This is a must must watch for anybody interested in the stock markets. Vijay Kedia may not be a very sophisticated speaker but his talk is full of gems. Must must watch.
Hat Tip : Bosco
Sunday, March 20, 2016
Friday, March 18, 2016
Infibeam’s uncharacteristic boldness may unnerve IPO investors
Last Modified: Thu, Mar 17 2016. 01 39 AM IST
Infibeam is the oddball of the e-commerce industry: its revenue growth is glacial, as compared to Flipkart, but it has managed to post profit. But with the IPO, it has thrown caution to the wind
Infibeam Inc. Ltd is an oddball in the e-commerce industry. Its revenue growth is glacial compared with larger competitors such as Flipkart although, unlike them, it turned in a marginal profit in the first six months of this financial year.
And far from being a spendthrift, it has been cautious both with fund-raising and expenditure. In the past three financial years, it has raised less than Rs.200 crore through various preferential issues, and its total balance sheet size stands at Rs.225 crore. In fact, there’s much to like about its business model, although more on that later.
With its IPO (initial public offering), however, Infibeam appears to have thrown caution to the wind.
It plans to raise Rs.450 crore through the issue, to add to the Rs.70 crore worth cash it already has on its books. Note that Infibeam has cumulatively spent only Rs.88.5 crore in the preceding five years as capital expenditure. The company’s version is it is now well-placed for the next stage of growth, for which it needs to invest in a cloud data centre, new software and a new office. Additionally, it plans to set up 75 logistics centres, in addition to the 12 it currently has. This giant leap vis-a-vis past trends may unnerve investors.
Another factor that could put off investors is news that Kotak Mahindra Capital Co. Ltd and ICICI Securities Ltd have reconsidered their decision to market the issue as lead managers. Investment banking sources say this was because of differences with the company on both the pricing and timing of the issue, although Infibeam has denied this.
To be sure, valuations of Internet companies have corrected lately. In the listed space, Alibaba Group Holding Ltd has declined by 15% since mid-December 2015. Flipkart’s valuation has also been marked down by 27% by one of its investors.
Infibeam, which had valued itself at Rs.425 per share for each of its preferential allotments, has sought an IPO valuation of between Rs.360 and Rs.432. While it’s true that the lower end of the price band represents a 15% discount to its earlier valuations, the recent choppiness in the market will add to the challenges in marketing the issue.
Valuations are far from cheap at 4.4 times estimated FY16 revenues (pre-money valuation at the midpoint of the price range). Besides, the IPO pricing suggests that returns have been poor for all existing non-promoter and non-employee shareholders—all of them bought Infibeam shares at Rs.425, with some buying as early as June 2012.
Its business model, meanwhile, is far removed from the ‘winner-takes-it-all’ mentality that drives business decisions of nearly all other e-commerce companies in the country. In fact, the reason it has managed to turn in a profit already is its strategy of providing e-commerce services to other companies rather than merely acting as a one-stop destination on its own website.
Some of its customers such as Panasonic India Pvt. Ltd, Hidesign India Pvt. Ltd and Crossword Bookstores Ltd use Infibeam’s online storefront solution called BuildaBazaar for their own e-commerce platforms. While some of them offer a per transaction commission to Infibeam, some others pay fixed retainer fees. Additional services such as mobile applications and promotions result in greater monetization of these relationships. This business reported earnings before interest and tax margin of 58% in the first six months of the current fiscal and 60% in FY15.
Infibeam’s own e-tail website, expectedly, runs losses; although the redeeming factor is that even here, the company had a gross margin of 1% in the first six months of the year. This business is growing at a relatively slow pace, while the profit-making services business has grown in triple-digits.
Lately, the company has managed to bag two international customers for its online storefront solutions. The company seems well-placed, therefore, for steady growth in revenue and profit, as it has in the past four years.
