ValuePickr Forum

VP CHINTAN BAITHAK GOA 2017 : Bheeshma Sanghani : INVESTMENT JOURNEY/PHILOSOPHY

Sharing a new learning for me - credit to M.Mauboussin. The irrelevance of growth if the company doesn’t earn a return on capital exceeding its cost for the same. I have observed people getting excited (me being a prime example) with earnings growth, However, growth adds value ONLY if it earns more than its cost. I am now more cautious about earnings growth and as a result more probing about its roots. Its certainly an important realization for me and reading Mauboussin has been a meaningful stepping stone in the right direction.

Best
Bheeshma

9 Likes

Hi

True! I have tried and used this for sometime now.

Valuation Formulas.pdf (172.4 KB)

Had made notes on this. Sharing.

p.s. do look at his tweets he has shared a photo of his ‘Valuation Shelf’ of his books. :grinning:

Regards
Deepak

4 Likes

Hi Deepak

Your notes are very well written and carefully expressed capturing the essentials. I especially liked the part where you have written that value is much more sensitive to positive changes in the ROC than growth. This presents many opportunities as one doesnt track ROC with the same fervor as one tracks growth in earnings or sales - leading to ignored companies that have good ROCs but growth has stagnated for one reason or the other. These companies are often available at reasonable valuations even in a bull market and valuations seem to display immunity from the vagaries of the marketplace despite lack of growth.

Your notes are well worth the read. Thanks for sharing them.

Best
Bheeshma

1 Like

The Credit Suisse guys have got some really smart people with very actionable advice.

I had found a very interesting report on Moats back in 2015. Here is the updated version of the same.
Take a look at this guys.
Measuring the Moat [2016 updated]

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Hi @ciri

Mr Mauboussins thoughts on many things have been very useful. The most important takeaway for me however has been his thoughts on identifying market expectations. Al rappaport his guide is also excellent. Expectations Investing - thr book co-authored by them is a very good read.

Mr Mauboussin uses his expectations investing framework to measure the moat of a co. From his works, i gather that the stock price of a co reverts to its long term earnings growth. If a co is successfull in creating a competitive advantage and then strenghtening it - then the stock price reflects it. The implied growth rate in the stock price is his quantitative measure of a moat is what his study says.

For several years HUL was trading at its implied growth rate of 10%. Recently, however the implied growth rate has improved significantly and it has so far sustained. Maybe a moat has been strenghtened there.

Hi all,

As i have invested i have learnt along the way. Some of my earlier investments were in cos which despite posting good numbers and good return ratios drifted down in terms of stock price and as a result i lost money. Some of such notable cos were Shankara, Tiger Logistics etc

Anyways, painful memories aside , i realized that one way to differentiate cos is look at how they manage working capital. More specifically, is the cash from operations (before working capital changes) enough to cover working capital needs?

While this may sound obvious , i think that any method that helps to separate cos that one should avoid deserves special attention

Money locked away in working capital needs to be funded and i have began to appreciate the impact this plays on the overall valuations of a business.

If you find yourself invested in such a co then there is only one way its going to end.

Looking at the working capital cycle and estimating working capital needs of a business is as fundamental as it gets. I have looked at the operating cycles of many businesses now and its quite revealing in terms of giving a sense of how difficult or easy the business is to run & operate.

So i am sharing a sheet that helps one to estimate working capital needs and relate it to the operating cash flow ( before WC changes ). Cos like Shankara , Tiger Logistics and countless others just cant generate enough. Ambika Cotton for e.g even in tough times has generated enough to be able to chug along while Indocount is not able to. Dmart and Future retail same story.

Vmart for long ( that is the co analyzed in the sheet attached ), was not able to generate enough.
However, it improved its cycle drastically and in 2017-2018 with an operating cycle of 55 days, it made enough cash to be able to cover its working capital and turned debt free.

VMART Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
WC Days 123 115 140 103 93 87 79 75 67 55 55

OC.xlsx (13.5 KB)

The cells marked in blue you will have to copy paste data from screener or any other source.
Items I and J are the numbers to look at. I is the WC required and J is Operating Cash flow ( before WC changes). The actual WC capital required by a business cant be picked from the balance sheet as the receivables contain a profit component and for cos with significant gross margins, the WC is overstated if picked directly from the balance sheet. It has to be estimated

Do let me know your views on the same. Any inputs appreciated

Best
Bheeshma

9 Likes

@bheeshma
I have read few of your post. Remember 1 post in dmart. You go deep into inventory turnover, working capital, usage of debt etc which is no doubt great, but I am not yet competent enough to understand or comment. I restrict myself to P&L, Yearly, quarterly, PE, 52 week low/high, RoCE, RoE and of course cyclicity, future road map, tailwind if any, competition etc… The qualitative part.

