DESTROYED

“Any year that you don’t destroy one of your best loved ideas is probably a wasted year” – Munger

Many years back, I destroyed something in my mind. It was neither good nor an idea. It was a prejudice – a wrong notion. The notion to discriminate members of the LGBT+ community. How I picked it up, I don’t know. Most likely from the society around me. The general behaviour of people is to discriminate and mock members of the LGBT+ community. Reason- they are different from us and don’t fit into the established norms of the society. I started behaving like others around me. Monkey see, monkey do. I regret that behaviour of mine. 

Over a period of time, the debates and discussions on TV and newspapers sensitised and educated me. I questioned my beliefs and I could see no good reasons to continue holding such beliefs.

Companionship is the most important physiological needs of a human being. Having a companion is a primal urge. According to a Biblical story, Eve was created by God by taking her from the rib of Adam, to be Adam's companion. Companionship is all about meeting of the minds, vibes, chemistry and frequency. Sexual orientation has nothing to do with it. 

The case for legal acceptance of same sex marriage in India is with the Supreme Court now. The court has finished hearing arguments and the verdict is awaited. Marriage equality would be a giant leap in making our country more equal. Every citizen in India enjoys freedom under the constitution. Choosing one’s marriage partner should be one such freedom.

As I finish writing the post and wait for the court’s verdict, I wish all my brethren of the LGBT+ the best and recite the following lines from the poem ‘Gitanjali’ by Gurudeva Rabindra Nath Tagore.

“Where the mind is without fear and the head is held high;
Where knowledge is free;
Where the world has not been broken up into fragments by narrow domestic walls;
Where words come out from the depth of truth;
Where tireless striving stretches its arms toward perfection;
Where the clear stream of reason has not lost its way into the dreary desert sand of dead habit;
Where the mind is led forward by thee into ever-widening thought and action -
Into that heaven of freedom, my Father, let my country awake"

To Short or Not?

I don’t have any holding long or short in the Adani group shares. This note is to talk about shorting in general, my own experience of short selling and finally Buffett’s wisdom on shorting.

Adani Group stocks have been roiled in the last couple of days post the publication of the Hindenburg Report. Hindenburg is a US based short seller specializing in finding companies which it suspects to be fraudulent or having financial irregularities. The research house goes short on these companies, publishes it reports and makes money if the stocks go down.

What is Short Selling?

Normally, when we buy shares of any company, we expect the prices to go up over a period and thus make money. This is known as long investing. Short sellers on the other hand sell shares of the company they don’t have [either by borrowing shares from other owners or selling in the futures market] and buy them back when the price goes down thus making money in the process.

Simply put long investors FIRST buy low and THEN sell high. Short sellers FIRST sell high and THEN buy low.

Perils of short selling

The first danger of short selling is the potential for unlimited losses. In the case of long investing – say you buy a stock at Rs 100. The worst-case scenario is that the stock can go down to zero. So, your maximum loss is pegged at 100. You can’t lose more than what you had invested.

In short selling, the potential for losses is unlimited. Say you short sell a stock at Rs 100. Theoretically, the stock can go up to any price and so can your losses. 

The second danger in short selling is absence of staying power. In long investing, one can invest and stay patiently in the position for a long period of time. In short selling, if the position moves against you, you will have to keep pumping more money to cover your losses. The requirement of more money to stay in the game might severely constrain your position and you may have to bow out early [and wounded] even if you are eventually proven right.

Markets can stay irrational longer that you can stay solvent ~ John Maynard Keynes

The third and most lethal danger of short selling is the possibility of a short squeeze. As I wrote earlier, in short selling the intention is to sell high and buy later at a lower price. Imagine you sold some stock at a high price and instead of price going lower, it goes higher and you have losses. You decide to take your losses, lick your wounds, and close out the position. For closing out the position you need to buy back the same quantity of shares which you had sold earlier. When you wish to buy the shares even at a higher price, to your surprise you find that there are no sellers in the market. The stock is locked in upper circuits day after day. The whole thing defies gravity and turns into a vicious loop.

There have been many examples of short squeezes in the capital markets. The one which is etched in my memory is that of Volkswagen. The German billionaire Adolf Merckle, the owner of Porsche tried to take over Volkswagen (VW). Amongst many steps that he took, one was shorting the shares of VW in the market but the tide turned against him and shares of VW kept marching up. With no shares of VW available in the market to cover up, the losses in the position mounted uncontrollably. The monetary and reputational loss was so high that Mr Merckle took his own life.

It's insane to risk something that you have and do need for something that you don’t have and don’t need- Warren Buffett

My experience of short selling

Soon after I started investing in the year 2004, being largely ignorant about the ways of the market, I took short positions in 2 companies because I found the valuations expensive. However, the prices went up considerably and I received a margin call from my broker. I had to liquidate my savings in the bank to fund the margin and eventually to close out the positions. The time I spent in that position was extremely unpleasant with sleepless nights. Having learnt my lesson that the odds are stacked against the investor in short selling, I decided not to do it again. I behaved like Mark Twain’s cat and haven’t touched the stove since.