The large fund-raise, however, will lead to a jump of three times in its balance sheet size. This will raise concerns about whether Infibeam will remain the tight operation it has been thus far.
mobis.p@livemint.com
Monday, March 14, 2016
Contrarian Investment Strategies: The Next Generation - David Dreman
This book is a must read. It is loaded with research, statistics and data. It also talks in detail about the investor psychology. Have given the rules talked about in the book. The rules alone may not have the impact it should have. The points below are just for directing the reader to the book. Even if you do not agree to the points raised in the book, it will definitely give you another perspective to the stock market.
The major thesis of the book is that investors overact to events.
The over valuation of the "best" and the undervaluation of the "worst" stocks often go to the extremes - so much so that their earnings and other surprises affect "best" and "worst" stocks in a diametrically different way.
Betting on well-defined patterns of investor behaviour will give you higher probabilities-strongly backed by statistics-than any other method of investing in use today.
Rule 1: Do not use market-timings or technical analysis. These techniques can only cost you money.
Rule 2: Respect the difficulty of working with mass of information. Few of us can use it successfully. In-depth information does not translate into in-depth profits.
Rule 3: Don't make an investment decision based on correlations. All correlations in the market, whether real or illusory, will shift and soon disappear.
Rule 4: Tread carefully with current investment methods. Our limitations in processing complex information correctly prevent their successful use by most of us.
Rule 5: There is no highly predictable industries which you can count on analysts forecasts. Relying on these estimates will lead to trouble.
Rule 6: Analysts forecasts are usually optimistic. Make the downward adjustment to your earnings estimate.
Rule 7: Most current security analysis requires a precision in analysts estimates that is impossible to provide. Avoid methods that demand this level of accuracy.
Rule 8: It is impossible, in a dynamic economy with constantly changing political, economic, industrial, and competitive conditions, to use the past to estimate the future.
Rule 9: Be realistic about the downside of an investment, recognizing our human tendency to be both overtly optimistic and overly confident. Expect the worst to be much more severe than your initial projection.
Earnings surprises, whether positive or negative, affect favored and out-of-favor stocks very differently. Surprise consistently results in above-average performance for our-of-favor stocks and below-performance for favored stocks
Rule 10: Take advantage of the high rate of analyst forecast errors by simply investing in out-of-favor stocks.
Rule 11: Positive and negative surprises affect "best" and "worst" stocks in a diametrically opposite manner.
Rule 12:
(A) Surprises, as a group, improve the performance of out-of-favor stocks, while impairing the performance of favorites.
(B) Positive surprises result in major appreciation for out-of-favor stocks, while having minimal impact on favorites.
(C) Negative surprise result in major drops in the price of favorites, while having virtually no impact on out-of-favor stocks.
(D) The effect of an earnings surprise continues for an extended period of time.
Rule 13: Favored stocks under perform the market, while the out-of-favor companies outperform the market, but the reappraisal often happens slowly even glacially.
Rule 14: Buy solid companies currently out of market favor, as measured by their low price-to-earnings, price-to-cash flow or price-to-book value ratios, or by their high yields.
Rule 15: Don't speculate on highly priced concept stocks to make above-average returns. The blue-chip stocks that widows and orphans traditionally choose are equally valuable for the more aggressive businessman or woman
Rule 16: Avoid unnecessary trading. The costs can significantly lower your returns over time. Low price-to-value strategies provide well above market returns for years, and are an excellent means of eliminating excessive transaction costs.
Contrarian Stock Selection: A-B-C Rules
Rule 17: Buy only contrarian stocks because of their superior performance characteristics.
Rule 18: Invest equally in 20 to 30 stocks, diversified among 15 or more industries(if your assets are of sufficient size)
Rule 19: Buy medium- or large-sized stocks listed on the New York Stock Exchange, or only larger companies or the American Stock Exchange.
