The "10-baggers"

10-bagger: A stock whose price multiplies 10 times over.

Is it possible to get 9x returns through equity investments in 2-5 years ?

I haven't actually reverse engineered to find all stocks that increased over 900% in a 2 to 5 year period with an attempt to find patterns…though as I write this, it does'nt sounds like a bad idea at all...

Breaking the Myth

What kind of stocks do you think can give 9x returns?

I know, I know... most people do not think of 9x returns in the first place...
Come to think of it and the first thing that is likley to hit the mind is....ah, it's gotta be a micro or small cap stock...well, at least this is what I initially thought...

And after all the study, discussion and experiments with my mentor and partner in Investing, our first successful 10 bagger (actually 9 bagger to be precise) investment was Reliance Industries which was already the 2nd biggest company in the country by market cap at the time we invested…huh!

"Sum of parts is often more than the Total"

In 2005, while the buy back was on amidst the brotherly dispute, there was huge underlying value in Reliance which in my opinion did not get reflected in the valuation. The thing that I really liked about the company was that every once in a while, one of the underlying businesses like telecom, energy, capital, retail etc under Reliance would mature and pop out.

Back then, my uncle used to describe Reliance Industries as:

"a hen that gave a golden egg once every 2-3 years !"

If you got to have a healthy baby, you gotta nurture and feed it well, and so did Reliance use it's free cash flow to conceptualize, start and grow these businesses internally. For the first few years though, babies often need extra nourishment and affect the earnings (not the future earnings potential though). These babies were unseen/unvalued by the world (or the investor community so to say) hence resulting in a lower overall valuation of the consolidated business, than what would have been the valuation of the company standalone itself. These (perceivably unwanted) babies were huge businesses (blue chips) in the making, that were presently consuming cash and lowering the immediate profits.
If only one tried to see these businesses separately and value them 2-3 years forward, would he have seen the true underlying value…

Unfortunately (though for me, a blessing in disguise), most people have to be shown different pieces separately to be able to see the value… put them all in a box and they start valuing the box without knowing the contents.

To show it mathematically

1. Business A makes a profit of 10 million on sales of 100 million and grows at 20% annually and is valued at 200 million
2. Business B makes a loss of  (3)  million on sales of  50 million  and grows at 30% annually and is valued at 100 million

(Note: Business B is in it's early/growing/capital demanding years)

Now imagine that these 2 businesses A and B are part of one single company AB and hence the consolidated results of company AB are shown as:

1. Company AB makes a profit of 7 million on sales of 150 million and grows at 23% annually

Would you value the business at 140 million or less or 300 million?

As I said: "Sum of parts is often more than the Total"

Having said that, smaller companies are indeed more likely to fetch 10x returns for the reasons of the nature (Unless off course there is no limit on the market size and companies such as coke and Wal-Mart can find customers and favorably open retail stores on Venus, Mars and Jupiter)

(Start with Venus, I heard that women are from venus, so there must be a lot of craze for shopping out there too…)

While I usually restrict myself to look out only for consistently growing businesses that are ready for the next big leap...

Sure, you could get 10x returns in cyclic or commodity businesses too...
After all, every dog has a day, and when the demand-supply equation is favorable for a commodity business, it can certainly grow 10 times in a run up…most often eventually followed by a significant fall as the pendulum swings back or to say when the demand-supply equation turns back upside down, since these are cyclic after all...

Note: 10x returns need not always be the result of 10x growth in the business or underlying profits

10x means the market capitalization of a business becoming 10 times (or more than 10x if there is equity dilution and less than 10x if there is buy-back on the way...)
Now to explain this in a bottom-up or "per share" way:

Market Price of a Stock = EPS * P/E  
(where P/E = Market Price / Earnings Per Share)

From my understanding and observation of successful 10 baggers so far, it is the multiplication factor of the enhancement in these two variables, that leads to 10x returns…

1. EPS (Earnings per share) growing about 2 to 4 times in this period
2. P/E growing 2 to 4 times in this period

EPS Growth

For a good business growing earnings at around 30% compounded annually, a 69% to 271% growth in about 2-5 years is not a surprise. After all, 100 * (1.3)^2 = 169 and 100 * (1.3)^5 = 371.29 (compound interest at work)

(Also, 100 * (1.3)^10 = 1378.58 !!!, so a business growing at 30% would be about 14 times in 10 years)

 
Price / Earning Growth
 
Among other things, P/E is often a result of market liquidity, investor confidence, growth potential, longevity, confidence in promoters etc…

At macro level, a bull run is very supportive in getting from x to 10x…
With one or more of the following factors: Lower interest rates, higher growth rate for economy, favorable and high ROI for businesses, high liquidity in markets, high investor participation in markets etc
 
It goes without saying, that 10x returns are mostly marked by a huge investor recognition for the business/stock leading the company's move from micro to small, small to medium or medium to large sized business.

