Crazy Luck Series 1

Warren Buffet attributes good portion of  his success to what he calls "Ovarian Lottery"

"  just before you emerge you have to go through a huge bucket with 7 billion slips , one for each human. Dip your hand in and that is what you get - you could be born intelligent or not intelligent, born healthy or disabled, born black or white, born in the US or in Bangladesh, etc. You have no idea which slip you will get"

" Born in USA as a white man right at the time when greatest bull market was to begin was too good an opportunity "

But then lot of people had this opportunity so why warren buffet succeeded ??

That is where definition of luck play the role  :

Luck is when preparation meets opportunity .

Degree of Luck then is determined by ...

How does one prepare for opportunity ??

How does one know it is a opportunity ??

How does one know which opportunity is right for him ??

How does he compete with others for that opportunity ??

In series 2 we will see how does one do it ..

Cracking Investment Code

What is code for successful investment ??

Understand the business : That is tall task as some time even owners don't understand the business they are in , and hence often fail to meet customer needs profitably

Buying One dollar investment for 40 cents is popular guide for success . First there is no standard measurement tool that can calibrate a investment as One dollar , so how do you know you are buying at right price

Trust a expert ( Investment Advisor) : Well most of them are on a job earning  lower than you and have no experience of managing their own money . They learn by making mistakes on your money .

SIP in Mutual Funds / ULIP . People have  scary stories of 2007 and great stories of 2003 : well still this is better story than most inspite of loot of high expense ratio these mutual funds charges and have no accountability unlike other industry executives

That is precise reason I am an journey to find the Successful code of Investing . It is called S CODE .

More on it soon ...

Telecom stocks reratings

Telecom stocks are like US railroads stocks of 1940s . They have large  debt in their books  and have high depreciation to take care .

Interestingly they generate good loads of cash month after month . all new electronic equipment we use need to run on this highway and we all consumers have to pay rent to telecom company .

They are in consumer facing business and people are pretty aware of the brand they use , but premium paid for brand is low so in  sense one may say they are commodity business like sugar ,potato etc .But strangely people don't monitor their payout to these companies that closely as grocery items even when the amount is pretty significant

Unlike consumer  companies they don't have raw material cost that increases yoy but it increases once in 20 years , and hence they face valuation and debt challenges once in 20 years , post that they have significant advantages on raw material cost , network effects and distribution scale advantages .If one goes by porter frameworks barriers to entry is high , and consumer power is very limited , substitutes are not many . unlike airlines the industry is more rational and has generated profits even in worst years
so what ...
I feel it I'd right time load up these share inspite of. new competition as price to cash flow is in single digit and environment is becoming conducive ,  raw material has been bought ( price fixed for next 20 years ) .

Aache din ...

Idea No 8 : Don't leverage to buy stocks but ride on firm's operating and debt leverage for huge gains

Cyclicals Stocks : These stocks are excellent examples as to how one can benefit on firm's operating and debt leverage .  

What are Cyclical stocks ??

This  category of stocks that success and failure depends  heavily on the business cycle and economic conditions . Metals , Manufacturing , Automobile and auto ancillaries etc are part of this category.

Consumer cyclicals include industries such as automotive, housing, entertainment and retail. The category can be further divided into durable and non-durable sections. Durable cyclicals include physical goods such as hardware or vehicles, while non-durables represent items like movies or hotel services. 

The performance of consumer cyclicals is highly related to the state of the economy. They represent goods and services that are not considered necessities, but luxurious purchases. During contractions or recessions, people have less disposable income to spend on consumer cyclicals. When the economy is expanding or booming, the sales of these goods rise as retail and leisure spending increase.

Consumer Cyclical stock Buy decision : 

Ideally stick to market leader or second player as the profit margin reduces dramatically in relation to market share . The right time to buy is 2-3 years in to bear market when most negatives have been factored in and industry capacity reduces by Min 20%  . Guiding Value indicators 

The Max ( Avg last 3 yrs )  PE ratio  to be paid at any time is 10 
Debt equity ratio should not be more than 1.5
Prices to sales ratio need to be capped at 1


Consumer Cyclical stock Sell  decision :

The right time to buy is 3-4  years in to bull market when most positives  have been factored in . You may decide  not to sell the stock if you are in country where population is growing . Guiding Value indicators 

The PE ratio is greater than 20 
Debt equity ratio is greater  than 2 . 
Prices to sales ratio is greater than 2

Consumer Cyclicals tend to have high operating and debt leverage relative to defensive and hence these stocks exhibit sudden increase in profitability when economy starts booming  and can turn out to 20 - 50 bagger before becoming expensive . So if you have picked the stock at right time it is better to hold the stock for at least 5 to 6 years . 

A small example below illustrates how consumer cyclicals can become 20 bagger 

Simple Worksheet
	Bear Market	Bull Market
Revenues  in Crs	1000	2500
Varaiable cost 60%	600	1500
Contribution	400	1000
Operating leverage
Capacity Utlisation	50%	100%
Fixed Overheads	100	100
PBIT	300	900
Debt Leverage
Long term Borrowing  Cost	10%	8%
Debt	2000	1000
Interest	200	80
PBT	100	820
Tax ( 30%)	30	246
PAT	70	574
PE	5	15
Share Price	350	8610

  

Crazy Investing : Danger of Quality Stock : 2

This is in continuation to my earlier tread  . In this lets us understand what I mean my Quality dimension  & Price Dimension in detail 

Quality stock or investment  is very subjective and relative.

Traditional Quality definition  is 

• Earning Growth over period of time : Industry structure and future environment

• Certainty of earning: : Ability to differentiate

• Management Value system - to share earning and be fair and transparent to all stake holders

Consumer tastes , regulation, technology , country competitive context  changes often impact industry structure and hence the firm that is operating in that industry context . This often leads to shift of good quality business to bad business and vice versa . These changes impact Moat and hence ability to generate Cash   

Also Management changes and strategies can also destroy Moat or burn cash and hence need to be continously studied and evaluated .  

The  passive investment theory that Quality stocks will keep compounding on account of Moat is a fad that has been spread by so called Value investors to such a extent that people are ready to pay any PE multiple for these stocks . 

All stock are quality investment at right prices 

Business that have rational competitors and favorable industry structure can enjoy PE equivalent to their growth ( ie if company earning is growing at 18%  YOY , one Year forward  PE should 18 -20 Max ) . Any such Quality business being sold at PE higher than PEG = 1 , needs to be bought with care and should be continously assessed YOY to see if earning power is getting diluted or strengthened . 

Also One may read Ben Graham Intelligent Investor wherein he tells again and again to be weary of so called Quality Business which may not be neccessary be Quality Investment .

Crazy Investing 3 : Danger of Quality Stocks

Quality Dimension 

Quality stock or investment  is very subjective and relative.

Traditional Quality definition  is

• Earning Growth over period of time : Industry structure and future environment

• Certainty of earning: : Ability to differentiate

• Management Value system - to share earning and be fair and transparent to all stake holders 

Price Dimension

But quality by itself is useless unless it accompanied with price equation . Price + Quality defines value and that reduces risk or craziness investing

Traditional Price Quality equation has emerged   PE , PEG etc as ratio . These ratios reduces risk but does not tell whether this quality is right for me ( relative )

Time Dimension 

The next dimension of investment is Time , which again along with quality and price reduces risk and makes investment more relevant and rewarding. Some interesting factors are

• Investor age

• Investor earning life cycle 

• Investment time duration

Emotional Dimension 

The next dimension is investor EQ .. A every subjective , but essential dimension that needs to be understood and factor in investment .

In next few articles we will explore all 4 dimension of investments