Analyze any stock in just 5 minutes – Is it possible?

This is what I got in email today from my online broker. They were recommending how to buy and sell stocks in JUST 5 minutes.

I wish things were that easy. I usually spend about a week or two before making a call on an investment. In bigger investments, I spend more than a month analyzing the industry and the variety of competitors.

Very rarely, very very rarely, I end up buying a security on the same day I read about it.  I spend more time on reading through the financials especially when it is recommended by somebody else and not my own research.

I buy probably about 1-3% of the securities I analyze. That means a I spend a whole lot of time doing nothing but reading more and more about the companies and their industries. Once in a while, you run into something and you feel all the things lined up correctly in your investment criteria and then begins the phase two of the analysis. This is what Charlie Munger always quotes – “Invert, always Invert.”

One needs to see what are the worst case scenarios and see if your thesis holds up in those scenarios. Often, when you invest, it is very easy to see the glass half full than rather half empty. As a very positive person, it is very tempting to see the glass being more than half full than being half empty :) But when it comes to investing, it is a very necessary thing to keep your emotions in check as emotional investing yields terrible results.

To sum it up, spending time to analyze a stock is very key. Very often, the security you are analyzing may go up in value very quickly and you may feel that you want to rush your analysis. But as I have seen my investments through this past decade, these securities come back in prices you want from time to time. And of course, there are thousands of securities to buy. So be patient, the 5 minutes of stock analysis is not for a long-term investor.

Thoughts on recent trends:

If one may notice when filling your gas/petrol tank, the prices of oil has come down. This in turn has affected a lot of oil and gas companies in the US and in Canada. Some of them are not doing well and lot of good companies are sold at cheap. This is a good time to buy shares of oil and gas companies that are financially stable.

 

Is Confrontation good for you? The Story at Intel with Andy Grove

I have spent a good deal of time at startups, working for them, running them and have tasted all the different pallets of it. One thing that I have always enjoyed and known for is confronting ideas when I feel it is weak or unsupported. In fact one cannot work in a startup, if they don’t have confronting ideas about the progress of the product/company.

Some people do take it very personally and they are terrible for working with. But I always feel it is better to let a bad idea die than to make it survive because the person delivering the idea is too nice.

Here is a wonderful write up by Andy Grove on how to make constructive confrontation.

How to make confrontation work for you?

At 5reds, I do throw up ideas that doesn’t go with many of your beliefs and I do it for a reason :) To make you think why Srini writes like this. I welcome your confrontation so we can shake out bad ideas of mine.

Activist Investors 101 and My experience with investing along with them

Activist investors are one who acquire significant stake in a company and ask for changes in management or management style. This includes representing themselves in the board or influencing many decisions made by the board.

Why do Activist investors do that?

Believe it or not, most companies are run by people who do not have a lot of knowledge in other areas. Please see my article on the essential skills of CEO. The management may be great product developers or even great sales folks, but if they don’t do proper capital allocation, shareholders lose.

Activist investors jump in buying somewhere between 1 to 10% of the company and make the management to do things differently so that shareholders are rewarded better. Most of the time these changes produce better results which makes the share price go up and we all stay happy.

Famous Activist Investors

  1. Carl Icahn
  2. Bill Ackman
  3. Daniel Leob
  4. Ralph Whitworth
  5. Boone Pickens

The list can go on. I have invested along with them time and time again and have reaped very good results. I have lost money along with them too when I got blind sided by overconfidence and not looking at the numbers properly.

My Experience

Some of my recent string of success include Apple along with Carl Icahn. A a big win for me was with Ralph Whitworth on HP. I still have investments tagged along with Bill Ackman, Dan Leob and Boone Pickens. They are up but not up yet to their intrinsic value and hence I do not want to discuss them now as I am buying more of them.

My biggest loss was that of JC Penney with Bill Ackman. I had underestimated the customer switching behaviors when it comes to retail. Warren Buffett had written in length about his failures in retail and I still invested looking up on a charming CEO in Ron Johnson. But retailing is hard and one needs to be scrubby to become a successful retailer. Even if one works hard, it is not that you can retain that title for long. Look how Walmart is doing today compared to their results 20 years ago. Amazon is the king of the day, but I do not know how will they sustain 20 years from now. The most important mistake I did in JC Penney investment was that I ignored the financials trusting Ron Johnson would make the turnaround. Although I didn’t lose all of my money, JC Penney was a good lesson learnt for me.

Why am I talking in length about JC Penney?

Three reasons.

  1. Tagging along with an Activist investor does not guarantee  you a successful return.
  2. The numbers will have to add up in your head. In JCP’s case my numbers didn’t add up but I still invested ignoring my rules.
  3. Have a 3-5 year horizon. I had to quickly cut my JC Penney investment because things changed and I had to dilute my holdings.

