Bibliophile: The Most Important Thing by Howard Marks “Second- Level Thinking”

One of the books which has influenced me and my investment journey is “The Most Important Thing by Howard Marks”. This book teaches us the most important thing which we need to develop for becoming a wise investor. In this article, I include my learning from the 1st chapter of the book – “Second Level Thinking”.

This chapter talks about in-depth thinking for each and every opportunity and even before making any decisions. As the name suggests, we need to enhance our thinking level for making a decision. I found this concept similarly useful in my life also as it’s useful to the investment world. So, I am starting my learning from the 1st chapter of the book.

If we want to get a return as similar as market returns, then we do not need to enhance our level of thinking. We can just make an investment into the index fund, ETF etc., which are listed on exchanges. But what if we want to earn an above average return, we need to make a different decision and need to think differently.

We should need to come out of the crowd and take our stand. We might get right or might get wrong, but should not stop our thinking and decision making. We should keep in mind that even successful investors do not prove right all the time. Even Warren Buffett has made an investment mistake such as Salomon Brothers Inc., Tesco, a Dexter shoe company. We should not fear from making a mistake but should learn from it and should not make the same mistake again and again.

Mr. Howard Marks has discussed that how we can think differently about making a good return on investment. And he gave the name of the concept “Second Level Thinking”.

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Source: The Most Important Thing by Howards Mark

There are many incidents which I personally have experienced in my investment journey where I found real effects of this concept.

Let me explain the 2nd level thinking with an example.

  • One good company which treated as a great company by the market.

The company has a good network effect, reliable brand name and also many news making a tie-up with e-commerce enterprises. Also, got hurt due to changes in the traditional tax structure. Once in a while, the company traded at a valuation of ~140x P/E, ~58x P/BV, ~7x Market cap/Sales, ~76x EV/EBITDA etc.

The company has a good track record and a good brand name but the market has treated it as the great and current valuation of the company is ~64x P/E, ~20x P/BV, ~4x Market cap/Sales and ~44% fall in price from its high price.

This suggests that if any opportunity is much discussed at market space, then we should be more cautious regarding that opportunity and if possible need to stay away from it.

Same with the reverse scenario. Making an investment in metals, sugar sector when everyone fearing from these sectors. When sugar and metal prices were on the lower side, then that was the best time to make an investment in these sectors.

sugar-prices

sugar

We can see that all sugar stocks have started performing after August-2015 from where also prices of sugar started increasing.

  • There are many examples where we have experienced this situation. We can able to create huge wealth when we have made an investment in the adverse scenario.

The scenario of the year 2008 subprime crisis, 2013 or 2016 demonetization situation. If we have made an investment at such panic situations, we can able to create a huge wealth.

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Same with the reverse situation. When there are a high growth and happy scenario starts, we should keep cautious with our investment. We cannot able to catch the bottom and the high of the market, but we can able to stay with cautious with the surrounding scenario.

The Cocktail Party Stock Market Indicator

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  • When news of falls in corporate earnings at everywhere and everyone dumps stocks, then it’s a good buying opportunity. If earnings fall less compared to expectations, then we can see a huge shock. And if everyone is expecting to fall in earnings then only we can able to get the good opportunity to enter into a particular business.

tamo

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Second level thinking is different, difficult and more detailed compared to the first level of thinking. When the 1st thought comes in our mind, we always need to think deeply about it before making any decision.

First level thinking is very easy and many are following it but for getting a different result from the crowd, we need to think differently. As Mr. Howard Marks has quoted results matrix for the second level thinking.

matrix

Our unconventional behavior can help us to achieve unconventional results. Thus, for getting a superior return we need to adopt the second level thinking. And for developing a second level thinking, we need to work hard. We need a huge courage for going against the crowd and it’s not an easy task to perform.

returns-and-how-they-get-that-way

Read for more detail: The Most Important Thing Illuminated by Howard Marks

Disclaimer

Above article is just my perception, and perception can be wrong. For me, my perception can be right but for others, it might be wrong.

