Financial wizard India: Learning's from the legends

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6 Tenets of successful investing

The tenets are drawn by Howard Marks and were narrated by him in an interview .This tenets are the foundation of Oaktree Capital Management.

Oaktree capital management is a distressed & credit fund run by Howard marks & his partner Bruce Karsh. They sold majority of stake to Brookfield Asset Management few years back . He is also famous for his informative memos.

He have also written two book’s

Following are the 6 tenets of successful investing by Howard Marks.

1. Control Risks

As Oaktree Capital Management works in a high risks area of distressed & credit market; it very important for them to control risk. Risk = here it means permanent loss of capital. Risk here do not cover price fluctuation or anything else. So one should always things about risk in all the investments one does may it be equity or debt.

Howard say’s

“ No need to always beat the market .Maintaining low volatility in the fund is important .It’s okay to do poorly in a good year but we can beat the market in the bad year & reduce volatility “

The above quote goes out of picture many times while investing .As described by Charlie Munger called locker room culture where one wants to beat all other on month on month, quarter on quarter, etc on Wall street .

2. Being Consistent.

Howard Marks say’s

“not required to be in top 10% or 20% funds, be below average in good times & above average in bad times “.

The above quote means that it’s okay to under perform when the market is at a crazy valuation, because it gives an opportunity to perform well by investing when there is blood on the street. It’s very important for a prudent investor to be rational over a long periods of times as market can seduce you away from the reality. Try always to have a hedge in your portfolio.

3. Only active in less efficient market.

Oaktree capital management is only active in less efficient market like distressed credit or equity market of emerging market where the markets are less efficient.

Howard marks came from the batch of mid 60’s when the concept of market efficiency was developed and taught but he didn’t believed in it. Jokingly in said in an interview that if beer is fallen on the floor the professor who taught market is always efficient will never pick up the same, but a student nearby will pick it up and brink the beer.

For example in case of India most of the great investors over the past decades have found best of the stock from mid and small cap space which is a less efficient market. But one should be very careful while dealing in less efficient markets like mid & small cap space in India as it can be too risky.

4. High degree of specialization.

Oaktree operates in different types of segment of asset management. So this tenets means that each fund manager should operate in his designed area of experience. Real estate distress fund manager should only operate in the same fund and not buy equity in other types of businesses.

This is very important to understand & learn as many a times fund managers fix up the funds. For example :- From personal observation many small and mid cap mutual funds buy small positions of large cap stocks because they are doing well which is not the requirement of the investors .

5. Investment decisions are not depended on micro forecasts.

Micro= short term & Macro = long term

“There is no need of economist’s forecasts as it is just an extrapolation” Howard says

Which means that all the economic forecasts made are just extension of what have happened in the past; which cannot be true in long term. For example the tech bubble, global financial crises, high interest rates of 80’s & low interest rates of present times, etc. He also says “One cannot have a superior insights in micro, which is economics, currencies, markets & rates. One cannot predict everything right at a same time in two or more times a row. So one should focus on macro & try to mitigate risk.

6. Long term approach.

Oaktree capital management do not try to time the market; instead they try to alter between defense & offense. Which means that they buy when is fear on the street & sell when there is euphoria on the street. Howard marks calls it taking the temperature of the market .When you try to time the market you need to get two decisions right i.e. selling on time & buying it again.

Howard marks for people who don’t know about investing and cycle.

"It’s much better to buy & hold instead of cycle positioning; for the people who cannot make superior decisions".

Book recommendations

Amazon.in (For India)

Learn to earn : https://amzn.to/2E2sg2N

Betting the street: https://amzn.to/30oCjqo

One up on wall street: https://amzn.to/39ecEEJ

Amazon.com(FOR USA)

Learn to earn: https://amzn.to/2Pku89g

One up on wall street: https://amzn.to/31uDJAn

6 Types Stock categories BY PETER LYNCH

Peter Lynch is a famous fund manager who managed Magellan Fund at Fidelity Investments who gave 29.2% return over a period of 13 years; his assets under management increased from $18 million to $14 billion at the end of his tenure.

He is also the author of three famous investing books which according to me everyone should read

1. One up on Wall Street.

2. Learn to earn.

3. Betting the street.

Peter lynch was the person who coined the word multi-bagger. He used simple & profound method for picking stocks for his fund.

In this book ONE UP ON THE WALL STREET he described

6 types of stock or business to invest in stock market

Slow growers

This are the company who grow at very slow pace well below the market average and also provide a very low return. All fast growers eventually become slow growers. This stocks can provide good safety of capital, but can never provide above average return.

Stalwarts

This company are well grown established companies. They do not grow faster than but above or near the market average. But this companies give good protection in times on recession, as the earning are more predictable. They may not have more room for growth. This types of companies usually provide a good dividend yield & often buy-back their shares.

Fast Growers

This are the stocks which not only provide above average return, but they make one’s investment career.

This stock grows at 20-25% p.a., but they should not be the hot stock in the market which grows at 50% which probably cannot be sustainable. Grow of this types of company should be sustainable over a period of time.

The company should have good balance sheet & profits .Check whether there is a further room for growth. Proven track record of revenue, profit, cash flows, etc over a period of time. Most important thing check whether the growth rate is rising or falling.

Cyclical

They are the company which follow the economy. This companies grow when the economy is booming and fall when the economy goes into a recession. Timing is everything in this stock, buying it on the right time in the cycle is very important. Look for inventory levels in the industry and all other factors. Industries includes car industry, real estate, airlines, hospitality.

Turnaround

These are the companies which went bankruptcy and now are bought by new companies or taken over by new management with the backing of the creditors. Examine how the turnaround will actually happen. What are the future plans of the company for eg:- bank of America is a turnaround which gave 10baggers return from last financials crisis before the COVID-19 crash.

