"Investing" - a perspective

So what is Investing ?

For the sake of providing a definition, here is the simplest one that I have come across so far:

"Investing is putting out money to be sure of getting back more money later and at an appropriate rate"

Yes Yes ... I hear you… I agree it's a very simple and generic definition.... but that's the way it is…

Investing, as I understand is a lot about "Perspective"
(what feels like "gold" in the hands of one, could feel like a "mine" to someone else)
Trying to generalize Investing by your taste/understanding and mixing perspectives may not always result in a "goldmine", so to say...

On a more serious note this time….

How do you make Investment decisions ?
How do you decide whether a deal available in the market is good ?

Answer: By comparing the 'Price' and the 'Value'

Price: How much is it selling for ? (Market)
Value: How much do you think it is worth ? (Intrinsic)

That's All!
While the Price is offered by the Markets, you need to find the Value on your own.
The trick however is that there is no Universal Value and there is no correct or incorrect value…
This means neither will searching Google help you "find" the value, nor will using Bing help you "decide" the value…

Now the question is, how do I then arrive at the Value ?

What differentiates Investors from each other [other than 'Perspective' and 'Composure (including emotional)] is how they 'Evaluate'…
This is the single reason 'why Investors are not commoditized' and 'why Investing is not automated' …. :)

Now for Valuing, you may use any data/approach you like from studying business models, to strategy, balance sheet, cash flow, free cash flow, dividends or dividend yields, brand value, patents, culture, promoters, employees, RoE, moat, book value, sales and profitability, growth in business, profitability or holdings, study the sector or economy, correlate it with macro economic factors like GDP, liquidity, unemployment rates, bank interest rates, bond yields…….and on and on and on from business to business.

You have your freedom to approach it the way you like…but more importantly, do it yourself and know what you are doing...

(Perhaps, I will talk more about my way of valuing companies in a separate blog later)

One interesting dimension to valuation is:
Value of something today versus Value of something in the future (as expected/projected/estimated) …. i.e.: 5 or 10 years thereafter
[This dimension builds the foundation for long term investing! ]

However, you do not arrive at the value by asking friends or reading recommendations or listening to analysts or looking at the stock price or the historic stock price range…..

Three common mistakes Investors make with Investing/Valuing

1. Depending on other people's recommendation or valuation (most often: analysts, articles and friends)
Two reasons why you must do your homework yourself:

1. There is neither going to be an "understanding" of it nor any "learning" from it unless you do your homework yourself
   (And more that anything else, Investing is about experimenting, learning and growing as an Investor)
   "Give a man a fish, and he’ll eat for a day. Teach a man to fish and he’ll eat for the rest of his life"
2. Who do you blame when you lose money ?

2. Using the Price Tag to find the value of a productThis is as funny and as stupid as it can get! Yet over 99% investors are unable to escape from this temptation!
Look at the business first, see how much it is worth, then look at the market price and see if it looks attractive.
If you look at the price first, you are bound to get influenced by it ….and your Value of the business may tend to confirm to or towards the Price…
Again, the relatively smarter ones should know that seeing the range of the Tag price for last 52 weeks is also not going to tell you the Value….
Remember that the best opportunities for investment are the ones where Price and Value are farthest apart (leave aside growth for now)

I for one apply the same approach to bargaining and find it awfully interesting to observe people when they negotiate… :)
(I will in fact write a separate post on my approach to "bargaining" some time … :))

3. Bottom-Up instead of Top-Down
I believe the way to study and value a business is top-down.
You look at the business in totality, look at its existing and potential market, looks at revenues, profits, cash flow, assets, debt etc, then come up with a value that you think it is worth(or what would you be willing to pay to buy the whole business) and compare it with its current market cap.
You can now divide your value of business by equity of the business to find how much you would be willing to pay for a % ownership in the company by buying shares.

I have seen a lot of Investors, specially retail investors go lost in per share data(Earnings per share, Dividend per share, blah blah blah)….
Many have argued with me as to what is wrong with their approach.

