Founders and startups

Fwd: Interest rate and Multiples

for example, the earnings stream of newspaper publisher Gannett Co., in which Buffett bought a minority stake in 1994. Buffett paid approximately $24 (split adjusted), or 16 times earnings, for 4.9 percent of Gannett's shares. At the time, 30-year bonds yielded 7.8 percent. Buffett's returns, compared to a 30-year government bond, have been exceptional (see Figure 5-3). Buffett, in fact, was willing to pay a premium for Gannett, based on the fact that Gannett's earnings yield would quickly surpass the yield on bonds. Going forward, analysts were projecting that Gannett's earnings would grow at nearly 13 percent annual rates. Thus, Gannett offered Buffett a compelling earnings stream, especially after bond yields fell to around 6 percent in late 1997.

 

Not surprisingly, Gannett's stock rose by more than 150 percent in the three years subsequent to Buffett's purchase. By early 1998, newspaper properties such as Gannett had been bid up to between 20 and 25 times

One way to think about valuations is inverse of 10 Yr bond rate + certain premium; 12.5x plus 4 x i.e. 16.5 x

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Best regards,

Chaitanya

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Value vs Momentum

Avanti Feeds - purists could have been bought only once in January (Gups)
L&T Finance holdings could have been bought multiple times in June and July
Vakrangee could have been bought in June and September
Federal once in October
RBL - multiple times but one would not be in the money
Bata - Could have been bought in July, October
Mahanagar Gas - could have been bought several times

Belief, participating in your belieg

Nifty Fifty

"Coca-Cola Co. After a steady climb to near $150 per share by late 1972 and then holding within a fairly tight trading range during the brutal decline of 1973 in the $130 to $150 range, Coke finally fizzled with the market in 1974, proving that even some of the bluest of the blue chips eventually fall when markets sell off hard.Near the end of 1973 Coke was selling off as high weekly volume escalated. By early 1974,Coke was down to near $110. The selling really hit home in late summer and fall of 1974 as institutions were unloading the stock. By year-end 1974 Coke was trading near $50 per share. This example alone should be a lesson to all that believing any stock to be immune
to declines due to its reputation no matter what is happening in the market is a dangerous mind-set.We’ve seen others in prior market periods (RCA, Xerox, etc.), and we’ll see others in future cycles (Cisco, Lucent, etc.) that were thought to be immovable on the downside prove to be just like all other stocks — they tend to move with the market, even if they sometimes seem to delay the inevitable"

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W ith the Dow approaching 9000, many a strategist has trotted out the cautionary tale of the Nifty Fifty, those beloved stocks of the early 1970s that came crashing back to earth in the bear market of 1973-74. Just as Microsoft and Gillette number among today's highflyers, back then members of the Nifty Fifty such as Avon Products ,Polaroid , McDonald's and Walt Disney flew way above the rest of the stock market. In fact, some of Nifty Fifty were changing hands at 70-90 times earnings, and value investors have long viewed the Nifty Fifty's subsequent swoon as proper retribution for unbridled excess in the marketplace.

But now comes a revisionist view of that bygone era. Jeremy Siegel, a Wharton School professor at the University of Pennsylvania, has just released a new edition of his book, Stocks for the Long Run, and in it he calculates that an investor who bought the Nifty Fifty at their seemingly ridiculous highs in December 1972 and held them for 25 years did roughly as well as those who simply bought the S&P 500. To Siegel, this performance shows the enduring value of high-quality growth stocks. "You can look at the original Nifty Fifty two ways: Either the prices were crazy-high in 1972, or in the subsequent bear market, people panicked and the stocks got very undervalued. I believe the second view is closer to the mark," Siegel says.

The Original Nifty Fifty Revisited | The New Nifty Fifty

Warren Buffett made a similar point recently in Berkshire Hathaway 's annual report when he wondered whether the attractive prices of the past, not the full prices of today, "were the aberrations."