Five fundamental indicators can be used to supplement the three A-B-C rules of contrarian selection
Indicator 1. A Strong financial position
Indicator 2. As many favorable operating and financial ratios as possible
Indicator 3. A higher rate of earnings growth than the S&P 500 in the immediate past, and the likelihood that it will not plummet in the near future.
Indicator 4. Earnings estimates should always lean to the conservative side.
Indicator 5. An above-average dividend yield, which the company can sustain and increase.
These additional methods may not be for every investor, but you should be aware of them, since they represent some of the latest results from research.
Rule 20: Buy the least expensive stocks within an industry, as determined by the four contrarian strategies, regardless of how high or low the general price of the industry group.
Rule 21: Sell a stock when its P/E ratio (or other contrarian indicator) approaches that of the overall market, regardless of how favorable prospects may appear. Replace it with another contrarian stock.
I think 2 1/2 to 3 years is an adequate waiting period. If after that time the stock still disappoints , sell it.
Another important rule is to sell a stock immediately if the long-term fundamentals deteriorate significantly.
To Summarize : don't be stubborn, don't be greedy and don't be afraid to take small losses
Rule 22: Look beyond obvious similarities between a current investment situation and one that appears equivalent in the past. Consider other important factors that may result in markedly different outcome.
Rule 23: Don't be influenced by the short-term record of a money manager,broker,analyst, or advisor, no matter how impressive; don't accept cursory economic or investment news without significant substantiation.
Rule 24: Don't rely solely on the "case rate". Take into account the "base rate" - the prior probabilities of profit or loss
In each instance , the information in the particular case being examined should , where possible , be supplemented by evidence of the long term record of similar situations
Ex. Most buyers of hot ipo in the 1980s and 1990s focussed on the individual story and forgot that 80% of these issues had dropped in price after the 1962 and 1968 market breaks.
Rule 25: Don't be seduced by recent rates of returns for individual stocks or the market when they deviate sharply from past norms(the "case rate"). Long term returns of stocks (the "base rate") are far more likely to be established again. If returns are particularly high or low, they are likely to be abnormal.
Rule 26: Don't expect the strategy you adopt will provide a quick success in the market; give it a reasonable time to work out.
The Investor Overreaction Hypothesis makes these predictions:
1. "Best" stocks under perform the markets, while "worst" stocks outperform, for long periods.
2. Positive surprises boost "worst" stocks significantly more than they do "best" stocks.
3. Negative surprises knock "best" stocks down much more than "worst" stocks.
4. There are two distinct categories of surprise: event triggers(positive surprises on "worst" stocks, and negative surprises on "best"), and reinforcing events(negative surprises on "worst" stocks and positive surprises on "best"). Event triggers result in much larger price movements than do reinforcing events.
5. The differences will be significantly only in the extreme quantiles, with a minimal impact on the 60% of stocks in the middle.
Rule 27: The push towards an average rate of return is the fundamental principle of competitive markets.
Rule 28: It is far safer to project a continuation of the psychological reaction of investors than it is to project the visibility of the companies themselves.
Crisis Investing
Rule 29: Political and financial crises lead investors to sell stocks. This is precisely the wrong reaction. Buy during a panic, don't sell.
Rule 30: In a crisis, carefully analyze the reasons put forward to support lower stock prices-more often than not they will disintegrate during scrutiny.
Rule 31: (A) Diversify extensively. No matter how cheap a set of stocks looks, you will never know for sure that you aren't getting a clinker.
(B) Use the value lifelines as explained. In a crisis, these criteria get dramatically better as prices plummet, markedly improving your chances of a big score.
Rule 32: Volatility is not risk. Avoid investment advice based on risk.
Small-Cap Contrarian Rules
Rule 33: Small-cap investing: Buy companies that are strong financially (normally no more than 60% debt in the capital structure for a manufacturing firm)
Rule 34: Small-cap investing: Buy companies with increasing and well-protected dividends that also provide an above-market yield.
Rule 35: Small-cap investing: Pick companies with above-average earnings growth rates.
