{"id":9,"date":"2016-08-24T09:32:14","date_gmt":"2016-08-24T09:32:14","guid":{"rendered":"http:\/\/cedcapital-in.preview-domain.com\/?p=9"},"modified":"2020-03-03T05:55:48","modified_gmt":"2020-03-03T05:55:48","slug":"owners-manual","status":"publish","type":"post","link":"https:\/\/cedcapital.in\/?p=9","title":{"rendered":"Owners\u2019 Manual"},"content":{"rendered":"\r\n<p><span style=\"font-size: 14pt;\">Our Owners\u2019 Manual represents the collective will of all our partners. As trustees of our collective wealth, firm\u2019s managing partners will always honour the manual in designing the firm\u2019s investing and operating actions. We owe the inspiration to create this manual to Warren Buffett.<\/span><\/p>\r\n<p><span style=\"font-size: 14pt;\">\r\n\r\n<\/span><\/p>\r\n<p><span style=\"font-size: 14pt;\">Here it goes:<\/span><\/p>\r\n<p><span style=\"font-size: 14pt;\">\r\n\r\n<\/span><\/p>\r\n<p style=\"padding-left: 40px;\"><span style=\"font-size: 14pt;\"><strong>Partners\u2019 trust is our asset, their money our\u00a0<em>liability<\/em><\/strong><\/span><\/p>\r\n<ul class=\"wp-block-list\">\r\n<li style=\"list-style-type: none;\">\r\n<ul>\r\n<li><span style=\"font-size: 14pt;\">We put\u00a0<em>partners first<\/em>\u00a0in our incentives, conduct and communication. This is not a vague marketing catchphrase. Having known the compounding power of trust, it makes an immense\u00a0<em>business sense<\/em>\u00a0to do so. It would be foolish to do otherwise.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">We operate knowing that partners\u2019 hard earned money is on the line. Our investment presupposes\u00a0<em>protection of capital<\/em>. And our operations presuppose\u00a0<em>frugality<\/em>.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">Noble intentions should be matched by concrete actions. The managing partners, therefore, have their major portion of networth invested in this firm. We eat our own cooking.<\/span><\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n<p><span style=\"font-size: 14pt;\">\r\n\r\n<\/span><\/p>\r\n<p style=\"padding-left: 40px;\"><span style=\"font-size: 14pt;\"><strong>Our long term goal is to keep increasing \u201cour share in economic earnings and net assets of underlying businesses\u201d as % of our investment cost.<\/strong><\/span><\/p>\r\n<ul class=\"wp-block-list\">\r\n<li style=\"list-style-type: none;\">\r\n<ul>\r\n<li><span style=\"font-size: 14pt;\">We donot treat stocks as screen tickers or lottery tickets. For us a stock represents part ownership in a live business that has an intrinsic value which may be different from its price.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">By owning a stock we get to own a share in economic earnings and net assets of underlying business. By economic earnings we mean normalised earning power.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">We will do well if, in long run, we can increase \u201cour share in economic earnings and net assets of underlying businesses\u201d as % of our investment cost.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">Essential to seeing this happen is that we buy good businesses at or below their intrinsic values and hold them till they remain good\u00a0<em>and<\/em>\u00a0inexpensive (points 3, 4 and 5 below).<\/span><\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n<p style=\"padding-left: 40px;\"><span style=\"font-size: 14pt;\"><strong>First key to our work is conservative assessment of intrinsic values of underlying businesses<\/strong><\/span><\/p>\r\n<ul>\r\n<li style=\"list-style-type: none;\">\r\n<ul>\r\n<li><span style=\"font-size: 14pt;\">Stated simply, intrinsic value of any business is the present value of its future cash flows.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">To make intrinsic values\u00a0<em>reliable<\/em>, we try to limit our research to good businesses that have some competitive advantages, are simple to understand and are run by able and honest management.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">Moreover, our analysis presumes that most things in business\u2013 commodity prices, interest rates, and demand \u2013 will turn out to be\u00a0<em>cyclical<\/em>. We give due credit to this reality while imagining future.