week end bulletin is insightful not only about business and stockmarket but also about whole in general i have changed many of my habits about investing and looking life in general after i started reading the bulletin,mind you i have been an active particepent in stockmarket for the last 30 yrs still i feel there is so much to read and learn ,thank you for the effort of collecting and sharing the information.
Hi Tejas, great compilation. What’s most impressive is how you have been able to pull all the articles together with a two line summary of each! Is there a system you follow for storing / saving these articles for future reference? Would love to know your method.
I use evernote to store all the articles that I read and like. I usually add a small summary to each article that i add to evernote and also tag them for later reference. <- this is for my personal use.
Additionally, for articles that I think should be a part of any weekend issue, I will add a link to a separate evernote document. Then before the weekend, i'll review all the links that I have added through the week and write these two liners for each of the links. These summaries and links are then copy-pasted here and scheduled to be released on Saturday mornings. Thats my process in a nutshell.
Tejas, the column on Old Dominion Freight Lines was very relatable to an Indian example: TCI Express.
TCI Exp does something 'similar', but different in the manner it banks on the superior network, compliance, and services, and all of it shows up in its capital efficiency. Their numbers are a bit remarkable in the Indian context / and the industry context and the article drives home the point why. Enjoyed reading it, thanks.
Hi Tejas, Thank you for your insightful thoughts and collation of articles for a curious soul like myself. I read your thoughts on markets in the “Investing is simple, but not easy” series and wanted to share my 2 cents on it. As you rightly said we don’t have a handle on demand-supply, pain expected due to the pandemic, influx of liquidity by most govts, interest rates etc. etc. In such an environment, don’t you think it would be much more fruitful if we be a bottoms-up picker “more so” than having a more broader outlook? I agree this is not anything like our recent history but if we believe in the processes of Graham-Fisher school of thoughts, then concentrating on the main principles of bottoms-up investing style and looking for companies with super high quality dominant companies which can withstand a pandemic can be more interesting than trying to figure out the macro picture. Things like looking for a predictable free cash flow generating companies with large barriers to entry, high ROCEs, strong BS, no need of outside capital to survive, good management/governance and limited exposure to risk out of one’s control. I say this because, the way of doing business in India is changing and dominant companies with such characteristics are not only going to survive but thrive once things normalise. Hence, with the activist investor kind of underlying process, it would be great if you could share your thoughts on what kind of parameters you value the most while doing bottoms-up analysis. It will be interesting to learn from your experience. Thanks once again for your generous nature of sharing knowledge with us.
While my investment preference continues to remain bottoms-up, my comments sound more macro as I am trying to generalize. The issue that I am trying to highlight is that valuations across the board are not cheap anymore. Typically during bear markets you get to buy good quality businesses very cheap. However, this time around that is not the case. As a simple exercise, try and reverse engineer the growth rates implied within your coverage universe. You'll find that valuations are implying pretty high growth rates being sustained for long. While it may very well be the case that these businesses indeed sustain that growth rate; but in that case, they are fairly valued. Where is the margin of safety?
As for my process, its very simple: look for high quality growth businesses that have superior cash-flow generation and trade at attractive yields. Where I think the process differs is in looking at at least 5 years of cash flows rather than focusing on the next 4-8 quarters. Thus my game is high-quality + time arbitrage. And I can tell you that some of the highest quality businesses are discounting more than a few years of cash flows based on my frame-work.
Lastly, my note tries to highlight an anomaly that I observe in the market. It is by no means a guide to go against the market, as I myself remain largely invested with some cash on the sidelines. For me to be completely invested though, I would require a much higher margin of safety.
I hope that clarifies. Thank you once again for your comment.
Some additional thoughts: low margin of safety = lower future returns.
The following text from Ben Carlson makes the point very well:
Valuations can be helpful for setting reasonable expectations for investors because higher valuations typically lead to lower long-term returns while lower valuations typically lead to higher long-term returns.
Going back to 1926, the average 10-year return on the S&P 500 is roughly 10.4% per year. When the CAPE ratio was below 10, the average return jumps to more than 18% per year. But when the CAPE was 25 or higher, the average 10-year return falls to just 4.2% per year. So the fact that valuations are stretched today means investors should likely rein in their performance expectations.
However, it’s also worth noting the range of outcomes investors have experienced within overvalued markets. The worst 10-year return when the CAPE was above 25 was an annual loss of nearly 5% per year while the best 10-year return was 9.3% per year.
So even if valuations remain higher because the composition of the sectors in the stock market have changed or interest rates remain historically low, investors should still temper their expectations about expected long-term returns. Valuations are not a timing tool in terms of calling a market crash but they can help investors set reasonable expectations about the range of future outcomes.
Thanks for your reply. I agree with you completely on the reverse DCF methodology to understand what kind of growth investors are factoring in. Just one clarification, when you say attractive yields, Its the free cash flow yields you are talking about right? Also generally what do you compare a company's free cash flow yield with? For you how do you come to a conclusion if its attractive or no? Thanks
Yes, it is free cash flow yields. As to how and what to compare, that's worthy of a post that I'll do someday. A little too long to elaborate here. But it's largely derived from the DCF model.
week end bulletin is insightful not only about business and stockmarket but also about whole in general i have changed many of my habits about investing and looking life in general after i started reading the bulletin,mind you i have been an active particepent in stockmarket for the last 30 yrs still i feel there is so much to read and learn ,thank you for the effort of collecting and sharing the information.
Thank you for the kind words. I am glad that you find it of value.