There are two issues that I see with this:

1. In most cases, I have seen that people's bottom-up approach does not scale all the way to the top. I can bet that more than 90% retail investors do not know either or all of Market Cap, Annual Sales and Earnings of the businesses that they have invested in.
   On the least, have you ever done the exercise of multiplying your per share figures with total equity of the company to see how big your company is…
   Many may still not get the point. While some may actually laugh wondering "Do you really want to buy the whole company and Do you have so much money!"
2. How do you expect to evaluate market potential of a company ?
   Funny, as I haven’t heard anyone start from thinking that XYZ company has the potential to make revenues of ABC per share
   "A man has $1 million in wealth. He has decided to distribute it equally among all his employees. Being one of his employees, you are certainly excited, but can you tell me what would be your share of his wealth without knowing how many employees he has ?" For employees such as these, I wish that the man has at least a million employees :)

Traders and Brokers excused, but if you intended to be an Investor, remember that 'Stocks are but just a medium to Invest in a Business…'
Investing is not about buying some stocks and refreshing the stock price every 5 minutes to track the health and performance of your business :)

If you cannot tell the value of something (how much should it be worth) and yet decide to own it, how would you ever know if you paid the right price, and how would you ever know it is the time to sell...
"It is like getting into a debate or an argument without having an opinion"
Can there be Investors without a Perspective (or an Investment philosophy) and without a Value for their businesses in mind?

Leaving product, service or need based Markets aside and talking about stock markets…..

If you come to think if it, the very foundation of Markets is based on the differences in Opinions and Perspectives
Every time someone is buying a stock, someone else is selling it
(Under all normal circumstances, Every single trade/transaction reflects contradiction in what 2 people/parties believe)

Alternatively, If everyone thought alike, there would be no transactions :) [Under all normal circumstances]

A lot of questions start getting answered as you take eyes and time off the stock prices and start wondering why Markets were created...
(I will leave the exercise to you as this questions is best unanswered)

Coming back to Valuing, Investing and Markets:
For most part, you make money by going against the market.
You buy or sell when you are convinced that the price offered by the markets does not reflect the true value or potential ...

On a closing note
Use markets as a tool for Investing, exploit and take advantage of them when they seem irrational… But more friendly you get with markets and more you start gossiping, singing and dancing together, less are the chances that you would find more compelling opportunities…under the influence of your friend...

I recommend reading Mr. Ben Grahams theory on Mr. Market !

How it all Started

It was the summer of 2003 and I was still in my last teen…

As an intern at Wipro, there were exactly two expectations from me:

1. Thou shall reach office before 9 AM and shall not leave office before 6:30 PM
2. Thou shall not Sleep in office …..

Spend some time studying about various web technologies online ignoring the fact that there was no computer allocated to me, there were 3 of us sharing the same computer….

Do whatever you feel like except sleeping, except browsing and except talking….. So this left very few options for me…. day dreaming, Introspection, coffee and still Sleeping (sometimes covering face with books or notes…. and sometimes hiding under the desk :)

One thing that I really liked about the company (or at least the promoter) was that Mr Premji, Chairman (who was then also the richest man in India) used to stand in the cafeteria queue(once right behind me) himself waiting for his turn to pay Rs: 18/- for the South Indian buffet lunch (Unlimited :)) [It felt like there was no need to be rich]

One of my companion who was a senior intern (a post graduate appointed as a 6 month intern for the second time) had a relatively busy schedule….his job involved noting the latest stock price of Wipro Infotech from NSE and BSE and updating it on the official Wipro website every couple of hours….
This dude was priviledged and had a sense of pride .... Specially because he had access to the lab, which housed the client machine that was used to connect to a server which intern remotely connected to the main server that hosted the Wipro website…. huh

For the first few days, I just wondered why couldn't they write a script (once and for all….) to fetch live stock prices of Wipro from NSE and BSE websites and automatically update them on Wipro website (not every 2 hours, but perhaps every few seconds)
Instead of hiring a full time intern to do this manually. I used to wonder what Value he brought to the company, leave aside me whose job was but just to observe and wonder, after all….
It was however good in the sense that it created a job for one more person, made one more bachelor eligible for marriage….and perhaps helped one more man(family) make a living…. :)

Blessing in disguise: my companion decided to delegate the work of noting the stock prices from NSE and BSE websites to me….. Off course, this meant giving the machine and web access to an untrusted party…..i.e.: me :)

I soon began to check stock prices of various other companies (whichever came to my mind), like Infosys and Satyam as they were Wipro's natural competitors……Bata, as I was wearing Bata shoes, Britannia, as dad worked at Britannia, Union bank, as mom worked there….Reliance, because everyone knew this one…..ICICI, because I had seen it in the ads ... and so on…..

