Diamonds in the Dust: Consistent Compounding for Extraordinary Wealth Creation

by Saurabh Mukherjea

Over the last few years, there has been a growing realization among Indians that their life's savings, the bulk of which are parked in physical assets like real estate and gold, are unlikely to help them generate sufficient returns to fund their financial goals, including retirement. At the same time, many have lost their hard-earned money trying to invest in financial assets, including debt and equities. Such losses have occurred due to many reasons, such as corporate frauds, weak business models and misallocation of capital by the companies in whose shares unsuspecting investors parked their savings. What options do Indian savers then have to invest in, and build their wealth?
Diamonds in the Dust offers Indian savers a simple, yet highly effective, investment technique to identify clean, well-managed Indian companies that have consistently generated outsized returns for investors. Based on in-depth research conducted by the award-winning team at Marcellus Investment Managers, it uses case studies and charts to help readers learn the art and science of investing in the US$3 trillion Indian stock market. The book also debunks many notions of investing that have emerged from the misguided application of Western investment theories in the Indian context. Vital and indispensable, this book will serve as the ultimate manual on investing and provide practical counsel to readers to achieve their financial goals.

Genres: Finance, Nonfiction, Business, Money, India, Economics, Personal Finance

301 pages, Hardcover

Published January 1, 2021

About the author

Saurabh Mukherjea is founder and chief investment officer of Marcellus Investment Managers. He is the former CEO of Ambit Capital and played a key role in Ambit’s rise as a broker and a wealth manager. When Mukherjea left Ambit in June 2018, assets under advisory were $800mn. Prior to Ambit, Saurabh was co-founder of Clear Capital, a London-based small-cap equity research firm that was created in 2003 and sold in 2008. He is a CFA charterholder with a BS in economics (with First Class Honours) and an MS in economics (with distinction in macroeconomics and microeconomics) from the London School of Economics.

Reviews

[Santhosh Guru · Rating 3 out of 5]

(More like 3.5 stars) If you are active in the Marcellus Universe, there is nothing new you learn from this book.

Don’t get me wrong; it’s a good book emphasizing the philosophy behind choosing the stocks. But if you are following Marcellus through other channels like newsletters and videos, you know it really well.

In short, three criteria for choosing a company to invest in:
- Companies with clean accounting and track record.
- Companies with a great competitive advantage.
- Companies that have a good capital allocation strategy.

I really wish the book is edited and produced better. It felt like an extension of their blog. The emphasis on Rahul Dravid and lessons on investing felt a bit force-fitted for me. YMMV.

[Vijay Netke · Rating 4 out of 5]

Diamonds in the dust is about finding stellar companies to invest in Indian listed market. Authors talk about their three-step investment framework which is look for companies which have clean accounting, deep competitive advantage and are having sensible capital allocation.


On the aspect of clean accounting author stresses it is essential to see whether company you are investing is having clean accounting or not. Profit and loss account is easy to manipulate therefore authors have special liking for cash flow statements. Whether company is able to generate free cash flow or not is important metrics. For instance in case where conversion of profits into cash flow is weak author advises to stay away from such companies. As rightly pointed out in the highly leveraged businesses like banks and lending businesses the quality of accounting becomes even more crucial. Accounting jugglery in Indian companies like Satyam Computers, Deccan Chronicle, Manpasand Beverages, Cox & Kings, Amtek Auto and finally in DHFL housing finance is explained via case studies. 


