Beyond 'sin stocks'-companies whose business models depend on general bad health

While we all know about the classic 'sin stocks'(gambling, alcohol, tobacco, arms), not many would have thought of other stocks as benefiting from human vices/distress. However, if we look at what drives certain business models, we remove the blinkers and realize that certain stocks thrive on tragedy and on general economic distress.

1. Healthcare/Hospitals-Correcting lifestyle diseases caused due to pollution. This especially applies to speciality clinics
2. Pharma-Lifestyle diseases
3. Snacks-Ready to eat/unhealthy-yet this appeals to obese people and 'salt sugar fat' unholy trinity helps to ensure this. 
4. DG Set/Inverters-These are energy inefficient but as per Economic Survey estimate, quite prevalent due to poor grid power
5. Real Estate in city centres: These survive due to long commutes and poor public transit-hence people prefer to stay in cities rather than in suburbs like what happens abroad
6. Security Systems: Depend on penetration of crime. Zicom and Quickheal are examples of this
7. Mobile broadband: Depend to a large extent on underpenetration of wired broadband. Otherwise, the natural choice for homes and offices is wifi/fixed line
8. DTH: Depends on the cable operator not being present or not competing efficiently. However, this suffers from the tax arbitrage enjoyed by the (till now) unorganized LCO(Cable operator)
9. Gyms/Fitness: Lifestyle diseases and obesity lead people to these options rather than the (simpler) morning walk.
10. Skin cleansing: Companies like Kaya Clinics cite the increasing pollution and social pressure as reasons for people to take their treatments

I am not passing any judgement on these companies/sectors but am pointing out the scope of immense disruption here, if things change for the better.

Identified that no-brainer investing strategy? Read this before you invest

Sometimes, a particular investing strategy seems just so obvious that we wonder why nobody around us gets it. It is easy to get seduced by the logic that we have XYZ credentials(read CFA/CA/MBA etc), have worked in ABC place(best equity/PE/hedge fund) and have spent so much time on the analysis(think of academics who spend months/years on a research, and the endowment bias makes them reluctant to abandon it without atleast publishing something!), and so we should know better than those multitudes of noise traders out there who have made the market inefficient. But remember that the market can remain irrational longer than you can remain solvent, also that your analysis itself may be flawed/misplaced. Below are some examples of seemingly no-brainer strategies, which need a deeper critical thinking before being acted on

1. Growth Sector story: Every bubble-be it IT stocks, realty, telecom, education, consumer goods or microfinance-starts with the promise of an penetrated Mecca, which is accessible to the lucky investor who parks his money NOW. But, think whether the low hanging fruit has been already plucked by those PEs/VCs/angel investors who invested in the first movers. Are you investing in the lemons who are approaching you after being rejected earlier, and who will need to spend more to grab market share from incumbents, and run more risks. See this from the micro level, not assuming that those glossy consulting reports/graphs 'halo effect' will help your company as well.
2. Fundamentally cheap(low price to earnings):- This is especially the case in cyclical stocks, or those stocks at the fag end of their growth cycle. So try placing the stock/industry within their respective business cycle and growth stage, before comparing the multiples with other stocks. PEG ration helps here for such an analysis. 
3. Intermediary/Distribution model:- Here, the company does not run credit risk but usually runs a platform to facilitate transactions. Think makemytrip.com/Redbus/Ebay. But even there, you need to think critically-when will that information asymmetry go away? Already, price comparison websites(whcih are ad-supported) are threatening to disrupt the business models of travel and book retail sites. So do not assume that agency model is riskless and can grow for ever. 
4. Low price to book:- Even for very low price to book multiples of say 0.1, it needs the most detailed balance sheet analysis to look for cash losses(which depress the ROE/balances), contingent liabilities, low asset quality, corporate governance risks like tunneling/related party transactions etc. 
5. High dividend yield:-Besides the obvious risk(can this be sustained), you should also see the future plans/track record of the company. Stocks that yield more than bonds, do not stay that way for long-either someone takes them over or promoter looks for better business opportunities.
6. 52 week lows:- While such stocks may get hyped up, look for the 3yr H/L and also all time lows. Also, remember to look for stock splits/bonus/rights issues which the price reporting service may have forgotten to adjust for. Else, you will end up being the sucker waiting for them to go up. And lows usually have a reason, so do not skip that analysis in the feeding frenzy to catch it at the lows.

These are just a few examples, of the need to always keep that critical thinking filter open. 

How to avoid group think/tunnel vision in your economic understanding

One would associate the title of this post  with a management book rather than this blog! The reason this post exists, is because to have the courage to be contrarian, one should try to avoid group think-or the vice of thinking like everyone else based on what the mass media says.

As the famous fund manager Sir John Templeton had said, the best time to buy is when there is blood on the streets. Like most good advices, that is logically acceptable but hard to implement because of liquidity issues(people may be sitting on unrealized losses and be low on cash) and due to analysis paralysis and other traps. They also may fall prey to mass media induced panic and hysteria. To avoid that, some points which I have found useful are

• Look beyond the headlines-preferably with data:-Before acting on headlines, try to support/refute it with data. In this age of Google Public Data Explorer and other publicly available data sets, one really has no excuse for avoiding that.
• Diversify your news sources:- However good the source may be, never stock to just 1 newspaper/magazine/blog. Diversify.
• Read globally focused magazines: Economist/Forbes are 2 good examples of that, as also their online blogs/archives/editions.
• Blogs:- Individuals are usually free of any editorial pressures/compulsions to be politically correct. So find a few quality blogs and then
• Non mainstream media: Tehelka, Al Jazeera are examples of this
• NGOs:-They often raise issues which blow up later. So be aware of the top of mind NGO issues like Africa farmland grab, China environmental crisis, food security etc. That may help later. 
• Multilateral Agency Reports/Updates:-While the World Bank/IMF/FAO/WIPO/WTO may have a pro Western slant, the fact remains that they have tons of useful data, and often come out with insightful research reports on various aspects. Some recent examples of it are the ADB report on innovative infrastructure financing in India, FAO study on agricultural farm land etc. As these reports rarely get reported but reflect top quality thinking, one does not lose by reading them, to see if they fill any gaps in understanding. 

Hopefully, all the above will help you refine your own mental models.