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This is a thread of mistakes, diligence findings & lessons. Some personal, some professional. Will keep adding as I dig through memory. Hope it’s as useful to you as it was & is for me. No names. Context wherever possible
#InvestingMistakes #DiligenceFindings #Lessons
1/ What it takes to grow a company 100 cr in size is different to grow it to 500 cr is very diff for 1000 cr, v diff for 10k cr. Very few ppl have the skills to lead such cos. Hence very few small caps will make it to largecaps
2/ Mistaking ROCE / ROE expansion (driven by cheaper input cycle) for management skill — industrials, chemicals, commodities
3/ Ignoring capacity addition in global RM supply chain and assuming access to RM as a moat — manufacturing, industrials, semiconductors
4/ High rev growth / utilisation / occupancy driven by black to white conversion; which peters off when the conversion is largely complete — tolls, hotels, retail. Sectors with large cash collections
5/ “A rolling loan gathers no loss” — financials
6/ Goldplating of capex. Knowing the unit economics helps — mostly infra, industrials, textiles, food processing. In infra / industrials capex imported through related parties and multiple friendly intermediaries
7/ Ignoring promoter share pledges and promoter LAS. This one cost me dearly in 2010. It’s a good thing pledges are disclosed publicly now
8/ Promoters buying back slow moving inventory from retail shops through “friendly” parties to show sexy inventory metrics — retail
9/ Paying retail / consumer multiples for a wholesale business.
10/ Using working capital to fund capex — infra, industrials. This is relatively easy to figure out. If short term WC loans >> Net working capital and LT debt small in comparison to debt mix and capex something is surely wrong.
11/ Average businesses with little or no differentiation having super high margins at premium to industry leader (which are not sustainable)
12/ Mistaking a benign currency driving margins in an import business (assumed to be sustainable) for management skill
13/ Raising debt to pay dividends — financials
14/ Buying a consumer loan book outright to show higher share of consumer loans in the hope of getting a consumer finance multiple — financials
15/ Investing in asset intensive businesses at the peak of their profit cycle by paying peak valuations. Normalise. Always normalise
16/ Assuming price rise due to limited float as a sign of market validation.
17/ Always start to rethink risk in light of well funded competition and new entrants — multiple industries
18/ Capex / unit and working capital significantly different from industry peers needs investigation.
19/ Not investigating the promoter entities and trading houses which are large shareholders in a stock. If these are shell cos owned by dubious ppl can destroy value fast if a scam / adverse event breaks out
20/ Force-fitting an analysis to an idea which has caught your fancy. This was unfortunately a bad habit from professional investing and took some time to unlearn
21/ Building a position too quickly without seeing validation of thesis playing out in numbers. When price seems optically cheap this is a big temptation.
22/ Installing a market related app ie Moneycontrol. Ever since deleting it I found more time, cleared my head and also improved my phones battery life
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