Sunday, 15 September 2019

The Art of Valuation

How do you determine if something is expensive? Is a book available at Rs 5,000 expensive? Is a pair of shoes available at Rs 3,000 expensive? Is a music system selling at Rs 2 lakh expensive? Or is the latest iPhone 11, which will probably be around Rs 1 lakh, expensive?

At the outset, it’s easy to say that most of these things are “expensive.” The metric of expensiveness that most of us unconsciously use here is what the average product in the category costs. A book is available at Rs 200. Why buy one at Rs 5,000? A phone comes under Rs 10,000, why buy an iPhone that’s over Rs 1 lakh? Another metric that’s consciously applied is they money you have at disposal. If your bank account has just Rs 5,000, a Rs 3,000 pair of shoes is a big ask.

Both the metrics mentioned above are not the true gauge of expensiveness. Expensiveness should be judged against features, quality, excellence and so on. For instance, a Rs 5,000 book that captures the best information and presents it to you in a highly appealing form isn’t expensive. It’s actually cheap. By reading it, you will get useful information that will help you in the future in directly and indirectly making money. If not anything, it will help fulfill your intellectual appetite and will be a joy to read. 

The iPhone is elusive to many, given its high price, yet it may not be expensive. With the superior safety that Apple products provide you, combined with the cutting-edge technology and the pride that comes with owning an Apple product (I don’t know many proud Android or Samsung or Xiaomi users), it’s actually a bargain. If you don’t have the required amount to spend, that’s a different story. But that doesn’t make the iPhone expensive.

When you invest in stocks, you don’t look at the stock price alone. You read it in conjunction with other fundamental factors such as earnings. Similarly, don’t see things from the price perspective alone. Compare the price with the excellence the product offers. You will be surprised to find many bargains around you that you once felt were eye-watering. 

Sunday, 25 August 2019

The Industry of Tomorrow # 2: The Simplification Industry

In an increasingly complex world, those who can simplify stuff can have a premium position. Call it the simplification industry. Things are generally simple by nature but over time complexity is added due to scientific and entrepreneurial zeal. Then starts the competition to provide more and more features at the same price point or in order to raise it. That’s when things get out of control.

Look at your TV remote and all the unusual functions it has apart from the basic ones. In order to add more “comfort” for the viewer, marketeers kept adding features to the remote. Now viewers are actually terrified of all the things that a remote can do. By mistake if you press a button, you may create enough trouble for yourself to keep you engaged for a few minutes to undo it. In many cases, you will require “expert” help. In some cases, even the experts can’t help you.

Or consider the panel of a basic landline phone. Earlier there used to be the numbers plus one or two more keys. A landline phone kept in front of me has the following apart from the numbers: *, #, Redial, Flash, M1, M2, M3, M4, Menu, Dial, Prog, and a few more keys that have some pictures on them. I haven’t used any of them in my life and have no need for them either. Of course, such objects come with an instruction manual, but when was the last time you read an instruction manual?

All this is true not just about things but also content, software, education and so on. There has been an increasing bent towards complicating stuff. Perhaps there are people who feel great about doing so. Warren Buffett said, “There seems to be some perverse human characteristic that likes to make easy things difficult.” But complicated things have made consumers’ life hell. The need is to simplify things to their most basic level. Companies that can do so can command the loyalty of their customers. They can actually command a premium despite their simplified offerings. The Google phones that come with pure Android operating system, which don’t have any manufacturer-installed “features,” actually charge a premium. Likewise, those who can explain things to people in a simple manner can expect to have a larger following than those who talk of abstruse stuff, no matter how intelligent they are. 

So, as an entrepreneur, you should pay attention to simplifying your offerings as much as you can. Intelligence applied towards doing so is intelligence well utilised.  

Read the other article in this series at: 
The Industry of Tomorrow # 1: The Privacy Industry

Saturday, 10 August 2019

How to Really Simplify Stock Investing

If you had to name one muddled science, stock investing would qualify for it instantly. There are as many theories and methods of investing as there are analysts, investors, traders and experts. Interestingly, the search for the holy grail of stock investing is still on. Investors, analysts and experts are still looking for that one foolproof way which can help them make money in all seasons. Sometimes they look at Buffett (or any other star investor); sometimes they look at data; sometimes they introspect; but the quest for one perfect method doesn’t seem to be getting over.

This quest has given birth to several formulas and rules that have become so entrenched in investing that they almost look sacrosanct. For instance, consider the division of stocks by their size: large, mid and small caps. Somebody sometime divided stocks by size. This thought then penetrated so deeply in investing that you have separate strategies to deal with these stock types. Many investors like to divide their portfolios across them. The thought itself has become the foundation stone of new theories and methods. 

