Author Archives: ZerotoBillion

What a day it has been! A small step for TaMo but a giant leap for Indian electric vehicle industry. So I write today as a note to myself as to what patience, vision and bull market can do to your portfolio.

As I noted earlier, I had been holding TaMo since January 2018 and the earlier bet was only based on what it’s sales are and why should it be selling at atleast one time sales which would make it close to 600/-. That story also had a small glimmer of hope that maybe one day the EV business will take off and the whole rerating will happen and blast it will go up, just like Tesla! That story, well,died last evening at 5PM with the press release confirming raising of $1B for EV business at $9-10B valuation. Let’s see how!

All of you by now have understood that if the EV business is worth $9B, the whole company should be worth well over $40B atleast. So that makes it close to 1000/- share. This is well, just the beginning. The fun begins now!

India is on cusp of a huge electrification revolution which will be led by TaMo is old news. The real juice is the news that private equity has made TaMo EV company the latest $10B unicorn. TPG isn’t working on God’s behalf. They are here to make money. So if they’re putting in $1B now, they’re looking to cash out 4-5-10x over the next five-ten years, which will generate the returns their investors are accustomed to. And I’m not sure if all of you noticed but TaMo has promised that come the day of deliverance, TPG can cash out in whichever form it like- sell it back to TaMo, IPO or anything else they wish for. So it’s not cash burn and dump like Paytm. We’re talking real returns here. And why do I think TaMo EV company’s valuation will grow? Well, let’s look at baby Tesla!

Tesla came with it’s IPO ten years back and was valued at close to $10B while it was still selling 1-2k cars in US. Come 2019 and when people realised it wasn’t going to die, it shot up from $50B to $900B in 18 months. I’m not suggesting anything but this is how EV companies are being valued and with 1.3B population, TaMo has huge domestic market to capture.

So, my hunch is, if nothing stupid happens and things just unfold as they do in the house of Tata- quietly, we’re looking for atleast 5x our money in TaMo from here. I was earlier willing to not sell it before 2025 but now I just realised at any valuation less than $100B, I’d be leaving too much money on the table. That might be the costliest profit booking ever!

PS: If this can happen for EV in TaMo, I’m just wondering if it does happen for INX in BSE, will BSE also not be rocketing north of 5000/-. Who knows! Be patient, don’t sell unless you’re dying tomorrow and let the market takes care of you. Till then, laugh, dance and make merry. Diwali came early on Dalal Street!

So here we are today with Sensex cruising past 60000 and Nifty almost on the verge of being an adult at 18000. This has been a fantastic run from the March’20 bottom and I’d argue that this Bull will run miles before it sleeps.

Imagine this scenario- markets are at life highs, people are making money and portfolios are climbing up each day; IPO subscriptions are beyond belief and India story is getting noticed again. What do you think market participants and men on the main Street should be doing? You’d say they’d be celebrating onset of this prosperity and running over each other to invest money. Well, this is not what’s happening. Everyone and his aunt are waiting, if not praying for a correction. Everybody, except a miniscule minority is doubtful of this Bull Run.

A Bull Market has four stages- Pessimism when people claim that the world is coming to an end and markets are going down to zero. This is what we witnessed in March-June 2020. The Bull takes its birth right at this point of maximum despondency. The next phase is when the market moves up higher, makes higher highs and every dip is bought while nobody’s watching. This is beginning of the second phase of Skepticism. I remember this vividly when people around me were cocksure of a looming correction in well, July 20, August 20, Diwali 20, January 2021, March 2021, lockdown 2.0, June 21, and now they’re predicting, ergh almost praying for one at Diwali 2021. This is when Market has coolly cruised past 60000. A large chunk of those who’ve missed this massive rally are now trying to justify their genius by making the one’s who made money believe that this is a false bull run and we’re in for a massive drop. This is like the liberals terming Modi’s victory as a fraud on democracy. Plain vanilla- Bullshit!

A Bull Market climbs many a walls of Skepticism. The third phase is of acceptance. This is when everyone with cash who has missed this rally will give up and invest to participate and give this run legitimacy. That’s when headlines will change- India will shine again( in Media), growth rate predictions will go up, panelists will cheer the resilience of our economy, new acronyms like BRICS will be coined and India will be touted as the next land of milk and honey. Everyone will make money and be happy about it. Stocks will be the best thing ever and the prosperity

I’m a firm believer that this is a multi year mega Bull run which will make a lot of people wealthy beyond their dreams. This is the second time in past 40 years when India’s economy and markets have bottomed out together. This was the case in 2003-04 in India and 1980-81in US which were both followed by massive runs in economy as well as markets.

