The 3 Investor's Edges! How do you fare on the 3 scales?


(Donald Francis) #1

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 Ketan 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
  • Published information (all sources) - digging & Collating - ValuePickr edge
  • Management Q&A - ValuePickr edge
  • Industry professional feel/refinements - ValuePickr attempted (like say in Pharma)
  • Distributor/Supplier scuttlebutt - ValuePickr attempted
  • Industry/Sector/Product demand/supply gaps - ISG (Investor Supergrowth) Edge
  • RM Demand/Supply - ISG (Investor Supergrowth) Edge: ValuePickr attempted
Analysis Edge
  • The same information set may be interpreted differently by different set of users; novices, senior investors & Gurus
  • ValuePickr attempts to get better & better at this critical edge with help from the combined eco-system of juniors, seniors, institutional investors, and industry professionals
Market Edge
  • Behavioural Finance aspects; sentiment & momentum -globally relevant;
  • Typical to Indian markets - what work in Indian markets; usual red flags; what to be suspicious of

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??

Posted byAkbar Khanat Monday 11:02

Count me in.. how do we go about it?

Posted byDonaldat Monday 12:06

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?

Posted byDhwanil Desaiat Monday 14:26

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


Posted byDonaldat Monday 15:03

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.

Posted byAkbar Khanat Monday 15:31

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

Posted byAkbar Khanat Monday 15:41

Of course we can start as you say Donald.. just trying to clear my thinking.

Posted byDonaldat Monday 16:27

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

Posted byDonaldat Monday 16:35

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

Posted byAbhishek Basumallickat Monday 19:44

I am not sure if we have a thread, but if we don't, can we also have a thread to discuss out investing mistakes?

Posted byRasKhemat Tuesday 15:17

How about adding Glodyne to the list?

Posted byDonaldat Tuesday 16:05

Abhishek

We will shortly start a thread on Investing Checklists - We need strategies for overcoming failures . I have some thoughts, will take your help in seeding it, as I know you are big advocator of checklists.

Another big advocate of checklists is Gaurav Sud. We can initiate things with your and Gaurav's kind of checklists, and then go on to add to this by building on from the experience base of others and take advantage of the cumulative knowledge in ValuePickr community.

-Donald

Previously Abhishek Basumallick wrote:

I am not sure if we have a thread, but if we don't, can we also have a thread to discuss out investing mistakes?

Posted byDonaldat Tuesday 16:16

Hi Raskhem/Others

Please note a dedicated forum has been startedLessons from Corporate Fraud/Midemeanor in Public Domainto discuss stocks where things have gone wrong, and the stocks been hammered - Could be due to Corporate Misadventures, or Corporate Frauds, Or even Political Regulatory Interference.

Please add to that thread directly on above matters.

This thread Investor Edgewill move on (from the focus on Corporate Lessons) and continue to discuss/focus on what aspects provide Investors with an Edge, and how ValuePickr Community can find avenues to add value to and/or refine sources of Investor Edge.

Investor Checklists - strategies for overcoming failure was thought about and is being initiated in a new thread.

What else - please keep throwing your ideas!


TMIT Chapter 2: “Understanding Market Efficiency (and Its Limitations)”
(Donald Francis) #2

We have opened atleast 3 threads for identifying “Failure Patterns”. These are Lessons from Corp Misadventures, Lessons from Corporate Fraud, and Investor Checklists. And these are for helping us AVOID mistakes.

But Avoiding mistakes does not make us a super investor. It probably makes us little better investors than the run-of-the-mill crowd.

As I see it, Investor Edges come incrementally

1). Make sure to AVOID mistakes - by identifying and incorporating as many failure patterns into your Mental Models, or investing decision making process. And, then

2). Identify “Success Patterns” (of Businesses)

There are many ways of looking at Success Patterns. Some of these we have discussed and documented in our Capital Allocation Framework thread.

Another way of identifying success patterns could be - If we can identify what is in the DNA of this company that will make it successful, or supremely successful.

When I start thing on this pattern - a few example immediately spring up in my mind. And I am sure the community will throw up many more examples:)

Time for a Success Patterns thread.

-Donald


(Atul Garg) #3

Hi,

Excerpts from the first page on this thread …

“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.”

I was going through the opto circuits thread to understand what went wrong with opto, but really couldn’t get much. All the way, it seems a good story backed up with good numbers. Seniors, please help understand what went wrong with opto.

