Book Review #44: Investing Between the Lines: Author: L J Rittenhouse

I have so far reviewed 43 books in my series on 50 Finance Books. The books reviewed so far falls into different genres like Personal Finance, History of Finance, Wisdom and Investing Fundamentals. The

book 'Investing Between the Lines - How to make smarter decisions by decoding CEO Communications' written by L J Rittenhouse falls into the genre of CEO Communication. This may be the only book of this genre in this series.

Why does CEO Communication matter?

The goal of Rittenhouse Approach is to create a gold standard for CEO Communication, by culling examples from thousands of such communications. The way CEO communicates is very important due to the following reasons.

• It reveals the character of the CEO. Authentic leaders write trustworthy letters
  
• Warren Buffet uses it to identify the integrity of senior management, which is one of his main investment criteria. He reviews past CEO communications to see if the commitments and plans made in the past has been followed up in later years.
  
• It instills confidence in the shareholder's that their company is managed prudently. It assures that the the mission, vision and core values guide the management in their decision making.  
• It provides transparency on the running of the company 
• It helps investors anticipate serious problems at their inception before them become 'news'
• It helps align investor and management expectations
• Transparent CEO communication has a direct and positive correlation with investor returns
  

About the author.

Laura J Rittenhouse is a financial expert.  She is named as one of the top 100 US thought leaders in trustworthy behaviour.  She is the founder of Rittenhouse Rankings Inc, which helps its customers increase their valuation by providing trust building corporate communications. In addition to the above book, she has written two more, Buffet's Bites and 'Do business with people you can trust'

About the book

The goal of every CEO should be to create sustainable businesses. By analyzing how CEO communicates, an investor can know if the CEO is progressing towards that goal. A successful CEO communicates with candor and specificity. She links the present decisions to the culture and values generated over time and is candid about the mistakes made and lessons learned from them. Most importantly she appreciates the contribution of the three groups of stakeholders - Employees, Suppliers and Customers - to the success of the company.

Her communication can be looked upon as an evolving story. Investor can easily connect the dots.

CEO makes decisions that involve making judgements between multiple options. Corporate culture and values act as a bedrock in making these judgements. The culture can be transparent or opaque. Since the CEO can strengthen or modify the culture and values of the company, the CEO communication points to the direction of the company. A transparent CEO informs and educates. She explains how the revenues were generated, specific plans for the present and the future, the challenges faced and how they were addressed and expected risks and how they will be addressed. She is consistent over the years and communicates progress on the goals announced in the previous years.

How will an investor analyze the CEO Communication? What are the parameters to look for? What are the clues or signs under each parameters that informs them if the CEO is competent? How can they identify the potential pitfalls? 

To answer these questions, the investor needs a mental model, an approach or a framework. This is where Rittenhouse Approach comes in.

The Rittenhouse Approach

This book provides a structured approach to analyzing CEO Communications. The focus is entirely on the text of CEO's annual letters to shareholders. The goal is to analyze the CEO communication to develop a model of sustainable business To come up with the criteria, the company analyzed over 1000 CEO communications. Based on this they came out with 130 topics. These topics are divided into seven parameters as shown below.

Rittenhouse Rankings Approach

The book provides a set of four or five clues that investor can use to evaluate each parameter. Scores are given for the performance on each of the clues. It also provides relevant examples from CEO communications to illustrate the points. Communication supported with numbers gets higher scores. There are negative scores as well. Finally, the approach comes up with one score to rate the CEO communication. 

While the score itself is important, the components are far more important. For example a higher overall scores with high scores on Capital Stewardship and Candor is better. 

The analysis could be as simple as counting the number of times a specific word is used in a letter. One of the criteria in the parameters Capital Stewardship is to count the number of times the word 'Cash' is used in a letter. They also look for FOG, the number of times platitudes ("We are going to be the best version of ourselves") is used in the letter. Needless to say more the number of the word 'CASH' it is good, more the proportion of FOG in the letter, that is a cause of concern.

The summary of the approach is given in the diagram below.

As an example of  Parameter and their evaluation criteria, let us look at the parameter 'Capital Stewardship'. It is measured by the following criteria (the book calls them Clues)

1. Cash and Cash flow
2. Operating and Financial Goals
3. Capital Discipline
4. Balance Sheet Measures
5. Risk Awareness. 

A Cash Flow Statement consists of three groups. Cash Flow from Operating Activities (also known as Operating Cash Flow), Cash Flow from Investing Activities and Cash Flow from Financing Activities. There are two different terms that CEO uses about Cash and Cash flow. Free Cash Flow (FCF), which is the net cash available after providing for Capital Expenditure. This the cash that accrues to the investors and which they use for valuing a business. A good CEO focuses on FCF. However if the management focuses on 'Operating Cash Flow' then it a red flag. It is possible that there are negative flows related to Investing and Financing that impact the investors. An investor should know why the CEO is focusing on OCF and not on FCF.