Remember- it’s not a Bull run if you’ve to justify it.

PS: I’m so happy that the view which I’ve held all this while was so eloquently articulated by RJ himself in his latest interview with BT Today.

I have been investing for over four years now but the real learnings have been in the past four months. What I mean is not that I have wasted the other time but in order to really find out what works, you have to first eliminate everything that doesn’t.

Ad Charlie Munger says, invert, always invert. So in order to become a great investor, you should first figure out things which will make you a pathetic one. They’re pretty simple to figure- trade extensively, especially on tips, buy stocks which are hot, invest in loss making, debt laden penny stocks etc. So once you’ve found that all these things will quickly turn your million dollars into zero, you know what to not do. So do what’s left- buy companies with long term focus, businesses which are easy to comprehend, profitable and have existed for long time, don’t trade much. Rest is patience to hold as compound interest shows its magic.

Similarly in life, the quest is to become wealthy, not just rich. Wealth works for you even when you’re not looking. If someone holds shares of Reliance, it doesn’t matter if you do anything else special- the company still will make money day in and day out and so will you, in terms of rising share price and dividends. Real wealth is made by letting compounding works- to hold stocks for long enough as the value of underlying business grows first slowly and then exponentially.

So over the past four months, my learning curve has suddenly grown exponentially. I stumbled upon people who’ve taught me things which effectively have changed my investing thesis. Nick Sleep, Mohnish Pabrai, Guy Spears and to a bit Naval Ravikant have had enormous influence on the way I now think and invest. This happened just the way compounding does- slowly and stealthily.

I read close to 50 investing books before I read Richer, Wiser and Happier by William Green which introduced me to Nick Sleep. At the same time, my daily dose of YouTube led me to a refined version of Pabrai who himself has been thoroughly influenced by Sleep’s philosophy. Guy was the common figure in the two and thus, I also read his book and watched his videos. Naval Ravikant happened similarly- I was reading a book on Crypto Billionaires and it so happened that the book mentioned Ravikant. Lo and behold- I met him as well.

Every fortuitous development in my life has happened through books. I kept reading whatever I could find on Amazon as I deemed fit to read and my life changed the way I described- slowly and stealthily. I never did a day’s work but still managed to learn so much as once you put in enough years, compounding works wonders. So it’s been over 7 years that I have been reading and now the learning curve is pretty steep.

What I’m trying to tell you is in order to learn to invest, you must first quickly figure out right role models. Since you don’t know who are the right ones, eliminate the bad one’s. I’ve been pretty lucky that I found Howard Marks and Seth Klarman much before the Covid crash which enabled me to be pretty ready for the bargain sale last year. However, I also realised that while making money in a bear market is tremendously easy , the real quest is to grow it in the subsequent Bull run and to protect it in the next bear phase.( Italics added)

This led me to find out people who have been able to positively grow their money irrespective of bull and bear runs. No, it doesn’t mean I’m trying to find a way that my money will only grow and shares don’t fall in a falling market. What I mean is to find a way to somehow shield the impact of a bad market and not make the common bull market mistakes.

So I learnt that I must do the opposite of what people do in a Bull Market- go up the quality ladder. Most people chase the highest returns in a Bull run- like Basant Maheshwari is now showering praises on SAIL and other quality investors are buying junk stocks, left and right. So I decided to get out of cyclicals like metals and oil stocks and bought Colgate and HUL. I am trying to realign my portfolio in such a way that hypothetically, if there is a 40% drop tomorrow, I’m dead sure that the only thing I have to do is to buy, not flee.

I forgot to mention this guy called Terry Smith. He’s a British investor who’s mantra is- buy good companies, don’t overpay and do nothing. His wisdom has made me believe that it’s much better to buy Colgate at 40x earnings than to hold ONGC at 5x earnings. This wasn’t an easy change but I must confess, I’m at much peace now.

So now my activity level has dropped significantly. I’m basically content with what I’ve now and would only look to buy LIC and NSE, once they’re on sale. The biggest learning has been to think not about the next quarter or even next year, but to visualise what might happen over the next ten plus years. Once you can do that, all you must do is to let the reality unfolds over time. As Munger say- learn to watch paint dry.

So this is an attempt to structurise what I have learnt over the past four years and see if I can develop some sort of decision tree or a checklist to value a stock.

