Revisiting 2018

As 2018 draws to a close, I would like to draw your attention to a condensed version of my thoughts / writings which I put over the last 6 months.

What started as an experiment, thanks to Alok Kejriwal who was kind enough to spare his valuable time when I reached out to him out of nowhere and how he insisted that Writing was the key to get clarity of thought. I decided to give it a shot.

My progress thus far:

  • 23 articles every weekend (2 got delayed by 2 days each due to my ill-health, laziness, family chores, my mind coaxing – what if you skip? See, excuses galore!!! After all, man is a rationalizing animal and not a rational one!
  • From not being a SEBI Registered Analyst to being one!! (Thanks to Sunil, he pushed me to get it; while my thoughts remained unaltered, the disclaimer did change)
  • From having started to write a blog https.jaagrav.wordpress.com to having got a website now: www.jaagrav.com (I can’t thank Rajesh enough, who seeded this thought of having one’s own website and who helped me through and through, couldn’t have been possible without him.

Capsule version of 2018:

Kitna Deti Hai? – Great, Good & Gruesome Business highlights how HUL has been the most fuel efficient (highest cash flow per unit of capital) as the safest (NIL debt), thereby giving its passengers (shareholders) the most joyous ride (Highest Delta Market capitalization per unit of capital)

Jeff Bezos: Tech Entrepreneur or a Better Investor? highlights Jeff’s thoughts as an investor rather than a tech entrepreneur. In fact, had Jeff been into the world of investing, he would have given Warren Buffett very serious competition. Jeff’s letters to shareholders is a treasure trove and has some amazing insights about Taking a long-term approach, Focusing on free cash flow per share as against profit, Believing in the magic of compounding, Betting bold even when there is a 10% chance of 100x payoff, How an ordinary boat eventually beats a better rower (how he is fortunate to benefit from a business model that is cash-favoured and capital efficient), His inversion principle of focusing on customer first and work backwards, High-velocity decision making.

Aviation: Hyper-competitiveness @ loving it!! refers to about how the current stress in the aviation market and the hyper-competitiveness will result in few airline companies getting some pricing power eventually, provided they eliminate the temptation to make people airborne at any price, thereby making some of them profitable once again.

Atul Auto: ‘David’ of the 3-wheeler Industry refers to how Atul Auto has been able to able to operate profitably in an industry, where the largest competitor is 15 times larger. One of the key reasons for this has been its ability to raise prices, without any loss in the volume of business – which makes it a great business. Also, capital requirement has been minimal, thereby leading to ever-increasing stream of earnings.

Self-Deception + External Capital + Short-sightedness = Disaster refers to how most of the Indian steel companies having become insolvent had the same underlying self-deceptive story to say: Deallocation of coal blocks, cheap imports eating into domestic demand, dwindling steel prices and government policy changes.  There was no mention of each of their company’s increasing reliance on external capital, operating in a commoditized industry wherein the lowest price wins, cyclical nature of the industry, high capital intensity and cash flows hard to come by. After all, a cone perfectly balanced on its apex will topple over if there is slightest defect in its symmetry; and even if there is no defect, the cone will topple in response to a “a very slight tremor, a breath of air”.

Mgmt > Biz Economics: Are you kidding? refers to why it is better to invest in companies wherein the underlying economics of the business is robust, and it is not dependent upon the management. Eicher Group which previously had 15 businesses including tractors, trucks, motorcycles, components, footwear and garments, none of which being a market leader, focused on 2 promising businesses – Motorcycles and tractors and sold the remaining 13 businesses.

Recommended by Experts, Invert please!! elucidates how investors get lured by the gullible experts and fail to ask some basic parameters like: Willing to invest in companies which do not even produce returns of 8% per annum on an average, negative or meagre cash flow producers and which have inability to service their debt. After all, if children are supposed to do their homework, aren’t we?

52-Week High – Awful Reference Point? refers to how humans don’t tend to evaluate things / stocks in absolute terms. They evaluate them relative to a comparison standard or a reference point, viz. 52-week high and how this behaviour resulted in shareholders losing 57% of their wealth by investing in an auto company, now being nicknamed as Ghata Motors

D-Mart Vs Future Group: Observations elucidates some of the philosophies on which each of the company was built. In a retail business, where winning is obviously centred towards details, it is important to grow steadily but profitably. D-Mart has followed this cardinal principle to the dot as compared to Future Group which wanted to grow aggressively and has stumbled in the past once. (Some just don’t get it!!)  D-Mart’s humility and understanding their circle of competence around their limitation of understanding both investors’ and e-commerce instils transparency, in sharp contrast with Future Group.  Also, D-Mart’s long-term focus itself enables them to own their store as compared to shut and move approach of Future Group, thereby enabling them to save on high rentals as compared to Future Group, which takes pride in being one of the largest rent-payers in the country!!

