@Mudit.Kushalvardhan Everything about personal finance is “personal”. It depends on you. You can have 100% of your portfolio in simple index funds like the following:
One can start with index funds and then as one gets more comfortable in researching, and owning stocks then one can allocate increasingly more to stocks.
@Mudit.Kushalvardhan
You please take this advice whole heartedly without any doubt and confusion. Rarely I found people like Basumallick who is advising genuinely without any conflict of interest. The more I read his views and older posts I came to realize that he is one of the gem of this forum among few. Very balanced, intelligent and broad minded. One can learn many things just by reading his thought articles.
Hello Abhishek sir. I have asked the same question to Hitesh sir but asking here again, to get more viewpoints so that I can understand how experienced investors like you and Hitesh sir think about these points/issues/flags.
I am not sure if you follow this business of Rolex Rings closely but your views would be appreciated considering that the points which are kind of bothering me are more from Governance perspective rather than business perspective.
These are few points which I gathered from the DRHP of the Rolex Rings. Businesswise I think it fits my framework of simple business with less moving parts (becomes easy to understand and track) and also looks at interesting juncture considering that most of the bearing companies are trying to set India as their export hub.
**Just wanted to know how one should look at these points? Do you consider these as big red flag?
Before I get into the specifics of this particular case, let’s examine the broad outline of what we are trying to achieve. Our effort (at least my effort, should not generalise) is to be able to generate good absolute returns over the medium to long term.
For that, we need to find and invest in good companies that can grow their revenues over time and are not overly expensive (that is, where valuation multiples are not likely to compress significantly during our holding period). Now, we also need to realise that no company will be perfect. Our problem starts when we read a lot of American investment books and try to retrofit those concepts in India at this time 
Now, let’s come to your points.
Yes, most probably the independent directors were appointed before the IPO. If it was my company I would do the same.
Family members holding most key management positions is also pretty common in Indian family-owned and family-run businesses. And contrary to western opinion, I believe that is not a bad thing. It is not as if professional management cannot be incompetent Owner-management tends to take a longer-term view than professional management.
The salaries in the company are very clearly based on family structure. All the Madekas get a higher remuneration compared to the outsider professional management personnel. Again this is normal practice in Indian companies. Whether it is the right thing to do is debatable. However, as a company with a 1000cr revenue and a 130cr PAT, the CFO does get paid reasonably well. The overall remuneration of the all the Madekas put together does seem to be on the higher side. Now, here you need to put in your judgement call as to how much of negative weight you will put to this factor.
We should always be sceptical of related party transactions. Another negative factor to weigh and consider. You also need to see how many such RPT are there and is it a regular feature. Unfortunately, this year’s AR is not yet out to delve into this.
Most of the time, this happens out of ignorance. And for B2B businesses, it is the product quality and customer relations which matter more. If I start a company with the same name, I doubt if I can make bearing rings as well as them and if SKF and other giants would even give me the time of the day forget ordering from me. So, ignorable factor for me.
Thanks a lot Abhishek sir for detailed answer. Much appreciated.
Experienced packed answers like these help new investors like me to build more practicle approach to look at the things.
My takeaway from your answer and Hitesh Sir’s answer is, one should be aware of these little things but these things are fine as long as business continues to deliver and doesn’t messes up in big way.
yes, basically you need to make a list (even if it is not explicitly done on pen and paper or excel) of factors that determine the attractiveness of the investment. Then you can give it scores or ratings. Each factor has a weightage.
Most experienced investors do this in their minds implicitly. What factors to consider and how much weightage to give to each factor will come through experience and learning.
While analysing any company, especially for long term holding, there are some basic criteria that need to be fulfilled. A little bit of leeway can be given here and there considering the Indian way of doing things and the jugaad entrepreneurs employ. ( For the flavour of the season investments like a specific stock or sector which we want to ride for short to medium term, these criteria are to be relaxed even further. )
First and foremost criteria to consider according to me are :
Opportunity size… Company should have a big enough and growing marked for its products/services, in comparision to its size.
