Basant Maheshwari 2
Basant Maheshwari 2
Basant Maheshwari 2
need of the hour is to bet big and hold it for its up move.
Notes on The Thoughtful Long time can compensate for little less return rate. Being in the game
matters more.
Investor by Basant Maheshwari Equities Don't Outperform All Asset Classes All The Time
Index Investing
Category Investing In India index is market cap weighted instead of being price weighted
as it is in the USA.
Mental Model
Which means Indian index gives more weightage to few stocks
Optimized?
But I think the same thing is happening in US market too, FAANG
People/Website Basant Maheshwari Attributes Of A Full Time Investor
Status Read
When work becomes passion - wealth follows.
Type Book
If you don't know why you should be buying a stock then this is not your
cup of tea.
Part A: The World of Investing Its the research that needs the passion not the minute to
The Business Of Investing minute outcomes
Notes on The Thoughtful Investor by Basant Maheshwari 1 Notes on The Thoughtful Investor by Basant Maheshwari 2
Companies don't grow at 40% on an individual basis. There has to be a Inflow of Foreign institutional investors FII
sector tailwind for which such stocks are leaders.
Maximum Leverage
Market tops and bottoms are caught by two people: fools That is when participants of the market are full in and has also
taken leverage with their position
or liars.
Why market falls suddenly:
Basant suggests that one should not buy immediately when the market
Just a little drop in prices leads to leveraged people getting margin
crashes and should wait on the sidelines and wait for the 'blood to dry'.
calls which further leads to a chain reaction of selling further dropping
of the prices. This further creates fear in the market and the weak
An investor who buys stocks on borrowed capital is less players start selling.
likely to make a mistake than the one who buys it on
I fell one must remember that even though a bull market will raise the
borrowed conviction. prices of the stock, a company would take its own time to perform.
In the long run shareholder's return is determined by the ROE only Sense of uneasiness around
Notes on The Thoughtful Investor by Basant Maheshwari 3 Notes on The Thoughtful Investor by Basant Maheshwari 4
Here are some trends: Franchise led growth
There is always a bull market somewhere: in some asset class Such businesses need less capital
New Sector for each bull market Buying commodity and selling brands
Scale of opportunity But we need to remember as Prof. Sanjay Bakshi said in his lecture
a high gross margin could also make a business fragile as it could
First generation entrepreneurs
sooner or later attract competition and kill those margin.
Stocks hitting all time high
Lack of entry barriers Low cost of production and economics of scale
Pickaxe and Shovel Theme Large Upfront Capital Expenditure
If ecommerce increases Blue Dart, Gatti like companies will benefit Network Effect and Switching costs
A good business is which purchases on credit and sells on cash Products whose buying cannot be postponed
Purchasing on credit shows competition among suppliers Ex: Toothbrush, medicines, etc.
Selling on cash shows buyers are weak and dispersed Growth, ROE with DuPont Analysis
This also means that business is running on float money: Negative When Does an Acquisition Work Out & When It Doesn't
working capital
Acquisition generally signal that company is moving towards slow growth
Business Models: phase
Entry Barriers The ROCE gets diluted because the cash held under investments do not
form part of the capital employed whereas if this cash is used in an
Brands
acquisition it will included.
Market share vs Mindshare
Therefore, if a business has less ROCE than the current one the ratio
Mindshare means the customer itself comes to buy the product will fall.
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Is Your Company Taking Up The Market Share? People seldom change: Avoid management that was fishy once but
now is showing a clean chit
If your company is has a revenue growth more than the competitor and the
rate at which the market is expanding then your company is eating up Operating Leverage- Looking For Margin Expansion
market shares of competitors
Operating leverage: When a company expands output it adds less to its
But do keep probability in mind fixed costs and hence the increase in revenue creates a more than
If there is growth at the cost of dilution of equity then its not a good proportionate increase in profits.
sign Companies with a high gross margin and a low net margin are more likely
The Leader is always first to gain market share when new competitor to experience an expansion in margins.
spreads the product awareness. How Companies Cook Books Of Accounts?
An unorganized sector suffers from lack of operating efficiencies, financial A company which manipulates its numbers would generally show either
support and are generally family business who don't want to expand. lower revenues, higher expenses or a larger block of fixed assets.
