Saturday, June 19, 2010

Abbott Labs

I had originally put out a post on Abbott labs about 2 year back when I added it in my portfolio. The link is enclosed below.
I had bought it around the Rs 540 mark when the markets were around the 16500 range. The stock ended today at 1134 with the index at 17,400 levels. Along the way I sold about 50% of my holding around the 735 mark and continued to hold the rest.
So on a like to like comparison Abbott has delivered me over 110% return as compared to the Index which delivered about 4% in the same period. ( I haven’t factored in the dividends that came thru and the share buyback that took place).

Thought process
1) My original premise on Abbott was the fact that it was a great business with high ROE and throwing out surplus cash every year. Though there are other pharma companies with a similar structure, what I liked about Abbott was the fact that the parent globally had a philosophy of returning cash back to shareholders in the form of dividend or share buybacks which made it more attractive as a holding.
2) I also along the way anticipated that the parent which was generating surplus cash would direct that surplus cash into acquisitions with a greater focus on emerging markets. Abbott acquired Solvay and followed up with its current acquisition of Piramal Healthcare making it the largest pharma company in the country.
The market has of course carried out a round of PE re-rating and assigned it a PE in sync with large MNC pharma companies from the tier 2 pharma company PE that it was getting.
Doesn’t all of the above make me sound like a great analyst?
I want to bring here the interesting concept of “Hindsight Bias”. To quote Wikipedia “Hindsight bias is the inclination to see events that have occurred as more predictable than they in fact were before they took place”. Simply put we believe that we predicted or were prepared for event that have happened in the past. Invariably most people will recognise hindsight bias when something goes wrong. For Ex Most people will tell you that they knew that the sub prime crisis was waiting to happen.
The real challenge of hindsight bias to recognise it when something goes right for you. For ex In Abbott’s case my hypothesis was based on point 1 of the thought process that I have listed above.
Point 2 of how I predicted that they would be acquiring companies in India and become the largest pharma company in the country is complete hogwash and a attempt at making me look very intelligent and insightful.
So the return that the stock generated from about Rs 540 to about Rs 725 was my stock picking skills but the return from there onwards to 1100 bucks is pure luck :-). But then I m not complaining.
I though however believe in a concept which I call “ Positioning for luck”. Will write a separate post on that.

Tuesday, June 1, 2010

Nowhere Man

After my previous post on women and investing, I must admit there is one woman beyond my wife that I observe everyday. She is my daughter who is currently three years old and hence, the boss of the house :-).

Is there something to learn from observing her?
If u have a child around the same age or maybe + 2-3 years you will observe a interesting phenomenon. The child has infinite amount of physical energy. It is extremely difficult to restrain the child in a given place or position beyond a few seconds. She is in a constant state of physical motion with arms flaying and legs moving. Try getting a child to do nothing for 10 minutes and u will accept defeat even before you start the task. Getting her to stand still beyond a few seconds is a non starter. It’s like Brownian motion

So the point is
I want to quote Blaise Pascal here. The man I disliked in my engineering days for giving us hydraulics but the man who came up with very interesting insights in human behaviour.
“All human evil comes from a single cause, man's inability to sit still in a room”.
Like the child we crave for activity. Maybe not physically but our brain never stops. It wants action, wants to be in the thick of action and if not anything create action where non exists. The itch to put in the next trade or buy the next stock that you analyse.
And like the child, it really is not in control of its actions.
I have been in the last 15 days working hard to do nothing :-). Caught up on some reading, steered clear of annual reports and spent time thinking.

The title of this post of course comes from a nice song by The Beatles
Nowhere Man
"He's a real nowhere man,
Sitting in his Nowhere Land,
Making all his nowhere plans
for nobody"