Rule 36: Small-cap investing: Diversify widely, particularly in small companies, because these issues have far less liquidity. A good portfolio should contain about twice as many stocks as an equivalent large-cap one.
Rule 37: Small-cap investing: Be patient. Nothing works every year, but when smaller caps click, returns are often tremendous.
Rule 38: Small-company trading (e.g.Nasdaq): Don't trade thin issues with large spreads unless you are almost certain you have a big winner.
Rule 39: When making a trade in small, illiquid stocks, consider not only commissions, but also the bid/ask spread to see how large the total cost will be.
Rule 40: Avoid the small, fast-track mutual funds. The track often ends at the bottom of a cliff.
Psychology and Markets
Rule 41: A given in markets is that perceptions change rapidly
Wednesday, March 9, 2016
Major relief for Crompton Greaves
The company has sealed a deal to sell its ailing international power business, which will help cut debt
Hamsini Karthik
March 9, 2016 Last Updated at 22:21 IST
It has been back-to-back gains for Crompton Greaves. First, it firmed up on the demerger of its consumer business, which lit up its stock price by 12 per cent. Now, the sale of its international power business reaching a closure lifted its stock by nine per cent on the bourses on Wednesday.
The company's international business valued at €115 million or Rs 850 crore and sold to US-based private equity First Reserve International on a cash and debt free basis, will give the much-needed respite to Crompton Greaves. Most analysts were not attributing much value to the international power business, given its 20 quarters of cash-loss record. Earlier, expectations were that sale of this business would not fetch more than Rs 400-500 crore. However, now realising Rs 850 crore, analysts at Kotak Research attribute a fair value of Rs 40-45 a share to the power and industrials business (non-consumer business) against its earlier valuation of Rs 22-28 apiece. Motilal Oswal Securities, too, has revised its FY17 earnings per share target from Rs 3.8 for its non-consumer (power and industrials) business to Rs 5.3.
Although the money will come in a staggered manner, it will help Crompton cut its debt burden significantly from Rs 900 crore as on December 31, 2015 to nearly zero. Its management has guided for zero interest cost with the closure of the sale. Most importantly, the company’s profitability would get a boost. If these assets are excluded, the management said theoretically it would add Rs 350 crore to profits in FY16.
Following its sale, in FY17, while Crompton Greaves now expects to clock revenues of Rs 6,500 crore (down 35 per cent compared to FY15 revenues, largely due to sale of international power business) from the non-consumer businesses, net profit is pegged at Rs 325 crore; up 55 per cent compared to FY15. With the automation business also expected to be sold in FY17, its overseas exposure will be restricted to drives and rotating machines business, which are value-accretive. That said, the fate of Rs 1,200 crore worth of loans advanced by Crompton to its international entities is the only overhang, where it might have to take a write-off if no effective means of handling the same is discovered. For now, the Street is building in zero recovery from these.
Going ahead, with the budgetary push for infrastructure sector and prospects for the domestic non-consumer business inching up, FY17 holds promise for Crompton Greaves.
Friday, March 4, 2016
Re-rating for Crompton Greaves' consumer biz
Re-rating for Crompton Greaves' consumer biz
Focus on brand building, expansion of product basket and channels will aid earnings growth going forward
Sheetal Agarwal March 04, 2016 Last Updated at 21:35 IST
Come March 16 and the Crompton Greaves stock will trade ex-consumer business - Crompton Greaves Consumer Products (CGCP). Most analysts are positive on the consumer business, which is likely to list sometime in April, and believe it has the potential to re-rate going forward. Consider this: CGCP is expected to list somewhere between Rs 100 to Rs 110 a share. But, some analysts such as Misal Singh of Religare Capital Markets ascribe a fair value of Rs 120 to Rs 140 to the consumer company, whereas Macquarie Capital and MOSL assign a value of Rs 140 and Rs 125, respectively. Crompton Greaves’ shareholders will get one share in CGCP for every share held; the current price of Crompton Greaves is Rs 141, which indicates the potential for value-unlocking.
