If the new thing you are considering purchasing is not better than what you already know is available then it hasn’t met your threshold. This screens out ninety nine percent of what you see.
- Charles Munger
The above quote is not only applicable for new stock additions to your portfolio, but also to any goods you want to buy or find it as an attractive replacement to what you already know. If I go to a departmental store and see a new brand of biscuits; attractively priced than the one I regularly buy, I would look at two things first. 1) Whether the biscuit is from a reputed manufacturer, 2) What are the ingredients and is it comparable to my regular brand.
The first question answers whether I can trust the new product (to what extent determines my trust with each company and its various products I have tried so far) and spend the money even though it is bargain. The second question makes sure whether I can quickly decide how much value I am deriving by making an apple to apple comparison with the product I am familiar with.
When I bought the new biscuit, my mind would say it is a bargain. But in true fact, it will become a bargain only after I taste it (at least few times; I always find it difficult to form an opinion on the first instance, whether it is biscuit or a shampoo). If the taste of the new product is equivalent or better than my regular brand, then only I can truly say the product is bargain. Otherwise, my purchase is 100% waste as it can't replicate the satisfaction I derive from my regular brand.
But there are various other factors also on play when we make a decision to buy a product. But keeping aside those factors, thinking along the lines of the above two questions helps me to come to a quick conclusion.
People can form their own filters which work for them based on their personality. These filters should help everyone in a long way to avoid petty expenses, which tend to have a big impact when repeated over a long period of time.
Sunday, November 29, 2009
Sunday, November 22, 2009
Bargain
At the company where I work, I had an interesting observation among my colleagues over the last two weeks.
One of our East Asian Country affiliate had some excess stock to clear. The regional management decided to buy the distress inventory and then sell it among the regional staff as well as their family, friends and other vendors who are interested to buy the products at nearly 60% discount to market price. This in a way helps the affiliate to write off the inventory and recover some cash.
Over several days, the marketing department fixed prices for the products based on the production cost and almost all the regional staff members were able to grab bargains. The happy faces could not betray their glee in their mind.
Subsequently the floor was opened to family members and friends. The marketing team which was constantly assessing the stock movement offered bargains for the marginal stocks to clear the space. Those who bought the same products found out the reduced prices and started regretting that they could have waited longer to get these products at 50% lesser prices than what they bought earlier.
At the end of the exercise, several off them felt, they could have got a better price, had they waited for the offers which came in at surprising frequencies. While many of them were happy they could get products at a much lower price, those who could not buy it at the further discounted price were much more unhappy and regretful.
The behavior was exactly the same exhibited by the stock investors in a falling market. Buyers who bought the stocks at a price they see value, start regretting when the stock moves southwards. If they are correct in their valuation methodology, they should be happy to buy the same stock at a much lower price and instead, they start to regret their early entry. At times, they build courage and invest further at each drop. But sometimes the market surprises them buy going down again and again, the churn in their stomach overwhelms their mind. Investors, who are confident of their investment decisions and lack further buying power, hold on to their investments, regretting their lack of fire power at an opportune time. Another group would stop looking at the stock prices, unable to tolerate the loss day-in-and-out, but will hold on to their stocks. The third group which follows the "stop-loss" theory would start to sell the stock, thus doing exactly the opposite of buy-low and sell-high they wanted to do at the beginning.
There would be several other set of behaviors investors could exhibit. But let us see what we can learn from the three groups highlighted above.
1. The first group is confident of their valuation of the company as well as the future prospects of the company and gleeful to utilise the opportunity provided by Mr. Market to increase their stakes based on their capacity. This group would be happy to look back few years later how wonderful their decision is if their judgments are correct.
2. If you had exhibited the attitude of the second group, you are not far away to join the first group. Few cycles of market downturns would increase your confidence level. These investors would have much more confidence down the line when they see that their investments done five or ten years back are still positive even after a substantial market correction, would increase their holding in the said companies confident off their future.
3. The third group helps the other two groups to buy the stocks at bargain prices. So we need this group without which the other groups can't exist. Looking at the skill set of so many investors around you, there would be so many falling in this category. If you happen to be in this group, improve your knowledge about the markets and upgrade yourself. But if the task is difficult, sell your stock holdings and invest in index or ETF's on a regular basis and concentrate on your regular job.
One of our East Asian Country affiliate had some excess stock to clear. The regional management decided to buy the distress inventory and then sell it among the regional staff as well as their family, friends and other vendors who are interested to buy the products at nearly 60% discount to market price. This in a way helps the affiliate to write off the inventory and recover some cash.
Over several days, the marketing department fixed prices for the products based on the production cost and almost all the regional staff members were able to grab bargains. The happy faces could not betray their glee in their mind.
Subsequently the floor was opened to family members and friends. The marketing team which was constantly assessing the stock movement offered bargains for the marginal stocks to clear the space. Those who bought the same products found out the reduced prices and started regretting that they could have waited longer to get these products at 50% lesser prices than what they bought earlier.
At the end of the exercise, several off them felt, they could have got a better price, had they waited for the offers which came in at surprising frequencies. While many of them were happy they could get products at a much lower price, those who could not buy it at the further discounted price were much more unhappy and regretful.
The behavior was exactly the same exhibited by the stock investors in a falling market. Buyers who bought the stocks at a price they see value, start regretting when the stock moves southwards. If they are correct in their valuation methodology, they should be happy to buy the same stock at a much lower price and instead, they start to regret their early entry. At times, they build courage and invest further at each drop. But sometimes the market surprises them buy going down again and again, the churn in their stomach overwhelms their mind. Investors, who are confident of their investment decisions and lack further buying power, hold on to their investments, regretting their lack of fire power at an opportune time. Another group would stop looking at the stock prices, unable to tolerate the loss day-in-and-out, but will hold on to their stocks. The third group which follows the "stop-loss" theory would start to sell the stock, thus doing exactly the opposite of buy-low and sell-high they wanted to do at the beginning.
