What you pay to own a business is price and what you get is value.Price is certain and upfront & value is conjecture & will evolve over time in future.Value is present worth of company as judged from estimated cash flows that company will generate over time.Assessment of value depend upon magnitude,certainty,timing,pattern,volatility and longevity of those income flow.

  1. Successful investing calls for judging the value right, setting the purchase price at good discount,revisit the equation time to time and enjoy with patience.
  2. What creates value is about identifying large opportunities that has earning growth ,growth with longevity,predictability and relative smoothness,top notch management that lets value of business be nurtured,protected and shared equitably and getting at the price with adequate margin of safety.
  3. The difficult part is getting right psychological traits, a disciplined behavioral make up, quite sense of innate confidence(not arrogance and rigidity), a sense of serenity during adverse marketing condition & an independent,curious mind.
  4. Investing is all about collating,assimilating and using all insights about a business available at a time,analyzing it from diverse perspectives and finally forecasting of that future.When the process is done with integrity,intensity and intellect, the outcome is normally good.
  5. It is impossible to operate only on the good part of market curve and always being able to avoid the bad one.Those incredible timing skill are not well endowed or proven. Equity investing is indeed long term even though it is not considered fashionable these days.
  6. Size of opportunity is foundation of investment edifice, on which the large value creation rests.It describes the opportunity and duration of growth of a business. It is about notion of whether a business can grow at meaningfully high rates for meaningfully long duration.
  7. The idea of growth is derived from idea of size of opportunity & the idea of sustainability of high growth is derived from character of opportunity,size of opportunity and vision and competence of management.When two gets combined,it becomes a compounding machine.
  8. It is delta or rate of change which determines value creation, in sense that fundamentally large and sustained rate of change can only come when there is large size of opportunity which is not yet fully tapped into.
  9. Business may have profitability,superior capital efficiency,favorable economics and competitive dynamics,may have reasonable current growth & yet it may fail to create efficient compunding ,simply because it may about hit a glass ceiling. Value creation dies when future growth stops.
  10. Selection of an individual business with the high potential sectors should be done base on what opportunity size they represent. Care should be taken to avoid a business focussing on a very small sub-sector withing sector, specializing in very small niche area or is unable to tap the opportunity.
  11. While size helps,what matters more is the character.Also,more than present size what it will become is more critical. Character is ability to create economic value by generating superior capital efficiency,its ability to ward off competitive challenge and to thrive over time.It enjoys moat which gives pricing power or resilience to external threats. Size of opportunity will provide headroom for growth and character creates economic value out of that growth. Size +character completes the picture.
  12. Ultimately, returns in investment are a function of earning growth,quality and predictability of earnings,quality of management and margin of safety.
  13. Real trade off is not about large and mid cap, it is about quality or lack of it, whether earnings are real or cosmetic,whether earnings are backed by capital efficiency which will create value or whether earning will sustain or not.
  14. Price of equity over long term is nothing but a slave of earning and its relentless growth over a period of time.If the earnings are real and if they keep growing, that will definitely reflect in the price.
  15. Equity is all about growth-bigger is the amplitude of growth and greater is the longevity of growth,stronger is the compounding and higher is the multiplication.
  16. A quality of growth sustained over time will enhance value.Even if one has misjudged the value and overpaid, rise in value over time will give a chance to catch up and will let avoidance of permanent loss of capital.
  17. Market tend to view capital dilution with healthy skepticism. Non dilutive growth reflects that business has intrinsic character such that it can grow relentlessly & yet not call for more and more external capital.
  18. Business entailing significant capex and business with significant capital dilution are an anti-thesis to earning good returns & provide mediocre returns. It cannot create a sustained value over long time.
  19. When ambition overtakes sensible economic logic, business size may be burgeoning, but actual value created may keep diminishing and get impaired. Such business not only erode past value created but also render sterile all the intermittent capital raised since then.
  20. Per unit market returns for a unit growth of profits is less for acquisitive growth, than for organic growth. Organic growth is durable and suatainable and market value this sustainability factor of internal growth much higher than acquisitive growth.