The Rittenhouse approach reviews CEO communication to look for words like Goal, Objective, Target and Aim, all of which suggests a focus on goals. They divide the goals into three types. Motherhood goals are generic statements of intention like 'we want to be the best in our industry'. Serious goals combine intentions with measurable outcomes like 'we want to increase sales by 20% next year'. Superior goals wraps a context around the goal. They generally contain a performance matric (increase RoI by 2%), a performance benchmark (compared to industry standards), and specific set of actions to be taken to achieve this goal.

Capital Discipline of the company can be evaluated in two ways. One, how often CEO talks about ROI (Return on Investment), ROIC (Return on Invested Capital) and ROA (Return on Assets). The second way is to see if the CEO focuses on Book Value, which is more predictable and dependable, or on market value, which is more at the mercy of external factors. A good CEO will focus on Book Value, leaving the investors to take care of the market value. 

An analysis of the Balance Sheet will show its liquidity position as well as the Debt to Equity ratio, two key parameters from an investor's perspective. Despite its importance, most of the CEOs do not discuss it much. Any company, whose CEO communicates the status of the Balance Sheet and actions taken to strengthen it, should get a higher investment rating. 

Risks are inherent to any business. It is the duty of the CEO to communicate potential risks and mitigation plans to the investors. For many companies, like insurance and banks for example, Risk management can be a significant competitive advantage. Recognizing the importance of risk. Rittenhouse approach looks for references to the word Risk in CEO communication, with more references displaying competent leadership

Similar detailed analysis is done for all ten parameters mentioned above. 

The strength of this approach is its detail and its consistency over the years. Analysing the CEO communications for the same company year on year can demonstrate the integrity of the management, whether they act on their promises or keep shifting goal posts. In addition, this approach could also focus on changing managerial styles as the company replaces CEOs and helps the investors analyze what works and what doesn't.

How will this book help?

This is a book for all retail investors. The approach is intuitive, easy to understand and easy to put into action. The 'CEO Speak', with surfeit of jargon and numbers can be intimidating to a lay investor. By following the simple but detailed approach mentioned in this book, a lay investor can take informed investment decisions. 

This book is different from all the other books I have reviewed so far in my 50 books in finance series in that this has almost zero math. Numbers if any, add intuitive context to the points mentioned. Any layman can read the book and almost immediately start reading CEO communications with a new and enlightened eye. 

If only for that, I will give this book a 5/5 rating.

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?

Book Review #42: The Psychology of Money: Author: Morgan Housel

Most people approach money based on scientific principles. There are many formulae and theorems on how to invest and grow money. After the stock market crash of 2008, Morgan Housel, author of the book ‘Psychology of Money’,  observed that handling money is more of an art than science and the success in handling money depends on how one handles the emotions and stress associated with money.
 

Unlike hard sciences like Physics, money is not dependent on some universal rules, it has behavioral connotations. In 2008 Mr.Housel wrote a report titled ‘Psychology of Money’ that contained 20 behavioral aspects relating to Money. The book 'The Psychology of Money - Timeless Lessons on Wealth, Greed and Happiness' is an elaboration of the ideas that were briefly discussed in the 2008 report.
 

The book is structured across Introduction, 20 chapters followed by a postscript on the evolution of the American investor over the last century.  18 chapters discusses the behavioral aspects of money, the penultimate chapter is a summary of the principles discussed in the earlier chapters. Chapter 20 discusses how he invests his money.
 

Book Review #41: Margin of Safety: Author: Seth A. Klarman

This is the review of the book Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor written by Seth A Klarman

In the introduction to the book, Mr.Klarman sets out two goals for writing this book. One is to highlight the investment pitfalls so that the investors could avoid them. Two is to explain why value investing method works and often works spectacularly.

Value investing is the strategy of investing in security trading at an appreciable discount from underlying value. This approach has a long history of delivering excellent returns with limited downside risk. It requires a great deal of hard work, strict discipline and a long-term investment horizon. Few are willing to put that effort.