Regarding, Competitive advantage aspect of investment author uses the IBAS (Innovation, Brand, Architecture, Strategic Assets) framework to analyze the moat of the company.  While doing so authors gives examples and  as also cases studies of Abbott India, HDFC Bank, Garware Technical Fibres, Page Industries, HDFC AMC, TCS, Pidilite, Divi's Lab, GMM Pfaudler, Asian Paints etc and strongly suggests to invest in these type of companies


On third aspect of Capital Allocation, Authors suggests that having clean accounts and competitive advantage is essential but they are not enough in themselves. The business which has competitive advantage will generate free cash flow as there will generate return on capital more than cost of capital. But, many companies squander this free cash flow by chasing unrelated diversification such companies be avoided according to the framework given in the book. Then there are companies which don't have enough headroom to invest these fres cash flows back into the business authors also wants us to avoid such companies. In the book they have compared and contrasted the capital allocation decisions of Tata Steel with Pidilite Industries.  One of the finest examples of capital allocation given in the book is of Kotak Mahindra Bank about how it acquired ING Vysya Bank and its Joint Ventures with global leaders. 


Having given this three-step framework on what to buy. Authors turn their attention to question of when to buy and end by saying it is futile attempt to time the market. Regarding valuations they seem to imply that high PE multiples for companies like Asian Paints justified because of longevity of future cash flows. In the Discounted Cash Flow(DCF) method the terminal value due to longevity of cash flow is most under appreciated part of the valuation and hence these companies seem to trade at optically high PE valuations. 


The framework followed by authors relies more on consistency and not on momentary flashes of brilliance this perhaps why the book makes multiples reference to cricketing legend Rahul Dravid. In the end authors have given the checklist for investing as per their framework.  The book is great learning experience to new investors. However, if you have read earlier books of Author like Coffee Can Investing, Unusual Billionaire and Victory Project you may find many things are the same. Authors have given great insights and brilliant investment style but at a times it feels as though they are looking more into rear-view mirror and not looking ahead.

[Shekhar Singh · Rating 3 out of 5]

A few concepts are well explained and useful. Second part is mostly marketing marcellus.

[Vijay Chengappa · Rating 3 out of 5]

Marcellus is one of the first AMSs in India which regularly brands their work in the form of these books and media appearances in the right conclaves (read 'Value Investor').
This book follows the gospel of most value investment tomes, a few token excerpts from Buffett & Munger, and a few past case studies of duds and superstars.
While the advice mentioned here is mostly well meaning (albeit fairly generic level,most of this info can be gleaned out of a free stock screener), it begs the question of whether continually investing in companies with PEs greater than 35-40 (which most firms that clear all the filters mentioned in their writings tend to hover around ) is wise in the long term (especially considering that Indian markets are the most expensive in the world), and no real international market exists for most Indian product companies (save IT).
Hard to see how long this boom of expanding Mcaps can last, and the concomitant returns of these funds that all invest on the same few high ROCE companies, leading to almost ridiculous valuations for these selected stocks.

[Zubin Nanavati · Rating 5 out of 5]

Diamonds in the dust is the lesser known successor of Mukherjea's Coffee Can Investing. While CCI discusses financial planning and wealth management in general, Diamonds takes it a step further, providing insight on picking the right companies to invest in, for long-term wealth creation.

The book primarily focuses on growth investing, arguing that it's counterpart, value driven investing, is not as effective when it comes to holding your investments for long periods (>10 years).

With compounding on your side, along with clean, efficient capital allocators as market leaders, the authors aruge that the diamonds in your portfolio are bound to generate consistent, market beating returns.

A stellar read, and an amazing pt. 2, to CCI, from Mukherjea and team.

[Harjot Narula · Rating 3 out of 5]

The book kept advertising about Marcellus investment strategies and practices to the point that I almost dropped the idea of completing it. The author(s) would introduce a concept, talk a bit on it and then without explaining how an individual investor should approach it, comes “hey, we at Marcellus do it diligently for you.”
However, as they say, all’s well that ends well.
Now through it entirely, the value addition came from the data and the case studies it provided along with of course the handy checklist an investor must refer to for fundamentally understanding any business.
The appendices explaining key ideas and other books authored by either themselves or other revered investors/academicians made the book just about worth reading it.

[Ujval Nanavati · Rating 5 out of 5]

Anything Saurabh Mukherjea writes is worth reading. Unlike other folks, not only does it distill investing wisdom to its most basic elements but also candidly shares what he knows. Others make equity investing out to be a complex science and guard their approaches as if they were some secret sauce. Those "experts" either do not want to let on the common sense aspect of the "science" and/or are getting high on their own supply.

