Notes from Prof Aswath Damodaran’s talk at Google

I found this wonderful talk – both in style and substance, in numbers and stories – as he mentions – delivered by Prof Aswath Damodaran (of New York University) at Google posted on Youtube over this weekend.

Here are some notes/ statements from this talk to takeaway:

“Accounting is not valuation”

“Goodwill is the most useless asset known to man – goodwill is a plug variable, the problem with goodwill is it sounds good”

“The Shareholder’s Equity is a reflection of the past. It is a record of everything that has happened to the company over its lifetime.”

“The value comes from Investments that you have already made or Growth assets”

“Growth assets is a bit messier. It is the value of investments I am expecting you to make over the future”

“You got to stop and make a reality check. What are you buying when you buy this company? Because the way you assess the company depends on that”

“You can’t make interest payments with ideas. If you are a young growth company, don’t go looking for trouble. You have to raise equity”

“Growth can be good, bad or neutral. So the question to ask is – what is the value you will create from the growth?”

“When I look at investing and valuation, there are two camps. There are the numbers people and there are stories people”

“The problem is that the stories people think that the numbers people are all geeks, and the numbers people think that the stories people are all crazy. And they can’t talk to each other. My endgame for my valuation class is to have numbers people with imagination, and stories people with discipline”

“And I think they (i.e. the numbers people and stories people) are both right and they are both wrong. There is something to be gained from the other side. And to me, that is the key to doing valuation right. Think about your weaker side and work on it – because that’s what is going to give you the power in valuation”

“When I hear strategic – I am going to run out to the door. Because you know what it means – that the numbers don’t fly but I really really want to do this. A strategic deal is a really stupid deal”

“If you have negative cash flows upfront, you should expect to see disproportionate positive cash flows at some point”

“I would rather be transparently wrong than opaquely right. And in this business of valuation, people want to be opaquely right. They will say things that are so difficult for you to construe that no matter what happens, they can say I told you so”

“Your estimates could be wrong, but that doesn’t mean you can’t make an estimate. Saying that there is too much uncertainty and then investing in a company, to me is the height of insanity”

“If you cannot value a company, atleast do the logical thing and never invest in those companies. But if you want to invest in growth companies, you have to get your hands around those numbers and make your best estimates”

“I have never got the urge to explain what some other person pays for something”

“Much of what you see passing for valuation out there is really pricing”

“Price and Value can diverge, and if they diverge, they can give you very different numbers”

” (On Social Media Companies and their valuation) This game is going crazy right now. People are buying users because that’s what the market is rewarding right now. You say- what’s wrong with that? Markets are fickle. Today they like users. Tomorrow they may not”

“This is a game – i.e. investing – where luck is the dominant paradigm. We like to think it is skill and hard work. It’s luck”

“There is no smart money. There is less stupid money and more stupid money”

“When we get big differences in value, it’s not because the numbers are different, it’s because we have different narratives. Not all of these narratives are equally likely.That’s really the question you got to ask. What is the right narrative for this company?”

Book Synopsis: Winning the Loser’s Game

Peter Drucker, the management guru, said, “This is by far the best book on investment policy and management.”

The more I read books on investing, the more I get convinced that investing is much simpler than most people think or are told. Simple, but not easy as Buffett had once said.

Most of what one really needs to know is included in ‘The Intelligent Investor‘ by Ben Graham. I think everything else is either some adaptation, repetition or not very useful.

BOOK_Winning-the-Losers-Game‘Winning the Loser’s Game’ by Charles D Ellis is another such book which is a good read on investment policy, and contains some timeless techniques repeated over and over again. The problem is not in understanding the lessons, it is in the implementing.

The underlying theme of the book is that due to the predominance of professional institutions in the markets in recent years, the very fact that each of them competes on the basis of trying to beat the market makes it impossible for any of them to consistently win – hence making it the loser’s game.

For individual investors who are sidelined in this mad rush, reconciling to this fact and not trying to compete, but rather plodding along and trying to minimize mistakes, and refusing to play the game is the only real way they can win. And they can do that by adopting an investment policy with index funds, which provide them with an unfair advantage, at the core of it.

But if that is the simple message of this book, why waste 200+ pages on it?

Right at the outset, in the foreword, it is candidly stated that most of the message of such books can be completed in 2-3 pages of prose, (or as Scott Adams said in 1 page).

“Each of these books outlines an easy-to-understand solution that could be distilled to two or three pages of prose. Why, then, do the books run hundreds of pages? While it takes a short time describe the conclusion, the bulk of the message provides the motivation for establishing a sensible program and the conviction for maintaining it through thick and thin.”