SIMPLE IS BETTER – ISSUE -5 – TEMPTATION OF SPENDING

This time I come up with my 5th issue on mid-month due to few most money spending days of the month.😉 In My 5th issue, I am going to discuss regarding our temptation for spending money. In all my previous issues, I discussed regarding savings, investing and growing our investment for creating wealth. But for creating wealth, we must have to make savings and need to transform those savings into an investment.

If we always stay with our lifelong partner (Investing) then our lifelong partner (Investing) always stay with us in our bad time.

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For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -5 – TEMPTATION OF SPENDING

SIMPLE IS BETTER – ISSUE -4 – Mr. EMI V/S Mr. SIP

In my last 3 issues, I have written on how we can save money (Simple is Better – 1), Power of compounding (Simple is Better – 2) and Expectations v/s Reality (Simple is Better – 3). Now, in the current issue, I am going to talk about the transformation of our living style for creating a wealth.

I am going to try to explain this concept with one story, which can help us to understand the concept in a simple manner.

This story contains 2 families and both the families are living in the same city but they have a huge difference in thinking, living style etc.

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -4 – Mr. EMI V/S Mr. SIP

LEARNING FROM KITE FLYING FESTIVAL FOR INVESTING IN EQUITY SHARES PART – 2

Last year at the same time, I wrote on Learning from Kite flying festival for investing in equity shares. This year I am going to release the sequel of my previous article 😉 and try to explain learning in a detailed manner.

Flash Back 😉

Kite as a businessManager

USPCompetitors

 

As we have seen the kite as a business, thread as a competitive advantage (USP), other kites as a competitor and consider the person who holds the kite as a manager/ a leader, who run the business.

Partner

The person who not only holds the kite but also the person who hold sets of thread (Firki) is also important. If he does not support well to the person who holds the kite, then going higher and higher become difficult.

Starting of Part – 2

 

Now, after a brief recap of my previous article; let me start with detail explanation.

A good kite also needs a wind to fly to the sky high. A skillful person who knows how to make the kite to fly well also cannot be able to push his kite to the sky high if there is not an availability of good wind flow. And also, if sun temperature is very high, then also a person cannot able to make a kite fly well.

Similarly, with the business,

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If the economy isn’t able to grow or growing at a very slower than business also cannot be able to grow much faster though business having a good manager. A good manager can able to sustain his business, but without good growth, the business can suffer.

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Similarly, if the temperature of the sun is very high means Interest rate among the economy is very high then it will become more difficult for the manager to expand the business.

As I am not going to write much about macro factors in the current article so let me move forward with details on a business level.

If we get a good kite with a skillful person who makes kite to fly well then,  

Huge wealth creator = Good Business + Good USP + Good Manager + Good Key Employee

Good business with a good USP can grow decently by itself also but additionally if it gets a good manager then this business, having a potential to become a huge wealth creator for us.

We can have a couple of examples of businesses such as Symphony Ltd, Eicher Motors Ltd. Piramal Enterprise etc.

Symphony Ltd.

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Symphony Ltd. Was established as a Symphony Comfort Systems Ltd. for manufacturing air cooler in the year 1988. And in 1990, the company expanded business to all over the India. Two years after launch, the Symphony had become a national brand. After the IPO in the year 1994, the company expanded its product portfolio Water heaters, room heaters, flour mills, water purifiers, air conditioners, washing machines and exhaust fans but none of the products succeeded excerpt air cooler. Due to this reason, the company falls under BIFR [Board for Industrial and Financial Reconstruction] company in the year 2001.After BIFR, the company exited from all the diversification and continue to focus on Air cooler business. In the year 2008, company turnaround and acquired International Metal Products Co (IMPCO). Currently, the Symphony has ~50% of the market share in organized residential air cooler market (From AR 2015-16).