Scalability… If opportunity size is there to grow, company should have the ability to grow fast. And this means it has the ability to deploy incremental capital , but this should be at a higher rate of returns. If company which generates an ROE of 20% for say last 3 years plans to expand and expects ROE on expanded capacities to be 25%, its always a good proposition provided they deliver.
Sustainibility and Predictability : There should be a clear run way for growth visible and business should not be lumpy. Companies with long periods of growth or promise of more than 20-25% CAGR for a few years will provide good returns even if you pay higher price at the time of entry and hold it for long. ( should not be bought at exhorbitant valuations of say 50-100 PE and grows only at 10-15%)
Balance sheet : In growing companies there can be some debt but it should not be out of proportion. Plus the return ratios once the growth engine starts chugging along should be above average. There can be a few years initially where free cash flow can be negative, but as long as overall picture is good, its okay.
Promoter holding and pledging: Promoter holding should be sufficiently high to inspire confidence as an investor. Pledging should be negligible if at all. If it is high initially, over a period of time it should start going down.
Management : Promoter owned and run business is a good combination provided promoters know how to manage the companies Reasonably decent salary structure for promoter families is okay. Related party transactions within limits is also okay, as long as promoters do not feed their private ventures with money from publicly listed companies.
An example of a fantastic management in the wrong business I encountered few years back was in GRP, the erstwhile Gujarat Reclaim Rubber. They used to recycle waste rubber into recycled rubber. This was usually used in tyre manufacturing. Now tyre industry itself is a heavily cyclical industry and if your company is dependent on the fortunes of it, then its a tough business and difficult to give consistent numbers. I met the management a couple of times during AGMs at Ankleshwar. Father and son duo is fantastic in their knowledge of the business and humility. And they provide superb food in the AGM. 
But for my visit to the company, that was the only highlight. Its a tough business to run and inspite of top notch management, has hardly provided multibagger returns since many years.
Above can be broad starting points to look at for long term investments in terms of business quality and management quality. If these are satisfied , then one can do more digging and then take a call.
You can read up One Up on Wall Street ( I feel its a book worth reading multiple times) and Pat Dorsey’s Five rules for succesful investing. Try to digest and internalise these books (esp Lynch’s book) and look at the Indian way businesses are done (by going through annual reports of multibagger companies) and most of the queries at analysing companies will be gone.
Try to look at the company as a whole rather than bits and pieces. Idea should be to look at the big picture and avoid excessive analysis if the big picture is okay.
Super answer and practically very useful. Couldn’t have put it better.
Thank you Hitesh sir & Abhishek Sir again for such a detailed answers. Really feel privileged that I am able to connect with such a seasoned investors and learn from them.
I found this episode very interesting. Railways has been a part and parcel of growing up in India and I still prefer traveling by train (< 2 night journeys) than flights. There is a pleasure in sitting on the window side in a train and seeing the countryside
Here are some points from this video:
Hello Abhishek sir,
Can you throw some light on your new smallcase offering quiver? Is this also based on momentum? Would this perform well in uptrend market or does it have elements of say mean reversion as well for sideways market? Is there some criteria for minimum large/mid cap stocks in this or the whole world is the limit? If there is any other writeup please share.
Thanks in Advance
Firstly, I try not to discuss my services on this platform. But, since you have asked, let me put a few lines on it here.
Quiver is a concentrated portfolio. It has 0-10 stocks at any time. The main idea is to have an aggressive portfolio using fundamentals, technicals and quant. This has all types of styles in that one basket. Some are momentum, some are mean reversion and some are on the verge of breakouts. The idea is to aggressively focus on trend following and risk management.
All this means churn is significant for at least 70-80% of the portfolio. There is no market cap bias. Neither is there any sectoral bias or any constraints. Basically, it is a free-flow concentrated vehicle to try and generate above-average returns.
There is a short video you can watch to understand: Intelsense Research Services - An Introduction - YouTube
The Draft National Electricity Plan, September 2022 offers great insight into the Power Sector.
