An interesting article on the Black Scholes Model and its foibles.


Some timeless quips from Buffet and Munger Link:

Mr. Buffett on the use of higher-order math in finance: “The more symbols they could work into their writing the more they were revered.”

Mr. Munger on the same theme: “Some of the worst business decisions I’ve ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you but it doesn’t. They teach that in business schools because, well, they’ve got to do something. ”




Mr Parag Parikh is considered one of the top value investors in India. His firm PPFAS has a blog in which Mr Jayanth Pai is active. I have enjoyed it and have subscribed to it through an RSS feed. The following is an interesting piece from one of his recent entries.

In keeping with the festive spirit, I thought of donning the garb of Moses and impart a light-hearted version of God’s ten commandments to investors with a disclaimer that “We do not intend to hurt the sentiments of speculators or day-traders. Resemblance to any person or financial advisor living or dead is purely coincidental”…..

1.You shall have no God other than Warren Buffett: He is truly a living God in the world of investing. It is difficult to hold a candle to him. Hence believe only in Him and ignore the myriad pretenders to his throne.

2. You shall not worship the trading terminal: The terminal is not your temple. Make it your slave. It will always try to tempt you to over-trade. Do not fall for its (and your broker’s) wiles.

3. You shall not take the name of “Investing” in vain: Do not undertake speculative trades and convert them into “long term investments” merely because they are underwater….

4. Remember the Sabbath day: Do not think about stocks on Sunday. Sunday is meant to be enjoyed with your family and not to be spent with CNBC and the Economic Times.

5. Honour your mentors: Do not forget the critical role that they have played in moulding you as an investor when you entered the stockmarket. Treat them with reverence.

6. You shall not murder: By this I mean murdering the definitions of long term investing by treating a day, week or month as “long term”. Think in terms of “years”…..

7. You shall not commit adultery: By this I loosely mean, do not overdiversify your portfolio. Too many stocks is akin to too many mistresses. It is difficult to maintain all of them.

8. You shall not steal: This applies more to agents and advisors. You shall not steal investors’ money by rendering false, biased or unduly optimistic advice. Investors beware….

9. You shall not bear false witness: Do not blindly act and induce others to act on the views and “tips” given by members of the financial media, market experts, technical analysts etc. Doing so will be akin to bearing false testimony to events you never saw.

10. You shall not covet your neighbour’s stocks: Never purchase a stock merely because your neighbour has made money in it. The stock and the timing of the purchase may be completely incongruous with your financial and psychological profile. Being envious of your neighbour will not help you in any manner.

As Charlie Munger once noted “Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun.”

Have a happy and profitable decade ahead…..

Reading list


The original post I wanted to make.

I have a reasonably good collection of books on value investing (Read some and many are pending). However thought will compile the list in a single post.

Investment Analysis:

Security Analysis by Benjamin Graham

Intelligent Investor by Benjamin Graham

Beating the street by Peter Lynch

One up on Wall street by Peter Lynch

Common Stocks And Uncommon Profits by Philip Fisher

Value Investing and Behavioural Finance by Parag Parikh

You Can Be A Stock Market Genius by Joel Greenblatt

The Five Rules For Successful Stock Investing: Morningstar’s Guide To Building Wealth And Winning In The Market by Pat Dorsey

Warren Buffett and the Interpretation of Financial Statements by Mary Buffett and David Clark

Buffettology by Mary Buffett and David Clark

Margin of Safety by Seth Klarman

Cash Return on Capital Invested: Ten Years of Investment Analysis with the CROCI Economic Profit Model by Pascal Costantini

Value Investing: From Graham to Buffett and Beyond by Bruce Greenwald

Distressed Debt Analysis: Strategies for Speculative Investors by Stephen Moyer

Financial Statements  – Nitty Gritties:

Financial Shenanigans by Schilit

How to Read a Financial Report: Wringing Vital Signs Out of the Numbers by John Tracy

Hidden Financial Risk: Understanding Off Balance Sheet Accounting by Edward Ketz

Financial Fine Print: Uncovering a Company’s True Value by Michelle Leder

Biographies/Business history:

The Great Crash 1929 by JK Galbraith

Manias, Panics, And Crashes: A History Of Financial Crises- by Charles Kindleberger and Robert Aliber

Extraordinary Popular Delusions and The Madness of Crowds by Charles MacKay

The Big Short by Michael Lewis

When Genius Failed by Roger Lowenstein

Too Big To Fail by Andrew Ross Sorkin

Barbarians at the Gate

Buffett: The Making Of An American Capitalist by Roger Lowenstein

The Snowball

General Books:

Fault Lines by Raghuram Rajan

More Money Than God by Sebastian Mallaby

The Art Of Choosing by Sheena Iyengar

The Checklist Manifesto by Atul Gawande

The Ten Commandments For Business Failure by Donald Keough

Competitive Advantage by Michael Porter

Competitive Strategy by Michael Porter

Good to Great by Jim Collins
Built to Last by Jim Collins and Jerry I. Porras

The Black Swan by Taleb

Fooled by Randomness by Taleb

I have been using Flipkart for purchasing books. They give reasonable discounts ranging from 10 to 30% on most books (and as most readers of this blog would like discounts on anything, would suggest one to give it a try).

