tag:blogger.com,1999:blog-7832676223555801988.post4967039113148510528..comments2023-05-07T16:38:33.184+05:30Comments on Manufactured Luck: Fool’s Wisdom #4 : An alternate approach to position sizingManufactured Luckhttp://www.blogger.com/profile/17054602349579736386noreply@blogger.comBlogger20125tag:blogger.com,1999:blog-7832676223555801988.post-85577599323306745532014-11-23T09:46:41.362+05:302014-11-23T09:46:41.362+05:30Very insightful and educative for individual inves...Very insightful and educative for individual investors. This sentence summed it up for me "Unless one pays extraordinarily high price for a high quality businesses, generally one would suffer only opportunity cost and not loss of capital." Thanks for sharing your thoughts. Harihttp://www.bitsbusiness.comnoreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-39625689367749044222014-10-29T21:08:45.663+05:302014-10-29T21:08:45.663+05:30I am thankful to have come across this article. Bu...I am thankful to have come across this article. But please accept my sincere thanks. This article is loaded with wisdom. Pure gold!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-67003153649309871722014-10-02T23:32:02.750+05:302014-10-02T23:32:02.750+05:30Hi Jatin,
Thanks for your appreciation. We recent...Hi Jatin,<br /><br />Thanks for your appreciation. We recently made a presentation on this topic at FLAME https://t.co/K45IAWhllp Have a look when you get the time..Manufactured Luckhttps://www.blogger.com/profile/17054602349579736386noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-69340208763758901302014-09-30T16:50:54.215+05:302014-09-30T16:50:54.215+05:30Thanks Abhinav & Niren for developing and shar...Thanks Abhinav & Niren for developing and sharing this wonderful framework.<br /><br />I am a strong believer in having the right processes and this will surely help me improve my investment analysis process. <br /><br />What you are essentially saying is that fine you may invest in a bad business but there should not be an illusion of it being a good business, you have to be true to yourself, know the reasons of investing (good valuation) and have a clear exit strategy(when valuation catches up or stays low for extended period of time making it a value-trap)<br /><br />Having defined exposure limits of 2-3% in each idea and overall caps for the quadrant is surely an effective way of keeping a check on the overall portfolio risk.<br /><br />Also agree its far easier to avoid mistakes then to get hooked on to doing only right things (which actually are clear only later in hindsight)<br /><br />Overall a brilliant post. Keep flowing more of such frameworks and wisdom :)<br /><br />Jatin Khemanijatinhttps://www.blogger.com/profile/04189656003203382998noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-45500467274116193182014-05-25T07:57:26.395+05:302014-05-25T07:57:26.395+05:30PS: The 4 quadrant slotting of companies is very ...PS: The 4 quadrant slotting of companies is very good !<br /><br />Arun SGUnknownhttps://www.blogger.com/profile/17771508716928275535noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-36743047824878330552014-05-25T07:48:54.707+05:302014-05-25T07:48:54.707+05:30Hello Manufactured Luck -
Good post and am glad ...Hello Manufactured Luck - <br /><br />Good post and am glad I stumbled into this blog! Keep up the good work !<br /><br />#1 Capital Preservation....many famous value investors say this, but I am honestly not able to grasp what this _truly_ means. Is it to mean not to invest in BB businesses, or something different? But then no one deliberately invests in bad businesses; they only prove to be bad in hindsight. Or, does capital preservation means to invest in business at below fair value, to ensure a margin of safety? What does this preservation of capital really mean? Also, what does the corollary mean.....destruction of all of the invested capital, or part of invested capital? Even Mohnish Pabrai says..."tails I dont lose much...", but some loss is hence possible, we can attempt to reduce the probability of it occurring, and indeed this is manufactured luck.<br /><br />#3: Yes, agree 100%...Mr. Market is very intelligent - and stocks on an average are priced where they ought to be. Mr. Market is also given to wild mood swings and that is when he becomes irrational! 2008-09 is a good example of extreme depression of Mr. Market. Now looking at valuations of some of the companies, I wonder is Mr. Market feeling very exuberant now in May-2014?