Siegel's findings are especially relevant now because they come at a time when many investors are straining to find historical comparisons for the current bull market, in which stocks, by most measures, are pricier than ever. Among the stocks behaving like the Nifty Fifty of yesteryear are Pfizer , Coca-Cola , Microsoft, and Gillette, all of which command sizable premiums to the record-high 25 price-to-earnings ratio of the S&P 500. Coke, for instance, trades at 52 times its 1997 operating profits, about double the P/E of the S&P.

As the accompanying table shows, the Nifty Fifty returned 12.7% annually (including dividends) in the nearly 25 years between December 1972 and June 1997. That's just a bit behind the 12.9% return on the S&P 500. And the gap wouldn't be much different if the returns were carried forward until today.

Siegel figures the Nifty Fifty were just 3% overvalued in December 1972 and that they then entered a more than decade-long period of significant undervaluation. The low point relative to the S&P came in 1980, when oil and natural-resource stocks were topping the market.

At their height in late 1972, the Nifty Fifty traded at an average of 41.9 times their earnings in that year, more than twice the multiple of the S&P, which was then 18.9. The Nifty Fifty also were known as "one-decision" stocks because the companies had such outstanding prospects that it was argued an investor never needed to sell them. A reporter for the New York Times, Burton Crane, wrote these famous words at the time:Xerox 's multiple not only discounts the future but the hereafter as well.

"There are some disquieting parallels between now and then," says John Neff, the former manager of Vanguard's Windsor fund. Neff points out that investors once again are paying high multiples of earnings for companies like Procter & Gamble , even though such companies are expected to deliver profit growth that's only in the low double digits.

"Look at Gillette and Coke. They aren't sparkling unit growers, but look at the multiples," Neff says. He notes that the high-teens growth anticipated for Gillette and Coke assume continued improvement in profit margins, adding, "you can't improve margins in perpetuity."

Neff wonders how Coke will be able to crank out 17% growth in earnings per share when the amount of soda it is selling each year is rising by only 7%. He contends that investors buying the current Nifty Fifty at today's high levels might get hurt in a stock slide and have to wait years to get even again.

Nonetheless, many observers maintain the stock market today is considerably healthier and less stratified than it was in the original Nifty Fifty era. "Back then, there was an intense narrowing of the market. There were fewer and fewer stocks holding down the fort," says Charles Pradilla, strategist at Cowen & Co., who was around in the Nifty-Fifty market and in earlier periods of enthusiasm for growth stocks. "It's a different situation now. The market is broadening as it goes up."

Although the two eras may not be comparable, in 1995 Morgan Stanley came up with a new Nifty Fifty index that featured many large, high-quality growth companies, as well as some oil and financial issues. In a sign of the staying power of great companies, there's considerable overlap between the Nifty Fifty of the 1970s and those of today.

Bulls argue that today's Nifty Fifty simply aren't as expensive relative to the S&P 500 as their precursor was in 1972. As noted on the accompanying table , the new Nifty Fifty carry a price-to-earnings ratio of nearly 25 based on projected profits for the next 12 months, versus a P/E of 23 for the S&P.

"Anyone worried about Microsoft's multiple ought to look at the P/Es of 1972 or the early 1960s," Pradilla says. Microsoft, one of the most expensive big stocks in the market, surged seven points last week after the company signaled another stronger-than-expected quarter. It now trades at 88, about 48 times projected calendar 1998 profits and 56 times 1997 calendar earnings.

Back in 1972, the most favored of the Nifty Fifty, Polaroid, fetched 95 times earnings. Disney and McDonald's sported P/Es of 71, and many lesser companies like Digital Equipment , Black & Decker and Kresge (now Kmart ) had P/Es of around 50.

It's true that buyers of the original Nifty Fifty ultimately fared well, but they would need plenty of fortitude to stick with these stocks during the lean years. Avon and Polaroid saw their prices fall more than 80% during the 1973-74 bear market, with Avon not topping its 1972 high until last year. After the crash, it took Coca-Cola more than a decade to get back to its 1972 peak, while Burroughs (now Unisys ) has lost ground in the past 25 years. The sub-par performance of all the tech companies in the original Nifty Fifty, including IBM , shows the difficulty of maintaining dominance in a fast-moving industry.