That is the reason, if someone can provide the motivation and the conviction, it is still worth it. So at the cost of repetition, here are some of the key wonderful lines from this book ‘Winning the Loser’s Game’, which hopefully will serve that purpose.

“The principal reason you should articulate your long-term investment policies explicitly and in writing is to protect your portfolio from yourself – helping you adhere to long-term policy when Mr. Market makes current markets most distressing and your long-term investment policy suddenly seems most seriously in doubt.”

“Don’t trust yourself to be completely rationally when those all around you are driven by emotion. You are human too.”

“The biggest challenge is neither visible nor measurable; it is hidden in the emotional incapacities of each of us as investors. Investing, like parenting teenagers, benefits from calm, patient persistence and a long-term perspective and constancy to purpose. That’s why “know thyself” is the cardinal rule in investing.”

“The hardest work in investing is not intellectual; it’s emotional. Being rational in an emotional environment is not easy, particularly with Mr. Market always trying to trick you into making changes. The hardest work is not figuring out the optimal investment policy; it’s sustaining a long-term focus – particularly at market highs or market lows – and staying committed to your optimal investment policy.”

“Knowing history and understanding its lessons can insulate us from being surprised.…For the serious student of markets, they are not truly surprises: Most are really almost actuarial expectations, and long-term investors should not over-react. Sharp losses are to be expected and even considered normal by those who have studied and understand the long history of stock markets.”

“The story of the first hot, then ice-cold fund manager exemplifies the pathology of the mutual fund industry. On the way up, the fund management company and the press lionize the manager, attracting attention to the winning strategy. Investors respond by throwing bushels of money at the seemingly invincible stock picker. Assets under management and performance peak simultaneously. Investors suffer as performance deteriorates. The fund management company, the press, and the public turn their attention elsewhere, ignoring the embarrassment of the fallen hero. The fund management company gets paid. The fund manager gets paid. The investor pays.”

“When profit motive meets fiduciary responsibility, profits win, investors lose.”

And finally, after much repetition, Charles Ellis, in the final chapter, provides a simple summary, again. Which is simply this:

“You or no one else can ever beat the market consistently. If someone can, you can’t tell who it will be. So focus on your asset allocation, don’t lose to Mr Market’s moods, and use index funds, and you will beat most over the long-term – which is 20 years or more.” That’s about it.

Book Synopsis: The Little Book of Common Sense Investing by John Bogle

Over the past 6, 12 or perhaps 18 months, the Indian capital market performance has had a polarized structure. It is broadly divided into, on the one hand, a small set of wonderful companies that are grossly overvalued, whichever way you look at it, and which keep getting expensive; and on the other hand, a large set of decent or not so good businesses that are just about reasonably or grossly undervalued.

Whatever the reason for it, but the fact is that mutual funds and fund managers who had performed quite well till about 2011 have suddenly lagged market indices, and in some cases, quite drastically. Value investors have found themselves wanting, in pursuit of value.

May be it is a case of style drift, when a particular style of investing goes out of fashion and a new one catches on. May be it is something else. May be in the long-term they will catch up, may be they won’t – I don’t know. The fact is that as an individual layman investor, beating the market using star-ranked active funds or value style stock investing has not been easy.

Moreover, beyond a new set of winners that have emerged, a large part of the mutual fund industry has found it difficult to match, forget beating, the main benchmark indices. So far till about couple of years back, in the Indian markets, it was not the case. But the usual winners are not winning, and that is the case if one looks at 6 month, 1 year, 2 year and in some cases, 3 year performances too.

3 years may not be sufficient time to assess performance, but the fact is there have been a new set of winners – in funds, fund managers and individual stocks.

littlebookThis triggered me to read ‘The Little Book of Common Sense Investing’ by John Bogle, the singular personality responsible for popularizing the Index Fund in the West through his mutual fund company Vanguard.

Truly a masterpiece, this book makes it simple for the lay individual investor to incorporate the fundamentals of asset allocation and rebalancing into his portfolio based mostly on a set of low cost, Index funds. It is the easiest way a truly long-term investor can be assured of building wealth for himself over decades of investing.

This book starts with a foreword note in which Warren Buffett says: “A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth. In this book, Jack Bogle tells you why.”

Bogle goes on demonstrate how investors turn a winner’s game into a loser’s game by chasing the illusion of market beating returns. He further explains that, while there will always be winners that beat the market over different periods of time, it is not predictable who will do so in the future based on past results, and shows how these winners change from time to time, thus surprising investors.

Finally, he advocates that investors should focus largely on their asset allocation, rebalancing strategy and base most or all of their long-term portfolio on low cost index funds.

Here are a few excerpts from the book:

“Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.”

