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Circle of Competence


What is common among Sachin, Pele, Schumacher, Tiger Woods, Mike Tyson, Navrathilova?
Sachin only into cricket, Pele only into soccer, Schumacher only into F1 racing, Tiger Woods only into Golf, Mike Tyson only into Boxing, Navrathilova only into Tennis

What is common among Maruti, Hero Motocorp, Pidilite, Asian Paints, TCS, Page, Castrol?
Maruti makes only Four wheeler passenger vehicles, Hero Motocorp makes only two wheelers, Pidilite is only into adhesives and specialty chemicals, Asian Paints only into paints and varnishes, TCS only into software, Page only into inner, sports and leisure wear, Castrol only into automotive lubricants

The keyword above is ‘only‘ and that’s what made all of them exceptional, and that means they have all stuck to what they know and what they are good at – core competence – with a lot of passion

And we all know very well how much shareholder returns these companies have created.

That’s what Warren Buffett and Charlie Munger called sticking to your circle of competence.

“Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital.” – Warren Buffett

“We have to deal in things that we are capable of understanding.” – Charlie Munger

Staying within one’s circle of competence is very important in investing and that is the first level of Margin of Safety

Thanks,

 

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Overvaluation?


One of the simple back of the envelope calculations to check if some stock is overvalued or not is to check its market capitalisation to its entire sector market capitalisation and revenues.

So, just thought of analysing the sector leaders of this bull run (HDFC Bank, TCS, HUL, Bajaj Finance).

HDFC BANK

1

(Here the point to note is, the overall PSU Bank’s Market cap is quite less than sector’s revenues… Undervalued????)

TATA CONSULTANCY SERVICES

2

HINDUSTAN UNILEVER

3

BAJAJ FINANCE

4

Data from moneycontrol.com
Data numbers in crores

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All time highs and lows


Recently came across news where a stock price was referred to have hit an all time high.

So just thought of going through a list of stocks from recent bull run sectors (Finance and Consumer), and come up with their all time low and high and present price/market cap.

Some of the stocks have hit an all time low of less than a rupee and moved to as much as 4 digits – that is more than 1000 times and today they are very strong brands and still going great.

As you can see almost all of these are products and services we use on a daily/frequent basis in our day to day life.

That is as per Peter Lynch – Buy what you see !!!

Company Name All time low All time high Latest Price Latest Mkt Cap
Bajaj Auto 147.32 3,472.60 2,689.20 77,816.58
Hero Motocorp 18.00 4,200.00 3,238.00 64,666.57
Maruti Suzuki 156.10 10,000.00 9,364.00 282,867.77
HDFC Bank 6.45 2,219.05 2,078.45 564,286.40
Kotak Mahindra 0.64 1,424.00 1,287.55 245,481.78
ICICI Bank 3.82 365.65 340.65 219,182.55
Axis Bank 2.46 655.35 656.55 168,620.02
Kajaria Ceramic 1.41 787.55 491.15 7,806.84
Cera Sanitary 3.25 4,300.00 2,735.00 3,557.11
ITC 0.69 353.20 312.70 382,474.07
VST 49.70 3,774.00 3,161.00 4,881.19
Whirlpool 10.63 1,805.00 1,795.25 22,776.67
Symphony 0.13 2,212.75 1,118.85 7,827.14
TTK Prestige 5.75 8,911.20 6,914.75 7,987.34
Bajaj Electric 1.65 706.35 544.25 5,559.06
Hawkins Cooker 15.00 4,650.00 3,350.05 1,771.44
Havells India 0.16 723.00 714.60 44,696.29
V-Guard Ind 2.61 254.90 221.95 9,451.02
HDFC 6.80 2,051.00 1,950.15 329,806.26
Indiabulls Hsg 166.00 1,439.40 1,278.10 54,535.97
LIC Housing Fin 4.60 794.10 520.50 26,267.71
GRUH Finance 0.16 381.95 341.00 24,969.09
Dewan Housing 1.58 685.00 664.85 20,853.61
Repco Home 158.05 923.00 552.10 3,454.01
Bajaj Finserv 87.06 7,200.00 6,974.00 110,980.82
Bajaj Finance 1.95 2,959.70 2,984.05 172,468.66
Nestle 59.33 11,590.00 11,325.00 109,190.80
Britannia 14.00 6,944.10 6,737.00 80,951.22
GlaxoSmith Con 93.75 7,695.00 7,429.75 31,246.21
Bata India 11.86 1,087.60 1,095.95 14,085.98
Relaxo Footwear 1.14 874.00 849.75 10,227.05
Titan Company 1.17 1,006.00 882.05 78,307.18
Jubilant Food 80.80 1,555.00 1,550.60 20,463.12
Asian Paints 2.73 1,488.60 1,392.00 133,520.33
Berger Paints 0.41 341.45 342.75 33,282.23
HUL 9.33 1,807.75 1,769.00 382,709.18
Godrej Consumer 4.94 1,450.75 1,435.65 98,121.00
Dabur India 3.00 490.70 479.50 84,392.00
Marico 2.10 388.00 375.15 47,665.00
Colgate 39.06 1,285.00 1,152.30 31,284.00
P and G 151.11 11,000.00 9,744.30 31,119.00
Emami 2.34 714.00 565.55 25,464.00
Gillette India 40.00 7,196.90 6,491.05 21,057.00
Page Industries 241.25 36,335.95 35,430.65 40,033.00

