Buffett, Speculation and Financial Jungle
Recently read Edwin Lefevre’s work on Reminisces of a Stock Operator. While a long term sensible investor may loathe at betting the farm, equipment and bottom dollar on new impulses daily, a few lessons are immortal for all seasons. He comes back to the game time and again after absolute bankruptcy, that in itself is a great story. Following is a para from the book:
and after making and losing millions of dollars I want to tell you this: It never
was my thinking that made the big money for me. It always was my sitting.
Got that? My sitting tight! It is no trick at all to be right on the market.
You always find lots of early bulls in bull markets and early bears in
bear markets. I’ve known many men who were right at
exactly the right time, and began buying or selling stocks when prices
were at the very level which should show the greatest profit. And their
experience invariably matched mine that is, they made no real money
out of it. Men who can both be right and sit tight
are uncommon. I found it one of the hardest things to learn. But it is
only after a stock operator has firmly grasped this that he can make
big money. It is literally true that millions come easier to a trader
after he knows how to trade than hundreds did in the days of his
The winning traits of a financial enterprise which works on leverage are hunger and capability of management but conservation in lending. The risk obviously is leveraged balance sheet wherein 5% of NPAs could be dire and 8% could be fatal for the organisation, thus 92% of well calculated honest earnest customers would not bail the business from 8% scoundrels. How a firm lends, collects, incentives to its agents, matches liabilities with assets, securitises, build valuable repository of knowledgebase on an industry strengthens the growth path. I am finding myself like Lynch who bought 100s of financial stocks in his portfolio being equally smitten hook line and sinker by PSUs, Private Bank/s, NBFCs. PSU banks lack management continuity but have niche in rural setting and low cost deposits, and 50% of unbanked India.
Size does not matter
I do realise the multibaggers are easy to make from low PE or low Market Cap stocks, or in less mature organisations but financial sector being “infinitely scalable” (limited only by the size of Universe!) a 10,000 Crore Market Cap stock has an equal chance of being a 50,000 Crore that a 1000 Cr market cap of being a 5000 Cr entity, other things being equal. I am trying to suggest here that a mature business has an equal opportunity unlike a mature FMCG or restaurant company for instance. How many burgers does a billionaire eat ? or how many shampoos, soaps, shoes does he buy ? McDonalds has no chance of being a five bagger anytime soon.
If management bandwidth being equal and NPAs and loan book maturity, cost of funds and growth prospects are similar no preference should be given to smaller cousin nor is smaller fish at a disadvantage. However, if smaller one trades at half the PE or book value then we do need to give a consideration. I like NBFCs for their niche in ignored and overlooked sector despite high cost of funds vis-a-vis banks from big ones like Shriram Transport, City Union Finance with a promise of 20-25% growth to micro ones that trade between 2-4 times PE ratios. More when I buy them.
I read somewhere that a person was so enticed with Buffettology that he vowed to buy 1 and only 1 stock of Coke if it were listed in India. I think one could not be more wrong than him as growth was his measuring rod, since a porfolio of 10 Indian PSU Banks will beat Coke over the next decade very very comfortably.