WHAT CAN BE A PROBABLE BOTTOM OF INDIAN STOCK MARKET?

We have seen a sharp fall in the market these days. Now, everyone has a question that what can be a probable bottom? where we should start buying? Bottom of the market already made? Should we buy or will we have missed out this opportunity? Yes, Nifty has reached to the fair value zone but pendulum never stayed at the middle zone it will go extreme to both the direction. So, we have seen upside extreme and now have to see downside extreme move.

Before starting answering the above questions, here, I am requesting you to read my old article which I had posted on 4^th August 2019. In that article, I mentioned regarding market fall. Please first go through that article because the current article is a continuation of that article.

THE INTELLIGENT INVESTOR – 3 – A CENTURY OF STOCK-MARKET HISTORY

Now, if we analyze current fall then we can say that Indian corporate and GDP has witnessed a limited growth in the past. Also, Covid-19 virus has disrupted the entire world economy. Majority of the economy has started giving a revival package but if we look at the speed of the spreading of Covid-19 and death of the people then it is very painful for us as well as the economy.

Our PM has announced with the 21 days lockdown to fight against the Covid-19. We have taken this step well in advance so that we can able to control the situation, because if the situation will go out of control then we do not have a proper infrastructure for citizens to cure.

I have taken a few data from HDFC Bank India growth outlook 2020, cost of lockdown.

By looking at the above data and havoc of Covid-19 in the world, it is essential to go for the not only lockdown but to declare an emergency in India. Now, let’s go to the economic impact of this mayhem. People can oppose that government of the majority of the economy has started announcing a revival package. But We have to think that it’s not a financial crisis where you pump liquidity into the system and things will start recovering. It’s taking the lives of people so what will change after the liquidity get infused. People try to save life rather use those liquidities. So, disruption can take time to revive. If this problem can worsen it will be led to a financial crisis which is still pending to come. It’s just my thoughts, don’t know what can happen but this thing looking worse than any financial crisis.

If the normal situation has come where growth remains subdued then the market can remain in range but here this difficult situation can hamper the earning badly.  we have to understand that our states of India are equivalent of the many of the country where corona has done huge damage. Here, the world economy gets hamper, trade around the world hamper, supply chain get disturbs, corporates have to fund fixed cost, they only can manage variable cost through the lockdown.

Many of the articles and reports indicating towards global recession and as intense as the recession of 1929. I don’t know that will happen or not but I only can pray that such will not happen because it will take many further issues with many of the lives. Let’s not getting into the debate and do some number crunching which is always my favourite.

Current, Nifty EPS is ~Rs.444 so proceed with the calculation based on that. I am assuming current EPS will remain same for FY20 and all degrowth will account in FY21 and FY22 (if the situation will not come to the control then FY22 will also go for a toss).

I have taken the bank rate as an SBI FD rate after the rate cut.

Now, if we look at the earnings yield to bond yield ratio then it has reached at the 1.03x in the current period. If we take same EPS and take that ratio to the worst happen during the 2008 – financial crisis then it was 1.11x so nifty level come to the 8000 but Covid-19 will going to hamper earning growth and might be a new level of earning yield to bond yield ratio can come, which I have taken a range of 1.25 to 1.50 with a different scenario.

If things will be in control in coming few days then might be 5% degrowth can be possible and then market also maybe get stable at the old worst level of earning yield to bond yield ratio – 1.11x to 1.25x. But if things will get more worst then now and continue with coming 1-2 months then 10% degrowth in earning can be expected. I have made a study in S&P500 of USA and in that market earning yield to bond yield ratio has reached around 3x in worst level which I am not considering as of now. If we see that then past falls in the market have accounted for ~50% fall from the top so that that will also come to ~6215 level.

Now, another point is that earnings growth always essential for generating returns in the market. So that market can be remaining in the range till no sign comes for earning growth revival because, on the hope of earnings growth, the market has already run a lot.

I have posted an article on WHAT CAN BE A PROBABLE RETURN FROM SENSEX IN COMING 10 YEARS? a way back and where I have taken SENSEX level after 10 years on worst earning growth of 3.50% came at 43547 on P/E and 57678 on P/BV based. So, if earning growth cannot revive then the market can remain in range for a longer period. But from the current base, we can have a good chance of making a return in the range of 4-7% CAGR in the index overcoming 10 years. Tax cut reform will also aid in earning growth coming forward. We only have to pray that situation will not worsen from here and for that we have to stay at home, stay safe and fight against Corona.

#Stayhomestaysafe #Stayhomesavelives #Fightagainstcorona

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Quality Investing can be a Contrarian Investing….

I am going to write something different which is not easily acceptable to our investment society. But if we analyze it thoroughly then we can understand it and able to accept the reality.

So before going forward with the core discussion, let me start with some basic concepts.

Let me first mention what is contrarian investing?

 “Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time.” – Wikipedia

“Contrarian investing is the ideology in which an investor attempts to make profits by making his decision against the popular understanding but only when the conventional wisdom appears to be wrong.” – Trade Brains

After reading the above definition, we can come to know that contrarian means going against the herd. If we perform a task that is not performed by anyone then we fall into the category of contrarian person.

When it comes to an investment then What people usually do as a contrarian investing decision?

People run a list of 52 week low, the stock price has fallen a lot, low in valuation, companies having some problems & not with good financial but available as penny stock prices, etc. These things the majority of people are doing. I was in interaction with many of the clients and all those seek an investment idea with all the mentioned criteria earlier. In addition, they seek investment ideas where stock prices are below Rs. 5, 10 or maximum Rs. 100

A common myth in the market is catching a falling knife, turnaround, beaten-down stocks, etc. work as a contrarian. But if we check ground reality then the majority of people focus on those factors so if all want to do the same then how it can remain contrarian.

In addition, people average quality when stock prices start falling, the majority like to average at lower and booking profit when stock prices going upwards territory. They don’t have guts to book losses. Thus, lastly, they remain with the losers as they have booked out winners.

So, if the majority are performing in the same way then how it can be a contrarian investing?

I have taken a few examples of the companies which are having lower quality and prices have fallen. And as prices have fallen people have started accumulating those stocks. I have taken the last 10 shareholding patterns for reaching to a conclusion. All these people who have tried to catch a falling knife, those all have ended up with the losses.

We can see that people have to keep on buying as prices have fallen, book value bargain, try to catch a falling knife, averaging lower, etc.

So, what can be a contrarian investing?

When I asked people to invest in XYZ company and stock prices trading near 52 weeks high then people tell me that it’s already run up, give me something which has not run.

Also, stock prices are above Rs. 1000, 5000, etc. then they fearful and ask for a penny.

