Book Notes – The Art of Thinking Clearly

The Art of Thinking Clearly  – Better Thinking, Better Decisions
By: Rolf Dobelli

As a Premium Subscriber – Now you will have access to searchable and tagged “Notebook” for all book highlights I read, It will look like below once you open the link in a browser

In the scorecard > Look for a Tab “Books”

I recommend bookmarking and saving it as a notebook in Evernote. I am hoping to add 10-12 books after editing them by year-end 2020 and then ongoing 5-6 every year

Now for some insights from this fantastic book

Habits

Small actions, repeated over time, transform us.

Survivorship Bias

Survivorship bias means this: people systematically overestimate their chances of success.

In daily life, because triumph is made more visible than failure, you systematically overestimate your chances of succeeding

should you never put your hard-earned money at risk? Not necessarily. But you should recognise that the survivorship bias is at work, distorting the probability of success like cut glass.

Failed and small businesses do not enter the stock market, and yet these represent the majority of business ventures.

Nature Vs Nurture

The author attributes a lot to Nature

swimmer’s body illusion – As with the swimmers’ … Read the rest

NBCC – Worth a Swing?

I learned the concept of Debt Capacity bargain from Prof Sanjay Bakshi vicariously and wrote on MOIL using the framework.

NBCC is looking like a similar opportunity e.g. in March 2020 it was available at a market cap of INR 2880 crore for few days, My calculations using optimistic and pessimistic average cash flow from operations are below

My Assumptions are

  1. Any bank would be comfortable with a interest coverage of 3X or even less given its a Mini Ratna government-owned company
  2. Have taken interest rate of 6% based on the latest GOI bond raising
  3. INR 750 crores cash consolidated level based on credit rating report and also this figure is similar to FY20 balance sheet number
  4. All cash is considered as excess cash( hence added to market cap) because they have a policy of executing projects against customer advances, which is also followed for real estate and redevelopment projects

 

Some other considerations positive

  • As a thumb rule in past investors have done well-buying business below 10 times their free cash
  • Decent dividend yield
  • they have an order book of INR 70,000 cr and counting. At 5% margin and assume they execute all the projects in the next 5-6
… Read the rest

Aarti Drugs – what to do with a fast 5 bagger?

Uncle Iroh is my favorite character in the animation series The Last Airbender

Uncle Iroh is known for his words of wisdom as he freely advises most of the other characters throughout the series, including his nephew Prince Zuko.

Zuko is preparing to battle General Zhao in an Agni Kai, a battle that will define their future, A Night before the battle Zuko asks for advice from Uncle Iroh to win this crucial battle.

Iroh’s reply was

Although his musings of wisdom are given within the constraints of the animated fantasy, most of his wisdom can be applied to one’s life and some in investing too.

Aarti Drugs Limited was established in the year 1984 and is part of Aarti Group of Industries, The Company is engaged in the manufacturing of

  • Active Pharmaceutical Ingredients (APIs)
  • Pharma Intermediates and Specialty Chemicals and
  • wholly-owned subsidiary- Pinnacle Life Science Private Limited focussing on formulations

For a company of its size (sub INR 5000 cr sales), it seems to punch above its weight targeting specific APIs / compounds and then gaining world dominance

 

And API is a tough business to be in

ADL has been continuously striving to keep its costs to minimum … Read the rest

Jump to Youtube

I have started recording new content on the youtube channel, subscribe to the channel to always get video in your inbox. Some latest videos are

1. Gold Investing
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Please let me in comments about what else you would like in upcoming videos.… Read the rest

Idea update & Ashiana AR Markings

Ashiana is a perfect example of a good company caught in an extremely difficult external environment. The industry was facing a slowdown and COVID is going to give a death blow to many, given their balance sheet they will survive but as Investors best is to forget that you own stock for the next 2-3 years.