[AK · Rating 4 out of 5]

Saurabh is a veteran in for stock market and is a delight to listen for investors. Prior to starting his own investment venture with the name of Marcellus he was star CEO of Ambit Capital.

In the book, Saurabh has shared some of the real life examples of HNI and well educated individuals who lost money in the market. He has talked about the fundamental principles on the basis of which Marcellus does investment and some of the basics of investing.

One of the important facts which he has discussed in the book is 95% of the Indian household investment going in Gold and Real Estate despite the fact that both the asset class has struggled to beat inflation over a substantial period.

The kind of analogy he has used in the book makes it interesting and easy even for person who is not from a finance background to understand stock markets and investing. The book is a must read for people who are interested in stock markets with Indian context.

[Shailesh · Rating 5 out of 5]

One more good book by Saurabh & his team.
This book goes into the various details like forensic accounting & capital allocation. The various case studies provided are an eye opener & are good references on what can go wrong & what happens when decisions turn out right.

Very good checklist in the appendix that can be readily used.

To be honest, after reading this book, it has been a stark realisation that if one has invest on his own then one needs to dig really deep into the annual reports. The other option is to rely on professionals with integrity & who works in the interests of their customers.

To summarise, this book is a thesis on the following statement by Warren Buffet “ Investing is simple by not easy”

[Nikhil Kumar · Rating 4 out of 5]

Authors explain their investing philosophies in a simple way and by using Indian case studies which make it very relevant.

[Karan · Rating 5 out of 5]

An easy recommendation for anyone who wants to learn stock picking for generating consistent healthy returns on their capital. This book, like all other books by the Marcellus team teaches you how to identify strong well-run franchises with clean accounting practices and Himalayan barriers to entry that consistently generate wealth for their shareholders for years on end.

[Deven · Rating 5 out of 5]

Must Read

[Vishal Jain · Rating 2 out of 5]

300+ pages long brochure for Marcellus Portfolio management services

The book started with a bang with Rahul Dravid as an analogy. But after that the book talks mostly about how Marcellus selects consistent compounders for their PMS. Few pointers which I felt could have been handled better in the book.

1. A lot of examples where companies went off their checklist and did poorly were quoted with the benefit of hindsight. Wonder if there were any examples of companies doing well despite failing on the checklist. Atleast an intellectually honest attempt should have been made.

2. In the competitive advantage section, they seem to be valuing international parentage and exposure to international market overwhelmingly for any company.

3. Even the capital allocation section has examples quoted with hindsight benefits. As I reader I felt I was getting only a partial glimpse through selective examples which suited the narrative instead of possibly the complete picture of what all possibilities are there.

4. Few places the content could have been less click baity and more to add value to the reader. For example - under clean accounting model, the authors talk about having 12 forensic accounting ratios which Marcellus uses but goes only to show only 4 of them in the exhibit. Click bait 101 - To know more about these forensic ratios, subscribe to Marcellus PMS.

Overall, some parts of the book were definitely useful knowledge but the feeling of being sold something (the PMS) on every page made the experience unpleasant. Why should I pay for reading their brochure?

A less salesy and more intellectually honest attempt at sharing learning would have made this book a bestseller. But alas, it ended up becoming a brochure!

[Venky · Rating 3 out of 5]

A book that resonates with the tenets of prudent investing, Diamonds in the Dust is a timely guide for the intrepid and the experienced alike, who aspire to invest in the Indian stock market in a sustained and cautious manner. Saurabh Mukherjea and his co-authors set out the context by demonstrating why investing in the stock market yields a better financial prospect when compared to alternatives such as real estate. Real estate, in India, in stark contradiction to the West, fetches approximately 3-4% as rentals, but comes with a considerably higher cost of borrowing at 7%, you are not better off. Such a high cost of capital detracts a majority of the populace from investing in real estate. A fact that is also illustrated by innumerable ghost condominiums awaiting occupants.