In the years after the crash of the original Nifty Fifty, many observers figured those kinds of valuations never would be seen again. Forbes magazine wrote in 1977 that the Nifty Fifty era smacked of tulip bulbs and the "temporary insanity of institutional money managers." Forbes then concluded that hardly any company was worth 50 times earnings.

But were all of the Nifty Fifty overvalued? To help answer that question, Siegel makes an interesting calculation: He determines a "warranted P/E" for each stock in the Nifty Fifty, using whatever stock price back then would have resulted in gains that equaled the return on the S&P over the past 25 years. Philip Morris , the top-performing stock since 1972, should have had a P/E of 78 in 1972, rather than its actual multiple back then of 24, Siegel argues. Coke deserved a P/E of 92, double its 1972 P/E of 46. Polaroid, by contrast, should have had a P/E of just 16.5, not 95. But that's hindsight. Today it's easy to forget the wild enthusiasm that was generated by instant photography in the 'Sixties and early 'Seventies. Millions of Americans owned instant cameras, and Polaroid's chief, Edwin Land, was a pop hero like some of the Silicon Valley barons of today.

Today's Nifty Fifty don't look as pricey relative to the S&P as their forebears did in 1972, but that's partly because today's Nifty Fifty have essentially taken over the S&P. The top seven companies in Morgan Stanley's Nifty Fifty are the same as the seven largest stocks in the S&P 500. In the transition, industrial companies and other economically sensitive stocks have largely been banished from the upper reaches of the S&P, and that has increased the index's P/E.

Also, the original Nifty Fifty were a gamier lot than the current bunch. To match the highflying nature of the 1972 Nifty Fifty, today's roster probably would have to include outfits like America Online , Dell Computer , Cendant , Lucent Technologies and maybe even Yahoo! .

Tom McManus, an independent market strategist who conceived the new Nifty Fifty while working at Morgan Stanley, argues the current stock market is a lot like a Mercedes-Benz: "It's expensive, but you get what you pay for." He says the S&P 500 may have a higher P/E than at any time in the past, but he adds, "You're getting greater quality than you did a generation ago."

He says investors are rightly paying a premium for the top companies in the S&P because of their strong franchises. McManus concedes that few of the leaders boast sizzling profit growth, but investors rightly prize the sustainability and consistency of their earnings.

The comparison between the Nifty Fifty's rates of earnings growth and their price-to-earnings ratios is captured in the nearby table. Anything above 1 in this column means the P/E of the stock exceeds its long-term earnings growth rate, meaning the stock looks pricey by this measure.

Even Siegel, whose book makes the case that stocks are by far the best long-run investment, admits he's a "little scared" about the current market. Clearly, last week's market action indicates that investors are a little scared, too. They apparently want more reassurance about earnings and economic growth before they push the Dow past 9000.

One last word of caution: Although you would have nearly matched the S&P by buying the Nifty Fifty in 1972, remember, you would have done a heck of a lot better buying them in 1980.

Consumer Durables - Show me the money

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Best regards,

Chaitanya

Virus-free. www.avast.com

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Best regards,

Chaitanya

Machine learning

1) Train a supervised model to predict the stock prices of a certain company by using all the stock data available from the past few years. A method called a "similar day approach" can be used to to train such a system. Time series prediction may be used for this.

2) Build a predictor that predicts the best stock to invest into based on the following
    i) The recommendation of experts (the weighted mean where weight of each expert is the rating he obtains)
    ii) The performance of the company in the past few months (Time series)
    iii) Return prediction from the previously trained model

3) Use natural language processing to automatically redirect a user to relevant information by looking at his/her queries, past searches etc.

4) Predict the effect of various day to day happenings or events on the stock market prices. For example, If donald trump wins elections, will that effect the prices of particular stocks?

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Best regards,

Chaitanya

VI vs VC

Over the course of a career, you’re going to make a sequence of bets, Andreessen says: “You’re going to make those bets of the places you choose to go and the people you choose to work with. You’re going to screw some of those up.” And just like in the VC business, it’s wise to understand the difference between two types of errors. Mistakes of commission — losing everything you invest in a company — can be tough, but you’ll get over them in time. Errors of omission — not investing in the first place — will scar you for life. “Every highly successful VC has made mistakes of omission, really big ones, of companies that they had the chance to invest in, they should’ve invested in, they didn’t invest in,” Andreessen says. “Take the bet, lose 1X. Don’t take the bet and possibly miss on 1,000X.”