Hi Tejas, great compilation. What’s most impressive is how you have been able to pull all the articles together with a two line summary of each! Is there a system you follow for storing / saving these articles for future reference? Would love to know your method.
Hi Karthik.
I use evernote to store all the articles that I read and like. I usually add a small summary to each article that i add to evernote and also tag them for later reference. <- this is for my personal use.
Additionally, for articles that I think should be a part of any weekend issue, I will add a link to a separate evernote document. Then before the weekend, i'll review all the links that I have added through the week and write these two liners for each of the links. These summaries and links are then copy-pasted here and scheduled to be released on Saturday mornings. Thats my process in a nutshell.
Hope that helps.
Thanks Tejas. That’s very helpful.
Tejas, the column on Old Dominion Freight Lines was very relatable to an Indian example: TCI Express.
TCI Exp does something 'similar', but different in the manner it banks on the superior network, compliance, and services, and all of it shows up in its capital efficiency. Their numbers are a bit remarkable in the Indian context / and the industry context and the article drives home the point why. Enjoyed reading it, thanks.
Thanks Baidik! That's an interesting observation
Hi Tejas, Thank you for your insightful thoughts and collation of articles for a curious soul like myself. I read your thoughts on markets in the “Investing is simple, but not easy” series and wanted to share my 2 cents on it. As you rightly said we don’t have a handle on demand-supply, pain expected due to the pandemic, influx of liquidity by most govts, interest rates etc. etc. In such an environment, don’t you think it would be much more fruitful if we be a bottoms-up picker “more so” than having a more broader outlook? I agree this is not anything like our recent history but if we believe in the processes of Graham-Fisher school of thoughts, then concentrating on the main principles of bottoms-up investing style and looking for companies with super high quality dominant companies which can withstand a pandemic can be more interesting than trying to figure out the macro picture. Things like looking for a predictable free cash flow generating companies with large barriers to entry, high ROCEs, strong BS, no need of outside capital to survive, good management/governance and limited exposure to risk out of one’s control. I say this because, the way of doing business in India is changing and dominant companies with such characteristics are not only going to survive but thrive once things normalise. Hence, with the activist investor kind of underlying process, it would be great if you could share your thoughts on what kind of parameters you value the most while doing bottoms-up analysis. It will be interesting to learn from your experience. Thanks once again for your generous nature of sharing knowledge with us.
Dear Aditya,
Thanks for your comments
While my investment preference continues to remain bottoms-up, my comments sound more macro as I am trying to generalize. The issue that I am trying to highlight is that valuations across the board are not cheap anymore. Typically during bear markets you get to buy good quality businesses very cheap. However, this time around that is not the case. As a simple exercise, try and reverse engineer the growth rates implied within your coverage universe. You'll find that valuations are implying pretty high growth rates being sustained for long. While it may very well be the case that these businesses indeed sustain that growth rate; but in that case, they are fairly valued. Where is the margin of safety?
As for my process, its very simple: look for high quality growth businesses that have superior cash-flow generation and trade at attractive yields. Where I think the process differs is in looking at at least 5 years of cash flows rather than focusing on the next 4-8 quarters. Thus my game is high-quality + time arbitrage. And I can tell you that some of the highest quality businesses are discounting more than a few years of cash flows based on my frame-work.
Lastly, my note tries to highlight an anomaly that I observe in the market. It is by no means a guide to go against the market, as I myself remain largely invested with some cash on the sidelines. For me to be completely invested though, I would require a much higher margin of safety.
I hope that clarifies. Thank you once again for your comment.
Some additional thoughts: low margin of safety = lower future returns.
The following text from Ben Carlson makes the point very well:
Valuations can be helpful for setting reasonable expectations for investors because higher valuations typically lead to lower long-term returns while lower valuations typically lead to higher long-term returns.
Going back to 1926, the average 10-year return on the S&P 500 is roughly 10.4% per year. When the CAPE ratio was below 10, the average return jumps to more than 18% per year. But when the CAPE was 25 or higher, the average 10-year return falls to just 4.2% per year. So the fact that valuations are stretched today means investors should likely rein in their performance expectations.
However, it’s also worth noting the range of outcomes investors have experienced within overvalued markets. The worst 10-year return when the CAPE was above 25 was an annual loss of nearly 5% per year while the best 10-year return was 9.3% per year.
So even if valuations remain higher because the composition of the sectors in the stock market have changed or interest rates remain historically low, investors should still temper their expectations about expected long-term returns. Valuations are not a timing tool in terms of calling a market crash but they can help investors set reasonable expectations about the range of future outcomes.
Source: https://awealthofcommonsense.com/2019/08/the-impact-of-interest-rates-inflation-on-stock-market-valuations/
Thanks for your reply. I agree with you completely on the reverse DCF methodology to understand what kind of growth investors are factoring in. Just one clarification, when you say attractive yields, Its the free cash flow yields you are talking about right? Also generally what do you compare a company's free cash flow yield with? For you how do you come to a conclusion if its attractive or no? Thanks
Yes, it is free cash flow yields. As to how and what to compare, that's worthy of a post that I'll do someday. A little too long to elaborate here. But it's largely derived from the DCF model.
The TED Talk was very insightful. Overstimulation is indeed the problem that makes people feel overwhelmed.
Absolutely! The second article also makes a similar point: don't forget to live for today while you keep chasing your tomorrow.
It’s an innovative, insightful & learning weekend Read, I wait for it. thank you!
Thank you for the kind words!
Always pleasure reading Tejas...k
Keep the good work going
Thank you Sanjeev.