  21. Within acquisition what has worked better is goliath (bigger firm)acquiring david(smaller firm) rather than the other way round.
  22. Diversification happens for many reason- 1 when existing business is getting saturated 2- when management believes they can explore new avenues confidently 3 when purse is heavy and idea is few 4 when idea of grandeur overtakes rationality of economic logic . During the period,when situation is unfolding ,market tends to take a muted view of situation,till managment prove their ability in new area through performance.
  23. “Owning stock is like having children: dont get involved with more than you can handle”-Peter Lynch.
  24. There is only a limited capability humans have and even the best of managements have capability confined only to a particular area or very limited number of activities at best. When even the best of management try their hands into un-related or less related activities, record of their success has been rather patchy and uncertain.
  25. Buffet-”The stock market is a no-strike game,You dont have to swing at everything- you can wit for your pitch.There is only few opportunies worth swinging at, for any business.It is best to disregard the cajoling of cheering crowd to act.
  26. Quality of business is ability to generate superior,consistent,predictable and durable ROCE.It essentially stems from moat like pricing power of business, protected intellectual advantage,legally sanctioned monopoly,valuable brand, an exclusive technology,favorable customer goodwill,lasting cost advantage and the like.Absence of moat means weak quality of business which will erode over a period of time.
  27. High capital intensive business is ill-designed to create lasting and /or superior value over time. High capital intensity fundamentally lowers value creation through increased operational risk and reduced capital efficiency, thus exposing business, over time, to vulnerabilities if not failure.
  28. For a business to create a value, it needs to have low capital intensity both on fixed capital and working capital.If capex is must,then better to have capital intensity due to working capital rather than fixed capital. Due to rigidity of fixed capital, it becomes difficult to modify the fixed capital intensity with change in business condition.
  29. So the business with asset light and income heavy has structurally the capability to preserve and create lasting value ,if it also has superior ROCE.
  30. Persistent and superior capital efficiency is the single most important evidence of quality.Value creation can occur only if there are economic profits..
  31. Consistency,durability,predictability & superiority of ROCE is the acid test on which economic value creation is tested.
  32. Hygiene of ROCE gets reflected more vividly in balance sheet rather than P&L statement. Whether fixed capital commitment is frugal and whether capital is optimized due to better and efficient run management will have bearing on total capital employed and in turn have bearing on ROCE.
  33. The reason for high performance over a longer period of time includes 1-very favorable entry price 2-large and growing size of opportunity 3-Great clarity of earning growth 4-Higher predictability of earning 5-superior management quality 6-outstanding capital efficiency 7-no capital dilution for a prolonged period
  34. Preservation of capital means 1-not losing capital 2-growing capital over period of time.The real root for preservation of capital comes from quality of business and quality of management. Quality of business is its ability to generate an outstanding return on capital employed, sustained for a long period of capital, consistently and predictibly.
  35. ROCE reveals the inner core of businee,it shows that the character of a business is so much harder to change. An ugly business cannot be whitewashed and made to look like cindrella .Equally, high quality business even if faced with temporary setback or challenge,will be able to fight back and recover.
  36. The superiority of business is inferred from superiority of ROCE and the superiority of management from superiority of the ROE. ROCE and ROE are critical parameter to compare, on a consistent basis, across business and management.
  37. Integrity,vision and execution capability are key tangible determinant for judging the quality of management.
  38. Quailty of business precedes the quality of management. It is much harder to change the core character of business .An ugly duckling cant be brushed up to be swan.
  39. The good business, because they possess compounding power, represent a continuum rather than a point to point participation which is a case with bad business. Therefore, good business is actualy an investment compared to bad one which is a trade. Hence, good investment is matter of skill, while profiting from bad business boils down to a game of chance.
  40. Capital allocation is fundamental test for judging the calibre,temperament and character of management. ABility to manage a business is as important as ability to recognize what one is not competent in.Unnecessary diversification must be avoided.
  41. Wisdom lies in ability of management to know,where to allocate capital and having courage and conviction to remain focused and having character to judiciously remain away from allocating incremental capital to business where there is lack of core competence.
