What type of Investor are you :Quantitative or Qualitative ?

Time and again, we hear/read that investment in companies with heavy "moat" are key to successful investing career. Investing in a couple of them at right price will ensure that you can spend your life after retirement at a beach (or any place, you think is better !) with a chilled beer in your hand.

But if finding the sustainable "moat" had been so easy, then nobody would have cared and sought it so vigorously. And the reason why finding "moats" is not easy is that one has to look beyond raw numbers to ascertain whether a business have a sustainable "moat". Good Numbers (Ratios, quarter on quarter results) can only provide support  to the view of moat's existence and in itself can't assure moat existence. So, its one's own business sense, which can help him ascertaining it. As mentioned by Mr. Buffett " I am good businessman, coz I am a good investor, and , I am a good investor, coz I am a good business man".

So, to be an outstanding investor (which in my case is the one who beats the average on a regular basis) one needs to have an uncanny ability to judge the business on qualitative aspects such as :

1) Management : Managers like Ajay Piramal, Sunil Bharti Mittal, Ratan Tata, Steve Jobs etc. at helm in itself are a moat to business as they have phenomenal capital allocation ability)

2) Products : Products such as Colgate, Coca-Cola, Cadbury's, Surf, Google,  which have itself become the face of the industry and are always first to strike our mind when we think of that industry)

3) Barriers to Entry :Where entrance in the industry is restricted by number of factors such as Government's restriction, Intellectual Constraints, High Capital Outlay, Monopolistic or Duopolisitc industry dynamics (For e.g. Motorcycle industry in India, where still a large chunk of market share is captured by 2 player namely Bajaj Auto and Hero Motrocycles)

4) Economies of Scale (Where the organisation such as "Walmart" grow to such a level that they get the power to squeeze supplier's or buyer's to the possible extent and add muscle to their top line, bottom line, middle line, side line, and every line available in this universe)

5) Other's :  Other Qualitative aspects which can be judged only by seasoned qualitative investor's or one with outstanding business sense.

As you can see, judging a company on qualitative aspect is not that easy as it seems while reading Mr. Buffett's letter, Philip Fisher's material. One needs to go and check for the data in terittories such as customers, suppliers, competitors, management meetings etc. and then make decision based on the information, which can be really difficult for passive investors. Often, while judging the company qualitatively, one experiences behavioural biases (you knew, that it will be coming !!) which are the one of the most threatening enemy for an investor. These behavioural biases are results of the decision making on something "Unknown & Unknowable" , in other words, which can't be judged with absolute correctness.

So, with all this gyaan, do I mean to say that we can't be a good investor if we are not good at analysing the qualitative aspect. No, as there is another ideology for investors like you and me: Quantitative approach.

Ben Grahams - Net Net, Debt capacity Bargains, Special situation investring and Joel Greenblatt's Magic formula are few out of those quantitative approaches which have outperformed the averages satisfactorily over a period of time. As rightly said by Mr.Buffet "buying extremely cheap, will ensure that even a mediocre selling price will result in outstanding result". And a testament to these techniques is the fact, that Mr. Buffet in itself started its own business partnership with these quantitative approached and later on graduated to "Qualitative" approach. He also asserts that he is "85% Ben Graham, and 15% Fisher".

So, to conclude, find your own calling, as to whether you are a "Qualitative" investor or a "Quantitative" investor ? Venture out in Market as per your own "Circle of Competence".  So, be assured, that even with quantitative approach and disciplined attitude in market, you'll be able to spend you post retirement life at beach (Whether Bondi Beach or Calangute beach, will depend on your own discipline !!!)

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Cheers !
Tony Stark
(CEO - Stark Capital)

Solar Power Plants : Can we term them as "Toll Bridge" functional equivalent ??

"In an inflationary world, a toll bridge would be a great thing to own because you've laid out the capital cost. You built it in old dollars and you don't have to keep replacing it"

-Warren E. Buffet

Above words are one of those excellent peice of advice, which Mr. Buffet has imparted to the fellow investors for better understanding of his business evaluation process. Though simple, but these words have profound meaning.

In Oct 2012, Prof. Sanjay Bakshi also posted a thought provoking on the functional equivalent of "Toll Bridge". In this post, I'll make an attempt to evaluate Solar Energy project from the "Toll Bridge Equivalent" perspective

Statutory Warning :

(a) The analysis might be suffering from "Confirmation bias" . Reader's discretion is expected.

(b) Since I am looking this analysis from the goggles of a "toll bridge" equivalent , so I might be lacking on variety of mental tool requisite for unbiased analysis. In words of Mr. Munger, " I am a man with hammer, and every thing to me look likes a nail"

Analysis :

Solar Energy project is a long term project whereby an entity setups solar panel today and generates electricity for future year (say 25- 30 years). So, going by the sacred words of Mr. Buffet , a solar panel's capital cost is laid down initially and the benefits are reaped in future years without any future incremental cost. In other words we built it in "old dollars" and we "don't haved to keep replacing it". So, prima facie it seems like a decent business model like a toll bridge, but unlike toll it has got several competition like non -conventional energy sources such as Wind based power plants, Hydro electric power plants. So we cant say that this business model has got a wide "moat". Though it has got some "moat" attached to it but it will converge within few years.

