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The Equitymaster Research Digest

Best 30-second mind in the world, value investing roadmap and more...
Sep 25, 2015

There's something about successful investors and their favourite books. They seem to can't get enough of them. We've heard how Warren Buffett likes to go back to the value investing bible Security Analysis every once in a while.

Then there's another successful Indian origin value investor Mohnish Pabrai, which recently admitted to having read his favourite book, Poor Charlie's Almanac, more than seven times! And he may be not done yet. The book is so choc-a-bloc with insights that every time Pabrai reads it, he has something new to learn from it.

I can't help but agree. Page per page, it has perhaps the most wisdom I have ever come across in one book. Insights literally leap off the pages of the book. No wonder Warren Buffett claims Charlie Munger, the author of the book, as having the best 30 second mind in the world!

The best antidote to a jumpy mind

It is indeed to the credit of both Munger as well as Pabrai that the use of checklists has become so widespread in investing. As a matter of fact, our own 'Checklist Project' got off the ground after we heard these two gentlemen derive enormous benefit out of it.

You would be shocked to know that even after all these years and with so much wisdom at their disposal; people like Warren Buffett and Charlie Munger still have their blind spots. When you analyse their investment mistakes, you realise that most of them weren't because they got some exotic math or complex strategy wrong. Instead, most of them arose because they missed something very basic. Their minds simply jumped things and missed important details.

A checklist therefore is a fantastic way to deal with this kind of a faulty wiring that even the most well trained brains seem incapable of fixing.

A walk down the errors lane

Our own checklist is nothing but a list of red flags that we've put together after analysing our previous failed recommendations.

It is all about asking the right questions to be honest. We look for 2-3 important reasons why a stock failed and then those points find a permanent place in the checklist.

And every time we recommend a new stock, we run it through all the points in the checklist to ensure we aren't missing out anything important.

Take one of our failed recommendations Eastern Silk for example. Recommended in 2006 at an adjusted price of Rs 80, the stock lost more than 50% for our subscribers (We don't know whether this will make you feel any good, the stock has lost another 90% since then!).

Mind you, the performance leading up to the time of our recommendation was quite good, making us believe the good times will continue. However, no sooner the 2009 crisis erupted; it started going downhill. It has kept finding new bottoms since then.

Our post-mortem revealed that the company was simply riding an industry wide tailwind and neither had the ability to hold on to its volumes nor the pricing power to protect itself when things take a turn for the worse.

Digging further, we realised that the products the company sold were luxurious in nature and not necessarily non-discretionary. Therefore, when the slowdown struck, luxury spending was the first thing the consumers cut down on and this impacted both volumes as well as margins.

Infact, things came to such a pass that because of low volumes and poor margins, the firm had to shut down its whole outsourcing business which resulted in more than 80% of the revenues getting knocked off. This plunged the company deeper into a liquidity crisis from which it has never recovered.

Performing this review on Eastern Silk has given rise to two questions which have now become a permanent part of our checklist.

  • Are the company's products meant for luxury consumption or are non-discretionary in nature?
  • Does it have bargaining power with its customers as well as suppliers?

Analysing a lot of our failed recommendations in a similar manner has thus given rise to a lot of questions that we now ask of every stock that we recommend across most of our services. We have eventually come to the view that it is a fantastic exercise and has really added a new dimension to the way we go about researching stocks.

The checklist and the India Letter

In fact for our megatrend service, The India Letter, there is always a tendency to get carried away by the big picture and in the process, overlook stock specific things or not give it enough consideration. The use of checklists thus ensures that the company not only has a huge growth runway ahead of it but is also very strong fundamentally so that the upside can be maximised.

The team tells us how it had to change its mind with respect to a recommendation on a pump company when it was subjected to the checklist. As we went through the different items on the checklist, it became clear that the fundamental strength was not as strong as imagined. The team is glad it did not go ahead with the recommendation as the stock is down some 40% from the price we were contemplating to recommend at.

By the way, The India Letter team hopes to come to you with many profitable megatrend investment opportunities in the years to come!

Hence, I strongly recommend that you upgrade your subscription now and get access to The India Letter! (When you are renewing, do look up the multi year option, which in my view offers fantastic value!).

See, the bottomline is that the Megatrend has just started and the changes are trickling in.

And these changes could potentially have a big impact on some companies over the next decade or so.

We are confident that this could lead to potentially big returns in the years to come. So, don't miss this opportunity... Join The India Letter today!

The guide for every budding investor

Coming back to the topic of books, Warren Buffett has another book he considers amongst his all time favourite. It is The Intelligent Investor by Benjamin Graham.

He is of the view that the book lays out such a fantastic roadmap for value investing that anyone who internalises the principles laid out in the book is highly unlikely to not succeed as an investor.

Given this, wouldn't it be great to have all the important principles culled out and put together in the form of an easy to understand guide? Well, the good news is we have done just that in the form of a guide which we are calling 'The 7 Secrets of a Shrewd Value Investor'. This guide will come to you at the click of a button and that too, absolutely free of cost. So, do stay tuned.

Well, let us now move on from budding investors to people who are at the fag end of their careers i.e. nearing retirement.

Did you know that many Indians do not give much thought to retirement planning? While they focus on leading a rich and fulfilling life in their younger years providing for their kids and families, most are not able to maintain that lifestyle once they become senior citizens.

Anisa Virji, the Managing Editor of Common Sense Living, has made a very strong case for retirement planning and why it is necessary if you want to continue leading a rich, independent life without having to depend on your children. Well, if you are serious about living well today and retiring well tomorrow, I recommend you read Anisa's thoughts on this and how you can get access to the Ultimate Retirement Bundle...

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