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My Experiments with Investing Books: Mistakes
and Learnings
Dayanand Deshpande, 24th September 2016
No statement is more true and better
applicable to Wall Street than the
famous warning of Santayana: “Those
who do not rem...
Investing’s greatest lessons can’t be
taught in a book or in a classroom.
They have to be experienced and
often times the ...
Objectives of the Presentation
• Review the books that influenced me the
most.
• Recollect the important messages from
the...
The Intelligent Investor
By far the best book
about Investing ever
written
- Warren Buffett
Key Concepts from the book
1. Investment vs. Speculation
“ An Investment Operation is one which, upon
thorough Analysis, p...
Key Concepts from the book
2. Two kinds of Investors:
a. Defensive (Passive)
• chief aim is avoiding losses
• secondary is...
Key Concepts from the book
3. Portfolio and stock selection for defensive and
enterprising investors
• .
Key Concepts from the book
4. Mr. Market
• .
Key Concepts from the book
5. Valuation of Growth stock:
– Value = Current (Normal) Earnings * (8.5+
2*expected annual gro...
Key Concepts from the book
6. Margin Of Safety
If you are going to drive 8000 pound truck on the
bridge, you build a 15000...
What I focused on:
1. Portfolio Policy for the enterprising investor:
a. Buying in low markets and selling in high
markets...
What I focused on: Bargains
Buying bargain issues of various types
“The bargain issue that can be most readily identified
...
What I Did for Finding NCA >= Mkt cap:
1. Got a friend to develop a software to filter out such
bargain stocks…(2008-2009)...
What I focused on:
Buying into special situations or workouts
1. Open offers due to acquisitions of large stake.
2. Delist...
What I focused on-Open Offers:
Buying into special situations or workouts
1. Open offers due to acquisitions/takeovers of ...
What I focused on: Delisting
Buying into special situations or workouts
1. Open offers due to acquisitions/takeovers of la...
What I focused on: Rights Issues
Buying into special situations or workouts
1. Open offers due to acquisitions/takeovers o...
What I focused on: Merger Arbitrage
Buying into special situations or workouts
1. Open offers due to acquisitions/takeover...
My Experience
“It is extraordinary to me that the idea of buying
dollar bills for 40 cents takes immediately with
people o...
My Experience – Simple, Not Easy
1. Overall no loss in Cigar butt operations.
2. Great learning in finding out bargains an...
My Experience – Simple, Not Easy
3. Many failures/ frauds such as Prithvi Info, Eastern Silk, Ensa
Steel, Pritish Nandy, M...
My Experience – Simple, Not Easy
4. Many cigar butts (NCA issues) remained undervalued like
Ansal properties, Anik industr...
My Experience – Simple, Not Easy
5. Some performed well such as Borosil glass, Trent, Indo count
(sold at 100% profit in 2...
My Mistakes – And Learnings
1. Wrong time? – 2008-2011 – for cigar butt
operations. Many great companies available at dirt...
My Mistakes – And Learnings
2. Very short term focus. Selling at 10%, 20% or max
50% gains, like a trader
Learning: Practi...
My Mistakes – And Learnings
3. Mixing the Special situation strategy with NCA
issues. (selling after very small gains in a...
My Mistakes – And Learnings
4. Wrong allocation. (big allocation to Gwalior
chemical and some Open Offers (e.g. Goldstone
...
My Mistakes
5. No attention to the underlying businesses and
qualitative aspects like management quality,
competitive anal...
My Mistakes
6. No attention to emotional aspects:
– “We shall say quite a bit about the psychology
of investors. For indee...
My Mistakes
6. No attention to emotional aspects:
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
900000...
My Mistakes
7. Working in isolation
– No validation with other value investors
Learning: network and learn from other inve...
You Can Be A Stock Market Genius
Spin-Offs, In General,
beat the markets
Gotham Capital Investment Record
Year Returns % Cumulative basis $1
becomes
1985 +70.4 1.7
1986 +53.6 2.62
1987 +29.4 3.39...
Key Concepts from the book
1. Concentration
– Do your work, pick your spots
– Don’t buy more stocks, put money in the bank...
Key Concepts from the book
4. You need to read business press/ and BSE/ NSE
filings to locate and analyse new spin-off
pro...
What I did – Demergers/ Spin-offs
1. Searched the company filings in BSE/ NSE.
2. Kept a track of SEBI Website for the app...
My Experience– Demergers/ Spin-offs
1. A very high success ratio compared to failures – It
really works.
