Views on Life & on Equity Investing

Wonder, Wealth & Abundance

When to sell / 90 degree flipped bell curve / Hour glass

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For an Active investor,

Good reasons:

  • When the stock trades at significantly higher valuations compared to peers or its own history (historic / relative valuation)
  • When a better idea is available in the market (opportunity cost)
  • When original thesis has been proven wrong and your are playing an ostrich or engaging in mental accounting, loss aversion bias etc.
  • Fraud by management
  • When you need money for change in personal circumstances (big expenses / retirement)
  • When the stock is overbought
  • When the industry future does not look favourable
  • When the stock has become significantly overweight in the portfolio (40% for some or 15% for others) even if its cheap/attractive (portfolio concentration risk), this was the stock that became 5 bagger in a year on 10% portfolio weight
  • You bought for relative cheapness by you don’t really understand the company business model that intimately and/or industry that well
  • You had no idea why you bought the stock, buy low sell high
  • Fundamentals are changing
  • Company has decided to invest money into an unrelated business
  • Massive expansion planned that could make the company very indebted
  • Sell in blocks, be reluctant to sell stocks with a promising growth story ahead
  • When the industry has caught on mania and all stocks are selling at 100 PE+ in that industry (crypto/.com/clean tech/algae based energy/biotech/AI/Robotics etc)
  • Your stock has become the buzz and is in media everyday
  • Selling a hot growth stock much before the growth slows down (PE contraction slap)
  • Portfolio rebalancing
  • You are following a system but making an exception in this case, hard to tell if you are emotional or not

 

Bad reasons:

  • Its dropped in value
  • Market, Economy, Industry is bearish (if that was the original thesis.)
  • Panic selling by institutions or public for any reason (such as out of 100-200-500 / industry index)
  • Selling for tax reasons
  • Dividend has been eliminated – without investigating the reasons
  • Transaction costs

 

In short, you need to make the portfolio stronger, improve its quality, character and diversification, your portfolio should become a hardy survivor cockroach over time.

Two illustrations

Rotated Bell Curve

If you have generated financial wealth, gained and applied right sort of knowledge then in most cases the portfolio should resemble the graph below.

  1. More stocks as an amateur (that is the right model, most people start with single stock)
  2. Fewer stocks when you are experienced
  3. More stocks when you have more than enough money than you need

FullSizeRender

To appeal to your lustier and more imaginative side, another illustration is the hourglass figure like silhouette of well shaped girl. You can complete the other bits in this image, here is the outline. You remember an Ad (I am unable to find in which the mountain hiker asks for a bottle of coke by gesturing the shape of a bottle, her father thought this chap is asking for a girl). Found a similar one.

 

Here is the illustration:

IMG_0461

Disclosure: Have vested interest in the companies mentioned. Views are personal notions and do not represent any organisation or company. Investment in stock market can (and many a times do) result in loss of principal capital.

http://www.elevendimension-funds.com

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Written by amitdipsite

October 12, 2017 at 6:33 pm

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Roller coaster

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One thing to say buy and hold, another to practice it. One thing to say buy as if stock market is shut for 10 years, another to avoid looking at stock prices for one week.

One of the stocks that I have held through TWO 40-50% drawdowns is Muthoot Capital over the past five years. I have done it once with few other stocks but not twice. Question to ask: Will you do this with 30% portfolio weight on a single stock. Having trading mentality is a good idea in these cases. Or if you really have the confidence, will you add more after price is more than 50% down? Its a question one should ask before buying.

Here is another look at an Australian counterpart, Bellamy’s Australia, into infant milk/foods, about which I wrote twice https://lifeandequities.wordpress.com/2015/11/07/organic-trend-has-no-end-trilogy-new-zealand/ and https://lifeandequities.wordpress.com/2015/09/16/organic-food-long-term-trend/

all within two short years, the range has been 1 dollar to a steep 16 dollars, then lost 75% of the market cap to trade at less than 4 dollars.

Insider trading, lack of growth in China, imposition of duties etc. were the chief reasons.

ASIC (equivalent of SEC / SEBI) is quite weak and feeble institution, Bellamy’s has paid a fine of mere of 66,000 AUD, less than peanuts.

http://www.sbs.com.au/news/article/2017/10/11/bellamys-pays-fine-conclude-asic-claim

Company is back trading at 10 AUD. So, your returns are dependent on your entry price. I think sometime it pays to be medium term oriented rather than long term. “Holding forever” is certainly a bad idea.

BAL

 

Written by amitdipsite

October 11, 2017 at 2:35 am

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Don’t wait for the robins

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“My experience is that the recommendations of Wall Street analysts are wrong more often than they are correct. An investor told me that he once had an account with one of Wall Street’s most respected firms. He told the Wall Street firm immediately to purchase any stock that was added to the firm’s overweight list—and immediately to sell the stock when it was removed from the list. After several years of following this approach, the investor closed his account with the most respected firm because his results were particularly poor.

Why do analysts tend to be substandard stock pickers? Most analysts follow only one or a few industries and tend to have deep knowledge about the companies they follow. However, there is a large difference between knowledge and judgment. It is said that knowledge is knowing that a tomato is a fruit, but judgment is not putting it in your fruit salad. To have good judgment, you need to have the knowledge, but, in my opinion, you also need many other qualities, including common sense, stable emotions, confidence, and, quite possibly, an indefinable sixth sense.