The beauty of 10 bagger investing is that even if you have a horrible hit ratio of 10% (one in 10 stocks you pick grows 10 times) you would still be in good profits!

However, with just a 10% hit ratio, the challenge would be in finding 10 potential candidates for the job...

Maggi

 

do minute ruk sakte hain, sir ke bal reh sakte hain... 
kyuki, badi gazab ki bhook lagi, maggi chahiye mujhe abhi… Umm, Maggi Noodles ! Maggi Maggi Maggi

People talk about businesses, brands, products, margins, market share what not… I am yet to meet a person between half and twice my age who isn't mad about maggi…

Whether from adventure trips or from school, hostel, college, bachelor days… while some lucky souls get to eat maggi even after marriage…
Talk of maggi and everyone has some fond memories to share…
now that's "mindshare!" … Priceless!

And just like Warren Buffet says, I'd like to say a few things about "Maggi"

1. If I gave you Rs. 1000 crores or $200 million, would you be able to kill Nestle's "maggi" business… I bet you won't (and I don't have that kind of money to give you anyway)
2. I know that 5 or 10 years from now, a lot more maggi packets would be selling resulting in more profits :)

Maggi noodles take just about 2 minutes to cook, hence the name
"2 minute noodles !"
How to Prepare: The Maggi noodle cake and seasoning is added into boiling water for two minutes and it is ready for consumption.
 

Most people have their own way of having maggi, while some like it with vegetables, some like it dry, some like it with gravy, some like it with chicken/sausages/eggs, some like it with tomato sauce and some with chocolate sauce, some like it with mushrooms and what not… however, there is one thing common… they all like it one way or the other!

 
Well, making maggi is so simple that when I try to compliment my friend's wife for being a good cook and all (the fact that she cooks maggi really well)… it only upsets her :)
 
A lot of products have come and gone with huge marketing/adv campaigns, but could not beat or put a dent on maggi's share or business…

However, you do get to see some Top Ramen packets from Nissan still around in retail stores (On that note, did you ever ponder why top ramen sells cheaper than maggi)

Forget others, even the numerous variants of maggi supporting the new punch line "Taste bhi Health bhi" (maggi atta, maggi rice mania, dal sambar, tomato, chicken, blah blah blah) combined do not come close to the original Maggi masala 2 minute noodles...

After all, It's in the taste!

Though it is noteworthy that Nestle has actually managed to build several products around the maggi brand, for instance Soups, Sauces, Ketchups, Seasonings, Cuppa mania… etc

Frankly, I haven't seen a maggi advertisement on television for a while now… but I remember going to a retail store exclusively to buy maggi at least several times in last few months… and trust me, if I don't find maggi in a retail store, I am unlikely to visit it again…
now that's the power of a good product or brand!

On a slightly related note, FMCG should benefit a lot from organized retail which is still picking up in countries like India. I don't think a good retail store can survive missing maggi, lays, ketchup, surf excel, coke, pepsi, sundrop oil, britannia biscuits, amul butter etc on their shelves… hence giving these FMCG products easy and expanded visibility/reach… there is certainly a lot more to talk on this subject, however I will leave it for a future blog.

10 bucks is all it takes…and it has been the same for almost 8 years now… Unbelievable... Isn't it ? Even coke has increased its prices from Rs. 5/- to Rs. 8/- (Remember the advertisement campaign: "Thanda matlab…Coca Cola" ... "Paanch matlab Chhota coke"… although chhota abhi bhi chhota hee hai… par ab bade ki price par miltaa hai")

(Well, being a stingy shopper, I know that Nestle reduced the weight of the maggi packets from 100 grams to 95 grams and recently to 90 grams, that's as good as a price increase of 11.11%, without perceivably telling the customer. Nevertheless, it's still worth it!)

