1/n
A tweet thread on my key takeaways and learnings from the book "Of Long Term Value and Wealth Creation from Equity Investing" by the brilliant Bharat Shah. The book is a repository of condensed wisdom from 3 decades of his investing career – a must read!
[RT if helpful]
A tweet thread on my key takeaways and learnings from the book "Of Long Term Value and Wealth Creation from Equity Investing" by the brilliant Bharat Shah. The book is a repository of condensed wisdom from 3 decades of his investing career – a must read!
[RT if helpful]
2/n
Essential principles of investing have largely remained unchanged over history of organized investing. What has changed is the interpretation and application by investors, as deemed convenient or expedient at a particular point in time.
Essential principles of investing have largely remained unchanged over history of organized investing. What has changed is the interpretation and application by investors, as deemed convenient or expedient at a particular point in time.
3/n
Investing is simple, but not easy.
Simple, because it's not difficult to understand the essential principles of investing- a large opportunity, accretive earnings growth, high character & a certain degree of predictability. Not easy, because the required discipline is rare.
Investing is simple, but not easy.
Simple, because it's not difficult to understand the essential principles of investing- a large opportunity, accretive earnings growth, high character & a certain degree of predictability. Not easy, because the required discipline is rare.
4/n
Even some of the best investors falter at “Doing it right” rather than “Knowing it right”. More failures have occurred, even among the greatest thinkers and investors, on account of former rather than the latter.
Even some of the best investors falter at “Doing it right” rather than “Knowing it right”. More failures have occurred, even among the greatest thinkers and investors, on account of former rather than the latter.
5/n
Good investing is a heady mix of art & science. The art is about understanding the quality & character of business & of the people behind it. Transcribing the art into a tangible working model is the science of it. The art part feeds into the science, not the other way round.
Good investing is a heady mix of art & science. The art is about understanding the quality & character of business & of the people behind it. Transcribing the art into a tangible working model is the science of it. The art part feeds into the science, not the other way round.
6/n
Returns are tangible, but the risk is not. Hence, returns appear as real to the investors, but risk appears as amorphous. Returns become real only if backed by intelligent risk taking. Quality of returns is different from quantum of returns.
Returns are tangible, but the risk is not. Hence, returns appear as real to the investors, but risk appears as amorphous. Returns become real only if backed by intelligent risk taking. Quality of returns is different from quantum of returns.
7/n
It is impossible to operate only on the good part of market cycles. Those incredible ‘timing’ skills hit you back if you try them long enough. Investing is indeed long term even though it not considered fashionable these days. Anyone saying otherwise is likely fooling you.
It is impossible to operate only on the good part of market cycles. Those incredible ‘timing’ skills hit you back if you try them long enough. Investing is indeed long term even though it not considered fashionable these days. Anyone saying otherwise is likely fooling you.
8/n
Size of Opportunity is the foundation for growth investing. Ask will it hit a glass ceiling or soar freely for long. Uses framework of size of fish (company) & the size of pond (industry). Size of the pond determines the size of the fish AND your meal. 4 possible outcomes:
Size of Opportunity is the foundation for growth investing. Ask will it hit a glass ceiling or soar freely for long. Uses framework of size of fish (company) & the size of pond (industry). Size of the pond determines the size of the fish AND your meal. 4 possible outcomes:
9/n
A business may have high profitability, superior capital efficiency, reasonable growth, yet fail to create efficient compounding, if it is about to hit a glass ceiling.
A large opportunity may fail to get high valuation if profitability is compressed. Eg: Organized retail.
A business may have high profitability, superior capital efficiency, reasonable growth, yet fail to create efficient compounding, if it is about to hit a glass ceiling.
A large opportunity may fail to get high valuation if profitability is compressed. Eg: Organized retail.
10/
The debate around large caps or mid/small caps is largely an artificial one. Debate is really between quality vs lack of it, the nature of growth (Accretive/Dilutive) & about future size rather than present one. Large/mid/small is relative to opportunity they are catering to.
The debate around large caps or mid/small caps is largely an artificial one. Debate is really between quality vs lack of it, the nature of growth (Accretive/Dilutive) & about future size rather than present one. Large/mid/small is relative to opportunity they are catering to.
11/n
After size, focus on feasibility of value creation. While size helps, what matters more is character. It is the ability of a business to create Economic Value (EV) by generating superior Return on capital over its cost of running the business over an extended period of time.
After size, focus on feasibility of value creation. While size helps, what matters more is character. It is the ability of a business to create Economic Value (EV) by generating superior Return on capital over its cost of running the business over an extended period of time.