All I want to know is where I’m going to die so I’ll never go there- Anonymous Hermit

Buffett on short selling

I have kept the best part for the end. I am sure you will relish and learn what Buffett has to say on short selling stocks. Credit for the following excerpts: Outstanding Investor Digest [OID]

In search of the Sangam

Prayagraj [earlier Allahabad] is the city where the 3 holy rivers Ganga, Jamuna and Saraswati meet and their confluence is the 'Sangam'.

Where is the Sangam in the field of investing?  

Go no far. Read what Buffett wrote in 1992 in the Berkshire Shareholder Letter:

"Leaving the question of price aside, the best business to own is one that, over an extended period, can employ large amounts of incremental capital at very high rates of return."

This is the trifecta which one should be looking for. True 30 years back, true today and will be true 30 years later. It's simple to read and understand but takes a lifetime to internalise and practice.

While thinking about this topic, analogy of a fruit bearing tree comes to mind. Compare a fruit bearing tree with a business. The roots of a tree are similar to the moat/competitive advantages of a business. Only if the roots are strong, will they hold the tree against natural adversities like droughts and storms. Roots provide longevity to a tree. Same way, only if a business has strong competitive advantages, will it hold fort against economic headwinds, competition and the like.

Next, fruits of a tree are akin to the ROCE [Return on Capital Employed] of a business. What good would a tree be if its roots are strong but it doesn't bear fruits? So, a good tree should have strong roots and should produce bountiful fruits. Similarly, a good business should have a strong moat which should reflect in healthy returns on capital.

Last in the trifecta is growth. A good tree should have strong roots, bountiful fruits and should have fruits with healthy seeds which can be planted elsewhere to compound into more trees. Similarly, a good business should have a strong moat, healthy returns on capital and the opportunity size large enough to continually deploy the incremental capital at good rates of return.

The confluence of these 3 is the Sangam of Investing. It produces the proverbial nectar, compounding of wealth and leads to investment nirvana.

There are many different ways to invest sensibly. Here, I am talking about investing in good quality businesses which I personally practice.

Thou shall value holding companies at a discount but not always

Shriram Group announced a restructuring of the group companies on Dec 13, 2021. The restructuring entails merger of listed operating companies Shriram Transport Finance (STFC) & Shriram City Union Finance (SCUF) and an unlisted company Shriram Capital (post the demerger of insurance and other non-lending businesses).

A couple of concerns which have been raised in the media about the restructuring:

1. Holding of Shriram Ownership Trust (SOT)-the promoter in the merged entity would be ~12%, which is considered low by some observers. Low enough that they have contemplated a ratings downgrade by rating agencies. 

I am not well aware about the mechanics of ratings but by simple logic, the number of shares held by SOT pre restructuring and post restructuring remain the same. The trust has not sold a single share in the last so many years. In fact, it has added to its share count by buying shares of SCUF from the open market in 2020 (here), buying shares of STFC in 2019 and infusing additional capital in STFC through preferential issue of shares (here). If the rating agencies were fine with the number of shares held by SOT earlier, why should it create a problem now when SOT has higher number of shares?

We also have a case of HDFC Limited which is a lender with no identifiable promoter. Directors and employees of HDFC Limited own a stake which is in low single digits. The majority shareholding in HDFC rests with institutions and foreign investors. 

If no identifiable promoter and low shareholding of employees is not a concern in the case of HDFC, how should it be a concern for the merged entity of Shriram where there is a clearly identifiable promoter and employees (through a Trust) own a ~12% stake? 

2. The second concern is about the discount which should have been given to Shriram Capital while merging the same in the restructuring. The rationale is that Shriram Capital is a holding company and holding companies sell at a large discount to their intrinsic values, hence Shriram Capital should have been valued at a discount in the restructuring scheme.

It's not a Biblical commandment that holding companies should be valued at a discount. Holding companies sell at a discount because shareholders in them neither get access to the cash flows of the investee companies nor they fully enjoy price appreciation of the investee companies since the investments are never sold /unlikely to be sold. Hypothetically, if a holding company were to announce a scheme where it would be wound up and the shareholders would get their proportional share of the investments which they can freely sell in the market- the discount to the intrinsic value of the holding company would evaporate in no time (ignoring frictional costs and taxation). 

In the case of Shriram Capital, it was a privately owned investment vehicle which held investments in STFC and SCUF. In the merger, the investments are being proportionally allocated to the shareholders of Shriram Capital. I believe it’s a completely fair game and there is no reason for a discount to be present in the restructuring scheme.

3. The third concern is about the challenges which the merger can throw both in terms of HR integration and business integration. This is a valid concern and only time will tell how the dust would settle. However, on a probabilistic basis the odds are higher that the merged entity should be able to handle any such challenge given the strong pedigree of the business and the management.

(This post is not an investment advice. It is meant for discussion purposes only. My clients and I are invested in both STFC and SCUF)

The Art of Playing

While the Olympics are on, I recalled this brilliant obituary of Raymond Poulidor.

Poulidor, a French cyclist, stood on the podium of the Tour de France 8 times but never was on the top step. In 14 tours he lost by a lot of margin.

However, he was the most popular cyclist. 

