Arthur Zeikel: Financial Wisdom Letter

From Arthur Zeikel (Father) to Jill Anne Zeikel (Daughter).

Date: Oct. 17, 1994

Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal by balancing one’s risk-tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time-consuming, money11requiring discipline, patience, and consistency of application. Too many investors fail to follow some simple, time-tested tenets that improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an uncertain undertaking.

I hope the following advice will help:

A fool and his money are soon parted. Investment capital becomes a perishable commodity if not handled properly. Be serious. Pay attention to your financial affairs. Take an active, intensive interest. If you don’t, why should anyone else?

There is no free lunch. Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns relate to inflation. Better to be safe than sorry. Most investors underestimate the stress of a high-risk portfolio on the way down. Don’t put all your eggs in one basket. Diversify. Asset allocation determines the rate of return. Stocks beat bonds over time.

Never overreach for yield. Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun (Ray DeVoe). Spend interest, never principal, If at all possible, take out less than comes in. Then a portfolio grows in value and lasts forever. The other way around, it can be diminished quite rapidly.

You cannot eat relative performance. Measure results on a total return, portfolio basis against your own objectives, not someone else’s.

Don’t be afraid to take a loss. Mistakes are part of the game. The cost price of a security is a matter of historical insignificance. Averaging down, which is different from dollar cost averaging, means the first decision was a mistake. It is a technique used to avoid admitting a mistake or to recover a loss against the odds.

When in doubt, get out. The first loss is not only the best but is also usually the smallest.

Watch out for fads. Hula hoops and bowling alleys (among others) didn’t last. There are no permanent shortages (or oversupplies). Every trend creates its own countervailing force. Expect the unexpected.

Act. Make decisions. No amount of information can remove all uncertainty. Have confidence in your moves. Better to be approximately right than precisely wrong.

Take the long view. Don’t panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesn’t work. Recognize the rhythm of events.

Remember the value of common sense. No system works all of the time. History is a guide, not a template.

This is all you really need to know.


(When this article was originally published in 1995, Arthur Zeikel was president of Merrill Lynch Asset Management in New Jersey)


Some More Lynch Gyaan

Know the Fundamentals

One of the main principle of Lynch’s stock-picking approach is to focus only on the company’s fundamentals and not the market as a whole. Lynch doesn’t believe in predicting markets, but he believes in buying great companies–especially companies that are undervalued and/or underappreciated. One might say Lynch advocates looking at companies one at a time using a “bottom up” approach rather trying to make difficult macroeconomic calls using a “top down” approach.

Lynch believes that investors can separate good companies from mediocre ones by sticking to the fundamentals and combing through financial statements to find profitable firms with solid business models. He suggests looking at some of the following famous numbers, which happen to be many of the same numbers that stock analysts at Morningstar look for.

Percent of Sales. If your interest in a company stems from a specific product, be sure to find out if it represents a meaningful percent of sales. It doesn’t make sense to remain interested if this number is inconsequential.

Year-Over-Year Earnings. Look for stability and consistency in year-over-year earnings. In the long run, a stock’s earnings and price will move in tandem, so look for companies with earnings that consistently go up.

Earnings Growth. Make sure a company’s earnings growth reflects its true prospects. High levels of earnings growth are rarely sustainable, but high growth could be factored into a stock’s price.

The P/E Ratio. Think of the P/E ratio as the number of years it will take the company to earn back your initial investment (assuming constant earnings). Keep in mind that slow growers will have low P/E ratios and fast growers high ones. It is particularly useful to look at a company’s P/E ratio relative to its earnings growth rate (PEG ratio). Generally speaking, a P/E ratio that’s half the growth rate is very attractive, and one that’s twice the growth rate is very unattractive. Avoid excessively high P/E ratios and remember that P/E ratios are not comparable across industries. However, comparing a company’s current P/E ratio with benchmarks such as its historical P/E average, industry P/E average, and the market’s P/E can help you determine if the stock is cheap, fully valued, or overpriced.

The Cash Position. Look for a company’s cash position on the balance sheet. A strong cash position affords a company financial stability and can represent a built-in discount for investors in the stock.

The Debt Factor. Check to see if the company has significant long-term debt on its balance sheet. If it does, this could be a considerable disadvantage when business is good (can’t grow) or bad (can’t pay the interest expense).

Dividends. If you are interested in dividend-paying firms, look for those that have the ability to pay out dividends during recessions and a long track record of regularly raising dividends.

Book Value. Remember that the stated book value often bears little relationship to the actual worth of the company, because it often understates or overstates reality by a large margin.

Cash Flow. Always look for companies that throw off lots of free cash flow, which is the cash that’s left over after normal capital spending.

Inventories. Make sure that inventories are growing in line with sales. If inventories are piling up and sales stagnating, this could be an important red flag. Inventories are particularly important numbers for cyclical firms.