Meanwhile, the new management is likely to step up focus on brand building, consumer-centric innovation and enhancing its reach to non-electrical channel such as e-commerce, multi-brand retail, among others, to boost the consumer business. Notably, against three per cent (as a per cent of sales) advertising and promotional spends incurred by Havells, CGCP spends only one per cent towards these activities.
The company plans to improve this going forward and leverage the brand ‘Crompton’ to increase its presence in appliances and switchgear segments. Its core products (fans, lighting, pumps) stand to gain from increasing income in the hands of consumers after the seventh pay commission as well as higher thrust on the rural economy. The company’s pumps business (20 per cent of revenues) also stands to gain from halving of excise duty on pumps from 12.5 per cent to six per cent in the recently announced Budget. In this backdrop, Macquarie Capital believes CGCP should trade at similar valuations to Havells on account of the former’s higher earnings growth expectations going forward. Assuming a listing price band of Rs 100-110, CGCP is valued at 18-19 times FY18 estimated earnings.
Havells, on the other hand, trades at about 25 times FY18 estimated earnings. CGCP’s revenues have grown 15 per cent over FY12-FY15, which is in line with industry. Analysts at MOSL believe the company could post 14 per cent revenue growth in FY17. However, Ebitda margins could come down a bit as CGCP scales up advertising, sales and promotional spends going forward.
Strong brand identity, robust distribution network and healthy financials are some of the key strengths of CGCP, which aims to grow ahead of the industry. On the downside, half of CGCP's revenues are outsourced, which includes imports. Thus, its earnings are vulnerable to any sharp volatility in the rupee, which investors will have to keep an eye on.
Tuesday, March 1, 2016
Snippets from Berkshire Hathaway Inc 2015 letter
At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business. It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.
Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled businesses – gives us a significant edge over companies that limit themselves to acquisitions they will operate. Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance of finding a date on Saturday night. In like manner – well, not exactly like manner – our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash. Beyond that, having a huge portfolio of marketable securities gives us a stockpile of funds that can be tapped when an elephant-sized acquisition is offered to us.
Of course, a business with terrific economics can be a bad investment if it is bought at too high a price.
We need shed no tears for the capitalists (whether they be private owners or an army of public shareholders). It’s their job to take care of themselves. When large rewards can flow to investors from good decisions, these parties should not be spared the losses produced by wrong choices. Moreover, investors who diversify widely and simply sit tight with their holdings are certain to prosper: In America, gains from winning investments have always far more than offset the losses from clunkers.
Finally, Jeremy Miller has written Warren Buffett’s Ground Rules, a book that will debut at the annual meeting. Mr. Miller has done a superb job of researching and dissecting the operation of Buffett Partnership Ltd. and of explaining how Berkshire’s culture has evolved from its BPL origin. If you are fascinated by investment theory and practice, you will enjoy this book.
Saturday, February 27, 2016
Seth Klarman Year Ended Letter 2015
When somebody criticizes the stock I hold should I don the lawyer hat and defend it?. Lots of questions arise within me. Are they willing to learn from facts or am I just defending my ego ?. Are they trying to be genuinely friendly to me and trying to protect me ? Are all their stocks doing so well and only mine doing poorly ? Are their stocks in the ruins and they are trying to massage their egos by finding out there is a bigger fool out there ?
Ah whatever the reasons are , I feel that my energy is misdirected. I should not be spending energy on the defence of the stock or to refute the know-it-alls by being another know-it-all. I should rather spend my energy on researching the stock more, If I made a mistake, should sell it and look to live another day. If my process is right I should sit tight. I think Seth Klarman letter of 2015 is like a bible in the above scenario
BAUPOST LIMITED PARTNERSHIPS
2015 YEAR-END LETTER
“The whole problem with the world is that fools and fanatics are always so certain of
themselves, and wiser people so full of doubts.”
