Value investing in India, applying principles of Buffett, Phil Fischer and other great investors. An attempt to discover undervalued stocks that can generate above average returns combining fundamental and technical analysis
Saturday, June 4, 2016
Capital Cycle
Capital returns
Assessing management...
3 Value Investing World / by Joe Koster
/ 2 days ago
From Capital Returns (the excerpt below was from a Marathon letter in June 2014, and provides some good pointers to help in assessing management teams):
Over the last two years, Marathon has engaged in nearly two thousand meetings with company management. This activity, along with preparation and the writing of notes, consumes most of the investment team's working hours. Yet many commentators view such meetings as a waste of time. One can see their point. Managers are now so well prepared by PR advisers that meetings can seem like a promotional exercise. Investors still turn up. But for many of them, we suspect, their purpose is to gain an informational advantage about the short-term outlook for the business – in our view, a fruitless endeavour. Given the long-term nature of our investment approach, capital allocation is of paramount importance. The prime purpose of our company meetings is to assess the skill of managers at investing money on behalf of their shareholders.
Meeting management is not a scientific process. Rather, it involves making judgements about individuals, an activity which is prone to error (witness the rate of divorce). We go into meetings looking for answers to questions such as: does the CEO think in a long-term strategic way about the business? Understand how the capital cycle operates in their industry? Seem intelligent, energetic and passionate about the business? And interact with colleagues and others in an encouraging way? Appear trustworthy and honest? Act in a shareholder-friendly way even down to the smallest detail?
To assess such questions, the format of the meeting is important. In general, the smaller the number of people in attendance the better. Having fewer attendees on both sides of the table – large meetings often include company managers, investor relations personnel, financial PR types, stock brokers, and other hangers-on – encourages a more open and friendly dialogue. It also reduces the risk of attendants showing off, which can result in the conversation becoming hopelessly bogged down in detail. A new and dreadful manifestation of the quest for redundant detail is the "fireside-chat" format used at many sell-side conferences, which typically involves a CEO being quizzed by the specialist analyst. The conversation generally turns into a "deep dive" into factors impacting short-term earnings, which can be of no interest to long-term investors. Questions of this sort can be ludicrous. At a recent conference we attended, the boss of a major industrial firm was asked whether we could expect that same pattern of seasonality as the year before.
Large delegations from a company can be a sign that the CEO lacks confidence, resorting to a safety-in-numbers approach. This is often the case when dealing with companies in difficulty, as well as with many Japanese, Spanish and Italian firms. Contrast this with Geberit, the highly successful Swiss plumbing equipment company, whose CEO tends to arrive alone at our offices, having seemingly made his own travel arrangements, fitting us in between meetings with plumbers, architects and other customers.
When it comes to discussing a company's strategy, it is alarming how frequently one finds managers confused on the topic. Too often, the CEO mistakes a short-term target – say an earnings per share target or a return on capital threshold – with a strategy. "Our strategy is to deliver a 15 per cent return on capital," they say. Real strategy, whether military or commercial, involves an assessment of the position one finds oneself in, the threats one faces, how one plans to overcome them, and how opponents might in turn respond. During his tenure at General Electric, Jack Welch required managers of GE's divisions to prepare a few simple slides describing their operating environment in terms of: what does your global competitive environment look like? In the last three years, what have your competitors done to alter the competitive landscape? In the same period, what have you done to them? How might they attack you in the future? What are your plans to leapfrog them?
Getting CEOs to open up about their competitors can be difficult. They fear that too much openness may lead to a breach of confidentiality (professional investors are a thoroughly untrustworthy bunch) or that revelations about the firm's true market dominance might raise anti-trust issues. Besides, many managers are so fixated on growth, they fail to anticipate the likely competitor response (another example of the "insider view"). Still, on occasions something useful slips out. When a management team compliments a competitor, this can be like gold dust to investors. Learning that DMGT, the UK media company, found it hard to compete with Rightmove, the property listings website, contributed to our decision to invest in the company.
Discussing how a firm uses investment bankers and how it makes acquisitions (e.g., whether it prefers friendly negotiated deals to contested auctions) can be revealing. Unexpected diversifications into an unrelated area may suggest that something is not right in the core business. Views on share buybacks can also be highly informative. Very few CEOs see this as a legitimate investment on a par with capital expenditure or M&A decisions, presumably due to an aversion to shrinking any aspect of the company. Many fear that buybacks are an admission that the company has run out of investment ideas. On this subject, we like to hear managers justify buybacks based on an internal valuation model, as this can then lead to an interesting discussion about valuation of their business.
Forming impressions of the CEO's character, intelligence, energy and trustworthiness can be gleaned using a variety of questioning techniques. Intellectual honesty can be tested by asking the CEO to pick out what he or she thinks is important. To unsettle the more promotional CEOs, we like to ask what is not working and wait to see whether they have given the matter much thought. Sometimes the boss will seek to evade responsibility by asking a colleague to talk about a problematic area of the business. The CEO in denial often blames problems on a divisional boss and follows up by saying that management has now been changed. How the chief executive interacts with colleagues, such as the CFO or investor relations personnel, often reveals their leadership qualities. We like to see signs of individual curiosity at meetings – revealed, for instance, by their taking an interest in our own business. Signs of humility – say a recognition of past mistakes – give us some confidence that the chief executive has a grip on reality.
