Lottery Tickets = Small Caps

Lottery tickets are easily available, cheap and offer a great potential ROI. And yet, no rational investor would think of them as a great investment.

Why then, does the hunt for the potential multi-bagger small cap seem to catch our investment fancy? No one seems to be immune from them - see Cravatex for a classic example.

These lotteries are enticing because they create a false impression of value for money and obscure the obscenely low probabilities. Anecdotal stories of people winning the lottery captures our imagination, and drives the pursuit of the next great small-cap multi bagger.

Investment Idea: Sintex - Will it Tank?

In September 2013 (a month ago) Sintex was selling at a market value less than 2 times its annual earnings. If we were to assume that their business would remain stagnant and would continue to deliver their current earnings in perpetuity, that would be akin to a FD that returned 50%.

Here is an 80 year old company, an established brand with a global footprint, and yet it is being valued for bankruptcy.

Such are the ways of the nutty Mr. Market. For the rational value investor, the question here is not whether to buy, but how much to buy.

Sometimes, we are so busy looking for the Buffet, that we miss the Graham. 

See's - Sweet Returns

See's is a chain of candy stores owned by Berkshire. I run a startup in the food business, and every time I see See's numbers, I find it incredible that a non-tech company could have these kind of returns.

See's in 1972,

Sales= $30mn/16mn pounds of candy at a PBT of $5 million

Capital Employed = $8 million

In 2007 :

Sales= $383mn/31mn pounds of candy at a PBT of $82 mn

Capital Employed = $40 mn

That's a pre-tax return on capital of over 200% in 2007 from selling bleddy candies! How is this happening? Are their auditors on a sugar high?

And to top it off, their growth figures look SO BORING. For 35 years, they annually have grown sales volume by 2% and sales value by 8%.

Turns out, extraordinary business results can be achieved from a combination of subtle pricing power and muted reinvestment in the business. All See's did was increase their price of candy by about 6% every year while having to spend very little on equipment, working capital and the like.

I just can't wrap my head around the fact that something that sounds so simple is so hard to achieve.