for years now.

The painful lesson is similar to buying stocks on margin. If you are leveraged five to one, a 10% return on the leveraged portfolio equals a return on equity of 50%. The same (negative) return on equity goes for a 10% loss. Unfortunately, most businesses fail to use leverage appropriately and opportunistically, and use leverage at alarming multiples to equity. The results, as we all know, have been disastrous.

Wider margins
Again, the idea here is to squeeze as much profit out of existing sales as possible. This is achieved in one of two ways: increase prices or decrease costs. Very few companies can raise prices without incurring competition or meaningful declines in volume. Two prominent companies that can are Coca-Cola (NYSE: KO) and Wrigley (NYSE: WWY). Not many people are willing to save a dime in order to put an inferior product in their mouths. As a result, Coke and Wrigley have enjoyed decades of high returns on equity.

The generalizations are simple, but they cover the levers of profitability regarding this metric. Understanding how they each operate inside a business can give you insights into that firm's ability to earn above-market rates of return for prolonged periods of time.

Is Mutual Fund Industry cheating

2010-06-24T00:45:00.000-07:00

Sebi chief slammed the MF industry

Giving returns lower than individual investors:

“If you (mutual funds) are producing better returns than what an average investor investing himself in the stock market gets, then why is it that you are unable to convince investors that you are giving them better returns,” said Mr Bhave, at a mutual fund summit organised by the Confederation of Indian Industry (CII). “I mean, are investors so dumb as not to understand that they are getting better returns here (mutual funds) and yet would invest somewhere they would get lesser returns,” he said.

Sales of equity schemes of mutual funds have been hit, after Sebi banned mutual funds from charging investors to pay fees to distributors. Mr Bhave said that mutual funds needed to look at how investors benefit from investing in their products, rather than create an incentive structure that suits them.

Short-Term Focus
“Somehow the focus goes to short-term incentives and that ultimately results in a great loss for investors. And finally, when investors lose money, the whole industry also comes tumbling down. I think, this lesson needs to be internalised by all of us,” he said.

“You are becoming a shock absorber because you are taking short-term money ... now who asked you to take short-term money ... because you see that the neighbour (rival fund house) is taking short-term money and his AUM has gone up, so I need to compete,”

On large number of schemes with little difference
“Even if you put before me 3,000 investment products, I won’t know how to choose from those products. I’ll have no idea of which scheme is good for me,” Mr Bhave said. “If you really want to reach to the so-called small investors in whose name you do everything, does he need 3,000 options? Is there really so much of innovation that is going on? Are these schemes really so different from each other or were there incentives operating in the market that made us generate these 3,000 options?” he said.

Comments:
I think that MF's are cheating investors. We see that all schemes are handled by same fund manager. So what he is doing is when he is making 50% profit and 50% losses he is showing that in his star schemes to keep up their returns while their poorer cousins remain as it is. Overall Gain percentage of the Fund house with respect to equity must be a parameter that funds should provide other wise this skin hiding will continue in my personal opinion. After all this these people are ore interested in showing off their faces before TV screens rather than doing some quality research.

If some one can interested in Mutual Funds can unearth that overall fund house gain per year it would be appreciated.(another topic for Sucheta Dalal)

Well done Mr. Bhave but add some parameters so that Fund house performance is reviewed as a whole or introduce some returns based fee scheme. otherwise we are bound to see another desi version of American Recession

Related Links:
Economic Times : Mr Bhave's Speech

You can view comments on these threads

http://www.traderji.com/mutual-funds-discussion-forum/42261-mutual-fund-industry-cheating.html
http://www.inditraders.com/markets-general/3427-mutual-fund-industry-cheating.html

Gujarat Reclaim

2010-06-23T09:26:00.000-07:00

Don't think the obvious stock pick as suzlon it will be long time before suzlon manages some turn around but my stock pick is different this one's not a technology play but again a commodity play dependent on crude but it's product helps save the earth. This company is growing at a scorching pace and setting the tracks on the fire. I'll let you know about this stock after I have loaded up the stock full to my belly.