When the rain starts to pour

Believe me, when you look over 17 years and you calculate the averages it looks like any idiot should know that this works.
But in the middle of doing it when you are down 25% you don’t really know if it is stillworking. Does it make sense? Have things changed? Is it really going to earn that next year? 
Or newspapers
were a great franchise, but they are no longer a great franchise and they are running down

Maro prapancham

నా మదిలో ఎన్నో ప్రశ్నలు...

మరో ప్రపంచం పిలుపు కోసం ఇన్నాళ్లు వేచిన మది..

ఇపుడు అకస్మాత్తుగా ఉలిక్కిపడి లేచి గతాన్ని తలుచుకొని వెక్కివెక్కి ఏడుస్తుంటే...

ఈ క్షణం రేపు చరిత్రగా మిగలబోతున్నదనే భావన స్వీకరించలేక..

భవిష్యత్తు ప్రశ్నార్ధకంగా వెక్కిరుస్తున్నా...

మాకు అన్ని ఇచ్చి...నీవు మౌనంగా తప్పుకుంటుంటే...

నిస్సహాయంగా నీకు అశ్రునాయణాలతో వీడుకోలు పలుకుతూ...

మిత్రమా...

చరిత్ర ఒడిలోకి చల్లగా జారుకో..

మాకు నీ జ్ఞాపకాలు వదిలి..

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Best regards,

Chaitanya

Buffett on timing

And if there's a game it's very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it-- is a terrible mistake

but...

You wanna spread the risk as far as the specific companies you're in by owning a diversified group, and you diversify over time by buying this month, next month, the year after, the year after, the year after.

pharma 1

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Best regards,

Chaitanya

Modified Bronte - Risk management

We have a default at Bronte - and the default at Bronte is that we have a maximum percentage for a stock (typically say 9 percent but often as low as 3 percent depending on how we assess the risk of the stock) and as the fund manager I am allowed to spend that whenever I want but I am not allowed to overspend it. If we have a 6 percent position with a 9 percent loss limit and it halves I am allowed to add three percentage points more to the exposure. But that is it. Simon, being the risk manager, isn't particularly fussed if add the extra when the stock is down 30 percent of 50 percent, but I can't add it twice. If it is a position on which we agree we are allowed to risk 9 percent then I am allowed to risk 9 percent.

Very interesting insight - My only addition here would be have these limits for a losing position and for a winning position, be flexible in adding assuming you are already up 1.5 x and the valuations are still reasonable.

i.e. Maruti bought orginally at 15 x Year 1

Earnings grows by 50% and stock runs up 50% by year 2

Implies multiple remaining the same - Add more, assuming you added only 5% in the first place and you still think that it is a multi year compounder

Position sizing should be in broad limits without too much fixation

Whereas for the losing position I agree, get rid of them or average down only once - No point trying to protect the thesis when it has actually fallen apart!

Leadership at large organizations

Q: How are you different form him? A: As far as ITC is concerned we should look at it from the perspective that ITC is an institution and ITC works with certain processes and a DNA that has evolved over the years. The DNA of the organisation is one off distributed leadership where we have each business, which has a management committee and has a chief executive and we have a centre that in a way is place the role of venture capitalist and a mentor and we have very clearly a DNA which says that we will do things that will make us perform in 3 dimensions – financials, environmental and social. Now this process actually drives the whole management process in the organisation. Now what I would like to certainly continue doing is to continue what I have learned and what has worked well is to enable and empower, at the same time provide sufficient input and guidance so that each of the businesses can succeed. I am a hands on person, so I have to remain hands on, but at the same time not get into the day to day operations or any backseat driving. The trick really is to be able to remain hands on, give input, give guidance but in a whole ethos of enabling and empowerment so that each business can takes it own decision and succeed in it on right.