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Market Cap – How big can it get?


Look at the data given below for these companies, when they were listed, their listing market cap and today’s market cap and calculate for yourself how many times multibagger these are.

Company Name Listing Listing Day Mkt Cap approx (in Cr) Current Mkt Cap (in Cr)
Reliance 1977 10.00 818,507.00
TCS 2004 47,000.00 785,202.00
HDFC Bank 1995 200.00 564,829.00

There are close to 30 companies in NSE whose market cap is more than one lakh crore (https://bit.ly/2Nl8z5W) and of course they are multi-multi baggers for investors over past few decades.

But, the question is, how big can they get from here?

Can we expect the top 3 companies to become atleast a 10 bagger in next couple of decades? – that would be anywhere from half trillion to more than one trillion dollar market cap.

No one can answer with certainty. It may not happen, or may happen in a much longer time – not just in a couple of decades.

We may also see a spin off of the lines of businesses to happen to unlock value and list them separately, which is happening with some of the BFSI behemoths like HDFC and ICICI listing their AMC and Insurance businesses.

Hence, top market cap stocks can remain in an investor’s portfolio as pillars of foundation / all weather stocks and for consistent dividends, and any investor looking for 25x or 50x gains over next decade and beyond should look elsewhere.

Please share your thoughts in the comments section below.

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In hindsight…Opportunities we had a decade back…


I was recently reading about the Financial crisis of 2008.
So just thought of going back by 10 years to see how some of the great brands/businesses were trading at what levels.
Hence, decided to pick some random names which were usually touted to be the best companies to invest and sit on for a long time.
These companies were picked mostly from consumption and finance sectors, because, in my opinion, these are the two major themes that are participating in the current bull run.
I did not pick up super duper multi baggers of housing finance and commodities etc., because I don’t know how many of us would have thought of them to become a potential multi bagger today.
Hence, wanted to stick to very well known names at that point in time – ie. 10 years back.
The analysis is given below. Businesses were available at deep valuations. Not sure how many of us would have invested in these companies then.
Even if we could have just gone by the brand names and invested in them, it would have turned out to be great.