Don't be so sad we have a saying in hindi " समजदार को इशारा काफी है ". So keep guessing

The answer is Gujarat Reclaim

Shree Renuka - Strike2

2010-06-23T09:16:00.000-07:00

This is called Strike2. If you remember in the last time we discussed shree renuka (read it here) I mentioned a point called innovative management and here it is the real meaning shree renuka have clinched Equiav at 25% less price and they have restructured the debt to 10 years that's a beautiful strike.

Well done Management ! Simply job well done and by the way last time I checked CNBC Ticker the price was at around 67 so 21% profit.

Shree Renuka

2010-05-29T02:21:00.000-07:00

I would recommend renuka sugars for the following reasons

positives:
1) Sugar Cycle is at the bottom
2) innovative management(has large leasing capacity)
3) holds company which converts molasses to bio fuel systems
4) has own sugar cane output in Brazil (with refining capacity in India)- even without equipav
5) will be the first to benefit if exports okayed
6) ethanol and power very useful by products

now I'll post negatives also if you don't mind
1) cyclicals are always risky- crusher can't decide his output price- mkt fluctuations and also input price- govt fixes the price
2) levy sugar i.e. sugar to be given to govt. @ 20%

P.S.: I personally have a small position @55 and will not mind buying more if the market falls

Overheating Speculation

2010-05-27T06:16:00.000-07:00

Recently I read an article of Samir Arora's (Read the Article), this article mentions that for every 1 Rupee actual dealing in the market there are about 1 million betting on it's outcome. I think we can agree that futures transaction does not end with delivery and it is mostly utilising margin that we buy and 90% of us may not have deep pockets if required to pay up the entire money(I may be banned for this).when 1 million is riding on 1 rupee don't you think that 1 million will influence that transaction of 1 rupee in an unnatural way, The risk here also multiplies by many times the example is US housing market collapse where the reason for failure is not default by people but over heating of housing market due to rise in speculation. "speculation damages the economy many times more than the actual consequence"
You can find the related thread here

Information and Demand

2010-05-04T04:45:00.000-07:00

source: Capitalideasonline

Demand is driven by psychological forces unique to each trader. Information becomes merely the excuse to place the order.

On and on it goes, a 61/2-hour-a-day barter system initiated by investors whose interests, goals, limitations, access to news, and interpretation of events are as unique as fingerprints. Realistically, only 5 percent of the people buying and selling Exxon that day analyzed the company's prospects and placed a value on the company's shares. The remaining 95 percent used a tidbit of information as an excuse to act out a prevailing emotion or financial need. None of this suggests efficiency, but a system that holds stock prices hostage to the ebb and flow of emotion. Supply and demand truly drive prices on a day-to-day basis. Demand is driven by psychological forces unique to each trader. Information becomes merely the excuse to place the order.

At its worst, this outcry system results in organized chaos, panic, and true price inefficiency. Witness what happened in 1997 to Maverick Tube, the St. Louis-based maker of piping for oil wells. Amid a feeding frenzy for oil-drilling companies, Maverick's stock rose from $6 to $50 in nine months, then dropped again to $10 by mid-1998 (see Figure 1 below). Yet the company's earnings and net worth didn't rise ninefold. Nor was the subsequent collapse in price justified by fundamentals. Can such volatility be reasonable, or rational? Can one company be worth $6 a share in January, $50 by September, and $10 just seven months later? Absolutely not. We can say that in retrospect Maverick was fairly valued somewhere between those extremes and should not have fluctuated as much as it did. If the public had rationally priced Maverick, the stock might have risen slowly from $5 to $25 and remained at the price level for the next year. Instead, the stock was tugged up and down due to greed, fear, irrationality, and shifting perceptions of the company's prospects.