Utility of money

Scott Adams in failure

Charlie Munger

Kaufman also summarizes Munger’s approach into a ten-point value investing principles checklist. Here it is:

1. MEASURE RISK

All investment evaluations should begin by measuring risk, especially reputational.

• Incorporate an appropriate margin of safety
• Avoid dealing with people of questionable character
• Insist upon proper compensation for risk assumed
• Always beware of inflation and interest rate exposures
• Avoid big mistakes; shun permanent capital loss

2. BE INDEPENDENT

Only in fairy tales are emperors told they’re naked.

• Objectivity and rationality require independence of thought
• Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
• Mimicking the herd invites regression to the mean (merely average performance)

3. PREPARE AHEAD

The only way to win is to work, work, work, and hope to have a few insights.

• Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
• More important than the will to win is the will to prepare
• Develop fluency in mental models from the major academic disciplines
• If you want to get smart, the question you have to keep asking is “why, why, why?”

4. HAVE INTELLECTUAL HUMILITY

Acknowledging what you don’t know is the dawning of wisdom.

• Stay within a well-defined circle of competence
• Identify and reconcile disconfirming evidence
• Resist the craving for false precision, false certainties, etc.
• Above all, never fool yourself, and remember that you are the easiest person to fool

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

5. ANALYZE RIGOROUSLY

Use effective checklists to minimize errors and omissions.

• Determine value apart from price; progress apart from activity; wealth apart from size
• It is better to remember the obvious than to grasp the esoteric
• Be a business analyst, not a market, macroeconomic, or security analyst
• Consider totality of risk and effect; look always at potential second order and higher level impacts
• Think forwards and backwards – Invert, always invert

6. ALLOCATE ASSETS WISELY

Proper allocation of capital is an investor’s No. 1 job.

• Remember that highest and best use is always measured by the next best use (opportunity cost)
• Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
• Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven

7. HAVE PATIENCE

Resist the natural human bias to act.

• “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
• Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
• Be alert for the arrival of luck
• Enjoy the process along with the proceeds, because the process is where you live

8. BE DECISIVE

When proper circumstances present themselves, act with decisiveness and conviction.

• Be fearful when others are greedy, and greedy when others are fearful
• Opportunity doesn’t come often, so seize it when it comes
• Opportunity meeting the prepared mind; that’s the game

9. BE READY FOR CHANGE

Live with change and accept unremovable complexity.

• Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
• Continually challenge and willingly amend your “best-loved ideas”
• Recognize reality even when you don’t like it – especially when you don’t like it

10. STAY FOCUSED

Keep it simple and remember what you set out to do.

• Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
• Guard against the effects of hubris and boredom
• Don’t overlook the obvious by drowning in minutiae
• Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”

Mindfulness

Mindfulness practice is the practice of being 100 percent honest with ourselves. When we watch our own mind and body, we notice certain things that are unpleasant to realize. Since we do not like them, we try to reject them. What are the things we do not like? We do not like to detach ourselves from loved ones or to live with unloved ones. We include not only people, places, and material things into our likes and dislikes, but opinions, ideas, beliefs, and decisions as well. We do not like what naturally happens to us. We do not like, for instance, growing old, becoming sick, becoming weak, or showing our age, for we have a great desire to preserve our appearance. We do not like it when someone points out our faults, for we take great pride in ourselves. We do not like someone to be wiser than we are, for we are deluded about ourselves. These are but a few examples of our personal experience of greed, hatred, and ignorance.

As your mindfulness develops, your resentment for the change, your dislike for the unpleasant experiences, your greed for the pleasant experiences, and the notion of selfhood will be replaced by the deeper awareness of impermanence, unsatisfactoriness, and selflessness. This knowledge of reality in your experience helps you to foster a more calm, peaceful, and mature attitude toward your life. You will see what you thought in the past to be permanent is changing with such inconceivable rapidity that even your mind cannot keep up with these changes. Somehow you will be able to notice many of the changes. You will see the subtlety of impermanence and the subtlety of selflessness. This insight will show you the way to peace and happiness, and will give you the wisdom to handle your daily problems in life

Skin in the game matters!

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Best regards,

Chaitanya

Key is to create the freedom to choose