  42. Another important trait is- management of capital distribution. Even a good management fails to recognize that unwanted cash stored is actually a dilution of economic value & it doesnt indicate a strong balance sheet. excess cash indicates 1-misadventure into greener new pastures 2-Loose operational management & slackened efficiency 3-Control-freak orientation of management 4-dilution of ROCE and ROE 5 slackening the tightening of operation 6-possible infilteration in inferior new business which management has no core competence.
  43. High dividend payout ratio out of free capital builds faith. Good payout usually goes along with good business, a persistent decline of dividend payout would be marker for the diminishing compounding power of business.
  44. Conglomerate complexity leads to less value creation as market tend to respond to complexity with a set of emotion ranging from confusion,skepticism and even disdain.
  45. when bad business is mixed with good on; capital generate by good one is sucked out by bad one and overall outcome will be suboptimal.Also difficult business demands more time and attention.
  46. Misgovernance by management is not treated by market in positive way. Market have long memory much like that of elephant. When intent is not trusted, the value put on the numbers will diminish since market will prefer to shrink value to cover for a possible future cash and thus undervaluing business and management.
  47. When management displays penchant for foraying into newer and newer activities,then one has to view with deep suspicion because risk of going kaput would be high.
  48. It is really the value which is the master and price is eventually expected to obey the master.Price,like servant, can often be unruly,unpredictable,volatile and temperamental while value is more serene, more enduring and long term in character.By definition, price will oscillate all the time, while value doesnot go through wild gyrations.
  49. Price= fundamental value +-noise. Factors like greed,fear,ignorance,& hubris represent noise and sentiment,which intervene and distort the real discovery of value.
  50. The only predictable manner in which you can hope to make consistent and durable returns , is by ensuring that the value is ahead of price, which calls for a) an ability to understand real value of business b)having discipline to acquire that asset at discount c)hunting as high a discount as is possible to the value so that you improve your potential for return and also increase your margin of safety d) After acquiring good asset at good price,sit it out and dont unncessarily flirt with it for any reason.
  51. Investment task is to identify quality business ,identify its value,set a purchase price keeping in mind adequate margin of safety and then to sit out patiently without losing the perspective.
  52. Cash flow over time is the only enduring reality: Accounting profits and PE multipliers are popular, but unreal past times.
  53. Business has to generate FCF over every reasonable period of time and material FCF over its lifetime, for it to create value. More strignently, business has to generate OCF in virtually every single year or period.That is must for value creation.
  54. Basis of value creation is high ROCE. Thats the base condition,thereafter,there will be confluence of quantum/consistency/durability of growth,management quality and value. Consistent and long term value creation is function of superiority of business and its quality.Extent of value creation will be a function of growth,its predictability,management quality and valuation.
  55. It is about udging the size of opportunity, growth of profits,quality of that growth,its sustainability,management quality and the rate at which you dicscount future into the present.Most other aspects are noise and have only temporary effects on the price.
  56. Between two business with an identical ROCE and an identical consistency of growth rate, the business with greater in-built predictability will logically command a higher value.
  57. Ability to grow for a very long period of time is evidence of secularity and ability to grow in a very predictable manner is a measurement of consistency.Both secularity and consistency are foundation of value creation.
  58. A business doesnot have to grow its earning in fits and starts; it just needs to do it steadily.Consistency is what has happened in practice over a period of time and an observed consistency results in continual improvement in the valuation of the business, because sheer consistent delivery itself make people stir up and take notice of the business.
  59. Growth is key element for value creation.While quality is first filter,growth is a very vital fuel which is required for value creation engine to charge ahead.Without growth,value cannot be expanded even if the business happens to be in an excellent sector.
  60. Market is not rear view mirror.Windshield is needed for driving ahead.One needs history to understand and establish principles that identify value creation thoughts and practice.What will then matter is not the past history of company but the future opportunity. Investing is all about future-it is future which is guiding destiny of an investment
  61. When subtle or swift changes are taking place in the character of business, for which it is not prepared ,long term future of business comes under threat.And greater the time taken to grapple with this reality and to recognize and deal with this reality, greater will be the destruction of the value and business in the market.