Means buying stocks which are traded at 52 weeks high then people tend to stay away from it. In addition, when stock has moved upward and things have improved with it then we never have to hesitate by averaging upward. We need to book losses if things are not happening as per our assumptions and keep running profitable ideas.

“Cut the losers and stay with the winners” – it’s the only formula of staying with a portfolio of winners.

So, these all can be a contrarian where the majority of people don’t focus.

Mr. Nooresh Merani has twitted a few days back –

Similarly, I have taken a few examples of the companies which are having a decent quality and prices keep on rising. And as prices keep on raising people have started booking profit in those stocks. I have taken the last 10 shareholding patterns for reaching to a conclusion. All these people who have to try to sell out their positions, all have ended up with the regrets.

We can see that people don’t like to average upward when companies having a quality, they run for booking profits when the stock price has moved up rather keep holding a winner. So that what the majority are not doing that only can provide us with an above-average return.

It is not always one asset class; one investment style remains contrarian forever. As particular assets or investment styles generating above-average returns then that will attract more and more participants which convert contrarian style to general style or asset class. When equity becomes popular among the participants then it having a good probability of underperformance compared assets class which is relatively lower popular. So that we require to shift from asset class as it moves in the pendulum of unpopular to highly popular.

This is the only concept of contrarian investment that teaches us. But the majority of investors have taken this in a different way. And they try to hunt for the lower value, falling knife, etc. Yes, this can be a contrarian investment style but we have to compare that when the majority of the people interested in such situations then that will not remain contrarian any longer.

The majority of the time, investors avoid higher value, quality, keep upward-moving stocks and that can be a contrarian investment strategy for us till people not getting attracted to such quality companies.

So that there is not a single investment style or asset class which remains contrarian forever. It will be unpopular and will moves to popular and then again once in a while return to the unpopular. We have to identify it and that helps us to create and protect our wealth.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Interest rate cuts: Does it provide long-term benefits?

When rate cuts happen, people think that the economy is weak so that it required a rate cut. The reduced rate provides stimulus to the economy which resulted in the stronger GDP, higher corporate profits and higher stock prices. This is the first-level thinking.

Rather second-level thinker thinks that –

• Why do rate cuts happen?
• The economy is weak or weakening?
• What damage can occur if rate cuts not happen?
• How much worse it is?
• Does this rate cut help to revive things?
• Shouldn’t we need to take rate cut as a worrisome scenario?

A very nice example quoted by Mr. Marks that when we visit a doctor for our weak health and then he works on healing us through higher treatment, should not this worrisome for us?

First level thinker takes it as this treatment heal us and we will get all right soon

Whereas second-level thinker take it as –

• how much worse it is that such high treatment is required? Or the situation is worsening highly?
• Does it resolve the issue?
• Is this treatment sufficient?

We need to think that the doctor has to bring a higher treatment that means simple treatment does not go to work for healing us. This means either issue is big enough or it is on the way to becoming bigger. So that when we have a bypass that means chest pain is not because of a gas problem but actually, we have a heart attack.

What can lead to growth at a lower interest rate?

• Lower cost of borrowing – lower interest on EMI – more savings leads to more spending on the consumer front and that resulted in the GDP growth
• Lower cost of borrowing – encourage businesses to make an investment – lower cost leads to more cash left with businesses to make further Capex – earning starts growing – more dividends or stock buyback enhance cash inflow to the investors – more spending – that increases GDP
• Consumer spending increases – demand increases – encourage businesses to invest – more employment opportunities – more wages – increase consumers spending – GDP increases

The most important thing is that when interest rates go down then we reduce discount rates also. So that lower discount rates resulted in the higher assets prices. And lower rates encourage investors to take more risk to earn more return in the low return world.

Rate cuts provide hints for future rate cuts. And the above cycle keeps repeating.

There are many situations where lower rates are undesirable –

Low rates increase the inflation (some inflation is required for the growth but excessive can kill) – too much inflation increases cost of living – it makes hard for people to spend more money – lower rates reduces the return on the cash, money market investments, high-grade bonds so that people make an investment into the risky products to earn more return – people take more leverage to make an investment – this creates an assets bubble & some point of time it will burst.

Due to the lower interest rates, we provide lower discount rates to the assets which have increased the price of the assets and when the bubble burst interest rate increases which creates huge damage to the prices of the assets.

This is like painkillers which cure pain for now but harmful to health over a longer period if we continue with taking painkillers frequently for immediate relief then it can destroy our health in the future. So, we need to be careful while taking a painkiller for curing pain at the time.

We need to focus that whether growth is natural or artificial stimulating growth. If growth is not natural then central bank and government have to take measures to boost growth. Such kind of growth does not survive for long without stimulation.

As current slowdown is not only cured through rate cuts but the government need to bring further measures which can provide long-term domestic growth without any temporary stimulation. Temporary stimulation brings future demand in the current period or till the stimulation remains in the force. After that demand starts getting dry up. Such a stimulus can be more harmful and lead to huge damage to the economy at whole.

Inspired from Howard Marks memo – “On the other hand”

 

Avengers: Endgame and Investment

Previously I have written a post on learning investment lessons from movies such as “Chal Man Jeetva Jaiye”, “Dangal”, “3 Idiots”, “Rajneeti”, “Sanju“ and “Badla“. Now, I am going to write a few investment lessons from another movie Avengers: Endgame. Avengers: Endgame is not only a movie but it’s an emotion.

• Accept the reality and don’t lose temperament

Extract from the movie – At the starts of the movie, we have seen that Tony Stark stuck in a space and going to die. During the time, he has accepted death and didn’t lose his temperament. He has keep environment live.

Co-relation in real life – We face similar kind of events in our life and investment journey where we do not get any clue about what to do. We should not lose temperament and work on the acceptance of reality.

• Don’t lose hope and identity due to failure

Extract from the movie – We have seen that initially, Tony has denied helping Ant-man and Cap for time travel. But later on, he has worked on the time travel mission. He has made it possible to do a time travel.

Co-relation in real life – Similar way in our life and investment, if we faced failure then we should not stay away from our actual identity. Rather we should work on it and turn out our failure into success. If we lose our identity then we cannot get back success and we stuck with the failure for a lifetime. It is obvious that we face failures in our life, our assumptions go wrong, the market takes more time than we have assumed to recognize the value of our investment.

• Wait for the opportunity

Extract from the movie – We have seen that Avengers got an opportunity after the 5 years also. They had never think about it. But when the opportunity comes they have captured it and take benefits of it.

Co-relation in real life – In the investment field, we get very limited opportunities to make an investment. We need to wait for the opportunity while we are not getting it. We should not accept failure if we do not get an opportunity for a huge time. We should always wait for the opportunity.

