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Quote basant Replybullet Topic: "The Thoughtful Investor" by Basant Maheshwari
    Posted: 18/Jan/2014 at 10:13pm
Next month will see the launch of my book 'The Thoughtful Investor'. The book is an arrangement of my thoughts, ideas, learnings and experiences gathered over the last 22 years of my involvement with the Indian stock market. Spread over 1,35,000 words, the book which has taken me around 11 months to write, is presently in the design stage and should exceed 450 pages in print. It has close to 50 info-graphics in the form of diagrams and charts. These pictorial depictions will assist the reader in retaining the message that is being communicated through the 41 chapters of 'The Thoughtful Investor'.

As an investor, most of my learnings have come from reading the experiences of other fellow investors. Surprisingly out of the several hundred books written on investing there are just a handful which have been compiled with specific reference to the Indian markets. Moreover the level of knowledge that is being communicated through these few 'India centric' books remain very basic and elementary. The limited focus of these books also make them devoid of the practical aspects of investing.

The Indian investor has therefore found it difficult to come to terms with the specific issues that relate to his world of investing which has led to a lack of the feel good effect of understanding investing with examples from companies in his backyard. Most of the books that he reads are written by foreign authors with foreign examples on foreign companies and cater exclusively to foreign investors.

There are several ways to make money from the markets and my way of making money by trying to ride trends while keeping the downside risks in check, isn't necessarily the only way. But it has worked for me for the past thirteen years.

This makes me believe that it could well work for anyone else and hence this attempt at opening this channel of communication so that all my reflections on the market which I practice and a lot more has been compiled in these few hundred pages.

There are around 100 companies referenced in this book and some of these in detail. Each of these references have a takeaway for the reader in terms of lessons learnt or in respect to a piquant aspect of their valuation to elucidate the argument made in the respective chapters. The examples though in 'The Thoughtful Investor' remain Indian - all the way

The book assumes the investor to have a basic knowledge of investing in shares and takes him across the various facets of investing in a steady sequence so that both the new and the old investor acquires the necessary skills to use equity investing as a means to achieve - financial freedom.

This book isn't autobiographical in the sense that it has been written like a text rather than exclusively follow my dealings with the market in a chronological order. However the strategy that I have used to make entries and exits have been adequately explained in the context of the relevant discussion.

The Preface titled 'Dare to Dream in Stocks' discusses how I started my second innings at investing, post 2001. My first attempt at being an investor was a bundle of failures as I continued to struggle right from 1992 to 2001. The introduction, also talks about how I got my first big break post the 9/11 crash as I surrendered all my LIC policies and pledged shares borrowed from a relative to put money to work, after our family business was forced to close down by the unilateral action of the J&K Government.

The overall contents have been arranged to provide the reader with an information flow that would assist him in easy comprehension of the subject matter. A brief synopsis of what lies within the chapters is provided below. Of course the chapter numbers and sequence is subject to change but more or less the structure has been laid out and the content written and complete

A) The World of Investing:

The first chapter starts with what Indians think about investing and the risks of the game, the advantages of investing in stocks and how buying a stock of a company is in some cases a better way to wealth creation than physically doing the same business. The next chapter is on the magic of compounding which is the most essential feature of investing. Investors do not realise that the magic of compounding is dependent not just on the rate of return but also on the initial capital as well as the time period for which the investment is allowed to compound. The chapter also debates on how a negative year has the power to wash away years of hard work, an aspect that many investors forget to come to terms with in the initial days of their investing career. Chapter 3 deals with the argument that equities don't outperform all asset classes all the time, a bitter truth that never gets discussed by market participants as they refuse to understand that returns from equities is non-linear and comes in bunches which are sometimes too abrupt. So it is perfectly in order for a broad investment portfolio to under-perform other asset classes for up to as much as twenty five years. This argument is backed up with examples and data both from the Indian as well as the U.S markets. Under such a scenario the concept of index investing goes for a toss and the only way to generate returns is by having a handful of stocks and more importantly not staying in sync with the broad index. The subsequent chapter deal with the attributes that make up for a good investor some of these include being passionate about stocks and also optimistic about things in general as a person. An investor also has to spend a lot of time reading books about people who have made it big from the game. I refer to investing as either a game or a bet many times in this book and that is not to take away the long term flavour of this art but just to keep reminding the reader that the act of investing is always enveloped within the realm of uncertainty.

