Fraud detection

Notes from 8iholdings.com investment division update int
on the topic fraud detection is very interesting. Need to keep an eye on these aspects while analysing the company.

Learning’s from Berkshire Hathway annual letter 1982

Warren Buffett in his 1982 letter to investors, talking about two of his managers Phil Liesche and Ben Rosner, he wrote –

Both Ben and Phil ran their businesses for Berkshire with every bit of the care and drive that they would have exhibited had they personally owned 100% of these businesses. No rules were necessary to enforce or even encourage this attitude; it was embedded in the character of these men long before we came on the scene. Their good character became our good fortune. If we can continue to attract managers with the qualities of Ben and Phil, you need not worry about Berkshire’s future.

The lesson for an investor is that in stock market, you’re not just in the business of finding good businesses. Your real job is to find people who are running good businesses. That brings good fortune.

Lupin - what the badshah of dala street, Mr. Rakesh Jhunjhunwala did in FY 2016

We all know that Indian Warren Buffett, Mr. Rakesh Jhunjhunwala has a major investment in the Lupin. So I was curious to check whether he appears in the top 10 investors list. I took the annual report of Lupin for financial year 2016 and checked the section 'Shareholding pattern of top 10 shareholders" on page 93, there his name appears at the top holder. Next thing that I did was to glance at a page long transaction list of his trades.

My curiosity lead me to see what happens when Rakesh Jhunjhunwala buy or sell (small quantity) of his holdings in the market. Will he buy exactly at bottoms and sell at the peaks? Or he is also like any of us who will buy at the top and sell at the bottom? Or it is just random.

So I took all his trades from the annual report and plotted them on the price chart. Left hand axes represent the price while the right hand represented the quantity of his trade. Stars appearing above the Red horizontal line are the buy and below the line are the sells.

Now the analysis and interpretation of this .... well I'll leave it to you.

If anyone needs the data in a excel sheet then you can let me know and I can share the same.

Nifty intraday 26-08-2016

Our earlier views on Nifty about the triangle formation became invalid. I'll write a detailed note on this one over the weekend (Impact of the per-conceived notion on the Elliott wave analysis )

The fresh look at the hourly chart shows that we are either in 'C' of the 4th wave or on the 3rd wave of the bigger fall. For now we will go ahead and perceive the 'C' wave and will look into the 3rd wave possibility only if this wave does not end near 8410 region.

Nifty hourly chart:

The Halo Effect:

An article by JASON ZWEIG

"

In both cases, what psychologists have christened the "halo effect" was at work. In this quirk of the human mind, one powerful impression spills over onto our other judgments of a situation. The effect was first documented in the U.S. Army decades ago, when soldiers who earned high scores from commanders for one quality (such as neatness) also got high marks for entirely unrelated qualities (such as loyalty and physical strength).

Halos can be cast by many aspects of a company. Consumers who know a firm is highly profitable are more likely to believe its products are high-quality and its advertising honest. That helps build loyalty among customers, making companies more resistant to competition. And if you love a company's products, it is natural to conclude that it has superior management, too. 

"

He goes on to write the following to overcome halo effect while analysing a business/stock:
"

You can adapt a procedure described by the Nobel Prize-winning psychologist Daniel Kahneman—who is widely admired for his insights into decision-making—in his forthcoming book, "Thinking, Fast and Slow." Start by identifying a handful of objective factors that you believe can predict superior returns. You might, say, include low debt as a percentage of total capital, stable earnings growth, high return on equity, low price relative to earnings and a history of raising prices without losing customers.

For any prospective investment, rate each of these financial factors on an identical scale—say, from 0 at the bottom to 5 at the top. Then add a final, subjective factor: your overall intuitive impression of each company and its management, rating them on the same scale. Finally, total all the scores and divide by the number of factors; the company with the highest average is the one you should favor.

"

Detailed article can be read here.

Infosys EOD 25-08-2016

Elliott wave analysis of Infosys we saw that a 5 wave down move was ending (earlier analysis can be found here). Further to that Infy seems to have done a small 5 wave upmove followed by 3 wave decline today.