• Accept the failure but do not give up

Extract from the movie – We have seen that Thor was not able to accept his failure and he slipped into the depression. He was not ready initially for help to the Hulk but later on, get ready.

Co-relation in real life – Similarly, we should not slip into the depression when we face any failure but we should accept it and work on the turnout our weakness into the strength. If we slip into the depression then we cannot able to capture an opportunity when we get it.

• Accept the uncertainty which can change all the scenario

Extract from the movie – Thanos got aware of the plan of the Avengers and he came from past to the future for capturing all stones from Avengers. Avengers has believed that they collect all the stones and provide lives of those who lose life due to Thanos in infinity war. But Thanos also came to the future and he had attacked the Avengers.

Co-relation in real life – Similarly, we should accept the uncertainty while we make investment decisions. Anything can happen into the investment journey which we do not have assumed. Uncertainty is only certain to happen.

• Accept that we cannot control fortune

Extract from the movie – We have seen in infinity war that Avengers cannot able to stop Thanos and Thanos has completed his task. Avengers has made a huge effort to stop to Thanos but Thanos has given death to half of the population of the earth with few of Avengers also. This proves that we only can put efforts but cannot control the fortune.

Co-relation in real life – In the investment field also, we can just work on the company identifying, analyzing, allocation, risk management, etc. But we cannot control our return. The return will be not into our control. It’s just our fortune which we cannot control.

• Put entire efforts when the opportunity comes

Extract from the movie – When the opportunity comes to bring back the life of half of the world then Avengers has put entire efforts. Also, when it comes to again protect the entire world by Thanos, they have put their entire efforts and in which we have seen that Tony has lost his life. Hulk got injured and the black widow had sacrificed her life.

Co-relation in real life – We does not know that when the opportunity comes to us. But we have to be ready for the opportunity and when it comes, we must have to put our entire efforts. We do not get investment opportunities on a daily basis so till the time, we are not getting an opportunity, and we should start working on making us stronger and stronger. And when the opportunity comes to have to build up a position.

• Accept the disconfirming evidence

Extract from the movie – During the infinity war, we have seen that Dr. Strange had mentioned that they have one chance to win from the 14 million chances. Same into the Age of Ultron, when Tony wants to build a protection shield, then nobody got agreed with him. They said they fight for any uncertainty and either win or lose but that will be together.

Co-relation in real life – We should not think that if we have a good track record of making an investment then we will win the game. But we have to accept the disconfirming evidence and be prepared according to it. We should not negate the disconfirming evidence and prepare for upcoming uncertainty.

• Fight with own emotions to win

Extract from the movie – Tony was not ready to help for time travel when Captain America has approached him. He was fearing for losing togetherness of family. He feared because he has faced death very closely. He knows that he can help with the time travel but his fear was stopping him. When Pepper Potts had explained to him that he can help others and he should then Tony got ready to help for time traveling.

Co-relation in real life – Similarly, we also have a fear of losing what we are currently holding or what we can lose from our past failures. We should not keep our past memories to hold us and keep on drain us. We should control the emotion and fight with it. Otherwise, we cannot able to achieve what we want. If we have made an investment mistake in past and those memories holding us and stop us from making a new investment or we are holding an investment which we do not want to lose then we may not able to perform a task which is the demand of time.

LEARNING INVESTMENT LESSONS FROM MOVIE BADLA

previously I have written a post on learning investment lessons from movies such as “Chal Man Jeetva Jaiye”, “Dangal”, “3 Idiots”, “Rajneeti” and “Sanju“. Now, I am going to write a few investment lessons from another movie “Badla”. Badla movie has learning which can help us to make stronger our investment decisions.

• Focus on every detail

Extract from the movie – When we see to the movie, Mr.Bachchan put a huge emphasis on each and every detail, though detail is minor or important. And on the basis of those detail, he tries to solve out the entire story. He has collected all detail, data rather to getting emotionally trapped. Further possibilities of different stories, opinion, decision etc. will be based on the detail which Mr.Bachchan has collected.

Co-relation in real life – We need to put the focus on the each and every minor detail. We should not avoid any of the detail. We do not know which detail is useful to us, have a huge impact and we have avoided it. When we are analyzing any of the company and avoided a few information, then we may avoid a piece of much useful information too. So that we should make a checklist and keeps on improving our checklist for the covers each and every detail.

• Never trust anyone before knowing the person or ability

Extract from the movie – Ms.Taapsee has not put trust in Mr.Bachchan while discussing the entire story and providing detail to him for solving her case. She has made a discussion on the points which are common and given half information only.

Co-relation in real life – Similar with the investment field also, we get any information, many tips, etc. but we should not put trust on them before knowing the person and ability of them, otherwise we may end up with losing our entire capital also.

• Always focus onto the different possibilities -“Kya main wohi 6 dekh raha hu jo tumne muje dikhaya, ya woh 9 jo muje dekhna chahiye tha”

Extract from the movie – We have seen to the movie that Mr.Bachchan has built up different possibilities which might happen during the different situations or different possibilities for the same situation. Also, he has created doubt on the information provided to him. He has connected the different information available with him and created different stories which also can be possible on the basis of information rather rely upon the story which was communicated to him.

Co-relation in real life – Similarly with the investment also, we do not rely on the information and story getting communicated to us. But we should check what can be the different possibilities for the similar information provided to us. We try to build different possibilities and check what can happen when other possibilities will occur, what will be the results, does our investment will survive, our original hypothesis will prove right, etc. Whenever we do not think the different possibilities of the prevailing information then we believe whatever communicated to us and we may miss with the scenario which can be totally different from our original hypothesis.

• Make proper homework

Extract from the movie – We have seen to the movie that Mr.Bachchan has completed with his homework before meeting to the client. He has collected all the information, evidence, prepare different pieces of evidence, etc. Due to his efforts, he has never lost any of the cases, also he succeeds in getting true information from Ms.Tapsee.

Co-relation in real life – We also need to do proper homework before making any investment decision. This homework protects us from any of the unforeseen events, losing capital, getting false information, stuck into the trap, etc. Due to the proper homework, we can able to generate an above-average return with minimizing the risk associated with investments.

• Do not behave as “Tum jo bataogi wohi mere liye sach hoga (I will put trust on whatever you say)”

Extract from the movie – Mr.Bachchan initially told that he will put trust onto the information which communicated to him through Ms.Tapsee. But after that, he has also created doubt on the information provided by Ms.Taapsee. He has analyzed information rather to blindly believe in the information.