Some Lynch Gyaan

Stick to What You Know

Investing in what you know about and understand is at the core of Lynch’s stock-picking approach. This particular investment principle served Lynch very well in practice. Lynch invested only 51yna9svcnl-_sx328_bo1204203200_in industries he had a firm grasp on, such as the auto industry.

Lynch has pointed out that you will find your best investment ideas close to home. He claimed, “An amateur investor can pick tomorrow’s big winners by paying attention to new developments at the workplace, the mall, the auto showrooms, the restaurants, or anywhere a promising new enterprise makes its début.” Lynch’s main point here is to look around you, because that’s where you are most likely to find your winners.


Do Your Research and Set Reasonable Expectations

The second key principle in Lynch’s investment philosophy is that you should do your homework and research the company thoroughly. Lynch remarked, “Investing without research is like playing stud poker and never looking at the cards.”

He recommends reading all prospectuses, quarterly reports, and annual reports etc. If any pertinent information is unavailable in the annual report, Lynch says that you will be able to find it by calling the company, visiting the company, or doing some grass roots research, also known as “kicking the tires.” After completing the research process, you should be familiar with the company’s business and have developed some sense of its future potential.

Once you have done your research on a company, Lynch believes that it is important to set some realistic expectations about each stock’s potential. He usually ranks the companies by size and then places them into one of six categories: slow growers, stalwarts, fast growers, cyclicals, turnarounds, and asset plays.

Slow Growers. Large and ageing companies that are expected to grow slightly faster than the gross national product but generally pay a large and regular dividend. Lynch doesn’t invest much in slow growers, because companies that aren’t growing fast will not see rapid appreciation in their stock price.

Stalwarts. Large companies that grow at a faster rate than slow growers, with annual earnings growth rates of about 10%-12%. Lynch believes that stalwarts offer sizable profits when you buy them cheap, but he doesn’t expect to make more than a 30%-50% return on them.

Fast Growers. Small, aggressive, new companies that grow at 20%-25% a year. These companies don’t have to be in fast-growing industries per se, and Lynch favours those that are not. Lynch thinks that fast growers are the big winners in the stock market, but they also have a considerable amount of risk.

Cyclicals. Companies whose sales and profits rise and fall in a regular fashion. Lynch states that cyclicals are the most misunderstood stocks, and they are often confused for stalwarts by inexperienced investors. Investing in cyclicals requires a keen sense of timing and the ability to detect the early signs in a cycle.

Turnarounds. Companies that have been battered and depressed, and are often close to bankruptcy. Lynch notes that such “no growers” can make up lost ground very quickly, and their upswings are generally tied to the overall market.

Asset Plays. Companies with valuable assets that Wall Street analysts have missed. While Lynch says that asset opportunities are everywhere, he points out that you will need a working knowledge of the company and a healthy dose of patience.

Mold-tek Packaging

– 2015 profit 17cr and positive operating cash flow at 33cr.
– Dividend payout at an average more than 50% which is amazing for such small sized company.
– Recently did a QIP of Rs. 55cr at 220 Rupees and current price 230.
– First quarter growth at 50% thus even if v take 30% growth for the year the stock is at 15 times which is a little on higher side for a packaging company.
– ROE excluding the effect of new QIP is more than 25% which is unusual for a packaging company
– Debt levels very low – 0.2 times net worth
– Clients are all cream – In food – ITC, Cadbury, Unilever, Amul, Himalaya and more – In paints – all big paints company including Asian paints, Berger, Nerolac, akzo and In Lubricants – shell, gulf oil, HP BP etc
– New capacity expansion almost complete in Dubai RAK free trade zone and will be operational from Mar2016. So that revenue kicking in yet to be accounted for
– All long-term contracts with cream clients having a clause of passing on any increase or decrease of material cost to client thus protecting from any volatility in crude
– Sticky clients because of long term contracts but top 10 clients give more than 85% business
– State of the art manufacturing facility with using robots thus reducing manual labour, cost and mistakes and thus maintaining the standard and thus attracting good clients
– Promoter holding a bit low at 34% due to recent QIP, many mutual funds and other more than 1% shareholders own about 25% of the company.


Note: This is NOT an investment advice to buy or sell shares. I might own the stock and thus my views may be biased. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I am not a registered Research Analyst as per SEBI Regulations, 2014.

What are Moats?


What are Moats?

  • Moats are structural characteristics in the form of competitive advantages inherent to a business and the cold truth is that some businesses are simply better than others.
  • Companies with moats are more valuable than company without moats.
  • A company with an economic moat is able to invest its cash flows at a high rate of return for longer periods. Also the cash flows are protected over longer periods of time.
  • Economic moats also protect one’s investment from permanent capital impairment.

Mistaken Moats

  • Unlike horse racing which bets on the jockey, in business one needs to bet on the horse (business)
  • Moats are structural characteristics that are likely to persist for a number of years & hard for competitors to replicate.
  • Mistaken moats are great products, strong market share, great execution and great management. These are traps and absence of economic moats will make financial results turn on a dime.