Was the market efficient in 1996 when Coca-Cola traded at 40 times earnings, even though the company's earnings were expected to grow at only 17 percent rates? If investors accepted Coke's valuation, then they should have questioned whether Microsoft was efficiently priced at only 40 times earnings when earnings were growing at 35 percent rates. Was the pricing of Chase Manhattan efficient when the stock dropped to $ 12-five times earnings-in 1991 out of panic selling, only to rise above $100 in1997? What was efficient about the 1993 feeding frenzy surrounding bankrupt LTV Steel, when investors piled in and bid a nearly worthless company up to $3 a share? The shares traded so far beyond the company's intrinsic worth that LTV officials had to issue public statements warning people the shares had no value.

Did General Electric's intrinsic worth increase 150 percent in 1995 and 1996? Judging from the stock price, it did. But was GE's price rational? Only to an EMT adherent. General Electric's earnings rose by only 32 percent during that time, and its shareholder's equity rose by only 38 percent. Yet the stock increased at four times the rate the company increased in value. The only plausible explanation for GE's rally was that its stock was grossly undervalued prior to the rally and merely caught up to GE's earnings trend. But to acknowledge that fact is to acknowledge that GE's stock was inefficiently priced before 1995.

The classic example, of course, occurred in 1987. Was the stock market efficiently priced before, or after, the Oct. 19 crash? Did the intrinsic value of U.S. companies really drop 22 percent in six hours as the stock market suggested? Not at all. Nothing changed in corporate America that tragic day. The economy plodded along as normal, consumers went on their merry ways shopping at retail stores, and assembly line workers kept up their normal pace of production. What changed that day wife perceptions, perceptions that stocks had been unreasonably priced.”

Grahams irrelevance in todays era

2010-05-02T03:53:00.000-07:00

What style should the investor use as a picker of common stocks in order to try to beat the market ‑ in other words, to get an above average long-term result? A standard technique that appeals to a lot of people is called "sector rotation". You simply figure out when oils are going to outperform retailers, etc., etc., etc. You just kind of flit around being in the hot sector of the market making better choices than other people. And presumably, over a long period of time, you get ahead.

However, I know of no really rich sector rotator. Maybe some people can do it. I'm not saying they can't. All I know is that all the people I know who got rich and I know a lot of them did not do it that way.

The second basic approach is the one that Ben Graham used much admired by Warren and me. As one factor, Graham had this concept of value to a private owner what the whole enterprise would sell for if it were available. And that was calculable in many cases.

Then, if you could take the stock price and multiply it by the number of shares and get something that was one third or less of sellout value, he would say that you've got a lot of edge going for you.Even with an elderly alcoholic running a stodgy business, this significant excess of real value per share working for you means that all kinds of good things can happen to you. You had a huge margin of safety ‑ as he put it ‑ by having this big excess value going for you.

But he was, by and large, operating when the world was in shell shock from the 1930s ‑ which was the worst contraction in the English-speaking world in about 600 years. Wheat in Liverpool, I believe, got down to something like a 600-year low, adjusted for inflation. People were so shell-shocked for a long time thereafter that Ben Graham could run his Geiger counter over this detritus from the collapse of the 1930s and find things selling below their working capital per share and so on.

And in those days, working capital actually belonged to the shareholders. If the employees were no longer useful, you just sacked them all, took the working capital and stuck it in the owners' pockets. That was the way capitalism then worked.

Nowadays, of course, the accounting is not realistic because the minute the business starts contracting, significant assets are not there. Under social norms and the new legal rules of the civilization, so much is owed to the employees that, the minute the enterprise goes into reverse, some of the assets on the balance sheet aren't there anymore.

Now, that might not be true if you run a little auto dealership yourself. You may be able to run it in such a way that there's no health plan and this and that so that if the business gets lousy, you can take your working capital and go home. But IBM can't, or at least didn't. Just look at what disappeared from its balance sheet when it decided that it had to change size both because the world had changed technologically and because its market position had deteriorated.

