One of the challenges a disciplined investor faces is a dearth of opportunities as the market cycle grinds higher. If a deeper level of scrutiny is applied in decision-making, the more apparent phony values and overhyped growth fall apart. This makes it even easier to fall victim to sub-par underwriting.
Leverage is one of the major causes of a firm’s distress. It is not just limited to patently reported statistics of financial ratios, but is rather a deep issue. Often (not always!) straightforward and disclosed leverage on the balance sheet will get adjusted in prices, embedded in risk premiums; however it is the hidden leverage which will be more ominous. Read More
Benjamin Graham had introduced the concept of a mythical “Mr Market” to describe how sentiment or emotions drive markets in the short term. His analogy cautioned us in getting swayed into making an incorrect decision because of Mr Market’s emotional make-up. Mr Market is prepared to make us an offer to buy or sell a piece of a fractional ownership in common equity every day. In doing so he indirectly informs us about the assumptions on growth (in sales or earnings) that are being built in the valuations. In a strong bull market these assumptions might be overly optimistic and vice versa in case of a bear market. The choice to transact at a particular price (and valuation), Mr Graham tells us, is ours.
The Raging bull rally in 2017 in U.S. Market which continued in January 2018, has been halted in recent months. One of the reasons for initial correction in February was Rising U.S. Bond Yields. Thereafter, Rising Bond Yields took a little breather. Now again Bond yields have started rising which could prove to be dampener for U.S Equity Market going forward.
Distress investing is mostly thought of as investing in companies that are in deep trouble, especially financial distress. However if one thinks a bit further and looks below the generally accepted misconceptions one will be able to decipher large mispricing, viz. wide gaps between prices driven by short term selling pressure versus long term fundamental value. This article tries to clarify misconceptions and its objective is to further lay down sound principles and detail some relevant cases in the future. Read More
This article was originally published on ValueWalk
“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” – Warren Buffett 1
While the long expected earnings recovery has continued to push its realization date further out, equity markets have continued to march upwards. As indices have moved up while earnings have largely failed to keep pace, valuations, to the extent that one bases them on the current earnings power of the business, have increasingly extended themselves in the overvalued zone. The willingness of market participants to pay significantly more for the same stream of earnings is also reflected in exuberant behavior in primary markets.
- 1986, Chairman’s letter, Berkshire Hathaway. ↩
This article first appeared on Advisor Perspectives
“…. valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts.” – Warren Buffett
It is important to remember that all investments are subject to a certain amount of risk. ‘Risk” can simply be defined as the probability of losing whole or part of the sum invested. This probability must be considered before investing. Various tools may be employed to identify investment-worthy stocks such as fundamental analysis, price-to-earnings ratio, technical and quantitative analysis. Fund managers may combine two or more systems to determine the strength of investment.
By and large, traditional investment strategies are based on a fixed percentage mix of stocks, bonds, and cash for varying risk tolerances. It is often the money manager’s job to select the best investment options based on various theories that can be based on the long-term average performance of investment assets. For example, a moderate risk investor is likely to keep fully invested in 60 percent stock and 40 percent bond allocation without taking into consideration the risk. Institutions and fund managers may follow a relative investment approach, which in our opinion, has fundamental flaws as it focuses on short-term horizons and fails to incorporate emerging trends.
Since June 2015, we have been voicing our concern on market valuations on mid and small cap space. Irrespective of events like Brexit, demonetization or outcome of US elections, market momentum in mid and small cap space has been undeterred.
Since May 2014 with the outcome of Indian elections and NDA government coming in majority, we believe market has rallied on a complete hope based story where the gap between valuations and fundamentals has widened significantly. Focus has shifted from strong conventional businesses to emerging and turnaround stories where we believe the premiums paid are very high.
It is usually in a market like this when behavioural biases overpower an investor’s cognitive decision making ability where greed takes a precedence to rational thinking.
This article originally appeared on Advisor Perspectives.
“Ben felt that what I do now makes sense for my situation. It still has its founding in Graham, but it does have more of a qualitative dimension to it because, for one thing, we manage such large sums of money that you can’t go around and find these relatively small value-price discrepancies anymore. Instead, we have to place larger bets, and that involves looking at more criteria, not all of them quantitative. Ben would say that what I do now makes sense, but he would say that it’s much harder for most people to do.” – Warren Buffett 1 responding on apparent divergence from Graham, emphasis ours.
“The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage.” –Charlie Munger
“Not everything that counts can be counted, and not everything that can be counted counts.” – William Bruce Cameron 2