Notes on value investing

I shared these notes with few close friends today. Just reproducing them here.  1. As a thumb rule, I only look for stocks which are trading at less than 0.5-0.75 times of Revenues and have market cap <1,000 Crores and dig from there on. I learnt this trick while on my last fundraising stint with AH and others. I don't use any standard ratios.    2. I avoid companies which have subsidiaries (unless there is something attractive there). Its a pain to understand companies with too many businesses. I like companies with 'focus' and where I can find a single 'raw material' as primary input.  3. Ideally no mutual fund should hold the stock. No analyst reports, very bad website and almost no news - these are good signs for an investor. 4. Rest of the checks are primarily on corporate governance. I love it when a business is transitioning from Parent to Son/Daughter and they are in ED sort of positions in the company. They should be buying the stock (if...

Even Charlie Munger admits that investing is not easy. But it can be simple if one knows some basics well. I usually have a big pile of books pending a read - a good one in the current pile, which is also my recommended book for 2017, is 'Capital Returns' by David Chancellor. It is a compilation of investor letters by Marathon Capital and I think it is probably one of the 'must read' books for a value investor. I would go to the extent of saying it should be one of the first 10 books you must read as an wannabe investor - it will save you a lot of pain ! The key method put forth by D. Chancellor in this book is called "Capital Cycle Analysis" and he emphasises the value of looking at the 'supply side' in an industry instead of the 'demand side'. A key recommendation of 'capital cycle' investing is to invest into industries from where capital is exiting (i.e., when you see news clips about consolidation/M&A in an industry, sell o...

With the markets at new highs, among IPOs, there are also a handful of buybacks happening. Buybacks pose an interesting challenge for the intelligent investor.  At the basic level, it appears to be attractive for a long term investor. Lesser the number of shares, better the per share metrics should you hold on to them. But 2 interesting points one needs to ponder upon carefully: a. If the buyback price is greater than the 'intrinsic value', the management is committing the Holy Sin of Capital Management which is to buy high & sell low. So think twice when a great IT/FMCG major offers you a buyback at 20% more than current market price - is management paying a high price or a low price for the shares?  A smart management always buys back shares when its share price is languishing and they feel the tide is turning. A bad management buys back shares when its share prices are hitting 52-week highs and the biz environment is not likely to turn for the better.  b....