12/n
Earnings Growth Quality: Uses the concept of Compounding Multiplier (CM), where CM = CAGR of investment returns/ CAGR of profits over a period. Denotes returns generated per unit of profits. The book presents CM analysis for over 100 companies over FY 2003-12 and FY 2007-12
Earnings Growth Quality: Uses the concept of Compounding Multiplier (CM), where CM = CAGR of investment returns/ CAGR of profits over a period. Denotes returns generated per unit of profits. The book presents CM analysis for over 100 companies over FY 2003-12 and FY 2007-12
13/n
When growth goes away, Stocks become Bonds and cannot really quote higher than the Net Worth. If the outlook deteriorates further, they will be treated worse than a Bond and might trade a discount to their Net Worth/ Book Value. Case in point: NBFC scenario now.
When growth goes away, Stocks become Bonds and cannot really quote higher than the Net Worth. If the outlook deteriorates further, they will be treated worse than a Bond and might trade a discount to their Net Worth/ Book Value. Case in point: NBFC scenario now.
14/n
When the character of the market is a Growth market, focus has to be on growth investing and not Cigar Butts. Feels India is a growth market will ample high amplitude growth opportunities with desired longevity.
When the character of the market is a Growth market, focus has to be on growth investing and not Cigar Butts. Feels India is a growth market will ample high amplitude growth opportunities with desired longevity.
15/n
Not all growth is good. Focus on businesses with accretive growth over dilutive growth. Markets view capital dilution with a healthy skepticism.
Avoid if dilution is recurrent, devoid of economic logic, outsized or in unrelated areas or for perceived dubious reasons.
Not all growth is good. Focus on businesses with accretive growth over dilutive growth. Markets view capital dilution with a healthy skepticism.
Avoid if dilution is recurrent, devoid of economic logic, outsized or in unrelated areas or for perceived dubious reasons.
16/n
Businesses entailing significant Capex & those with significant capital dilution are Siamese twins and have same operating conditions. High capex will have high capital dilution & vice versa. These are anti-thesis to good returns & will lead to mediocre compounding at best.
Businesses entailing significant Capex & those with significant capital dilution are Siamese twins and have same operating conditions. High capex will have high capital dilution & vice versa. These are anti-thesis to good returns & will lead to mediocre compounding at best.
17/n
Market distinguishes colour of money. It does not reward acquisitive growth in the same way as Organic growth. In other words, per unit market returns for a unit growth of profits is less for acquisitive growth compared to organic growth.
Market distinguishes colour of money. It does not reward acquisitive growth in the same way as Organic growth. In other words, per unit market returns for a unit growth of profits is less for acquisitive growth compared to organic growth.
18/n
On Capital Allocation: A mgmt unsure about the payoff but allocating capital is flirting with uncertainty. A mgmt unsure of the size of opportunity will allocate capital randomly which could destroy value. No mgmt has the capability of managing >1 or at most 3 businesses.
On Capital Allocation: A mgmt unsure about the payoff but allocating capital is flirting with uncertainty. A mgmt unsure of the size of opportunity will allocate capital randomly which could destroy value. No mgmt has the capability of managing >1 or at most 3 businesses.
19/n
Banking & Finance: A special compounding machine
a. Proxy of the economic growth - Inherent compounding
b. Are lead indicators rather than lagged
c. Money is RM, raising RM at lower cost creates value
d. Dilution & leverage are part of the game & not a crime. ROA is the game
Banking & Finance: A special compounding machine
a. Proxy of the economic growth - Inherent compounding
b. Are lead indicators rather than lagged
c. Money is RM, raising RM at lower cost creates value
d. Dilution & leverage are part of the game & not a crime. ROA is the game
20/n
Business Quality – Growth Matrix: Forms the crux of Growth and Value Investing. Price provides sails or wings to the ship while earnings growth provides the wind. This image from Vishal @safalniveshak captures the essence (full credits):
Business Quality – Growth Matrix: Forms the crux of Growth and Value Investing. Price provides sails or wings to the ship while earnings growth provides the wind. This image from Vishal @safalniveshak captures the essence (full credits):
21/n
Scenarios:
• High ROCE, High growth – Strength to weather storms and progress
• High ROCE, Low growth – Preservation, but no progress
• Low ROCE, High growth – Illusion of progress
• Low ROCE, Low growth – The ships will sink
Scenarios:
• High ROCE, High growth – Strength to weather storms and progress
• High ROCE, Low growth – Preservation, but no progress
• Low ROCE, High growth – Illusion of progress
• Low ROCE, Low growth – The ships will sink
22/n
Growth-Quality and Compounding Multiplication (Tweet 12) are linked as seen in chart below:
Growth-Quality and Compounding Multiplication (Tweet 12) are linked as seen in chart below:
23/n
Quality, in simple terms, is the ability to generate superior, consistent, predictable & durable ROCE
2 vital tests of Quality:
a. Capital Intensity: Whether a business fundamentally requires high capital
b. Capital Efficiency: Whether the capital generates superior returns
Quality, in simple terms, is the ability to generate superior, consistent, predictable & durable ROCE
2 vital tests of Quality:
a. Capital Intensity: Whether a business fundamentally requires high capital
b. Capital Efficiency: Whether the capital generates superior returns
24/n
A biz. with both high Fixed Capital & Circulating/Working Capital has unfavorable capital intensity profile. High Fixed capital intensity maybe compensated by low Working capital intensity and vice versa.
