Title: What got you here won’t get you there Author: Marshall Goldsmith Publisher: Hachette books ISBN-10: 1781251568 ISBN-13: 978-1781251560 Buy here:Amazon.in | Amazon.com
Marshall Goldsmith is a behaviour coach in leading companies. His day-to-day life involves working with CEOs of top companies, entrepreneurs, top lawyers and dignitaries. Goldsmith takes these already successful people and makes them more successful. How can he do that? Is he an engineer? A businessman? A mystic?
None of these. Goldman has discovered that for the people who are already in the top 2 percentile in their field, further growth is not limited by skill or lack of magic. Instead it is limited by their own behaviour. The way they behave with themselves, their colleagues, their families and their support group influences their success. Goldsmith describes 20 habits that act as a hindrance to further growth of these already highly successful people. With these habits, people stand in their own way. Some of them hit a plateau, while a few of them self-destruct, throwing away their careers and relationships. Continue reading Book Summary: What Got You Here Won’t Get You There by Marshall Goldsmith
Warning: This book is an advanced read even for finance professionals. You must have basic knowledge on capital markets to be able to understand and appreciate the book. Like high echelons of Carnatic music, this book is a God send for those obsessed with return on and of their investment, but most others may be unable to appreciate the finesse of the mentioned points.
This book is one of Investment Classics vouched by none other than the most well-known investor of our times Mr. Warren Buffett. Most revelations in the field of investment lose relevance overtime and even prove dismal in succeeding cycles, as can be seen in some of the commentary by the supplementary author Jason Zweig (more on that later) but Graham’s principles have themselves have survived several market cycles. Infact these principles thrive on the market cyclicality. So let’s go about to explore the voluminous book.
Speculation Vs. Investment
A shareholder is a part owner of the company and has to study the business fundamentals thoroughly before deciding to put his money into it. The investor must be convinced that he is receiving more value of the company for the price he is paying. Purchasing shares with the hope that it would increase in price is speculation. A non-professional who is speculating on share prices is purely gambling. It is an exciting past time worth being pursued with only a small portion considered as fun money which you are okay to loose.
Investor’s Biggest Enemy- Inflation
A good investment must deliver an inflation beating return with an acceptable level of risk. Graham considers bonds (debt securities) as one of the most important vehicle to achieve the same. Since secure return of principal is of prime importance, Graham prefers Govt.bonds over corporate bonds as there is nil risk of default by the Government and a few additional points from corporate bonds do not justify the additional risk. However, Graham recommends buying bonds of corporates when available at a steep discount in the secondary market due to temporary adverse conditions faced by the company or market.
Two Types of Investor – Defensive and Enterprising
Myth in investing world is that you have to take higher risks to obtain higher returns. According to Graham higher returns go to the investor who actively pursues it, i.e an enterprising investor while the passive or defensive investors get average returns.
Between stocks and bonds, Graham recommends a minimum of 25% and a maximum of 75% allocation on each of them. Only investors who are prepared for a huge draw down(notional loss on quoted price) should allocate 75% on stocks at any point in time. Conservative investors may be better off with maximum allocation on bonds.
Rules for Common stock Component
There should be adequate but not excessive diversification. i.e a minimum of 10 and a maximum of 30 stocks.
Each of the selected company should be large, prominent and conservatively financed.
Each company should have a long record of continuous dividend payments of atleast 10 years.
Set a limit to max price one would pay for the stock. Suggested: Trailing 12 months PE of 20 or average of 25.
Graham in general advices against picking stocks individually as he considers an individual cannot do a better job at stock picking than the professionals who seem to do a pretty average job themselves. His preferred way of investment in equity is through index funds.
For an enterprising investor who is willing to put in more efforts into stock picking he advises following guidelines:
Financial Condition: (a) Current assets at least 1.5 times current liabilities and (b) debt not more than 110% of net current assets (for industrial companies)
Earnings Stability: No deficit in the last five years.
Dividend Record: some current dividend
Earnings growth: Last year’s earnings more than of prev years
Price: Less than 120% of net tangible assets.