Co-relation in real life – We need not put the blind trust on the information getting communicated to us by the management of the company. We have to create doubt on the sayings, information for reaching the proper conclusion and decision. If we believe blindly on the information given to us then we may get trapped into it and end up with making a losing investment decision.

• Woh murkh hota hai, jo sirf sach ko hi janta hai par sach aur juth ke farq ko nahi janta

Extract from the movie – Very well said by Mr.Bachchan. Mr.Bachchan has understood the difference between truth and lie which has helped him to identify what actually the truth is. And a lie is not able to make him a fool.

Co-relation in real life – If we just know what truth is but does not know that difference between truths and lie then it has a higher probability that we get trapped to the lie which was communicated to us in the mask of truth. No one can make us fool through speaking a lie in the mask of truth. If we are not able to understand this different then people present us wrong information in the mask of truth and we believe it which impact us very badly.

• Hume jo sach lagta hai, jaruri nahi ke voh sabko lage

Extract from the movie – Ms.Taapsee told that she is always speaking the truth but Mr.Bachchan told that it is not necessary that truth is not that what we feel and that is not necessary that everyone else consider it as truth also, the truth is what we can prove. Judge also believe in the truth which we can prove.

Co-relation in real life – We believes that truth is what we are believing and everyone else also believes in the same manner. But it not necessary that what we believe is only the truth, but the truth is what can be proved. When we have made an investment to any of the company and we believe that company is good, it will able to perform well, etc. but that does not necessarily work as truth and everyone else also believe the company is good and perform well. But the truth is when a company can able to prove it and perform well.

LEARNING INVESTMENT LESSONS FROM MOVIE “SANJU”

Previously I have written a post on learning investment lessons from movies such as “Chal Man Jeetva Jaiye”, “Dangal”, “3 Idiots” and “Rajneeti”. Now, I am going to write a few investment lessons from another movie “Sanju”. Sanju movie having very negative comments regarding the reliability of the story but not be go deeper into it. This movie has a very inspirational story and as well as many lessons which we can implement in our life & in our investment career.

• We need a mentor who helps us with identifying right or wrong decision

Extract from the movie – We have seen in a movie that Sanjay Dutt having a many up and downs in life and during those tough time Mr. Sunil Dutt has helped him with proper guidance. Due to his guidance and support, Sanju can achieve success. Many times, we require a proper guidance which can help us with making a difference between right or wrong decision.

We have seen in a movie that whenever Sanju get confused, Sunil Dutt has shown him a way to get out of such a situation. He has supported him, encourage him to achieve success. Sunil Dutt has encouraged Sanju to make a right decision and also support when Sanju got stuck into worst situation. Books also in our life work as a mentor. When we do not have a mentor, we can take a help of books which help us with a selection of the right decision. Mentor help us to come out from the struggling situations where we are not able to find out the proper way.

Co-relation in investment life – Our investing life is as similar, we require a true mentor who helps us with a proper guidance and supports us in identifying a right or wrong decision. Whenever we get confuse he can help us with his wisdom which can uplift us to the next level. If we do not have a proper mentor then we should select books and try to learn from it. I had a conversation with few of a successful investor and they told that they did not train by a mentor but they read books from Graham, Phil Fisher, and letter of Buffett and prepare themselves for an investment journey.

• Drugs and suicide are not a solution to any problem

Extract from the movie – We have faced many problems in our lives and we have to fight with those problems, not give up against those problems. Many a time, people do not just give up against problems, they also start taking shortcuts for getting solutions for staying away from problems such as alcohol, drugs & suicide. Shortcut never provide us with a permanent solution against problems, also its effect badly to our loved ones. We have to fight against those problems and solve it permanently. We have seen in the movie that Sanju has started to take drugs or choose to commit suicide to come out of the difficult situations but that did not provide him with a permanent solution. When he decided to fight against difficult situations then he got a proper permanent solution. I can say it from my experience, I have also faced a few situations which are similar to the movie, I also got depressed but I chose to fight rather take a shortcut. And I am sure many of us chose to fight rather to give up. Fight against difficult situation seems easy compared to short cut but always provide us a proper permanent solution.

Co-relation in investment life – Similar to our life, we have also face difficult situations in our investments career. Many of us face it, fight against it rather take a shortcut. We failed during our investment career many a time, our investment might work worst, and it might not perform as we have thought. If we learn from those difficult situations, increase our efforts to become stronger and decide to fight for the success of our investment career, then we can achieve success in our investment career also. Those who are not able to fight against difficult situations, they choose to take shortcuts such as leaving of investment field (suicide from investment career), taking investment ideas from others, getting dependent on others’ tips (such work as a drug for us). If we take a advice from the mentor for building our investment career more stronger and enhance our efforts to become stronger then it will be a permanent solution for the difficult situation during our investment career. We grow stronger, our investment decisions improve wiser when we face difficult situations and fight against it, learn from it.

• Sometimes music / other than core work helps to heal us

Extract from the movie – Whenever we are depressed or found it difficult to focus on our core activities then it is better to work something else which can help us to getting heal from our depression and with it, we need to keep on trying to get back to the focus on slowly to our core activities. When we are depressed, distracted or disturbed then it will be difficult for us to get back our focus on our core activities. So that first, we should try to come out of the depressed situation. This really helps us to get back our concentration and become normal from depressing situations. I usually listen to music, do a workout or take a sleep which has to help me a lot to come out of the depressed situation and I can able to again focus on my core activities. We have seen in the movie that whenever Sanju got disturbed, distracted from his acting career, Mr.Sunil Dutt has helped him with music and music has healed his depression.

Co-relation in investment life – Similarly when there is a depressing situation for us in our investing career then rather be getting panic, we should focus on the some of the activities which make us feel better and relaxed. This will reduce our stress, heal our depression so that we can again focus on the investing activities. We have faced such situations many a time during our investing career, investment does not work as we assumed, all assumptions are in place but still not perform in a manner it should perform, etc. These all make us depressed and if we continue to focus on investment with such a depressed mind then there will be a higher chance to make a huge error, bigger blunders. It is better first to be normal and be relaxed then need to again focus on investing activities. Many a time, Small happiness do big miracles. And making a temporary distance from core activities will help to come back with more strength.

• Need a good circle of buddy

Extract from the movie – We have seen in the movie that Jubin has the spoiled life of Sanju. Due to Jubin, Sanju has started taking drugs & became abdicated to it. Whereas Kamlesh has helped to Sanju for coming out of his drugs abdication and also supported in tough time. If we have a good circle of buddy then they help us to put forward our views and get right views from them. They do not show selfish behavior to us but they provide us a view which is right for us, not views which feel us good. They make a debate with us on views, opinions which create stronger decisions, stronger execution. So that we need a friend like Kamlesh not like a Jubin.