There would be several other set of behaviors investors could exhibit. But let us see what we can learn from the three groups highlighted above.
1. The first group is confident of their valuation of the company as well as the future prospects of the company and gleeful to utilise the opportunity provided by Mr. Market to increase their stakes based on their capacity. This group would be happy to look back few years later how wonderful their decision is if their judgments are correct.
2. If you had exhibited the attitude of the second group, you are not far away to join the first group. Few cycles of market downturns would increase your confidence level. These investors would have much more confidence down the line when they see that their investments done five or ten years back are still positive even after a substantial market correction, would increase their holding in the said companies confident off their future.
3. The third group helps the other two groups to buy the stocks at bargain prices. So we need this group without which the other groups can't exist. Looking at the skill set of so many investors around you, there would be so many falling in this category. If you happen to be in this group, improve your knowledge about the markets and upgrade yourself. But if the task is difficult, sell your stock holdings and invest in index or ETF's on a regular basis and concentrate on your regular job.
Wednesday, November 18, 2009
Efficient Markets
Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day.
- Warren Buffett
Benjamin Graham has said that market is a voting machine over a short term period, and over a longer period it is weighing machine truly reflecting the strength of the company. Thus markets are efficient to truly judge the best from the worst.
But the efficient market theory has wrongly concluded a long term efficient market is also efficient in the short term.
This can be seen from the following example. During the height of the recent financial crisis, when the stock holders were assumed that all the financial sector companies were same as Lehman Brothers or Bear Stearns. This lead to the conclusion that none of the financial sectors are worth to hold and dumped the shares in droves. The result is a highly respected company like HDFC was quoting below 1300. Once the fear has subsided, the same market has re-priced HDFC at a price above 2500.
For a true "investor", market provides the opportunity to buy companies at great price and sleep well during every night.
- Warren Buffett
Benjamin Graham has said that market is a voting machine over a short term period, and over a longer period it is weighing machine truly reflecting the strength of the company. Thus markets are efficient to truly judge the best from the worst.
But the efficient market theory has wrongly concluded a long term efficient market is also efficient in the short term.
This can be seen from the following example. During the height of the recent financial crisis, when the stock holders were assumed that all the financial sector companies were same as Lehman Brothers or Bear Stearns. This lead to the conclusion that none of the financial sectors are worth to hold and dumped the shares in droves. The result is a highly respected company like HDFC was quoting below 1300. Once the fear has subsided, the same market has re-priced HDFC at a price above 2500.
For a true "investor", market provides the opportunity to buy companies at great price and sleep well during every night.
Tuesday, November 17, 2009
You're never going to be right nine times out of ten.
In this business (investing) if you're good, you're right six times out of ten. You're never going to be right nine times out of ten.
- Peter Lynch
In investing, always mistakes are going to happen. This happens because there are always some variables as the investor is looking for the future which is always uncertain and there could be surprises and mistakes which the investor may have not factored in. As the objective is to minimise the mistakes and maximise the profits, doing the proper spade work before investing delivers the results.
- Peter Lynch
In investing, always mistakes are going to happen. This happens because there are always some variables as the investor is looking for the future which is always uncertain and there could be surprises and mistakes which the investor may have not factored in. As the objective is to minimise the mistakes and maximise the profits, doing the proper spade work before investing delivers the results.
How and when to invest
If you took our top fifteen decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor.
- Charlie Munger
Munger is referring to the python game, with the principles in mind. Patience is the virtue of the value investor. Once you have the game plan, wait for the opportunities to come by, which will happen when the Mr.Market is in a bad mood. In between relax and enjoy the dividends and read the newspapers to keep you up-to-date with the happenings around.
- Charlie Munger
Munger is referring to the python game, with the principles in mind. Patience is the virtue of the value investor. Once you have the game plan, wait for the opportunities to come by, which will happen when the Mr.Market is in a bad mood. In between relax and enjoy the dividends and read the newspapers to keep you up-to-date with the happenings around.
Sunday, November 15, 2009
Think instead of calculating
People calculate too much and think too little.
- Charles Munger
Munger was 100% correct in his wordings. When looking for investing in a company, it is better to look at the business and how it functions and how the management is running the business. While the financial metrics do matter, these metrics are secondary as a result of the business functioning. To be a better investor, being a business analyst would be more important than a business valuer. The only way to become a business analyst is to think about the positives and negatives of the business and then keep up-to-date about the changes happening in the environment and its impact on the business. That would go a long way to be a successful investor.
- Charles Munger
Munger was 100% correct in his wordings. When looking for investing in a company, it is better to look at the business and how it functions and how the management is running the business. While the financial metrics do matter, these metrics are secondary as a result of the business functioning. To be a better investor, being a business analyst would be more important than a business valuer. The only way to become a business analyst is to think about the positives and negatives of the business and then keep up-to-date about the changes happening in the environment and its impact on the business. That would go a long way to be a successful investor.
Thursday, November 12, 2009
The Fifteen Points to look for in a Common Stock
1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of the current attractive product lines have largely been exploited?
3. How effective are the companies research and development efforts in relation to it size?
4. Does the company have an above average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?
- Philip Fisher
from Common Stocks and Uncommon Profits
2. Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of the current attractive product lines have largely been exploited?
3. How effective are the companies research and development efforts in relation to it size?
4. Does the company have an above average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?
- Philip Fisher
from Common Stocks and Uncommon Profits
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