There is something about Maggi… Umm ... I can't describe in words, but there is something about her, that makes everyone go mad about her :)

Well, I would consider this blog a waste if you are not craving to have maggi by now… :)

Bharti Airtel Top Down

For a business in an unorganized, unexplored or immature sector or market, I like to start with Top Down analysis to evaluate Market Potential (aka the size of Opportunity) and then narrow it down to the specific business leader based on its targetted Market Share, Customer Segmentation etc...
This approach is particularly good for market leaders in upcoming/fast growing sectors… and what better place to start than our population ~1.1 billion or ~6.5 billion if you have plans for globalization :)

Warning: What follows is very crude mathematics.

March 2001
Pagers were badly outclassed by mobile phones. However, these mobile phones were limited to rich and elite. Even incoming calls were Rs. 6/- or Rs. 12/- a minute and incoming text messages weren't free either.

July 2004
The market was ripe with 3 aggressive players: Airtel, Hutch and Reliance. Incoming calls were now free and making outgoing calls or sending text messages was now affordable.

The "turning point" for this market had been reached. The mobile phone cost which was the major "barrier to entry" for the student and the great Indian middle class was addressed both through low cost handsets and also through attractive handset financing schemes by operators.

"The Common Man" was now seen rushing to and queuing at outlets to register for the scheme.

And in what was to follow, you could find even the cab and auto rickshaw drivers, and small retailers / vegetable vendors carrying mobile phones.

Population as on July 2004 --> around 1.05 billion
Mobile Subscriber Base in July 2004 --> around 40 million

Projected Population in 10 years (2014) --> around 1.25 billion
Projected Mobile Subscriber base in 10 years (2014) --> anywhere between 400 million to 800 million

Bharti Airtel's market share (2004) --> around 25%
Bharti's Average Revenue Per User --> INR 563/-

It was more than obvious that average revenue per user was to fall as the mobiles expanded beyond the rich to lower income groups.

Managing same market share would mean over 125 million subscribers for Bharti Airtel in about 10 years… say 2014

At a Monthly ARPU of INR 300/- per user and a user base of 125 million subscribers:

Monthly Revenue potential: around INR 38 billion ($850 million)
Annual Revenue potential: around INR 450 billion ($10 billion)

So we are looking at "a business potentially scaling up to annual revenues of $10 billion in around 10 years"

At post tax margins of 20%, this means ~$2 billion in annual Profits

(Although we are only atrempting to evaluate the revenue potential in the scope of this exercise)

Top Down

I love numbers and use them extensively in analyzing businesses..

Big numbers, Small numbers, Growing numbers, Consistently growing numbers, Falling numbers, numbers product numbers, numbers by numbers, old numbers, new numbers, projected numbers, actual numbers… I simply love them all!

However, number are best when used practically and with common sense. My love for them begins to fade away the moment they become too complex (getting to 2'nd / 3'rd decimal places or getting into complex integrals and derivatives)

For a business in an unorganized, unexplored or immature sector or market, I like to start with Top Down analysis to evaluate Market Potential and the size of Opportunity and then narrow it down to the specific business based on its target Market Share, Customer Segmentation etc... This approach is particularly good for market leaders in upcoming/fast growing sectors… and what better place to start than our population ~1.1 billion or ~6.5 billion if you plans for globalization :)

Note: What follows in top down analysis is usually very crude maths.

There are lot of things that are left open in this Top Down analysis

• How much Capital Investments, Debt or Equity dilution is required to get there
• What will be the competitive environment in a matured market. Can the market share and margins be protected?

I like to track things like growth, profitability, equity dilutions (shareholder value) etc more regularly through the course of the journey, Quarter over Quarter or Year over Year… to see if the business is heading in the right direction…

[Note: There can be differences of magnitude in what you estimated and where market lands up]

In fact, from my experience, there will always be. However, you will thoroughly enjoy and learn from the journey as the story pans out.

Further, there may be lots of barriers/influencers ranging from Infrastructure, Government Policies, Regulatory Bodies, Capital constrains etc that not only dominate in determining the scale of the business, but also the profitability equation and the time it takes to scale out...

On the positive side, the business may expand through:

1. Growth in Market share
2. New dimensions for revenue, like Fixed line phones, Internet service provider, Adv's over Mobile, DTH services etc 
3. Mergers and Acquisitions
4. Any new businesses from Cash Flow, like Retail, Reality, Insurance etc

On the negative side, while the market may expand for the sector:

1. The business may lose Market Share
2. Unfavorable equity dilution (Company grows bigger in size, but shareholders become poorer in value)
3. The business may lose its margins and profitability (like Aviation)
1. Intense competition or regulatory barriers
2. Capital constraints / High Debt
4. Lack of tax Benefits / government policies
5. Governing Interest rates, economic situation etc

More to come...

