The Unusual Billionaires – one book which I have been postponing…but will read shortly! The author Saurabh Mukherjea, of Ambit made a presentation at the Morningstar Conference in October, 2017, Mumbai.
Here are some excerpts…
Most of us know that investment decision making is about fundamental investing. The fundamental investing starts with looking at the basic accounting, and reading the balance sheet of the companies. Sadly this is not much of a great thing as in the past. In the 1980s we had no choice but to get hard copies of the balance sheet and do cash flow and ratio analysis (hey even cash flow statements were not part of the published accounts then).
Let me kind a summarize what SM said….
Successful companies have the following characteristics:
- they have clean accounts
- lack of political connectivity
- conservative capital allocation
remember when the says this, it does not mean that there are no companies which have done poor capital allocation AND delivered good shareholder performance, but that is not the purpose of this post. This post is just to see how good accounting is a nice place from where a retail investor can start his search for good companies to invest.
The main reason why you get rewarded while investing in equities is that you are able to sit tight over long periods of draw down. If the accounts are clean, the investors are not in for an unpleasant surprise on the quality of earnings. Of course earnings will be down, but at least suddenly bad debts from the past does not wipe out the reserves ‘shown’ in the accounts.
As a long term survivor (and a suspicious mind set endowed upon me by the CA profession!) I have come to some conclusions – and it is reflected in my portfolio too (many of these companies are in my portfolio since the 1980s):
Cummins, Eid parry, Coromandel international, Carborundum universal, Supreme Industries, Hdfc ltd, Hdfc bank (1994), Hero motors, bajaj auto, LnT, Colgate, Nestle, Siemens, PnG, Cholamandalam, Kotak, Lakshmi machine works, Tube investments, Rane Madras, …..but that is digressing!
What Ambit looks for – good growth – which gives the upside and good accounting practices – which protect the downside. I find that people with poor accounting knowledge go and look for
a) less leverage (there is enough proof that a high leverage with good RoCE is a better combination)
b) conservative borrowing allocation – not enough empirical evidence
We also need to understand that Graham’s book of the 1970s have to be RE-READ so that we know which numbers to chase. Graham himself says that in his book – go and find out where!
Here is what Ambit looks for:
PnL mis-statement checks: CFO (we all do that I guess), volatility in depreciation rates (I would suggest it to all MBAs to read about depreciation – as per IT, and as per company law well enough before they get into reading balance sheets about depreciation), provisioning of doubtful debts – personally I prefer writing off all debt over 6 months old).
Balance sheet mis-statement: how the reserves have been made up (ignore the share premium of course), contingent liabilities
Pilferage: miscellaneous expenses (I do not understand how this works, I prefer looking at the gross and net margins), CWIP (honestly this is a black box, I wish the govt forced better break up of capital work in progress – many companies hide too much shit here),
Auditors remuneration: cagr of remuneration vs cagr of sales and profits.
more to come….for sure…
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