And in terms of blowing it, IBM is some example. Those were brilliant, disciplined people. But there was enough turmoil in technological change that IBM got bounced off the wave after "surfing" successfully for 60 years. And that was some collapse an object lesson in the difficulties of technology and one of the reasons why Buffett and Munger don't like technology very much. We don't think we're any good at it, and strange things can happen.

At any rate, the trouble with what I call the classic Ben Graham concept is that gradually the world wised up and those real obvious bargains disappeared. You could run your Geiger counter over the rubble and it wouldn't click.

But such is the nature of people who have a hammer ‑ to whom, as I mentioned, every problem looks like a nail that the Ben Graham followers responded by changing the calibration on their Geiger counters. In effect, they started defining a bargain in a different way. And they kept changing the definition so that they could keep doing what they'd always done. And it still worked pretty well. So the Ben Graham intellectual system was a very good one.

Of course, the best part of it all was his concept of "Mr. Market". Instead of thinking the market was efficient, he treated it as a manic-depressive who comes by every day. And some days he says, "I'll sell you some of my interest for way less than you think it's worth." And other days, "Mr. Market" comes by and says, "I'll buy your interest at a price that's way higher than you think it's worth. "And you get the option of deciding whether you want to buy more, sell part of what you already have or do nothing at all.

To Graham, it was a blessing to be in business with a manic-depressive who gave you this series of options all the time. That was a very significant mental construct. And it's been very useful to Buffett, for instance, over his whole adult lifetime.

However, if we'd stayed with classic Graham the way Ben Graham did it, we would never have had the record we have. And that's because Graham wasn't trying to do what we did.

For example, Graham didn't want to ever talk to management. And his reason was that, like the best sort of professor aiming his teaching at a mass audience, he was trying to invent a system that anybody could use. And he didn't feel that the man in the street could run around and talk to managements and learn things. He also had a concept that the management would often couch the information very shrewdly to mislead. Therefore, it was very difficult. And that is still true, of course human nature being what it is.

And so having started out as Grahamites which, by the way, worked fine we gradually got what I would call better insights. And we realized that some company that was selling at 2 or 3 times book value could still be a hell of a bargain because of momentums implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or other, or some system or other.

And once we'd gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.

And, by the way, the bulk of the billions in Berkshire Hathaway have come from the better businesses. Much of the first $200 or $300 million came from scrambling around with our Geiger counter. But the great bulk of the money has come from the great businesses.

And even some of the early money was made by being temporarily present in great businesses. Buffett Partnership, for example, owned American Express and Disney when they got pounded down.

Most investment managers are in a game where the clients expect them to know a lot about a lot of things. We didn't have any clients who could fire us at Berkshire Hathaway. So we didn't have to be governed by any such construct. And we came to this notion of finding a mispriced bet and loading up when we were very confident that we were right. So we're way less diversified. And I think our system is miles better.

However, in all fairness, I don't think a lot of money managers could successfully sell their services if they used our system. But if you're investing for 40 years in some pension fund, what difference does it make if the path from start to finish is a little more bumpy or a little different than everybody else's so long as it's all going to work out well in the end? So what if there's a little extra volatility.

In investment management today, everybody wants not only to win, but to have a yearly outcome path that never diverges very much from a standard path except on the upside. Well, that is a very artificial, crazy construct. That's the equivalent in investment management to the custom of binding the feet of Chinese women. It's the equivalent of what Nietzsche meant when he criticized the man who had a lame leg and was proud of it.

That is really hobbling yourself. Now, investment managers would say, "We have to be that way. That's how we're measured. "And they may be right in terms of the way the business is now constructed. But from the viewpoint of a rational consumer, the whole system's "bonkers" and draws a lot of talented people into socially useless activity.