Book Review #40: The Most Important Thing Author:Howard Marks

Book Name: The Most Important Thing:  Uncommon Sense for the Thoughtful Investor

Author: Howard Marks

Published by: Harper Business

ISBN: 978-9-35-302279-2 (Print)

Short URL: http://bit.ly/The_Most_Important_Thing

BOOK REVIEW

This book gets rating of 3/5

This is the review of the book 'The most important thing - Uncommon sense for the thoughtful investor', written by Howard Marks. Mr.Marks is a famous investor who is the co-founder of Oaktree Capital Management that he and his friends started in 1995. This book is an elaboration of various memos that Mr.Marks wrote to his investors over the years. Each memo deals with one thing that he considers to be the most important thing in investment. There are 19 'Most Important Things' covered in this book.

In comparison to other books that I have read in the genre of finance and investments, this is a much lighter read, devoid of any math. Personally I did not find a lot of value in this book since almost all of what I read in this book is covered in other books. However considering that this book has sold over 4.5 Million copies, it has to find a place in the list of finance books that I review as a part of my project.

Book Review #39: Four Pillars of Investing: Author: William J Bernstein

Four Pillars of Investing: Lessons for building a winning portfolio written by William J Bernstein is one of the best books on investing that I have reviewed in my book series on 50 Finance Books.

This book gets that rarest of rare rating of 5/5

Published by: McGraw-Hill

ISBN: 978-0-07-175917-5 (ebook) / 978-0-07-174765-9 (Print)

Short URL: https://goo.gl/qd2vsY

BOOK REVIEW

As per Mr.Bernstein, any investor in the financial markets should know the scientific basis of investing which consist of four broad areas which he calls the four pillars of investing. The pillars are Investment Theory, History of financial markets,  Investor Psychology (Behavioural Finance) and Business (How the mutual fund industry works)

15 Chapters of the book are covered under five sections, four of which cover each of the four pillars and the final sections puts it all together and guides the investor on his investment journey. One has to understand each of the four pillars deeply before venturing into the world of investment. In the preface to the book, author says that the key principle used in this book are accessibility and enjoyment. To that end, he has kept the math simple.

Book Review #38: How to be a billionaire: Author: Martin S Fridson

Just finished reading the book 'How to be a billionaire, proven strategies from the titans of wealth', written by Martin S Fridson,

Fascinating book.

Author sums up the layout of the book in the first chapter. This is the first book that I have read that does that. So let us dive right in.

Traditional wisdom on building wealth stress on the individual. Have a new idea and single minded focus, keep hope and optimism and keep dreaming and visualizing success, so they say, and you will eventually become a billionaire. The focus is on thoughts and attitudes as a means of attaining wealth. This thought is exemplified by the book 'Think and Grow Rich', written by Napoleon Hill.

 

The above approach is simplistic as per Mr.Fridson. The traditional wisdom miss two important qualities of a billionaire, their ability to negotiate great deals and their  understanding of financial concepts including taxation.

Book Review #37: Think like a billionaire, become a billionaire: Author: Scot Anderson

Your path to becoming a billionaire starts with your mind, what you feed into it and what you take out of it.  Before you become a billionaire, you have to think like a billionaire. 

The book 'Think like a billionaire, become a billionaire by Scot Anderson extensively covers the thought processes followed by billionaires. They (billionaires) think differently about seven things in particular. These are Money, Investing, Jobs, Risks, Wisdom, Time and Problems.

While we think Money is for expenses,

Book: 100 Baggers: Notes and References

These are the detailed notes from the book 100 Baggers written by Christopher Mayer. You can read the review by clicking here.

Chapter 1: Introducing 100 Baggers

You will learn the key characteristics of 100-baggers. There are only so many ways up the mountain, and we’ll map out these paths
Note: Objectives of the book. One, lear the key characteistics of 100 baggers. Two, explain some techniques by which an ordinary investor can identIfy and profit t from 100 baggers

you will learn why anybody can do

share with you a number of “crutches” or techniques that can help you get more out of your stocks and investing.

this book was called 100 to 1 in the Stock Market by Thomas Phelps.

“Every human problem is an investment opportunity if you can anticipate the solution,”

This was the main thrust of our conversation: the key is not only finding them, but keeping them.

Investors crave activity,

But investors need to distinguish between activity and results.

‘A lot of shavings don’t make a good workman.’”

Phelps advises looking for new methods, new materials and new products—things that improve life, that solve problems and allow us to do things better, faster and cheaper.
Note: This is what Jim Slater recommended in he Zuu Principe

“There is a Wall Street saying that a situation is better than a statistic,”

Phelps is quick to add he is not advocating blindly holding onto stocks. “My advice to buy right and hold on is intended to counter unproductive activity,”

Sometimes stocks take a long time to get going.

“One of the basic rules of investing is never, if you can help it, take an investment action for a noninvestment reason,”

You should sell rarely, and only when it is clear you made an error. One can argue every sale is a confession of error,

The main idea is to know how such returns have happened and what investors need to do to get them.