Now the moment you decide to have some sort of allocation, you commit yourself to investing in only that type of stock, no matter if there are better, more sound opportunities available elsewhere. In your "small-cap portfolio," you can’t buy a large cap or a mid cap, even if you have an opportunity available there. The same is true for "style-specific" portfolios. If you have a "value" portfolio, you would probably overlook "growth" or "dividend" or other opportunities.

In stock investing, and for that matter in other areas of life as well, we often tie ourselves up with rules, formulas, methods and ideologies. They look convenient at the time of formation, provide clarity and familiarity, and make the complex world simpler, but at the same time they take away freedom of thought. Once you have adhered to a method for years, it starts to look like an eternal truth that you can’t refute. 

So, should you have no methods? We all need them to make sense of the world and progress with our daily lives, including investing. But we should not be a slave to them. We should be willing to evaluate them from time to time. If something else sounds better, we should give it a try. We should also try to hone our existing methods and beliefs to make them fit the times we are in. All this is an interesting process if we show openness to it.

As far as stock investing is concerned, try to make your method as open as possible so that you aren’t tied to some belief. All you need to do to succeed in stock investing is to find good companies and stay invested in them. Rest everything is optional.

Saturday, 27 July 2019

The Real Cost of Stock Investing

If you buy a stock, what do you have to pay? The most obvious answer is the stock price plus the brokerage and taxes. That’s true but that’s not the total cost. The total cost of investing in a stock or the stock market is its quantifiable element and the unquantifiable element. When most investors talk about costs, they are talking about just the quantifiable element, not the latter one.

What is this unquantifiable element? It is the peace of mind. By investing in the stock market, you unknowingly commit to parting with your peace of mind. Now there are many things apart from stocks that can deprive you of the peace of mind and we are not going to talk about those lest we would enter into a philosophical realm from which it is difficult to escape. But like those things, stocks also can also claim a fair share of the peace of your mind. Ironically, most investors invest in stocks for wealth creation that could give them peace of mind eventually, but that’s what they keep losing every day.    

How does this happen? No matter if you are an experienced investor or a rookie, movement in stock prices causes you to experience a range of emotions over a short period of time—from ecstasy to despondence to anxiety to fear to doubt to irritation and so on. These emotions and their rapid fluctuations and recurrence are as if you were on an emotional roller coaster for the full day. You can imagine the impact it has on you. Little surprise, people in the financial industry age faster (my own observation; I don’t have any study backing it).

Emotional instability is the biggest cost you pay for investing in stocks. And because this cost can’t be stated in a currency, investors keep paying it without knowing that they are. This cost is much more than the gains you will ever make. Over their investing lives, most investors will be in net loss. That’s sad. 

What to do? Should you stop investing in stocks? No, of course. In order to reduce the emotional cost of stock investing, cut yourself from the financial world as much as you can. Don’t check your portfolio too often; once a week or fortnight is just fine. Consume less of financial news and analysis; most of it is useless in the medium to long term. Follow your stock strategy, not market movements. Find other useful pursuits than worrying about stock prices, the economy and the market.

It’s only when you have cut the emotional cost of stock investing that you can proudly say that you have made money in the stock market.

Saturday, 13 July 2019

Silly Stuff Serious Marketers Must Avoid

Marketing is a dynamic field. But there are still some old tricks that one can still find around. They have stopped creating an impact and actually become irritable, yet the textbook marketer doesn’t want to let go of them.

Take for instance discounting. Discounting for a short time is fine but if it stays forever, it stops creating the desired impact. Over time people realize that the discounted price is the actual price and there is no discount whatsoever. Worse, some think they have been tricked by making them believe that they are getting a bargain.

Now consider freebies. Marketers try to attract investors with free gifts. If you go for them, you are asked to share your contact details. Some people leave the deal that very moment. Others give fake information. I have created a “junk” email account. If I must part with my contact information, I provide that junk email address. I never worry about the emails in that account.

Many payment applications offer cashbacks these days to entice users. It’s only after you have earned them do you realize that they come with many riders. You can’t use more than a certain percentage of the cashback on one transaction. A highly irritable term is “up to.” The number written after up to is an attractive one. The moment you apply the deal, your payback turns out to be miniscule. 

From quoting 9s at the end of the price (299, 399, 999…) to duping you on no-cost EMIs that do entail a charge, to using tricky language, marketers often try to deceive customers. Erroneously, many marketers still think that marketing is about selling a product by using clever means. They spend a lot of time devising ways in which they can trick customers. They think that once the transaction is done, their job is over. That’s a mistake.

Marketing is about providing solutions. It’s about assisting the customer solve his problem. It’s about a life-long relationship. It’s not about fooling people. You might fool your customer once but he won’t ever come to you next time. What’s more, he will spread negativity about your business. The cost of this is enormous in the long term.

