Sunday, July 4, 2010

Positioning for Luck

In my previous post on Abbott Labs, I had written how part of the returns that the stock delivered for me was good stock picking and part of it was pure luck.
Can u position yourself to get lucky? How do u ensure that u get hit by good luck more often than bad luck.
I want to put across a example from my life in terms of how one can be positioned for luck. On finishing my 12th Std/ HSC/ Jr college, I took up admission into a engineering college in the stream of production engineering. A friend of mine from the same batch took up admission in a stream of medicine called “ Occupational therapy”.
In my batch of 80 students, there were 3 girls and 77 boys. In his batch of 50 students there were 2 boys and 48 girls. I m sure you will appreciate who amongst the two was positioned for luck :-). So even if I was a cute guy with a great sense of humour and extremely sensitive ( I cant claim I m any of the above), the stakes were just loaded against me to be able to woo a charming lady. My friend of course was in such a envious position that he would really have to shoot himself in the foot to get it all wrong.
There is of course always the probability that I managed to woo one of those three girls and my friend managed to get it all wrong but I would assign a very low probability to it.
He was just positioned to be lucky.

When we come to stock picking, unlike choosing u r graduation stream we have the option of choosing what stocks to buy and what to avoid. We can work our way to get lucky more often than been unlucky. Spot more white swans coming our way as opposed to encountering black swans.

Lets look at IT companies right now. Both Infosys and TCS are great companies with great business models. But at 26 PE with the world economy slowing down, currency turbulence, political pressures etc we are positioning ourselves to get unlucky on this one. These companies could still deliver great numbers and growth but at these valuations there is a high probability that we could get unlucky on these stocks. I cannot at this point visualise what possible events could happen which could make me lucky in these stocks.

I bought Clariant chemicals in my portfolio a couple of months around the Rs 430-440 mark. The stock came on my radar after I heard a global announcement about a plant shutdown in thane which would release some prime property ( about 36 acres) and unlock value. On the operating level the company has been delivering great numbers and improving performance on all fronts. I bought the stock around the 8-9 PE mark.
Beyond this Clariant has about 120 acres of land more at another plant in Kolshet Thane. It has maintained a very high dividend payout ratio over the years. The parent is in a bad shape and is rumoured to be up for sale. A possible sale will trigger a open offer in India.
Of the above variables only the operating performance and the land sale are known variables. All other variables are events that I could possibly get lucky with. They might not necessarily happen but when I bought the stock at 8-9 PE, I was positioned more to get lucky as opposed to get unlucky.

There is of course the other way of doing this
It was to get your parents to name you “Lucky” which would have resulted in you being lucky for the rest of your life :-).


Navjot Kashyap said...

Can't stop thinking about those 48 girls...
Baar baar mere dimag me ek hi gaana yaad aa rha hai...Kisse pyar karu,kaise pyar karu,ye bhi hai,ye bhi hai,vo bhi hai.....
Clariant Chemicals is a good girl...want me to share some even better girls...ok..see our Twilight Litaka baby,see our Sabero Organics babe,see our Symphony Comfort Systems babe,see IFB Industries...

Kisi ne khoob kaha hai...Aap samzhe to bhi khuda ki kudrat hai,na samzhe to bhi khuda ki kudrat hai...haha

Inquisitive Stranger said...


i just have a small query, you bought Clariant chemicals at 8 to 9 PE couple of months back, so why not share the same with your readers? when you find a good value stock, why dont you share.

Navjot Kashyap said...

Clariant's PE is 14 now..Industry Average is 11...
How can we justify buying Clariant..

Navjot Kashyap said...

Even if you bought it at 9 PE level and even if you keep Industry Avg. PE as 11 then,even then it defies any logic...

Ninad Kunder said...

Hi Inquisite Stranger

Its not a reluctance to share but time acts as a constraint in being able to blog regularly.



Ninad Kunder said...

Hi Navjot

U need to factor in that they ran a VRS last year for the closure of the thane plant. So without the VRS, u can add about 7-8 bucks to EPS. Also the 36 acres of land can be conservatively valued at about 5-6 crores a acre.

The company has had a high dividend payout ratio over the years and that is a good varaible with the imminent land sale. These were variables that were factored in when the stock was bought.



Rohit Chauhan said...

if you picked stock like you picked 'girls' in your youth :) would be warren buffett
unfortunately not all skills in life are transferable :):)


Ninad Kunder said...

Hi Rohit

I think if I picked up stocks as badly as I picked girls in my youth, I would be a pauper.

Fortunately my pathetic skills at wooing woman have not had a impact on my stock picking skills :-)



Arun said...

Hi Ninad,

Good post. I am assuming that you are assuming the orientation of your fictional friend :)

I think a similar idea is there in the last chapter of Talebs 'Black Swan' where he talks about taking exposure to good 'Black Swans'.

I am investing from last few years with decent results but I am more of a classic Graham follower. Do you think its safe to invest in these small companies specially during these market conditions?


Ninad Kunder said...

Hi Arun

I think it is safe to invest in either large or samll companies provided there is valuation comfort and one is comfortable with the business.

I would however in relatively smaller companies or unkown promotors added a additional margin of safety or do additional due diligence in terms of promotor intent.