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

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
  • 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

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Hi,

Donald, shall we discuss something less obvious like why Yes Bank and South India Bank is not going anywhere with very obvious good performance and bright future? Or are we more into documenting complete failures? My sense is bright and average both type of investors manage to avoid completecatastrophe situations, but the bright investors distinguish themselves by not falling into not so obvious traps.

The real question is; are these even traps or just doing there time in a range for a very long time. And, if they are doing a range for a very long time, then how can average investor identify such scenario and save himself from these.

Hi Gyan,

Good thought. We are actually introducing a “Value Traps” section next. (where you can’t put a finger on what’s really wrong, yet Mr Market is seemingly trying to tell you something)

Not saying Yes Bank or South Indian Bank fall into that category. There may be other reasons behind non-performance.

But there are some very clear value-traps - that can and should be easily identified -and stayed clear off. We will start a section on that soon - just give us some time. Need to seed that properly, else too much time of Admin/Moderator time gets taken up in influencing the right sort of content-additions.

I got a beating from Admin on account of the “Lessons from…” threads that started running away uncontrolled:)…the forum is now very vibrant, we need to seed early content carefully.

If you or anyone else would like to put your hands-up on working on Value Traps seed content, please raise your hands here!!

)- Donald

Dear Donald,

Just came across this article today. I hv also spoken to Mr. J and your this article needs corrections. Pl do. Then delete my this comment. The third edge is Behavioral edge. What you do after u hv information and analysis edge? How u behave after u have first tow edges is so damn important. These three edges were first mentioned by Bill Miller. Mr. Chetan Parikh (and not Ketan) of capitalideasonline.com mentioned this to one Mr. Chin during Chin’s visit to Mumbai.

One small typo error. two edges. Not tow.

Thank You Janak and Donald forsharing this really profound thinking for improving the investment process.

For a beginner it becomes easier to identify exactly where he is lacking and work on it.

Janak Sir, could you also share how you went about building the analysis edge and behavioral edge…your favorite books on each of these etc?

And say “Hi” to Mr J if you meet him :slight_smile:

Vinod

Dear Donald!

U have stated: He said the concept was introduced to them by Ketan Parikh - from the book (?)

Please note that the name shud b Chetan Parikh. Not Ketan.

JM

Most probably the concept is of Bill Miller of USA.

**

Thank forsharing process. **

:))

Vinod

Dear Vinod,

Learning is always work in progress. Analysis edge gets build up over years as we learn. Many times past patterns repeat themselves. If we r prepared with dry gun powder (behavioral edge) then we can take advantage of them repeatedly. Rather than book i wud say few sentences have helped me become a better investor. They r from Warren Buffett, Charlie Munger, Peter Lynch, Phil Fisher.

Investing is most intelligent when it is most business like. Value investors always want to have a margin of safety. I had met Vallabh Bhansali when I was very young. I attended his lecture and he literally made a fool of listeners. My thought process started from there on. From him i learned to understand different phases of industrial cycles and their impact on the co profits. Some contrarian investors have super behavioral edge. If i had just bot what he had hinted at, i wud have many crores.

Regarding behavioral edge i wud say that over all these years i have learned that as soon as you find some bargain, irrespective of the overall market, it makes sense to buy.

Hope i hv thrown some light.

JM

Thank you Janak Bhai,

You have definitely thrown some powerful light - I liked “Investing is most intelligent when it is most business like”

I was feeling disturbed with the time I was taking to build analysis edge and initial days of reading valuepickr made me more and more in-secure. Deciphering financial statements and their linkages was a daunting task. Its comforting to know that even building analysis edge takes time.

Can you throw more light on the industry cycles-profit bit - examples of your past investment in cyclicals will help.

And you are still very young :slight_smile:

Thank You again

Vinod

Dear Vinod,

Just like nobody can become a brain surgeon in one year, it takes time to understand industry cycles, industry dynamics, co DNA, co prospects, Management DNA, stock market cycles, fear greed hope etc . So be prepared for a long journey.

And all the best,

JM

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what a promising thread! I am perplexed why it stopped. reading these old threads where the seniors were once prolific and shared their thoughts is very enjoyable and value additive. I am stumbling across these very deep, buried old threads and uncovering a lot of usable information!

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Absolutely agree. Not seeing such write ups frequently or may be need to search more to discover gems like this.

Such threads have stopped because the answer is in the first comment itself.

he does not like to be in public forums…its the really loaded guys who need to stay off

The people who were writing these threads a few years back have now graduated to the really loaded category after the bull run.

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There is this comment by charlie munger that has stuck with me . More important than the will to win is the will to prepare. All the seniors have demonstrated this will to prepare.These threads are the living example of it. You cant get too far in a leaky boat. I will devote considerable time going forward in the preparation part of it by re reading old content on valuepickr. The older the content the better!

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