Book Review #36: 100 Baggers: Author: Christopher Mayer

Over 15 chapters,  '100 Baggers - Stocks that return 100 to 1 and how to find them' written by Christopher Mayer makes a fascinating reading. The book starts off by analyzing the 100 Baggers from the 70s to the early 2000s and try to find common lessons for the investors. The list of 100 Baggers is diverse in terms of age, industry and size. There are 50 year old companies, there are new ones, there are small, medium and large caps and these belong to diverse industries. 

To earn 100 bagger returns, you have to save yourself from yourself. Your bias to action when things are going nowhere, your itch to sell when the share price falls by whooping 40% in a day, your fear when the stock you own falls from high triple digits to single digits, as it happened in case of Amazon.

Buy the Kindle Edition of this book @Amazon at 135 rupees.

To get returns of the magnitude of 100 baggers, traditional mindset nor traditional investment style

Book Review #35: The Zulu Principle: Jim Slater

This is the review of the book 'The Zulu Principle - Making Extraordinary Profits from Ordinary Shares'. This book is written by Jim Slater. 

There are two ways by which an investor can make money in the market. Invest either in stocks or in bonds. Zulu principle is all about focus. So at the outset, the author informs us that this book will focus on the former (investing in stocks) and will ignore the latter. 

The first edition of this book was published in 1992, the author outlines the objectives of this book which is to explain five methods by which an investor can make money by investing in stock market. 

The five methods are to invest in:

Book Review #34: The Tao Jones Averages: Author: Bennett W Goodspeed

The book 'The Tao Jones Averages: A Guide to Whole-Brained Investing', written by Bennett W Goodspeed promised to give me a different perspective on investing. It did not much.

Human brain consists of two hemispheres, the left hemisphere that is analytical, deductive and logical and the right hemisphere that is artistic, creative and intuitive. The author's point was that while the markets always behaved non-rationally (right brained), the traditional analysts approached the market with a rational approach,  focusing mostly on the analytical part of their brain. By focusing on hard numbers - the trend, growth projection, DCF, financials etc - they were missing the potential of half of the brain. And they (the analysts) were wiser post-facto. They were good at explaining 'why an event happened as it did' and 'why they couldn't have anticipated it'.

20 Lessons from 'Rich Dad, Poor Dad'

The book Rich Dad, Poor Dad, written by Robert Kiyosaki (Review Here) is an iconic book in the personal finance space. In simple terms this book explains very complex financial concepts.

This was the second book that I reviewed in my book review series on 50 Books in Finance.

Here are 20 lessons that one can learn from this book. This is a whatsapp post. I am putting up this because of the relevance.

1. For most people, their profession is their income and they live through their work to survive. For rich people, assets they maintain, invest is their income.
2. If I want to buy something, I must first generate enough cash flow from my assets to cover these expenses. Buy luxuries last, not first.
3. Excess cash flow generated by my assets should be invested again into other assets.
4. Do not simply aim for more income, aim for more valuable assets, repeat the circle.
5. Reduce your expenses low and reduce your liabilities.
6. Create a corporation to protect your assets and reduce tax expenses. An employee earns, gets taxed, and then spends what is left.
7. Know a little about a lot. Learn something about accounting, investing, markets, the law, sales, marketing, leadership, writing, speaking, and communication. Now little about everything you can. Also See Bill Gates talking about the same point.
8. Work to learn, don’t work to earn. Find a job where you can learn one or more of the above mentioned skills. Alibaba’s Jack Ma also empahsized on this particular point here.
9. Do not simply buy investments. first learn how to invest as no one else can do it better than you.
10. You become what you study, so choose your study materials carefully and do read a lot.
11. Every rich person has lost money at some point, but many poor people have never lost a dime. Playing not to lose money means you will never make money. “Winning means being unafraid to lose.
12. “Failure inspires winners and defeats losers. Do not be afraid of losing and be bold enough to admit and learn from the failure. No one is born perfect.
13. Be in control over your emotions. Do not let fear or opinions of the general public dictate your actions.
14. Most sellers ask too much. It is rare that the asking price is lower than something is worth.
15. Surround yourself with winners. Sit with people who are smarter than you and you can learn from them,
16. Saying “I can’t afford it” shuts down your brain. Asking “How can I afford it?” opens up your brain.
17. Pay yourself first. Each month, first invest a certain amount of money into income generating assets before you pay your bills. Short of money, use this pressure to keep yourself on your toes.
18. Dream big, have a clear game plan in your mind. Always seek answers to important questions such as Why do you want to earn more passive income? For me, because I do not want to work all my life. I want to have control over how I decide to spend my time. Also, I want to support my parents financially because they helped me all my life.
19. Develop a skill to listen. Listening is more important than talking. Do not constantly argue and think with your mouth. Ask questions, grab as much knowledge as you can from others.
20. On the market: do not follow the crowd, and do not try to time the market. Profits are made when you buy, not when you sell.

