Thursday, May 15, 2014

How does moat grading work?

Several readers have asked me how I set a grade for the moat? I will try to describe this process and please pardon me if its a bit subjective as that's the nature of the exercise.

A moat grading system is required, much like a checklist is required, to keep the analyst or investor unbiased and rational. Without a system like this the analyst might have a tendency to apply his or her own biases to the moat grade - for example if I like to eat a particular kind of food product from a company I might ignore some of the factors such as employee relationships in the moat grading system.

Overall the moat grading system currently has 8 factors. Each of these factors is graded at -1, 0 or 1 basically suggesting non-existent or negative moat, weak moat and strong moat in the particular factor. Then the total score is divided by 8 to get a percentage. I have percentage ranges mapped for grades.

Sunday, May 11, 2014

Real estate vs equity markets: Value strategy

Often I find myself in discussions with family, friends and professionals on whether value investing is possible in the real estate markets. Several who are having this discussion believe that the equity markets have lots of cases of fraud and high risk whereas real estate is a monotonically increasing function. While this is not exactly true one can understand why people think so.


Real estate prices are very specific to the unit you own. Despite the advent of online websites like and accurate prices are not available daily. Bid ask spreads can be as high as 10% and even if there is volatility in the market it is very difficult to experience it as an investor. Equity prices on the other hand are experienced daily on TV, on websites, in the newspapers and all around by investors and thereby lots of volatility is experienced by the investor.

Volatility as you know is the value investor's friend and enables you to buy cheap businesses in several situations and is the reason why value investors typically stick to equities.

Monday, May 5, 2014

IGValue portfolio: Apr 2014 lessons & review

One of the goals of the IGValue blog is for me to keep it real by quantitatively measuring my performance and learning from my mistakes. So every month I try to review progress and make a list of things I have learnt. 

Lessons this month

  • The volume of companies to be reviewed needs to be very large to find even a few good ones
  • Stock screens like low P/E and high returns on capital have lots and lots of errors and need to be carefully used
  • Discipline is the key in keeping away from Companies on the edge - where the moat maybe just short or the price may be just a bit high (margin of safety is there but not enough)
  • Discount to market QIP (Qualified Institutional placement) puts retail & small investors at a disadvantage and necessarily does not drive prices down
  • Moat grading needs to be more mathematical as personal bias is likely to creep in without it

Saturday, May 3, 2014

Macro factors: Total Market cap to GDP ratio & index P/E

In general several people use several metrics to judge whether the market in general is irrationally exuberant. The ones I personally like are:
  • Sensex/NIFTY overall price to earnings ratio
  • Total market cap of listed stock to GDP ratio
Much like most macro factors both of these are gross approximations and should be used with caution. They do not under any circumstance form the basis of a trading strategy but just as a cross check to see if you are doing the right thing by holding on to a large invested position or cash position.

Friday, May 2, 2014

Heritage Foods - decent moat that shows promise but not yet in the greats

I love the dairy business and am always trying to find dairy companies to buy. It is one that takes an enormous doing to gain the customers' trust, inventories have to be held low as the goods are perishable and once you are established you can charge the earth for that trust. Nestle in India charges its customer huge premiums for consistent quality of milk and its products across the length and breadth of the country. Unfortunately Nestle trades at wild premiums at all times and it is unlikely that I will ever get to own Nestle. I analysed Kwality dairy for you and that didn't turn out to have a great moat so lets now look at Hertitage foods!

Heritage foods was established by N Chandrababu Naidu (who is know to have convinced Microsoft to setup a huge center in Hyderabad) in 1992. The dairy business is hugely profitable and all the other businesses seem to be losing money. As a dairy I think it might be one of the better run businesses and is a supplier to Nestle as well.