Now, coming to Prof. Bakshi's post on Functional equivalent for "Toll Bridge", the broad parameters laid out are as follows:

1. Pay the Toll
2. Mind of the user
3. Movement
4. Traffic
5. Gateway

Point wise analysis is as under :

1. Pay the Toll: Since electricity is one of the basic need for mankind and with the fact that still approx 60% of India is deprived of electricity, and rapid industrialisation has led to huge gap in demand-supply figures. So, in order to keep the country's growth momentum intact, the electricity demand will sustain and for the purpose Government is signing long term Power Purchase Agreement with the solar power project at high rate (As per Gujarat Solar Policy 2009, its Rs. 15/- for first 12 years and then Rs. 5/- for future years). So, Government is paying the toll to get access to the electricity. One can also sell the power through 3rd party sales, to enjoy the benefits of increase in revenue on y-o-y basis. 1^st point "Check".
2. Mind of the user: With this term " mind of the user" , professor meant that the product must not have any alternative. So, in a solar project, the underlying product is electricity and as we all would agree, there is no alternative to electricity. We cant imagine this world today without electricity. So , I guess, 2^nd Point "Check"
3. Movement : In a solar project, there is continuous movement of electricity or more specifically Electrons ( pardon me if I am wrong, and blame my commerce background for it) from solar panels to Grid and then to the end user. Also, since there are no viable technology available which can ensure the storage of power at large scale, so this makes the movement inevitable. Whatever energy generated, has to be transmitted. I agree that there are transmission losses, but still majority of current has movement. So, 3^rd point "check".
4. Traffic : As discussed above, since there is no viable source of large electricity storage, all the electric current has to be transmitted. So, therotically , there is no reduction in traffic movement as such over the period. There can be a fluctuation in Capacity Utillization but still it will generate electricity for atleast 10 hours a day generating healthy traffic of electric current over its useful life of say 30 years. So, 4^th point "Check"
5. Gateway : Gateway can be referred to as the junction point where two important ends meet. In effect, it is the passage which charges you to move from one point to other. Though I can't term solar project directly as a gateway like that of Internet, telecom companies or Power Dis-com, but indirectly it act as the reverse gateway between the buyer's demand for electricity and the suppliers urge to generate income. In order to source the electricity, the government is paying additional tarriff to solar projects for a considerable time frame. So, its upto one's own discretion whether to say, 5^th point "Check".

Other Aspects : Though prima facie, Solar project seems a good business model, but it has its own share of cons as well. Some of which i can think readily are :

• I guess the plant load factor in monsoon season should be less as compared to the normal scenario, hence reduced traffic/ movement in monsoon season.
• With involvement of Government, the project is subject to political risk. For states like gujarat where the government is stable and pro-active (personal view) , solar industry will be a good bet, but for other states (i won't name them) the tarrifs can change and dent the revenue for good
• Asset intensive industry. As per the latest information available to me, the cost per MW is somewhere near Rs. 8 Cr, which is on a higher side in comparison to its contemporaries.

Views invited.

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Tony Stark

(CEO – Stark Capital)

(Note : The author has no intention to copy the ideas of other blogs/websites. If the person metioned above minds mentioning their name on this blog, author is ready to do so. Special thanks to Prof. Bakshi for his post)

Wishing you a very happy new Year !!

First and Foremost, wishing you a very happy new year !

May this 2013 brings peace and wealth to you in abundance!!

Year 2012 turned out to be good year for equity investor with market rising by 25% or so. Euphoria has again started to build up, with brokerage houses have already started projecting Sensex at 25000 in the coming year. With support of numbers such as historical P/E range of sensex, P/BV etc., brokerage houses are selling the idea of sensex trading at slight cheap valuation.
I still wonder, that if these guys are so apt at valuing the market or a stock, why are they not betting their pants out and make a killing on street.

As far as I am concerned, I am as clueless as you are about the market direction.But considering the global scenario, and Indian market outperforming majority of its contemporaries, the valuations has soared and finding value opportunties will be tougher unless market corrects itself.

With IPO of CARE and PC Jewellers performing fairly, there can be couple more of IPO in the coming season from the companies who are waiting for the right time to raise funds. I wish investors excercise due care before investing and don't get any behaviourial bias from the profits of CARE and PC Jewellers.

I believe, that these times, when opportunities are tough to find, provide good opportunity to re read the golden words of Mr. Buffett, Mr. Munger, Prof. Bakshi etc. and act cautiously, as this euphoria often culminates behavioural biases while analysing and can lead to disaster.

For me, its time to go basics and control my emotions(Lure) to invest. Though I might miss the market rally, but I still want to stick to old school values and search heard for undervalued securities.

Keep Investing !!


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Tony Stark
(CEO - Stark Capital)