-- Bertrand Russell
Did we ever mention that investing is hard work – painstaking, relentless, and at times
confounding? Separating relevant signal from noise can be especially difficult. Endless
patience, great discipline, and steely resolve are required. Nothing you do will guarantee
success, though you can tilt the odds significantly in your favor by having the right philosophy,
mindset, process, team, clients, and culture. Getting those six things right is just about
everything.
Complicating matters further, a successful investor must possess a number of seemingly
contradictory qualities. These include the arrogance to act, and act decisively, and the humility
to know that you could be wrong. The acuity, flexibility, and willingness to change your mind
when you realize you are wrong, and the stubbornness to refuse to do so when you remain
justifiably confident in your thesis. The conviction to concentrate your portfolio in your very
best ideas, and the common sense to nevertheless diversify your holdings. A healthy skepticism,
but not blind contrarianism. A deep respect for the lessons of history balanced by the knowledge
that things regularly happen that have never before occurred. And, finally, the integrity to admit
mistakes, the fortitude to risk making more of them, and the intellectual honesty not to confuse
luck with skill.
........
Value investors must be strong and resilient, as well as independent-minded and
sometimes contrary. You don’t become a value investor for the group hugs. Indeed, one can go
long stretches of time with no positive reinforcement whatsoever. Unlike some other fields of
endeavor, in investing you can do the same thing as yesterday but achieve completely different
reported results. In the long run, the research and analysis you perform should overcome market
forces; the fundamentals ultimately matter. But in the short run, markets can trump effort and
insight. They move in unpredictable cycles, with investors stampeding this way and that.
Businesses quickly come in and out of favor, and the same business can be valued by the market
very differently in a matter of days, sometimes on the basis of new facts, but often because of
mercurial investor perceptions or simply money flows
........
It is critical for any investment firm to be built to take a pounding – structurally,
financially, and psychologically. Investors must have a patient client base that allows for
persistence during a bad year (or years), and an approach that limits risk while maintaining an
appropriate balance between greed and fear. Greedily throwing caution to the wind is eventually
disastrous, but fear-induced paralysis is not a recipe for success either. Investors must employ an
investment philosophy and process that serve as a bulwark against a turbulent sea of uncertainty
and then navigate through confusing and often conflicting economic signals and market head fakes. Amidst the onslaught of gyrating securities prices, fast and furious corporate
developments, and an unprecedented volume of data, it is more important than ever to maintain
your bearings. Value investing continues to be the best (and perhaps only) reliable North Star
for those who are able to remain patient, long-term oriented, and risk averse.
While value investing is a demonstrated strategy for long-term investment success, it
isn’t like being handed a treasure map. Rather, the value approach teaches you how to make
your own map. And even then, the map doesn’t tell you precisely where to dig for treasure: it
just points you in the proper direction.
Several years ago, a friend outside the industry asked me to mentor him in Graham and
Dodd, and I provided voluminous reading material and coaching. He was intrigued and
energized, he said, and declared himself a value investor. Three months later, he informed me
that he was giving up. It didn’t work, he had determined. It turns out that not everyone has the
patience and discipline to follow the one approach that has been demonstrated to deliver excess
returns with limited risk over the long run.
Value investors gain clarity by thinking about their investments not as quoted stocks
whose prices whip around on a daily basis, but rather as fractional ownership of the underlying
businesses. In Benjamin Graham’s construct, Mr. Market sometimes becomes greedy,
overpaying for your shares, and other times fearful, selling you his shares at bargain levels.
Successful investors must possess the mindset to take advantage of Mr. Market’s bipolarity, and
even come to appreciate it.
Two extremes of human nature, greed and fear, perpetually drive market inefficiency.