The authors then proceed to cock a snook at the universally acknowledged and accepted notion of Efficient Market Hypotheses (EMH). Conceptualised by economist Eugene Fama, as part of his 1965 doctoral dissertation, EMH holds that the financial markets are efficient, meaning no investor can gain an edge by acting on publicly available information. In 2013, Fama received the Nobel Prize for his work. However, Messrs Saurabh Mukherjea & Co emphatically argue that the much-vaunted concept of EMH does not work in the context of the Indian stock market.

Instead, the authors offer an alternative strategy/approach where four primary risks need to be "crushed". The four risks are accounting risk (misrepresentation of books, window dressing and accounting frauds that may be detected only after substantial damage in terms of erosion of wealth has been inflicted), revenue risk (the risk of irrelevant products or services being offered to, and unequivocally rejected by the public), profit risk (risk of being penny wise and pound foolish, by starving an organisation of much needed Research & Development expenditure and placing undue importance on knock-offs and mimics), and finally the self-explanatory liquidity risk.

The authors then proceed to highlight companies that have successfully overcome the quartet of risks by engaging in some ingenious strategies. In addition to the management of risks, the authors also highlight certain "red flags" that an investor can ascertain from a perusal of documents made public by an organisation. Burgeoning related party transactions, composition of the Board of Directors, with specific emphasis on an unduly high proportion of family members, composition and nature of contingent liabilities etc are some of the qualitative and quantitative factors every potential investor would do well to examine.

The book also provides a detailed overview of some material scams that have rocked the Indian equity segment. The overarching case of Satyam Computers is explained in depth and drives chills down the spine of the reader. Yes Bank and DHFL are some other prominent examples of blatant and brazen fraud.

Diamonds in The Dust - an invaluable acquisition for an eager investor.

[Nitin · Rating 4 out of 5]

There are many books written about value investing with a long-term horizon. Most popular titles on this subject are by foreign authors and focus primarily on U.S. markets. Granted, principles such as investing in companies with strong fundamentals, good management, and a competitive advantage are universal. However, the connection and clarity you gain from reading Indian case studies and examples make these concepts easier to understand and apply.
This book primarily focuses on three principles for selecting good companies to invest in:
1) Avoiding risky companies – based on financial audits using a set of accounting and other ratios.
2) Prioritizing companies with competitive advantages – such as strong brands, robust distribution networks, licenses/permits, and an innovation-driven culture.
3) Identifying companies that can reinvest excess cash flow – generated through operations to achieve a higher return on capital compared to the cost of capital.
Once you have selected these companies, the idea is simple: hold them for 5, 10, or even 15 years and let compounding work its magic. Sounds easy, right? Yet most investors fail to follow this approach due to impatience, overconfidence, greed, or lack of trust in fundamentals. Moreover, performing this due diligence is not trivial—it requires hard work and effort.
What the book does well is explain these concepts using case studies and data from the Indian stock market. Overall, it’s a quick, insightful read for anyone looking to clarify the rules of the game and build confidence in what it takes to grow wealth at a decent return without taking excessive risks!.

[Harshil · Rating 3 out of 5]

Being honest, the book has not much to deliver, if you have read Coffee Can Investing and are keeping yourself updated about the market. The book is loaded with promotional writings about how authors' investment fund is doing.

The investment philosophy covered in the book is repetitive, nevertheless important. Parameters which matter are: account quality, consistent compounding, and capital allocation. The authors explore deeply about all the three parameters.

Here are few important things you can learn:
* Invest in companies with good reputation in accounting. Read balancesheet and find if there are not much transactions between promoters' companies. Or, check if there are serious accusations in accounting.
* Invest in innovative companies which don't do over-diversification and are leader in their sectors. For example, Asian Paints and Pidilite which don't have any major alternative. Check their RoE, RoCE, Profit Margin, Profit Growth, and Sales Growth. Plus point if they have government patronage.
* Buy and hold for long time period. Let compounding take place. Don't try to time the market.