Scrip Closing Price on 18 Aug 2008 # of shares on 18 Aug 2008 Closing Price on 17 Aug 2018 # of shares on 18 Aug 2008 Present value of holdings Remarks
Bajaj Auto 275.70 36.27 2661.35 72.54 193,061.30 1:1 bonus in 2010
Hero Motocorp 792.15 12.62 3242.30 12.62 40,930.38
Maruti Suzuki 640.10 15.62 9152.10 15.62 142,979.22
Eicher Motors 262.15 38.15 28476.15 38.15 1,086,254.05
HDFC Bank 240.71 41.54 2077.35 207.72 431,504.72 FV from 10 to 2 in 2011
Kotak Mahindra 149.56 66.86 1263.25 267.45 337,857.72 FV from 10 to 5 in 2010
1:1 bonus in 2015
HDFC 472.74 21.15 1885.65 42.31 79,775.35 FV from 10 to 5 in 2010
Bajaj Finserv 510.05 19.61 7097.35 19.61 139,150.08
Bajaj Finance 14.07 710.73 2851.20 7107.32 20,264,392.32 1:1 bonus in 2016
FV from 10 to 2 in 2016
Britannia 278.00 35.97 6629.90 359.71 2,384,856.12 FV from 10 to 2 in 2010
1:1 bonus in 2018
Asian Paints 125.11 79.93 1400.65 799.30 1,119,534.81 FV from 10 to 1 in 2013
HUL 241.50 41.41 1784.75 41.41 73,902.69
Page 443.40 22.55 34011.35 22.55 767,057.96
Pidilite Ind 70.67 141.50 1123.70 283.01 318,013.30 1:1 bonus in 2010
MRF 3566.4 2.80 73747.75 2.80 206,784.85
Bosch 3750.00 2.67 18847.95 2.67 50,261.20
ITC 62.14 160.93 313.75 965.56 302,944.96 1:1 bonus in 2010
1:2 bonus in 2016
TCS 207.16 48.27 2012.75 193.09 388,636.80 1:1 bonus in 2009,18
Infosys 426.09 23.47 1430.38 375.51 537,118.45 1:1 bonus in 2006,14,15,18
Shree Cement 601.45 16.63 17758.4 16.63 295,259.79
Sun Pharma 146.52 68.25 623.5 682.50 425,539.18 1:1 bonus in 2013
FV from 5 to 1 in 2010

Note:
Stock prices from NSE

Data from moneycontrol.com and in.investing.com

Dividends not considered

Assuming rights shares were not exercised

Assuming Rs.10000 invested at closing prices on 18/Aug/2008

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Interesting reads 22 Nov 2013 – Rakesh Jhunjhunwala, Ramesh Damani, Raamdeo Agrawal, Robert Shiller, Vitaliy Katsenelson and more


1. The 17 Equations That Changed The World – http://read.bi/IcBDdl
An excellent distillation of world famous equations. I have heard a few and understood a very few, several are new

2. Are Bubbles Caused by Psychological Problems? – http://bit.ly/18kRAbS
Rober Shiller’s words on how economic bubbles can be compared to psychological malfunction.

3. Rakesh Jhunjhunwala, Ramesh Damani & Raamdeo Agrawal’s Investment Tips & Techniques – http://bit.ly/1cFZfRb
A nice article on words of wisdom from India’s greatest investing minds.

4. How Position Sizing Based on Probability of Returns Can Save Your Portfolio – http://bit.ly/1fhljGE
Jae Jun of OSV writes about the role of probability in position sizing from the wisdom of Vitaliy Katsenelson

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Interesting reads 21 Nov 2013 – Bill Miller, Mohnish Pabrai, Bubbles


1. Two Dozen Things I’ve Learned from Bill Miller and Mohnish Pabrai about Investing – http://bit.ly/182kNdO
Tren Griffin on his learnings from BIll Miller and Mohnish Pabrai – From Bill Miller, Points 8 (Value traps) and 10 (Profit booking) and From Mohnish Pabrai, Points 7, 8 and 9 (Moats and Comp Adv)

2. Add Rocket Fuel to Your Net Net Stock Portfolio to Boost Your Returns – http://bit.ly/HZlngg
Wow. A simple and nice review and comparision on 2 companies – which may look great at first sight – only upon further analysis will know which company is better

3. The Greatest Economic Collapses In History – http://read.bi/1ioq016
One of the best books that I have read about Economic History is ‘The Ascent of Money’ by Niall Ferguson. This article from Business Insider gives a quick overview on worlds greatest economic collapses in history

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