Economic Moats

  1. Intangible Assets – like brands, patents, or licences which competitors can’t match.
  2. Customer switching costs – products or services customers find hard to give up.
  3. Network Effect – Can be very powerful economic moat and enduring for a long periods.
  4. Cost Advantages – stemming from process, location, scale, or access to a unique asset.

Eroding Moats

  • Technology replacement by a competitor is a fact of life for most technology companies. Technology disruptions are unexpected & severe.
  • Disruptive technologies can hurt the moats of businesses that are enabled by technology even more than business that sell technology.
  • Even shifts in the structure of industries like consolidation can erode strong moats.
  • Investors should look out for the entry of irrational competitor into an industry.

Courtesy: The Little Book That Builds Wealth

Saksoft Ltd: Big Data Opportunity?

Saksoft Ltd – Chennai-based Mobile technology related company


  • Main business – in simple words – conversion and testing of compatibility of existing software of corporates to new age mobiles and tablets, big data analytic services and mobile app development. This business segment is exploding because of mobile and tablet devices becoming more and more advanced and prevalent with individuals as well as corporates.
  • More than 80% of their business is from US and UK
  • Last 5 years revenue CAGR 22% and profit CAGR 35%, first half of FY 2016 grown by 30%.
  • ROE – 15% (increasing YoY) and RoCE 19% (increasing YoY) – currently it is less because they have done many acquisitions in last few years and some of the impact has come in and some is yet to kick in
  • Even though they have done 4 acquisitions their debt to equity is very comfortable at 0.27 and most of the acquisitions are funded through internal accruals. In fact the company has 22cr of cash on its books as on Sep2015 so debt to equity is in fact 0.09 times. Company has spent about 100cr in acquisitions.
  • Promoter holding is 73.5% and about 9.5% is held by more than 1% shareholders, so very less float in the market. Promoter Mr. Aditya Krishna was one of the 4 team members who started Citi bank credit card business in India in 90s.
  • Its 2014-15 annual report shows complete transformation and clarity in vision of promoters over earlier years.
  • Currently company is available at 200cr market cap and did 17.37 cr profits in 2015, hence available at 11.5 times 2015 earnings. In first half the company grew its profits by about 30% from 7.15cr to 9.4cr, so keeping the pace of growth at say 25%, the company is available at around 9.2 times 2016 profits. Hence great downside protection
  • It is not widely covered on media and blogs, so could be a great money making opportunity as it gets exposed over period of time.
  • On a negative side, many of its employees reviews on glassdoor are not encouraging, but numbers show a different story and margins r not as high as what we expect from an IT company.


Note: This is NOT an investment advice to buy or sell shares. I might own the stock and thus my views may be biased. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I am not a registered Research Analyst as per SEBI Regulations, 2014.

Kesar Terminals AGM Updates


  • Mr Kilachand indicated that the Pawarkheda facility will begin in the next 15-20 days as the railways are carrying out the work of installing signalling systems and equipment to move rakes into and out of the facility. When the facility is fully operational, cargo like cement, fertilizers, textiles etc would be handled.
  • A big advantage would accrue to KMML if the railways go ahead with the proposal to halt goods handling operations at Itarsi. Because of congestion, the railways seem to be keen that Itarsi station handles only passenger traffic. Kilachand hoped that the goods traffic handled by the railways would move to KMML.
  • Mr Kilachand reminded investors that the warehousing business is competitive and there are many players. But KMML enjoys the advantages of having a goods rail line passing through its facility.
  • At present, the cold storage facility has begun operations with fruits and vegetables being brought in for storage. There is a big opportunity in handling agricultural produce since MP has become the country`s biggest producer of wheat and one of the bigger producers of rice. One can expect much of the cargo to move via KMML. Agriculture warehouse measures 16,000 sq meters.
  • The company may look at food processing business because of the location and availability of the facility and finance for food processing is available at 4 % interest.
  • The management is expecting revenues of around Rs 16-17 Cr in the first quarter of operations. Expected EBITDA margins at 60 % just like in the tankage business.
  • So far, the company has incurred a debt of Rs 88 crores for the project. Some of the debt is also being paid back. As for the huge debt on its books, Mr Kilachand says KMML may look at offloading stake to investors at a later stage when it can get higher valuations.
  • Regarding tankage business, company will begin work on either the Kakinada or Pipavav project once first phase of KMML begins operations. Company will have to reapply for permissions at Pipavav, but it has all permissions in place for Kakinada. Company is paying a rent of Rs 2 lakh per month for the land at Kakinada.
  • Management is expecting pricing pressure on its core tankage business at Kandla because of several facilities which are coming up at Pipavav and other places. Tanks have a life of 30 years but they need to be maintained. Depending on what is stored in the tanks, they can even get damaged earlier.



Note: This is NOT an investment advice to buy or sell shares. I might own the stock and thus my views may be biased. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I am not a registered Research Analyst as per SEBI Regulations, 2014.