Monday, February 21, 2011

Killing your own idea!


Yes, this post is about investing. I am not going to talk about how great Abhishek Bacchan was in Yuva or how baaaaad he was in Tera Jadoo Chal Gaya.. (Didnt see the movie, the trailers were enough to scare me off!)

Anyway, lets come back to the point before I start talking about Drona and frustrate you all!!  :-)

"Killing your own idea" is a concept that can save an investor's "synonym for donkey" time and again. Imho, any and every investor should understand this concept and try to apply it as much as possible. Lets see what it is all about...

The concept

The concept is pretty simple and common sensical. Basically try finding fault with any stock idea that you get. If you think something is good to invest in, try and find out as many reasons as you can, to come to a conclusion that it is not good to invest in. Try and kill your own idea as much as possible.

The process

The process is much more difficult than the concept. e.g. If someone asked you to describe yourself, how many negative points will you put forth? Similarly, when we like a particular investment idea, our mind automatically and subconsciously starts weeding out or justifying negative points associated with the idea. To counter this is extremely difficult, yet extremely important. (I also am not fully there yet). The first thing to do is to mentally disconnect yourself from the stock idea and look at it afresh. Be as skeptical and negative as possible. Best thing to do is, try and write down, point-wise, why that particular idea would be a terrible investment. You will, of course, be in denial first and will try to avoid and justify the worst things about the idea. But its a process and you will surely get there slowly. In the mean-time, what you can do is, ask a friend of yours, who hasnt seen the stock, to point out bad points about it. That should surely help.

The utility

Has this ever happened to you: you bought a stock after studying it properly. Few months down the line, some event unfolded which hit the company and the price sank. And you thought ' Oooo why didnt I think of that???' This happens to all of us a lot of times. We miss out some key point or factor, which seems obvious in hindsight a few months later. This happens because we have not taken a 360-degree view, we have not considered the negatives, we have not killed our own idea..

An example...

One idea I mercilessly killed recently was that of Gujarat Reclaim. Now, this idea seems actionable to a lot of respectable investors I know. But to each his own!
A bit about Gujarat Reclaim:

  • Essentially, the company recycles waste rubber. With rubber prices hitting the roof, the prospects of the company seem bright. Its the largest company in its sector in India.
  • I really liked the management of the company. They are very conservative, they have grown well, the books seem clean and the way the management talks makes me very comfortable. They also know their business and have been working continuously on technology.
  • Gujarat Reclaim has established numerous collection centers and agents, which supply the necessary waste rubber (essentially waste tyres) for recycling. (can be thought of as an entry barrier)
  • The company has also announced an expansion plan recently. All details can be found in the annual report.
  • The valuations are not very expensive. Market cap of about Rs.125 cr, 10 times trailing, 2% dividend yield, manageable debt on books, 18%+ operating margin.
So what killed the idea?

The above table shows the rupees per ton cost of rubber scrap and chemicals (raw materials) and the per ton selling price of reclaimed rubber (finished product) for various years. The last column shows the raw mat consumption as % of sales. It can be seen that while the rubber scrap prices have gone up 70% since 2005, the selling price of reclaimed rubber has gone up only 40%. Meaning, that the company has not been able to pass on hikes in raw material prices. There seems to be no pricing power. So will this situation worsen as rubber prices go up? (Since scrap rubber prices also go up). So, will this company benefit due to increase in rubber prices or will it be hit because of the same? Something to think about! (Btw, for the December 10 quarter, raw mat consumption to sales stood at 46.67%.)

I really like the company, but the valuations do not seem to reflect the above. They are not 'sitter' valuations. I will wait for the stock to correct, if at all, and then take a decent position in the same.

Cheers and happy investing!!

From Prof. Bakshi's blog

Prof. Bakshi has recently posted something very interesting on his blog. One can access the post HERE.
I request especially all my students to go through the same and participate.

Cheers and happy investing!

P.S. If you do not know who is Prof. Bakshi, then I sincerely believe you should search and read up all that you can on him. It will be a great education in itself!!

Friday, February 4, 2011

An update on stuff..

Hello people. Well, you have had to bear with me and my blog for quite some time now. I had discussed some stock ideas in various posts before. So, lemme put out an update about what happened to all those stocks.

I had written about MTNL being a value trap on 21st April, 2010. The price has moved down from Rs.74 to about Rs.50. I still maintain it is a value trap. A company i will probably never look at, as an investment candidate.

I had written about Kesar Enterprises demerger on 21st April, 2010. The demerger is through, shares of new company Kesar Terminals have been alloted and listed. I did earn about 15% in the entire transaction. However, there was a huge delay in the entire demerger and listing process. What was expected to happen in 2 months took more than 6 months. The delay has hit my annualised returns :-( I have been a seller of Kesar Terminals above Rs.115. Kesar Enterprises was sold off around the ex-date itself at an average price of Rs.62.

I had written about Aditya Birla Chemicals being really cheap, on 27th April, 2010. Since then, the price has moved up from Rs.87 to Rs.140. The company is entering a capex phase, which could depress return ratios for a couple of years. It is still not very expensive. I do not have any position in the stock at present.

I had written about LG Bala and Gujarat Alkalies as shorter term positions on 27th April, 2010. Both the stocks moved up. I have closed my positions in both with profit of about 30% and 10% respectively.

I had written about Ashiana Housing on 28th May, 2010. The stock moved up well and was beaten down again as problems with Lavasa started. Delays caused by Lavasa debacle could hit profitability for the medium term for sure. I still maintain it to be an excellent company. 

I had written about ACGL on 2nd June, 2010. The company reported phenomenal numbers in the recent quarter. Looks like Murphy's Law is not longer hitting the company. :-) The price has moved up from Rs.230 to Rs.350. Though margin of safety does not appear to be high at present market cap, there could be triggers like a merger happening, which could help unlock more value in the stock.

I had written about Phillips Carbon on 22nd June, 2010, in which I had said that even though it seemed to be in a sweet spot, I would not take a position in it. The stock price has moved down from Rs.186 to Rs.130 since then. However, here, I have been proven right for all the wrong reasons! The company did not report good numbers, as was expected. Further, a likely large acquisition by the company has dampened sentiment about the stock. Got lucky here! :-)

I had written about Binani Cement delisting on 25th November, 2010. The price has moved up from Rs.83 to Rs.91 since then. The reverse book building will start on 7th February, 2011. I intend to tender my shares at Rs.110. Let us see how it goes..

I had written about Dai Ichi Karkaria on 26th November, 2010. It is indeed an interesting case. Few readers also put across interesting points that I was not aware of. The price has moved down from Rs.48 to Rs.43. Worth another and even more indepth look for sure.

I had written about Alembic demerger on 31st December, 2010. I had advocated buying it below Rs.55. The price had not moved and looks like it wont come to my price at all. In that case, I will give this opportunity a miss.

I had written about Jyoti Structures on 12th January, 2011. I got out of the position on the ex-date itself (in hindsight, I got out at a very good price). I will be applying to the rights issue. Lets see how this one goes.

Well, there you go folks. Hope you had a good time at the blog. New ideas are a bit hard to come by still. Am looking at a few really interesting candidates. Will update soon.

Cheers and happy investing!!