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I generally analyse a good number of companies before investing in a few. A lot of times i am not able to figure out, with reasonable confidence, the range of intrinsic value estimates for the company. I have had this problem with telecom, retail companies etc. These are companies in a new, sunrise industry. There is a lot of promise and enthusiam around the companies and the valuations may reflect that. I do not have a doubt that these companies and industries will do well. The problem for me is figuring out how well, and how much of that is already built into the stock price.

On the other end are companies which are essentially conglomerates or a combination of businesses such as Reliance, IOC etc. These are in mature industries and are good companies. They may very well be undervalued. The problem for me is that they have a lot of moving parts. IOC has a 400 page annual report, relaince has (or used to have) a lot smaller businesses such as telecom, asset management and now retail etc. So analysing these companies would mean taking apart each of the sub-businesses, valuing each of them separately and then arriving at the whole value. Impossible …no, but definitely tough and a lot of work.

Compare that to the simple (as least to me) businesses such as castrol (lubes), Lanxess ABS(ABS), marico (FMCG), asian paints (paints), concor etc. I could go on and on. These companies are engaged in a single line of business, nationally or in some cases in international markets. They have a decent operating history, dominant position in a stable market, and in some cases attractive valuations. To boot, some even have a small annual reports to analyse (just joking!).

I have invested in both the complex and in the simple businesses (avoided the sunrise type industry as I don’t have a better idea of these businesses). Overall, I found that the simple businesses are easier to understand, to follow on a regular basis and in the end give good returns.

I am clearly influenced by the following quote by warren buffett

“Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn’t count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.”

So if I have an option between a diffcult to understand, complex conglomerate and a simple business(all else being the same), I generally opt for the simpler business.

I have been doing an analysis of my past stock picks and comparing my notes with how the stock picks have turned out over time.

I have been able to divide my picks into broadly three groups

Group A – The multibaggers. These were picks like concor, marico , asian paints, blue star etc. I had no inkling that these companies would do so well and the stock price would appreciate multiple times over the last few years when I first analysed and purchased the stocks. However on deeper analysis I found that the key reason the pick turned out well was due to a double dip I received. First the gap between the intrinsic value and the stock price closed. At the same time, these companies have been able to increase their intrinsic value through some great perfromance in the last couple of years. As a result of these two happy occurences, I have been able to get good profits

Group B – Good return stocks. These were picks like kothari products, macmillan, KVB bank etc. In case of these picks there was a narrowing of the gap between stock price and intrinsic value. As a result I was able to get decent returns as a whole. However in some cases where I was late in selling the stock, the eventual returns were lower.

Group C – The dogs. These were picks like Larsen and tubro (ouch !! see here), SSI, arvind mills etc. Each pick had its own reason for going wrong from over paying for the stock, poor performance of the business, sloppy analysis etc.

The above analysis is definitely not earth shattering and I have known it vauguely for some time. But after almost 8-9 years of buying, selling and analysing stocks, I thought of doing some analysis so as to improve my future performance.

Ofcourse the logical conclusion would be to always buy stocks in group A. However most of the stocks in that group seem to be fairly or over priced. I am finding more picks in group B. Not too exicted about it, but beats overpaying for quality stocks or picking dogs. Key point for me to remember would be to sell these stocks in time if they do not show promise of improvement in intrinsic value