Demystifying ROE- A lot to scratch beneath the surface

Return on Equity (ROE) is often hailed as the most important metric in judging the efficiency of a business. It is indeed an important metric. Legendary investors around the world have repeatedly highlighted ROE and its importance in investment decisions. One of the world’s most famous investors, Warren Buffett, has time and again expounded on the importance of ROE.

But the matter of fact is that very few new investors have a thorough understanding of ROE and its composition. So, the purpose of this piece of writing is to provide clarity on the concept of ROE and to lay down a practical framework as to how one should use the same to gain insights into the working of a business or an industry.

Simply put, ROE is a measure of profitability that calculates how many rupees of profit a company generates with each rupee of shareholders’ equity.

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8 Big Learnings from the Second Decade of Warren Buffett’s Investments

In one of our previous posts, we had written about this project of dividing all the letters of Warren Buffett into six parts representing six decades of Buffett’s investment journey. We also wrote about our learnings from the letters of Warren Buffett in the first decade (1957-1966).

This post is on our learnings from his letters in the second decade (1967-1976). For our readers’ convenience, just like the last time, we’ve put together an illustrated version of the letters. Please click here to download it.

Here are the eight big learnings from the second decade of Warren Buffett’s investment journey.

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An Introduction to Cement Industry for New Investors

The cement industry is one of the strategic and vital importance for every growing economy. The humble commodity of cement is used everywhere from construction or renovation of a standalone home to building giant skyscrapers and sea bridges which serve as testaments to human ingenuity and progress. Cement is the most widely used material in existence and is the 2nd most-consumed resource on Earth after water.

So we’ve created this report to simplify how cement industry work. This will definitely help the new investors wrap their head around the cement industry. We also cover the history of the cement industry in India and how the landscape has evolved over the years.

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An Introduction to Banking Industry for New Investors

Banks remain an enigma for new and inexperienced investors who are often clueless as to how to go about assessing them for a potential investment in the stock market.

It’s fair to say that banking is one of the toughest industries to understand for new investors.

So we’ve created this report to simplify how banks work. This will definitely help the new investors wrap their head around banking industry. We also cover the history of banking in India and how the landscape has evolved over the years.

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What We’re Reading

There is one activity that an investor can never over do — reading.

But it’s important that you read things that build your knowledge and help you make better investing decisions. Avoiding the noise is as crucial as reading the timeless stuff.

In this post, we’re sharing few good pieces that we came across this week …

Successful Investing Requires Both Humility And Arrogance

I would argue that an investor should have roughly equal doses of arrogance and humility to be able to perform well. The arrogance would allow him to stay apart from the crowd and believe in his own logic and objective reasoning, while humility would keep him grounded and not be seduced by hubris which would lower the quality of his investment decisions.

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What We’re Reading

There is one activity that an investor can never over do — reading.

But it’s important that you read things that build your knowledge and help you make better investing decisions. Avoiding the noise is as crucial as reading the timeless stuff.

In this post, we’re sharing few good pieces that we came across this week …

You have to live it to believe it

In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time (things like valuation and expected return). But that’s not what people do. The research showed that people’s lifetime investment decisions are heavily anchored to the experiences those investors had with different investments in their own generation – especially experiences early in their adult life.

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What We’re Reading

There is one activity that an investor can never over do — reading.

But it’s important that you read things that build your knowledge and help you make better investing decisions. Avoiding the noise is as crucial as reading the timeless stuff.

In this post, we’re sharing few good pieces that we came across this week …

When tech knows you better than you know yourself

Harari says, “I would say that, get to know yourself much better and have as few illusions about yourself as possible. If a desire pops in your mind don’t just say well this is my free will. I chose this therefore it’s good, I should do it. Explore much deeper. Secondly as I said join an organization. There is very little you can do just as as an individual by yourself. That’s the two most important pieces of advice I could give an individual who is watching us now.”

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What We’re Reading

There is one activity that an investor can never over do — reading.

But it’s important that you read things that build your knowledge and help you make better investing decisions. Avoiding the noise is as crucial as reading the timeless stuff.

In this post, we’re sharing few good pieces that we came across this week …

Stop Giving Investment Advice

So my advice is: take advice with a grain of salt. Especially at the early stages, where it’s more art than science. Get comfortable operating with a lot of variability and learn to trust your instincts.

 

An Opportunity Slowly Fading Away

A basic tenet of long-term investing is to look for high quality listed businesses. This essentially implies 1) they earn returns above cost of capital (reflected by return on capital employed), and 2) generate strong free cash i.e. they don’t require a lot of capital (fixed assets and/or working capital) to grow revenues and profitability. Those retained earnings can then be utilised either to acquire other companies in same line of business or diversify. Alternatively, excess capital could be returned to shareholders via dividends or buyback.

But have you ever wondered why would a promoter of such a business list his company as it involves diluting a significant chunk of his ownership to minority investors?

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What We’re Reading

A few good pieces the Smart Sync team came across this week …

Elmore Leonard’s 10 rules for writing.

Try to leave out the part that readers tend to skip. Think of what you skip reading a novel: thick paragraphs of prose you can see have too many words in them.

What is Amazon?

It started as an unbound Walmart, an algorithm for running an unbound search for global optima in the world of physical products. It became a platform for adapting that algorithm to any opportunity for customer-centric value creation that it encountered. If it devises a way to keep its incentive structures intact as it exposes itself through its ever-expanding external interfaces, it – or its various split-off subsidiaries – will dominate the economy for a generation. And if not, it’ll be just another company that seemed unstoppable until it wasn’t.

Weird things happening in Commerce, education, and politics

The media environment is like a crystal ball. By observing it, we can predict the future. Commerce will become quirkier, education will be overhauled, and politicians will increasingly look like anti-establishment celebrities. Industrial, Mass Media structures are obsolete and unfit for our new environment. Just as we cannot pick up a palm tree in Los Angeles and expect it to grow on the North Pole, systems from the Mass Media Age will not work in the Internet Age.

Noted value investor Tom Russo explains why he bought Google

In this podcast, Tom Russo covers buying Google now, comparing the company to Facebook, future growth opportunities starting from a large base, competition from Amazon, Google X’s long-term moonshots, and related stories in Tom’s portfolio companies Philip Morris and Nestle.

Astute value investor Jatin Khemani shares his key observations from analyzing market leaders across industries in India

Average age of these 60 companies is about 60 years. Moreover, 18 businesses have been in existence from the pre-independence era. The oldest of the lot is United Spirits (McDowell’s) which is 193 years old, followed by United Breweries (Kingfisher) which is 162 years old. This shows that it takes an enormous amount of time for any business to scale up and attain leadership and that there is simply no shortcut. There are only three businesses that came into existence in the 21st century – MCX (2002), IEX (2006) and Interglobe Aviation (2006).

If you’ve read something interesting, feel free to share it with us.