Here we do a deep dive into some of the critical portions from the standpoint of infrastructural development and opportunities that may open up in this space.
The plan envisages achieving a capacity addition of nearly 50% of the already existing installed base.
The total installed capacity for our country has grown at a rate of ~7.84% CAGR since independence.
The growth of installed capacity and energy generation has seen some tapering off compare to other historical 5 years periods and is expected to gain momentum from here.
Major reforms were undertaken in the Distribution Sector along with liquidity infusion during COVID -19.
The plan forecasts Region wise Energy requirement for the next decade.
The need for Inter-regional transmission capacity is stressed and also considered in the plan.
The estimated fund requirement for the capacity addition is a massive 14.35 lakh crore over the next 5 years.
The fund requirement to complete these projects is expected to provide growth opportunities for the Banking Sector at large.
The planned capex will open up requirements for the entire supply chain. Boiler, Turbine &Generator (BTG) form a major part of the thermal power plant. This is expected to benefit BHEL the largest player with L&T, Thermax & others.
Another very important part is emission control equipment like FGD - Flue Gas Desulphurisation and SCR - Selective Catalytic Reduction.
BHEL is already doing large FGD orders and working for SCR also.
The construction machinery requirement for a 660 MW set is outlined in the plan.
The plan mentions need of civil contractors to execute Hydro projects.
Wind Power plants execution can be achieved but focus on building quality turbines will be essential.
The plan stresses the need for developing indigenous sources for critical items.
The key material requirement is expected to provide major demand boost to Core Sector such as Cement & Steel. Major Cement demand coming from Hydro plants and for Steel from Wind projects.
Castings, Forgings, Tubes, Turbines and Generators requirement for Thermal Power Stations.
An FGD system alone will require huge amounts of Material for construction.
Limestone requirement for FGD is also expected to be massive.
Land Requirement in terms of Acre/MW was estimated.
Emission norms highlight the importance of FGD
The investments, if they fructify, could be a significant game-changer in the infrastructure space in India.
Can you throw some light on companies under NCLT in the power sector?
How are these being taken over. Are there any takers for these NCLT ridden power companies?
NCLT takeover always happens on a case-by-case basis.
@basumallick bhai Have looked into players like Techno Electric if the new electricity policy can work as tailwind? Any other beneficiaries given you have looked into the proposal in detail. Thanks.
National Logistics Policy 2022 is a policy initiative aimed at improving India’s overall efficiency in logistics. Here we take a brief look at what it means.
India’s logistics costs amount to 13% to 15% of GDP. The country ranks 44th in logistics, while the economy ranks fifth in the world.
Indian long-haul logistics is dependent largely on road transport as bottlenecks in their means of transport like railways and waterways abound.
Trucks in India run around 300 kms in a day compared to a global average of 400-500 km. Out of this, the empty drive rate is as high as 40% - the primary reason being a lack of information and coordination.
The railway is the second most opted medium in the country. However, both goods trains and passenger trains are run on the same rails and the passenger trains are given higher importance. Safety from damage and theft is inadequate and leaves businesses open to liabilities during goods transport. Moreover, dependency on other modes to transport goods through rail as the railway network is not always closely integrated with manufacturing and warehousing hubs.
Cost per ton-km across various modes in India
The main objective is to reduce costs incurred in logistics from 15% to around 8% of the GDP in the coming years.
This should help in building an efficient warehousing system and creating hubs or centres for streamlining the entire supply chain process and reducing the bureaucracy and promoting cooperative federalism in trade and commerce.
Reduced logistics costs should help in the accelerated growth of enterprises, SMEs and MSMEs thereby generating more employment opportunities and the development of human capital.
It should also help in the emphasis on “Supply Chain Management” as an area of study and career.
NLP proposes a Unified Logistics Interface Platform(ULIP) - a single portal comprising all the digital services related to logistics bringing together the unorganised service providers to standardise cost.