Infosys Elliott Wave analysis on 1 min chart:

Nifty EOD 25-08-2016

Nifty 1 min chart shows clearly how this a-b-c up move has played out. This over shoot the triangle trend line, just to complete the 'D' wave. And return back into the trend line, indicating the false breakout!

Nifty 1 min chart zoomed in:

Nifty 1 min chart showing the entire triangle formation:

Now let us step back and observe the hourly chart and hourly 9 RSI chart:

 Nifty hourly chart with 9 RSI
We can observe the triangle pattern in the RSI data as well!

Nifty intraday 25-08-2016

Nifty hourly chart shows a possible triangle completion. Current upmove from the low of 8590 appear like the next leg of the up move, a part of the 5th wave up. This has a potential to go up near 8880 range. However there are lot of resistance clusters above 8700 range. Today being the expiry day, market may swing dramatically in either direction!

We need to closely observe the breakout region near 8660 - 8680 range. If comfirtably moves above this then the breakout is confirmed. It may also spend more time in the region resting on the downward sloping upper trend line of the triangle in a pull back. However moving below 8650 will be a concern for this breakout.

Nifty hourly chart with Elliott Wave analysis:

Nifty hourly chart with 9 RSI:

Nifty end of the day 24-08-2016

Nifty after completing a complex correction involving abc-x-abc has moved swiftly in 5 wave form above the channel line starting at 2:07 pm. At the closing Nifty has completed a minor 5 wave up move followed by a minute 5 wave down move which represents wave 'a'. Then a very small 7 point upmove. This could be wave 'b' or it might still be going on tomorrow morning at the opening.

Two options can be seen at the opening tomorrow:
1. A very small upmove which should be contained below 8659.90 (beginning of the down move) then a swift down move may follow. That will complete the correction for the rise from 8620.90 to 8659.90. Then further upmove may commence.

2. A very swift down move which may go near 8642 which is 61.8% fibonacci extension or 100 at 8636.  That will complete the correction for the rise from 8620.90 to 8659.90. Then further upmove may commence.

Nifty intraday update 24-08-2016

Nifty seems to have not completed the correction before lunch (Nifty intraday 24-08-2016), but it was only one part of the complex correction abc-X-abc.

Nifty chart:

Nifty intraday 24-08-2016

Nifty seems to have completed a correction in the form of a-b-c for the rise from 8580.95 to 8661.05. This 'c' wave may complete near 8616 (or is already completed?). This may also go up to 8610.9 which is 61.8% fibonacci retracement level for the rise. At the completion this also looks like a pole and flag formation.

Nifty 1 min chart:

Infy (Infosys) completed a five wave down move in daily chart

Infy appears to have completed a 5 wave down move in (Elliott Wave) daily chart. This could be seen as a wave 1 or wave 'a' of the overall down move.

What does this mean to us as traders?
It means an a-b-c correction to follow. The direction of this move will be upwards. This abc could be part of wave 2 or wave 'b'. in either case the direction will be upwards.

Infy daily chart:

Nifty intra day 23-08-2016

Nifty seems to have completed a complex correction (in 5 min chart) a form abc-X-abc.

Nifty 5 min chart with Elliot wave analysis:

Notes from Guide to Investing - Robert T Kyosaki

When people ask how they can gain leadership skills, I always say the same thing: “Volunteer more”. In most organizations, it is hard to find people who actually want to lead. More people just hide in the corner hoping no one will call on them. I tell them, “At your church, volunteer to take on projects. At work, volunteer to lead projects.” Now, volunteering alone will not necessarily make you a leader, but if you accept the feedback and correct yourself well, you can grow into a great leader.

Through volunteering, you can get feedback on your real-life leadership skills. If you volunteer to lead and no one follows, you have some real-life learning and correcting to do. If you volunteer to lead and no one follows, ask for feedback and corrective support. Doing so is one of the greatest traits of a leader. I see many business that struggle or fail because the leader will not accept feedback from peers or the workers un the company. My squadron’s commanding officer in the Marine Corp would often say, “True leaders are not born leaders. True leaders want to be leaders and are willing to be trained to be leaders, and training means being big enough to take corrective feedback.”