The Great Indian "Potential"

Having been brought up in India, I was obviously used to standing in long queues pretty much everyplace I went and facing tough competition in pretty much everything I tried to do.

Whether it was buying/billing groceries, booking train tickets, booking movie tickets, visiting a temple, paying electricity/telephone bills, ATM's, banks, restaurants... queues, waiting, crowd and traffic was the way of day to day life.

Getting into one of the best college for engineering meant being in the first 120 amongst the 72,000 that applied…huh…"that's one in a 600!"

The good thing though were the 6 years of teenage that I spent in a completely residential school.

We were not familiar to the concept of money, since everything was taken care of, as long as daddy paid the school/hostel fees. The little that we kids did know about money was that it was a bad thing to have and the consequences of being caught with money in school would be disastrous.

In this part of the world, the demand/supply equations for almost anything always seemed balanced and life was just as easy as it could get. There were exactly as many glasses and plates for everyone as the number of us, as many seats in a class as the number of students, and an apple and a packet of milk everyday for each one of us.

It was indeed a world of its own, with just about 600 students on a fort spawning about 110 acres with over 50 teachers so that everyone could get their share of learning, 18 playgrounds so everyone could play at the same time…..wow

There was never a scarce for opportunities, if you ever wanted to do something beyond books, which children mostly did, there were options and options and options...

From creative extra curricular activities like Painting, Craft, Batik, Sculpture, Pottery, Wood work, Metal work, Paper making, Aero modeling to library, computers…and on and on and on

From vocal, orchestra and school band to any musical instruments...
Debates, Elocutions, Quizzes, Jam sessions, Socials and Plays...

Sports ranging from Football, Cricket, Hockey, Swimming, Squash, Tennis, Basketball, Table tennis, Badminton, Athletics, Horse riding, Cross country etc

Above all, there were things that needed nothing but company of good friends…gossip!

If this still wasn't enough, you could go beyond school boundaries for adventures ranging from Trekking, Skiing, Rafting, Cycling to Labor camps for social service or visit other schools for competitions or exchange programs.

It is true that there was certainly a strong competition in most of these activities…though I would attribute it to high spirits and passion versus pressure.

By March 2001, the glorious days of schooling were over and I was back to the other side of the world. The first few days were total fun given the new gift of freedom. I wonder if there is anyone who doesn't feel good to be out of school, no more exams after all :)

For the first few months, I cribbed and cribbed and cribbed… every place I went… every person I met… and everything I did… whether it was having to fight for movie tickets, standing in long queues for railway reservations, or travelling in jam packed buses on jam packed roads…

Illiteracy, Ignorance, Poverty and Population explosion had by now become my favorite topics of discussion...

However, even through the dusty roads and crowded lanes, one thing seemed clear… that India was moving… it was unstoppable… No matter how slow we moved and how long it would take… but it was undeniable… India was going to be a developed country one day…

The talks of India 2020 and India being a superpower were everywhere...

Well, it was evident that the lifestyle of an average Indian was going to improve (eventually), more and more of us were going to get some share of resources and technology in our lives, more and more of us were going to be productive and it was going to reflect through everything from education, food, textiles, retail, automobiles, telecom, electronics, aviation, housing, internet, services, banking and finance and what not... as and when their time arrived...

And slowly, at my own speed, I began to see the humongous potential and opportunities (particularly in evolution/expansion/scale out for businesses) that lay ahead...

Above all, I felt thrilled by the very thought of being able to see (and be part of) this transformation...

The usual crowds, queues and the same "One Billion" population that I used to be embarrassed talking about earlier had now become my starting point for doing Top Down evaluation of the size of Market/Opportunity for various businesses.

In the course of next few blogs, I will share some examples of quick evaluation of market potential for various businesses and sectors that I did mostly between 2003 and 2009.