"The more Tours he lost, the more the crowds liked him and the more he earned. At the height of his celebrity, in the mid 1970s, almost half of respondents to one poll made him their first choice as a dinner guest. In 1974 alone more than 4,000 articles were written about him, besides university theses and sociological studies."

Why? 

You will find answers in the attached article.

Internships 2021-22 : Update

We have sent a set of business cases to all the applicants who had paid the application fee.

In case you had applied & paid the fee but didn't receive the business cases, please check your spam/bulk folder.

If you still don't have it, do write in @ internships.prayaascapital@gmail.com with your details.

Thanks

Internships - 2021/22

Internships- Year 4

PRAYAAS CAPITAL

Year 2021/22

About me

Hello, my name is Ankur Jain and I run an investment management firm, Prayaas Capital (Chennai, India). 

I try to invest in good quality businesses, run by good managements and available at reasonable valuations. This investment philosophy has been beautifully practiced by Buffett and Munger through their investment vehicle: Berkshire Hathaway.

I started internships a few years back. The idea was to share my learnings with people who have embarked on their investing journey and have a deep desire to learn. I offered them for 3 years. After a break, I am opening internships this year again.

Method

We are going to pick up one business case and work through it over 2.5 months. Participants would be expected to work on the case during the weekdays followed by a discussion session every weekend. There would be 10 sessions of upto 90 minutes each.

I would choose a business which I feel covers a lot of ground in terms of the investment aspects- moat around the business, risks, quality of management, valuations, position sizing etc. I would pick up a business which I have already studied. That would allow me an opportunity to discuss the case in depth.

Case Study Method

Let’s read what Li Lu (Himalaya Capital) has to say about learning investment management.

-------------

Do you have any advice for students who are interested in getting into investment management?

The most important thing in understanding the investment business is by doing it. There is no substitute to actually doing it. The best way to do it is study one business inside and out for the purpose of making the investment- you may not actually invest. But having gone through the discipline of understanding one business as if you own 100% of that business is very valuable.

(Li Lu, Himalaya Capital – interviewed by Heilbrunn Center for Graham & Dodd Investing)

------------- 

It reminds me of a simple advice to teach cycling to children.

Step 1: Put your foot on the pedal and start pedaling

Step 2: Keep pedaling

Similarly, to learn investment management, nothing is better than reading an actual business. Thus, we will pick up one business and learn about it. Hopefully, you would continue to pedal, there on. 

Batch size and medium of learning

The internship will have 2 batches. The number of participants would be 15 per batch. Sessions would be conducted over Zoom. 

Requirements

This internship will not cover value investing basics. Participants are expected to have read and hopefully practiced value investing for atleast a couple of years. The idea is to polish what you might already know.

The second requirement is that you should have sufficient time at your disposal. If your academic/ professional work is demanding and doesn’t spare you atleast 3 hours a day to work on the internship, it won’t be value accretive.

Thirdly, you should have a basic idea of accounting.

Selection Process

If you are interested, please fill in the google form and deposit an application fee of Rs 100.

Application fee to be paid by UPI to internships@apl

The number of applications is limited to 300. 

Once all the applications are in, I would share a set of business-related exercises to the applicants. You would be required to submit your answers to those exercises. Based on the responses, I would choose the best 30.

The application window is open till June 25^th 2021 or 300 applications whichever is earlier.

 

Pay it Forward 

There is an application fee of Rs 100 to be paid by all applicants.

There is an internship fee of Rs 5000 to be paid only by the selected participants.

This year’s internships are dedicated to Yogyata Education Trust. This trust provides monetary scholarships to meritorious students of Class X studying in the Government Schools. A small reward can act as a powerful incentive for students who are trying to do something meaningful with their lives. Yogyata has been founded by my friend and cousin, Anurag Jain. Knowing him, I know that the trust is ethically run, with bare bone overheads. Your contributions (both application fee and internship fee) will go to this trust.

FAQs 

Ques:    What’s the timeline for the 2 batches?

Ans:      Tentative commencement dates: 

              Batch 1: August, 2021                    Batch 2: November, 2021

 

Ques:    Will all participants work on the same idea?

Ans:      Yes, all participants in the same batch will work on the same idea. However, they will                                           work independently. Research would be individual and discussion would be in a group.

 

Ques:    Do I need to send my resume with the application?

Ans:      No

 

Ques:    When does one pay the application fee and the internship fee?

Ans:      Application fee of Rs 100 is to be paid at the time of applying. If selected, an internship fee of Rs 5000 is to be paid 1 week before the commencement of the respective batch. Fee once paid is non-refundable.

Application fee being a small amount across large number of applicants would first be pooled in an individual account and then passed on to Yogyata. Internship fee has to be transferred directly to Yogyata.

 

Ques:    Do I get income tax benefit on the contributions made to Yogyata?

Ans:      Yes, the trust enjoys exemption under Section 80(G). Tax exemption receipts would be issued only to the participants who get selected and pay Rs 5000. Given the logistical challenges, no tax exemption receipt would be issued for Rs 100 paid as the application fee. 

In case of any other query, please write to: 

internships.prayaascapital@gmail.com