“Common sense tells us–and history confirms-that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost.”

“The classic index fund that owns this market portfolio is the only investment that guarantees you your fair share of stock market returns.”

“The brokers, the investment bankers, the money managers, the marketers, the lawyers, the accountants, the operations departments of our financial system are the only sure winners in the game of investing.”

“Fund investors are confident that they can easily select superior fund managers. They are wrong.”

“The beauty of a cap-weighted index is that it automatically adjusts to changing stock prices and never has to buy and sell stocks for that reason.”

“Common sense tells us the obvious; while owning the stock market over the long-term is a winner’s game, beating the stock market is a loser’s game.”

“It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”

“By and large, fund managers are smart, well-educated, experienced, knowledgeable, and honest. But they are competing with each other. There is no net gain to fund shareholders as a group.”

“Every single firm in the fund industry acknowledges my conclusion that past fund performance is of no help in projecting the future returns of mutual funds.”

“Studies show that 95 percent of all investor dollars flow to funds rated four or five stars by Morningstar.” {In India, this may be valueresearchonline or similar}

And last but not the least, why it makes sense to base your really long-term portfolio on Index Funds, rather than on active funds or individual stocks.

“Index funds endure, while most advisers and funds do not.”

Book Synopsis: The Reminiscences of a Stock Operator by Edwin Lefevre

reminiscencesMost personal finance books are boring. Most of them have nothing new as such.

Of course, there are the legendary books on investing that make great reading. They are generally written by gurus who have a past investing record, or by academics or a combination. Or they are written by journalists or writers following the lives of these ‘gurus’ and narrating them in an interesting manner. Such books are few and far between. Most others have a kind of sameness.

So when I read ‘The Reminiscences of a Stock Operator’ by Edwin Lefevre, I realised that I was reading a book on stocks that was a rare combination; a book with a fast-moving story, almost novel-type theatrics and some hard-hitting, long-lasting lessons. First published in around 1922, this is a book on the life of Lawrence Livingstone (fictional version of the real life speculator Jesse Livermore), and his stock speculation career.

Starting as a gambler on stock prices, Livingstone develops a sense of timing for stock prices, and goes on to become one of the most celebrated stock traders on Wall Street in the early 1900’s; making and losing millions multiple times in the first three decades of the 20th century. He is a trader, an unabashed one, not an investor. But as he goes through his journey, he learns a lot of lessons, that may be applicable to investing as well.

While I would not recommend this book for taking investing lessons, it is, nevertheless, the most entertaining book that I have read related to the stock markets. And through its pages of fast-moving, nerve-wracking stories and experiences on stock speculation, it contains a lot of wonderful quotes and takeaways for investors too.

Here are some key excerpts:

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”

“The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. The market does not beat them.  They beat themselves, because though they have brains they cannot sit tight.”

“Nobody can catch all the fluctuations.”

“It took my five years to learn to play the game intelligently enough to make big money when I was right.”

“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

“The desire for constant action irrespective of underlying conditions is responsible for many losses on Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.”

“There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

“After the initial transaction, don’t make a second unless the first one shows a profit.”

“If a man is both wise and lucky, he will not make the same mistake twice.  But he will make any one of ten thousand brothers or cousins of the original.  The Mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line.”

“He will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile.”

“Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping, he must fear; instead of fearing, he must hope.”

“A man may know what to do and still lose money – if he doesn’t do it quickly enough.”

“They say you never go broke taking profits.  No, you don’t.  But neither do you grow rich taking a four-point profit in a bull market.”

“The game does not change and neither does human nature.”

“The experience of years as a stock operator has convinced me that no man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions.”

And there are many such super lines in this book almost in every chapter.

Of course, a lot of the content is relevant to Wall Street in the early 1900’s, and lots has changed since then due to regulation and overall maturity of the capital markets. But despite that fact, this book is full of entertaining narrations of a full fledged stock operator who risked it all multiple times and learned many lessons on the way.

While the book may not appeal to every one, till I read this book, I could never imagine that writing on stock speculation could be so entertaining, as well as so educative.

Book Synopsis: The Warren Buffett Way by Robert G Hagstrom Jr

warrenbuffettwayA slightly old-ish book (first published in 1994), I chanced upon this book and picked it up again at the library recently, though I had read it a few years back.

While after so many years, it may not seem to have anything new, given that there is so much written about Buffett since 1994 and there are so many books with ‘Buffett’ in the title because it sells; at the time it was first published, it was quite well received.

A lot of the first half of the book is honestly quite disappointing, as it is essentially a repetition of what Buffett himself has already said in his letters to his shareholders over the years. The author himself is said to have confessed later though, that the book was actually meant to be marketing material for a hedge fund based on Buffett’s investment principles which he planned to launch later.