Book Review #18:The Shipping Man: Author: Matthew McCleery

The book 'The Shipping Man', written by Matthew McCleery, tells the story Robert Harrison Fairchild, a New York based hedge fund manager who stumbles into shipping industry by accident. While looking for contrarian investment opportunities, he observes that BDI (Baltic Dry Cargo Index) had fallen almost 97% from its peak in 3 months. Curiosity piqued, he digs deeper into learning about the industry. 

As a hedge fund manager, his first instinct is to buy shipping industry loans of the cheap and foreclose them earning a few quick bucks in the bargain. In his quest to find cheap loans, he quickly finds two things. One, the loans in the shipping industry work differently from other loans and two, the centre of global shipping finance is in Hamburg in Germany and that the idea of a high rate of return for a German is the cost of capital for an American.

While he could not buy a shipping loan on the cheap, the shipping bug had infected Robert. Based on an invite from a Greek financier named Spirolaki, Robert flies down to Athens where, over the influence of a cup of wine, Robert ends up signing a contract to buy a ship. The cost of the ship would be 5 Million USD, with a potential EBIDTA of 4 Million USD in the first year !!!

Robert Harrison Fairchild has become a Shipping Man !!!

Owning the ship was only the beginning. Immediately after owning the ship, Robert experiences both the thrills and challenges of being a shipowner. Due to famine, the Russian Government banned the export of Wheat. This meant that a huge opportunity was created to export wheat from other parts of the world, especially the US. As luck would have it, Robert's ship was currently in American Ports and he gets an order to ship a container load of wheat to Djibouti in Africa.

However, getting clearance from US port authorities was a huge challenge. Post their inspection, Robert spend almost 100000 dollars to get the ship ready. He gets the order. However while in the waters of Somalia, his ship is attacked by pirates.

This is where the next part of Robert's life begins. His ship is rescued by the ship of Coco Jacobsen who is a Norwegian shipping magnate. Jacobsen is facing claims from his bank to deposit $200 Million in his bank to 'mark his loans to market', or face foreclosure of his loans and the attachment of his ships as collateral by the banks. Knowing that Robert was a former US hedge fund manager, Jacobsen, in return for rescuing the ship, asks Robert to help him raise the money in the US junk bond market.

The rest of the book is about how they try to raise the money in the US bond market. There is an obligatory love interest between Jacobsen and Alex, who manages the issuance of the junk bond in the US markets.

The book is full of gems of financial and life wisdom. Finance as applied to shipping industry upends the conventional rules and laws. Sample these nuggets on finance in shipping industry...

About making money in Shipping Industry, “There is only the market. If your timing is not correct, you will never make money even if you are very smart"

About the revenue model of the industry, “There are only three ways to get an advantage over your competitors in this business.”
“What are they?” Robert asked.  “Pay less for your ships, pay less to operate them or pay less for your capital. In a commodity business like shipping, the only thing that really matters is price."

"The amazing part, he learned from reading another article in The Economist, was that because ships could carry so much cargo, even a tripling of charter rates equated to a relatively small percentage of the value of most commodities that moved by sea. As a result, even high rates didn’t create demand destruction as they did with crude oil and other commodities. When you added the effect of financial leverage to the operating leverage, Robert quickly recognized that owning ships in a strong market was like printing money.  Flush with cash generated"

About availability of money, "Money hides when there is danger, but pops out whenever there is value,”

About making money in the industry, “That is the point; everyone will make money…everyone except for you!”
“The Norwegian sale and purchase brokers who sell you the ship will make money; the British banker who finances the ship will make money; the chartering brokers who find cargo will make money; and the manager who operates the ship on your behalf will make money. The lawyers will make money, the flag states will make money, the classification societies will make money, the…”  “Stop,” Robert sighed.

About valuation of a ship, “The value of a ship is determined by the cash flow that people perceive it will generate over a period time. Charter rates must remain at very low levels for a very long time before the confidence and psychology of shipowners is affected."

About Freight Rates, “Robert, my friend, as an investor, you should know that supply and demand alone does not determine freight rates,”
“The movement of cargo has a certain intrinsic value, but the cost of moving cargo is determined almost exclusively by the perception of the direction of the freight rates.”