(For detail story of Symphony Ltd. Kindly visit – http://www.forbesindia.com/article/my-learnings/symphonys-achal-bakeri-on-how-to-make-your-company-great/33504/1

And lecture of Achal Bakeri https://www.youtube.com/playlist?list=PLgAkbY5uEbBS6XqDX6mxYMABSFYSt8WJj )

Eicher Motors Ltd.

eicher

Royal Enfield, a brand of Eicher Motors Ltd. has faced the much troublesome period in the past. Demand was low with sales barely crossing 2,000 units a month against the production capacity of 6000. And additionally, The Eicher Motors management did not see value in the box. Currently, Royal Enfield contributes ~40 percent of Eicher Motors’ turnover, ~80 percent of its operating profit (EBITDA).

Such huge turnaround was made by Mr. Siddhartha Lal, who is passionate about bike riding. Mr. Siddhartha Lal had asked for 2 years from his father Mr. Vikram Lal for turnaround Royal Enfield.

In bikes, he suggested changes such as a shift to an aluminum unitary engine with the gears and the engine as a single unit, disc brakes placed on the right and an electric starter were introduced. Mr. Siddhartha Lal also changed the way the bikes were sold—from rickety, basic, even dirty shops in dingy by lanes to state-of-the-art showrooms.

 

(For detail story of Eicher Motors Ltd. Kindly visit – http://www.forbesindia.com/article/super-50-companies-2015/eicher-motors-its-all-in-the-drive/40705/1

And Weekender Episode 17 Siddhartha Lal part- 1, part- 2 & part- 3.

 

If we get a kite which is not much good but with it a skillful person who make kite to fly well then,

Wealth Creator = Bad Business + Good Manager

If we get a bad business, having a good manager, then also that business can able to create a wealth for us. A good manager can able to make a business better for the long-term horizon.

Bharti Airtel

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Sunil Mittal, a founder of Bharti Airtel has started his 1st venture of manufacturing bicycle parts in Ludhiana at the age of 18. After He sold off his bicycle business, he started importing Suzuki Motor’s Electric Power Generators from Japan. This business was going well and Mr. Mittal started to make profits out of it. But as an Indian government banned the importing of gene sets, he has to stop this business. After falling of Generator business, he started with the marketing of telephones, various fax machines under the brand Beetle. In the year 1992, he got a chance to bid one of the four mobile phone network licenses auctioned in India; and in the year 1994-95, he launched AirTel under Bharti Cellular Limited (BCL). Within a few years, Bharti AirTel became the first telecom company in India to reach 2 Million subscriber point.

Bharti Airtel has a business which is highly capital intensive in nature. Business requires the constant investment of capital for purchasing spectrum, such as 2G, 3G, 4G and more, also for upgrading the network, maintenance of network, high government regulations, and huge competitions. Telecom business itself is a very tough business and Airtel survives as a market leader.

telcoms

(For detail story of Bharti Airtel Ltd. Kindly visit – http://www.startuparchive.com/bharti-airtel-success-story/ )

 

BUT, what happens when we get a good kite but with the unskillful person? The kite gets torn

Wealth Destroyer = Good Business + Good USP + Bad Manager

 Balaji Telefilms Ltd.

balaji

The Indian television market is expected to grow at a CAGR of 15.50% to reach US$ 15.20bn in 2019. Balaji Telefilms is one of the largest production houses across India, South Asia, South East Asia and the Middle East is delivering Hindi and regional content. The company has produced many hit TV shows such as Kyunkii…Saas Bhi Kabhi Bahu Thi, Kahaani Ghar Ghar Kii, Kasauti Zindagi Kay, Jodha Akbar, Pavitra Rishta, Bade Ache Lagte hai etc. company also has produced many hit movies such as Kyaa Kool Hai Hum, Shootout at Lokhandwala, Shootout at Wadala, Lootera, Once Upon a Time in Mumbai Dobaara, Shaadi Ke Side Effects and Ragini MMS-2, The Dirty Picture, Ek Villain etc.

loan-given

interest-income

In Fy15, Company has given interest-free loan and in FY16, an approximate company gets 8.30% interest income.

remneration-pat

In FY16, Company has posted Rs.2.80 Cr of Net Profit in FY16 and remuneration took by management was Rs.6.72 Cr in FY16.