Learning’s from Berkshire Hathway annual letter 2011

I was wondering what lead Warren Buffett to purchase IBM shares in the year 2011? I was thinking, probably it is the free cash flow it was generating or probably the consistently increasing dividend payment or the share repurchase policy of the company. But I was mesmerised by the clear thinking that Buffett had on the logic behind the IBM purchase. He answered it in the 2011 Berkshire Hathway annual letter from Warren Buffett. I’ll reproduce the text from the annual report below:

“This discussion of repurchases offers me the chance to address the irrational reaction of many investors to changes in stock process. When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well. A corollary to this second point: “Taking our book” about a stock we own – were that to be effective – would actually be harmful to Berkshire, not helpful as commentators customarily assume.

Lets use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their operational accomplishments were truly extraordinary.

But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.

Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us. Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?

I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the fine years.

Lets do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps #1 ½ billion more than if the “high-price” repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behaviour to know the futility of that – but we do want you to be aware of our personal calculus. And here a confession is in order: In my early days I, too, rejoied when the market rose. Then I read Chapter Eight of Ben Graham’s The intelligent Investor,  the chapter dealing with how investors should view fluctuation in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.

In the end, the success of our IBM investment will be determined primarily by its future earnings. But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will abandon my famed frugality and give Berkshire employees a paid holiday.”

Balmer Lawrie at the resistance line

Balmer Lawrie is at the resistance line for the 3rd time now. If it is able to cross this line firmly and hold above it, around 690 range then it may be considered as breakout. If not it may again re-visit its support zone near 500-540.

Following is the weekly chart of Balmer lawrie:

Loss aversion

Loss aversion also explains the behaviour of gamblers (and day traders and even stock market investors) who become risk seeking immediately after experiencing a string of losses. They will do almost anything just to “get back in the game.”

This tendency almost all the times causes traders to taken undue risk interms of :
1. Taking a trade which has a very poor setup.
2. Risking more capital than their system allow them.

As a result of these the trader will end up making further losses. This is a vicious circle. Sure recipe for disaster. A trader or an investor need to identify these tendencies and should have strict self imposed rules to resist themselves from doing any of these. That is the only way to create wealth and preserve it.

I Can Sleep When The Wind Blows

Years ago a farmer owned land along the Atlantic seacoast. He constantly advertised for hired hands. Most people were reluctant to work on farms along the Atlantic. They dreaded the awful storms that raged across the Atlantic, wreaking havoc on the buildings and crops.

As the farmer interviewed applicants for the job, he received a steady stream of refusals. Finally, a short, thin man, well past middle age, approached the farmer. "Are you a good farm hand?" the farmer asked him. "Well, I can sleep when the wind blows," answered the little man. Although puzzled by this answer, the farmer, desperate for help, hired him.

The little man worked well around the farm, busy from dawn to dusk, and the farmer felt satisfied with the man's work. Then one night the wind howled loudly in from offshore. Jumping out of bed, the farmer grabbed a lantern and rushed next door to the hired hand's sleeping quarters.

He shook the little man and yelled, "Get up! A storm is coming! Tie things down before they blow away!" The little man rolled over in bed and said firmly, "No sir. I told you, I can sleep when the wind blows."

Enraged by the response, the farmer was tempted to fire him on the spot. Instead, he hurried outside to prepare for the storm. To his amazement, he discovered that all of the haystacks had been covered with tarpaulins.

The cows were in the barn, the chickens were in the coops, and the doors were barred. The shutters were tightly secured. Everything was tied down. Nothing could blow away. The farmer then understood what his hired hand meant, so he returned to his bed to also sleep while the wind blew.

Proxy advisory firms

What are they and how we can benefit from them?
These are independent research firms giving their opinion on corporate actions such as AGM, voting etc by individual shareholders. They analyse a particular action and release their opinion (paid as well as free in some cases) about the event.

As an individual shareholder we can use these information to analyse the merits of voting in favor or against a particular coporate event in AGM, EGM, postal voting etc. Also the information produced can help us while analysing a particular company for investment.