How my stint at HDFC Bank taught me some Important Investing Lessons provides some important Investing lessons, wherein the1st lesson was: What you don’t do is more important than what you do? 2nd Lesson being: Costs matter and 3rd Lesson of investing which I learnt was: Discipline and patience pays off!

Maruti: Pyramid Business Model – Reason for success!! elucidates about how Maruti, by following the Pyramid Business Model approach became the undisputed leader of the Indian passenger car market.  A true pyramid is a business model in which lower-priced products are manufactured and sold with so much efficiency that it is virtually impossible for a competitor to steal market share by under-pricing the product or the service; hence the lowest tier of the pyramid is known as the firewall. Maruti’s firewall tier was created by Maruti 800.

Market mayhem + Investing Framework!! provides a framework which I have often used, helping me to take investment decisions, especially when strong franchisees have lost market value because of some problems or some behavioural attributes.

IHCL – Winner of Taj Mansingh Hotel auction: Really? charts how auctions cause asinine behaviour, because people tend to over-estimate the value of the asset, thereby resulting in over-payment. In a similar instance, IHCL’s recent win of Taj Mansingh hotel does not make sense mathematically. License Fee, employee cost and operating cost would be far higher than what the hotel would generate in revenues. Clearly, the management has gone on a (mis) adventure on this one!!

DMart – Saturating the Circle shows how have you grown over time is the key. While DMart grew from 1 store in Maharashtra in FY03 to 55 stores at the end of 9 years, it was restricted to primarily only 2 states, viz Gujarat and Maharashtra. Saturating and deepening the circle was more important as compared to spreading oneself too thin!!

And then, WHAT? – Important Investment Question enables to think about the 2nd and the 3rd order derivatives. When a company incurs capital expenditure in a commoditized industry, while its revenue would increase temporarily (Immediate Effect), but other competitors would also incur similar or higher capital expenditure (2nd order Effect). Greater capex across all the players would result in lowering of prices across the industry (3rd order Effect). This question also enables to think of the quote “Life is a marathon and not a sprint

High-priced stocks: Where is the denominator? provides an example of how some people do not even consider the denominator, i.e. earnings or cash flows. Looking at the numerator, i.e. stock price alone will only lead to faulty outcomes.

Visit to a Mall during Sale – Important Investing Lessons!!! places some important investing lessons around Principle of Scarcity, leading to Over-estimation of value thus excessive payment. How Power of incentives can be averted by not participating in auctions and how Social proof, (just because others are going, we tend to go as well!!) results in over-crowding and misconceived perception about a better bargain.

Insurance – Underwriting at what cost? touches upon how the Indian insurance industry is beset with underwriting losses and some of the underlying reasons identified were primarily behavioural and psychological, viz. Power of incentives, inability to sit calm, inability to sustain large performance variation, low barriers to entry, information overload fallacy, envy bias and sunk cost fallacy to name a few.

Being profitable is hardly the evidence of a good business provides example of how ITC and Tata Motors, while having the same cumulative profit since the last 17 years are valued vastly differently. Return on Capital, Financing of the capital and Free cash flows were some of the primary reasons for ITC being valued much higher than Tata Motors.

Train to notice what one sees – Jet Airways fiasco!! explains how the shareholders could have avoided to invest in the company by taking a long-term view of the business. The company had incurred losses in 8 of the last 10 years. The company had incurred 1.2% p.a. return on capital over the last 10 years and that the company did not having any pricing power – air fares between cities / countries have virtually remained constant, with fixed costs increasing slowly.

Precisely right, or roughly wrong? focuses on missing out the forest while looking at the trees. Focus on being precisely right is one of the key reasons for being short-sighted; this is where the telecom analysts who were busy predicting the next quarter earnings precisely failed miserably to realize that the industry would witness bloodbath, with more than 10 players, declining ARPUs, and increased capex requirements. It is important to incorporate a range of outcomes, including the possibility of improbable outcomes.

Continuity – How Boring? touches upon Alternate paths, which are invisible, hence you don’t think about them. Also, sitting on one’s ass and waiting to invest in businesses at the right price is boring!!

Quotational Loss = Buying opportunity? only when the franchise is excellent, and the underlying value remains broadly intact. In Tata Motors’ case however, terming it as an excellent franchise seemed to be gross mistake. Meagre Profitability and Cash Flows, Increased leverage, Cost structures out of whack, discretionary spend on automobiles are some of the factors which does not bode well. I would refrain from catching the “falling knife” unless it really starts building a franchise.

Boat without a Rudder!! touches upon behavioural aspects of Investing and that how most start-up founders fool themselves – since it’s very easy to fool oneself!! Also, the larger fish will buy the smaller fish someday is a wishful way to build a business.

Disclaimer: Please note that these are my personal views. While, I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action. 

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