THE FUTURE OF CYCLES – 17 – MASTERING THE MARKET CYCLE

Posted on May 31, 2020 by Jimit Zaveri under Bibliophile: Mastering The Market Cycle

Cycles in economies, companies, and markets

MMC17 01-min

If we follow above points mentioned by Mr.Howard Marks then definitely we can take advantage of market cycle and able to generate above-average return.

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “HAVING A SENSE FOR WHERE WE STAND”

The above link will help to understand how good news flows and media get crazy with higher index targets. In the above link I have compared 2017 with 2007 and given indication in 2017 for the upcoming bubble.

Nifty 12000 – Here, we can see that the media start celebrating when the market has approached new high. Such acts motivate to retail investors and that will lead to more market participation.

We can get an indication of the market bubble when we observe our surroundings.

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Investors try to predict bottom and still in the Fear Of Missing Out (FOMO). I am getting calls from many of people who are unaware with market, own little knowledge of market but tend to predict stock moments. They approach me with catching bottom, ask for advice (not actually, they want to get confirm with me) that they should invest right now otherwise they will miss out current opportunity.

People are involved in any of the decision-making processes whether it is in the economy, investing world, or anything else. So those human emotions also getting involved in the process. This resulted in more euphoric behavior at the wrong time and more desperate behavior at the wrong time by people. That will have resulted in the cycle. If the machine involves in the economy then it will not have a cyclical move.

The market has never moved in a straight line in the past and never will be in the future. So that we need to understand the cycle and need to take benefits from it. People think that excess bull or bear remains but that excess behaviour has to correct and that will have resulted in the cycle.

We can keep journal for events happens to our surrounding, major corporate deals, the behavior of people with us knowing that we are an investment professional, hot sectors which attracting major participation, junk starts flying, innovation in valuation matrix, etc. We cannot predict when the bubble will burst, but we can save ourselves from getting burst during bubble takes a journey towards burst. When we initially prepare ourselves for the upcoming bubble – burst then it will be going to happen that others will consider us a fool but we should accept being a fool rather than face huge damage to our wealth.

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

Mark Twain Don’t Get Attached

Posted on February 10, 2019 by Jimit Zaveri under Bibliophile, Bibliophile: Big Mistakes

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When we have an expectation from anything then it will start creating an attachment towards it. Such attachment can affect us while our expectation does not meet in real. Attachment ties us with particular things and we cannot able to go away from those particular things. So that we should be reasonably expected from our investment and never ever get attached to any of the investment made by us. When our assumptions got wrong then we should exit from the particular investment. But due to ego, attachment towards an investment, we keep on holding a wrong investment also. Many a time, Initial small losses can be transformed to the huge losses due to our attachment towards our investment.

Many a time, we all have experienced our thought – “I will exit my investment when it comes to a break-even” when we are in loss, we keep on thinking that how much more it will go down; let me add more money to the same idea. Such thoughts can kill us without informing us.

We need to focus on capital protection because –

Percentage Fall	Percentage to make up for the capital to 100%
10%	11%
25%	33%
40%	67%
50%	100%
60%	150%
80%	400%
90%	900%
95%	1900%

If we fall by 10% then we need to rise by 11% to reach a break-even point. And similarly, 100% require when we fall by 50%.

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When we come to know that we are wrong then we should exit from a particular investment rather put more money to it. Many of us make such mistakes where we keep on averaging our losing ideas. We should have a stringent process where we should have a clear exit criterion also so that we should not be affected by emotion. Having a clear process is to work as a blessing for us during the worst time of our investment journey.

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Mr. Twain has declined to make an investment which was suggested by Mr. Bell. Mr. Twain considers himself as well informed and well experience but in reality, he has an experience of failure to the investment field. We have to analyze ourselves whether we are really well experienced or not. And we only can perform such own analysis when we do not have an arrogance, overconfidence and ignorant into our mind.

I have seen many investors/analyst who has made plenty of mistakes and wrong investment decision but they consider themselves as a well experienced and more knowledgeable investor compare to others. They are not ready to accept that they have a history of failed investment, they do not realize it and learn from it. They keep on repeating those mistakes again and again. We should come out of from the behavior and work on what we know and what we do not know our strength and weaknesses, in-short self-analysis, knowing ourselves better than others. When we come to know about our strength and weaknesses then we can have a chance to perform to overcome our weaknesses and stronger our strength.

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We need to identify that we are wrong and for that, we have to be self-analytic. As we come to know that we are wrong then we must have to admit it and work on come out of it. If we found that our investment was wrong then we should book it without looking to loss or profit. I know it is difficult to do. I also got attached to one of the newspaper business at the initial days of my career and it took one year to admit my mistake and booked losses. But that investment has taught me that when you realized regarding the wrong decision than first go and close the position. Otherwise, it will stop us from focusing on the right decision also.

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This is the best way to manage our risk. I can give one example of the same. If I have a one investment idea where I want to make an investment and I am ready to take a loss of Rs.30 per unit of investment. Now, I count 1% of my portfolio (Let’s say as an example, it’s an Rs.1000000) so 1% of Rs.10,00,000 I.e. Rs.10,000. So that I should buy 333 units of particular investment (Rs.10,000 / Rs.30 loss I am ready to take). Here, if I go wrong then also I have taken a risk of 1% on my entire portfolio which helps me to stand for a longer period of time. Percentage of risk is different by person to person and probability of winning and losing from the particular odds.

Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

WARREN BUFFETT’S LETTER – 1996

Posted on October 20, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter – 1996

Acquisitions

Kansas Bankers Surety (KBS)

The company is an operating into the business of insurance which has a presence in 22 states, decent underwriting record with Don Towle as a manager. They made a deal to acquire a company at $75 million.

FlightSafety International

The company is the world’s leader in the training of pilots. The company operates in 41 locations, outfitted with 175 simulators of planes ranging from the very small, such as Cessna 210s, to Boeing 747s. About half of the company’s revenues are derived from the training of corporate pilots, with most of the balance coming from airlines and the military. They made an acquisition at $1.5 billion.

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We need to prepare a list of the errors which can be dangerous for the health of our investment and work to avoid those errors. If we work on the avoiding mistakes then we can win 50% of the battle.

List of mistakes which I have experienced during my investment journey –

Never ignore the true value of the company—Every business has some value and that we should not have to ignore. If we commit such a mistake then the market will defiantly punish us. Be careful with the true worth of the company and only buy it when it falls below its true worth. And if business not available below its true worth then ready to missed that opportunity. Loss of opportunity is better than the loss of capital.
Don’t buy HOT —-If we buy the hot business such as recent trend, new IPOs, business on which everyone is bullish etc., then we must have to exit it at the proper time. So if we aren’t able to exit at the proper time then it’s better to let it go such opportunities. If we buy HOT then that HOT will BURN our portfolio.
Buying a high leverage business — We need to avoid a business which has a huge borrowings, such borrowings can kill the business and also kill our investment journey.
Using the wrong valuation method — Every business will not get valued with a similar valuation matrix. We need to identify the nature of the business and then value a particular business. Such as we should not use the valuation matrix of growing non-cyclical business for cyclical business, should not use the valuation matrix of assets light business for assets heavy business and vice-versa. If we made such a mistake then whether we might miss a decent investment opportunity or we might lose our capital.
A mistake of buying a story, not a fundamental — I have never ever made such a mistake because I am a hard-core lover of numbers. But I have seen many of the people who always focus on the story and also which is very trending to the market. I believe that without the support of numbers, no story can survive for long. In the year 2014-15, Logistics stocks due to GST gets a trending story but due to lack of good numbers, the story gets failed. People generally avoid numbers due to lack of understanding of it. I firmly believe that “Stories are for kids, not for investors.”
Investing without a process and philosophy — I can overcome this mistake at the initial period of my investment journey and that is only because of my guru – Neeraj Marathe Sir (who always believe on having a process and philosophy for making an investment). I have seen many people who spent lots of time into the market but they do not have any process or philosophy. They change their philosophy as they meet various people. If we do not have our own process and philosophy for making an investment then we will not able to create a successful investment journey. I also learn from my guru that we must have our philosophy in a written format so that we can refer it over a period of time and stop ourselves from occurring a mistake.
Not using a checklist — We should have a checklist for a business, industry, financial, management etc. so that we can focus on the points to study and also not forget any point to study. I am using a checklist for the last 3 years and I can say that having a checklist helps me a lot. My checklist keeps on improving as my experience grows.
Making an investment decision with disturb mind — We should avoid making an investment decision while our mind is disturbed. Disturbance in mind will end up with the faulty investment decision and which can be harmful to our wealth.
Cloning a well-known investors/fund managers — Again I can overcome this mistake at the initial period of my investment journey and again credit goes to my guru. If we have our process and philosophy then we will not try to clone others. I have seen many people who have spent 10-15-20 years to the stock market then also not having any process and philosophy & they clone others. Many of the people have cloning as their investment philosophy because they love to use shortcuts. I always remember the quote of my guru –

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When Company does not have an opportunity to reinvest earnings at a higher rate than the company should distribute those earnings to the shareholders so that they can use it somewhere for getting a higher return. If the company does not have a good opportunity to reinvest earnings and then also company does not distribute earnings as a dividend then we need to be careful with a company (Question on the capital allocation decision of a management or earnings can be manipulated or business always needs a huge capital to sustain only).

Examples – No/Low growth high dividend payout

Examples – No/Low growth low dividend payout

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We need to check the above-mentioned factors in the company where we have made an investment and where we want to make an investment. Most important is to gain a market share. The company cannot able to gain market share, though the company has a competitive advantage then that competitive advantage not useful for us. We should not focus on the leadership position of the company rather need to focus on the companies which focus on the manufacturing, distribution, packaging and product innovation. Market leadership can be changed if the company does not focus on the mentioned points.

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According to Mr.Buffett, paying a higher price does not risk for the good companies compared to paying higher prices for the bad companies.

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Let me take an example of one the biggest wealth creator company of the Indian stock market—

INFY Chart

If someone has bought this company during the March-2000, at the high price of around Rs.431 then after the 16 years of the period, he gets returned at 7% CAGR. And if enter to the similar company at the low price of around Rs.275 during the March-2000 then after the 16 years of the period, he gets a returned of 10% CAGR (*Considering all-time high price for calculating returns). Though revenue has grown at 30% CAGR, Operating profit grown at 27% CAGR and Net profit also grown at 27% CAGR during the same period with supported by a good management team. During March-2000, the company was traded at 64x P/E at the low price of Rs.275 and this multiple is common nowadays.

When management of a good business diverts their focus into the business which is not performing well then such decision of the management affect the performance of the business.

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Example – We have seen examples such as liquor manufacturer enter into the airlines business, airport contraction business has diversified into the power business.

Mr.Buffett has also mentioned the Circle of Competence concept –

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