  62. Cancerous growth is not progress; it is destructive. Growth creates value only if growth is value adding.It adds value when, adjusted for time value of money, greater cash inflows occur than outflow.Quality of earnings encompss 3 factors- predictability of earning b) consistency of earning growth c) superiority of ROCE through which earning growth has been achieved.
  63. ROCE provides backbone to ship aka business to fight harsh condition while wind aka earning growth provides momentum and progress to the ship.The best combination is high ROCE and high growth.
  64. Good to great business + superior earning will lead to disproportionate results.
  65. When a multibagger happens in a very short period of time, chances of sustaining for a prolonged period are rather poor.
  66. If ROCE is fractured though high,even with same consistent earning growth ,compounding will be less than proportionate.When the ROCE deteriorated, the compounding of rturns for every incremental rupee of profits declined more than proportionately.
  67. Once the mindset is to avoid a permanant loss of capital, then you dont need to flirt with a large number of inferior business, to adopt dangerous investment methods to make money, to make flamboyant assumption to see opportunity in business when there is none and also to avoid mindset of rush.
  68. If the mindset is reasoned,calibrated and biased for quality with patience, then that is game which is a winning strategy in investing. Quality grows over time, patience will let it flower fully.
  69. The idea is not to look at valuation as first filter but quality as the first one.Having discovered the quality,we must fund the discouted price for proper margin of safey. It is always quality at an attractive price.
  70. Mr market is not he place for excitement. In stock market, perfectly boring and dull can produce extra ordinary results
  71. THe behavioral aspects of trying to prove the world that one has discovered something unique, on a voyage , makes an investors do,at times, bizarre and dubious things.
  72. Risk lies in whether there is enough comprehension and understanding of the business, the depth and capability of management, visibility of the future of the business,its value and whether one has psychological skill,discipline and courage of conviction to buy, with a healthy margin of safety, & being in the game,without being arrogant but with conviction & without sailing with popular trend of the market, & yet remaining observant.
  73. Good business get better with time.They compound while bad business fractures over time.Good business still retains a very high probability of avoiding any personal loss of capital, arising from any valuation mistakes.
  74. As long as you know the value,if that is real and you do nothing about volatility,there is no real risk.The risk comes, when we act on volatility, rather than act on what we know.
  75. Every lousy profit is a foundation of future losses.When one profits from a mediocre business,it is lousy profit. When one deals with a crooked management and yet make gains ,it is a lousy profit.When margin of safety is negative and yet one makes money, it is a lousy profit.
  76. A good investor has to act, on what he knows,carefully, watchfully while remaining observant.But not acting is not an option.That will take away from benefiting from ones knowledge.That is similar to acting against one own self.
  77. Crowd is not always wrong.But ,it often is.Independence is tested, & severly, when the price and value run afar. More it does so,over a prolonged period, more severe is the pressure to yield, to supplicate and to be subjugated. Capital preservation and large gains are the fruit of an independent mind, investingis not a popularoty contest
  78. Low beta over a period of time provides better risk-adjusted return than the high beta.Usual market participants are short term animals and hence chase short term returns by preferring higher beta, leaving low beta systematically undervalued over time. Loe beta over a period of time actually provides a superior risk adjusted return
  79. Usual market participant collectively as class, are very short term animals,it keeps chasing short term returns by indulging in series of high activity, short term trade behavior,in order to profit at every short burst o time.They constantly move from one wave to another and a third fashion to a fourth fad.
  80. Systematically low beta stocks remain undervalued and actually provide a great opportunity to a patient investor to spot this inefficiency and take full advantage of these long term opportunities and profit beautifully.
  81. Remaining confident yet genuinely self-critical and observant of ones decisions and decision making process, independent yet flexible , ethos and bias for constantly learning rather than ego are the personal attributes that make a key difference between good returns and great returns or between positive returns and losses.