Dollar(Rupee) Cost Averaging:
Such carefully selected stocks must be purchased through a monthly purchase plan of a fixed amount every month as long as the basis premise of selection holds good.
Portfolio Tracking and Updation:
The portfolio must be reviewed atleast once a year. But frequent urge to check the stock prices must be avoided.
Graham is extremely critical of companies that retain more earnings than required for growth. For the company managers to believe that they are more qualified in growing the retained earnings than the shareholders is incorrect, unproven and misaligned incentives.
My Critic on the book: The commentary of the book by Jason Zweig adds number of recent examples. However, the commentary is dated only till 2003. So the book completely skips the 2008 crash and the lessons from it. Jason Zweig has also recommends investing in junk funds as he says risk has been significantly reduced due to diversification. Diversification does not do away with systemic risks which while adequately addressed by Graham need to continue to be adhered too.
This book is a great read if you want to understand more on Asset Allocation in capital markets. For more in depth knowledge on picking stocks please read ‘Security Analysis‘ by Graham and Dodd.
Book title: Work clean – The life changing power of mise-en-place Author: Dan Charnas ISBN-10: 1623365929 ISBN-13: 978-1623365929
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Mise-en-place is a French term that means that there is a place for everything and everything must be in its place. The use of French is because the term originated in culinary circles in France where chefs emphasise the importance of a clean and organised kitchen counter to do things efficiently and ensure high food quality. As a result, just like everything culinary, saute and hors d’ouvre, words from the romantic language stuck around in English too.
Having worked with leading chefs in the United States, the author Dan Charnas talks about how to plan, organise and clean up so that you get the best out of your activities. Throughout the book he illustrates stories and scenes from the America’s top restaurants that exhibit thorough planning, organisation, cleanliness, minimalism and maximum utilisation. Charnas extends the knowledge gained from cooking into his personal and professional lives. In this book, he teaches us how to do so. Continue reading Book summary: Work clean by Dan Charnas
Peter Lynch, one of the greatest investors of our time has given ample time tested techniques in this book.
How retail investors can win in the stock market
-> Take advantage of what you already know. i.e invest in familiar sectors.
-> Invest in a house before you invest in a stock market
-> Ignore short term fluctations
-> Predicting economy or stock market direction is futile
-> 6/10 wins is a stellar record
Types of Stocks
Slow Growers – 4 – 6% growth. Stable Business like Power and other Utilities. Buy when you can’t find anything else.
Stalwarts – Medium Growth. 10- 12% growth. Established companies like HUL, CocaCola, P&G etc that grow year on year and make standard profit. Take profits at 30 – 50% and repeat with other stalwarts.
Fast Growers – Medium to small size companies that grow at 20 – 25%. Assess growth phase and sustainability.
Cyclical – Expands and contracts over time. Eg: Auto, Airlines, Tyres, steel, Chemicals.
Turnarounds – Stay with bad news for a possible good turnaround. But stay away from tragedies where outcome is unmeasurable. Lynch considers companies moving into unrelated fields as ‘diworsification‘
Asset Plays – Properties i.e land and other assets held by a company is more valuable than the quoted price.
Categorise the stocks you purchase into the above buckets and arrive at target price based on the category it falls.
What is a Perfect Stock?
Dull or simple business with a boring name
It does something dull Eg: Packaged Foods like biscuits, soap etc
It does something disagreeable Eg: Harpic
It’s a spinoff from a well known holding company Eg: Bajaj Finance
Institutions don’t own and analysts don’t follow.
Rumours abound like toxicity, mafia Eg: Casino
There’s something depressing about the business Eg: Funeral homes
It’s a no growth industry. Steady business, reliable customer base.
It’s got a niche
People have to keep buying it. Eg: Razor blades, cigarrets
It’s a user of technology which results in massive cost savings.
The insiders are buying
Company is buying back shares
Which stocks to Avoid ?
-> Hottest stock in the hottest sector
-> The next something
-> Avoid ‘Diworsification’ i.e companies that expand into unrelated business
-> Avoid acquisitions that lack synergy
-> Avoid whisper stocks i.e great stories with no substance and no earnings
-> Too dependent on a handful of clients
-> Beware of stock with an exciting name
When to Buy ?