A biz. may also be capital light but have mediocre capital efficiency.
A biz. with both high Fixed Capital & Circulating/Working Capital has unfavorable capital intensity profile. High Fixed capital intensity maybe compensated by low Working capital intensity and vice versa.
A biz. may also be capital light but have mediocre capital efficiency.
25/n
Predictability improves value since it has an implied effect of lowering the discount rate (in DCF). Future cash flows discounted at a lower or higher rate depending on it.
Consistency drives pricing premium and triggers re-ratings.
Predictability improves value since it has an implied effect of lowering the discount rate (in DCF). Future cash flows discounted at a lower or higher rate depending on it.
Consistency drives pricing premium and triggers re-ratings.
26/n
Businesses with lumpy capital requirements have a basic flaw from investing perspective & will have lumpy returns. Example: Airlines, Hotels. Metals (Steel), Oil exploration, etc
Businesses with lumpy capital requirements have a basic flaw from investing perspective & will have lumpy returns. Example: Airlines, Hotels. Metals (Steel), Oil exploration, etc
27/n
The superiority of a business is inferred from superiority of the ROCE and the superiority of a management from the superiority of the ROE.
@gordonmax
The superiority of a business is inferred from superiority of the ROCE and the superiority of a management from the superiority of the ROE.
@gordonmax
28/n
Growth of the earnings has a way of covering valuation mistakes, and thus help in avoiding permanent loss of capital. Even if one has overpaid, it helps in obviating this error of commission.
Growth of the earnings has a way of covering valuation mistakes, and thus help in avoiding permanent loss of capital. Even if one has overpaid, it helps in obviating this error of commission.
29/n
Margin of Safety: If you are going to invest like Ben Graham, then your sources of margin of safety are different than if you invest like Warren Buffett. You just have to be aware of those sources and also of their limitations.
Margin of Safety: If you are going to invest like Ben Graham, then your sources of margin of safety are different than if you invest like Warren Buffett. You just have to be aware of those sources and also of their limitations.
30/n
On timing: A high quality business, even if purchased at the highest price of initial year in a 5-year cycle & sold at the lowest in last year, generates substantially higher returns than opposite purchase timing for a low quality business.
On timing: A high quality business, even if purchased at the highest price of initial year in a 5-year cycle & sold at the lowest in last year, generates substantially higher returns than opposite purchase timing for a low quality business.
31/n
In bad businesses, the returns, if at all, can only be point to point; which means it is a very chancy transaction akin to flipping a coin many times over and getting it right every time.
In bad businesses, the returns, if at all, can only be point to point; which means it is a very chancy transaction akin to flipping a coin many times over and getting it right every time.
32/n
On Dividends: When business is mediocre, but payout is strong, market views it as unaffordable luxury. In such cases as far as Investment Returns go, mediocrity wins!
On Dividends: When business is mediocre, but payout is strong, market views it as unaffordable luxury. In such cases as far as Investment Returns go, mediocrity wins!
33/n
Market has long memory like much like that of an elephants. Retail investors, at times get caught in a bubble, and rely on short term memory. This is a recipe for pain.
PS: A bad management doesn’t change colour.
Market has long memory like much like that of an elephants. Retail investors, at times get caught in a bubble, and rely on short term memory. This is a recipe for pain.
PS: A bad management doesn’t change colour.
34/n
When intent is not trusted, the value put on numbers will diminish, since market prepares for a possible future shock and thus systematically undervalues such a business and management, for a long period till, if at all, the credibility is restored.
When intent is not trusted, the value put on numbers will diminish, since market prepares for a possible future shock and thus systematically undervalues such a business and management, for a long period till, if at all, the credibility is restored.
