Month: October 2021

Think Independent

I am amazed by the divide crypto projects have created among the billionaires. In a recently concluded conclave, Rakesh Jhunjhunwala said cryptocurrencies have no future

I have a thing for authority bias and if someone who is very smart and whom I respect takes a stance generally that would be a great starting position for me, if you are like me then I think this is something that you should fix.

Why?

First, let’s understand that as investors we have three edges

  • Information edge – Your ability to get valuable information legally gives you an advantageous position on an investment
  • Time edge – Your ability to invest long term and behave like an owner
  • Analytical edge – Your ability to interpret the same information differently from others will give an insight which most would miss, Howard Mark, call its second-order thinking

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Dividend or Growth

Short post

The Oracle of Omaha has beautifully summarised how to adopt a dividend distribution policy through his shareholder letters

 

Unrestricted earnings that can generate incremental earnings equal above generally available to investors should be retained or else they should be distributed back to shareholders.

This model forces the management to be capital efficient and creates long term wealth for shareholders.  Buffett also advised to do a quick dollar retention test to identify if management’s decision played out well over long term or not. Read post on ITC to understand how to run this test.

One problem with this model like all other look-back models is that one has to wait for 4-5 years before realising if the management’s capital allocation decision played out or not. The only option with investors is to rely on past track record and expect that management will continue to make smart decisions.

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Get ready to make next 200% in tail stocks

One of the perennial problems of value investors like me is my urge not to pay up , while the world is different now to the one when I started picking up 20 percent annual growers at 10 PE or less in 2009-10 there were few stocks  in my journey which always looked expensive whenever I have evaluated them Kotak Bank , HDFC , NESTLE just to name a few

Prof Bakshi has a superb article why quality is almost always undervalued from 2013 you can read it here

“More profitable companies today tend to be more profitable companies tomorrow.Although it gets reflected in their future stock prices, the market systematically underestimates this today, making their shares a relative bargain – diamonds in the rough”

How can someone overcome this dilemma in a practical manner ?

This is where the concept of tail stocks comes into picture. The practical implementation can be done in 3 easy steps

  1. Buy 1 stock each of your desired quality company that you would love to add to your portfolio and valuation is the only reason holding you back
  2. Create a google spreadsheet like this
  3. Any time the stock action changes to “BUY” in the
… Read the rest