This document provides tips for improving investment acumen. It recommends understanding accounting and financial statements, valuing companies using discounted cash flow analysis, comprehending a business's unit economics and profit drivers, comparing fundamentals to market expectations, thinking in terms of probabilities rather than certainties, constantly testing investment theses, guarding against cognitive biases, following a disciplined portfolio allocation process, and dedicating time each day to reading broadly. The overall aim is to gain proficiency in analyzing companies and making well-informed investment decisions.
2. 1. UNDERSTAND ACCOUNTING
You have to be able to read financial statements
Use financial statements to understand how the business is doing and correlating management commentary to
reality
Reference:
http://www.investopedia.com/university/fundamentalanalysis/
Dr Anil Sharma of IIT Roorkee on Financial Reporting and Analysis- 60 sessions of roughly 30 min each
https://www.youtube.com/watch?v=OT5RdoJAkhY&list=PLPjSqITyvDeUTeAOGhip_ubjN3y8oqT13
3. 2. UNDERSTANDVALUE
Intrinsic value is the present value of all future cash flows
Drivers of value
Cash flow (certain for bonds, uncertain for equities)
Timing (certain for bonds, uncertain for equities)
Risk (uncertain for bonds, uncertain for equities)
Focus on understanding the magnitude and sustainability of free cash flow
Industry life cycle
Competitive position
Entry barriers
Economics of the business
Capital allocation skills of management
1. Understand DCF process
2. Study companies in an
industry together
3.Talk to industry experts
4. 3. UNDERSTAND HOWTHE BUSINESS MAKES MONEY
Understand the basic unit economics – different for different industries
Understand the drivers of profitability
Understand the drivers of sustainability of profitability and return on capital
Read reports from KPMG, PwC,
EY, BCG, IBEF etc and try to
understand business models
Understand the inputs and
outputs of the business and how
one part affects other parts
5. 4. COMPARE FUNDAMENTALS WITH EXPECTATIONS
Fundamental value is different from the value that is already in the price
Price has embedded future expectations of all market participants
Significant money can be made only if there is “variant perception”
1. Read “Expectations Investing”
2. Don’t chase story stocks
without understanding or
conviction
6. 5.THINK IN PROBABILITIES
Nothing is certain
Focus on the process and not on individual outcomes
Magnitude of win vs loss matters more than frequency
You can lose money in large cap
established companies
Never be out of the market
7. 6. CONSTANTLY TESTYOUR THESIS
All investments are based on a thesis
No investment thesis is always sacrosanct
Seek non-confirming evidence
Update your thesis when new information arrives
Follow quarterly results
Follow the competitors
8. 7. BE CAREFUL OF MENTAL BIASES
Behavioral biases like endowment effect, loss aversion, sunk cost fallacy are
very powerful
Checklist based approach
Written down process
Use frameworks for stock selection, portfolio allocation, selling decisions etc
https://fs.blog/mental-models/
excellent compilation of mental
models
QGLP Model for stock selection
9. 8. PORTFOLIO ALLOCATION IS KEY
Investing has two components
Identifying a great opportunity
Meaningful allocation to it
Increased allocation with higher conviction and better prospective payout
Following a rule based approach with a minimum and maximum stock and
sector allocation for risk management purposes
Learning to average up with
increased conviction
Reducing allocation / selling
when valuation is extreme or
conviction reduces
https://forum.valuepickr.com/t/to
wards-a-capital-allocation-
framework/504
Valuation & Conviction matrix
10. 9. READ MORE
Allocate dedicated time to read every day
Read across a wide spectrum of disciplines – business, history, biographies, sociology, psychology etc
Read material which is opposite your point of view and try to understand the opposing perspective
Pursue active reading