Co-relation in investment life – Similar to the investment field, we need a circle of a good friend who told us which kind of mistake we have made, who support us during our difficult time, who can make a debate with us on our investment ideas which make our decision stronger. This helps us to make a wise investment decision rather than a biased decision. We have to differentiate who provide us a right view and who provide us a view which makes feel us good. If we stay with the wrong circle of buddy then we always get biased views, they provide us a view which we want to hear. Such views feel us good but not build us wiser. Many a time, we may be missed some important points and if we have the good circle of buddy then we can make discussion with them, we get proper views. I learn that such circle should not be huge, we have few buddies, maybe a max circle of 3-4 members.

• People will comment negatively, they are judgmental. Shut their mouth with success

Extract from the movie – We have seen in the movie that people, media has made negative comments regarding careers, drugs addiction, consider him a terrorist, etc. But Sanju has made a comeback and achieve a success. Media has put a question mark on his career, also everyone considers that he is finished & never able to come back to his earlier success. He has put efforts to develop himself and come back to his earlier success.

Co-relation in investment life – Such kind of negative comments, we also get during our investment careers. When our investment ideas do not perform well, we have made some mistakes, we face the difficult time to get proper investment ideas; then we get criticism from people. Many negative comments we get from people, but rather getting depressed with those comments; we need to put efforts on our career. We should focus on putting efforts into our career rather than responding to people. We need to work on identifying our mistakes, learn from it and put efforts to build us wiser. We should work on identifying good investment ideas and build a good portfolio which helps us to create a wealth. Such wealth creation is a response to all negative comments made to us, rather to replying with words to everyone. Negative comments should work for us as a motivation to develop ourselves rather depress us. And if we found useless negative comments from people then need to remember ustaad no. 3 from the movie – “Kuch toh log kahege logon ka kaam hai kahena, chhodo bekaar ki baton mein kaheen beet na jaaye rainaa”

• Always hope for the best days coming after worst days

Extract from the movie – We should not give up by experiencing difficult days whereas we should hope for the best time. Our life also works in a cyclical manner, we have worst days also and best days also but never one remain forever. We have seen in the movie that Sanju became a drug addicted but after proper treatment, he again became normal. Also, he has faced many failures in acting career but after putting efforts, be able to achieve success.

Co-relation in investment life – Many a time in an investment career, we faced difficult days but we should put an effort also during those days with the hope of best time is on the way. Sometimes our investment does not work in terms of stock price but all our assumptions for investment are in place then we have to keep faith and hope for the best and have a patience.

• There is another side of the story, do not just blindly believe in whatever we see or hear

Extract from the movie – We have seen in the movie that Anushka Sharma has played a role where she does not believe blindly to any of the information. She searches for the evidence, truth, and meet people who can help her to reach for truth. If she believes in the information which was given by Jubin then she is not able to reach the truth of the story. But she takes his information as a starting point for an investigation and searches what is the truth.

Co-relation in investment life – It is very essential for us to not believe any of the information blindly. We always look at the information suspiciously and try to find out evidence for the information. If we blindly believe on the information and those information proves wrong then we may incur a huge blunder with our investments. We have to see the story from different angles then only we identify and reach the conclusion that whether it is correct in the way it seems on the first instants. As an investor, it is our duty to check the available information to us rather believe in it and make an action.

If we trust ourselves then we can achieve success in our life.

Learning Investment Lessons from movie Chal Man Jeetva Jaiye

Jainam Share Consultants had organized a movie day on 6th January 2018 and the name of the movie was “Chal Man Jeetva Jaiye”. I am really thankful to Jainam Family for giving me the chance to watch a worthy movie. I am grateful to the entire cast & crew of the movie for the wonderful performance and script.

I am really grateful to Riddhi who helped me with editing and very effective ideas.

I always believe that we can learn many concepts from our surrounding environment. Similarly, this movie has some of the amazing concepts that I have learned and you can also which can be beneficial to our investment journey and as well as to our life.

• Decide our process to get success in our life

Extract from the movie – The movie began where it was shown that a father is pressurizing his son, Dev, a lot for achieving victory. Dev, unknowingly started following his father’s dreams but he did not know how to get a victory.

Co-relation in real life – A similar situation happens with all of us when it comes to our investments. Investors’ starts investing in multi-bagger stocks whereas they don’t even have enough knowledge about the company. We need to gather knowledge first and then decide whether the company is worth investing. If we don’t do a thorough study about the company, then there are chances that we might lose our capital rather than achieving reasonable returns.

• Pressure and stress can affect our decision-making ability

Extract from the movie – Dev was pressurized by his father to achieve victory and as a result, he lost his focus from all aspects and started losing in all the fields. He was often scolded and tortured by his father for not being able to earn medals and certificates.  Dev had always been forced upon the dreams that his father had for him. Dev was never given a chance to explore about his interests and that affected his decision making power.

Dev’s uncle, Vasant, had incurred a major loss in the family business and was highly stressed about it. He got pressurized by thinking about the materialistic and luxurious life of the family that he wanted to maintain and that led him in making a wrong decision. He chooses an unethical way: of leaving the country and doing fraud with the lives of the people by taking away all their money that they had invested in their company. He thinks of this way as ethical because Mr. Ajay Walia (whose company got bankrupt and he lost everything) had also done the same. Looking at someone else do it; made him think of the wrong way as the right way and he forgets about the moral values and ethics that he had learnt from his parents of not doing fraud or cheat with the lives of the people.

Co-relation in real life – Likewise, while there is a mad bull run in the market, when we see our fellow investors making money, we feel stressed and that pressure leads us to unethical thinking. We lose the capability of spotting the good investment companies; thus leading us to losses. Sometimes, such situations encourage us to compromise with our ethics & values for making an investment decision; hence forcing us to make faulty decisions. Rather than getting jealous of others making money, if we focus on our decisions and stick to our ethics; then there will be ample of opportunities coming up within our competence area that will lead us to good returns.

• Remaining emotionally stable also during the worst period of our life

Extract from the movie – Viren, who is playing a character of Vasant’s son, saw his father being stressed and hence taking wrong decisions. So he keeps himself calm and stays emotionally stable and decides that he won’t let his father take the wrong decision. Vasant asks his family to support him and the whole family does that except Viren and Dev. Although knowing that this is the crucial time for the entire family and they will have to face the whole family; both the brothers decide to stick to the ethical and the correct path. The family often scolded them, tried to emotionally break them and also tried to prove them wrong but these brothers keeps fighting for what’s right and not bothering that it was their family on the other end.