In no time, I was tracking over 40 companies and checking their prices at least 40 times a day….. Yes, that's 1600 refreshes!
It was time for lots of stupid questions and stupid guesses….like "higher the stock price, more prosperous the company :)",
"Cheaper the stock price, smaller the company and hence more potential for growth :)"
(I still remember a stock (sri cement ltd, not sure if I am recalling the name correctly ) which was trading at 20 paisa, huh….that's less than half a cent…one that I had decided to make my fortune with :))

I explored and found out the difference between NSE and BSE, nifty and sensex… and imagined answers to the rest of the silly questions myself...
I soon started tracking various company announcements, results, charts, shareholding pattern and what not (most of which, *correction* actually, pretty much all of which obviously went over my head)….But I enjoyed the pride in opening this stuff (and faking understanding of it) in front on several other engineers who were equally illiterate/dumb in finance, however not as smart :)

I quickly followed the activity by studying stocks in my dad's portfolio, most of which were held for 15 years or more….some like HDFC and HDFC Bank had grown 10, 20 or 50 times and made him a fortune...... while several others had ceased to exist… (a surprising observation was that some of the small commodity stocks had lingered around pretty much the same price levels through these 2 decades)

With my rapidly growing interest….In no time, there was a third expectation set for me as a summer intern:

3. Thou shall not access the NSE or BSE website from office :)

So I obviously got back to my desk, and this time I had more pronounced day dreams…dreams of making lots of money and being rich…
As I spent more time away from the markets and refreshing stock prices, pondering about what this was all about...I began to realize that there was something missing, something incomplete in the story that I had understood in the last few days……

One thing was sure, that all of Investing was certainly not just about the stock prices and stock tickers….. There had to be something more to it… something more fundamental or at least something differentiating…. Something other than just buying / selling shares and the moving prices…. The thought kept bothering me for a long time…on and off…..until I met Uncle Harish (more later) ….

Meanwhile, in weeks and months that followed, I enjoyed refreshing(F5!) the stock prices and tracking various of them….

Before my internship at Wipro was over, I already had a Virtual Portfolio at MoneyControl, had setup my savings, demat and trading account with HDFC Bank and had convinced mom for a partnership and for sponsoring me with the starting capital…. :)

Mom's are always like that…they can't say NO…..at least not the first time you ask for something….. My mom for a change, continued to fund me with more capital every time I asked for a little more…expressing opportunities and my expansion plans.... After all, she had been a banker for 25 years !

During the course of the semester that was to follow.... while most of my friends spent time taking extra classes, playing and going out..... I often found myself in banks, getting IPO applications, reading red herring, writing cheques and appling for the IPO's that season...

Coming back to college, I realized that coping up with engineering was only going to be all the more difficult now…..

Why Blogging after all....

Hello and Welcome to my first blog.....Better Late Than Never!

Well, here are some of the reasons as to why I have finally chosen to blog.....after all!

1. Hit the Audience Threshold :) [I believe with blogging, it will now be easier to share stories, thoughts, ideas and views with multiple(and growing in number) friends in a scalable way]
2. To capture random thoughts and ideas that come to my mind....but mostly don't get captured/recorded
3. Universal access......I can access/edit these from anywhere/anytime as long as I have access to the internet...
4. Being able to express/articulate your thoughts/ideas is a wonderful quality to have.....whether through Writing or Presenting/talking....so blogging is perhaps a step in this direction.
5. This can act as a potential back up in the long term....as well as a good place to look back (Assuming I do this consistently and build up/capture good volume) That reminds me, I have a huge lag/debt of topics to write about already.
6. Just like teaching, I believe that writing, explaining, reviewing, discussing stuff....helps improve your understanding of the subject....
7. I am still in the process of writing my first blog and have already started to realize how qualitative writing helps you with your thought process and as well in Organizing/Structuring them (bringing them out) better...
8. More Opinions and Comments, more learning and fun....!
9. Because my better half and my friends have been recommending me to....
10. Because I wanted to have at least 10 reasons....
    (To be brutally honest, because its Free!)
    
    Cheers!
    Vipul