Fear is primal, the effect of confronting the apparent loss of what you have. While your shares
today still represent fractional ownership of exactly the same business as when they traded
higher yesterday, people en masse are delivering the verdict that your shares are worth less. It is
natural to panic at the possibility of further markdowns. But crucially, you have to find a way
not to care or even to relish this eventuality. Warren Buffett has written that one should not
invest in stocks at all if uncomfortable with the possibility of a 50% drawdown. The mistake
some investors make is to accept the market’s immediate verdict as fact and not opinion, and
become disappointed, even frustrated. For investment professionals, trepidation over poor
performance can morph into fear of job loss. Career risk thus plays a role in their ultimate, and
usually untimely, capitulation; even those who wish to be patient may worry that their employer
or client will not share their resolve.
Paper losses can cause people to lose their bearings. When your portfolio is marked
down sharply, it’s natural to fear losing the rest. Thinking about your net worth based on the
latest stock quotes may superficially seem appropriate, because if you sold your shares today
that’s all you would get. But investors must adopt more complex thinking. What you’re really
worth is not what the market will pay today (that’s the erroneous assumption behind the efficient
market hypothesis), but rather the true value of the securities you own based on such attributes of
the underlying businesses as free cash flows, private market values, liquidation values, downside protection, and growth prospects. This is what Graham and Dodd taught and what we believe at
Baupost.
When the market, in the absence of adverse corporate developments, drives an
undervalued security down in price to become an even better bargain, that’s not reason for panic
or even for mild concern but rather for excitement at the prospect of adding to an already great
buy. When tempted to sell into a decline, investors must think not only about what they would
be getting (the end of pain that accompanies the certainty of cash), but also what they’re giving
up (a significantly undervalued security which, emotion aside, may be a far better buy than a sell
at today’s market price). This is why relentless and thorough due diligence and deep
fundamental analysis are so important. They give you the justifiable confidence to maintain your
bearings – to hold on and consider buying more – even on the worst days in the market.
Greed, too, is deeply rooted within people. It is expressed through the drive to acquire
more and more and the related angst felt when others are succeeding while you are not. This is
what J.P. Morgan meant when he said “Nothing so undermines your financial judgment as the
sight of your neighbor getting rich.” Or as Gore Vidal dryly noted, “Whenever a friend
succeeds, I die a little.” The positive reinforcement from repeated stock market success can be a
kill switch for risk aversion in that it tempts people into paying up and then holding on too long.
A recent article in Vanity Fair about a looming bubble in Silicon Valley noted, “Collectively
these start-ups have helped promote a culture of FOMO – or ‘fear of missing out,’ in Valley
parlance – in which few [venture capitalists], who have their own investors to answer to, can
afford to ignore the next big thing.”
Fear of missing out, of course, is not fear at all but unbridled greed. The key is to hold
your emotions in check with reason, something few are able to do. The markets are often a
tease, falsely reinforcing one’s confidence as prices rise, and undermining it as they fall. Pundits
often speak of the psychology of markets, but in investing it is one’s own psychology that can be
most dangerous and tenuous.
.......
Discipline isn’t something an investor should be turning on and off. There’s no point in
being disciplined most of the time, only to toss the fruits away in a weak, distracted, or greedy
moment. And there’s no such thing as being almost disciplined – even one moment of weakness
can invite the wolves in, and it can also send a message. If you expect the members of a team to
be disciplined, then letting down one’s guard on occasion is at first confusing, and then
demoralizing, as the benefits from prior discipline are squandered. If excessive risk-taking is
rewarded even once, there will quickly be no discipline at all
In the moment, public market investors have no ability to control investment outcomes,
but they can control and improve their own processes. We never shoot for high near-term
investment returns. Trying too hard to earn positive results, or assessing performance too
frequently, can drive anyone into short-term thinking, herd-like behavior, and incurring higher
risk. We do our utmost not to allow this to happen. We believe that by remaining focused on
following a well-conceived process, we will make good risk-adjusted, long-term investments.