Successful Spin-O...
My Experience– Demergers/ Spin-offs
2. Some Successful Demergers
* This doesn’t include the gains if you bought more quant...
My Mistakes– Demergers/ Spin-offs
1. No patience. (Buy Demerger – Stay longer )
Sold at around 22 just before it climbed t...
My Mistakes– Demergers/ Spin-offs
2. Very small allocations
– If you are with the insiders
– If you have worked harder
– N...
Summary of My Learnings
1. The concepts are simple, but not easy.
2. You have to work hard to earn good returns from
stock...
THANK YOU ! HAPPY INVESTING !!
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Investment Books and My Journey.

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Dayanand Deshpande of MysticWealth shares his journey,

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Investment Books and My Journey.

  1. 1. My Experiments with Investing Books: Mistakes and Learnings Dayanand Deshpande, 24th September 2016
  2. 2. No statement is more true and better applicable to Wall Street than the famous warning of Santayana: “Those who do not remember the past are condemned to repeat it.” -Benjamin Graham
  3. 3. Investing’s greatest lessons can’t be taught in a book or in a classroom. They have to be experienced and often times the teacher is loss. --MicroCapClub@iancassel
  4. 4. Objectives of the Presentation • Review the books that influenced me the most. • Recollect the important messages from these books. • List the mistakes I committed in following these books – theory vs. practice • Share and Validate my learnings.
  5. 5. The Intelligent Investor By far the best book about Investing ever written - Warren Buffett
  6. 6. Key Concepts from the book 1. Investment vs. Speculation “ An Investment Operation is one which, upon thorough Analysis, promises safety of Principal and an adequate return. Operations not meeting these requirements are speculative”
  7. 7. Key Concepts from the book 2. Two kinds of Investors: a. Defensive (Passive) • chief aim is avoiding losses • secondary is low effort & annoyance and infrequent decisions b. Enterprising (Aggressive/ Active) • determining trait is willingness to devote time and care to selection of securities • seeking a slightly better return (because expecting significantly better returns is probably unrealistic)
  8. 8. Key Concepts from the book 3. Portfolio and stock selection for defensive and enterprising investors • .
  9. 9. Key Concepts from the book 4. Mr. Market • .
  10. 10. Key Concepts from the book 5. Valuation of Growth stock: – Value = Current (Normal) Earnings * (8.5+ 2*expected annual growth rate) – Revised formula: Value = = Current (Normal) Earnings *(8.5 +2g) * 4.4/ yield on AAA bonds
  11. 11. Key Concepts from the book 6. Margin Of Safety If you are going to drive 8000 pound truck on the bridge, you build a 15000 pound bridge
  12. 12. What I focused on: 1. Portfolio Policy for the enterprising investor: a. Buying in low markets and selling in high markets (Timing) b. Buying carefully chosen growth stocks c. Buying bargain issues of various types d. Buying into special situations
  13. 13. What I focused on: Bargains Buying bargain issues of various types “The bargain issue that can be most readily identified is a common stock that sells for less than the company’s net working capital alone, after deducting all prior obligations…this would mean that the buyer would pay nothing at all for the fixed assets – buildings, machinery, etc. or any good-will items that might exist..” Danny Devito Explains This
  14. 14. What I Did for Finding NCA >= Mkt cap: 1. Got a friend to develop a software to filter out such bargain stocks…(2008-2009). 2. Invest in such stocks after a very cursory look at their businesses and background. • .
  15. 15. What I focused on: Buying into special situations or workouts 1. Open offers due to acquisitions of large stake. 2. Delisting 3. Rights Issues 4. Merger Arbitrage
  16. 16. What I focused on-Open Offers: Buying into special situations or workouts 1. Open offers due to acquisitions/takeovers of large stake. – http://www.sebi.gov.in/cms/sebi_data/common docs/prosep092016_p.pdf – http://takeovercode.com/ – http://www.takeovercode.com/open_offer_scor eboard.php – http://corporateprofessionals.com/home
  17. 17. What I focused on: Delisting Buying into special situations or workouts 1. Open offers due to acquisitions/takeovers of large stake. 2. Delisting – Infrequent but can give 10 to 25% in 1-3 months – http://www.bseindia.com/markets/PublicIssues/IPOIssue s_new.aspx?expandable=10&id=3&Type=D – http://neerajmarathe.blogspot.in/2011/04/playing- delisting-cases.html – http://www.slideshare.net/perfectresearch/delisting- ideas-how-to-evaluate- them?ref=http://perfectresearch.blogspot.in/2012/04/de listing-ideas-how-to-evaluate-them.html.