Investing is the last liberal art for a reason. You can value a stock to the last decimal and feel happy about it but the market can create its own price movement and you’re left flummoxed as to what is wrong with you. A lot of subjectivity is included and what matters the most is whether you can see a light bulb glowing and say- Aha! You must be able to visualise the future reasonably well, at an early stage,buy large enough and hold it long enough for thr story to play out.

As I say, find a reason to say no to a stock within five minutes. So let’s see what can help us in this aspect. Too much debt, capital intensive industries with no clear difference in product( construction etc) are a clear no for me. I will say no to a stock also if I can’t understand and reasonably explain a business model to someone who doesn’t have anything to do with investing. This allows me to negate a lot of ideas which can possibly block my capital.

Now the first and foremost checkpoint is if the company has a reasonable possibility to be alive after 10, if not 20 years. To find such companies, I look for companies which have been around for the past 30-50-100 years and are still going strong. HUL, Colgate, Reliance, ITC etc are all in this category. This helps me avoid the new new things which glitter a lot today but can fade in no time tomorrow.

Second, find companies which you believe can not just be alive but thrive in ten-twenty year’s time in India. This means, you’re inherently betting on a growing India and investing in companies which will grow bigger as India does. So anything which is not going to be profitable as India grows richer, eliminate all of them.

Third, if the company ticks the above two, find out if it can grow by investing more capital or less capital or basically no capital. A company like say a Bank or Larsen will definitely grow but it’s going to need a lot more capital to increase its balance sheet and to generate those profits. However, the companies which need this capital may also raise fresh equity capital leading to dilution of current equity, which means my shares are at a risk of being diluted to the extent of fresh equity raised. It’s a red flag for me. Also, if the company raises fresh debt capital and the market goes south, I might be staring at a potential bankruptcy. So a no no to me.

However, if there are companies which can grow reasonably well with India without raising fresh capital, you’re staring at a multi year multibagger story. The profits will rise but since the number of shares remain constant, the market capitalisation will only rise even taking into account a very high dividend payout. This is what I love. The brokers, the AMCs, the stock exchanges, HUL, ITC etc are all in this category and this is what I’m buying. The price movement can be anything in the meantime, but if you can hold them long enough, for 10+ years, you’re bound to be proven right.

Now comes the question of how to value a company which ticks all these boxes and if it should be bought or not. You’ve eliminated close to 80% of the market by these three checkpoints. So on a piece of paper, write out the name of a stock and dig down deep. See what can you understand about it and have the following in mind:

Sit down calmly and read the annual reports for the past three years and contemplate whether the story is getting clearer or not. If you’re still convinced, then ask yourself what according to you a similar company in US would be worth. This has helped me to calculate the runway ahead of us as the real destination of all capitalistic society is at WallStreet. So when I looked at valuations of NYSE and NASDAQ, it allowed me to believe that one fine day, if BSE can even become one tenth of what NYSE is, it can be valued North of $7 billion. When I valued ICICI securities, I looked at what Charles Schwab was doing in a quarter and realised that our brokers can do ten times more profits than today in ten years and still they’ll have more to go ahead of them.

This is how I’ve tried to build stories in my head. Once you’ve the story in your head loud and clear, you stop worrying about the price fluctuation and focus only on annual performance, that too over three year blocks. This is how conviction is built and you get the courage to hold.

PS: read Nick Sleep’s letters, available to download on Google and trust me, this man’s a genius!

How should I invest? This is one question which has my attention all the time. The more I hear biggies like Mohnish Pabrai and Guy Spier, the more clarity emerges in a cluttered mind which has all sort of crazy ideas in it.

Everyone who enters the world of serious investing goes through some phases. We all start with Ben Graham and his value investing thesis- don’t pay more than 15x earnings and 1.5 times book. This is what I did for close to two years before moving on to the other guys. I then was reading Howard Marks and basically every other thing on value investing, trying to learn from everyone from Buffett to Klarman and to who not. All of this led me to believe, erroneously though that buying and sitting on cheap companies with high assets will eventually make me rich.

I’ve been pretty passionate about investing. Thus, watching everything on YouTube available about Investing led me to the greats of Indian and Global investing. RJ, Ramesh Damani, Ramdeo Agarwal, Samir Arora and everybody else in the Indian league while Marks, Buffett and Munger and others on the global arena. I’ve heard them all, multiple times. When you’re young and new, everything looks wow. You’re drawn towards everything they say and you try and see whether you can replicate some or any of it. However, as time progresses and your portfolio reflects the real results of your actions, you realise Investing is simple but not easy.