And we know that if we do that, we will indeed earn good returns over time.
........
While operating within the constraints of value investing principles, we are determined to
look far and wide for opportunity, building our competencies over time based on learning and experience. We must neither be confined by a narrow mindset of what may or may not be
undervalued, nor become so aggressive in pursuing opportunity that we deviate far beyond our
circles of competence. I tell our team that we wouldn’t be doing our jobs if we remained locked
in the past, buying only the melting ice cubes of previously good businesses now in decline as
though technological change weren’t accelerating the obsolescence of entire industries. We
would also be remiss if we failed to take advantage of new analytical tools and resources. We
must consider new ways of thinking. We must continuously ask ourselves whether any
investment under consideration is just too hard to properly assess: Is the fruit too high-hanging?
In investing, there are no style points awarded for degree of difficulty. However, the complexity
and opacity that may cause others to discard potential opportunities as “too hard” can drive
market inefficiencies that result in opportunity for us. In 2015, we took a close look at “big data”
technology as a research tool and potential “edge” for Baupost. While there are a number of
applications that may be interesting over time, we continue to strongly believe that our
investment success will ultimately depend not so much on big data as on big judgment.
...........
As with Pavlov’s dogs, in a bull market investors find certain actions repeatedly
rewarded; their behavior thus becomes deeply ingrained. Amidst a relentless rally, almost anything you come close to buying but ultimately pass on goes higher, inducing you to be more
aggressive. Similarly, anything you sold you probably sold too soon, even if it had met your
price objective. In a bull market, focus on downside risk ceases to be shrewd discipline and
instead becomes an albatross. Many are seduced into raising their appraisals, because doing so is
rewarded. As if missing out on returns weren’t itself painful enough for “Type-A” money
managers, it also causes underperformance that can frustrate clients and raise career risk. Bull
markets don’t typically end until most have capitulated, at which point there is almost no one
new left to buy.
Bear markets, of course, offer their own false “lessons,” but in the opposite direction. As
prices fall, anything you previously sold turns out to have been a good sale; anything you bought
was premature accumulation. When securities become “value-ish,” they at once become too
tempting for the value-starved to avoid, yet still potentially toxic to one’s financial health. It
takes a great deal of fortitude to set the bar at the consistently right place in all market
environments. A bar that fluctuates with the tide is, in effect, no bar at all. Trading losses in a
down market can turn investors into Mark Twain’s proverbial cat who once jumped on a hot
stove: to this feline, all future stoves are also assumed to be worth avoiding. We haven’t been in
a broad-based bear market since early 2009, although numerous sectors now seem to have
entered one. We believe that value investing principles, great patience and discipline, a flexible
mandate, a time-tested process, and the ability to hold cash, as well as decades of experience in a
multitude of market environments, should serve us well in navigating through.
.........
It’s obviously far better to be alive today than 50 or 100 years ago. But optimism isn’t an
investment strategy. Growth isn’t always profitable growth, and the returns from investments
are typically determined more by the price paid than the growth rate. Whether any of these
favorable trends are fruitfully investable is unclear. While we may all be better off decades from
now, it’s reasonable, in light of the numerous concerns discussed earlier, to expect a bumpy ride.
.........
A fiduciary should think more about the safety of an entire portfolio than about any
individual holding. Is Baupost willing to make an investment that has a meaningful, even
significant probability of loss, if the expected value – the weighted amount and probability of
gain and loss – is hugely positive? The answer is yes. All positions involve a degree of risk; any
investment can go sour, and any probability assessment can be wrong. We manage the risk of
loss in any single position by sizing appropriately based on historical experience as well as by
striving for prudent diversification. Every day, businesses we own are making countless
decisions they believe will offer positive expected value to shareholders in excess of their firms’
cost of capital. It doesn’t make sense to own businesses which do that, yet be unwilling to do it
ourselves.
........
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