Asset Play

They are the companies which are sitting in some things valuable that market don’t know about. It can be cash, assets, inventories, accounting losses, no. of users, real estates, etc.

->Know what the asset is

–> Have patience

-> Look for debt

-> Look for management are they destroying or creating value

-> Look for hidden assets.

Amazon.in (For India)

Learn to earn : https://amzn.to/2E2sg2N

Betting the street: https://amzn.to/30oCjqo

One up on wall street: https://amzn.to/39ecEEJ

Amazon.com(FOR USA)

Learn to earn: https://amzn.to/2Pku89g

One up on wall street: https://amzn.to/31uDJAn

5 types of businesses which can become multibaggers- MOHNISH PABRAI

Mohnish pabrai is an Indian-American investor. This blog is based on the lecture given by him( Mohnish pabrai ) at Perking University (Guanghua School Mgmt) .The link of the video is available at the bottom of the blog.

He have written two books named Dhandoo investor & Mosaic.(Link given in the blog)

He started investing when he was 30 years old without attending a single class on investing with $1 million & aims to reach $1 billion by age 60 years which requires CAGR (COMPOUNDED ANNUAL GROWTH RATE) OF 26%.He also runs a foundation called DAKSHANA FOUNDATION.

5 TYPES OF BUSINESSES WHICH CAN BE MULTIBAGGERS-MOHNISH PABRAI

1.EXTREMELY WIDE & DEEP MOAT BUSINESS:

Moats means a castle surrounded by water which has piranha fish or a strong defence to protect it .This are the business which are very well established , have years of history or mind share of consumers (Cadbary).It’s very difficult for competitors to compete or even sometimes enter the market.

EXAMPLE: COCO COLA LTD, VISA LTD, MOODY LTD, CRISIL LTD, ETC

2.NEED A PRO OR EXPERT OR ALPHA MANAGER RUN THE BUSINESS:

Some companies or business cannot be run by idiots .This operations are very specialized and very competitive .The entry barriers are very less or have cut throat competition in the industry.

EXAMPLE: HDFC LTD, HDFC BANK LTD, KOTAK MAHINDRA BANK LTD , MOTHERSON SUMI SYSTEMS LTD, ETC

Dhando investor: https://amzn.to/2CtWKdI (free audiobook version available)

3. MARKET GETTING CONFUSE:

This are low risk & high uncertainty business; where the future growth or earnings cannot be predicted or the market is fearful about the future path of the business . But in this kind of businesses there are other factors which reduce the risk of the bankruptcy like property , plant ,equipments , stocks, share, patents,etc . But which can also provide a huge return .

EXAMPLE FROM MOHNISH PABRAI :There was Steel company having a market capitalization

a of $2.5 Billion, cash of 900 million, contract for 2 years of worth 650 million in each year and no forecast for the future the company can even go in loss in the third year because of cyclicality of the industry.After first of buying; the company forecasted that they have one more of earning visibility of 650 million . The market price when he brought as $45 in one year it doubled to $70; then in the third year half way the company was acquired by other company for $170 a share –Simple 4 baggers in 2.5 years .

4.BANKRUPTCY, REORGANIZATION, SPECIAL SITUATIONS:

This are companies who have arisen from odd or uneven situation .One of the best example is SATYAM (LATER ACQUIRED BY MAHINDRA NOW KNOW AS TECH MAHINDRA).

EXAMPLE FROM MOHNISH PABRAI:

SAM ZELL (MOHNISH PABRAI CALLS HIM GRAVE DANCER). He is an America investor and author of the book AM I BEING TOO SUBTLE.

MOHNISH considers him and all other big investor to be expert on US tax code.

The example goes this way there was a insurance company which went bankrupt in 1990 which had net operating losses (NOL) of 630 million; SAM bought it at 30 million in the year 1998. Then he joined a Transportation company which was highly profitable. But later the transportation company also went bankrupt which resulted in (bankruptcy)^bankruptcy

resulting in 800 million in NOL. Later he found a Waste recycling company (which converted garbage into electricity). This company had 2 billion in assets & 2 billion in debt; they bought it for 30 million . They did lots of changes in company did two right issues and returned the this company profitable . The stock went from $1 to $40 in few months .

AM I BEING TOO SUBTLE:https://amzn.to/2CrfGd5

5. UPSIDE HIGHER & LOWER DOWNSIDE:

This are companies or businesses which have lower downside but huge upside. This means a company may have a huge order book, small stake in huge non listed companies, huge assets , etc. The most important thing in this type of company is that the normal business operation are going smooth & the management is of high integrity. There is something in the company which will trigger the valuation

EXAMPLE BY MOHNISH PABRAI:

Before the DOTCOM bubble busted all the tech stocks where just going up, up, & …..up. But the valuation also went insane. But there was a bank called SILLION VALLEY BANK who had received warrants from this companies for various provided to them; but the value of warrants was never disclosed by the bank.Also the normal working of the bank was smooth and available at good valuation .So as the bubble started busting the bank started disclosing the warrants & stock gave 2.5 times return in 2 years & went to 5x return in 3 years

WARRANTS: Warrants are a derivative that give the right, but not the obligation, to buy or sell a security—most commonly an equity—at a certain price before expiration. ... Warrants that give the right to buy a security are known as call warrants; those that give the right to sell a security are known as put warrants.

Lecture link: https://www.youtube.com/watch?v=Jo1XgDJCkh4

Books recommendation:

Dhando investor: https://amzn.to/2CtWKdI

AM I BEING TOO SUBTLE: https://amzn.to/2CrfGd5

INTELLIGENT INVESTOR: https://amzn.to/32J6208