  18. 18. What I focused on: Rights Issues Buying into special situations or workouts 1. Open offers due to acquisitions/takeovers of large stake. 2. Delisting 3. Rights Issues – http://www.sebi.gov.in/sebiweb/home/list/3/1 6/13/0/Draft-Letters-of-Offer-filed-with-SEBI – http://neerajmarathe.blogspot.in/2012/04/right s-issues-get-it-right.html
  19. 19. What I focused on: Merger Arbitrage Buying into special situations or workouts 1. Open offers due to acquisitions/takeovers of large stake. 2. Delisting 3. Rights Issues 4. Merger Arbitrage – https://www.khanacademy.org/economics-finance-domain/core-finance/stock- and-bonds/mergers-acquisitions/v/simple-merger-arb-with-share-acquisition – https://fundooprofessor.wordpress.com/2012/10/20/teach/
  20. 20. My Experience “It is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn’t take at all. It’s like an inoculation. If it doesn’t grab a person right away, I find that you can talk to him for years and show him records, and it doesn’t make any difference. It is instant recognition or it is nothing.” -Warren Buffett (The superinvestors of Graham-and-Dodds-ville )
  21. 21. My Experience – Simple, Not Easy 1. Overall no loss in Cigar butt operations. 2. Great learning in finding out bargains and special situations. Start of value investing journey. • .
  22. 22. My Experience – Simple, Not Easy 3. Many failures/ frauds such as Prithvi Info, Eastern Silk, Ensa Steel, Pritish Nandy, MTNL , Gwalior Chemicals (buyback), Goltech (OO) etc. • .Prithvi Info – like Satyam Ensa Steel - commodity Pritish Nandy - communications MTNL – cash bargain - disrupted
  23. 23. My Experience – Simple, Not Easy 4. Many cigar butts (NCA issues) remained undervalued like Ansal properties, Anik industries, simplex Projects, bright brothers etc. Simplex Projects Ansal Properties Anik Industries
  24. 24. My Experience – Simple, Not Easy 5. Some performed well such as Borosil glass, Trent, Indo count (sold at 100% profit in 2 months), Nirlon, Sandesh , alfa laval and Atlas copco (delisting) Borosil Glass ITD Cementation Amara Raja Batteries
  25. 25. My Mistakes – And Learnings 1. Wrong time? – 2008-2011 – for cigar butt operations. Many great companies available at dirt- cheap valuations. • Learning: Never miss a growing company available at/ near NCA price and hold it for a very long time. “Growth comes for free”
  26. 26. My Mistakes – And Learnings 2. Very short term focus. Selling at 10%, 20% or max 50% gains, like a trader Learning: Practice sitting tight for a longer duration and more gains. Allow the time and Luck to play its role.
  27. 27. My Mistakes – And Learnings 3. Mixing the Special situation strategy with NCA issues. (selling after very small gains in a short time) Learning: • In special situations very small gains (5 to 10%) / month. • For bargains issues, generally a longer holding periods.
  28. 28. My Mistakes – And Learnings 4. Wrong allocation. (big allocation to Gwalior chemical and some Open Offers (e.g. Goldstone Infratech). Forgot “diversified” aspect of special situations. Learning: • High uncertainty such as legal, approval etc. • Always a basketful of special situations. • Also when you want to deploy the excess cash.
  29. 29. My Mistakes 5. No attention to the underlying businesses and qualitative aspects like management quality, competitive analysis etc.: – Some errors (blunders) of omission were Stock Buy Price Sell Price CMP Missed gains Eicher Motors 308 593 21000 3400% Arrow Coated 15 18 800 4300% Indo Count 5 10 766 7560% Tasty Bite 82 90 3930 4200% TTK prestige 140 160 4800 2900%
  30. 30. My Mistakes 6. No attention to emotional aspects: – “We shall say quite a bit about the psychology of investors. For indeed, the investor’s chief problem – and even his worst enemy- is likely to be himself” – We have seen much more money made and kept by “ordinary people” who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had an extensive knowledge of finance, accounting, and stock-market lore – pg 8, Intelligent Investor
  31. 31. My Mistakes 6. No attention to emotional aspects: 0 1000000 2000000 3000000 4000000 5000000 6000000 7000000 8000000 9000000 10000000 2008 2010 2012 2014 2016 2018 2020 Series1 Series2 0 1000000 2000000 3000000 4000000 5000000 6000000 7000000 8000000 9000000 10000000 30% -30% 15% 15% -5% 45% 100% 22% 18% 15% 63% -5% Series1 Series2 My Assumption What happens Learning: Understand behavioral biases and apply to investing
  32. 32. My Mistakes 7. Working in isolation – No validation with other value investors Learning: network and learn from other investors and gather insights. (Pune Equity, Value investors, whatsapp groups etc.)