Nevertheless, setting that apart, the book contains quite a detailed analysis of the business, financial and market metrics of many of Buffett’s principal investments through his early partnerships and via Berkshire till then; as well as a detailed description of the circumstances under which some of these investments were actually made. Definitely till it was published, and perhaps even later, no other book seems to have done such an in-depth analysis so far of Buffett’s investments individually.

This includes not only major holdings like GEICO, Washington Post, Capital Cities and Coke, but also other equity holdings like Gillette, Wells Fargo, Freddie Mac, as well as significant fixed income or bond investments that Buffett made till 1994. That part alone makes it decent learning for anyone interested in trying to emulate them.

But the last chapter of this book titled ‘ An Unreasonable Man’ makes good reading for anyone interested in a summary of what constitutes the Warren Buffett way – even after 19 years.

Here are some excerpts from this summary chapter:

The Warren Buffett Way

Step 1: Turn off the stock market

Step 2: Don’t worry about the economy

Step 3: Buy a business, not a stock

Step 4: Manage a portfolio of businesses

And in evaluating businesses, the author describes what he calls Buffett’s Tenets:

1. Business Tenets

– Is the business simple and understandable?

– Does the business have a consistent operating history?

– Does the business have favorable long-term prospects?

2. Management Tenets

– Is management rational?

– Is management candid with its shareholders?

– Does the management resist the institutional imperative?

3. Financial Tenets

– Focus on return on equity, not earnings per share

– Calculate ‘owner earnings’

– Look for companies with high profit margins

– For every dollar earned, look for at least one dollar of market value created

4. Market Tenets

– What is the value of the business?

– Can the business be purchased at a significant discount to its value?

It seems like an oft-repeated but decent set of common factors if one were to evaluate Buffett’s purchases over the years. Though of course, a lot of these can be said to be qualitative and imprecise beyond a certain point, and seem to have changed a bit in recent years.

Of course, it is not necessary (in fact, not even recommended) for every investor to imbibe these in their investing approach as such – that will only make investing complex for normal individual investors. It is not required for most investors to even attempt it.

But for those who have formulated their investing approach, and are interested in studying Buffett’s methods, though the book title promises more, The Warren Buffett Way does have a decent analysis of past investments and a checklist for the enterprising investor.

Introducing My Book ‘Common and Not So Common Sense’

frontcoverI have compiled some of my writings over the past couple of years into a book titled ‘Common and Not So Common Sense: Practical Lessons for the Individual Investor’.

The book is now available for purchase at the publisher’s site. It is available in both print and e-book (pdf) formats. You may order a copy as per details in the links below:

a) Print Version: Click this link Here priced at Rs.325/- plus shipping

b) Electronic Version: Click this link Here priced at Rs.149/-

Please let me know if the above links do not work, and I can order a copy for you if required. As always, I am reachable at ranjitrrk@yahoo.co.uk or through comments below. Feedback is more than welcome!

Please feel free to share this post or the links above, and spread the message to your friends and contacts who may be interested.

For further updates or future posts, you may follow the blog by subscribing via email in the box in the right column.

Thank you, and cheers!

One Idiot

One Idiot is a short 30-minute movie with a message on financial independence. The film is an initiative from IDFC Foundation (which may mean that it may indirectly and tacitly act as marketing for their mutual fund).

But nevertheless despite that, it is a nice attempt to educate the youth of today’s urban India on the importance of taking control of their financial lives (in the world of plenty that they are today exposed to), and how it can pay rich dividends over time and also make them ‘cool’.

It depicts an ‘idiot’ uncle whose dressing, chappals and haggling on vegetables makes him the laughing stock of teenagers, while they indulge in ‘cool’ activities, and often find themselves or their parents short on money. Their attitude changes when they realise that he is actually a multi-millionaire who has made his money work. The film ends with important financial messages communicated in a simple manner by the ‘idiot’ to the youth.

The film has been screened at a number of colleges in India since December 2012 and will hopefully add to the level of financial education, something that is not taught at our educational institutes.

Directed by Amol Gupte, One Idiot is a pleasant attempt to educate young people in a non-intrusive, entertaining manner on the power of saving, investing and compounding, and the effect it can have on your financial independence over long periods of time.

Some creative hyperbole is used for effect (e.g. Net Worth of 100 cr, Rolls Royce, presumably for shock value – one may also call it false promises). The film’s creative aspects and story telling are good, and overall, it effectively conveys the value of investing and compounding, specially if one starts early in a manner that makes it ‘cool’ for college goers.

All in all, a welcome attempt to educate and to entertain! Take a look below

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