Sniffing Out Shareholder-Friendliness

Shareholder-friendly managements…

…are the need of the hour.

What are the signs that we need to look out for, to know that a management is benevolent towards its co-owner?

Frugality in lifestyle and attitude is worth looking at.

What I’m trying to say is…

…that one hates to see a promoter living it up on company funds, at the cost of the company’s health.

Living it up is ok. Have the balance-sheet to justify it – first – please.

Are you debt-free? Quasi debt-free will do too.

Does your company ooze free cash-flow?

Are your employees well-paid and automatons for growth?

NPM double-digit?

RoE in the 20s?

Fine.

Live it up for all I care.

Take a high salary. Throw in a hefty commission.

God bless you.

I still want to co-own your company.

Any or most of these metrics not present & living it up on company money – well, nice knowing you, but no thanks.

We’re then looking for shareholder give-aways, you know,…

…dividends, bonuses, buybacks and stuff.

Again, the balance-sheet should show enough robustness to justify a giveaway.

If it doesn’t, it means that the management is trying to appease shareholders at the cost of the balance-sheet, and that’s an avoid in my book.

Look for simplicity in the annual report.

If one is getting lost in fancy words and hi-fi design, without being given the nitty-gritty at a glance, one is probably knocking on the wrong door.

Free cash-flow is a good thing. It allows for leverage to act upon opportunity and without incurring debt, among other things.

Look at deployment of net cash-flow generated from operating activities also. Deployment should be healthy. Shows growth.

Instead of looking for fad-stuff like synergy, let’s look to see if promoter action adds to the balance-sheet and makes it stronger.

These are just examples.

Sniff out shareholder-friendliness.

Put your own metrics together, to do so.

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You Miss, I Hit

We’re in the markets to…

…capture gains. 

How do gains come about?

Buy low sell high?

Sure, you’ve then got some gains. 

Enough?

Probably not, because everyone of us holds enough losers. That’s part of the game. Amongst many losers, we then find a winner.

How does one maximize gain?

One looks for mispricing. 

Let’s say we’ve id’d a stock. 

It passes our entry criteria.

Now, we look for an entry point that will give us a price advantage. 

We would ideally like the public to misprice the stock on the downside. 

That’s when we would like to pick it up. Higher the misplacing, higher our advantage. 

When is maximum gain captured?

This happens when the same stock is mispriced by the same public on the upside. 

Is such a strategy easy to implement?

Sounds easy, but NO!

Why?

(For starters), That’s because it goes against our grain to buy something really low, for fear of it going even lower, since sentiments are so down. 

Can well happen. You buy something really cheap, and before you know it, your something is down by another half. 

What’s your protection?

Rock-solid research. Identification of sound fundamentals. A shareholder-friendly management. Technicals that support you. Mispriced entry point. Product-profile that’s going to be around. Lack of debt. Substantial free cash flow. Etc.

If you’ve got such pillars going for you, it’s only a matter of time till they start to shine forth. 

If mass-depression causes you to wilt, though, it’s on you. 

Mispricing on the upside causes us to blunder too. 

Most sell their big winners which still have sound fundamentals, and can potentially go on to bag much higher multiples. 

Do this, sure, but only if you NEED the money. 

If not, give your potential multibaggers the time to become full-fledged ones. 

Sell early, and you won’t perhaps ever find another entry point. Winners barely ever give an entry-window. 

At market highs, sell your losers, because they’ll perhaps be inflated too, and you might get a good exit. 

When others misprice, make sure you hit some home-runs. 

Nath on Equity – Yardsticks, Measures and Rules

Peeps, these are my rules, measures and yardsticks. 

They might or might not work for you. 

If they do, it makes me happy, and please do feel free to use them. 

Ok, here goes. 

I like to do my homework well. 1). DUE DILIGENCE. 

I like to write out my rationale for entry. 2). DIARY entry.

I do not enter if I don’t see 3). VALUE.

I like to see 4). MOAT also. 

I don’t commit in one shot. 5). Staggered entry.

I can afford to 6). average down, because my fundamentals are clear. 

My 7). defined entry quantum unit per shot is minuscule compared to networth. 

I only enter 8). one underlying on a day, max. If a second underlying awaits entry, it will not be entered into on the same day something else has been purchased. 

I’ve left 9). reentry options open to unlimited. 

I enter for 10). ten years plus. 

Funds committed are classified as 11). lockable for ten years plus. 

For reentry, 12). stock must give me a reason to rebuy. 

If the reason is good enough, I don’t mind 13). averaging up. 

Exits are 14). overshadowed by lack of repurchase. 

I love 15). honest managements. 

I detest 16). debt. 

I like 17). free cashflow. 

My margin of safety 18). allows me to sit. 

I pray for 19). patience for a pick to turn into a multibagger.

I keep my long-term portfolio 20). well cordoned off from bias, discussion, opinion, or review by any other person. 

There’s more, but it’ll come another day. 

🙂