I was possibly the only person praying for a 2020 type crash in the markets, when it was going up and above all through 2017-19( 2018 was all but a minor blip). This was more behavioral than analytical that led me to invest heavily all through the crash and call the bottom of the market and also start of the current bull run. Being contrarion is difficult. I firmly believe that the current bull run is here to stay longer than we all expect and this is not even the beginning of a mega run. However, today’s blog isn’t about the market. This is about how I’ve evolved as an Investor.

The big change in my thesis came when I made some real returns on my portfolio in early 2021. Everyone makes money in a growing market but not many sustain it through the next fall. So I was extremely worried about learning two things- how to invest in a rising market and how to avoid a washout in the next bear market. This led me to the key words of longevity and quality. If you buy companies which are going to be around here for the next ten years and will make more money than they do currently, you’re sure to be around in the markets with a higher networth.

Also, the best decision of 2021 was to read this book called Richer, Wiser and Happier by William Green. I got introduced to Nick Sleep and also a new version of Pabrai. In 2019,I’ve read Pabrai’s Dhndho Investor wherein he talked of the truest cigerette butt style of investing we call Value Investing and wasn’t impressed much. However, through him I had also heated Guy Spier who then said how buying Google or Apple was actually Value Investing. Then I was too immersed in the Grahamical philosophy to even take him seriously. A costly mistake it was on my part. So after this book, I heard Pabrai and Spier again along with Nick Sleep’s letters. This I believe is the Holy Grail of Investing.

Nick Sleep and Guy Spier have possibly influenced me the most wherein the two talk of almost two different yet similar kind of investing. Nick talks of understanding the vision of a company early and buying big enough to make a difference in portfolio while Spier talks of buying companies which are going to be around for a hundred years and sitting tight atop them. Both of them have a monk like existence , Nick more of a hermit than anyone else( not one Youtube interview I could find). Also, Nick hates diversification and portfolio sizing which I agree with. If you want to have outsized returns, you must be able to withstand outsized drops in your portfolio valuations in the meantime or else you’ll make stupid decisions. He has held Amazon from the real price at around $20, all the way to $3600! That’s balls! Also, it is 70%of his portfolio. Now how many of us are ready for anything like that.

So here’s what I’m trying to do with the portfolio. Most of my portfolio is in a handful of stocks which I believe are going to grow very, very big five years from now without requiring any fresh capital, thus not diluting equity. Thus my portfolio swings wildly both ways but I’m not worried until 2025.( I’ve held them for three years already and have promised myself to not touch them for next three, easier said than done). Also, one half is in companies which are already pretty large, the gold plated companies I call them, which are serving such simple needs in human lives that they cannot be thought of going away in the next ten-twenty-fifty years. And no, I don’t subscribe to that guy Mukerjee who’s main job is to own whatever is going up and intellectualise it on CNBC.

Holding companies is a game of patience. Most of the people around you are not even trying to hold anything for one year. So once you start to play a game with a longer horizon, you’re at an incredible advantage to everybody around you. If you can invest something with a vision of seven years, you’re a pseduo-promoter. The price may go anywhere in the meantime while the value will grow over time. I may do worse than an index but it doesn’t matter. I’m not playing the game everyone else is. I’m not trying to beat an index or look good on TV. I am trying to invest in a way not many do these days. The returns, well, will take care of themselves.

I guess I’m the only one in my circle who’s convinced that what we have seen in the markets in the last one year is nothing and a mega Bull Market is still in it’s infancy. This viewpoint was also voiced by the great RJ in his latest interview and let’s see why!

A Bull Market is a period of prosperity,joy and riches. It’s a period where outsized gains are made by the believers and by the time it’s over, there is a significant difference in networth of the ones who benefited vis-a-vis the doubting Thomases. RJ went from a crore to 100crore in 1992, and so did Ramdeo Agarwal who went from nothing to 30crores in the same period. Companies worth next to nothing became household names and a new breed of investors made mark in the markets. So did the 2003-07 market which made an entire new set of India Bulls very, very rich. RJ became the legend he is while Ramesh Damani, Ramdeo Agarwal and all others turned everything they touched into Gold. Moral of the story is- a Bull Market is extremely beneficial to your networth.

So what’s happening currently. People who made money are doubting the sustainability of this run, the guys looking at economy are out of the market and every Tom dick and his brother are predicting Market topping out, not tomorrow but yesterday. Newspaper headlines, Twitter etc is filled with news of imminent crash and everyday when the market falls, people sigh a sense of relief. This is the typical syndrome of second stage of the Bull Market- Skepticism.

