Notes on value investing

A diversion - for a change posting something from the technology world rather than the value investing word. Multi-disciplinary thinking :) !     Beautiful is better than ugly.     Explicit is better than implicit.     Simple is better than complex.     Complex is better than complicated.     Flat is better than nested.     Sparse is better than dense.     Readability counts.     Special cases aren't special enough to break the rules.     Although practicality beats purity.     Errors should never pass silently.     Unless explicitly silenced.     In the face of ambiguity, refuse the temptation to guess.     There should be one-- and preferably only one --obvious way to do it.     Although that way may not be obvious at first unless you're Dutch.     Now is better than never.     Although never is often better ...

One does not buy a stock, one buys a business When buying a business, know the business Price is what you pay, value is what you get Part of the risk in investing is the risk of paying too much  Ignore information at your peril Understand what you know and don't mix what you know with speculation Anchor a valuation on what you know rather than on speculation  Beware of paying too much for growth When calculating value to challenge price, beware of using price in calculation  Return to fundamentals; prices gravitate to fundamentals (but that can take some time) From 'Accounting for Value' by Stephen Penman

One of India's ace value investors recently came on Bloomberg TV and disclosed that he had purchased NIIT (a large training and skill development services provider) for Zero Enterprise Value. And he simply said, "yes, buying NIIT for zero enterprise value was the investment rationale". Though I have known the EV concept for quite some time now, it was this Khan Academy video which clarified the concept to me better. So if you are watching that video, I need not elaborate further. I think in the video the real concept that became clear to me was that EV is clearly focusing on "valuation of the operating assets (i.e., the enterprise)" and it ignores the non-operating assets such as cash. This focus on operating assets is a very useful way of: Comparing two enterprises where the operating assets have been created with different capital structures (in terms of equity and debt/liabilities) and Comparing the operating profits that each enterprise is gener...

Earnings are what matter in stock valuation. This is a conclusion arrived at by leading thinkers - even though different people have suggested different methods. Stephen Penman's approach in forwarding the Residual Income Method rests on two key arguments: a. "Earnings that ' generate value ' are what should be considered in stock valuation". [By contrast, dividends and free cash flow denote 'distribution of value' and hence, they are not the best measure for stock valuation. Hence he suggests that dividend discount model is not the most beneficial for valuation purposes.] b. Dividends and free cash flow do not matter in company valuation. The stock market recognizes that earnings add value and dividends reduce value in the firm. What matters is residual earnings and abnormal earnings growth. Focusing on residual earnings and abnormal earnings growth is equivalent to anchoring valuations on book value or on capitalized earnings. Important lessons ...

Picking stocks is quite an art with a tinge of science. That said, it appears that if you pick stocks with a certain characteristics, you would more or less turn out to be a winner given a few years' time. Following is a simple gist of my approach. a. Quality and longevity of business - What is the nature of the business and how good is its economics? Would it improve over time or worsen? It is important that the business has some or all of the below characteristics: How big is the market?  Do customers pay the price demanded for or is there strong price negotiation? Do customers typically pay upfront or on time? Is the business seasonal? Does the business undergo rapid changes? Will the business exist 10-20 years from now? Is the business affected negatively by regulations? Is the business causing harm to the society or environment? What is the nature of competition? - Price/Quantity/Co-operative? Is the market heavily fragmented? Are there dominant players with ...

Slow Dance by David L. Weatherford Have you ever watched kids On a merry-go-round? Or listened to the rain Slapping the ground? Ever followed a butterfly’s erratic flight? Or gazed at the sun fading into the night? You better slow down. Don’t dance so fast. Time is short. The music won’t last. Do you run through each day On the fly? When you ask: How are you? Do you hear the reply? When the day is done, Do you lie in your bed With the next hundred chores Running through your head? You better slow down. Don’t dance so fast. Time is short. The music won’t last. Ever told your child, We’ll do it tomorrow? And in your haste, Not see his sorrow? Ever lost touch, Let a friendship die Cause you never had time To call and say, “Hi?” You better slow down. Don’t dance so fast. Time is short. The music won’t last. When you run so fast to get somewhere, You miss half the fun of getting there. When you worry and hurry through your day, It’s like an unopened g...

Below is my take on 5 forces for QSR. The QSR analysis has to factor in location-specific competitive advantages which a broad 5-forces approach can often miss out. Localization of competitive advantages is Bruce Greenwald's significant contribution to understanding competition. Another key element to be factored in is food regulation (esp. beverages licenses). a. Supplier Power - There are two kinds of supplier power. While basic raw materials are agri-commodities and chefs/waiters, there is another major supplier for QSR. The real estate provider. The success of a QSR is significantly dependent on the location. It is widely known that chains like McDonald's use Cluster Analysis based on demographics to pick the locations where they want to open outlets. Consider McD's outside Andheri (W) Railway Station (don't know if it is still there !) or Starbucks outside Santa Cruz airport. Contrast this with the old generation south indian restaurants in Matunga. Typically,...