And the Berkshire system is not "bonkers". It's so damned elementary that even bright people are going to have limited, really valuable insights in a very competitive world when they're fighting against other very bright, hardworking people.

And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. You're much more likely to do well if you start out to do something feasible instead of something that isn't feasible. Isn't that perfectly obvious?

How many of you have 56 brilliant ideas in which you have equal confidence? Raise your hands, please. How many of you have two or three insights that you have some confidence in? I rest my case.

I'd say that Berkshire Hathaway's system is adapting to the nature of the investment problem as it really is.

We've really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money's been made in the high quality businesses. And most of the other people who've made a lot of money have done so in high quality businesses.

Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result.

So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects.

Author : Charlie Munger

Sustainable Advantage – The important tool to shareholder value

2010-05-02T01:41:00.000-07:00

source : TED

General	Specia
Physical resources : A steel company should have its own Iron ore mines	Strategy : Managements that follow good long term startegies thinking ahead of the curve are always able to create share holder value.
Locational advantage : Either the company has to be located closer to its raw material source or the market in which it seeks to operate.	Technology: Companies that spend on technological upgradation are able to maintain their position in the market. ompare a Hindustan Motors with a Maruti.
Economies of Scale: WIth increasing capapcity the company generates economies of scale that push down costs even lower.	Human Capital: This is the most important facet of business activity. My personal preference is to look for IIT and IIM Graduates in the top level positions.
Tariff : Businesses which survive on tariff and protection measures are never unable to create share holder value.	Culture : Companies that are able to integrate themselves witrh the local culture are able to maintain and generate that sustainable advantage.
Entry : Buffet called it the ultimate advantage. " If you gave me US $ 100 billion and say take away the soft drink leadership of coca cola in the world I'd give it back and say it cannot be done"	First Mover: Companies that are first mover in their Industries and are able to hold on to that advantage enjoy better multiples and also hold on to their advantage
Cartels: These are agrements amongst sellers not to sell below a certain price or to hold back supplies. Generally the life of cartels is very difficult to envisage and therefore they enjoy lower PE's.	Entrepreneurship and Risk taking And finally it is the entrepreneur that makes and creates that sustainable advantage.

Markets react temporarily to political news

2010-05-02T01:24:00.000-07:00

Source: TED

Markets reacts only temporarily to political and military news but the reaction to fundamental news is permanent and pronounced. See the chart below when ever the Index fell in the backdrop of political or military news (terrorist attacks, wars etc) it recovered fully after a year. Therefore investors should not sell on news that do not affect the Company fundamentals.As always this is one of the hardest things to do because when prices fall people can lose sleep irrespective of whether they are long term or short term investors.

Date of event	Index	Percentage of fall	Reasons for the fall	One year later	Index	Gain Percentage
04-04-2000	5053	7.15%	Technology crash	04-04-2001	3605	-29%
11-04-2001	3458	4.26%	Tehelka Expose	11-04-2002	3479	1%
12-09-2001	3150	3.73%	W.T.C 9//11	12-09-2002	3126	-1%
14-09-2001	2987	5.27%	W.T.C 9/11	14-09-2002	3098	4%
17-09-2001	2830	5.27%	W.T.C 9/11	17-09-2002	3076	9%
31-03-1997	3666	8.26%	Sitaram Kesari pulls support	31-03-1998	3896	6%
10-06-1998	3469	4.52%	Pokhran Blast	10-06-1999	4041	17%
15-06-1998	3349	5.81%	Pokhran Blast	15-06-1999	3951	18%
26-04-1999	3406	4.74%	Jayalalitha Withdraws support	26-04-2000	4534	33%
17-05-2004	4505	11.13%	B.J.P loses power and a Left front supported Congress Govt. is elected	17-5-2005	6466	43.52%

Markets Climb a Wall of Worry

2010-04-18T01:19:00.000-07:00

The Sensex has returned about 18.62 % compounded annual return over the past 27 years in spite of:

