Vishal Khandelwal

Corporate Governance: How Companies Screw Investors

March 15, 2015

When a CEO combines his ego and willingness to put precious capital on the line to grow his company bigger, faster, it can create disaster for investors.

All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” ~ Blaise Pascal

You must have heard the fairy tale where a spoiled princess reluctantly befriends a toad, who magically transforms into a handsome prince triggered by the princess kissing it.

Well, those were the older times. Today’s capitalistic society has been witness to a large number of spoiled princesses trying the same trick on a large number of toads, only to realize that the tale of them turning into princes they had heard of was just that…a fairy tale.

If you are confused why I am writing about the tale of the toad and princess, let me get straight to the point now.

If there’s one quick way a lot of companies and their CEOs have destroyed a lot of shareholders’ wealth in the past, it is through mergers and acquisitions (M&A).

So in the world of M&A, the spoiled princess is the company that is looking to acquire another company, and the toad is that other company that’s waiting to be acquired.

Now, despite 50 years of evidence demonstrating that most acquisitions don’t create value for the acquiring company’s shareholders, corporate managers continue to make more deals, and bigger deals, every year.
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InvestorInsights: Ankur Jain

March 10, 2015

A young and smart value investor Ankur Jain shares his insights on the process of sensible, long-term investing.

In this issue, we profile Ankur Jain, a value investor and investment advisor based out of Gurgaon. Ankur is a Textile Engineer from NIT, Jalandhar, and MBA from MDI, Gurgaon. He is also a Berkshire Hathaway fan. The study of textile engineering has helped him understand why most textile operations are inferior businesses as experienced and taught by Mr. Buffett

Ankur invests long term money in businesses which have a demonstrated track record of consistent earnings. He is curious about businesses and love the process of analyzing them. He dives deep into a business while reading about it and comes out once he is convinced about its beauty or the absence of it.

Apart from investing, Ankur finds himself charged up watching mysteries, playing monopoly and visiting heritage monuments. You can write to him at ankurjain2100@gmail.com.

In this interview, Ankur shares his thoughts on his investing process and philosophy and also a lot of valuable lessons for new investors.

Safal Niveshak (SN): Could you tell us a little about your background, how you got interested in investing?

Ankur Jain (AJ): The earliest influences were my relatives. A few of my relatives are in conventional businesses. I often visited their shops and other places of business etc. I was particularly fascinated by the form of writing accounts which used to be a red book called the bahi-khata. It was interesting and great fun to see how businesses were run and accounts were written.
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Spotlight: The Tyranny of Valuations

March 3, 2015

Valuing stocks seems like a tough task in itself and more difficult is drawing a line between paying up and overpaying. Here are some insights on this topic I draw from investing legends and their experience.

Charlie Munger said this in his landmark speech titled – A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business…

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount.

Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.

Now, if I were to look at some of the high quality businesses in India, it surely seems that investors are taking Mr. Munger’s idea about paying an “expensive looking price” very seriously. Here are, for instance, the P/E ratios of some high quality businesses…

In Lewis Carroll’s “Through the Looking Glass”, Alice’s finds that she has to run faster and faster just to stay in place.

Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else if you run very fast for a long time, as we’ve been doing.

Here’s the advice Red Queen, an antagonist in the story, offers Alice…

A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!

In sum, the Red Queen advises Alice to exert ever more effort just to maintain her current position.
Evolutionary biologist Leigh Van Valen took inspiration from the Red Queen’s words and proposed a principle called the Red Queen Effect in 1973 to explain how, for an evolutionary system, continuing development is needed just in order to maintain its fitness relative to the systems it is co-evolving with.
In biology, this means that animals and plants don’t just disappear because of bad luck in a static and unchanging environment, like a gambler losing it all to a run of bad luck at the casino.
Instead, they face constant change – a deteriorating environment and more successful competitors and predators – that requires them to continually adapt and evolve new species just to survive.
This theory has been applied to explain the relatively high speeds of rabbits and foxes, each of which developed faster running abilities in an attempt to gain respective advantage in the predator-prey relationship between these two animals.
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EthicalAnalyst: Ethics in Investment Business

February 20, 2015

Honesty and ethical practices are of utmost importance in any business, and especially in the investment business that remains clouded under mistrust. What’s wrong and what must be righted is what we discuss here.

The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you’re not naive enough to think we’re living in a democracy, are you buddy? It’s the free market. And you’re a part of it. You’ve got that killer instinct. Stick around pal, I’ve still got a lot to teach you.

Corporate Governance: When Words Speak Loud

February 15, 2015

We discuss the quality of language used by companies in their annual reports and other investor communication, and suggest why this may be a result and indicator of governance or mis-governance.

In August 1998, the US stock market regulator, Securities and Exchange Commission (SEC) released a book called A Plain English Handbook.

Now, you may wonder, “What business does a stock market regulator has to focus on plain English?”

The SEC released this handbook to show corporate managers, especially CEOs, how they could use well-established techniques for writing in plain English to create clearer and more informative disclosure documents like annual reports, while meeting all legal requirements.

The preface of the handbook was written by none other than Warren Buffett – the man who writes the world’s best shareholders letters – and this is what he wrote –

For more than forty years, I’ve studied the documents that public companies file. Too often, I’ve been unable to decipher just what is being said or, worse yet, had to conclude that nothing was being said.

There are several possible explanations as to why I and others sometimes stumble over an accounting note or indenture description. Maybe we simply don’t have the technical knowledge to grasp what the writer wishes to convey. Or perhaps the writer doesn’t understand what he or she is talking about.
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