Thanks,

Atul


(Donald Francis) #4

Check Opto Circuits thread in Company Q&A.

That should give you enough pointers to look at the Balance Sheet closely over the years, ponder over the changing strategy of the company for achieving growth in recent years, the cost that came with it, any few other small small things …including Mr Market’s telling you something!

-Donald


(Tony) #5

Company Q&A Link: …/…/company-q-a .

Recently i had read an article in Forbes India on Onmobile. The link is here:

http://forbesindia.com/article/boardroom/why-arvind-rao-and-onmobile-went-down-a-dark-road/33420/1

Hope this helps us in the analysis you have undertaken.


(Atul Garg) #6

Thanks Donald,

I went through the thread, you mentioned, and the last two ARs.

Thats an eye opener. What I have come up after this case is to definitely take a look at the asset break up of the company, which I didn’t give much attention before.

Thanks for the linkTony. A really nice article about the hard realities of poor managed debt.


(Donald Francis) #7

Great Atul,

I really like your systematic approach. With the right attitude and hard work you will go very far:)

You may like to share this learning in the Opto Q&A Thread? Others will benefit and can add to interpretations/inferences drawn.

-Donald

linkTony.


(Atul Garg) #8

Thanks for the kind words Donald.

All I am trying is to learn from the seniors on valuePickr, awonderful platform for learning.


(Tony) #9

Here is one more good article on how Moser Baer destroyed shareholders wealth. Read this article in Forbes India. Link is here:

http://forbesindia.com/article/boardroom/moser-baer-has-all-but-shut-down/33432/1


(ranvir dehal) #10

http://forbesindia.com/article/boardroom/the-rise-and-fall-of-subex-founder-subash-menon/34109/0

this is about how badly planned acquisitions and the debt assosciated with it can lead to sudden big failures. also the promoter took debt from people who were not much int. in the company but more in their part of the flesh .


(Donald Francis) #11

Thanks Tony for the excellent value-addition you are doing for the community. Meant to acknowledge earlier, but forgot:(

These are wonderful articles - to open our eyes, and broaden our exposure to what goes wrong/can go wrong. The fact that you are tracking these, implies to me a pretty refined investment learning/thinking on your part.

I want to spend some time consolidating these learnings for the benefit of us all; will find some time later.

-Donald


(Tony) #12

forgot:)(

I am grateful to you Donald. After being on this site I am learning the nuances of investments in its right sense. You guys truly put in so much effort. I am just adding a brick to the wall you have constructed. I have a good book by Seth Karlman titled. Margin of Safety. How can i give a soft copy to you? Can you give me your email id? This book is out of circulation. Reading this book will add more value to this site.


#13

I think we can add few more to the list

Bartronics

Jupiter Bio

KLG Systel

Zylog


(Krishna) #14

How about

Satyam

DB Realty


(Dhiraj Dave) #15

I have been passive member to valuepickr for last 3 years. However, find your idea and approach very good and hence would like to involve in forum more actively.

I would like to add following names:

Plethico Pharmaceutial

XL Energy

Shree Lakshmi Cotsyn

The major problem with Indian companies is buying of sales. In order to get better working capital limit from Bank, they have to show higher sales and receivable/inventories. The best way to do is through accommodation with other company. I purchase Rs 100 worth stock from you and simultaneously sell Rs 100 worth goods you on credit for 3 months. There is no exchange of goods and it is risk free transaction. However, I accept a bill in your favour which gets discounted with Bank and you draw bill in my favour which again get discounted with your bank.

The other prevalent accounting trick is to do revaluation of assets in following way. You have Rs 100 assets in your balance sheet. You shall that asset to subsidiary for book value. No profit in your book and tax outflow. Now you moved to high court for merger of this subsidiary with your company. The CA valuation as required by high court is Rs 1,000(it can to even to 10,000/- or Rs 100,000/-). You in high court application ask court to consider incremental Rs 900/- as revenue reserve. High court judge being not accept in account would pass order to consider Rs 900/- as revenue reserve. Next year, without any change, the company has effectively done revaluation without revaluation reserve. Even if reserve considered capital reserve, the company can issue bonus out of same. This is what financial engineering (or magic, value out of air). And also it vanishes in air eventually making greedy retail investor paying price for greed.

Please let me know your view.