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Occam S Razor

Occam's Razor is a problem-solving method that minimizes assumptions, applicable in equity markets to distinguish between noise and actual signals. The document emphasizes focusing on 'Internal Compounding' of earnings retention while investing and highlights the importance of company management quality. It suggests identifying and holding companies that exhibit strong internal compounding, particularly in a growing economy like India.

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manojmalik1190
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14 views3 pages

Occam S Razor

Occam's Razor is a problem-solving method that minimizes assumptions, applicable in equity markets to distinguish between noise and actual signals. The document emphasizes focusing on 'Internal Compounding' of earnings retention while investing and highlights the importance of company management quality. It suggests identifying and holding companies that exhibit strong internal compounding, particularly in a growing economy like India.

Uploaded by

manojmalik1190
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF or read online on Scribd
Occam’s Razor A problem solving method that makes fewest assumptions. This mental model can be applied in equity market to reduce “noise” from actual “Signal” How to apply Occam's Razor By ignoring macro or political news and focussing on “Internal Compounding”. [Showed illustration on how money invested in S&P has grown at healthy rate even though there were string of bad news throughout the history] Internal Compounding of Earning Retention Thought experiment Company Company Company Co! ry B c D Initial Investment 100 100 nH 0)0) 10( (INR) ROE 6% 6% yO) vA0), Management fees as % of 20% rey) 20% 20° earning aa any Ne Te eye) Vere) 01 8 Prevailing Eel sa Rog oC) - 10% Taal lave A & Bare bad businesses but B is owner oriented management. Therefore even though A &B are will trade at discount to initial investment, B will sell at premium to A. A&B both are value destructors C & D both will sell at premium to INR 100 but D will sell cheaper to C because D does not have scalability (As it is returning entire retained earnings) Try to find, buy and hold of companies like type C There are companies of type E which don’t need capital to grow and they are very rare Valuation and entry price for type C — As India is growing economy, what looks expensive is not expensive when we look back. Gave example of Asian Paints. Even on the larger base by taking 3 year rolling period, it can be proved that Type C creates incremental value and hence eventual increase in market cap The only scenario in which the concept of “Internal Compounding” will not be rewarding to shareholders is in case of bad governance ml aoe gM Late) e p=] mG) gt) een eA] EPS = (A) Net Income / Sales X (B) Sales / Asset X © Asset / Net-worth X (D) Networth / Sales Outstanding (A), (B) and © have limits up to which it can be improved but (D) does not have any limit. “Maximum you can lose is 100% but there is no limit gains in investing” My type C companies — Suprajit, Ajanta pharma and Kotak Mahindra Stay safe people, Cheers

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