It is amazing what the markets can do to you. They collect fees in advance, teach you something awesome, and then make you repent for thinking that lesson is permanent!

So the market is a place where you need to play different roles, learn different things, have different views and opinions, and TRHIVE on Chaos. Let me share some:

  1. Companies that allocate capital efficiently and earn a healthy return on capital are more likely to survive and create wealth over the long term.

Any good market guy will tell you this and you will nod your head sagely. Millions of examples – Asian Paints, Hdfc, Colgate, Gillette, Coromandel International. Yes all multi baggers.

And your portfolio will mock at you – ITC, Larsen – one of the worst capital allocators and at the same time multi baggers.

2. It takes a big brand to make good money for the shareholder – commodities do not matter.

I was almost scoffed at by one of the biggest investors for tracking 2 commodity companies – he actually told me with government control these companies will never make money for you. He did not know that another common friend had asked me to do a research into BOTH those companies at a time when I was still trying (and hoping!) to set up an independent research companies.

Result: I own, and trade Supreme Industries, Coromandel International, and EID Parry. All 3 the first time I bought in 2 digits – in fact Coro and Eid below Rs. 20. 1986 I think – I could be wrong about the date.

3. Companies are important, spending time on the Macro is useless – Peter Lynch is the person who taught me this, and I agree totally.

The more important learning is actually to see BOTH the economy, industry, and the company. Simply because in case of a bull run, all the companies in that INDUSTRY will do well. For example (March, 2017) you are better picking up some infra stock – even a poor allocator (!!) or a power company instead of a well managed FMCG. When Infra booms even the shit in infra will do better than the best in pharma – assuming pharma takes a pause (hello readers these are just examples, read my disclaimers regularly).

4. Meeting and Knowing the Management of a company is important.

Almost everybody will tell you that. Wrong. Reading the balance sheet without any pre conceived notions is far more important. When we did the research on Supreme Industries ¬†we knew NOTHING about it (circa 1988) and thought ‘how can a commodity business generate profits’. Well it did. It regularly shows up on the Motilal Oswal Wealth study. Dull boring company where the management spoke only about the numbers over numerous cups of tea. Meeting the management helped.

Shaan Interval, Indiana Dairy – we got carried away with the promoters, their education, experience, etc. both companies scarred me. Of course there are others – some wiped out from the face of earth – Patheja Forging, Krishna Filament, Silverline, Crest Animation – meeting the management did not help. We heard EXACTLY what the management told us. We did not do a dis-passionate analysis of the numbers. Of course we exited major positions -but the time spent and some money invested was gone.

5. You should not be wedded to any idea.

Every professional will tell you this. Every self made man will laugh at you for saying this. I have done more portfolio analysis than many other people I know. Even now I get long excel sheets to clean up portfolios. I am a ruthless pruner. One portfolio I saw had many shit shares – Richardson Cruddas, and shares which you would not have even heard of. He had inherited some shares and bought some shares. He just held them for long periods of time. No, he had no knowledge of what and why. He was not ‘over educated’ like a CA or an MBA. He was a great mechanical engineer with love for old things.

The shares that he had ‘not sold’ had created far, far, far more value in his portfolio than the amount of money lost in some poor investments. Yes it is easy for me to say ‘If he had sold Silverline and kept Infosys’ – however his simpler action of keeping both meant a dead loss of Rs. 6000 (1994/5 I guess) was much much smaller than the 53% IRR in Infosys. It is sheer madness to think what could have happened if he had sole Silverline and bought more of Infosys. If you imagine that you should also weigh in the probability of having sold Infosys to buy Silverline!!



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