<\/span><\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n<p style=\"padding-left: 40px;\"><span style=\"font-size: 14pt;\"><strong>Second key is to buy at or below intrinsic value<\/strong><\/span><\/p>\r\n<ul>\r\n<li style=\"list-style-type: none;\">\r\n<ul>\r\n<li><span style=\"font-size: 14pt;\">Key to reduce the risk of permanent loss of capital is not to overpay. Good businesses are rare and situations that make them available below intrinsic values are rarer still. Such situations broadly include:<\/span>\r\n<ul>\r\n<li><span style=\"font-size: 14pt;\">Out of favour business (cyclical downturns, one time difficult but solvable problem)<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">General market downturns (recessions, depressions)<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">Contrary analysis (time arbitrage, different view)<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">Disinterest (small size, index exclusion)<\/span><\/li>\r\n<\/ul>\r\n<\/li>\r\n<li><span style=\"font-size: 14pt;\">Owing to this\u00a0<em>dual rarity<\/em>\u00a0(rare business, rare prices), often we need to sit on cash (or cash equivalents) and\u00a0<em>wait<\/em>. When owing to the four factors above (i to iv), opportunities do present themselves, we bet big by limiting our portfolio to 10-12 concentrated positions.<\/span><\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n<p style=\"padding-left: 40px;\"><span style=\"font-size: 14pt;\"><strong>Third key is to hold businesses till they remain good and inexpensive<\/strong><\/span><\/p>\r\n<ul>\r\n<li style=\"list-style-type: none;\">\r\n<ul>\r\n<li><span style=\"font-size: 14pt;\">Big money is mostly made, not by frequent buying and selling, but by\u00a0<em>holding<\/em>.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">If the businesses that we buy (after step 3 and 4 above) remain good\u00a0<em>and<\/em>\u00a0inexpensive, holding them for long term renders focus and saves costs\u2013 two essentials for benefitting from the power of compounding.<\/span><\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n<p style=\"padding-left: 40px;\"><span style=\"font-size: 14pt;\"><strong>Actions driven by rationality rather than emotions<\/strong><\/span><\/p>\r\n<ul>\r\n<li style=\"list-style-type: none;\">\r\n<ul>\r\n<li><span style=\"font-size: 14pt;\">Owing to greed, envy or fear, short term prices sometimes get de-anchored from intrinsic values.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">Execution of points 3, 4 and 5 above will require us to remember this dichotomy, and keep our focus on intrinsic values.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">By not chasing hot stocks during bull runs, we like all value investors will see temporary but reversible periods of underperformance. Bear with us during those periods. We would be conserving cash to put to use when the bubble bursts. When bubble does burst, resist selling and if possible invest more. During those periods markets go on SALE and our hard work is rewarded.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">As a corollary, it would be unwise to gauge our performance from short term price movements. We, therefore, look at changes in fundamentals to review our performance.<\/span><\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n<p style=\"padding-left: 40px;\"><span style=\"font-size: 14pt;\"><strong>Reporting philosophy<\/strong><\/span><\/p>\r\n<ul>\r\n<li style=\"list-style-type: none;\">\r\n<ul>\r\n<li><span style=\"font-size: 14pt;\">We will follow the agreed reporting format irrespective of good or bad performance.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">The spirit of the reporting format is expectations managing partners will themselves have if our roles are reversed.<\/span><\/li>\r\n<li><span style=\"font-size: 14pt;\">Mention of mistakes will precede mention of accomplishments.<\/span><\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n","protected":false},"excerpt":{"rendered":"<p>Our Owners\u2019 Manual represents the collective will of all our partners. As trustees of our collective wealth, firm\u2019s managing partners will always honour the manual in designing the firm\u2019s investing and operating actions. We owe the inspiration to create this manual to Warren Buffett. Here it goes: Partners\u2019 trust is our asset, their money our\u00a0liability [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":10,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[3,2],"tags":[],"class_list":["post-9","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment-process","category-value-investing"],"jetpack_featured_media_url":"https:\/\/cedcapital.in\/wp-content\/uploads\/2020\/01\/Owners-Manual.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/posts\/9","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/cedcapital.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=9"}],"version-history":[{"count":4,"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/posts\/9\/revisions"}],"predecessor-version":[{"id":193,"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/posts\/9\/revisions\/193"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/media\/10"}],"wp:attachment":[{"href":"https:\/\/cedcapital.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=9"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cedcapital.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=9"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cedcapital.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=9"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}