Evaluating the management of a business The fixed assets are valued at higher rated due to over invoicing of
assets.
Buying an expensive business managed by an honest Dividends and taxes are good indicators for quality of earnings as they
management fetches better results then one managed by need to be paid in hard cash.
suspicious people. Beware of frequent equity dilutions
The rate of increase in inventory and receivables should not exceed the
Importance of being with a good management diminishes
rate of increase in revenues
in a bull market but increase manifold in a bearish one.
Change in auditor or too many related party transactions are also red
signs
A dishonest management never runs a debt free
Stocks To Avoid
company.
It is more important to avoid losers than finding winners as if a stock that
Some ways to evaluate management: halves in price needs to double up for the investor to break even.
Over ambitiousness of the management can be understood if they Chances of making money multiplies manifold with a focused company
bring a lots of IPOs from the group company. Like: Kishore Biyani's rather than one which is running multiple businesses under on roof.
Future Group.
Stocks to avoid:
Mergers or takeover of companies that are related to the promoters Growth through repeated dilution of equity or debt
Honest management always pays taxes and keeps a good dividend
Unnecessary diversification
payout
Lots of acquisitions
Exorbitant salary payments
Large Market cap in relation to the size of the sector
First generation promoters
Stocks making new lows
Transparency in the AR
Notes on The Thoughtful Investor by Basant Maheshwari 7 Notes on The Thoughtful Investor by Basant Maheshwari 8
Untested business models You must figure out whether the small cap company has the ability to
scale its business.
Cheap second line stocks in later stage of bull market
Multibaggers From Small and Mid Cap Stocks
Leading stocks from the leading sector of previous bull market
Cyclicals that are performing too well The number of times a stock could go up in the future is
Wide coverage relative valuation and priced for perfection dependent on its earnings growth and not on the number
Too much showcasing of times it has moved up in the past.
Drivers Of A P/E Ratios
The trigger for multibaggers will be growth and scalability of the
Businesses that get higher PE company and not at what valuation is it available.
Having predictable and sustainable earning For example: when a company keeps taking away market share
from the organized sector. VIP Industries or Safari could fall into
High entry barriers
this.
Positive cash flow
Small cap companies that are not leaders in their sector have a risk of
Should a small investor always stick to small cap stocks slipping down the delivery and execution of earnings.
But if the sector itself is very huge then you might not need a
If buying small and micro caps is the way to riches it is
leader.
also the path to bankruptcy
Ex: SUN TV vs ZEE
But if one finds few good small caps they could change one's life. No equity dilution + less/no debt and increases revenue with operating
Getting out of small cap becomes a huge problem unless you are a leverage is sure shot multibagger.
investor with small corpus
You need to check whether the management is competent because
often small cap don't have resources to hire professional managers.
Part D: Buying and Selling Strategies company's performance would be the best one. Ex: Ambika Cotton
Mills
Should a Small Investor Stick to Small Cap Stocks?
Temporary down in profitability due to advertising or capex done
Small cap companies without entry barriers are not suitable as these should not be given much importance.
companies don't have the ability to become a large cap.
Checklist according to Basant:
A company must have revenues of at least Rs.100 cr as it works as a
proof that their business model works. ROE > 30%
I disagree with this one. I feel 30% is too high and if a company
It is very difficult for small caps to survive a pandemic.
earns such ratios it will definitely will be face with competition
But what if it does? CCL is one of the companies which were not in the future as it would attract other players.
significantly affected by COVID.
Refer to:
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Fragility & Optionality in Business Models A high growth company rarely goes back to the high growth stage
after it starts to slow down on the growth curve
No dilution of equity and less/no debt
High quality stocks rarely become cheap so trying to buy them as
Debt should be less than 50% of the net worth
bargains is a strategy that never works out as much as it is debated.
Positive cash flow The believers of a story generally get in early before the bottom and
Dividend yield is 1.5 to 2% have to bear the pain before the gain.
A high quality company in a low quality sector(Infrastructure) Lesson: If a stock moves up like 15% it does not mean it can't
move further.
A high quality company in a high quality sector(consumer)
Aban Offshore
A low quality company in a low quality(Real Sector)
Lesson: It is better to buy a mediocre business with lots of tailwind
An investor should always stay away from this one as it has the
than a great business with lots of headwinds
potential of maximum damage.