A lot of people suggested me to cut down the length of my blogs…Just like cricket has moved from tests to one days to 20-20 now :)

(Jokes apart, I am done for the day...)
To be continued …

The power of Consistency

October 2008: Most of my close friends had by now relocated to US one after the other. The days (specially the weekends) weren't the same anymore and the same city which we had actually started liking so much in the recent past, now felt terribly monotonous and bland…

All 3 founders of VAT club were now at different geographic locations. While we termed it "expansion plans", the truth was that something led to an explosion that scattered and threw us in different directions. The pieces were not equal though. The heaviest one ended somewhere in the northern part of India and started shedding weight thereafter. One piece flew all the way to US while the third one that was facing the ground had no choice but to go deep under. The fact was that 2 of the 3 members of the VAT club had graduated and hence had to move on as per the founding rules of the club, while the 3rd one was still "Single" spelled "Singhal" :)

Somewhere deep inside, I knew that these days were never to return. (After all, school days, teen age, college days and the golden days of bachelorhood, like all good things feel short and longed for... By Design)

The handful of us that were left in Hyderabad (by choice :)) decided to catch up over a game of cards (Flash !)

We were disciplined players and did not like to have significant sums of money involved. In case you are familiar with the game, you obviously know that the game has no meaning without money. So we played with minimal starting amounts of Rs. 1/- (about $0.02)

We used Rs. 1/- and Rs. 2/- coins for playing and the only condition was that the winner had to take back all his winnings in coins.

I have a habit of not only applying 'probability' but also 'money management' while playing games such as Flash … No, seriously…
(It may be hard to believe but my returns are usually proportionate to how long I have played)
At least I was certainly amazed by my own attempt to shape my gaming strategy to produce consistent returns over time similar to that of my investment portfolio. Off course, this strategy can only work in irrational markets :) [And it was playing for fun after all]

The net result of the 6 hours of playing all night was my win of Rs. 198/-

All the coins together in my hands felt good and the sound was sure soothing to the ears (remember the track 'Money' by Floyd), so we started again on what we did best: fooling around!; thoughts of growing this coin collection to buy a cycle, bike or an SUV… then calibrating how many boxes or cartons it would take to store as many coins and so on…


Since I was the winner and also a man of foolish ideas, I brought all the coins home and actually thought of growing this collection… :)
Without much effort, I easily managed to add about Rs. 10/- in change to my collection everyday, collected and saved from various day to day transactions.

P.S.: Sometimes, I would spill all the coins in my collection all over my bed and go crazy! I enjoyed counting, sorting and organizing my coin collection every once in a while :)

I soon realized that there were lessons to learn even here… The power of Consistency!

Nothing beats doing something regularly… even

"An apple a day means 365 apples a year"

It has been about 16 months since I started collecting these coins (change) and now have over Rs. 5000/- in change. These are actually stored in cylinder shaped plastic jars that are working well as my dumbbells these days :)

I know, I know, I ain't get no interest on these savings …
But the idea was never really that of savings and return, it was meant to be an experiment. Or perhaps, I had a point to prove...

Here is some mathematics for the day:

By saving Rs. 10/- everyday and assuming an annual interest rate of 10%, you would have about Rs. 3762/- in a year, about Rs. 23,000/- in 5 years, about Rs. 60,000/- in 10 years and Rs. 2,15,000/- in 20 years…

Here is the complete table for reference:


[assuming an interest rate of 10% per annum]

I have purposely avoided showing these calculation with higher return rates like 20% or 30% (as I would like to cover it in a separate blog sometime soon "Compound Interest - the strongest force in the universe!")

However, still trying to give you an idea of what higher rates of compounding can do to your investments: If you consider the same 10/- par day savings at a 30% annual rate, it would be equal to 1,73,528/- in 10 years (versus 59,959/- at 10%) and 25,65,767/- in 20 years (versus 2,15,477/- at 10%) [Yes, that's roughly 2.5 million]

Yea Yes, that's correct... Savings of Rs. 1000/- per day at 30% compounded annual return would be Rs. 25,65,76,800/- in 20 years (or about 250 million)

For more, try it for yourself at: http://wealth.moneycontrol.com/jtcompounding.php

Typical daily expenditures of individuals:



Hence it is clear that it won’t make an iota of difference to your lifestyle if you accidentally drop a 10/- rupee note from your pocket every day (come on... this is like having 2 cigarettes or a tea or making a regular phone call)

The term is "SIP: Systematic Investment Planning"

Moreover, if you are not investing in Fixed Return Instruments or investing in market tradable investment, you are likely to benefit from Dollar cost Averaging (knowingly or unknowingly :))
[The concept is well known, however I will do a blog on this soon]


From the table above, one more thing is quite evident, the fact that after 10 years or so, fresh savings of Rs. 10/- per day wouldn't be much needed anymore. Since the 10% interest from existing/accumulated investments is well above your fresh savings of Rs. 10/- per day.