1 War (With Pakistan – Kargil 1999).
Increasing Terrorism and threats to Internal Security (Punjab, J&K, Assam , Naxalite problem in Bihar & other parts of India).
2 Major financial scandals and a number of minor ones (Harshad Mehta, Ketan Pareikh, C.R. Bhansali,Sanjay Agarwal etc).
2 assassinations of Prime ministers (Indira Gandhi & Rajiv Gandhi).
Number of communal riots (Ayodhya, Godhra - They keep happening with immaculate consistency).
More then 11 different Governments perusing different manifestos and putting all of them under a common banner titled Common Minimum Program..
Poor Monsoons on more then 3 to 4 occasions.Each year the market speculates as to how the Monsoons have hit the coast of Kerala but over alonger period of time they do not matter. More so with increasing irrigation systems and development our dependence on monsons will come down further.
Mortgage of Gold to tide over the foreign exchange crisis (In 1991 the Indian Govt. mortgaged Gold to the Bank of England).
Coalition governments have governed major portion of the last 25 years.
Numerous number of natural calamities and disasters (Tsunami 2004, Gujarat Earthquake 2001, Surat Plague 1995).

Source: TED(The Equity Desk)

Concentrated portfolios - The Best way to hold stocks.

2010-03-15T01:11:00.000-07:00

A diversified portfolio tells you two things. One is, your standards are falling. Or the other thing, the markets are incredibly cheap. So yes that itself gives you discipline. If you are finding it incredibly difficult finding your dozen good ideas, again it tells you that either your standards are way too high, so you are an academic or the market is probably overvalued at this point - Vinod Sethi Fmr Fund Manager at Morgan Stanley

The Robert Hag storm Study
Results of Concentration

STEP - 1 The Different Sample Size

Computer Randomly assigns from 1200 companies, 12000 portfolios of various sizes. For 10 years returns .

3000 portfolios containing 250 stocks each

3000 portfolios containing 100 stocks each

3000 portfolios containing 50 stocks each

3000 portfolios containing 15 stocks each

STEP - 2 Results of the Sample analysis

Stocks	Best returns	Worst returns	Out perform
250	16.0%	11.4%	63/3000
100	18.3%	10.0%	337/3000
50	19.1%	8.6%	549/3000
15	26.6%	4.4%	808/3000
Gp	13.8%		Average
S&P	15.2%		Real

The Final Answer

Sample	Chances of outperforming the market.	Number of stocks that outperformed the market
With a 15 stock portfolio.	1-in-4	(898/3000)
With a 250 stock portfolio.	1-in-50	(63/3000)
Random returns are better with a focused portfolio. (Hence, Stock Selection)
Trading Costs and taxes are ignored but they would lower returns
(Study from The Warren Buffet Portfolio by Robert Hagstorm)

The Black Swan

2010-02-01T06:14:00.000-08:00

Before the discovery of Australia, people in the Old World were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the colouring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. Our single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one (and I am told, quite ugly) black bird.”

That’s the opening paragraph from Nassim Nicholas Taleb’s book The Black Swan - The Impact of the Highly Improbable. “The central idea of this book concerns our blindness with respect to randomness, particularly the large deviations” the author writes.

It is these large deviations from the normal that Taleb calls the “black swans.” Take the attack on the twin buildings of the World Trade Centre in New York on September 11, 2001. Or the war in the author’s native country, Lebanon, which people felt would end in a matter of days, but which went on for seventeen years.

And what makes these black swans particularly dangerous is that most of the times, they are unexpected. “Consider the turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.”

Given this, “what we don’t know” becomes more important than “what we know.” However, this does not stop individuals from coming up with explanations for everything, even though they are unexplainable at most times. As Taleb writes, “as I formulated my ideas on the perception of random events, I developed the governing impression that our minds are wonderful explanation machines, capable of making sense out of almost anything, capable of mounting explanations for all manner of phenomena, and generally incapable of accepting the idea of unpredictability. These events were unexplainable, but intelligent people thought they were capable of providing convincing explanations for them - after the fact. Furthermore, the more intelligent the person, the better sounding the explanation.”

