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!