Bharti Airtel
Having a part owner mindset sometimes backfires and you tend to not
sell when the fundamental starts deteriorating and you start to Lesson: If there is a problem like company not being profitable, you
rationalize it. could enter when the company becomes profitable.
Basant had taken a long position in Voltas and the stock was falling. It is never too late to buy a good stock or sell a bad one.
So, he used to go on long walks and used to counter the number of Kaveri Seeds
Voltas AC around his area. which gave him confidence not to sell.
Lesson: If the financials are good and the business is debt free with
But it was a mistake as he realized that AC contributed only 30% of high ROCE and promises average growth then one can buy a little
the company's revenue. without trying to understand a great deal about the business.
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A debt free business with high ROCE is the first signal to a Portfolio Skewness due to movement of one stock
robust business model.
I disagree with this one. As long as one believes in the stock
A person learns more about a business after he has bought the and the fundaments are good the holding period should be
stock than he does before buying it. forever and not selling just because of too much exposure or
volatility.
One should not worry about missing an opportunity as if one goes the
next one will come earlier than you expect. One should not look at the price of after selling a stock as it could
affect you emotional.
When To Sell and When Not To?
Love your family not your stock Part E: Analyzing Sectors and Industries
Selling is making an educated guess. Basic Economy Stocks, Diversified Businesses and Spinoffs
Reasons to sell Basant considers Tea as pure commodity play but with an exception.
Opportunity Cost If the company gets into branding its product and making value
products like green tea or herbal tea.
As money is finite
CCL Products India) ltd is exactly what he is talking about.
Extended valuations
They are getting into branded business
If market cap of a company is low compared to growth
opportunity ahead then a high P/E does not matter. They are making products like Freeze Dried, Spray Dried,
Premix, etc.
A bull sector loosing favour
Similarly like in Textile industry, unless the company gets into
To make money it is not necessary to buy at the bottom or sell
branded business getting a high valuation is difficult.
at the top.
Basant warns about investing in companies who sales depend on
But if someone gets stuck in the fall, it is better to fall with the
others. Like Munjal Showa
leader rather than with a laggard.
Power Sector is highly regulated which makes it difficult for the
Change in original thesis
company to generate high returns. Therefore, if someone want to play
Change in fundamentals, management not executing, or power sector theme then one must bet on equipment manufacturers.
Government policy
Similar to the story of selling Shovel when everybody is digging for
Take immediate action - irrespective of your purchase gold.
price.
Analyzing Companies With Cash on Balance Sheet
A question to ask is whether you would have bought that
Why market discounts cash?
stock if you would have had this information at the first
place. Due to questionability on existence of cash
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Holding cash is a double edge sword. It saving you during bear market Portfolio construction strategies
but pulls you down in bull.
The gap between them them should be large enough because Diversification vs Concentration
holding companies always remain undervalued.
Concentration:
Unless it owns a private company which is doing quite well like,
Advantages
info edge owns stake in Zomato.
Reduces changes of making wrong decision as you chose your
PSU Stocks
investment very carefully
You need two things in PSU
Better risk management as you bet large on few stocks, you
Cheapness tend to be alert and move out with the first sign of trouble.
Tailwind I would change this to 'permanent' trouble.
Analyzing Secular Growth Stocks Disadvantages:
Pricing power It sometimes becomes difficult to get out of the stocks due to
If a company can increase its price every year 68% illiquidity
or, retain its price with the input cost are low But if you have a small portfolio then this should not be a
problem as big money is made here.
I think CCL Products cannot do this. As it takes 30% margin on
whatever is cost but still it has the power to command 30% Needs confidence and good knowledge about the company, as
margin and the economy behavior does not matter. you cannot afford to loose.
Notes on The Thoughtful Investor by Basant Maheshwari 15 Notes on The Thoughtful Investor by Basant Maheshwari 16
Lowers the average quality of companies you hold.
My thoughts:
Price and not valuation affects your decision to take leverage. I follow
valuation approach and my guru's warn me of taking leverage. Hence, I
have no takeaway's from this chapter.
A leveraged portfolio will give me sleepless night and you need to
constantly track your position as if they go down you need to cut your
losses as to not over leverage.
Don't loose out what you need for what you want