Dear Anand .. If I see the general Patterns in your writing you don't think banks are great business... Am I right in my understanding that you avoid banks and NBFC completely irrespective of how strong the track record and other traits are....?
Your understanding is directionally correct, except for the 'irrespective' part. A single-digit # of banks/NBFCs are trustworthy, competent and investable. Generally, as an industry, I view is as high-risk, with that risk being under-appreciated most of the time. Petty pickpockets look like statesmen on the way up. In good times, everyone goes nuts: bankers, their borrowers, liquidity, us investors, regulators. When the party ends, it goes nuts in a different way: opacity, evergreening, accounting fraud, bail-outs, shotgun marriages. At both ends, there's a multipicative, feedback-loop angle that magnifies the combined nuttiness of individual factors. In a dodgy, opaque place with extreme swings, I'd double down on safety-margin, on both company-choice & what I'd pay.
Fantastic essay. If one had to ask, "What one question does this essay answer?", My response would be "Why are P/E ratios meaningless?"
The minutiae that go into selecting the sector, industry, and the company include an implicit margin-of-safety component. Even if they may not provide the rationalizing brain a reason/meaning as is the case in a late stage check.
"Except the final stage, every check is qualitative, asking the question “Safe enough?” summarises it perfectly. Came across this thought process while reading Seth Klarman's posts. A common fallacy people commit, he highlights, is using Margin of Safety as a lazy way to account for all the "known-unknowns". His 'at least 40% MOS' approach is rather for the "unknown-unknowns". Always found that really powerful.
"A final layer of safety is added by linking valuation to real financials, in an empirically-grounded manner." This sentence is not clear, can u elaborate, please?
Thanks a lot. I really hope sometime you write an article about how do you go about valuations without even thinking about growth.. Looking forward.....Really appreciate your taking the time in writing this blog. Please continue writing....Finally going through all the articles.. I was painful on linked to follow the articles..so thanks again in making it easy to follow.....
Thanks a ton... This is one of the superb essays I have read till date.. Lots of wisdom packed in 14 pages.. As usual, I have a few questions, but will reserve it for when you post this essay here.....
Dear Anand .. If I see the general Patterns in your writing you don't think banks are great business... Am I right in my understanding that you avoid banks and NBFC completely irrespective of how strong the track record and other traits are....?
Your understanding is directionally correct, except for the 'irrespective' part. A single-digit # of banks/NBFCs are trustworthy, competent and investable. Generally, as an industry, I view is as high-risk, with that risk being under-appreciated most of the time. Petty pickpockets look like statesmen on the way up. In good times, everyone goes nuts: bankers, their borrowers, liquidity, us investors, regulators. When the party ends, it goes nuts in a different way: opacity, evergreening, accounting fraud, bail-outs, shotgun marriages. At both ends, there's a multipicative, feedback-loop angle that magnifies the combined nuttiness of individual factors. In a dodgy, opaque place with extreme swings, I'd double down on safety-margin, on both company-choice & what I'd pay.
Fantastic essay. If one had to ask, "What one question does this essay answer?", My response would be "Why are P/E ratios meaningless?"
The minutiae that go into selecting the sector, industry, and the company include an implicit margin-of-safety component. Even if they may not provide the rationalizing brain a reason/meaning as is the case in a late stage check.
"Except the final stage, every check is qualitative, asking the question “Safe enough?” summarises it perfectly. Came across this thought process while reading Seth Klarman's posts. A common fallacy people commit, he highlights, is using Margin of Safety as a lazy way to account for all the "known-unknowns". His 'at least 40% MOS' approach is rather for the "unknown-unknowns". Always found that really powerful.
I love the way you construct these posts. Simple, informative and straight-from-the-heart. Keep them coming. :)
"A final layer of safety is added by linking valuation to real financials, in an empirically-grounded manner." This sentence is not clear, can u elaborate, please?
No forward/FY23 PE multiple nonsense
Thanks a lot. I really hope sometime you write an article about how do you go about valuations without even thinking about growth.. Looking forward.....Really appreciate your taking the time in writing this blog. Please continue writing....Finally going through all the articles.. I was painful on linked to follow the articles..so thanks again in making it easy to follow.....
Towards the end of this very long pdf, I discuss this under "narrowing it down to an answer" https://www.linkedin.com/posts/anand-sridharan-8aba23_elements-of-sound-judgment-long-form-version-activity-6685407352247607296-vNAL
Thanks a ton... This is one of the superb essays I have read till date.. Lots of wisdom packed in 14 pages.. As usual, I have a few questions, but will reserve it for when you post this essay here.....