Final Thoughts

Please read Icahn’s write up on his investing over the years including at Apple.

Activist investors get 80 % success rate compared to most people. An average investor gets less than 30%. Now that is a huge difference. Most value investors get 66% success rate and that alone is good enough for somebody to make wonderful money.

So tagging along with Activist investors  is great as long as you are sure about the financials and the theory behind the turnaround story. Most of the time all the activist investor  asks is to make some small changes to make good returns. These are the types of investments that will guarantee success.

I will tag along with them in the future and will keep posting information as I close any investment.

For people who do not want to invest in individual stocks, Icahn, Leob and recently Bill Ackman have started publicly listing their funds. You could buy some shares and make an amazing return.

These are the words of Icahn in the above article –

If you had purchased stock of IEP, our flagship company, at the start of 2000 you would have had an annualised return of 21.5% compared with the s&p500’s 3.8%; and if you had bought IEP on April 1st 2009 you would have had 33.8% compared with the s&p500’s 20.4% (counting in each case up until September 30th 2014). Even more telling is the return of a person who invested in 23 companies whose boards our appointees joined between January 1st 2009 and June 30th 2014; if the person invested in each company on the date that the nominee joined the board and sold on the date that the nominee left, they would have obtained an annualised return of 27%.

Disclosure: I actually follow a list of about 15 activist investors and at this point do not want to list them all here.

 

How do you save $60k dollars

I am sorry to have such a spammy title – but in reality that is how much it costs per year to study MBA at Columbia University. As a serious value investor, I would rather put my money in investments and try to get what they teach at Columbia at Youtube. One of the reasons people go to MBA at Columbia is because of Professor Bruce Greewald. He is an authority on Value Investing. Columbia was also where Warren Buffett got his MBA and it was the same place where Benjamin Graham was teaching Warren Buffett about the fundamentals of investing.

Now, back to the title. There is a wonderful video about the philosophy of Value Investing by Bruce Greenwald. You have two options here – spend 60 grand per year and study at Columbia or watch this 1.5 hour video. Please note that you will be given the right to spend that 60 grand only after you get admission at Columbia which I can confidently say is not that easy.

Spend the next one and half hours learning about the fundamentals of Value Investing. I have posted many videos before about Value Investing but this one is special because Professor Greenwald addresses some of the myths about Value Investing, especially in the areas of what it is and what it is not. I am thanking Google and Youtube for saving me so much money and helping me learn so much online.

The often forgotten but most necessary skill of a CEO

The job of a CEO is very often lonely within a company. He has to cater to the masses ( the employees ) and talk to investors, customers and prospects to ensure the company grows and does a healthy business. But a third and often most important skill of a CEO is Capital Allocation.

It is a forgotten skill, but it makes all the difference in a company being a successful one.

A CEO can delegate certain responsibilities depending on the status of the company.

  1. In a startup, the CEO’s role is mostly raising more money and ensuring that money is spent prudently. Any dollar spent in a start up should bring in more than a dollar in value. Taking care of employees is not a necessary thing in startups. In small companies, employees need to be very much self-motivated on a daily basis, if not, they are not fit to be working in a startup. Capital Allocation skills play very essential role in the success of a startup. To raise more money, the CEO should have a great salesmanship and be able to articulate why his business has better potential than others. Expenditures when done optimally, can ensure that the money raised gives a very long run way. A company that grows without much of a revenue in a long run will cease to exist eventually.
  2. In mid sized companies, the CEO cannot afford to have a COO, but he certainly can afford a HR person to ensure employees are motivated. Increase in sales, solely falls on the lap of the CEO, but the more important thing of Capital Allocation i.e) funding new projects to expand growth, lies within the CEO. The mid-sized company will remain a mid-sized company without growth and eventually a smarter competitor will take it down. Again, as you see here, the CEO needs to have two skills and can effectively outsource the third to a HR person.
  3. Today, in public companies, it is very common to have a COO, i.e) the Chief Operating Officer. He can take care of regular company operations and do much of the sales. Of course, there will be a full fledged HR department whose goal is to keep happy and motivated employees. The CEO would time-time work on sales for big accounts but the biggest ever responsibility of a CEO is to ensure Capital Allocation is done correctly. Without it, he will have very unhappy shareholders. Unhappy shareholders will yield to an unhappy board, which will replace the CEO eventually. Capital Allocation in a public company doesn’t end at right amount of money is spent on building new products and acquiring new customers. It also involves in analyzing/ acquiring other companies, spinning off divisions, closing divisions if they are underperforming and even sale of the company if somebody is willing to provide a very higher price than what you think the company is worth. A public company CEO has a fiduciary duty towards the shareholders.

As we have seen above, Capital Allocation is the most important skill any CEO will need to be successful.