I actually started writing this post to mention some books I have read or bought on investing. But just as I started writing, I wondered where Landmark and Crossword would end up if Flipkart becomes India’s Amazon.

I know many of my friends who  go to Landmark or Crossword to just browse books and eventually order from Flipkart, especially those who purchase books regularly. This inspired me to check how the scenario in US had panned out. Barnes and Noble is the largest book retailer with physical stores and Amazon is largest online book retailer.

Barnes and Noble has returned 1.33% to shareholders in the last 17 years  (Not annualized, Net!!). It looks like the book business as a whole has not been value accretive to shareholders.

Amazon, on the other hand has just returned 100 times (10000%) returns in roughly similar period.

This killed it:

“As of May 1, 2010, B&N operated 1,357 bookstores in 50 states, 637 bookstores on college campuses, and one a Web eCommerce sites, which includes the development of digital content products and software.”

Though the reasons are fairly obvious, when it is put in terms of hard coded return figures (1.33% vs 10000%) for investors, it kind of drives home the point on disruptive competition.

Prof JRV has a good post on some of the books he has enjoyed on financial history..

and some books on the recent crisis.

It took me quite some time doing this, but is useful to take a printout (double sided please!) and read through. I have read them in parts and not continuously. This should give some continuity of thought. It would be interesting to understand how he evolved over years. I consider this to be the Bhagavad Gita equivalent for Business.

(Please click File -> Download original to download the PDF)

There are many times when we get attracted to companies with fast growth in reported sales and earnings. And when such companies also generate high ROAs and ROEs and are available at single digit P/Es (with no debt and reasonable cash in Balance sheet) it is a potential multi bagger in waiting.

The figures for the company I am talking about is as follows:

This company is available at a market cap of 400 crores and has no debt. It operates in the attractive pharma industry. It has grown at a CAGR of 40% in last 4 years (excluding 2006 low base year) and has earned wonderful returns on its asset base.

However, before we invest in this company, to get a better picture, one has to look at the cash flow statement which is as follows.

As we can see, the cash flow figures present a stark contrast to the earnings figures. The company made PBT of 128 crores in last 5 years but just made 25 crores in CFO. Please note that we are not talking about Free cash flow but Cash from operations.

This does not automatically mean that the company is cooking its books. There can be businesses with very high working capital requirements which ensure that no CFO remains post working capital investments.

It is prudent to understand the key working capital ratios in such cases to understand what is happening. The figures for that are as follows:

Cash conversion cycle = Receivable days + Inventory days – Payable days. The lower it is the better it is for a company. This effectively measures “how long does it take a company to convert its product to cash”.

As we can see the company’s receivable days shot up and is at 120-140 days now. Its inventory days, which is the number of days of inventory stored, is also very high. But the payable days, i.e. the time taken to pay its suppliers has been coming down.

So effectively the company has not been able to collect money from its customers for 120-140 days, it also is storing inventory for 140-150 days and pays its suppliers within 80-100 days. Definitely not a great picture.

Usually such companies resort to earnings management like recognizing revenues much in advance than the actual sales occurs. This is to show fast growth.

A check is to understand “how much cash the company actually collected from customers” and “how much did it actually pay suppliers”.

Cash collected from customers = Revenues – Increase in A/R

Cash paid to suppliers = COGS + Increase in Inventory – Increase in accounts payable

This should be compared to Revenues and revenue growth should more or less match cash growth. Else it may mean that the company is potentially managing earnings.

As we can see from this, in 2006-08 period the company collected far less cash from its customers compared to 2008-10 period. The company may potentially have been more aggressive in recognizing revenues. If we look at COGS though, the company has paid more to its suppliers than what is recognized as COGS. The company may have potentially been more aggressive in not recognizing expenses.

It is possible that this may be a perfectly valid company with clean books. But one must observe the CF statement and BS statement and not just the IC statement since they may potentially tell a very different picture, as it was in this case. The key is to understand the “why’s” if at all one still wants to invest in this company. Because, at the end of the day, cash is king.

The company is Bliss GVS Pharma and has been recommended by ET this Saturday to be among the fastest growing fundamentally sound companies.