“What is the Hanseatic approach?” Annie asked unsure to what her boss was referring.  “Oh please, you know the drill, Annie, just add up the total undiscounted cash flow that the vessel will generate for the remainder of her useful life based on 10-year average rates and use that figure as the value of the fleet,”

"everyone knows that a long-term investment is just a short-term investment gone wrong,”

“Anyway, people with a strong balance sheet spend too much time at lunch and think about girls instead of doing more business. There is nothing more dangerous than a strong balance sheet."

“Growth is a principle preached only by people who have nothing of their own to lose,”
“And what exactly is that supposed to mean?” Robert asked.  “What it means is that the people who want growth are the same people who are not satisfied with that they have. Governments need growth because they are a giant Ponzi scheme that needs more tax revenue, and people with nothing need growth to get something, and people who feel small think they need to grow to feel big.”

“The spot market does not care if you are big or small. And there are no economies of scale in the shipping business, not beyond a fleet of 10 ships. That is the perfect sized fleet. You can capture the rest of the efficiencies by being the big client of a third-party ship manager.”

Here are some nuggets of life wisdom....

"Robert Fairchild was beginning to question his own social utility; a dangerous form of soul searching that had ruined the lifestyles of many men before him. He knew that he had entered the treacherous waters of introspection and he had to be very careful."

“The experts are often wrong because they know too much about a market that is inherently unknowable."

“You strike me as a person who needs to learn things through experience,” Spyrolaki said, “which is fine, but also expensive.”

“You are going to successful at this business because you are a little crazy and you need to be a little crazy to be a shipowner. If you are crazy and you are a man of your word and you have money, then you have the chance to become a good shipowner.”

"so few Americans really know how to enjoy their life. They scurry around from place to place never stopping to enjoy the gifts of a healthy body and mind."

"Robert, a life without passion is not a life at all.”

"there are certain times in life when speed is more important than price,”

"two happiest days of a shipowner’s life are the one when he buys a ship and the one when he sells a ship for a profit"

"once you’re really rich, all you can do is lose,”

"It felt good to stand between an investment bank and a huge fee."

“The cycle of life and the cycle of shipping are not so different sometimes; enjoy it while it lasts.”

“When a man stops trying, then he is really in trouble. There will always be many good reasons not to do things in life, but people who achieve the great things are the ones who believe in themselves and find reasons to do things even when sometimes they do things that are not so smart,”

"as long as you show up and have a positive attitude, you will probably do just fine."

"success in life was basically random; it was a function only of being out in the world with a willingness to try new things."

Finally, you also learn a lot of terminologies used in the industry, without which no expert analysis of the industry can take place.

"NSF, shorthand for Norwegian Sales Form."
“Bunkers are the fuel that the ships burn at sea."
"ton miles are the total amount of cargo multiplied by the distance that it is carried by the ships."
"That is what SHINC stands for: Sundays and Holidays Included. It is a term in the charter party agreement."
"it is proper to use the female pronouns when referring to ships. This is because in the olden days, sailors were away from women for so long that they referred to everything they saw using female pronouns – even for the sea herself. They were lonely men.”
“Worldscale is just a standardized way to express how much money a tanker earns on a voyage. It takes into account port charges, canal transit fees and bunker prices,”

I read this book twice. While reading this book the first time, I was confused as to who the real hero of the story was. While the story starts off with Robert, the gripping story of his buying a ship, his adventures with running it and finally him having to sell it, all within a span of one year, was over by the 10th Chapter of a book of 23 Chapters. Other characters kept flitting in out out intermittently. The story of Coco Jacobsen, a Norwegian shipping magnate, and his attempts to raise money in the US junk bond market, dominates the second half of the story.

So who is the real hero of the book?

It took me a second reading to realize that the real hero in this book is the Shipping Industry. This book is a celebration of the industry. The shipping industry is presented to the reader with a lot of passion, almost bordering on love and affection. The triumphs of the industry are eulogised, the defeats underplayed. The quirks and the whims and traits of the industry are presented with elan and panache. 

After reading this book, you will come to know of the shipping industry in detail. You will know the drivers of the industry, its finances, the mysterious ship owners and their hardworking crew. You will know that traditional methods of valuation are useless in a shipping industry. You will learn the industry jargon, the acronyms used and the industry ecosystem. You will learn that Balance Sheet is useless in Shipping Industry and that making profits is almost impossible given the cost dynamics. Intermediaries make money in this industry, not the owners. You will learn that you have to use feminine pronouns when talking about the industry.

After reading this book you will be a better person. You will almost become a Shipping Man. 

You will become a better shipping man.....

What more do you need? 