Co-relation in real life – Market often shows us a challenging period during our investment journey but we need to remain emotionally stable and keep ourselves away from emotional diseases such as ego, envy, greed, fear etc. All such emotions influence our decision and lead us to get deviate from our process. Please refer to the article for further details of how does our emotion influence our investment decision BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”

• Importance of different viewpoints

Extract from the movie – Vasant and Viren both have different perceptions of the same situation. Viren was enforcing for a different viewpoint which led the entire family re-think about their decision and yes they finally accepted the viewpoint that Viren and Dev has been explaining since the beginning, as it was a better and an ethical way of dealing with the problems. We should accept the viewpoint of the other and try to empathize from their angle. There is a possibility that we might get a new perspective to see a problem and that can be more useful to our decision making.

Co-relation in real life – When it comes to our investment journey; we face the same situation. There are ample of people who will give you too many companies to make investments in, as per their knowledge and their research. But it’s up to us whether to believe all of them or to believe some of them. People have different mindsets and there will be a situation where 1 person days good about the company whereas the other says bad. In such a situation; we get to know a different viewpoint and a different perspective from various people we trust on. But we should at times believe on people and re-think couple of times before investing as it is a matter of our earned money through hard work.

• Acceptance of our mistake

Extract from the movie – Vasant accepted his mistake of taking a wrong decision due to stress and ego and he decides to change his decision. If he wouldn’t have accepted the viewpoint and changed his decision in time; then that would have led him to lose his brand value, his goodwill, his happiness, his inner peace, the trust that others had in him, his relationships, etc.

Co-relation in real life – We often make mistakes during our investment journey but we need to realize it at the earliest and accept our wrong decision by not getting influenced of other factors. We should think of recovering our losses and increasing our profits rather than feeling guilty on our wrong decision.

• Have faith in yourself

Extract from the movie – Vasant in his past had grown the business and created a brand value. He had never lost his money. But when he faced such a situation; he had lost faith in his own self and he thought that he doesn’t have the courage to rebuild the empire. But Viren always showed trust in his father’s ability and he kept on saying that he knows that his father has the ability to build an empire again.

Co-relation in real life – During a sluggish market scenario, there are times that even our best investment cannot generate good money for us. But we have to have patience and trust on our decisions that sooner or later we will earn and gain good returns.

• We are losers just because of ourselves and not because of others

Extract from the movie – Dev was unable to express his thoughts in front of his own family. His continuous failure due to his father pressure had restricted him to open up and talk about what he wanted to. When he was asked to faced his complexions and his fear; only then he fought with his own self and was able to realize that he failed because he had created a belief in his mind that he is unable to do anything in his life.He only can able to create an impression in front of his family after getting the realization of his weaknesses. It was then that he realized that it wasn’t his father that was the cause of his failure but it was his inner self that didn’t let him take a leap. But when he overcame his weaknesses; he achieved success.

Co-relation in real life – We also face similar situations during our investment journey. We might have made losses couple of times. But we should face those failures and try learning of overcoming them rather than withdrawing the money. One should think of recovering the losses and switching from the negative balance (loss) to the positive balance (profits). Because if we don’t think positive then those failures might affect our future decision for making an investment.

As it is rightly said “YOU MAY FIND THE WORST ENEMY OR BEST FRIEND IN YOURSELF”

• Building brand value takes efforts for years but just a few minutes to ruin it

Extract from the movie – Vasant and his brothers had worked really hard for years to create a brand value for their company. But if he would have decided to take a wrong decision of declaring bankruptcy; then that would have ruined the brand image that they had build in for years. People would have cursed them for their decision as they would have cheated them. And this would have created a negative impact for the company and its image.

Co-relation in real life – Similarly, we should always be careful while taking a decision in life and not make any blunders. We should think with a peaceful mind and not atleast when we are stressed. If done so in stress; we can lose the trust that people have in us and we can harm our reputation which we have built with our hard work over the years. Remember, “DON’T LET ONE MISTAKE RUIN A BEAUTIFUL THING”.

Kindly watch movie for more insights.

Dev (Krishna Bhardwaj) & Me

Viren (Hemen Chauhan) & Me

 

 

LEARNING FROM KITE FLYING FESTIVAL FOR INVESTING IN EQUITY SHARES PART – 2

Last year at the same time, I wrote on Learning from Kite flying festival for investing in equity shares. This year I am going to release the sequel of my previous article 😉 and try to explain learning in a detailed manner.

Flash Back 😉

 

As we have seen the kite as a business, thread as a competitive advantage (USP), other kites as a competitor and consider the person who holds the kite as a manager/ a leader, who run the business.

The person who not only holds the kite but also the person who hold sets of thread (Firki) is also important. If he does not support well to the person who holds the kite, then going higher and higher become difficult.

Starting of Part – 2

 

Now, after a brief recap of my previous article; let me start with detail explanation.

A good kite also needs a wind to fly to the sky high. A skillful person who knows how to make the kite to fly well also cannot be able to push his kite to the sky high if there is not an availability of good wind flow. And also, if sun temperature is very high, then also a person cannot able to make a kite fly well.

Similarly, with the business,

If the economy isn’t able to grow or growing at a very slower than business also cannot be able to grow much faster though business having a good manager. A good manager can able to sustain his business, but without good growth, the business can suffer.

Similarly, if the temperature of the sun is very high means Interest rate among the economy is very high then it will become more difficult for the manager to expand the business.

As I am not going to write much about macro factors in the current article so let me move forward with details on a business level.

If we get a good kite with a skillful person who makes kite to fly well then,  

Huge wealth creator = Good Business + Good USP + Good Manager + Good Key Employee

Good business with a good USP can grow decently by itself also but additionally if it gets a good manager then this business, having a potential to become a huge wealth creator for us.

We can have a couple of examples of businesses such as Symphony Ltd, Eicher Motors Ltd. Piramal Enterprise etc.

Symphony Ltd.

Symphony Ltd. Was established as a Symphony Comfort Systems Ltd. for manufacturing air cooler in the year 1988. And in 1990, the company expanded business to all over the India. Two years after launch, the Symphony had become a national brand. After the IPO in the year 1994, the company expanded its product portfolio Water heaters, room heaters, flour mills, water purifiers, air conditioners, washing machines and exhaust fans but none of the products succeeded excerpt air cooler. Due to this reason, the company falls under BIFR [Board for Industrial and Financial Reconstruction] company in the year 2001.After BIFR, the company exited from all the diversification and continue to focus on Air cooler business. In the year 2008, company turnaround and acquired International Metal Products Co (IMPCO). Currently, the Symphony has ~50% of the market share in organized residential air cooler market (From AR 2015-16).