35/n
On valuations: Investing is about pricing the value, rather than valuing the price. Price to earnings is a rubbish way of computing value. But unfortunately it is most prevalent. P/E is in fact a derivative of value, but people infer value from P/E
@suru27 @FI_InvestIndia
On valuations: Investing is about pricing the value, rather than valuing the price. Price to earnings is a rubbish way of computing value. But unfortunately it is most prevalent. P/E is in fact a derivative of value, but people infer value from P/E
@suru27 @FI_InvestIndia
36/n
The basic trick is NOT to look at valuations as first filter, but at quality. Pure cheapness is never a virtue. The trade-off is never in terms of valuation vs quality; its quality followed by valuation. Buy businesses with superior & sustainable ROCE rather than just low PE
The basic trick is NOT to look at valuations as first filter, but at quality. Pure cheapness is never a virtue. The trade-off is never in terms of valuation vs quality; its quality followed by valuation. Buy businesses with superior & sustainable ROCE rather than just low PE
37/n
On behaviour: It’s the innate desire of (even a good) investor to leave footprints on sands of time that makes him/her choose the less obvious over the obvious & to see virtues in inferiority over quality. Desire to shun boring businesses induces bias for the poisonous ones.
On behaviour: It’s the innate desire of (even a good) investor to leave footprints on sands of time that makes him/her choose the less obvious over the obvious & to see virtues in inferiority over quality. Desire to shun boring businesses induces bias for the poisonous ones.
38/n
Investing is not a get-rich quick scheme, though such outcomes also occur at times. When it happens, they are merely milestones in long term process of Wealth creation. Hoping for the same to sustain leads to a larger wealth erosion with the reverse flow hitting you harder.
Investing is not a get-rich quick scheme, though such outcomes also occur at times. When it happens, they are merely milestones in long term process of Wealth creation. Hoping for the same to sustain leads to a larger wealth erosion with the reverse flow hitting you harder.
39/n
Ultimately, investing is nothing if not business like. It is a myth to believe that one can earn investment returns even if the underlying business has inferior economic value creation.
Ultimately, investing is nothing if not business like. It is a myth to believe that one can earn investment returns even if the underlying business has inferior economic value creation.
40/n
Investors like to talk about absolute returns when markets are falling & relatively superior returns when markets are on ascendance. Absolute and relative returns are like 2 rabbits – you try to catch both, you get neither in your hands. Focus on first, you get the latter.
Investors like to talk about absolute returns when markets are falling & relatively superior returns when markets are on ascendance. Absolute and relative returns are like 2 rabbits – you try to catch both, you get neither in your hands. Focus on first, you get the latter.
41/n
Lao Tzu says “I have just three things to teach you: simplicity, patience, compassion. These 3 are your greatest treasures.”
In good investing, read it as simplicity (of business), patience (of investor) and passion (for quality).
Lao Tzu says “I have just three things to teach you: simplicity, patience, compassion. These 3 are your greatest treasures.”
In good investing, read it as simplicity (of business), patience (of investor) and passion (for quality).
42/n
“Based on my personal experience over last 3 decades, rarely do more than three or four variables really count. Everything else is noise.”
“Based on my personal experience over last 3 decades, rarely do more than three or four variables really count. Everything else is noise.”
43/n
Summary: I have tried to capture the essence of Bharat Shah’s learning in 4Ps (though he never uses them). Note that the book is full of nuggets that are best appreciated when read in full. Thanks.
/End
Summary: I have tried to capture the essence of Bharat Shah’s learning in 4Ps (though he never uses them). Note that the book is full of nuggets that are best appreciated when read in full. Thanks.
/End
Big thanks to @Gautampolisetty for sharing the book with me (no longer in publication, but the learnings are timeless). A good book teaches a few lessons & reinforces old ones, a great one makes you rethink your investment process - this book from Bharat Shah just does just that!
Thought you might like this thread
@jposhaughnessy @shyamsek @BrentBeshore @safalniveshak @alphaideas @awealthofcs @morganhousel @dollarsanddata @naval @rohitchauhan @jvembuna @Anil_Tulsiram @Ajaya_buddy @rajivmehta19 @contrarianEPS @safiranand
@jposhaughnessy @shyamsek @BrentBeshore @safalniveshak @alphaideas @awealthofcs @morganhousel @dollarsanddata @naval @rohitchauhan @jvembuna @Anil_Tulsiram @Ajaya_buddy @rajivmehta19 @contrarianEPS @safiranand
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