The pain of losing forms chapter - 6, which argues as to why this is such a common feature of an investor's life that cannot be done away. The pain of losing arises both on permanent as well as temporary loss of capital but an investor should understand that someone who cannot take the pain will find it hard to participate in the gain.

A long debate on the concept of 'Buy what you see' follows in Chapter 7, where the reader is introduced to the advantages and the pitfalls of using this concept. I discuss my own experiences in picking up winning stocks through this method. This chapter is filled with historical evidences on how much more an investor could have achieved by following this strategy. Chapter 8 is on the study of macro numbers and its usefulness to the way it is debated in the media and amongst the investor community. It discusses why macro events except for a few ones have limited shelf life and how a long term investor of equities should deal with these events. The next chapter deals with the theory of intrinsic or fair value as computed through the discounted cash flow method and how it differs from the actual price and why price and value seldom equal each other due to the overriding factor of emotion in stock price discovery.

B) Bull markets, Trends and Economic Bubbles:

This section starts with Chapter - 10, which explains the essential attributes of an economic bubble and how it can be picked up by an astute investor. A bubble can happen in any asset class or in a specific sector of the stock market and has to be backed up by liquidity, leverage and an open ended dream on anything that is new or has remained depressed for long. In this context one has to understand that there is always a bull market somewhere for an investor to make money from and irrespective of the broad indices an astute investor will always find ways to multiply wealth if he is on the lookout for a new emerging sector theme.

This is followed by a chapter which discusses all the global bubbles which includes the Tulip mania of 1634, South Sea bubble of 1720 , Railway Mania of 1860, the U.S Great Depression of 1929, the Nikkei bull market of 1989, the Nasdaq bubble of 2000 and the U.S Housing and Emerging market crisis of 2008. Each of these bubbles are explained to communicate the common theme that ran across them which were liquidity and leverage acting on anything that was new. The idea behind taking the reader across these past bubbles and their attributes is to make it easier for him to attempt catching the next bubble when it comes along. An effort has also been made to explain how liquidity by itself does not create a bull market but a bull market is created by the uniqueness of an asset class on which the liquidity is made to act as a catalyst.

Chapter 12 deals with Identifying tops and bottoms which is a tough game but we still discuss the important features of both the tops and bottoms while arguing that it isn't necessary for an investor to buy at the bottom and sell at the top to make a lot of money as investors who are aware of the signals that are emitted at the tops and bottoms will do equally well. These signals are not the general psychological arguments of everyone getting invested and no one talking about stocks but originate from the specific price action that the underlying securities reflect, few months before and after these turning points which are in hindsight, termed as tops and bottoms.

The idea of discussing the past bubbles is to make an investor aware that even though the past does not exactly represent itself into the future the patterns remain the same - almost always.

Continuing with this exercise of identifying the tops and bottoms the next chapter discusses the attributes of identifying the next trend. We try and discuss the features of finding the next next big stock market theme and use it to argue in Chapter 14 on what the next big theme is for the Indian markets with the specific attributes that will make this theme move too far ahead from what it is right now.

C) Industry, Company and Financial Analysis:

This section starts with a chapter on understanding business models through the concept of entry barriers, pricing power, brands, patents, cost of production etc. The discussion extends to market share and how it differs from mindshare with the other essential attributes that either make up for a good or a bad investment. Stock computational tools comes in next in chapter -16 where there is a paragraph wise listing of the essential tools of stock analysis with their formulas and significance. These tools collectively help an investor in conducting a detailed financial analysis on a stock. This chapter starts with the argument that no single tool of analysis is enough and how an investor has to rely on a combination of these. Analysing the RoE through the DuPont route comes in next with case histories from the past, reasons on how and why the RoE matters and how it equates with growth and dividends. Chapter - 17, is based on the specific reasons why companies acquire other businesses. The discussion takes in real examples to explain the criteria which makes some acquisitions work for some companies while acting as a destructing force for the others.

