Bharat Shah’s book – Of Long Term Value and Wealth Creation from Equity Investing- is considered as a simple super-text on investment and original thought in investment investment. Abhymurarka has written a worth reading summary this book. The book is a repository of condensed wisdom from 3 decades of his investing career – a must read for every long term investor!
- Essential principles of investing have largely remained unchanged over history of organized investing. What has changed is the interpretation and application by investors, as deemed convenient or expedient at a particular point in time.
2. Investing is simple, but not easy. Simple, because it’s not difficult to understand the essential principles of investing- a large opportunity, accretive earnings growth, high character & a certain degree of predictability. Not easy, because the required discipline is rare.
3. Even some of the best investors falter at “Doing it right” rather than “Knowing it right”. More failures have occurred, even among the greatest thinkers and investors, on account of former rather than the latter.
4. Good investing is a heady mix of art & science. The art is about understanding the quality & character of business & of the people behind it. Transcribing the art into a tangible working model is the science of it. The art part feeds into the science, not the other way round
5. Returns are tangible, but the risk is not. Hence, returns appear as real to the investors, but risk appears as amorphous. Returns become real only if backed by intelligent risk taking. Quality of returns is different from quantum of returns.
6. It is impossible to operate only on the good part of market cycles. Those incredible ‘timing’ skills hit you back if you try them long enough. Investing is indeed long term even though it not considered fashionable these days. Anyone saying otherwise is likely fooling you.
“Journey to Excellence involve identifying the right things, at the right time, and to act upon them with the right way to achieve desired measurable outcome.”Bharat Shah
7. Size of Opportunity is the foundation for growth investing. Ask will it hit a glass ceiling or soar freely for long. Uses framework of size of fish (company) & the size of pond (industry). Size of the pond determines the size of the fish AND your meal. 4 possible outcomes:
8. A business may have high profitability, superior capital efficiency, reasonable growth, yet fail to create efficient compounding, if it is about to hit a glass ceiling. A large opportunity may fail to get high valuation if profitability is compressed. Eg: Organized retail.
9. The debate around large caps or mid/small caps is largely an artificial one. Debate is really between quality vs lack of it, the nature of growth (Accretive/Dilutive) & about future size rather than present one. Large/mid/small is relative to opportunity they are catering to.
10. After size, focus on feasibility of value creation. While size helps, what matters more is character. It is the ability of a business to create Economic Value (EV) by generating superior Return on capital over its cost of running the business over an extended period of time.
11. Earnings Growth Quality: Uses the concept of Compounding Multiplier (CM), where CM = CAGR of investment returns/ CAGR of profits over a period. Denotes returns generated per unit of profits. The book presents CM analysis for over 100 companies over FY 2003-12 and FY 2007-12
12. When growth goes away, Stocks become Bonds and cannot really quote higher than the Net Worth. If the outlook deteriorates further, they will be treated worse than a Bond and might trade a discount to their Net Worth/ Book Value. Case in point: NBFC scenario now.
13. When the character of the market is a Growth market, focus has to be on growth investing and not Cigar Butts. Feels India is a growth market will ample high amplitude growth opportunities with desired longevity.
14. Not all growth is good. Focus on businesses with accretive growth over dilutive growth. Markets view capital dilution with a healthy skepticism.
Avoid if dilution is recurrent, devoid of economic logic, outsized or in unrelated areas or for perceived dubious reasons.
15. Businesses entailing significant Capex & those with significant capital dilution are Siamese twins and have same operating conditions. High capex will have high capital dilution & vice versa. These are anti-thesis to good returns & will lead to mediocre compounding
16. Market distinguishes colour of money. It does not reward acquisitive growth in the same way as Organic growth. In other words, per unit market returns for a unit growth of profits is less for acquisitive growth compared to organic growth.
17. Margin of Safety: If you are going to invest like Ben Graham, then your sources of margin of safety are different than if you invest like Warren Buffett. You just have to be aware of those sources and also of their limitations.
18. On timing: A high quality business, even if purchased at the highest price of initial year in a 5-year cycle & sold at the lowest in last year, generates substantially higher returns than opposite purchase timing for a low quality business.
19. Market has long memory like much like that of an elephants. Retail investors, at times get caught in a bubble, and rely on short term memory. This is a recipe for pain.
20. On valuations: Investing is about pricing the value, rather than valuing the price. Price to earnings is a rubbish way of computing value. But unfortunately it is most prevalent. P/E is in fact a derivative of value, but people infer value from P/E
21. The basic trick is NOT to look at valuations as first filter, but at quality. Pure cheapness is never a virtue. The trade-off is never in terms of valuation vs quality; its quality followed by valuation. Buy businesses with superior & sustainable ROCE rather than just low PE
22. Investing is not a get-rich quick scheme, though such outcomes also occur at times. When it happens, they are merely milestones in long term process of Wealth creation. Hoping for the same to sustain leads to a larger wealth erosion with the reverse flow hitting you harder.
23. Focus on 4Ps – Potential, Product, People and Predictability as detailed in below diagram
24. Investors like to talk about absolute returns when markets are falling & relatively superior returns when markets are on ascendance. Absolute and relative returns are like 2 rabbits – you try to catch both, you get neither in your hands. Focus on first, you get the latter.
25. Lao Tzu says “I have just three things to teach you: simplicity, patience, compassion. These 3 are your greatest treasures.”
In good investing, read it as simplicity (of business), patience (of investor) and passion (for quality).
26. “Based on my personal experience over last 3 decades, rarely do more than three or four variables really count. Everything else is noise.”