Therefore, I would not comment on your current post, rather would like to know more on your logic of selling when 15%down from buy price. Refer your presentation. This is indeed very surprising… If you buy quality growing companies, one should average down rather than selling isn’t it? 15 % is just too close. Also I prefer trailing stop loss of 20-30% for low conviction bets only. Ex Maruti if falls, I will average down. But let’s say yes bank falls by 20% from High, I exit.

Would like to have your views on this. Thanks.

1 Like

Hi @homemaker

Welcome to Valuepickr

The logic of 15% is based on my average buy price. I average down 2 or 3 times for cos where I have a good feel about and where I am sure about the true worth. If after that the co still drops I feel that the market knows something I don’t and I get rid of the position without applying too much brain.

Since I have a concentrated portfolio and invest in growth cos I run the risk of denting my portfolio if I have incorrectly become more optimistic than necessary. When you are investing in cos where most of the value is going to come from future growth and actual growth is below your expectations the value of your share drops dramatically.

I also like to have specific rules and let these take the decisions for me. When it comes to my portfolio i like to have quantitative rules. That’s why i like the Ben Graham style, he had specific rules.

I am a believer in the efficient market theory and over a long period the price reflects things that you may not know but others do. I am comfortable with 50% falls provided I am willing to average down after assessing no loss in earning power and the price stays less than 15% below my average buy price.

Best
Bheeshma

Exactly. I was partially thinking along the same lines. While I enthusiastically set out in October to build my portfolio, I thought I will do it once and run it in auto pilot. But I think portfolio building itself takes time may be 12 months. Even after averaging down 2—3 times, still the price falls by 15%, is a clear sign market is telling I am wrong. Please exit.

Also by exiting, not only we preserve capital but gives flexibility to look for better options.
Averaging down is like giving your conviction a few more chances and time. It can’t go on for ever and hope based.

Let me thank you, for reinforcing the vague concept which was honestly irritating me for quite some time

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Concept of averaging is never a nad idea however you have to 99.9% sure of knowing the things happening in sector, stock. Once invested and have conviction, i just go and do averaging in stocks i have selected in core portfolio, you should be happy as aquisition price go down hence return in investment go up.:grinning::grinning::grinning:

Hi @homemaker

I would like to add that I am in the startup phase of my investments - so ones strategies should be aligned to ones experience in the markets. Typically beginners like myself enter the markets with half baked know how and are ignorant about important aspects of investing. To cross the chasm one needs rules that protect you in this phase from too much harm as mistakes are inevitable. One should be flexible and discard notions that don’t work and retain the ones that do.

As one acquires skill to avoid the bad apples , the good apples pile up and then you can breathe a sigh of relief. No seasoned investor I know uses 15% exits - but that’s due to their better abilities at picking winners.

Best
Bheeshma

2 Likes

This is one of the. Best article on working capital changes with some practical example

I always study cash flow and working capital changes before investing and this article given me lots of awareness on this topic , read it numerous times
Hope it may be helpful to you also
Thanks
Ashit

7 Likes

Thanks @ashit

Yes, looking at WC changes and movements holds a lot of promise as a tool to identify well run cos. Looking at the operating cycles of footwear cos for e.g - one can easily identify the ones facing issues from the ones that aren’t

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hi @bheeshma Thanks for the sheet. Shouldn’t we be careful about the companies which operate with the borrowing? The sheet has taken the borrowings into account. If the borrowings are high & cash flows/cash is not present then it should be treated as negative, right?

receivables days is calculated by dividing receivables by sales * 365. since sales also has the profit component of any transaction, it is used as the denominator when calculating “days”. so its like to like.

on the other hand, the denominator for calculating inventory days and payable days is cost of sales (or cost of goods sold) because that is the financial value (cost) incurred to generate that level of inventory and payables.

hence i am not quite clear what you were trying to say when you said it cant be taken from the balance sheet and has to be estimated.

The receivable days as you said is like to like. However, the figure of receivables present on the balance sheet has a profit component. Do let me know if am making a mistake somewhere.

If cash flows are insufficient to cover WC then the co will need to resort to borrowing. If that situation continues for a while then the co will be in a soup else it will need to scale back.

1 Like

James Simmons - undoubtedly the greatest quantitative (read mathematical) investor of our times

He ends his talk with his 5 guiding principles

  1. Do something new
  2. Collaborate with the best people you possibly can
  3. Be guided by beauty
  4. Dont give up
  5. Hope for some good luck
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This is a short writeup by a friend of mine on his 3 month learnings on the stock market. He is not the one to dabble in the stock market at 41 but he did and this entertaining account not only contains some good genuine learnings but also is useful for some vicarious experience. Not to mention he is an extremely good writer. For those who want to reach out to him do ping me.
The Lockdown Robinhood.pdf (642.3 KB)

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Nice Article He has nicely explained the process, Thanks for sharing