What should the marketer do? He should put himself in the customer’s shoes. Would he like it if a freebie required him to share his contact information? Would he like it if having been offered an “up to” 100% cashback, he ended up with just 5%, which can only be used in tranches? If you are giving something away, have no strings attached. If the customer likes your free product, he will come back and pay up for the other things you are selling. 

As a marketer, your  primary challenge is how to create more and more value for your customer. Invest your energies there.

Saturday, 29 June 2019

How to Deal with Companies in Trouble

Lately, many Indian companies have run into trouble. From those belonging to the NBFC sector to the ones hit due to poor corporate governance, the list is long. Unfortunately, many investors (including myself) have had to bear the brunt. Can an investor preclude investing in such companies?

After a scam has been unravelled, business newspapers and magazines are filled with postmortem analysis and how you could have avoided the impacted companies. But that’s all with the benefit of hindsight. Even if someone reliably predicts a troublesome company, how do you distinguish his analysis with the countless other analyses and propaganda against companies doing the rounds. In my view, you can’t always avoid investing in a stock that will turn a nightmare later on. This makes your post-crisis strategy important.

The first leg of your post-crisis strategy actually happens when you make the investment. Invest as per your pre-decided allocation strategy. Don’t go overboard with investing in just one company, no matter how promising it appears and how attractive it has become. Secondly, avoid buying more when the stock price has started to crash. Thirdly, avoid the temptation to sell away (unless you are in profit or making a small loss) just because some news has broken out.

Now the core of your strategy. You are invested in a company that’s caught in some trouble and your stock is already down significantly, say above 25% or, worse, 50%. What should you do? Avoid acting on media reports and wait for more clarity. Media tries to sensationalise things and hence its reporting will likely be nothing short of a doom prediction. Also, media is hungry for developments like these so that they can fill pages. If you sense that there’s indeed some trouble, try to measure its impact and timeline. If some problem is going to be over in the next six months, you might like to hold the stock.

What if you still don’t have clarity but the stock keeps falling? In all such cases, it’s better to start exiting in lots. If  it’s a big holding, it can be sold over a year. Smaller holdings can be sold between three to six months. By selling in tranches, you still stand the chance of benefiting from a recovery, which looks elusive when the crisis happens. The impact of the loss also gets distributed. Above all, you save the remaining capital from getting destroyed.     

In India, especially in recent times, stocks that faced some trouble have been thrashed to such an extent that a recovery looks impossible. It’s natural for the investor to lose hope. Just formulate a post-crisis strategy and stick to it. Over the long term, if your overall stock selection is good, such losses are neatly absorbed by the gains.

Sunday, 9 June 2019

How Anyone Can Pick Great Stocks

For most of us, good investing is about picking great investments. And that’s understandable. With a plethora of investment options available—many of which are substandard—it’s only natural that we should actively look for “great” investments among them. In fact, many fund managers, private-equity professionals and advisors spend much of their time in finding great investments. Of course, they charge you hefty fees for this service. What if you could identify such investments yourself? You won’t have to pay the fund manager and you will have greater control over your portfolio. 

Finding great stocks is easier than you thought. But you will have to open up your eyes. If you track businesses, good businesses are right there in front of you. You deal with them; you consume their products. Such businesses have stood the test of time. In the Indian market, some of such companies are HDFC Bank, Kotak Mahindra Bank, Hindustan Unilever, Dabur, TCS, Maruti Suzuki, Britannia, ITC and so on. Why shouldn’t you invest in them?

Investors face a few problems while investing in this “simplistic way.” Because these companies are clearly visible, they don’t arouse much interest or perhaps thrill. What arouses interest is what’s not widely known—that stock which you discovered after weeks of analysis and that nobody knows about but you. Secondly, the “already discovered” companies are expensive in valuations. Classic investment science says valuations are crucial, so investors give such discovered names a miss. Yet another category of investors feels that large companies can’t give smashing returns as mid and small caps do. Further, some investors feel cheated if you tell them the names of such stocks because they already know them. They want to know something new.  

The world of investing has been made complicated for no reason. While most experienced investors and analysts stress the need to be simple, they do just the opposite. This results in countless theories and models that try to pick the “winning” stocks and “beat” the market and the peers. It appears that investing were a game where only one person or a handful of people can win. If you “score” less than your neighbour, you have failed. 

Investing in already-discovered stocks should be the core of your investing strategy. Don’t worry about valuations much. Such stocks seldom come cheap, given their quality and robustness. They move slowly but then they also won’t likely fall the way mid and small caps do. Over the long term, the returns from the popular stocks add up to become significant. Invest in them for the long term; don’t get obsessed with short-term ebb and flow in them or their financial performance. Such companies have a history of weathering the storm. In short, they are boring but effective. 

Once you have made a core portfolio of such stocks, you can go about hunting for the next stars. This will make your overall portfolio prepared both for the next bull or bear market.