Category Archives: Price to Earnings Ratio

Time after Time

Posted on by
Reply

I know, I know, the title of this blogpost is also a hit-song by Cyndi Lauper from the ’80s. As a kid and entering my teens, a rainbow-coloured Cyndi made an impression.

So, as fragile Miss Lauper with her multi-coloured hair was crooning the song to the top of the pops, the world was coming to terms with the aftermaths of the Iran hostage crisis, the Falklands war etc. etc.

Cyndi didn’t know it at the time, but the track “Time after Time” would go on to become a huge, huge hit, appearing in the sound-tracks of many movies and basically becoming an all-time song.

World makets recovered to the dotcom boom of the 90s. Investors were making the mistake of greed, again, time after time. Scrips with no earnings were selling for hundreds of times the book-value.

Bubbles burst. That’s what bubbles do. In the ensuing mayhem and the fear that engulfed investors, the share prices of capital-gains generating zero-debt companies with regularly increasing dividends and impeccable managements fell drastically too. That’s what fear does, time after time.

As time passes, investors forget their old mistakes. A horde of newbies joins the fray, ready to make the same mistakes of human nature, again, time after time.

Cyndi’s was a love song. It had nothing to do with finance cycles.

It’s title is so compelling though. And, of course, I just love the song.

A Time for Things

Posted on by
Reply

You don’t normally have dinner at breakfast time, do you?

Of course not.

Similarly, you don’t buy into a State Bank of India with a 5 year horizon when 6 years of earnings growth has already been factored into the price.

There’s a time for things.

You do buy into the same State Bank of India with a 2 week horizon when it’s shooting off the table and giving clear-cut up-moves as it makes its way into no-resistance territory.

And that’s about it. You’re in it for the short-term because that’s how the environment has defined itself. It’s a trading environment, not really meant for investors, whether conservative or unconservative. Thus, you have a stop-loss mechanism in place, in case there’s a down-swing, because up-moves can go hand in hand with down-moves. Where there’s a big money to be made, there’s chances of making a big loss too.

Oh, are you asking why you can’t enter into such stocks at this time with a long-term perspective? I see. Do you fly first class? No? Why not? Because it’s expensive, right? Similarly, such stocks are expensive just now. That’s not to say they won’t rise further. What you need to understand is that when you wake up five years from now, such a stock will have peaked and could possibly be heading for its trough. So your net returns over the long-term could even be negative.

Really wanna be a successful investor? Then you need to learn to buy cheap, with a margin of safety. You need to be patient enough to wait for lucrative entry levels.

Not getting your margins of safety anywhere in the markets just now?

Ok, just trade till you get them. Then you can stop trading, and start investing. Fine?

A Beautiful Concept called Margin of Safety

Posted on by
Reply

The most beautiful, genius things in life are simple.

And therefore, they are difficult to implement.

We like complications. Sophistication. When something appears simple, our first impulse is that of rejection.

We get our families insured, our car insured, house, properties etc. etc. all insured, in fact, we are busy buying protection everywhere. During winter we wear protective clothing. Our children swim with protective gear. Our cars have seat-belts and airbags. The list of how mankind protects itself is endless.

Then why is it that when it comes to putting one’s hard-earned money on the line, all thoughts of protection go out the window, and one becomes malleable enough to jump into the next hot story at even seventy or eighty times earnings?

Why is it that here we are not clinging on to protection? Basic question – are there any protective measures prevalent in the world of investing? The answer is yes, and many. In this article, I’ll name two and address one.

There’s the protective stop-loss (to be differentiated from the trigger-stop). Let’s talk about this one some other day. Right now, let’s focus on the other major avenue for protection, called margin of safety.

Basically, what margin of safety says is “Buy Cheap”. Period. What it’s not saying is that one should buy any odd-ball, cheap stock. It’s referring to quality stocks and telling us to buy them as cheaply as we can. The result will be a buffer price-band, which in case of a major market-crash will still limit our losses and save us from the urge to abandon our investment at rock-bottom prices. So, this concept asks us to have patience and wait for opportunity, and not to be impulsive and plunge blindly.

Margin of safety is applicable while trading also. One can buy into market leaders upon dips. The dip gives one a short-term margin of safety.

The primary advocate of margin of safety is none other than Warren Buffett himself, from an investment point of view.

So, to implement this simple and beautiful concept, one requires the virtues of patience and discipline.

Wishing for you safe and lucrative investing!

Cheers!

And what’s so cool about Private Equity?

Posted on by
Reply

-> that it’s private, i.e. for example no masses prevalent that can dump stock to make a company sink.

-> that the underlying is not quoted on a stock market, so you are definitely not following your investment on a day to day basis, but only on a quarter to quarter basis.

-> that each deal is scanned and studied thoroughly, and its price negotiated extensively.

-> that deal exclusivity also leads to price exclusivity.

-> that deal anonymity leads to an unrealistically low Price/Earnings multiple at purchase.

-> that deal transformation and resale at IPO level can translate into huge Price/Earnings ratio differentials – in other words, when the public is allowed to purchase a company on the stock market that has been nurtured by a Private Equity house that has brought it to IPO level, the Private Equity house makes a killing, because it dumps all its shares on to the public in the first 2 days as the IPO opens.

-> that the high management fee, at least till now in India, buys quality professionalism that investigates and seals your investments for you. As of now, there’s less riff-raff in this field in India. Here’s my rating amongst the companies I have dealt with:

1). Milestone Capital – excellent corporate governance, sound real-estate deals, foraying into education and healthcare – the best.
2). ICICI Venture – a very close second. Happy with them. Good appreciation of 65% of deals.
3). Franklin Templeton Private Equity – good, a little slow, but steady.
4). Cinema Capital – ok, nothing unusual till now.
5). Edelweiss – avoid, lack of disclosure.

-> that for another 2-3 years, entry will still be exclusive, and after that the entry barriers will be too low to make the returns being generated currently.

-> that the inflow of foreign funds to India currently is still very small, and can grow exponentially if conditions here keep improving. And what are the bulk of these funds looking for? Private equity holdings.