  33. 33. You Can Be A Stock Market Genius Spin-Offs, In General, beat the markets
  34. 34. Gotham Capital Investment Record Year Returns % Cumulative basis $1 becomes 1985 +70.4 1.7 1986 +53.6 2.62 1987 +29.4 3.39 1988 +64.4 5.57 1989 +31.9 7.34 1990 +31.6 9.66 1991 +28.5 12.41 1992 +30.6 16.21 1993 +115.2 34.88 1994 +48.9 51.97 1995 Returns the capital Annualised Returns since inception +50.0%. (1985-95 : 50% 1995-2005: 40% )
  35. 35. Key Concepts from the book 1. Concentration – Do your work, pick your spots – Don’t buy more stocks, put money in the bank 2. Spin-Offs in general beat the market – Picking your spots in spin-off universe can result in better returns than average spin-off 3. Characteristics of exceptional spin-off opportunity – Institutions don’t want the spin-off – Insiders want the spin-off – A previously hidden investment opportunity is uncovered by spin-off transaction (e.g. cheap stock, great business, a leveraged risk-reward situation)
  36. 36. Key Concepts from the book 4. You need to read business press/ and BSE/ NSE filings to locate and analyse new spin-off prospects. 5. Keep an eye on the insiders – Insider buying – especially management-before and after demerger – Effects on the shareholding patterns – Stock options
  37. 37. What I did – Demergers/ Spin-offs 1. Searched the company filings in BSE/ NSE. 2. Kept a track of SEBI Website for the approvals. – http://www.sebi.gov.in/sebiweb/home/list/3/1 4/62/0/Scheme-of-Arrangement 3. Read through the scheme of arrangement filed for the court convened meeting of shareholders. – Example: Orient Paper and Industries 4. Kept an eye on filings unders SAST regulations on exchanges – http://www.bseindia.com/corporates/Sast.aspx ?expandable=2 5. Kept a record of the events:
  38. 38. My Experience– Demergers/ Spin-offs 1. A very high success ratio compared to failures – It really works. Successful Spin-Offs Failed Spin-Offs Alembic Chemicals Asian Hotels Cadilla Healthcare Zenith Birla Dalmia Cement (patience) Bilpower D-Link Texmaco Kesar Enterprises IDFC (in process) McMilan India (MPS) Gulf-Oil Corporation Dhunseri Enterprises Orient Paper and Industries Provogue Mastek Crompton Greaves, Max India
  39. 39. My Experience– Demergers/ Spin-offs 2. Some Successful Demergers * This doesn’t include the gains if you bought more quantity of spin-off entity/ original entity after demerger • . Stock Price before demerg er CMP for original stock CMP of the spin-off Total Gain % CAGR Returns Alembic Chemicals 35.18 38.85 670 (Alembic Pharma) 1922% 72% (2011 to 2016) Dalmia Cement 266 116 1727 (dalmia bharat) 600 % 38% (2010 to 2016) Orient Paper and Industries 71 80 202 300% 48% (2013 to 2016)
  40. 40. My Mistakes– Demergers/ Spin-offs 1. No patience. (Buy Demerger – Stay longer ) Sold at around 22 just before it climbed to 153.
  41. 41. My Mistakes– Demergers/ Spin-offs 2. Very small allocations – If you are with the insiders – If you have worked harder – Need to make large commitments to see the effect on the pf.
  42. 42. Summary of My Learnings 1. The concepts are simple, but not easy. 2. You have to work hard to earn good returns from stock market, like any other business. 3. Avoid short term profit booking. – Have other sources of income as markets can remain subdued for a long time. – Avoid looking at stock portfolio frequently. (not able to achieve yet) – special situation PF separate from long term portfolio
  43. 43. THANK YOU ! HAPPY INVESTING !!

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