Bull Market climbs the wall of worry at every stage. Even from the absolute bottom, we’re only up 2x on an index level. if we study the previous markets, every mega run ends in 4-10x on the index level in two-five years. Our Sensex went from 700-4500 in two years in 1990-92 and from 4000-20000 between 2003-07. The market I believe we’re going to replicate most closely is the Sensex run from 2003-07 and the American great run of 1980s when Dow went from 1000-11000 before topping out in 2000! There are eerie similarities between then and now.

1980s was preceded by horrible times in America. High inflation, Oil shortage, recession of 1970s had all but predicted the death of equities( an eponymous article came out in Business Week in 1979!!!) Cut to 2002-03 in India- Kargil war, three years of failed monsoon and severe market correction. Sensex never crossed it’s high of 4500 made all the way back in 1994! Everyone had given up on Stocks! The markets and economy made simultaneous bottom. What followed was the glorious bull run which led to multi years of prosperity and riches. US won the cold war while India went from a third world country to a Trillion Dollar economy!

Coming back to 2021, India! COVID-19 killed the growth story, markets collapsed and people ran for cover. Headlines still predict the third wave and people would rather want the markets at 10000 Nifty than 20k Nifty! Come-on guys, history rhymes and is making all the noises to grab this opportunity and change your lives. People are making money and still doubting it. The 🐂 is still a young calf! We’ll see this grow into a multi year mega run which can propel nifty to 25-30k( maybe more) before topping out.

Just a few examples. Bajaj Finance was available less than 200 ten years ago and is up 30x from there. TTK prestige is up 15x, Nestle is up 6x, Eicher went 15x before correction. So if you would have listened to economists and experts in 2009, you’d have certainly not bought any of these. Ask yourself, would you have bought Bajaj Finance at 500 after it had doubled in three months? The answer is No. You’d have said, I’ve seen it at 300, and I’ll again buy it thereabouts. So you’d have seen it crossing 800,1000,3000 and all the way to 6000!

Now come back to BSE. It crossed 1200 for the first time in its history this month. People who’ve seen it double in three months want it at 500. It might go there but it might also double from here before correcting 40%. That will also mean it’ll be 1500! I don’t know when it’ll top out. People have been predicting Amazon’s top for 10 years. It’s nonsense! It may or may not happen but by the time it does, you’d be so poor to even think of buying.

A 🐂 run is always followed by a 🐻 market. However, if something goes up 10x and corrects 40%, it’s still up 6x! That’s the point most are missing. Nifty can very well correct 40% someday, but what if it goes up 3x from here before that? Think about it!

In the midst of the bull market which we are in, it’s time for me to share some new insights which I have gained recently. This mostly is a mix from the last two books which I have read- Richer, Wiser, Happier and Masterclass with SuperInvestors.

If you study the successful investors across market cycles, there are certain similarities they all share. One, within the first five-seven years of their career, they rode a couple of stocks which went all the way up 10-50-100x and become financially independent. Rakesh Jhunjhunwala had Sesa Goa and Madhu Dandavate budget while Ramesh Damani had Infosys and Radhakishan Damani held HDFC Bank at 40rs! Secondly, once they identified a stock and the price went up, they increased their holdings at periodic intervals to multiply the eventual gains which created enormous wealth for them. And third, they held these stocks through thick and thin and didn’t panic their way out at the worst instance. Let’s look at it closely.

We have talked about multiple mistakes people do to lose money. This blog is dedicated to discern mistakes which Investors do when they’re in the money, i.e.when their stocks go up. There are three types of investors. At the bottom of pyramid is typical retail- they sell half their shares when it doubles and say I have recovered my cost and the rest of the stocks are for free. I won’t care even if it goes to zero. Well, this is the dumbest thing one does in the markets while making money.

There is a deep concept which few of us understand. This is, color of the money is same. What it means is that every penny in your bank account has equal purchasing power. Money doesn’t care whether you have won it in a lottery, or your mother gave it for your birthday or you’ve worked hard to get it as a salary. This is a Eureka moment once you realise what difference it makes to the way you think of money. So the shares which you think are worth zero are actually potential capital for you to invest somewhere else and compound it even further.

I’ll give you an example. I bought NALCO at average of 40 and sold it on the way up at an average of close to 72-75. Now my friends also did the same but he sold half his shares at close to 80 and is holding the remaining half saying it’s for free. I reinvested the money in ISEC and BSE and that money is up 50-60%. This means I have sold NALCO effectively at close to 120 as the 75 has also gone up 60%. This is the magic of consistent compounding.Today NALCO is at 88. So my rate of return has moved higher significantly.

