Is this the costliest blunder moat investors commit? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Is this the costliest blunder moat investors commit? 

A  A  A
In this issue:
» Look who has come to the rescue of PM Modi
» A round up on markets
» and more....


00:00
Our subscribers of ValuePro, a premium service that we have based on the principles of Warren Buffett, are by and large a satisfied bunch of people. If not for anything else for the fact that with both the portfolios that we have created, we have been able to beat the benchmark indices. However, we believe we could have made them happier. It's just that there have been a few slip ups in our choice of stocks.

None bigger than a stock that answers to the name of Maharashtra Seamless. Recommended in June 2010, this story certainly didn't pan out as expected. Mind you, we felt it had a lot of things going for it at the time of our recommendation. Its average return on equity was 23% over the 13 years prior to our recommendation with absolutely no debt on its books. What more, it also appeared to be using its cash flows quite judiciously. Thus, when it came to capital discipline, it had perhaps ticked all the right boxes.

Consequently, the reason the story failed to take off lay somewhere else perhaps. And what really helped us zero in on it was Warren Buffett's 1991 letter to shareholders.

You see, the hard taskmaster that Buffett is, there are only a few businesses on the face of this planet that make him go weak in the knees. And he likes to call them franchises. Now, what exactly are these franchises? Well, as per Buffett, these are those rare firms that can price their products or services aggressively. In other words, increase prices steadily year after year without worrying about market share whatsoever.

Buffett believes that this is only possible if the company's products or services are needed or desired, are thought to have no close substitutes and are not subject to any price regulation. Firms not meeting any of these criteria will have difficulty pricing its products aggressively. And therefore, they do not qualify to be franchises as per Buffett. In fact, he likes to call them just businesses.

As we came across this explanation by Buffett, it gave us a perspective that hit us like a ton of bricks! You see, so far, we had decided to term our mistake with respect to Maharashtra Seamless as an error of judgement. But Buffett's inputs on the topic literally made us see the light. What we had essentially done is we had assumed Maharashtra Seamless to be an economic franchise. However, in reality, it appears to be just a business in the sense that Buffett described it.

And why was this distinction important? Well, for the simple reason that if it indeed was a business the way Buffett calls it, then it also had to be valued that way. It can't be given a franchise like valuation which is the mistake that we committed.

Mind you, we are not terming the business as bad. However, we believe that given the nature of the industry that the company is in, it is a few notches below in terms of qualitative parameters than Buffett's idea of a franchise. And therefore, it has to be valued accordingly. Please note that investor can still end up making money on the stock provided he buys it a significant discount to its intrinsic value. However, this intrinsic value in turn has to be based on its earnings power as a business and not as a franchise.

Sadly, it is only after losing our subscribers 40% of their capital invested in the stock that this reality has dawned upon us. Nevertheless, there's a very important lesson that we have learnt here. And it is the fact that investing in franchise can be very lucrative. Buffett's track record is of course proof of the same.

However, one will have to work very hard to ascertain that the franchise is indeed a franchise and not just another business. For if there's even the slightest of doubt, you are better off valuing it like a business and then buying it at a margin of safety to its so called business value. Better still, you can simply ignore and move on to a stock whose business model you think can analyse with lot more confidence.

Do you think misreading the moat is the biggest mistake moat investors make? Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
Start Investing In Megatrend Stocks With Our Latest Pick... (Ending TODAY)
Our latest Megatrend stock recommendation went live yesterday.

And we can tell you it is a company with a worldwide presence, a large customer base and a huge potential for profit.

In short, everything you would look for in a Megatrend stock.

So sign up our The India Letter service now and get the full details about this stock right away.

What's more, when you sign up for The India Letter now, you'll also get Vivek Kaul's 3 "Easy Money" Trilogy books worth Rs 1,215 for FREE.

However, this opportunity will be available till TODAY midnight only!

So act fast. Click here for full details...

------------------------------

02:45  Chart of the day - Publisher's Note
Please note that as publisher, we respect the intellectual property rights of a third party and ensure that appropriate credit is given to the source of information/content. In this edition of The 5 Minute WrapUp however, there was this inadvertent error on our part in not mentioning the primary source, Ambit Capital and only referring the secondary source, Financial Express. We are thus removing the chart from the website in order to respect the intellectual property right of the original publisher.

03:55
The Sensex is up by 15% odd since the Modi government assumed power in last May. With stock markets being barometer of the economy in general, it is the tendency of people to link the government performance with market performance. In that sense many would say performance of the government has been good.

However, the Modi sarkar has drawn quite a bit of criticism as well in the last one year. Some say it's anti-farmer and pro-corporate. The opposition has labelled it suit boot wali sarkar. Some corporates have also been vocal in saying that the pace of reforms is snail paced and delivery is slow.

However, amidst all this criticism, one person has come to the defence of PM Modi and he is none other than our RBI governor, Dr Rajan. He was recently quoted saying that expectations from the government were quite unrealistic in the first place when PM Modi assumed power. And judging the performance of government so soon is premature. Yet, as per him the government has taken some concrete steps to resurrect the economy in such a short time frame.

We cannot agree with Dr Rajan more. For one, it may not be possible to meet expectations from all quarters at one go. Secondly, when expectation bar itself is so high even a slight delay results in disappointment.

Also, one must realize that resurrecting a 2 trillion dollar economy is not an easy job and PM Modi is not a student of Hogwarts School of Wizardry. Thus, he should be given more time to deliver. The real test of this government will be in 2019 when people shall compare delivery with promises. If execution happens then public expectations will be met we reckon.

04:30
The Indian stock markets were trading in the red at the time of writing. While the BSE Sensex was down by 27 points, NSE Nifty was down by 8 points. The Asian stock markets were trading mixed at the time of writing. European stock markets also opened mixed today.

04:50  Today's investing mantra
"When you combine ignorance and leverage, you get some pretty interesting results". - Warren Buffett
Today's Premium Edition
A peek into Dr Reddy's R&D strategy
Dr Reddy's had recently presented its R&D portfolio and shared the progress, and their focus on various therapies. Here is the update on the same.
Read On...Get Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

This edition of The 5 Minute WrapUp is authored by Jinesh Joshi and Rahul Shah.

Equitymaster requests your view! Post a comment on "Is this the costliest blunder moat investors commit?". Click here!

  

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. Neither Equitymaster, Research Analyst or his/her relative have any financial interest in the subject company.
  2. Equitymaster's Associates has financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407