The following chapter has a detailed argument on sticking to companies that gain market share from their competitors with ways to understand and evaluate this. The discussion further elaborates on the set up where it becomes easy for a company to take market share away from its competitor. Evaluating the management of the company through the various aspects of study both financial and otherwise is as important as the business model and is elaborately discussed in chapter- 20. The next chapter deals with dividend payments which forms one of the most important features of investing in listed companies. Moreover in the long run, a company's share price mimics its dividend growth and investors have to be on the lookout for the dividend to growth payoff where either the dividend or the growth have to be sacrificed for one another. The dividend growth quotient is a concept that I have introduced just to ensure that this payoff matrix can be evaluated to decide if the payoff is in favour of the investor or not. This along with case histories from the past comes in next. Chapter- 22 discusses how a company is set for operating leverage and the essential triggers for the same while the next chapter is focused on how companies cook their books of accounts and how an astute investor can identify them without too much analysis. This is followed by chapter 24 which is based on stocks to avoid or companies that an investor should stay way from or should stay permanently cautious on even while he rides and profits from it during a bull market.

Chapter - 25, deals with understanding the magic of the price to earnings ratio. It starts with a discussion on the various drivers of a P/E ratio and why some of these drivers are more important than the others even while there remains no single way to compute the right P/E of a stock. The argument extends to debating on how some stocks are valued based on cash flow and dividend instead of just growth. In total there are over a dozen factors that affect the P/E of a stock and all of these are handled in depth here with real examples wherever possible. The following chapter deals with the critical topic of P/E expansion and P/E contraction and how stocks continue to fall even while their earnings keep on rising just because the P/E gets ahead of itself and why some stocks refuse to fall even after they become expensive. As like all discussions in this book this chapter is filled with real examples specific to the Indian context.

D) Strategies on buying and selling different types of stocks:

This section starts with why it isn't a great idea for investors to focus exclusively on small caps. The pitfalls of small cap investing, issues of survivorship bias and when it makes sense to focus only on small caps and when it makes sense to stick with the tried and tested large caps. This is followed by chapter - 28, which elaborately argues on the various filters that one should employ while buying potential multibaggers from the small and mid cap space. These filters range from business, sector positioning, management, growth, industry tailwind and extend into the financial analysis of these potential winners. Both chapters 24 and 28, argue on the reasons that causes a trend of rising revenues and increasing profits to break and why some companies from the same sector continue to grow even after the sector loses fancy even while the others fall by the wayside after that.

Everyone likes buying stocks that are falling from their highs which is in some cases akin to catching a falling knife. In this context a chapter has been added on when to catch these falling knives and when not to with a detailed explanation on the significance of the quality of the company and of the sector while catching these falling knives.

Chapter - 30, deals with my regrets on stocks that I saw but missed and how an average investor will always have more misses than hits but what matters is how much he manages to make from his hits rather than what he manages not to make from his misses.

Chapter - 31 ends the section with an elaborate discussion on when to sell. This chapter should be read along with chapter - 24 on stocks to avoid to get a more comprehensive picture on this most tricky aspect of investing. There are notes on when to sell a cyclical, when to sell banks and NBFCs and stocks to hold forever. My own experiences on how I have sold several of my stocks forms a significant part of this chapter.