Appearances can also be revealing. A CEO of an industrial company who wears expensive shoes, or a snappy suit, is more likely to enjoy the expensive company of investment bankers than spend his time visiting factories and customers. Signs of vanity are generally off-putting. One CEO was spotted before a meeting carefully adjusting his elaborate bouffant hair style in our washroom. Several months later, he launched a large and foolhardy acquisition.
Meetings can also provide insights into a management's approach to costs. This frequently comes out in discussions about compensation. Learning about something as mundane as corporate travel policy can also tell us a lot. After Brazil's AmBev took over the Belgian-based Interbrew, its managers told us about a new edict limiting business-class flights to those lasting six hours or more. This insight into corporate frugality was a pointer to the same management's ability to cut costs at Anheuser-Busch – which prior to the merger sported a fleet of eight Falcon executive jets – and increase the US beer company's operating margins by a massive ten percentage points (between 2005 and 2011). We were equally impressed to learn that senior executives at another company preferred the underground to chauffeured limousine when travelling around London. The number of IR representatives in attendance is a good indicator as to how carefully a company counts its pennies. Of course, we have made mistakes when assessing management teams. But, in our view, trying to spot a great manager remains a game very much worth playing.
Sunday, May 15, 2016
A mind for numbers
- Procrastination is the key for math, creativity and investing!
- Combine bursts of focus with frequent breaks - a bit like chess players taking breaks in the midst of an intense game
- Huge dividends for focused intensive work
- Solitary walk is worth a week in front of the computer trying to notch up solutions - I agree:0
- Focus -> Diffuse->Focus-> only problem is Focus with smartphones/mails/watsapps et al
- Edison would hold a marble in his hand and doze off in a chair sitting until the marble bounced off the floor and got him out of his nap
- Keep your working sessions short - much like working out at the gym
- ok to be disagreeable, external feedback critical to improve, attempting to be creativity bolsters creativity, redo if you falter the first few times
- Learning a new language is a mumbo jumbo of focused attention followed by a super diffused mode of plugging the words into one's conversation
- Key to assimilation - Move chunks of interpretation into long term memory not so much into working memory
Tuesday, May 10, 2016
Friday, April 8, 2016
Monday, March 14, 2016
Tuesday, March 1, 2016
Saturday, February 27, 2016
Multi tasking
Tuesday, February 9, 2016
Technology Investing
We have got to a point where we are converging and focusing. So, for example, we are reluctant to do e-commerce although we have done ‘Happily Unmarried’ and that is tracking well and we continue to support that. But other than that we are most likely going to stay away from e-Commerce.
We have done 99labels earlier if you recall. We like the Information Arbitrage businesses, we like businesses that will have some technology build on IP we like Classified businesses, we like businesses where we enable handshakes we do not like businesses where we carry inventory and so on.
So there are patterns that we sort of follow, but having said that it is a good management team, good company scaling up well, good gross margins, high operating leverage, marketed on its space we would look at it, whether or not we have our internal competency in that area or not.
Source: Sanjeev Infoedge earnings call
Saturday, January 30, 2016
Past Cycle - Kenneth Andrade
India pulled through in the last cycle because of the global recovery. The capacities [in the 1990s] around textiles, metals and other commodities gave companies the ability to price products in the international market in dollar terms. I remember steel prices going all the way down to $160 per tonne between 1998 and 2000 and then rally to $1,000 per tonne midway through the last decade. This, plus the rupee depreciation, helped these companies/assets become financially solvent in 2008, a recovery exactly a decade from where these assets got laden with financial excesses (high debt and low equity). Large commodity companies, notably Tata Steel, had RoEs in excess of 40 percent for almost two years, something they had not seen for a very large part of the company’s history.
In short, India depreciated itself out of the problem in the last cycle.
However, power and fertiliser plants set up in that era did not see as much benefit compared to export-oriented companies or firms which manufactured commodities, which linked their prices to landed costs. Power and fertilisers were sold in the local market which was rupee-denominated and they clearly could not make supernormal profits to get through the excesses of the ’90s.
We have a larger part of the latter problem this time around. Infrastructure assets have to earn revenues based on the earning capacity of the domestic economy. They are rupee-linked. So even if there is depreciation of the currency, a lot of these companies will not see a rise in turnover or asset prices connected to the fall.
Another thing that does not help is that India again had a number of commodity companies that acquired assets at the peak of the cycle, and all through debt. This plays out very negatively at a time when commodity prices have virtually halved in value.
Read more: http://forbesindia.com/article/investment-guide-2016/choose-the-volatility-you-are-happy-to-live-with-kenneth-andrade/42027/2#ixzz3yi03xxOy