Luckily for my friend, nalco has also gone up. Imagine the pain when he could have sold it for 85 but didn’t and now the price is 50 and he can’t sell! This is a classic case of destroying compounding.

The second type of investors are those who buy low and ride all the way up while basking in glory as their stock has turned multibagger. They gain lots of praise from friends, broker and colleagues. However, as they are too attached to their low buying price, they don’t add anymore and hold insignificant quantities and thus, don’t generate the wealth which was for them to take. Let’s take an example. You bought 100 BSE at 500 and it’s now 1200. You’ve turned 50k into 1.2l. congratulations. However, your absolute gain is only 70k. Now imagine you added on the way up and have 500 shares at and average of 800. So you turned 4l into 6l. Your absolute gain is 2l. Now let’s say you hold 1000shares at average of 900. Even then, your 9l has become 12l and your absolute wealth is higher! This is the key to riches. It doesn’t matter what you make in percentage terms, what matters is the absolute money you’ve made.

Look at RJ. He bought 1cr Tata Motors last year when the price was close to 120. He also bought 27.5lakh shares in this year March quarter when the price was close to 325. So even if his average has gone up, the real money he has made has also gone up significantly.

Third kind of investors are the genius ones. They hold stocks which they believe are worth much more than the price they’re paying now, add all the way up and aren’t rattled with a 40-60% price cut. RJ must have held Titan through multilple 70% price drops in the 23 years he has held the stock. This also means now his holding in Titan itself is worth over $ 1Billion. This is the magic of long term compounding.

So identify the mistakes you have been making and correct them in time. Otherwise, you’ll remain where you are and see other people getting rich!

There’s immense buzz around all of us with regard to Zomato’s ongoing public issue and hence, the blog is here.

There are a few aspects my friends have gotten excited about. One is that the price band is very cheap at 72-76 per share. This makes them believe that it’s a good bet. Second, with Amazon and Google valued at what they are, no-one wants to be left behind in this potential get rich quick IPO.

Firstly, price per share is a simple yet stupid way to identify if a share is cheap or not. The key is market capitalisation. Different companies have different equity capital based on which they issue total number of shares. BSE has an equity capital of 9 crores, made up of 4.5 crores shares of rs 2 each while IOC has an equity capital of 10000 crores approx, made up of 1000 crore shares of rs 10 each. So the per share value will signify different level of ownership. Holding 1000shares of BSE will obviously give you more ownership than holding 1000 shares of IOC.

Zomato is raising close to 9375 crores at a market cap of close to 60000crores. So at 72rs per share, it is issuing close to 833 crores shares and thus, you can calculate your ownership levels. So, never judge a company by price of its share. Dig deeper and look for balance sheet.

Second, it’s a loss making machine. To generate 2000crore in sales, it needs 2850 crores in capital. This is insane. The company says it is not looking to get profitable anytime over next 5-10 years. This basically means, it’s selling something worth rs 2850 for rs 2000, by funding the gap between the two by somebody’s money. That someone used to be venture capitalist until the ipo and now it’s going to be your money! So choose yourself if you want to forever fund a loss making venture with no returns except how Bitcoin works- the hope that it will go up in price and you can sell it to someone more dumb. Well, like I say, that is not investing. It’s called speculation.

For 2000 crores of sales, HDFCAMC generates over 1600 crores of profit( ebitda) and 1200 crores of net profit. That’s a business I’d be happy to own. So, with no profits in sight, I don’t think investors can see anything but losses all over them while the promoters bask in glory and media coverage.

So does this mean all potential startups are bad? Nopes. Look for businesses catering to niche groups which can later be scaled up significantly and need no discounts to grind growth. There is no difference between swiggy, Zomato or dunzo. A customer will order from whichever app offering more discount. I do that myself. So these businesses are like airline companies. They have growth, scalability and repeat customers. They however are best wealth destroyers. They never make sustained profits, if they make any.

So choose your companies well. Find out why do you want to own what you do. And if it’s just a long bet on- oh this might be the next Amazon, god bless you.

There’s one more significant problem public investors are going to face with such companies. The private equity has already bought them at infancy and have made 100x their money before dumping them onto public with no potential growth in sight. So with 60000 crores market cap, do you really believe Zomato can double without any profits? The analogy with Infosys or Amazon is wrong as they never raised money from private equity. Infosys was valued at 30 crores at its ipo in 1992 and now is worth over 4lakh crores.