For most people, there comes a time in life when their savings pool is large enough to self sustain. This is a time when the magnitude of their earnings/salary is much less than the pool of savings and they don't have to worry about fresh savings any more.

There are 3 stages to personal investing: (as I describe them)

• Stage 1: Saving money from monthly salary/income and investing it (Continue doing this for months/years until you build an investment pool that is significantly bigger than your saving capacity)

• Stage 2: Switch to pure Investment mode (Spend/blow all your earnings/salary and enjoy). For the portfolio, focus only on maximizing returns on the existing pool (in a somewhat protected way based on your risk appetite). However, reinvest any profits/dividends/interest from the portfolio.

• Stage 3: Financial Independence mode (This is when the secondary income from dividend/interest/income from investments is enough to either meet your monthly expenses or equals your salary/earnings (and growth of your portfolio equals or exceeds inflation). i.e.: There is no financial need for a primary earning from job etc)

This is almost the same as how most good businesses shape (specially traditional or capital intensive businesses…) They all start with an initial equity and sometimes debt. Continue to Invest more and more through equity dilution or fresh debt for years as business expands (often having a negative cash flow for several years). Then eventually maturing and not requiring any fresh investments. The mode where profits are either reinvested or distributed as dividends.

However, we behave very differently when it comes to personal finance.
Typically, people get started very late on stage 1 at an average age of 30 or 35, often take debt for house etc, reach the stage 2 near retirement (or are sometimes just forced into stage 2 after retirement) and most of us never reach stage 3 (usually a variant of stage 3 that has a diminishing portfolio)

The reason isn’t always a late start or quantum of earning/savings, but lack of thought to financial planning or money management.

Having said that, there is one more important lesson:

It was the year 2002 and I was back home for my end semester vacations. Just as everyday, the door bell rang at around 7:30 PM. It was dad who had returned back from office.

Before actually going towards the kitchen looking for some snacks and sweets :), he stopped by in the common room, placed his briefcase on the dining table, set the digits in number lock to "333" (actual numbers changed for security reasons :)), opened his briefcase with both hands mostly using the two thumbs, took our a piece of A4 paper, an article that read:
"Benefits of Saving/Investing Early"
(more on this in a separate blog later)

By August 2003, I had started saving and investing even before I had started earning :)
For the last 5 years in work life, I have been saving and investing well over Rs. 1000/- per day and have managed a compounded annual return of well over 30%.

Stage 2 is soon to arrive. Perhaps, savings or investment of fresh 1000/- per day to my portfolio would soon have little or no meaning in a few years time. What this means is that the portfolio or size of my investments will hit a size that does not need fresh investments (of the same tune as what I have been doing. i.e.: Rs. 1000/- per day) Hence, the focus would now shift to maximizing returns instead of maximizing savings!

• Spend all primary earnings on living/personal expenses/charity etc (No more savings or fresh investments)
• Focus on maximizing returns from the portfolio (Since a 2% additional return from portfolio would contribute more than a full year of primary savings)
• Grow portfolio and work towards Stage 3/Financial independence. (When dividend income from portfolio meets either monthly salary or monthly household expenses)

Happy Investing!

The Cycle Rickshaw Lender

The three wheeled cycle rickshaw is a unique and somewhat ancient form of transport, deriving its front from that of a bicycle and back from a Tonga or Bullock cart :)

I have a personal liking for these as against the modern day vehicles.

At the heart of the concept lies the human engine which is made up of 'calf 'and 'thigh' muscles, the fuel used is 'carbohydrates' (while some variants also operate on 'fat') which comes built-in with the engine, the by product that gets emitted is 'sweat'…

Apart from efficiency, some other reasons why I personally prefer/enjoy cycle rickshaw rides more are:

1. Speed… (The slow speed actually concurs well with my relaxed and laid back attitude)
2. 
   
   Convertible… so what if I can't afford the convertible model of BMW (The simple design of these cycle rickshaws allows them a convertible roof) What this means is that you can enjoy bits of wind/breeze, sun or rain while travelling, depending on what's in menu for the day.
3. 
   
   Peace of mind… You go at your own pace enjoying the beauty around (both natural and mad made), traffic is least of your concerns (sometimes a blessing) and there is hardly a sense of competition with other vehicles around. This not only reduces chances of accidents (leaving happy accidents) but also makes the overall experience pleasant (in contrast to commuting in metros under loud horns, dark clouds of smoke and mental abuse :))

It was the year 2001, I was finally out in the civilian world..after spending 6 full years in a boarding school. I got started again on what I did best, negotiating and bargaining, applying price value comparisons on almost anything, surveying people (most often the common man … milk man, rickshaw wallas, drivers, shopkeepers and on and on and on), understanding individual perspectives, understanding how people made a living and decoding business models.