Book Review #33: Bulls Bears and Other Beasts: Author: Santosh Nair

The book, Bulls Bears and Other beasts tells the story of the evolution of equity markets in India as seen through the eyes of the protagonist Lalchand Gupta. While the visible hero is Lalchand, the invisible hero is the Indian stock market ecosystem, including the stock exchanges, SEBI (Securities and Exchange Board of India) and the GOI (Government of India) that introduced significant market reforms that catapulted the Sensex from 750 in the 1990 to almost 34000 by the end of 2017.

Both stories run in parallel in this fascinating book. One is the story of Lalchand himself, his ups, downs, fights, wins and loses. You tend to sympathize, empathize and get excited with him. The other is the evolution of India from a closed economy - consisting of close knit group of powerful brokers, market manipulations, only one Institutional Investor (UTI), minimal retail participation in the markets and a slowly growing economy - to open economy - consisting of globalization, SEBI, National Stock Exchange, wider retail participation and of course the mother of them all the arrival of Foreign Institutional Investors (FIIs)

Having worked with Economic Times and then with Moneycontrol.com, Mr.Nair writes from a vantage point of having 'been there, done that'. He is as much an author as a participant in this brilliant book.

This well written, fast paced and easy to read book paints a large canvas, the evolution of equity markets in India starting from the beginning of the tumultuous years from about 1988. Lalchand is a product of the Mumbai (it was called Bombay in those times) underbelly of the 80s. He was born and brought up in the slum areas and got into lot of bad company. However, he quickly corrected himself and while working in a chemical company, got opportunity to know about the workings of the stock market.

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In the early eighties only few stock exchanges existed in India, the biggest of them being Bombay Stock Exchange (BSE) followed by Calcutta Stock Exchange (CSE). In the late eighties, where this story begins, there was hardly any retail participation in the stock market. Easy money was made by a lucky few who has subscribed to the IPOs of MNCs. UTI was the only domestic institutional investor. Brokerage rates were 1.5 percent and investment based on the fundamentals of a company was still in its infancy. There was hardly any publicly available information on the companies. A lot of 'research' done those days would constitute as insider trading today.

More than the stock market professionals, company promoters used to speculate heavily in their own shares through their favored brokers, known as 'house brokers', who were known to be proxies for the promoters.

UTIs business was crucial to the prosperity of the brokers, since it was the largest institutional investor. Since UTI traded in large blocks of shares, there was good money to be earned by way of commission. More money was made by front-running UTI trades. If it was a buy order from UTI, the broker would buy shares on his personal account. Then when the block purchase was done, the share prices will go up and the broker will sell his personal stocks and make good fortune. The reverse process happened in case of sell order from UTI.

There were few high rollers like Nimesh Shah, Manu Manek and Ajay Kayan who were revered and feared at the same time for their ability to make or break a company. Sometimes the companies fought back. The personality clashes between stake holders is very exciting to read. For example, the story of Manu Manek's fight with Reliance Industries makes fascinating reading.

Prior to 1995, the stock market processes and reporting were very primitive. Most of the transactions were manual and used crude forms of data entry and reporting tools. Speakers installed in various trading floors were used to communicate and blackboards were used to update the prices of the frequently traded shares. Trading data was entered in colour coded sauda pads, end of the day reporting was through bhav copies and disagreements were sorted through mutual discussion based on a strictly observed 'caste' system of the stock exchange.

When you are discussing India's stock market, you cannot avoid Harshad Mehta, the original big bull. The way he manipulated the banks to fund his stock purchases, how he routinely moved money between money market and stock market, how he ran up the prices of ACC to unheard of 10500 rupees based on a vaguely constructed 'replacement cost' theory, how he spend lavishly and attracted attention to himself and finally how this ponzi scheme that he ran was discovered, he and his cronies were arrested and the markets went through a major tailspin....all are discussed in much detail.

The year 1992 was significant for the Indian markets. Significant financial sector reforms were initiated. SEBI (Securities and Exchanges Board of India, in the lines of SEC in the US) was formed. The office of the CCI (Controller of Capital Issues) was abolished. Companies were given freedom to price their IPOs as they wanted, (prior to that, the shares had to issued only at the face value), FIIs (Foreign Institutional Investors) were allowed in the country from October 92. Initially they were hesitant to come to India. In the first six months, by March 93, only 15 Crores of FII investments came to the country.

India's response to the Mumbai serial blasts of '93, form a pride of a place in India's history. One of the blasts happened in the basement of BSE on a Friday. By working overtime over the weekend, the staff of BSE made it operational for trading on Monday, showing to the world that India will not be cowed down by terrorism. 