Furthermore, in my opinion, most individuals, including securities analysts, feel more comfortable projecting current fundamentals into the future than projecting changes that will occur in the future. Current fundamentals are based on known information. Future fundamentals are based on unknowns. Predicting the future from unknowns requires the efforts of thinking, assigning probabilities, and sticking ones neck out—all efforts that human beings too often prefer to avoid.

Also, I believe it is difficult for securities analysts to embrace companies and industries that currently are suffering from poor results and impaired reputations. Often, securities analysts want to see tangible proof of better results before recommending a stock. My philosophy is that life is not about waiting for a storm to pass. It is about dancing in the rain. One usually can read a weather map and reasonably project when a storm will pass. If one waits for the moment when the sun breaks out, there is a high probability others already will have reacted to the improved prospects and already will have driven up the price of the stock—and thus the opportunity to earn large profits will have been missed.”

Warren Buffett wrote:

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10, and 20 years from now. Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month—or a year—from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
Ref:  “Common Stocks and Common Sense.” Wiley

Written by amitdipsite

October 10, 2017 at 8:16 pm

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Bubble is here

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Written by amitdipsite

October 9, 2017 at 5:37 pm

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5-10 year waiting list for table at restaurant

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That’s Damon Baehrel

https://en.wikipedia.org/wiki/Damon_Baehrel

https://www.damonbaehrel.com/reservations/

“Since April 1, 2014, we have taken an extended break from accepting NEW reservation requests in order to process/organize the influx that came in by that date. Continuing National/International media coverage combined with an existing multi-year backlog resulted in us being completely inundated and overwhelmed with requests from around the world.”

Call it grandmother of  deprival-uber-super-reaction.

https://www.eater.com/2014/1/16/6296197/how-to-get-a-table-at-damon-baehrel-in-new-york-state

This is a classic example of Great but not Big (https://lifeandequities.wordpress.com/2017/08/08/great-not-big-2/). Damon has a 20 seater restaurant in the basement of his home. Earns ~10,000 USD per day. Great at his craft, has work life balance and demand for his product/service that he can never expect to meet with his 20 seater.

“I’m not new. I’ve had this restaurant 25 years this year. I opened in 1989 and I’ve never sought out any kind of publicity. I’ve always liked to stay below the radar a little bit because I really enjoy living my life this way. Everything comes from the 12-acre property. In other words, I have no suppliers of any kind.”, says Damon.

Should he instead be planning a franchise option and run on the treadmill because he has less money than the owners of Subway?

Written by amitdipsite

October 8, 2017 at 7:04 am

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Judging Management – 2

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  • Interest of the Management should be aligned, greater holding of equities the better.
  • Buying from the open market. Beware of preferential issues.
  • Longer the tenure of  the CEO the better.
  • Commentary during bad times. Is the management forthcoming about mistakes.
  • Management compensation to profits ratio, the lower the better.
  • If profits increase, then special or normal dividends should be increased. Best is to have a stated dividend policy.
  • Flamboyant and acquisition oriented managements must be avoided.
  • Acquisition should be measured on per share earnings. If management gets compensated as a percentage of profits, their yardstick is different.
  • Boards of most companies are puppets, as such, they will not stand for the interests of the minority.
  • Google past fraud, imprisonment, court cases against management
  • Related party transactions, complex structure of subsidiaries, lack of commentary in management discussion section are red flags.
  • Have the capital allocation decisions been made with a long term view.
  • Does the management take frequent impairment?
  • Does the company try to smoother earnings by taking impairment in the quarter with abnormal gain?
  • Does the management always meets its target? Hint: It shouldn’t.

Written by amitdipsite

October 8, 2017 at 5:02 am

Posted in Uncategorized

Judging management

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“If a company’s balance sheet passes muster, I then try to get a handle on management. The competence, motivation, and character of management often are critical to the success or failure of a company. To form an opinion on management, I normally pay careful attention to the management’s general reputation, read what the management has said in the past, assess whether the management’s stated strategies and goals make sense, and analyze whether the management has been successful carrying out its strategies and meeting its goals. However, I am humble about my abilities to accurately assess managements.

Experience shows that investors can be unduly impressed by executives who are charismatic or who purposely say what investors want to hear—who play to their audience. Also, investors frequently will undeservedly credit management for a company’s favorable results and vice versa. Favorable or unfavorable results often are fortuitous or unfortuitous. A number of years ago, I was one of a few hundred securities analysts attending a particularly charismatic Wall Street presentation by Dennis Kozlowski, the CEO of Tyco International. At the end of the presentation, the audience burst into applause, and one attendee turned to me and said: “Kozlowski might be the single best executive in the country today.” A few years later, Tyco was near bankruptcy and Dennis Kozlowski was headed for prison. This is just one example of why one should be humble about his abilities “to judge a management.”

“After trying to get a handle on a company’s balance sheet and management, we usually start studying the company’s business fundamentals. We try to understand the key forces at work, including (but not limited to) quality of products and services, reputation, competition and protection from future competition, technological and other possible changes, cost structure, growth opportunities, pricing power, dependence on the economy, degree of governmental regulation, capital intensity, and return on capital.”

“Because we believe that information reduces uncertainty, we try to gather as much information as possible. We read and think—and we sometimes speak to customers, competitors, and suppliers. While we do interview the managements of the companies we analyze, we are wary that their opinions and projections will be biased.”
Excerpt From: Edgar Wachenheim, III. “Common Stocks and Common Sense”

Written by amitdipsite

October 8, 2017 at 2:48 am

Posted in Uncategorized