<br /><br />#7: Conviction to me, is not a boolean YES or NO, Absent or Present kind of attribute. I'd like to think of it more as a gradient. Complete absence of Conviction would mean that everyone would need to seek an appointment with the dart-throwing monkey! Its only with change of degree of conviction that one can move on to the next step of individual stock sizing in a portfolio. Stronger the conviction in a stock, higher is the allocation. But you're right, conviction is not forever, any belief needs to be constantly questioned, constantly evaluated for change of circumstances, either within the company, or external environment. You have said it perfectly - a change is not necessarily due to change of environment, just improved insight is enough. <br /><br />Thanks, <br />Arun SG<br /><br />Unknownhttps://www.blogger.com/profile/17771508716928275535noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-6406501282882020392014-04-24T19:03:45.760+05:302014-04-24T19:03:45.760+05:30Hi ML (manufactured luck) team, you have explained...Hi ML (manufactured luck) team, you have explained the concept & the framework very well. Let me add my two cents to it. As mentioned in your post there are two main steps before you invest. (1) Identify a good business (2) value the business. For step (1), my view is that everyone should first calculate a score based on some criteria or mix of criteria (eg ROCE/sales growth/EPS growth/Dividend etc). Then, stratify the co's into four groups (great, good, average, bad). In step (2) take the great/good businesses & value them based on various criteria like DCF etc. The next step would be then to invest in them if market price is at a discount to the value arrived.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-69878720908298009872014-04-23T14:07:14.253+05:302014-04-23T14:07:14.253+05:30Aptly put across Abhishek,
If you find it a good ...Aptly put across Abhishek, <br />If you find it a good business then surely your assessment is right. There were enough factors available publicly to recategorise Crompton at various points in time. About the tricky nature of the assessing qualitative factors .. Well just like a lot of other things in life .. It ain't easy for sure !!<br />Best of ML !!!Manufactured Luckhttps://www.blogger.com/profile/17054602349579736386noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-342749597530550512014-04-23T11:55:37.085+05:302014-04-23T11:55:37.085+05:30Thanks for the reply...makes a lot of sense...
Ju...Thanks for the reply...makes a lot of sense...<br /><br />Just a name that comes to mind - Crompton Greaves - where taking a call at 250 bucks hurt the most....good business with strong brand, decent management (though had issues such as private jet purchase and of course the share sale by Mr. Trehan - obviously he must be having a sense of the operating performance before it unfolded via slump in quarterly earnings) and reasonable valuations - don't know where to categorize it ...in hindsight probably a GB and not a GG....couldn't avoid it at that time with a strong positioning of the company and decent valuations...assessing the management and the numbers was indeed tricky, wasn't it? Abhishek Trivedihttps://www.blogger.com/profile/10990729985541273459noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-37092152249061745002014-04-22T14:36:50.005+05:302014-04-22T14:36:50.005+05:30Hi Abhishek,
Thanks for the questions..
We are n...Hi Abhishek,<br /><br />Thanks for the questions..<br /><br />We are not suggesting that one invests in any and every BG idea even which you don't like. If nos. are an issue or management is an issue, why like in the first place? Avoid completely without doubt. Invest only if your analysis tells you that you should. <br /><br />However, do not fool yourself by thinking that just because you like it, it is a good business. Be aware that you have chosen to buy it in spite of it being a bad business and manage the risk accordingly. We have given examples of Triveni & Polaris. In our judgement 1) accounts have not been written by a fiction writer 2) Management is okish, not great 3) business bad (commodity, low ROCE, lack of moats etc) but valuations provide margin of safety (at the time of writing). If the answer to any of point 1&2 would be in the negative zone (accounts cooked, fraud management) we would not invest, whatever the price. Also, its ok if you don't want to smoke this quadrant. If you want to avoid these kind of mispriced bets, its just fine and depends on your aptitude.<br /><br />On the second point, we have mentioned that we would entirely invest in GG ideas if we find sufficient opportunity. Other quadrants come into play only for excess capital.<br /><br />On whether 40% is high or not, would suggest not to focus on the number caps/floors. Those are designed keeping in mind our risk appetite. Choose your own caps/floors based on risk appetite. The key thought is to slot ideas into the 4 quadrants.<br /><br />Trust that helps, do write back in case of further issues..Manufactured Luckhttps://www.blogger.com/profile/17054602349579736386noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-71314399855607196552014-04-22T14:07:46.702+05:302014-04-22T14:07:46.702+05:30Thanks Amit, Glad you liked it!!Thanks Amit, Glad you liked it!!Manufactured Luckhttps://www.blogger.com/profile/17054602349579736386noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-85310890938025236822014-04-22T11:03:13.301+05:302014-04-22T11:03:13.301+05:30Great post Niren and Abhinav !!! ...Always a pleas...Great post Niren and Abhinav !!! ...Always a pleasure reading your post.