(For detail story of Symphony Ltd. Kindly visit – http://www.forbesindia.com/article/my-learnings/symphonys-achal-bakeri-on-how-to-make-your-company-great/33504/1

And lecture of Achal Bakeri https://www.youtube.com/playlist?list=PLgAkbY5uEbBS6XqDX6mxYMABSFYSt8WJj )

Eicher Motors Ltd.

Royal Enfield, a brand of Eicher Motors Ltd. has faced the much troublesome period in the past. Demand was low with sales barely crossing 2,000 units a month against the production capacity of 6000. And additionally, The Eicher Motors management did not see value in the box. Currently, Royal Enfield contributes ~40 percent of Eicher Motors’ turnover, ~80 percent of its operating profit (EBITDA).

Such huge turnaround was made by Mr. Siddhartha Lal, who is passionate about bike riding. Mr. Siddhartha Lal had asked for 2 years from his father Mr. Vikram Lal for turnaround Royal Enfield.

In bikes, he suggested changes such as a shift to an aluminum unitary engine with the gears and the engine as a single unit, disc brakes placed on the right and an electric starter were introduced. Mr. Siddhartha Lal also changed the way the bikes were sold—from rickety, basic, even dirty shops in dingy by lanes to state-of-the-art showrooms.

 

(For detail story of Eicher Motors Ltd. Kindly visit – http://www.forbesindia.com/article/super-50-companies-2015/eicher-motors-its-all-in-the-drive/40705/1

And Weekender Episode 17 Siddhartha Lal part- 1, part- 2 & part- 3.

 

If we get a kite which is not much good but with it a skillful person who make kite to fly well then,

Wealth Creator = Bad Business + Good Manager

If we get a bad business, having a good manager, then also that business can able to create a wealth for us. A good manager can able to make a business better for the long-term horizon.

Bharti Airtel

Sunil Mittal, a founder of Bharti Airtel has started his 1st venture of manufacturing bicycle parts in Ludhiana at the age of 18. After He sold off his bicycle business, he started importing Suzuki Motor’s Electric Power Generators from Japan. This business was going well and Mr. Mittal started to make profits out of it. But as an Indian government banned the importing of gene sets, he has to stop this business. After falling of Generator business, he started with the marketing of telephones, various fax machines under the brand Beetle. In the year 1992, he got a chance to bid one of the four mobile phone network licenses auctioned in India; and in the year 1994-95, he launched AirTel under Bharti Cellular Limited (BCL). Within a few years, Bharti AirTel became the first telecom company in India to reach 2 Million subscriber point.

Bharti Airtel has a business which is highly capital intensive in nature. Business requires the constant investment of capital for purchasing spectrum, such as 2G, 3G, 4G and more, also for upgrading the network, maintenance of network, high government regulations, and huge competitions. Telecom business itself is a very tough business and Airtel survives as a market leader.

(For detail story of Bharti Airtel Ltd. Kindly visit – http://www.startuparchive.com/bharti-airtel-success-story/ )

 

BUT, what happens when we get a good kite but with the unskillful person? The kite gets torn

Wealth Destroyer = Good Business + Good USP + Bad Manager

 Balaji Telefilms Ltd.

The Indian television market is expected to grow at a CAGR of 15.50% to reach US$ 15.20bn in 2019. Balaji Telefilms is one of the largest production houses across India, South Asia, South East Asia and the Middle East is delivering Hindi and regional content. The company has produced many hit TV shows such as Kyunkii…Saas Bhi Kabhi Bahu Thi, Kahaani Ghar Ghar Kii, Kasauti Zindagi Kay, Jodha Akbar, Pavitra Rishta, Bade Ache Lagte hai etc. company also has produced many hit movies such as Kyaa Kool Hai Hum, Shootout at Lokhandwala, Shootout at Wadala, Lootera, Once Upon a Time in Mumbai Dobaara, Shaadi Ke Side Effects and Ragini MMS-2, The Dirty Picture, Ek Villain etc.

In Fy15, Company has given interest-free loan and in FY16, an approximate company gets 8.30% interest income.

In FY16, Company has posted Rs.2.80 Cr of Net Profit in FY16 and remuneration took by management was Rs.6.72 Cr in FY16.

 

AND, also both kites are not good and the person is also unskillful to make kite to fly then

Huge wealth Destroyer = Bad Business + Bad Manager

This one is a deadly combination and one should avoid such investment. Such investment can become our biggest mistake.

Bhushan Steel Ltd.

Bhushan Steel is a sixth-largest steel manufacturing company as per capacity of 2.2 million tonnes (mt) in India. Steel consumption is highly cyclical in nature and also depended on the economic and industrial conditions worldwide and for the regional market.

Over the last 9 years, the Company has generated cash flow from operation of Rs.9192.68 Cr and required to invest Rs.28957.62 Cr. So, that company needs to fund expansion by taking additional debt; and debt of the company increases from Rs.5718.14 Cr in FY08 to Rs.44477.93 Cr in FY16.

In August-2014, Central Bureau of Investigation (CBI) arrested vice-chairman of Bhushan Steel, Mr. Neeraj Singhal, on charges of bribing SK Jain, chairman of Syndicate Bank for taking a bribe of Rs 50 lakh for increasing credit limit of some companies in violation of banking rules.

Sources: Moneycontrol, Moneylife, Forbes India, Equitymaster, mint, screener etc.

—- Charlie Munger

Disclaimer: Businesses discuss in this article is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered research analyst.

LEARNING INVESTMENT LESSONS FROM MOVIE “Dangal”

Previously I wrote learning investment lessons from movie “3Idiots” and “Rajneeti”. Now, I am going to write few investment lessons from another super-hit movie “Dangal”. Dangal movie having a very inspirational story and as well as many lessons which we can implement in our life & in an investment.

• Investment journey is also full with struggle

Wrestling can give medals and fame but doesn’t provide intermediate cash inflow which is required for living life. This has affected the game of Amir Khan, his wrestling career and he has to start doing a job.

At the initial stage, Investment journey is also as difficult as wrestling show in a movie. When we are constructing our portfolio at that time our portfolio is smaller in size. So, that it will not help us with huge dividend as intermediate cash inflow which can helpful for living our life.

• Events are not always as per our expectations

In the movie, it shows that Amir Khan wants a son for fulfilling his dream, but actually, he got 4 daughters. So, that every time events don’t occur as we want it to occur.

As similarly in investments, events don’t always occur as per our expectations. For example, if we have made position in any logistic stock by focusing on GST then we expect that GST gets passed and get implemented. But as we have seen GST get postpone many times. So, that we also have to face for the unexpected events can occur in our life and also in the investment field.