My highlights from the Annual report can be accessed here
 
PS – Evernote highlights are best viewed on a desktop

Portfolio Addition

 … Read the rest

Buffett’s $1 Test on ITC

ITC is the one stock today which is splitting investing community in half

 

It has got attention from even famed traders

 

As good students of history we will go back to what Mr. Buffett had to say on management efficiency

“Unrestricted earnings should be retained only where there is a reasonable prospect – backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future – that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors.”

1984 Shareholder Letter

Now let’s put ITC’s management to this test, steps are easy

  1. Calculate retained earnings of ITC (net profits – dividends)
  2. Sum retained earnings for rolling five years
  3. Measure market cap delta against every rupee retained

here is the result

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CERA Sanityware – All’s well?

In my last update to you in 2017, I had pointed out that the Important variables to track for this company are

  1. Topline growth
  2. Return on Capital not impacted due to tiles expansion – Currently, it is about 30%
  3. New business growth
  4. No further declines in PAT margins (Somany’s margins are low – Pure Tiles player)
  5. Continued investment in branding and promotions

Let’s revisit all of them

  1. Topline growth has de-grown for the first time in many years in Mar 2020, management indicated in call that this was due to COVID lockdown in the last few days in March, the overall quarterly trend for last 2-3 years is also not inspiring

2. ROCE is steadily declining from ~30% to ~25%, part of the blame is tiles division, the other part is excess cash retained in the business (INR 230 crores)

3. Tiles business has grown from INR 170 cr topline to INR 265 Cr from 2017 to 2020 and they have added a new category called Wellness which caters to high margin audience

4. PBT margins are stable as per the above graph

5. These expense has been trimmed down and the company indicated in concall that  they can save … Read the rest

Why I like ETFs

I have been an active stock picker since 2008-9 and this is the first year I have got my hands-on ETFs

So what are ETFs?

An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index

Lars Krojier has written an excellent book (Investing Demystified) on ETFs and you can get a good summary from this video series, I encourage you to spend 30 mins to go through them.

Like always I like a theory but I wanted to see numbers and once numbers stacked in favor of ETFs I got sold and started adding them to my portfolio.

How did I do the numbers?

I compared returns from Jan-2018 to Jul-2020 on a momentum portfolio, large indexes and active stock decisions I took between those dates

Why Jan-2018 as a starting date?

In Jan-2018 I had subscribed to a very well respected momentum service for their sake it will remain unnamed

What were results

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Granules India – A Value Migration Story

According to Adrian J. Slywotzky, “value migration” is the flow of economic and shareholder value away from an increasingly outmoded business design toward others that are better equipped to create utility for customers and profit for the company.

Mr. C Krishna Prasad, Chairman of Granules India gave us a glimpse into the future of the company and their aspiration to move into the upper echelon of the industry

Our Company is in the midst of an evolution. We have built a strong base business that will continue to grow as it gains defensible market share while expanding profit margins as more of the business comes from formulations and quality conscious customers.

While we are currently synonymous with large-volume products, we have taken several steps to move into more complex offerings. We have leveraged our existing capabilities to turnaround Auctus’ API operations which will be vital as we file ANDAs to expand our FD portfolio.

Annual report 2015

It’s one thing saying and its completely different thing delivering it, the below chart depicts their 10-year transformation journey

Many were willing buy generic viagra visit for more to pay because of the high cost of … Read the rest

Ajanta Pharma – Pivoting its fortunes

Let me refresh your memory from this 2015 chart on how Ajanta pharma, Granules India and Suven Life Sciences were operating in different sections of the industry

Five years and things have turned on their head in 2020

  • Ajanta Pharma – Started selling in regulated markets
  • Granules – Set upfront retail shop in the US
  • Suven – Has moved into API manufacturing at scale

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each of them had their own niche and slowly build complementary capabilities. Nothing depicts the pivot made by Ajanta pharma better than below chart

 

from no presence to getting 1/5th of their is sales … Read the rest