So I’m not looking to order Zomato anytime soon, unless it’s from a restaurant I like! Rest, it’s your money!!

This comes a day after a sudden drop in Tata Motors shares, which saw a move from 358 to 310 in less than an hour, leaving most of us baffled for want of an explanation. Market participants traced this move to a press release from the company citing acute shortage of semiconductor chips, which is likely to hamper production for the upcoming quarter as well.

Let’s first see what does this all mean and why the title is apt for today’s blog. Whenever there is a sudden move on either sides, market experts/commentators on TV and Twitter want to justify this based on something, in order to explain to us investors as to why the market did what it did. Most of the time these explanations are meaningless at worst and an intellectualised ignorant commentary at best. Afterall, if the experts can’t tell you in 5 minutes as to why Tata Motors is worth 15000 crore less in one hour, what good are they doing to mankind. Hence, the first step is to not buy into these arguments.

Secondly, and I like to quote Samir Arora here, which is while making decisions in the event of such a sharp move, you’re best served with logic. If at 1PM, TaMo is trading at 358 and you’re happy to own it, will you be sad to own it at 310 at 2PM? Investing don’t work in this fashion. So the second step is to dig out the likely explanation as provided by market analysts and expose it to a bit of logic. The press release said there is an ongoing shortage of semiconductor chips, which is likely to worsen through the next quarter but will subside over the next one year. The company has possibly lost 30000 vehicles it could have produced.

If you just googled shortage of semiconductor chips, you’d have found that similar press releases have been issued by BMW, Mercedes, Volkswagen, and even Nissan and Suzuki. So in this scenario, the entire market has shrunk affecting all players equitably. Hence, it is not a company specific issue. Now if you believe that due to this shortage,you want to sell TaMo, you’d rather sell all auto stocks as all of them will be equally affected.

However, if you have read the press release carefully, it said there is a pending demand for over 110,000 vehicles with the company and due to availablity of inventory with dealers, they’re likely to report higher sales numbers going forward. And if you think you still want to sell, go ahead and dump your stock.

Doing your own research is essential to develop conviction in the story of stocks you own. Unless you’re sure of what you’re buying and for what reasons are you buying, you’ll forever be unsure of your holdings and make wrong investing decisions all the time. You can outsource research, but you can’t outsource conviction. Buying and holding a stock for three five seven years takes a lot of guts and if you’re so nervous buy a ten percent drop in a day, you’re best served by not owning any stocks.

Ask yourself logically, is it possible for a business to be worth Ten Thousand crores less in an hour and in case it is, and in case you’re already holding the stock, doesn’t it mean it’s an opportunity to add to what you already have? Or is it the first sign of an incipient stress which means you should get out fast.

We’re all too familiar with value traps, wherein a lot of people bought the dip, all the way to zero. DHFL, RCap, Jet Airways, Yes Bank are all fresh in our memories. Once you’ve burnt your hands in something like these, you’re very wary of buying anything on sale, again. This is why I said, unless you’ve done the hard work, developed conviction in a stock, you’ll never be able to differentiate between the two.

In order to ride a multibagger, you should be willing to hold through significant drops in stock prices. Amazon, Google, Reliance have all seen their prices correct 50-70% not once but on multiple occasions in their listing journeys. If you were the one to sell at the wrong point, you’d have missed the biggest wealth creators in the history. This is where non-financial research of a stock is important.

If you read the balance sheet, income and cash flow statements, you’ll only see in the rear-view mirror. Investing, however, is buying into the future. You should be able to visualise things three five years into the future and see if your stock fits the bill once India changes, economy grows, technologies change the way we live etc. If you can see and visualise a story that way, most of the times you’ll see it trading at cheap as the market is still not valuing it beyond the next three months. EPS estimates can only capture as much. They can never capture the tailwind a stock can have wherein it’s possible to grow 100% in a year for multiple years, if not decades.

PS: There’s a fantastic book- Richer, Wiser, Happier by William Green which has been published recently. I recommend it to all of you as it’s going to take you places you can’t even imagine that they exist. Especially, read chapter 6 on a couple of investors based in UK, Nick and Zack who hold over a couple of billions of dollars each in their individual accounts. Astonishingly, Nick owns only three stocks while Zack holds six. And they have rode Amazon for over 18 years, with all the price drops and everything in between. And what does that mean- Amazon has grown over 100 times in past 18 years, making both of these gentlemen billionaires.

This is the power of vision and courage. Rest is all gibberish.