 

AND, also both kites are not good and the person is also unskillful to make kite to fly then

Huge wealth Destroyer = Bad Business + Bad Manager

This one is a deadly combination and one should avoid such investment. Such investment can become our biggest mistake.

Bhushan Steel Ltd.

bhushan

Bhushan Steel is a sixth-largest steel manufacturing company as per capacity of 2.2 million tonnes (mt) in India. Steel consumption is highly cyclical in nature and also depended on the economic and industrial conditions worldwide and for the regional market.

bhushan-cfo

Over the last 9 years, the Company has generated cash flow from operation of Rs.9192.68 Cr and required to invest Rs.28957.62 Cr. So, that company needs to fund expansion by taking additional debt; and debt of the company increases from Rs.5718.14 Cr in FY08 to Rs.44477.93 Cr in FY16.

In August-2014, Central Bureau of Investigation (CBI) arrested vice-chairman of Bhushan Steel, Mr. Neeraj Singhal, on charges of bribing SK Jain, chairman of Syndicate Bank for taking a bribe of Rs 50 lakh for increasing credit limit of some companies in violation of banking rules.

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Sources: Moneycontrol, Moneylife, Forbes India, Equitymaster, mint, screener etc.

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—- Charlie Munger

Disclaimer: Businesses discuss in this article is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered research analyst.

LEARNING INVESTMENT LESSONS FROM MOVIE “Dangal”

Previously I wrote learning investment lessons from movie “3Idiots” and “Rajneeti”. Now, I am going to write few investment lessons from another super-hit movie “Dangal”. Dangal movie having a very inspirational story and as well as many lessons which we can implement in our life & in an investment.

  • Investment journey is also full with struggle

Wrestling can give medals and fame but doesn’t provide intermediate cash inflow which is required for living life. This has affected the game of Amir Khan, his wrestling career and he has to start doing a job.

01

At the initial stage, Investment journey is also as difficult as wrestling show in a movie. When we are constructing our portfolio at that time our portfolio is smaller in size. So, that it will not help us with huge dividend as intermediate cash inflow which can helpful for living our life.

  • Events are not always as per our expectations

In the movie, it shows that Amir Khan wants a son for fulfilling his dream, but actually, he got 4 daughters. So, that every time events don’t occur as we want it to occur.

02

As similarly in investments, events don’t always occur as per our expectations. For example, if we have made position in any logistic stock by focusing on GST then we expect that GST gets passed and get implemented. But as we have seen GST get postpone many times. So, that we also have to face for the unexpected events can occur in our life and also in the investment field.

  • Har woh cheej joh inka pehelwani se inka dhyaan hatavegi… main usse hata diyon (I will eliminate anything that deflects their attention from wrestling.)” Avoid noise

When 1st time Amir Khan doesn’t get son as per his expectations, all villagers had started providing advice to him. But he realizes that nothing has happened after following all pieces of advice of different people. Also, many a time, Geeta and Babita had argued regarding their long hair, tiredness, body pain, cannot able to focus on study, etc. but Amir Khan has always found ways from it. We should not stop our journey though obstacles keep on coming.

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The same happens with our investment field. When we start building a portfolio or researching on any of the business, people start providing an advice. We should differentiate between noise and a true information. If we keep focusing on noise and get trapped, then, at last, we also don’t get anything as per our expectations.

  • Don’t lose hope

Amir Khan disappointed when his wife gives birth to four daughters. He gives up his dream thinking that girls cannot wrestle and lose hope of fulfilling his dream to win gold (Award) for the country. But one unexpected incidence – when his older daughters, Geeta and Babita come home after beating up two boys, help him to realize that girls also can become a wrestler.