• Har woh cheej joh inka pehelwani se inka dhyaan hatavegi… main usse hata diyon (I will eliminate anything that deflects their attention from wrestling.)” Avoid noise

When 1st time Amir Khan doesn’t get son as per his expectations, all villagers had started providing advice to him. But he realizes that nothing has happened after following all pieces of advice of different people. Also, many a time, Geeta and Babita had argued regarding their long hair, tiredness, body pain, cannot able to focus on study, etc. but Amir Khan has always found ways from it. We should not stop our journey though obstacles keep on coming.

The same happens with our investment field. When we start building a portfolio or researching on any of the business, people start providing an advice. We should differentiate between noise and a true information. If we keep focusing on noise and get trapped, then, at last, we also don’t get anything as per our expectations.

• Don’t lose hope

Amir Khan disappointed when his wife gives birth to four daughters. He gives up his dream thinking that girls cannot wrestle and lose hope of fulfilling his dream to win gold (Award) for the country. But one unexpected incidence – when his older daughters, Geeta and Babita come home after beating up two boys, help him to realize that girls also can become a wrestler.

As similar, whenever we don’t get the stock for investment, then we also get disappointed. But actually, we should not lose our hope and keep researching on the businesses, we might get one good investment opportunity after studying numbers of businesses. Also, when we have made position in the stock with some assumptions and those assumptions turn out into reality but might be at a lower speed. Then also we should not lose our hope any hurry to exit from our position; one moment can able to change the entire result.

• “Medalist pedh pe nahi ughte … unhe banana padta hai … pyar se, mehnat se, lagan se (Medalist don’t grow on trees … you have to nurture them … with love, with hard work, with dedication)”

Since becoming a wrestler, Geeta and Bbita have to do a strong exercise and hard work. They regularly wake up at 5:00 o’clock in a morning and start doing exercise. Their regular efforts make them successful.

Same happens with investment field also. We also need to put a continuous effort, continuous reading of Annual Reports, business/ industrial magazines, etc. our regular efforts with discipline only help us to become a successful investor. We also need to make an effort in developing our investment process and philosophy.

• Don’t focus on what people think

We have seen in the movie that people have started talking regarding Amir Khan when he had started coaching Geeta and Babita in wrestling. Many a time people laugh at him and also Geeta & Babita has to face such teasing from people.

When we pick up any stock for research or make position in any of the stock than many people start to laugh at us; might be start teasing us. But we have to stick towards our process and philosophy without getting disappointed from the comments of people. We should know that what we are doing and having a full understanding of it.

• Dangal ladne se pehle dar se ladna padta hai (Before you fight you need to fight with your fear) and Practice brings confidence

Initially, Geeta and Babita feel fear for wrestling and not ready for a fight. Geeta loses her 1st wrestling match also. But after that, she gets motivated and asks her father for the next match. Geeta won many matches with confidence. Continuous practice brings such confidence to her.

Initially, we also feel the fear that what happens to our investment? If stocks fall from our buying, then what happens? Am I ready for making an investment? We also need to stick to our process and philosophy. It might be possible that our initial investment ideas could be our biggest mistakes, but continuous practice can bring confidence under us. And confidence can push us to become a successful investor.

• Never be overconfident

After winning a national championship, Geeta went to institute and she begins to disregard the discipline she has been brought up with. When Geeta visited her home, she is determined to show her father, she can wrestle well without his techniques. Geeta finds herself losing every match as she is not following her father’s techniques or she is not fully focused on wrestling (painting her nails and growing her hair long).

Same happens with our investment field. We easily get overconfident in the market. When we invested, stocks start running, we should always analyze the reason for such run up; rather think that stock runs because we have a position. The stock never knows that we are holding it or not. We always need to stay humble and stay focused towards our process.

• “Geeta ka natural game attacking hai, apne technique ke chakkar me fasake uska game hi ulta kar diya. Yu to wohi baat ho gayi ke Sehwag ko bola jaye bhai tu Dravid ki tariyah khel. Na Sehwag reh jawega aur na Dravid ban pawaga. (Focus on our natural game)”

Geeta’s coach’s training differs significantly from her father’s techniques. Geeta believes her coaches’ techniques are better and that her father’s techniques are outdated. But those new techniques have changed the natural game of Geeta. And Geeta lost matches.

Similar to the investment, as and when we get diluted our focus from our original philosophy and investment style which is suitable for us; from that time, onwards our investment career also having a tough period started. We should focus on investment style suitable to us rather try to copying style of others.

(Source: SafalNiveshak: The Wisdom of Intelligent Investors (Special E-Book))

• “Kehne ko toh ek round sirf do minute ka hota hai … par socha jaave toh do minute mein 120 second hote hai … us ek second ka intezar kar jab samne wala galati kare (To say, there are only two minutes in a single round … but if you come to think of it, there are 120 seconds in two minutes … wait for that one second when your opponent makes a mistake)”

By this dialogue, Amir Khan wants to say that Geeta should focus on the game and do attack when the opponent makes a mistake. She cannot able to get points in every second, but she should attack a right time.

As similar to this, we should always wait for the right opportunity to come, rather run for catching up all opportunities around us. We should keep in mind that we cannot able to catch each and every opportunity around us so that we should wait for the right opportunity to come toward us.

(Source: The Most Important Thing by Howard Marks)

What is Capital Dilution???

Dear Friends, capital dilution is one of the most crucial parameter to analyze any company. And also shows the ability of management to run business. So it is essential for us to understand what is capital dilution.

 

“Dilution is a reduction in the ownership percentage of a share of stock caused by the issuance of new stock.” – Investopedia

 

As per above definition, we can say that if we holding 1% of ownership in any company then that will reduce by dilution of capital.

So that due to dilution, partners in business will raise and ownership in business will falls.

Business which needs frequent capital to invest in the business then management having only 2 alternatives to raise fund; one is bringing debt and dilute capital.

Dilution of capital can provide good advantage to business in a good time but that dilution becomes curse for the business in a worst situation.

As we have seen in above example that company generated additional Rs.5 cr of profit but due to dilution that profit share got reduced. So for getting additional profit share, business need to generate above average profit. Due to increase in number of partner per share profit (EPS) will falls, which is negative for the owners of the business. In listed company, we as minority shareholders are an owner of the company. And dilution (increase number of partners) are negative for us.

By studying Cash flow statement, we can come to know about issuance of new capital.

Also when we check notes on share capital then also we can come to know the number of shares issued by the company.

Also Earning Per Share (EPS) gets diluted by issuance of new capital.

Thus, we have to be very careful with the business and management who frequently dilute capital for any purpose.