Just wanted to share something I picked up from another senior investor during the latest Gujarat trip. Let's call him Mr J. even he does not like to be in public forums...its the really loaded guys who need to stay off
...that's a good guess!
What makes for a great Investor. he said he learnt this concept way back in the 90's when attending impromptu lectures organised on Sunday afternoons at the Oxford Book Club, Mumbai by Chetan Parikh. There he was the youngest but had the good fortune to rub shoulders with who's who of today's investing world in India - Prashant Jain, Sanjay Bakshi, Sanjoy Bhattacharya, Parag Parikh, Sampat, any manmy many more names he dropped
He said the concept was introduced to them by Chetan Parikh - from the book (?)
Thought it was interesting to put it this way...and makes you think more clearly...and may help us in our investing journey. If you clearly know what edge you are missing, you may go after speeding up the learning curve.
So as food for thought for myself...I started putting down what I thought were edges for us and others, and how to go about it.
| The 3 Investor Edges | Sources |
|---|---|
| Information Edge |
|
| Analysis Edge |
|
| Market Edge |
|
I clearly realised while we are getting better at Information Edge and Analysis Edge - most of us newbies remain blank about the Market Edge - typically how Indian markets operate. And I would be real envious of how Ayush & Hitesh go about this - while discussing a few companies - ha yaar- idhar kuch gadbad hai - something is not right...and they will substantiate it!
Comes with a lot of churning - peter Lynch style I guess - but that's a big edge - that's how they avoid many of the stocks - they know what to clearly stay off - 70% of the time they are in agreement....they can reel of a few examples for each type of red flag...One thing I learnt ... these guys examine "failure" a lot... if something is not working for a long time ... you can't really put a finger on what's wrong...they typically say...the market is trying to tell you something ...pay attention...Opto Circuits was a good example...and we sort of cracked it in time
Now that's interesting right?
Thinking of developing some of these "food for thought" ideas in case study format - any volunteers?? Can I have a show of hands??
Count me in.. how do we go about it?
Thanks Akbar for the early hands-up.
I am still toying with how to go about it. One straightforward way is to document the failures "that are in the public domain" ...folks have already written about it...so we can quickly speed up the learning curves there.
If we play with enough of these documented failures, we will start seeing the "patterns" that Investors with Market Edge already have established in their minds. But instead of documenting the failures - we document a Pattern - Say Funds siphoning of by way of inflated Capex - and find documented cases of such instances.
The OnMobile Case - personal greed overtaking ethics & normal good judgement - of otherwise impeccable professionals.
We can start off by listing documented failures. Then check for the Patterns found in these. Then we get in the Market Edge guys like Ayush, Hitesh, Gaurav to help us identify common patterns. Once we have 3-4 examples of a certain pattern - We document the Pattern - with the examples highlighting the pattern.
Does this seem a good way of going about it?
Previously Donald wrote:
Thanks Akbar for the early hands-up.
I am still toying with how to go about it. One straightforward way is to document the failures "that are in the public domain" ...folks have already written about it...so we can quickly speed up the learning curves there.
If we play with enough of these documented failures, we will start seeing the "patterns" that Investors with Market Edge already have established in their minds. But instead of documenting the failures - we document a Pattern - Say Funds siphoning of by way of inflated Capex - and find documented cases of such instances.
The OnMobile Case - personal greed overtaking ethics & normal good judgement - of otherwise impeccable professionals.
We can start off by listing documented failures. Then check for the Patterns found in these. Then we get in the Market Edge guys like Ayush, Hitesh, Gaurav to help us identify common patterns. Once we have 3-4 examples of a certain pattern - We document the Pattern - with the examples highlighting the pattern.
Does this seem a good way of going about it?
Hi Donald,
Excellent idea indeed. I think, if we can build the repository of this kind, it will give all boarders tremendous edge. It is what Munger calls learning from vicarious experiences.It will be 'one of its kind' initiatives which will be unique across value investing forums across the globe. I keep tab ofmany ofthese forums and I have not come across such thing on any of them. I think it is worth implementing with full force. I am all for it and will try to contribute whatever little I can with my limited experience.