05

As similar, whenever we don’t get the stock for investment, then we also get disappointed. But actually, we should not lose our hope and keep researching on the businesses, we might get one good investment opportunity after studying numbers of businesses. Also, when we have made position in the stock with some assumptions and those assumptions turn out into reality but might be at a lower speed. Then also we should not lose our hope any hurry to exit from our position; one moment can able to change the entire result.

  • “Medalist pedh pe nahi ughte … unhe banana padta hai … pyar se, mehnat se, lagan se (Medalist don’t grow on trees … you have to nurture them … with love, with hard work, with dedication)”

Since becoming a wrestler, Geeta and Bbita have to do a strong exercise and hard work. They regularly wake up at 5:00 o’clock in a morning and start doing exercise. Their regular efforts make them successful.

06

Same happens with investment field also. We also need to put a continuous effort, continuous reading of Annual Reports, business/ industrial magazines, etc. our regular efforts with discipline only help us to become a successful investor. We also need to make an effort in developing our investment process and philosophy.

  • Don’t focus on what people think

We have seen in the movie that people have started talking regarding Amir Khan when he had started coaching Geeta and Babita in wrestling. Many a time people laugh at him and also Geeta & Babita has to face such teasing from people.

07

When we pick up any stock for research or make position in any of the stock than many people start to laugh at us; might be start teasing us. But we have to stick towards our process and philosophy without getting disappointed from the comments of people. We should know that what we are doing and having a full understanding of it.

  • Dangal ladne se pehle dar se ladna padta hai (Before you fight you need to fight with your fear) and Practice brings confidence

Initially, Geeta and Babita feel fear for wrestling and not ready for a fight. Geeta loses her 1st wrestling match also. But after that, she gets motivated and asks her father for the next match. Geeta won many matches with confidence. Continuous practice brings such confidence to her.

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Initially, we also feel the fear that what happens to our investment? If stocks fall from our buying, then what happens? Am I ready for making an investment? We also need to stick to our process and philosophy. It might be possible that our initial investment ideas could be our biggest mistakes, but continuous practice can bring confidence under us. And confidence can push us to become a successful investor.

  • Never be overconfident

After winning a national championship, Geeta went to institute and she begins to disregard the discipline she has been brought up with. When Geeta visited her home, she is determined to show her father, she can wrestle well without his techniques. Geeta finds herself losing every match as she is not following her father’s techniques or she is not fully focused on wrestling (painting her nails and growing her hair long).

Same happens with our investment field. We easily get overconfident in the market. When we invested, stocks start running, we should always analyze the reason for such run up; rather think that stock runs because we have a position. The stock never knows that we are holding it or not. We always need to stay humble and stay focused towards our process.

quote-failure-comes-from-ego-greed-envy-fear-imitation-i-have-success-not-because-i-am-smart-warren-buffett

  • “Geeta ka natural game attacking hai, apne technique ke chakkar me fasake uska game hi ulta kar diya. Yu to wohi baat ho gayi ke Sehwag ko bola jaye bhai tu Dravid ki tariyah khel. Na Sehwag reh jawega aur na Dravid ban pawaga. (Focus on our natural game)”

Geeta’s coach’s training differs significantly from her father’s techniques. Geeta believes her coaches’ techniques are better and that her father’s techniques are outdated. But those new techniques have changed the natural game of Geeta. And Geeta lost matches.

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Similar to the investment, as and when we get diluted our focus from our original philosophy and investment style which is suitable for us; from that time, onwards our investment career also having a tough period started. We should focus on investment style suitable to us rather try to copying style of others.

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(Source: SafalNiveshak: The Wisdom of Intelligent Investors (Special E-Book))

  • “Kehne ko toh ek round sirf do minute ka hota hai … par socha jaave toh do minute mein 120 second hote hai … us ek second ka intezar kar jab samne wala galati kare (To say, there are only two minutes in a single round … but if you come to think of it, there are 120 seconds in two minutes … wait for that one second when your opponent makes a mistake)”

By this dialogue, Amir Khan wants to say that Geeta should focus on the game and do attack when the opponent makes a mistake. She cannot able to get points in every second, but she should attack a right time.