The evolution of the Indian markets starting 1993 are fascinating to read. In the FY 93-94 alone, 770 IPOs raised about 13000 crores from the market. Most of them were raised by greedy promoters who raised money at crazy valuations. FIIs pumped in 5000 crores in the year. The highlight of the year was the NFO (New Fund Offer, used to be called IPO back then) of Morgan Stanley Growth Fund. It was a 15 year close ended fund, and raised 1000 crores against a target of 300 crores !!

It listed in the market at a discount to the face value. Many investors, who wanted to make quick buck, lost money. 

The history of India is the story of forces of modernization fighting against forces of status quo. It was no different in Indian markets. While there was a lot of suggestions to computerise and modernize BSE, the strong Broker Lobby opposed it vehemently. They did not allow new brokers into BSE by rapidly hiking the membership charges. They were blind to the regulatory changes taking place all around them. In November '94, National Stock Exchange (NSE) started operations and this led a crippling blow the entrenched interests in BSE.

This was a self goal by BSE

NSE and BSE were different like chalk and cheese. From day 1, NSE started operations with an electronic trading system. While NSE had a weekly settlement system, unlike BSE, positions were not allowed to be carried forward. Unlike BSE which was run by brokers, NSE was run by professionals and did not have a single broker member in its board. In addition, unlike BSE, which was restricted to Mumbai, NSE had a pan-India reach offering services across the country. Unlike BSE, where membership was severely limited and expensive, anyone could become an NSE member by paying a refundable deposit fee and clearing an exam. This democratized the trading ecosystem in the country unlike any other action. 

In just eleven months after going live, NSE overtook BSE in terms of daily traded turnover, becoming the top exchange in the country!!

While electronic trading had its benefits, it created certain pitfalls. Since the very nature of electronic trading was faceless, a group of brokers could get together and trade in a stock among themselves to give an impression of heavy volumes. 

Asian currency crisis hit the market in 1997 and led to a prolonged bear market. For the first time in India, companies started downsizing. Downsizing was unheard of in India till then and many equity analysts that were earning huge packages found themselves without jobs, worst the MNC brokerages that employed them downed shutters. There was bloodbath all around.

The book celebrates Indian market, warts and all. The rampant manipulation of IPOs in the mid 90s, the MS Shoe scandal, the high interest rates (retail investors received interest of about 16% on their bond investments, I still have some like ICICI money multiplier bond and Zero coupon bonds), the depression of the mid 90s, series of market reforms initiated by SEBI, P Chidambaram's 'Dream Budget of 1997 that revived the market sentiments, Asian Currency Crisis  of 1997 that led to a bear market, the retrenchment of equity analysts, rise and fall of Ketan Parekh, the boom and bust of 'New Economy Stocks', Unit-64 fiasco, IPO manipulation of the early millennium through benami Demat accounts, disastrous IPO of Reliance Power, the carnage of 2008 in the aftermath of subprime crisis, the run on ICICI Bank, the return of UPA in 2009 and the ensuing bull market, Satyam Scandal ...

All of these are covered in just enough detail to sate the curiosity of a reader who just want to have an overview or for a researcher who may want to dig deeper...

UPA 1s maiden budget of 2004 which abolished LTCG (Long Term Capital Gains Tax) and introduced Stock Transactions Tax was another major morale booster for the market and single-handedly enabled the arrival of long-term retail investors into the Indian market through expansion of mutual fund industry. 

Seamlessly weaved together with the story of the stock market is the story of Lala. His progressive elevation as a respectable broker, his father's demise, his brother's graduation, the playing out of his dreams...

In Lala, we see a pragmatic and ethical stock market professional, playing dual role of a bystander story teller as well as a successful market participant. There are lessons to be learned for a newbie investor there..

This book is a must read for anyone who is interested in the India's stock market. If you are an investor, this book will give you perspectives about the benefits of long-term investments in equity market, after all Sensex moved up from 750 in 1990 to 34000 today, an annualised return of 15% . If you are historian, this book has details about some of the critical incidents that happened in the markets in the last 30 years. If you are policy wonk, this book will give you some ideas of what works in the market and what does not.

Finally, for my generation, we were lucky and unlucky at the same time, I would say. We came of age around the 90's, when the major changes were initiated. To that extent, one could say that we were lucky to have been living through these exciting times. However, the sad part is, we lived our life by the day, oblivious to these path breaking changes and unable to yield any major benefits from them. In the last thirty years, people have won everything. lost everything and recouped the losses and became millionaires twice over. Many of us missed the exciting journey.

There is still time. India is just starting to grow. Join the fun and run with it....

I give this book a rating of 5/5, the second book in this series of '50 Finance Books' that is getting this rating.

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