Do it yourself

Despite the risks inherent in equity share ownership, the traumatic shocks of 1992, 2000, 2008 and 2020, equity remains a popular investment option among both individual and institutional investors. In fact, after the global financial crisis of 2008-09, the riskier equity (startups and pre revenue) has become even more popular with the investors who have been chasing yields on one hand and had access to cheap money on the other hand.

After the market crash due to outbreak of pandemic, the inflows into global equity funds have surged exponentially. The net flows in 2021 YTD alone exceed the net flows during previous two decades (2001-2020).

Anecdotal evidence suggests that one of the main reasons behind this unshakable popularity is the possibility of scoring “big”. It is this chance of multiplying the money in short term, which has attracted hordes of investors to the stock market.

Nonetheless, there is no dearth of people who are scared of the word ‘equity investing’.  Some of them have lost their entire savings in stock market, and the others, considering it another form of gambling, did never invest in shares.

Where do you stand in this picture?

·         Is it true that the investment option, which has statistically given highest returns in all economic conditions, did never work for you?  If yes, did you try to examine the reasons for this?

·         Even if you made fabulous gains in the stock market, could you attribute these to careful planning, or was it a fluke?

·         Do you consider investing in stocks an art and a science, or just a ‘roll of dice’?

As an investor I have always been fond of stories. My strong belief has been that if the story is good, numbers will definitely chase it. To the contrary, if the story is bad, no matter how good the numbers look presently, it may not be worth investing in.

Like in any other method of investing, this method also has its own limitations. Sometimes, good stories fail to sustain the momentum and lose the track midway. Sometimes, bad stories change the course and get on the right path with the help of good numbers.

Nonetheless, I like the story method of investing, as it suits better to my aptitude. In following this method of investing, I just need to keep my eyes & ears open to the happenings around me and look for stories worth investing. New product in my kitchen; new appliance in my bathroom, new or larger hoarding on street corner, an attractive advertisement in newspaper, a shopkeeper pushing some product harder than usual, some management on magazine cover, your children or wife insisting too much to buy a particular product, a news about new technological invention, a motivational story about some innovation changing the life of some people, etc. are some of the signs that could lead you to a potential investment story.

This method of investing saves me from bothering about mundane things like monthly sales & production numbers, quarterly accounts, RBI policy announcements, daily price changes in stock markets etc. It also save me from staying awake till midnight to hear what US Federal officials have to say about inflation and interest rates in US.

I also avoid quantitative (or number driven ) approach to investment for two simple reasons—(i) I am not good at mathematical and statistical techniques of analysis (read MS Excel); and (ii) it makes me dependent on other analysts for my investment decisions. If I have to follow this approach, I would rather entrust my money to a professional fund manager and live in peace.

If you are wondering why am I sharing this thought with the readers, let me explain the trigger. Recently, there has been a debate on social media about the portfolio of very famous fund manager. The critics argued that the earnings of the companies included in much spoken about portfolio of this fund manager would need to grow @20-21% CAGR for next 20years to justify the current PE ratio of the portfolio. The critics also highlighted that if the investment time horizon of an investor is not long enough to match the assumptions of the fund manager, the chances of poor returns are significant.

The supporters of the fund manager argued that for his analysis he used “compounding of cash flows” rather than “compounding of earnings” and therefore the criticism is invalid. The cash flow of a business may compound much faster than earnings (profit after tax or PAT). Since the critics are viewing the portfolio from a totally different vista point, their criticism need not be taken seriously.

My point is that when you use the quantitative method of analysis, it is possible to use a variety of tools for analysing a business. The analysts using different tools may get an entirely different outcome. For example, using different method for calculating the terminal value of a business (e.g., GGM vs Exit value) may give entirely different fair value for the same underlying business. This problem is less likely in using qualitative (or story) method in investment decision making. A good mix of these two would though be panacea for an investor. Find a story emotionally and test that mathematically.