These things are already available in open domain, or in previous books written by the same authors. So, if you've already read much then this is avoidable. Otherwise, learn from the book.

[Omnish Singhal · Rating 5 out of 5]

Just like humans communicate with the help of language, Accounting the language for business. If you really want to understand an underlying business, how it makes money and how it is reflected in the financial statements, you'll have to learn "Accounting". The book has dedicated 2 chapter (approx. 150 pages) on "Accounting". If you are really looking forward to spend serious time in understanding accounts (with examples in this book) and learn to interpret financial statements, then this book can be a bedrock for New age investors.

Apart from that, what differentiates a business in a market and what protects it from its competitors, this book has presented several case studies of great compounders like HDFC Bank, Asian Paints, Pidilite Industries, Kotak Mahindra Bank, Divi's Lab and several others, to make the relevant points.

In continuation of the above, the importance of CCP (Coffee Can Portfolio) has again been highlighted with relevant examples.

Bonus Chapters dealing with The batting style of Dravid and lessons from it for investing and finally a case Study of GCMMFL (popularly known as Amul)

Overall, a decent read and value for money.

[Tanvi Saraf · Rating 5 out of 5]

Saurabh Mukherjea is one of the great Indian minds of this century. I love hearing him speak or reading his research. I had a "Eureka" moment while reading this book, a feeling i rarely get and only while reading the greats such as "Physcology of Money".

One of the takeaways I had from this book is that corporate governance standards, which we take for granted in markets such as the U.S., still have a long way to go in Indian (and other emerging) stock markets. The book was rife with past examples of promoters siphoning off money or reallocating among the sister firms. Let's just say I wouldn't attempt to stock pick on my own in the Indian markets after reading this book, with the exception of the top tier companies.

Other takeaways: The Indian market seems to be a tough nut to crack and any company who cracks the code ends up earning phenomenal returns on capital employed, which can be in the range of 35% ( 2-3 times the best we see in developed markets). International firms almost always fail when they try to go it alone in India.

[Santosh Soni · Rating 4 out of 5]

This book is about investing your hard earned monies in avenues that can generate consistent returns over a long period of time. The first chapter starts with the example of famous cricketer Rahul Dravid and his consistent performance for Indian cricket team and how his mindset can help retail investors excel in making rationale investment decisions.

The team at Marcellus Investment have created a consistent compounding formula:
Clean Accounts + Competitive Advantage + capital allocation = consistent compounders.
They shows how and why following this method of investing can bring positive returns.

This book is recommended for beginner investors or those who wants to start Investment.

**please note**: The author has indirectly advertised his firm Marcellus Investment at intervals throughout this book.
Always remember stock market Investments carry risks, invest carefully, understanding the risk and returns before proceeding.

Happy Investigating!!

[Aman Gupta · Rating 5 out of 5]

Another insightful book by Saurabh, this book provides a good template to find stocks for investing in the Indian equity markets.

It tells what qualitative & quantitative metrics to look for in analysing stocks.

While every institutional investor has a process of screening stocks, what makes this book special is, Saurabh simplifies that approach for the know nothing retail investors.

There is no much in this book than what Saurabh already speaks in his webinars & interviews. Still, I think it's a worthy addition to an aspiring stock picker's bookshelf.

The best thing I liked about this book was that Saurabh has given the entire screening process in the form of a checklist in the Appendix section.

While it may not be fully exhaustive, it is way too much for a retail investor.

There may be some elements where it may appear that he's advertising his PMS, but I'm willing to overlook that, in the favor of the immense knowledge he's distributing freely.

[Aditya · Rating 3 out of 5]

The book starts off with explaining financial problem faced by a HNI individual, and in a quest to resolve through the Marcellus approach book takes on the journey of stock market through accounting analysis, what to buy, when to buy and talks about some common misconceptions.