Buy when Price line is below Earnings line and Sell when Price line goes way above the earnings line.
P/ E guideline – check historic P/E levels to know average.
Check if companies have a plan on how to increase future earnings – reduce costs, raise prices, expand into new markets, sell more to same market, close down loss making operations etc.
What to look for before you buy
(1) Does this new trending product have an impact on co’s prospect. If yes consider, else no.
(2) PE Ratio & Growth = long term growth rate + dividend yield / P/E Ratio – ratio < 1 poor, 1.5 – 2 – Ok , 3 and above – Excellent. This is not same as PEG ratio.
(3) Cash Position – Cash, Cash equivalents and marketable securities over long term debt. Revised P/E = Market Price (less) Cash Per Share/ Earnings
(4) Debt Factor esp for companies in trouble. Can they survive the crisis?
(5) Dividends – Regualr dividends payouts acts as floor for drop in price.
(6) Book Value (BV) – Before buying for Book Value examine the assets that form part of BV and ensure it is worthy. BV could also be Asset plays due to nderstaed value of real estate,land, securities, tax write offs etc
(7) Cash flow – Free cash flow to be checked for heavy capex industries
Signs to look out for – Piling up of (obsolete) inventory , pension plans and future obligations including contingencies. Eg: litigations.
A 20 PE at 20% growth rate will make more than 10 PE stock at 10% growth rate
Recheck your story every few months to see if they are still relevant.
How to avoid the ‘dotcom’ crash scenarios yet participate in the upside of new technology
Pick and Shovels Strategy : Investing in Denims rather than the gold rush. More money is to be made by the suppliers or direct beneficiaries of a much hyped industry Eg: Microsoft Vs Dell
Through Holding Company: When a holding company has a subsidiary in the much hyped sector which might later be spun off. Holding co. business is a downside protection.
Through ‘Brick and Mortars’ that benefit from the efficiency by use of this new technology.
Personal preferences can be a reason to add companies to list of stocks to research . But never invest without doing the homework i.e knowing
(1) Company’s earning Prospects
(2) Financial Condition
(3) Competitive Position
(4) Plans for Expansion
(5) At what stage of Expansion phase is the company currently in
Invest for the the long term so that you will not be forced to liquidate for need of cash in a bear market. Only Invest what you can afford to lose without the loss having any effect in your foreseeable future.
The Final Checklist:
P/E ratio – High or Low – Compare with similar co’s in same industry.
% of institutional ownership – Lower the better
Are insiders (Promoters/Directors) buying ? Company buyback?
Are earnings growing consistently
Strong or Weak Balance sheets i.e Debt/Equity Ratio
For Slow growers – Dividend consistency and Dividend/Earnings ratio
For Stalwarts – Check P/E, for possible ‘diworsificcations’, growth rate, momentum and for long holding periods chk performance over prev. recessions and downturns.
Cyclicals – Watch out for new entrants. Anticipate shrinking P/E. auto up and down cycles last for 4-5 years each. Deeper down cause higher ups.
Fast Growers – Is PE almost equal to growth rate in earnings. Is Expansion speeding up or slowing down? Does it have room to grow ? Proven ability to expand ?
Turnaround – Will business survive ? Liquidation Value of company. How will turnaround happen? Is Business coming back or costs being cut ?
Asset Plays – Is there any hidden value in the assets? Is company taking on new debts ? Beware of Provisions and contingencies.
Points to note:
(1) Understand the nature of the company and specific reason for holding the stock.
(2) Categorise your stocks for right expectations
(3) Big companies small moves in prices, small companies make big moves.
(4) If consideration is based on specific product, consider impact on company
(5) Consider small proven and profitable companies
(6) Avoid hot stocks in hot industries
(7) Be suspicious of 50% growth rates
(8) Moderately fast growers in non growth industries is an ideal investment
(9) Insiders buying the stock
(10) Don’t buy only on stated Book Value. Consider Real Value.
Realistic Expectations – six of 10 ideas and 12- 15% return.