This is pretty turbulent time for first time investors. Coming off from the massive correction of last year, most of them have made big returns in whatever they bought last summer. Making money in a Bear Market is easy, especially for someone who had the temperament to buy fear. However, if this is the first bull market of your life, you’d agree that to buy right is more important than anything else.

When you’re trying to make a name for yourself in the world of investing, and have a vision to make loads of money, all you need is one Bull Market at the beginning of your career where you can significantly improve your level of capital.

I can tell you from my experience, the feeling of getting that one big idea, that one stock which you’ve discovered and the market doesn’t yet price fully; the stock which you’ve put your money into and are getting excited about as the business improves, the feeling of being right two years from now when the stock doubles or triples is not something one can express or explain. It can only be experienced.

When you’re working hard to make it big, you do a lot of work in the dark. You read everything you can about the markets, investing, big investors, stocks, companies and try and frame your own processes and valuation models as to what do you believe is a good bet to make. It’s funny because doesn’t matter what you do or what you miss, a lot of luck is in play. You can be sure shot about everything and still the stock turns out to be a dud. Or you can simply get lucky and make a killing in the wierdest bet you’ve made.

So here’s what I believe one should do. You’ve to develop a method to control your investments and stick to them patiently. In the world of investing, process is all you can control, the outcome is beyond anybody’s grasp. So when you get disciplined about the way you’ll pick stocks, your failure rate will go down and you’ll make fewer mistakes. Charlie Munger famously says that all he tries to do is to avoid doing stupid things than to be smart.

You know if you positively compound your money even at low rates, in twenty years you’ll end up being very rich. The key is to avoid multiplying the whole thing by too many negatives or zeroes. That way, you money will only add up, not goes down every other year. This is a simple method which works wonders over long periods of time.

Developing an investment philosophy takes years in the making. The more you learn, the more you realise that you understand a lot less than you think you do. Also, it’s not one size fits all, universal laws of gravity which you can apply in isolation of everything else and it still would work. Investing is more of an art than science. Hence, a lot of ideas you’ve which will work depends on the sheer gut feeling you develop over time, but can’t put to words or explain without sounding confused.

When you’ve an idea you think is a big thing, a bulb goes up in your head. You know that it’s going to go up not twice but ten fifteen times and now you can’t find out why. You look up for research reports and there’s not much available. People in the market don’t think it’s a good bet but you somehow are convinced that it’s going to go up considerably. It’s all in your gut that you build positions. Something like this happened to me with BSE and ICICI Securities. I had positions when they weren’t the favorites, and the Market suddenly discovers them and they’re all over the place.

However, the market is a very bad judge of long term bets. Nobody could have foreseen if HUL will go up 10x in ten years if they had listened to the guys on tv but slow yet steady, it did go up 10x in the past ten odd years.

There’s an old video of Ramdeo Agarwal in which he explained how he bought Eicher and Nestle, at almost 25 times earning and still made ten times his money. There are some stocks which can grow their earnings faster than whatever the market believes they can, and generally at the beginning of this era, they’re trading pretty cheap to modest multiples. Nestle was available at 25-30 times earnings in 2009-10. No value guy touched it. However, if you can visualise correctly that the business will grow faster than expected, both the Price/Earnings and the Earnings will grow faster than the market and thus, the share price will go up 5x-10x in five six years.

So I believe some of these non lending financial companies can grow their profits much faster than the most liberal estimates of the market and since they’re due for P/E expansion, they can go up significantly.

Just do a small research for yourself. Google all stocks in financial sector, banks, nbfcs, brokers, AMCs etc. See what their profit margins are and the valuations they’re trading at. Now ask yourself one question. In five years, is it possible for these companies ( non lending financials) to grow their businesses two-three times, assuming more Indians come to the markets and invest at a higher rate then they currently do. In that case, at their profits margins, what is the most conservative estimates of their net profits be like. If that number is anywhere close to 2 or more, you’re looking at a three bagger atleast as once the growth kicks in, the company trading at 15 times earnings also gets treated better and trades at a higher multiple. That’s how you know what can happen if you sit tight on these companies.

If you don’t believe what I say, look at the share charts of some of the prominent asset management companies of the USA, like Blackrock, Blckstone, T Rowe Price etc and their earnings profile. They’ll look eerie similar to some of our companies. That’s a trick to check if your judgements are directionally right or not.

Whether or not you double in three four years only time will tell. Till then, all you can control is the process through which you invest. Also, the constant goosebumps is an added feature!