There is never just one cockroach in the kitchen. This is factually incorrect. If you take out all but one of the cockroaches from the kitchen, then there will be just one cockroach in the kitchen. 🤣
But the metaphor of "there's never just one cockroach in the kitchen" is valid for business and investment analysis.
Basically, the metaphor is about information asymmetry - there is information about some shit happening in a company - which is not yet public information. And that it will take time for this information to be fully disseminated.
But markets open every day. They have to price an asset in which “some shit is happening” even if all the shit that’s happening is not out yet (sorry about the pun).
So they take cues from the first news of “some shit happening” and respond accordingly. And most people have no idea on day one if the market is right or wrong.
The market consists of many kinds of folks. Some own the stock, and now that shit has happened, they panic and sell. Some who own it think of it as an opportunity to average down.
Or they don’t own the stock and think of it as cheap because it’s down 20% in a day, or that it’s fallen to a multi-year low, or the lowest P/E, or P/B in so many years etc.
There are all sorts of justifications to buy or to sell. Whether those justifications are right or wrong, only time will tell - when all shit has come out.
But the metaphor tells us something. It tells us that more often than not, the first sign of some shit happening in a company is not going to be the only sign and that there will be more shit that will come out, and it’s premature to buy in this situation now as an investment.
Notice the keywords "more often than not." The metaphor is not a law; it's just an observation of base rates of similar situations in the past. It merely tells us that usually happened in the past (but not always).
Not all market participants are investors. There are traders too. And some traders may feel that the market has over-reacted and there is too much negativity in the price and there will be one pop that will give them a decent upside from here.
But an investor cannot think like that. That’s because, an investment operation is one which, upon thorough analysis, promises safety of principal, and an adequate return. So wrote Ben Graham.
An investor needs a promise of the safety of the principal but when a company is going through shit and more shit may come out, then it’s not possible to evaluate how safe the principal is until all the shit is out. So this can’t be an investment operation.
In other words, one needs to have some sense of the worst-case scenario before thinking of the downside risk. And if that’s not possible right now (because not all the shit is out yet), then it cannot be an investment operation.
There is a nuance though which needs attention: Position sizing.
If he concludes that there is a significant downside (can't be more than 100% unless leverage is used) but that downside is more than offset by the potential upside, after considering probabilities, then he may be willing to expose a small part of his wealth to such an operation.
This operation will then be correctly classified as an investment operation because of (1) asymmetric payoffs; and (2) low exposure which guarantees the safety of capital at the "portfolio" level even though the investor may lose 100% in this "one" position.
This is why investing is so much fun. A conservative investor may stay away from such a situation but an aggressive one looking for a mispriced bet will look for exactly such situations. And both will be right in their own ways.
Another source of fun in all this is that if one waits for all the shit to come out, then there may not be an adequate return left in the situation because of competition with other investors, some of whom may be willing to take a little more chance with their principal.
So, the key here is to think about how much shit is still in there waiting to come out and how much of it is in the price already? Sometimes the price is so low that even if there is more shit in there, there is not much downside left in there. Sorry about the pun again.
In the end, figuring out how much more shit is still there and equally important, how much of it is in the price, is more of an art than science. One has to have a "feel" for these things to get them right.

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More from @Sanjay__Bakshi

24 Nov
Let’s make no bones about this. On INR 420 cr. of revenues in FY 21, Licious lost INR 370 cr.
Trying to disrupt a model (local butcher shop) which has been around hundreds of years (think Lindy effect) requires u too not only sell at a price not too different from local butcher price but also to spend a bomb on logistics, packaging, and customer acquisition (advertising)
The idea that e-com players don’t have to pay rent (key cost for bricks and mortar players) looks attractive but only if you ignore that e-com players must also pay “rent” to book “ad space” on TV, print, and social media for acquiring customers.
Read 11 tweets
4 Oct
Read a few media stories on what's happening in spot markets in nat gas that do not mention anything about what's happening in the futures market. For example, see price in April 2022. Image
Whenever shortages appear, the typical manager simply can’t wait to expand capacity and thereby plug the hole through which money is showering upon him." - Buffett
When shortages finally occur in a commodity industry, the rebound to prosperity frequently produces a pervasive enthusiasm for expansion that, within a few years, again creates over-capacity and a new profitless environment. In other words, nothing fails like success. — Buffett
Read 5 tweets
12 Sep
If you think about it, we successfully multitask a lot of the time. Walking and talking on the phone for example. When we drive we can’t just focus on the steering wheel or the rear view mirror.
Our moms and grandmoms multi tasked seemingly effortlessly. Just think of a typical day in their lives when they were married, had kids, and had a home to run.
I don’t think they would say sorry no tiffin box for you today because I have to run the laundry.
Read 4 tweets
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This I agree with. While 100 Baggers by @chriswmayer is a fabulous book, there is a need for literature on building the conviction to hold.
And it’s not easy to develop a conviction to hold on to things that should be held. There are these “demons” that will enter the mind of the investor, which will prevent them from holding on to what will turn out to be an outstanding stock.
Demon # 1: The market is too expensive, so I should sell this business. This demon shifts the investor’s focus from the economics of the underlying business to the markets.
Read 18 tweets
16 Jun
Don’t take credit risk. Stick to quality companies. Hmmmm
Are HDFC Bank and Kotak Mahindra Bank quality companies? If so, then did they become so without taking credit risk? Answer: No.
There is risk in everything. If, for example, you refuse to take credit risk while investing in bonds, you will only buy treasuries. But treasury bonds are highly risky in the sense that they almost guarantee a long term mediocre (or even negative) real return after inflation.
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Technically speaking it’s possible. In a tobacco litigation scenario, if courts decide against the company and award huge damages, then litigants can go after all its assets.
But the taint of tobacco is removed from non tobacco assets if they are separated from the tobacco operations with ITC tobacco having no stake in them.
In the US something analogous happened when tobacco companies massively increased dividend payout ratios thereby protecting payouts to shareholders from litigation awards.
Read 10 tweets

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