 A list of three independent research firms posted by Mr. Manish is available in SlideShare in the below link
http://www.slideshare.net/ManishTulsian/proxy-advisory-firms-in-india

My learnings from Warren Buffett's Berkshire Hathway annualre report 2010

Warren Buffett writes in 2010 annual report about how to calculate the intrinsic value of Berkshire Hathway. The same approach or the method can be adopted by us while reviewing or valuating business. 

“Though Berkshire’s intrinsic value cannot be precisely calculated, two of its three key pillars can be measured. Charlie and I rely heavily on these measurements when we make our own estimates of Berkshire’s value.

The first component of value is our investments: stocks, bonds and cash equivalents. At yearend these totalled $158 billion at market value.

Insurance float – money we temporarily hold in our insurance operations that does not belong to us – funds $66 billion of our investments. This float is “free” as long as insurance underwriting breaks even, meaning that the premiums we receive equal the losses and expenses we incur. Of course, underwriting results are volatile, swinging erratically between profits and losses. Over our entire history, though, we’ve been significantly profitable, and I also expect us to average breakeven results or better in the future. If we do that, all of our investments – those funded both by float and by retained earnings – can be viewed as an element of value for Berkshire shareholders.

Berkshire’s second component of value is earnings that come from sources other than investments and insurance underwriting. These earnings are delivered by our 68 non-insurance companies, itemized on page 106. In Berkshire’s early years, we focused on the investment side. During the past two decades, however, we’ve increasingly emphasized the development of earnings from non-insurance business, a practice that will continue.

The following table illustrate this shift. In the first table, we present per-share investments at decade intervals beginning in 1970, three years after we entered the insurance business. We exclude those investments applicable to minority interests.

Yearend	Investments ($)	Period	Compounded Annual Increase in Per-share Investments
1970	66
1980	754	1970-1980	27.5%
1990	7,798	1980-1990	26.3%
2000	50229	1990-2000	20.5%
2010	94730	2000-2010	6.6%

Though our compounded annual increase in per-share investments was a healthy 19.9% over the 40-year period, our rate of increase has slowed sharply as we have focused on using funds to buy operating businesses.

The payoff from this shift is shown in the following table, which illustrates how earnings of our non-insurance businesses have increased, again on a per-share basis and after applicable minority interests.

Year	Per-Share Pre-Tax Earnings	Period	Compounded Annual Increase in per-Share Pre-Tax Earnings
1970	2.87
1980	19.01	1970-1980	20.8%
1990	102.58	1980-1990	18.4%
2000	918.66	1990-2000	24.5%
2010	5926.04	2000-2010	20.5%

For the forty years, our compounded annual gain in pre-tax, non-insurance earnings per share is 21.0%. During the same period, Berkshire’s stock price increased at a rate of 22.1% annually. Over time, you can expect our stock prices to move in rough tandem with Berkshire’s investments and earnings. Market price and intrinsic value often follow very different paths – sometimes for extended periods – but eventually they meet.

There is a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently employ. Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.

This “what-will-they-do-with-the-money” factor must always be evaluated along with the “what-do-we-have-now” calculation in order for us, or anybody, to arrive at a sensible estimate of a company’s intrinsic value. That’s because an outside investor stands by helplessly as management reinvests his share of the company’s earnings. If a CEO can be expected to do this job well, the reinvestment prospects ad to the company’s current value; if the CEO’s talents or motives are suspect, today’s value must be discounted. The difference in outcome can be huge. A dollar of then-value in the hands of Sears Roebuck’s or Montgomery Ward’s CEOs in the late 1960s had a far different destiny than did a dollar entrusted to Sam Walton.”

Basically Buffett is suggesting us to value the business as three components:

1.       Investments

2.       Operational business

3.       Utilisation of retained earnings

Generally in the business that we will be evaluating, the order of these three elements will be

1.       Operational business or income from main operations

2.       Investments – income from investments. These will be typically in liquid mutual funds or fixed deposits (FDs)

3.       Utilisation of the retained earnings