Penny wise...
A Blog from India focusing on Personal Finance, Finance Education, Investing and Retirement Planning...
Saturday, October 30, 2021
Waiting for Mastershare Dividends. Our family tradition....
Sunday, December 13, 2020
Book Review #43: The Zurich Axioms: Author: Max Gunther
This is the review of the book 'The Zurich Axioms' written by Max Gunther, who also wrote the book 'How to get lucky'. You can read my review HERE (I have not published the post yet, I will update this link, once I do that).
Swiss are famous for their prudent and successful money management. It is not for nothing that they have earned the moniker 'The Bankers to the World'. They have a legendary ability to take on and manage risk. At USD 83000, the nation of a couple of million people has the second highest per capita income in the world.
They must be doing something right with money that we can learn from.
What are their thought processes? What are the principles that they follow when it comes to money? What are the lessons that we could learn from them?
Saturday, November 14, 2020
Book Review #42: The Psychology of Money: Author: Morgan Housel
Friday, June 21, 2019
How do spinoffs create value?
Management actions like spinoffs present two benefits. One, they help the market close the gap between the price and the value by giving shares directly to the investors. Two, they send a clear message that management is shareholder friendly.
Market regularly throws Value Investing opportunities
One such opportunity arises when company decides to spinoff its subsidiary into a new company. In the chapter 10 of the book Margin of Safety Mr.Klarman discusses the value investing opportunities provided by spinoffs.
Spinoff is the distribution of shares of a subsidiary company to the shareholders of the parent company. Spinoffs help parent company to divest businesses that no longer fits strategic objective. The goal of spinoff is to create parts with a combined market value greater than the present whole.
In case of spinoffs, as the shareholders dump the shares immediately after the spinoff, the share prices get significantly depressed. Unlike other securities, the selling is not because the sellers know something more than the buyers, in many cases, the selling happens because the sellers know nothing.
- Spinoffs help increase the market value of the group.
- Shareholders are ignorant and tend to dump shares
- Spunoff companies do not fit the strategic objective of the Institutional Investors and hence they dump the shares
- Management wants to keep the share prices low
- Not many analysts track spiinoffs
Spinoff opportunity is the most valuable in the first few weeks of trading.
Friday, June 14, 2019
Book Review #41: Margin of Safety: Author: Seth A. Klarman
Friday, June 7, 2019
How do you value a business?
Friday, May 31, 2019
Difference between investors and speculators...
In his book 'Margin of Safety', the legendary investor Seth Klarman explains the difference between investors and speculators. To investors stocks represent a fractional ownership of business. They transact securities that offer an attractive risk reward ratio. Investors believe that over the long run security prices tend to reflect fundamentals of the business. Investors in a stock expect to profit in at least one of the three possible ways. From free cash flow generated by the business which will be reflected in higher share price or will be distributed as dividends, from increase in multiples and by the narrowing the difference between price and value.
Speculators on the other hand, buy and sell securities based on the expected price action based on the behaviour of others. For them securities are a piece of paper. Speculators are obsessed with guessing the direction of stock prices. They use technical analysis to predict the direction of market. Many investment professional are speculators in the garb of investors. Investors have a chance to make money over the long-term, while speculators are likely to lose it over time.
The author tells the story of 'trading sardines' versus 'eating sardines' to explain speculation. It was observed that sardines were disappearing from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, "You don't understand. These are not eating sardines, they are trading sardines."
Like sardine traders, many financial-market participants are attracted to speculation, never bothering to taste the sardines they are trading. Speculation offers the prospect of instant gratification. Moreover, speculation involves going along with the crowd, not against it. There is comfort in consensus.
Viewing stocks as piece of paper precludes rigorous fundamental analysis. Neither rigorous analysis nor knowledge of underlying business is required. Speculators play the 'greater fools game'. Speculative activity can erupt in Wall Street at any time and is not identified as such till considerable money has been lost.
Even assets can be catagorized as investments or speculations. Both can be purchased from market and both fluctuate in price. The main difference is that investments throw cash flow, but speculations do not. For example, stock is an investment, gold and other collectibles are speculation. Value of speculations fluctuate solely based on supply and demand since they do not throw any cash flow.
In financial market it is important to be an investor and not a speculator. Successful investor is unemotional taking advantage of the opportunity provided by the greed and fear of others. They respond market with calculated reason. Investors use the opportunities provided by Mr.Market, without looking up to him for investment guidance. It is important for investors to differentiate the stock price fluctuation from underlying business reality.