E) Analysing different sectors:

This section starts with a chapter on evaluating the low P/E stocks that are related intimately to the basic economy and has a note on the specific attributes of stocks from sectors such as agriculture, auto, auto ancillaries, fertilisers, seeds, cement, power, hotels, infrastructure, capital goods and real estate. It ends with suggestions on how to evaluate diversified businesses and understanding spin offs. The subsequent chapter analyses companies with cash on balance sheet and the essential features of their analysis. This is followed by chapter 34 which has an exhaustive discussion on analysing banks and NBFCs and what to look for while evaluating these businesses. The NBFC space has been discussed with specific reference to gold lending companies, mortgages, consumer financiers etc. The following chapter deals with an argument on why commodity cyclicals are never a good long term play. It discusses on when it makes sense to hold them and when to fold them. Chapter - 36 has a writeup on valuing holding companies and the pitfalls thereof and why the discount of a holding company always remains. This is followed by chapter - 37 on how to deal with government or PSU shares. The section ends with chapter - 38 which lists down the points while analysing secular growth companies like consumers, IT and pharmaceuticals.

Each chapter in this section lists down the essential attributes of the sectors discussed and the safeguards that an investor should employ while analysing the same. The discussion also reflects on the valuation matrix to be used to ascertain whether the stocks in each of these sectors are valued rightly or not with the price that is reflected on the screen.

F) Portfolio Construction strategies:

This is a small section and starts with the gains and drawbacks of a concentrated and a diversified portfolio, the different sector and stock filters that investors need to adapt while constructing a portfolio, the way to assign weights for each of the stocks and the way to design a diversified portfolio. The discussion also has a note on the thoughts which make most first time investors lose money in the market. This chapter ends with an argument on when and how to buy and why there is no sin in buying a stock even after it has moved up from the initial buying price and why selling at a higher price to buy it back lower isn't always a good idea from the overall portfolio point of view. The following chapter deals with leveraging and why it could be an important part of investing. The kind of filters to be employed while leveraging a portfolio and the safeguards to be taken in case of an overall market decline.

G) The Final Word:

The book ends with chapter - 41 with a detailed point by point questionnaire that investors could employ while talking to the mnagement, dealers, distributors or in conducting their own research. These questions are segregated under the various heads and are focused on analysing the business model, industry scenario, government regulations, management, strategy, income statement (revenue, raw material, labour, administrative costs, margins, taxes net profit) and balance sheet (liabilities, assets, working capital and capital employed).

Date of launch: February 2014.

Edited by basant - 18/Jan/2014 at 10:21pm
'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now:
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Quote raviteja02 Replybullet Posted: 18/Jan/2014 at 10:35pm
Dear Basant

You have hit the nail right on its head. Bang on!! In fact, I have felt the same void that you have aptly put, most examples in all popular investment books are specific to non Indian markets which puts Indians in a tough spot to relate.

More importantly, it would be a different feeling to know your investment philosophy in greater insights and I'm waiting for the book with immense anticipation.

Wishing your book all the very success.
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Quote Janak.merchant1 Replybullet Posted: 18/Jan/2014 at 10:40pm
Superb Basant. Big Congrats. Will buy as soon as u launch.

Best wishes,

I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money.
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Quote rohit1889 Replybullet Posted: 18/Jan/2014 at 10:48pm
Wowwww !!! The synopsis you have put up signals that it will be terrific book to read. Eagerly waiting for it.

Basantji, one correction. This is your 2nd book. TED is the 1st one.
If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won't get bored.
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Quote subu76 Replybullet Posted: 18/Jan/2014 at 12:09pm
Congratulations Basant Sir. You are India's answer to Peter Lynch..a true rock star
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Quote Bhupan Replybullet Posted: 18/Jan/2014 at 1:18am
Thanks. Basantji for this writeup I would be waiting for this book.
Will it be available online?
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Quote krisheq Replybullet Posted: 18/Jan/2014 at 2:30am
Wow!! Thanks Basantji. Eagerly waiting to order. Reading your book will definitely enlighten millions of ordinary middle class Indians who also wish to be successful in investing in equities.

I wish you great success in this new venture into writing books. Hope you will continue writing few more books.
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Quote tigershark Replybullet Posted: 18/Jan/2014 at 5:20am
book release on 12th feb 2014!Smile
understanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things
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