A common tracking of inventory levels to better facilitate the demand addressing capacity and introduction of advanced technology in tracking and coordination of various services.
Ease of Logistics Service (ELOG) will be launched for grievance redressal and support to aid the continued smooth functioning of operations.
ULIP is also to be well integrated with digital tools across the logistics value chain to provide an end-to-end dashboard for efficient planning and execution.
30 logistics systems of 7 Ministries/Departments have been integrated through 102 APIs with ULIP. The aim is to create a UPI kind of structure in which every single transaction of the logistics department can be authenticated.
Integration of ULIP with other digital tools
Huge costs are needed for the initial infrastructure developments primarily in roads, trucks, rails, warehouse development and technology implementation.
Logistics is largely a disorganised market and implementation of uniform systems can be initially challenging.
Reduction of tax revenue on various fronts for the government might cause bias in the effective implementation of this policy.
As a digital system, system availability, efficient and fast operation, maintaining resilient and reliable backup facilities and cybersecurity are very important for smooth functioning. Any disruption that causes a delay could cause higher losses under the hub system.
It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes. ~ Warren Buffett
This quote has been embedded in my mind since I first read it. So, I try to observe the world and keep reflecting on the mistakes that I and that others around me make. There is a lot to learn. Today, I will discuss one such mistake. And one made by, perhaps, the person I admire most – Charlie Munger. So, when our guru makes a mistake, you should sit up and take notice.
Here is what happened. Charlie Munger took a bet on the Chinese giant Alibaba. This was just before the Chinese government decided that Jack Ma had grown too big for their comfort and pared his wings. Munger bought his initial stake at around $246 per share. So far so good. Alibaba was a giant in China. It was one of the largest B2B and C2C ecommerce sites in the world. Alibaba was on its way to launching the largest IPO on the Shanghai Exchange in Oct 2020. Just before this, Ma addressed an assembly of high-profile figures in China with a controversial speech that criticised the Chinese financial system. And then suddenly, he practically went missing for three months.
This more or less started the crash in Alibaba’s stock. From above $300 it has now crashed to close to $70, an overall fall close to 75%.
Alibaba monthly price chart
source: tradingview.com
Munger probably convinced this was a passing phase and things will get back to normal after Jack Ma is “taught” a lesson in adhering to the government line, doubled down and kept adding as the stock kept falling. He added substantial quantities in the Jul-Sep quarter around $182 and again in the Oct-Dec quarter around $145. Each time he nearly doubled his position from before. He probably realised his mistake and sold half his position in the Jan-Mar quarter of 2022 at $115. Today the stock price is around $70.
Munger kept averaging down before booking partial losses
Source: gurufocus.com
When I sit and think about this trade, here are the lessons I draw from it.
Mistakes will be made. You need to keep your guard high all the time. As Richard Feynman famously said, “You must not fool yourself, and you are the easiest person to fool.” As investors, most of the time we keep fooling ourselves. The best way is to have a focus on building processes that will firstly, prevent you making a mistake, and secondly, even if you do, will protect you from making great damage to your portfolio.
Note: This article was first published on The Economic Times.
Great article …good insight…thanks for sharing !
I have a different point of view here, I obviously don’t have anything to prove my point, but I guess it sure has merit.
Munger is 98 years old now. I am guessing he must have been at least 90 when he bought the stock. 90 may not be old age by the standards of geniuses, but nevertheless I guess it is not an age where the brain can work the same as it did even 10 years ago. So despite Munger being Munger at the time of the investment, but he may not have had his entire brainpower by his side, including his vast experiences, because experiences too are memories which also reside in the brain. He may not have went through the entire process of investing in the stock, he simply may have nodded his head as approval.
So I don’t think it is appropriate to look at this particular investment from any standard vantage point, considering the advanced age of the investor in question.
On a lighter note, I would be glad to stand corrected if Munger himself sees this post, and says that I am utterly wrong, and he is healthy as a horse, and he is currently reading about Metaverse.