Taleb provides an interesting example on explanations using two Bloomberg News headlines that appeared within half an hour of one another in December 2003 on the day when Saddam Hussein was captured.

“Bloomberg News flashed the following headline at 13:01: US Treasuries Rise; Hussein Capture May Not Curb Terrorism.

“At 13.31 they issued the next bulletin: US Treasuries Fall; Hussein Capture Boosts Allure of Risky Assets.”

As Taleb writes, “It happens all the time: a cause is proposed to make you swallow the news and make news more concrete.

Now, that doesn’t mean that things happened because of the reasons being offered. “The problem of overcausation does not lie with the journalist, but with the public. Nobody would pay one dollar to buy a series of abstract statistics reminiscent of a boring college lecture. We want to be told stories, and there is nothing wrong with that - expect that we should check more thoroughly whether the story provides consequential distortions of reality… Just consider that newspapers try to get impeccable facts, but weave them into a narrative in such a way as to convey the impression of causality (and knowledge). There are fact checkers, not intellect-checkers. Alas.”

As far as explanations are concerned, the jury is still out on why the Dow Jones Industrial Index crashed on October 19, 1987. And once it had crashed every year, the traders expected the markets to crash in October 1987. “After the stock market crash of 1987, half of America’s traders braced for another one every October - not taking into account that there was no antecedent to the first one. We worry too late - ex post. Mistaking a naïve observation of the past as something definitive or representative is the one and only cause of our inability to understand the Black Swan,” writes Taleb.

This ex-post reasoning affects those who work in professions having high randomness. “People in professions of high randomness (such as in the markets) can suffer more than their share of toxic effect of look-back settings. I should have sold my portfolio at the top; I could have bought that stock years ago for pennies and I would now be driving a pink convertible; etcetera.” (Source: DNA)

Hidenburg- Shoe Shine Boy

2010-01-01T05:37:00.000-08:00

Here is the compelete story about the shoe shine boy

In the winter of 1928, goes the legend, Joseph Kennedy, the famous American businessman, stopped by a shoeshine stand on the way to his posh Wall Street office. The shoeshine boy worked up a sweat trying to earn a tip, but the humorous Kennedy was going to offer the boy a tip of a different kind.

When the boy swiped the rag across the rich gentleman's shoes for the last time and looked up at him from the dirty sidewalk, Kennedy said: "You've done a fine job, my boy. So, here's a tip for you: Stay in school." And he smiled and chuckled as he walked away pulling up his nubuck leather gloves, walking cane under his armpit, very pleased by the joke.

But the boy was not of the timid kind. "Oh yeah," he yelled back at Kennedy, "well, I got a tip for you too: buy Hindenburg!" Intrigued, Kennedy turned around and walked back. "What did you say?" – "Buy Hindenburg, they are a fine company," said the boy. "How do you know that?" –- "A guy before you said he was gonna buy a bunch of their stocks, that's how." – "I see," said Kennedy. "That's a fine tip. I suppose, I was a little harsh on you earlier," he said, pulling off a glove and reaching in his side pocket for some change. "Here, you've earned it."

Little did Kennedy know that the man whose shoes the clever boy polished before him was not a stockbroker with a hot tip. He was a naval engineer from a base in New Jersey, who, flattered by the kid's attention to his golden-button uniform, told him that for Thanksgiving the navy would float a huge zeppelin in the sky called Hindenburg – but made the boy promise that he would never, never ever get close to it because of the dangerous gas they used to make it fly.

Little did the boy know that Kennedy, a cunning investor, thought to himself: "You know it's time to sell when shoeshine boys give you stock tips. This bull market is over."