Another suggestion I have is that in addition to looking for what went wrong with companies, we can also dissect failures/mistakes from the angle of what all psychological tendencies and biases led to misjudgements and mistakes. I am sure,with market veterans sharing their valuable experience, we all can learnhow behavioural aspects can make a difference between winning and losing.
Best Regards
Dhwanil Desai
Great Dhwanil. Lets wait to hear from Akbar if he agrees with the way I have proposed.
Then we can start off with first the listing of such documented cases - with 1 para brief on specifics of the case, with links to the sources of detailed info/case study, etc.
In simple terms, what I understand is information edge and Analysis edge will be able to explain the returns that investors can generate based on rise or fall in earnings. By market edge we are trying to guage why p/e increases or decreases. Why Rerating or Derating happens and if we can find patterns which could be used to identify new cases for rerating or derating.
Just thinking loud...
To identify cases, we could check the divergence of stock price with respect to performance of the stock on the basis of results.. i.e. cases where there has been in crease in earnings but no increase in stock price (fall in p/e). Or the opposite case, If there is fall in earnings, but the stock price holds (increase in p/e). Also one can possibly consider increase/decrease in PEG.
In my opinion, behavioural finance could be a good starting point. Why investors stay out or why they jump in. There are biases which need to be studied here. We can collate examples from seasoned investors what kept them invested (in a derating) or what kept them out (in a rerating). One can realise this in hindsight. Why did I not sell? Why did I miss the bus?
Under sentiment and momentum what we need to decipher is what did the market know (did not know) compared to retail investors who invested in stocks that did not rise or fell and also cases where retail investors did not invest and the stocks shot up (missed chances).What we need to check is if retail investors could participate or not. impact costs, circuits could give an idea.
Further, as you say these cases can be drilled down to factors like Information asymmetry, Incapable management, Accunting frauds, Industry headwinds, government control etc
Of course we can start as you say Donald.. just trying to clear my thinking.
Let's first deal with concrete things, and later to more abstract and difficult to grasp "feel" factors.
Failures - can be dissected well. And There's a big market edge if you can avoid failures. I have often been asked why ValuePickr Success rate is so high and Failure rate so low. In the last 2 years I have ascribed various reasons - to beginners luck, intense scruitiny, holistic framework, etc.
But now I am more clearer why - we have kept improving - very low failure rates and higher and higher success rates. Its because much of our screened ideas come now from 2 primary sources - you may or may not realise it - Ayush Mittal & Hitesh Patel - very prolific churners of stocks & ideas - people with an absolute open mind - humble and they listen to everyone - but they have a very refined market edge - their mental patterns are extensive - on Red Flags - what you should be suspicious off - what you should stay off- what are grey areas.
Their contributed ideas are already screened for anything suspicious or grey and certainly for disaster-avoidance. And tehn they must meet the solid BS, zero or low debt, good growth, and "zara hatke" kind of companies - companies with some edge....very rarely run-of-the-mill.
This is the reason I give Institutional side analysts/Fund Managers now ...when they want to understand - why our method works - will it keep working - or this is just a phase - when our kind of companies are in demand. That's another very interesting discussion thread, And I will inititate it sometime this week, Inshaallah
My next post will have a list of 10 such companies - documented failures - that's there being discussed in public domain...we need to make sure that things are in the Public Domain...we cant be discussing hearsay matters in a responsible forum like ValuePickr. Let's keep that distinction very clear in our minds.
- Donald
Some companies where things went wrong, sometimes horribly wrong:
1. OnMobile
2. IRB Infra
3. KEMROCK
4. Deccan Chronicle
5. Tanla Solutions
6. Teledata
7. Prithvi Info Systems
8. Riddhi Siddhi Gluco Biols
9. K S Oils
10. Anand Raj Industries
Feel free to add more. The Veritas dissected cases R-Power, R-Com, India Bulls, others all can come in, perhaps.
Let's do the dissection in a separate thread -dedicated to "Lessons from Corporate Fraud/Misdemeanor in Public Domain". I will start this thread and provide links for you to continue the speciifcs there.
That will leave this thread to discuss options for other Market Edge Sources/ and how we can go about aquiring those edges...slowly...gradually
-Donald