At some places, due to the involved technical nature of the book it became challenging to follow what the author wrote and exactly on the other end there were a few topics which were extremely detailed. Need to pick and choose what to read in the book.

At the end, it's pretty much about "Marcellus" marketing. Use CCP. Use LCP. And so on..

Can be avoided. Some good insights but wouldn't be on the top of my bookshelf.

[Vikas Garud · Rating 5 out of 5]

Book provides comprehensive guide to rational equity investing in Indian market. The book states that one should invest in companies having clean account, strong competitive moat, having free cash flow & prudently investing part of the free cash flow to grow the business further. Time in the market is more important than timing the market.
The book comprehensive checklist for choosing a business to invest in.
The case studies of few selected companies given in a book are excellent read.

[Pradeep Bani · Rating 5 out of 5]

Amazingly written non fiction book for investing. Very few books are written on Indian market. You can easily relate and explanation is mind blowing. After reading this book I am very clear about behaviour of Indian consumer and market in general. I highly recommend this book it is well researched. As rightly said by Saurabh that you should not blindly follow investment advices given by US stock researchers and investers because Indian market and it's economy is entirely different. An eye opener.

[Pushkar Sohony · Rating 4 out of 5]

The book is an essential read for investors seeking to build and preserve wealth through consistent compounding. Complex financial concepts are explained in an understandable manner making this book valuable for both novice and experienced investors.
The book delves into the principles of consistent compounding, emphasizing the importance of patience, discipline, and strategic investment choices. The book has real-world examples and case studies, showcasing how ordinary investors can achieve extraordinary financial success by adhering to sound investment practices.

[Umang · Rating 4 out of 5]

Diamonds in the dust is a book rich with stories, experiences and richer with data, facts. While it is well structured with the concepts on how Marcellus anchors its investment philosophies, this book is a quite of a workbook which a serious investor will have to re visit often. A few chapters which describe the processes are difficult to master unless you belong the field of corporate accounting and have the means to get access to such data points. Hence, some of these chapters personally for me were a bit overwhelming.

The authors strike a balance keeping their diverse readers in mind and have done a brilliant job of inspiring and sharing this wisdom.

[Ramakrishnan M · Rating 2 out of 5]

First of all, it is not clear whether marcellus fund is actually beating the broader index consistently (leave alone doing better than other pms funds)...so without that proof (not back testing data but real performance proof) it is unclear how far their approach can or should be trusted on.

Secondly for things like competitive moat their notes don't really give clarity on how an investor can analyse it.

The only thing I liked in the book was the list of forensic audit items that flag that the financial reporting may be fudged.

[Chandy John · Rating 3 out of 5]

All of Saurabh Mukherjea's books are worth reading. He should be the most trustworthy voice in Indian equities and investment as a whole right now. His best book is probably Unusual Billionaires. I plan to go back to it now that I finished this.

I don't follow cricket, and though about a tenth of this book is about Dravid's unique technique and what makes him tick, that was one of the most interesting bits. Saurabh encourages investors to emulate him- technically and behaviorally.

[Anirudh Somani · Rating 4 out of 5]

This book basically shows why Investing is difficult and not for your average Joe. I see a lot my friends/acquaintances trying to dabble in to managing their own money just to indulge into intellectual masturbation

This books lays down the case studies when read with an open mind makes your realise how many variables go into making an investing decision. Good luck to everyone trying to play the game without understanding the rules, competitors etc

[Mainak Mandal · Rating 5 out of 5]

A must read for anyone investing in the Indian Stock Market. Very clear and actionable investment advice. However since mukharjea's whole philosophy is that Price is noise, so there is no material on valuation. Which I think is not entirely true. As Peter Lynch points out, even if you buy a fantastic company, at a highly inflated price you may not make any return for a long time as the market starts to value it correctly.

[gaurav · Rating 4 out of 5]

A good book for any investor

The book is really helpful to anyone who is planning to invest or has already invested in Indian equities. I liked the chapter which deals with the question of market timing. The book has few technical details but it comes with the subject. Overall a great book and a must read.