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Wednesday, June 24, 2015

Multi-losers Or Multi-baggers:Take Your Pick

Investing has many facets.Terabytes of data,millions of websites,books,esoteric algorithms,secretive formulae devised by Ph.Ds from ivy league colleges and your humble retail investor as well.All wanting to buy at the best valuation.

So many methods.So  much madness.

“Inverse,always inverse.”Reportedly a saying by Charlie Munger,Buffett doppelganger,an acclaimed investor in his own right,who took this from Carl Jacobi,a 19th Century mathematician.

Valuation by inverse is to work backwards through the data on the target firm.It is easy to find firms trading below Book Value(BV) or even below the value of their net assets.Does it make the stock of that firm a good buy?

Is the firm heading towards bankruptcy?what are the vendors saying?Legal issues?Many companies with BV below 1x, viz MTNL,Reliance Infra genuinely have lost their way and taken on so much debt that the income is not enough to even service the interest.

In the same way,stocks trading above 20x BV might not have much headroom left to give the desired returns.Hindunilever,Page Ind,Eicher Motors will really have to achieve dramatic results to sustain the returns given in the past.


There is so much data available on the internet that unlike a professional analyst you need not take the trouble to go and meet the management in person,although it helps if you have the contacts.

The market always surprises.No one in 2008-09 could have forseen the CMP of stocks like DLF,IndiaBulls Real Estate,Lanco Infra etc

Inverse analysis helps to match price to valuation at prevailing market levels.In earlier blogs I have discussed keeping emotion out of investment decision making being one of the toughest things to do.I feel it is more difficult to predict multi – losers rather than multi-baggers.All you can do is:-

i)Avoid investing emotionally
ii)Avoid going with the herd
iii)Act decisively when the opportunity comes

Do not hold on to losers if fundamentals or management makes you uncomfortable

Talk of Sensex scaling 40,000 by 2020 is but talk.What is important is the return that you get at the end of the year.Talk to your Investment Advisor,not just listen to him or her!