The city was Allahabad, the city of god, the city of rivers and sangam, the city of kumbh, the city of Nehru and Gandhi, the city of temples, good chat stalls and awesome food joints. Attributed to the small size of the city, you could reach almost anywhere by travelling a few miles (or few minutes). Above all, the city life was as slow as I could have possibly desired for myself.

Coming back to the cycle rickshaws…
During my initial days at college, I'd make at least 3 round trips a week to various places whether for buying books, groceries, mango shakes in katra, eating out (escaping mess food) or watching movies. Since all these trips were made on cycle rickshaws, what this indeed resulted in was my survey of about 2 dozen cycle rickshaw wallas by the end of my first month and by now I had begun to understand their lifestyle and day to day issues in and out...

A typical cycle rickshaw back then costed around Rs: 4000/- (or $80)
Most of the cycle rickshaw men hired cycle rickshaws from a lender.

The rent for a cycle rickshaw would typically be:
Rs. 12/- per day (6 AM to 8 PM) and Rs. 8/- per night (8 PM to 6 AM)

This meant a rental income of Rs. 20/- (0.5% of the price of vehicle) per day for the lender, potentially translating into Rs: 7300/- for 365 days of the year.

However, let us account for approximately 65 idle days in a year (or 5 idle days every month) of no rickshaw lending activity (attributing to holidays, repairs, demand-supply gap, riots/strikes etc)

This still means 300 days of leasing (a healthy 82% utilization), translating into a rental revenue of Rs. 6000/- (or $120)(or 150% of the price of vehicle)
[Note: This is without accounting for interest from recurring deposit of Rs: 20/- for 300 times in a year]

The lifetime of a cycle rickshaw can be anything between 10 to 15 years (Frankly speaking, it may be used for as long as desired by repairing/replacing wheels, seat cushions or any other accessories and parts on a need basis)

Let us account another Rs. 2000/- or 33% of revenues as expenses towards staff cost, collection charges, provision for non performing assets and depreciation (non interest cost as we have no leverage).
This still leaves pre-tax profits of Rs. 4000/- (an ROI of 100% a year)

Tax liability would be unlikely due to limited quantum of profits that may not cross the tax brackets.

Having said that, I saw potential to increase average revenue per rickshaw by sticking some posters on cycle rickshaws for advertisements by local brands.
In fact, if advertisers would be willing to pay as much as Rs: 20/- per day per rickshaw for displaying their ad banner. I could in turn forego the daily rent collected from these rickshaw drivers hence running a "social" business, which was not only profitable but produced a 100% ROE :)

After I returned to college from my 2nd year vacations with Rs. 40,000/- that mom had given me for starting my equity portfolio, I kept wondering if I should instead start my cycle rickshaw lending business with 10 rickshaws bought using this money. In less than a year, I could have doubled these to 20 with a 100% ROE and 100% of profits reinvested. In the years to follow, I could have had 40, 80, 160 and soon over 300 of my rickshaws in the city.

In fact, if I decided to take leverage(bank financing) with a debt to equity ratio of 1:1, I'd be able to speed up and grow at about 200% a year.

While I day dreamt of my business plan to riches, the unwanted dreams of my engineering subjects such as physics, dynamic systems, operation research filled my nights with horror.

What I did not think of was the market opportunity and market potential.

At 200% growth rate, in less that 10 years, the city would have had more cycle rickshaws that the population :)

In fact, the whole market size for cycle rickshaws was about 300 :) and this market was already fully captured. Though it is easy to find opportune people to lend rickshaws to, but it would have only led to too many rickshaws on road, drop in cycle rickshaw men earnings due to excessive competition emerging from increased supply and lower utilization for lenders including me.

Besides, there were other challenges like barrier to entry, micro management (the lender would have to make daily collections from every person he lent to) and inventory (parking for rickshaws on days of low business) I soon realized that this was not my path to millions ("$$$") and I would have to look for an alternate business plan.

However, the real reason for not starting was lack of gut, a missing business partner and off course, engineering to cope with.

This analysis eventually helped me take back a very important lesson. While it may be good to talk of percentages for growth rate and compounding for evaluating investment returns at a micro level, it is equally important to understand the macro picture (market opportunity / market potential) in addition to having a model for scalability.