<br /><br />You have talked about making an allocation in the BG quadrant where valuation is of higher importance than the business quality....does an allocation still make sense in a BG when it is run by an iffy management....for all you know the numbers on which the valuation is based might be cooked - and beyond a point it is truly difficult to figure that out from analysis of the financial statements, especially in the midcap companies eg. netting off borrowings against loans and advances....<br /><br />Also a clarification needed - u mentioned that in worst times for the market, and the best for BG, the allocation should could be capped at 40% - isn't that too high .....in bad times for the market wouldn't good businesses be available at better valuations (though not cheap) and hence exposure to bad businesses with good valuation be lower?<br /><br />Regards,<br /><br />AbhishekAbhishek Trivedihttps://www.blogger.com/profile/10990729985541273459noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-89616310213510754762014-04-22T10:41:56.216+05:302014-04-22T10:41:56.216+05:30excellent...great thoughts
excellent...great thoughts<br />Anonymoushttps://www.blogger.com/profile/13845294247252212480noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-71783675992166752142014-04-22T09:51:01.403+05:302014-04-22T09:51:01.403+05:30Hi Anon,
Happy our thoughts made you think!! You ...Hi Anon,<br /><br />Happy our thoughts made you think!! You wouldn't read this anywhere else :)Manufactured Luckhttps://www.blogger.com/profile/17054602349579736386noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-11178667409204100402014-04-22T02:07:31.974+05:302014-04-22T02:07:31.974+05:30Amazing. Is this your original idea? Else pls poin...Amazing. Is this your original idea? Else pls point to the book/ resource. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-55344839515174763802014-04-21T22:48:31.362+05:302014-04-21T22:48:31.362+05:30BTW, just to add, the focus of the post is the 4 q...BTW, just to add, the focus of the post is the 4 quadrant approach. If you are seeking higher concentration, it should be quite possible to achieve it as well within the above framework. The caps and floors are ours. You should be easily able to change them to suit your own risk appetite. The framework should help nevertheless..Manufactured Luckhttps://www.blogger.com/profile/17054602349579736386noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-72632834436862755392014-04-21T22:43:05.520+05:302014-04-21T22:43:05.520+05:30Hi Manish,
Thanks for your comment. To each his o...Hi Manish,<br /><br />Thanks for your comment. To each his own :) Manufactured Luckhttps://www.blogger.com/profile/17054602349579736386noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-70458518620895392142014-04-21T22:32:19.898+05:302014-04-21T22:32:19.898+05:30Anil,
Thanks for your positive feedback and readi...Anil,<br /><br />Thanks for your positive feedback and reading through carefully :) We are all forever learning. We fear that we will end up writing a book if we ever attempt to simply list our mistakes!!Manufactured Luckhttps://www.blogger.com/profile/17054602349579736386noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-53459817405803878592014-04-21T20:23:58.104+05:302014-04-21T20:23:58.104+05:30Hi,
I m a trendfollower and spinoff investor.
I t...Hi,<br /><br />I m a trendfollower and spinoff investor.<br />I tell u wat, interesting article but with 1 big flaw!!! U can never get rich. Sure u won't go broke, but forget about changing ur strata in single generation. All the blokes and dames I knw who have made it big in any industry have loaded up when the stakes were high and the odds favorable. Unfortunately, there is no other way unless u r starting as a billionairre interested in cap protection.manilifehttps://www.blogger.com/profile/03267000847634653877noreply@blogger.comtag:blogger.com,1999:blog-7832676223555801988.post-85640122263310507072014-04-21T19:13:32.906+05:302014-04-21T19:13:32.906+05:30Thanks Abhinav/Niren for this excellent post. Thou...Thanks Abhinav/Niren for this excellent post. Though perception of good/bad quality business will differ, still its an excellent practice to place the stock in appropriate quadrant. <br /><br />Only if I had learned these two concepts without paying steep fees in term of time & money. 1) "When analysing a prospective idea, we have learnt to first conclude on the business quality judgement and then move to the valuation, in that order". 2) "Poor quality businesses are most likely to result in a permanent loss of capital, something we wish to avoid in line with Commandment 1."Anil Kumar Tulsiramhttps://www.blogger.com/profile/08957135865779188117noreply@blogger.com