A small portfolio of 3 – 10 stocks would be a managable size. The composition of the portfolio should be
Growth – 30 – 40% – Slow -Low Risk low gain /Fast – High risk high gain Stalwarts – 10 – 20% – low risk moderate gains Cyclicals – 10 – 20% – low risk high gains or high risk low gains based on entry level Turnarounds – Rest – high Risk High Gain
Consider risk portfolio and age factor while allocation.
When to Sell
If company has gone up well to factor in all good news, it may be sold. But if original story is intact stay invested.
Slow Growth – On 30 – 50% appreciation or when fundamentals have deteriorated. Stalwarts – Price strays too far from earnings, and/or industry P/E. Slowing growth or vulnerability of a major division. Cyclical – 100% of capacity is used, Inventory build up, product slowdown, union demands, high capital requirement for expansion. Fast Growers – too much media attention, no where to expand business, high P/E of 30 + when growth is below 20, high institutional holding, exit of key executives to join rival. Turnaround – After the turnaround, High dependency on one customer, growing debt , rising inventory , High P/E. Asset Plays– Once hidden value is unlocked and is fairly priced. Increased institutional ownership, lower sales, increase in debt , dilution of share value.
Do not buy a mediocre company because it is cheap.
Who is the book for: The book is meant for retail investors with a long term investment horizon.
What retail investors must avoid to avoid losing money?
(1) Following the stock tips provided by brokers blindly. Brokers have vested interests in increasing volume of your trade and not your profits.
(2) Intraday Trading : Its a high speed game which hardly anyone has mastered. Its no wonder we don’t have any stock market millionaires/billionaires who have become rich solely due to intra day trading.
(3) Investing on Borrowed Money: Although stock market is one of the greatest wealth generators it comes with no guarantees or timelines. Pressure of borrowed money and to make higher returns than the cost of funds can cause the investors to take many high risk bets leading to loss of capital.
(4) F&O trading: High margin trading without understanding its risk can cause capital to be wiped out in no time.
The time tested strategy to create wealth in the stock market is to:
“Invest in high quality business(stocks) and hold it for the long run.”
Book title: Getting Things Done: The Art of Stress-Free Productivity Author: David Allen ISBN-10: 0142000280 ISBN-13: 978-0142000281
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The biggest problem in our modern life is that we overload ourselves with information and objects, but don’t have a good system to organise them. As a result, everything is a tangled mess, where we can hardly find what we need. Be it our houses or our email inboxes, we always face two problems.
We search all over the place and don’t find what we need immediately. This wastes a lot of time, which could have been put to productive use.
Eventually we give up our search and get copies of the same thing. This adds to our clutter and the size of the proverbial haystack, making it more difficult to find things the next time.
This is one of the oldest books on investments and personal finance that has survived time and covers all the basic knowledge required for a beginner wealth builder. The fable covers simple advice to start wealth building to most common mistakes committed by those in their journey to financial independence.
Book title: Nudge Author: Richard Thaler and Cass Sunstein ISBN-10: 0141040017 ISBN-13: 978-0141040011
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Nudge is a book written by American behavioural economist and nobel prize (Economics) winner Richard Thaler and lawyer Cass Sunstein, who takes deep interest in behavioural economics and ethics in law-making and government policies.
The premise of the book is that one can highly influences choices and decisions that people make by subtly modifying the way that choices are presented. In doing so, they describe a role named ‘choice architect’, whose responsibility is to carefully design choices so that choice-makers can be protected from bad choices and led to good choices. Continue reading Book summary: Nudge by Richard Thaler and Cass Sunstein
Dan Pink in this book discusses the changing landscape of Selling where buyer is now the King and all of us are sellers in one way or other. He challenges a lot of accepted norms of selling. He also proposes new ways that has worked for people who thrive in this new environment. Dan has divided the book into three parts. Lets us now examine each part of the book individually.
This is a short book but is going to be a difficult book to summarize as it as numerous short chapters with valuable content. The index itself itself runs four pages, so I am going to just give you enough info to prompt you to pick the book.
Why asking the right questions is important?
One who asks the questions, owns the conversation. We are inherently tuned to answer any question posed in front of us. So by asking the right questions, we can direct our and the other persons thing in the direction we want.