As similar to this, we should always wait for the right opportunity to come, rather run for catching up all opportunities around us. We should keep in mind that we cannot able to catch each and every opportunity around us so that we should wait for the right opportunity to come toward us.

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(Source: The Most Important Thing by Howard Marks)

SIMPLE IS BETTER – ISSUE -3 – EXPECTATION V/S REALITY

In issue 3, I am going to talk about distinguish between expectations and reality.

The majority of our acts is results of our expectations. We take many steps for fulfilling our expectations. Expectations always play a vital role in our life.

If we keep our expectation low/ reasonable then we can able to achieve more in reality and that help us to stay happy. We should keep in mind that we can able to achieve what we have expected but many a times results will not be in a way what we have actually expected.

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -3 – EXPECTATION V/S REALITY

SIMPLE IS BETTER – ISSUE -2 – POWER OF COMPOUNDING IS EVERYWHERE

In this 2nd issue, I am going to explain compounding, its effect and most importantly essentials for taking benefits of compounding in more detail.

Actually, many of us live life with a belief in our mind that compounding is only related to investment field (I was also in same belief). But when I thought about my life then I come to know that “Power of Compounding is Everywhere”. This power has performed a huge role in my life. According to me, from the our born to our current life and also in future, we have experience effects, benefits and entire process of compounding in our life.

Power of compounding beyond our imagination and this power can able to creates a huge miracle.

albert-einstein-quote-on-compounding-interest

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -2 – POWER OF COMPOUNDING IS EVERYWHERE

SIMPLE IS BETTER – ISSUE -1 – BASIC NEEDS V/S ESTEEM NEEDS

Dear Friends,

I learn many things in my life and keep on learning much more. But one common thing which I learn is “Keep things simple”. We have many complications in our life and if not, then we create it. But according to me, keep things simple is actually more complex. My Guru always mentioned that “Simpler the things, more better it is.” From today (Auspicious day of starting of new Samvat 2073), I am going to start series of articles with title of “Simple is Better”.

I am dedicating My first issue of series “Simple is Better” to my Gurus and to all who having influence in my life directly or indirectly. So, that I am going to post my few of learnings from my Gurus in my first issue.

As a many people, I also have seen dreams to buy big home, car, other precious things and most important to achieve financial freedom from my childhood. This is a common dream of every common man. Many common men can’t able to fulfil their common dreams and then argues that fulfilling our dreams are very difficult to impossible.

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -1 – BASIC NEEDS V/S ESTEEM NEEDS

NILKAMAL LTD ANNUAL REPORT REVIEW FY15-16

Nilkamal Ltd.

NILKAMAL’S CORE BUSINESSES

  • Material Handling Solutions
  • Moulded Furniture
  • Nilkamal Mattrezzz
  • Nilkamal Home Ideas, the Home Furnishing Store
  • @home, the Mega Home Store Retail Chain

Company manufacture and sell over 1.4 Million plastic molded chairs in Indian markets, along with sofas as well as ready to assemble furniture too.

Annual Report Review FY2015-16

Disclaimer: This is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered analyst.

SAREGAMA INDIA LTD. ANNUAL REPORT REVIEW

Saregama stretches back over a century to 1901. Formerly known as The Gramophone Company of India Ltd. and more popularly as HMV (His Master’s Voice), Saregama was established as the first overseas Indian Branch of Electrical & Musical Industries Limited (EMI), London. From producing the first song recorded in India in 1902 by the star of yesteryears, Gauhar Jan, to creating strong inroads into the production of cinema and television content, digital retailing, aggregation, radio programming and events, Saregama has evolved into one of India’s premier entertainment content companies.

Annual Report Review FY2015-16, FY2014-15.

Disclaimer: This is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered analyst.