Books for trading

2009-12-01T04:58:00.000-08:00

Once Warren Buffet was asked by students of an American University about his recommendation of books on investment. After giving his list of favourites like Ben Graham, Phil Fischer etc...he had following advice:

Students should start by actually investing small sums, not just investing on paper. Without actually investing, one will not experience the emotions resulting from price increases as well as price decreases. “There are books on investments and sex. But, the real thing is different”

Dow Jones Industrial Average, 1900–2006

2009-11-27T10:11:00.000-08:00

Dow Jones Industrial Average, 1900–2006
Copyright 2007, Kevin A. Tuttle, Tuttle Asset Management, LLC (www.tuttleassetmanagement.com). P/E data from Dr. Robert J. Shiller.

Brand, Price and Quality

2009-10-10T08:42:00.000-07:00

Recently I had to buy an Engineering Drawing Pen. I had to walk in to shop on the road to Abids. The shop owner was delightfully flaunted a branded pen worth 300 bugs. But when he went out to a chai, the shop keeper’s Assistant pulled up and 30 bugs pen and said that both the branded ones and this one are of same quality.
Not sure about what he was saying I checked out both of them. On my inspection both were of same quality. The cheaper ones had a little plastic feel. No probs I did my mathematics that I could buy 10 times if at all any problems arise that too in future so I walked away happily.

Similar was the case with Microsoft Mouse around 700 bugs (water proof and all). But an humble Indian make was priced around 50/-. I asked the shop keeper why the price difference his answer was the brand. ok an logical decision is to go for an 50/- rupee mouse and change the when you have problem. At least I would get to try on 14 different mouse's with the same price. So when brands do I have leverage the local ones will prevail over especially when the difference in price is greater than double and there is no perceptible difference in quality. people beware the signs next round of business revolution are round the corner. we are seeing that with brands like ITC and HUL in FMCG. So Investors beware Localization is around the corner.

Afterword: So companies need to continuously innovate to outperform localized products with better performance and quality

Why is an Hedge Fund better than an Mutual Fund

2009-09-29T07:42:00.000-07:00

Hedge Fund is a word you might have read in the news papers. They are mutual cousins to the Mutual fund community in many ways. There are 2 differences First they work like a Mutual fund but on a larger scale in terms of money, Second there pay system to Fund Managers is different. Lets leave out the first one and come to the 2nd one the pay to the Managers. An astonishing fact about mutual fund is their payment system is an fixed Fees irrespective of his performance.
So even if fund goes down by 85% the pay to the managers is fixed. The Hedge Funds Payment is performance based. So naturally for an higher pay they perform well to make more money.

What should we do in countries like India where we do not have any Hedge Funds. Go for ETF and still use all the Technical factors for timing.

The downside with Hedge Funds is they take higher risk to gain more. hedge funds inherently have the risk of taking higher leverage so the next time you look at an MF ad or your Financial Adviser(Yes they still live) do ask them about FUND MANAGER'S FEE

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My aim is to Empower an Investor and NOT to recommend any Product. Write Comments to encourage me.

The Return of Giovanni Medici

2009-09-03T10:11:00.000-07:00

Hello there,

This is the space where all our thoughts will go in while building a portfolio of quality stocks which which take a lifetime. Welcome to Riser3 Valuations. A place where ideas are transformed to reality. We are working in an environment where investment becomes a mere shopping commodity. The performance is measured in term of Assets Under Management rather than performance

We have a dream to create a financial Institution with a global footprint which exceeds Index returns by at least 5-10 percentage points. We wish to evolve as an powerful Fund Management Firm in the global Money Management Industry. We feel that our dream of long term returns can be exceeded when we continue to beat the Index by some points consistently.

We will cease to exist if we fail in beating our benchmark because

As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing

-- WILLIAM STANLEY JEVONS

We are sure that by working our way by investing in Fundamentals, we can achieve above average returns. This is a dream which we hope to achieve