I found the same lesson explained wonderfully well by Warren Buffet in his letter to shareholders of Berkshire Hathway for the year 1989:

We face another obstacle: In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law may not operate for a time. But when the base balloons, the party ends: A high growth rate eventually forges its own anchor.

Carl Sagan has entertainingly described this phenomenon, musing about the destiny of bacteria that reproduce by dividing into two every 15 minutes. Says Sagan: "That means four doublings an hour, and 96 doublings a day. Although a bacterium weighs only about a trillionth of a gram, its descendants, after a day of wild asexual abandon, will collectively weigh as much as a mountain...in two days, more than the sun - and before very long, everything in the universe will be made of bacteria." Not to worry, says Sagan: Some obstacle always impedes this kind of exponential growth. "The bugs run out of food, or they poison each other, or they are shy about reproducing in public."

The Bigger Fool

Since today is April 1'st ... the Fool's day… I thought of writing and assembling something on the same topic :)

Once upon a time, in a village, a man appeared and announced to the villagers that he would buy monkeys for Rs. 10 each.

The villagers seeing that there were many monkeys around, went out to the forest, and started catching them.

The man bought thousands at Rs. 10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at Rs. 20. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to Rs. 25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it

The man now announced that he would buy monkeys at Rs. 50 However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs. 35 and when the man returns from the city, you can sell them to him for Rs. 50 each."

The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere...

This is what "The Greater Fool Theory" is about :)

From Wikipedia:

The greater fool theory (sometimes the bigger fool theory, also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a bigger fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else for an even better price.

Some consider it a valid method of making money in the stock market, particularly momentum investors; however, fundamental investors believe that market participants eventually realize that the price level is too outrageous (too high or too low) and the speculative bubble pops. The greater fool theory relies on market optimism and market momentum concerning a particular stock, an industry, or the market as a whole.

"Sounds like playing 'passing the parcel' ... but with a
Time Bomb"

It is similar in concept to the "Keynesian beauty contest" principle of stock investing.
http://en.wikipedia.org/wiki/Keynesian_beauty_contest

The question is whether you buy stocks that you find most attractive

or

You buy stocks that others would find most attractive (regardless of what you think about those)

However, in a world of too many fools, this does not end here, this can be carried one step further to take into account the fact that other investors would each have their own opinion of what other investors think. Thus the strategy can be extended to the next order, and the next, and so on, at each level attempting to predict the eventual outcome of the process based on the reasoning of other rational investors :)


It is true that "Markets are like Voting machines… "
However, your Investment decisions or opinion need not be the "Average" opinion on the street (that too , of a street that itself looks at others opinion to derive its own)
Instead, use your right/freedom to expression, use democracy to your advantage and for the general good

(Why not Vote for the person you like instead of trying to predict who would have maximum votes)

Now that's a difference between "speculating" and "investing" …
For Investing you would look at inherent qualities of the politician (or that of a company) rather than looking at popularity or mob predictions!

(It all goes back to my yesterday's blog about going against(or at least independent of) the market and Ben's theory on Mr. Market)

I see this as one of the growing problems with the market today...
(To be honest, this is but a reflection of our society today... )

People today are more concerned about what others think and what others are doing ?
"Tell me, what do others think about me ?"
"Will everybody like my new dress ?"
"blah blah blah….because everybody else is doing it… ! "

I see this ("watch out what others are doing") phenomenon is more popular in bull markets (good times) when everyone seems to be doing well...

It is only in bear markets or bad times (failures in life) that people make an attempt to look inward...

I guess that's why we need cyclical markets :)
[A "bear" or "beer" every once in a while is what we all need]

To add further, these days many sites display the average target price of N investors, the average expectation of results of N investors, the average recommendation for a stock based on buy/sell/hold ratings by several analysts/investors…

If you have thought as much and in case you believe this is the right approach, then you obviously understand that Market prices are determined by millions of people and hence they ought to be fair… aha, "The Fair Market theory"...

Unless you have confidence in your intellect and resulting decisions and the strength and patience to stand by it… you are unlikely to outperform the markets…

"More often than not, try to leverage your innate self, your IQ, your creativity/art, your innovativeness, your hobbies, your comforts, your choices, your beliefs, your passion and yourself… you you you" (without being an egoist :))

"Don't undermine your worth by comparing yourself with others. It is because we are different that each of us is special"

Wow, now that reminded me of "The Fountain Head" by Ayn Rand