  82. Investing outcomes is not only a function of ones intellectual ability, but also a functions of ones capability to control the emotions of temperament.It is vital to not only know what is right but also practice what is right.
  83. The art of being wise is the art of knowing what to overlook”. Attempt to embrace and analyze every idea is neither feasible nor proficient. Inclusion as a principle has more use in politics and social science but not in investing.Exclusion ,its method and its fineness are virtues in the field of investment. Only a few need to come through, which can be studied well. Net should be so fine that only a few things can come in and most will be repelled back. Once dross is removed from gold ore,the truth sparkles like gold.
  84. The skills required to preserve capital are- 1) to understand core principles which creates value. 2-strong and disciplined mindset to adhere to these principles 3- having the sagacity to leave the game when game is not worth playing. When market price is higher than intrinsic value or has complete bearing of underlying economics or impossibility of business to generate economic returns from that heady price levels, then one has to leave the game.
  85. One may know value and yet one may not act upon it. Which is why investing is not about intellect but also about wisdom.Intellect helps in judging the value but it is wisdom which will help you in carrying it through wen the market behaves contrary to what one believes and yet staying course about what youknow rather than surrendering to whiplash of mr market.
  86. Ego is expensive hobby to have in market. Ego blinds mind from rationality.It makes investors discover virtues from dross. It also makes investors to be on a voyage to find that next , new idea -wich has more novelty and less virtue. Ego is a sin in investing.
  87. Rear view mirror is meant to avoid specific accidents but driving quality, ensuring good results and even avoidance of other types of accident are entirely a function of front screen.
  88. falling in love with what you own and filtering away that information which runs contrary to what we own are significant pitfalls that an investors need to avoid.
  89. Temperament and serenity, aided by unleveraged money , help an investor to deal with panic situations of the kind which are natural to arise, when faced with drawdowns.
  90. Knowledge of the business invested and its value is the only real protection against losses and essential for enhancing returns.Judicious balance between diversification and concentration is valuable idea.
  91. You are neither right or wrong because crowd disagrees with you. You are right because your data and reasoning are right.
  92. Investing is not a democracy.It doesnt require a majority approval. Equally it is not popularity contest that demands it to be liked for it to be succesful.
  93. The ability to act on what one believes in face of hostile majority against you, is an advantage and not threat.Independent mind and solitude are virtues in investing.
  94. Many times it looks attractive to ride the cycles and trade in and out quickly and make opportunistic gambits because market have become viviously punitive and mistakes get punished disproportionately in a rather short period.
  95. Any patient investor who has made the right identification and is willing to hold for a considerable period will make handsome return, because volatility is not thread but friend of a good investor because he doesnot have to go and hunt, rather opportunities come knocking on their own.
  96. There is tendency to confuse information as knowledge ,given there is so much information from all side.Investors feel when they get information,they have compelling need to respond to it.Constant inundation of information is resulting in flurry of activity and volatility of price,giving you an illusion that price,if you dont catch it, may run away.But the reality is actually to the contrary.
  97. A short term player with impatience is likely to be an easy fodder and may get consumed by this volatility, due to interplay of psychological force of greed,fear folly and ignorance. But for a patient,knowledgeable and long term player who is clear about what he is doing, the volatility is a friend and a boon because he, with his detached demeanor, will have greater chance of getting opportunities on the platter.
  98. When the markets are in exuberant mood, participants tend to believe in its continuance and when market are terrible, people just want to disengage to cut the pain. Cycles are permanant , so long as human traits of greed,fear and arrogance bound.
  99. Investors should reduce frequency with which they check how well their investors are doing.Closely following daily fluctuation is losing proposition, because the pain of frequent small losses exceeds the pleasure of equally frequent small gains.Deliberate avoidance of exposure to short term outcomes improve the quality of both decisions and outcomes. You are also less prone to useless churning of your portfolio if you dont know how every stock in it is doing every day.
  100. It is only when you do more with less that you improve the quality of business and enjoy a superior ROCE. When core is compassionate, it reflects the integrity, care and fair behavior of the management.

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