Nazmus Sakib

To measure a country's money supply and liquidity, we often use broad money (M2). If we want to understand what drives the money supply in Bangladesh, we can look at the breakdown of the M2 and understand how each driver of the M2 is affected.  Here is a visual representation of the breakdown of M2. Net domestic assets and net foreign assets sum up the broad money.  Source: Bangladesh Bank Broad Money Growth: As of Jun'24, net domestic assets contribute 85.6% to the total broad money, M2. The rest is contributed by net foreign assets. At its peak since June 2001, net foreign assets contributed 26.2% to the total broad money Broad money growth has been growing at one of the slowest paces in recent two decades. See chart below.  Source: Bangladesh Bank Net Domestic Assets: Net domestic asset growth has also slowed as of Jun'24, however, it was on the higher side as of Jun'23 and Jun'22 which were offset by negative growth of net foreign assets.  Source: Bangla...

Risk is not a function of asset quality which sounds counterintuitive as it defies the general belief that assets with higher quality have lower risk and vice versa.  Howard Marks joined the investment management industry in Sep’1969. His organisation and many other firms engaged in nifty 50 investment. They invested in the fifty best and fastest-growing companies in America. The belief was that nothing bad could happen to those companies. But they were priced so high that anyone invested in those fifty best companies in Sep’1969 would lose more than 90.0% of their money in the next five years.  Then Howard Marks left the world of equities in 1978 and got the responsibility to invest in high yield bonds, bonds of companies that were struggling in business and perceived to be of lowest quality. He made money steadily and safely on those lowest quality bonds.  The lessons from this is that asset with the highest quality doesn’t guarantee return if the price paid for it is ...

When investing in a stock or any cash-generating asset, you are betting on the future. Buying a cash-generating asset means you are trading cash for future cash flows. Michael Mauboussin calls it a form of time travel where the buyer travels into the future to see what cash flow they can get from the asset and judge if the price quoted today makes sense. The only problem with this approach is that we don’t have the time machine.  So, most of us are guessing. And the downside with the guesswork is you will be wrong a lot of the time. Even if your guess turns right, you shouldn’t credit yourself with the result. You may have factored some of the catalysts in your guesswork, and you may have missed a few. And those missed few would have altered the result that you expected had it gone the other way around.  There are too many unknowns, and we are working with probabilities of few knowable factors. It is crucial to have the humility to recognise when you're at a disadvantag...

First rule of value investing is to look at stocks as pieces of businesses that you can own. I buy into this philosophy as it makes the most sense to me. I focus on two things when I take position in stocks: underlying value of the business and the price I am paying. While the price is obvious, the underlying value is an enigma.  Nobody can figure out the true value of a stock. Most investors try to gauge future cash flows from a business and discount them at a  rate to derive the value of the business. This process seems a good practice but has a lot of fault lines.  Nobody can predict the future cash flows. The best you can do is to have a reasonable expectation but what is reasonable is always debatable.  So, what to do?  One practice to reach a decision is to take conservative assumptions for the business and see whether the value based on conservative assumptions is above or below the price the market is currently assigning. If the price is still below the ...

How does a stock generate return for investors? There are lots of ways to break it down, but in this article I will focus on one of the simplest breakdowns. I will borrow the Grinold-Kroner Model .  You buy a stock of a company from the exchange. You have a finite time horizon, after which you want to sell the stock in the exchange. During your holding period the price may fluctuate a lot. What matters is at what price you buy and what price you sell. In between these two points, you will receive some dividends if the company disburses some of its cash flow to the stockholders.  Now you understand, you can make money in two ways from a stock. The price appreciation, if the selling price is higher than the purchase price, and the dividend that you receive during your holding period.  Dividend: A company that generates handsome cash flows and don’t have much option to reinvest that cash, will most likely share the cash flow with the stockholders either in the form of divid...

Imagine a time when it is easy to borrow money at extremely low rates. The supply of capital is abundant. I know it’s hard to imagine nowadays but these sorts of environment do emerge time to time, a time when anyone with the hold of idle money is ready to supply the capital in exchange of whatever small return possible. Many supplier of capital also seek risky ventures. Suddenly, their risk appetite go up.  New businesses form. Many of the existing businesses load up debt. They increase the capacity to serve wider market ignoring the fact that their competitors are doing the same thing and the market can only consume a fraction of the increased supply. They cut prices and are okay to do business at low margins. Now, the hurdle rate is low. Earn a low return, because you can finance it at low rate.  Most businesses spend lavishly because it’s the boom time. The businesses that have been avoiding too much debt is now at the mercy of the expansionists. They don’t load up debt or...

In 1900, Railroads as a sector contributed 63% and 50% to the US and UK stock market capitalization.  The sector is now nonexistent in both countries' public equity markets. Now, the information & technology sector dominates the US market, and industrials and health in the UK. Many of the sectors that exist and dominate today were nonexistent.  According to the UBS report , of the US firms listed in 1900, some 80.0% of their value was in industries that are small or extinct today. In UK, the figure is 65.0%.  Meanwhile, some sectors that existed in 1900 are still as relevant as they were 120+ years ago. Banking, insurance, food, beverage, tobacco, and utilities sectors still represent a significant portion of the market.  Some industries decline, some emerge and thrive, and some survive and matter longer than others. The market concentration is an indicator of which sectors are driving the economy at a given point in time. 

When we look at economic, industrial, or business trends, we need to understand whether they are secular trends or cyclical trends.  For instance, our population growth is on a declining trend. A few decades ago, population growth was above 2.0% and now it is 1.0%. There is a clear downward trend and this trend is likely to continue for at least a few more decades due to declining fertility rate, rising cost of living, growing urbanization, etc. It's a natural course of the economy. The declining trend in population growth is there for decades and looking at other indicators, it is safe to say the trend is likely to continue for at least a few more decades. It's a secular trend - a trend that sustains for a long period with greater predictability. Now, think about the current upward trend in the interest rate. Was the trend the same 5 or 10 years back? No. It moves in cycles. In some periods, there was a downward trend, and then there was an upward trend. It is not likel...

“It's not what you buy, it's what you pay. And success in investing doesn't come from buying good things, but from buying things well. And if you don't know the difference, you're in the wrong business.” - Howard Marks  Even if you find a great company with solid fundamentals (e.g., high ROIC - Return on Invested Capital, ample growth opportunities, impressive management, competitive advantage), it may not be a good investment if you pay too much for the company's stock.  Well, how much is too much? If you buy a stock when it is trading at its historical highest P/E (Price divided by Earnings per Share) and/or highest P/B (Price divided by Book Value per Share) due to heightened optimism, cheap money flow, or some one-off boost in earnings, you are most likely to pay too much for the stock.  Sometimes, even a company with bad fundamentals (e.g., low ROIC, low market share, declining margin) can be a good in...