10 – Current temptation, future frustration

The tenth part of the Series is “Current temptation, future frustration”. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can be saved our wealth.

I am starting this article with one of the company which is engaged in the business of trading has a 52 weeks low price of Rs.9.60 and LTP is Rs.62.2, a 52-week high of Rs.79.2. This company has rewarded ~6.48x of return in a year.

Let’s start looking at the numbers.

We can see that the company has high volatile sales, OP Margin% and not earning profits.  

We can see that higher receivable days and payable days where we can say that almost 3 years of receivables and a year of payable. Shocking…..

The major balance sheet item is advance recoverable and for that, there is no provision made by the company.

The company does not have a good return ratio.

When we look at the shareholding pattern then promoters hold only 6.89% now and the remaining hold by the public. If the promoters have trust in the performance of the company then they have to hold higher holding.

This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.

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

This series contains learning from books –

Financial Shenanigans

Quality of Earnings

The Financial Numbers Game

Creative Cash Flow Reporting

You Cannot See Money with Your eyes

If we see some tempting offer then we must have to be suspicious. There is no free lunch available.

We have to analyze various aspects before making any investment. We may make mistakes and mistakes are essential to learning about and correcting them for better growth.

People make an investment with emotion rather than with mind which led to losing money by a majority of people. At last, they become a dreamer, speculator, or broke down. When someone told us about a good deal and earning good in the future then our emotional bias comes into the picture and become greedy as well. This emotion stops us from making wise decisions.

If we want to be successful in the B and I quadrant then we have to train our mind that we can observe what others used to ignore. We can start by getting more about financial literacy. Our ability to create more money will bring more money for us. This education helps us with taking proper steps and investing becomes less risky for us. Education will help us to differentiate between good and bad advice.

Also, when we know about investing, we or our advisors choose to provide us higher yield with a less risky avenue.

We need to understand that when we buy any property on a mortgage then that’s not our assets rather than its and assets of a bank. It will fall under the liability side of the balance sheet. When we fail to make payment on time, the bank will take over that property from us. Taking debt is not always bad but if we take personal debt then it must be small. And if we go for a huge dent then someone working for paying it. That’s means business debt.

As we have learned in the series of rich dad poor dad that we consider assets to only be those properties that generate a cash inflow to us. All other properties are considered as our liabilities.

Now, comes to savings and deposits then yes those are not taking any cash flow out from us so that is our first level of assets.

Many of us spending our life on the opinion of others rather to focus on the fact. We should only trust facts nothing else.

When it comes to money, most people are either lazy or searching for shortcuts, so they don’t do enough due diligence. And there are still others who are so afraid of making mistakes that all they do is due diligence and then do nothing.  Too much due diligence is also called ‘analysis paralysis.’ The majority cannot become financially free because they live in debt till die. So, this will not bring freedom for them.

Read for more detail: Rich Dad’s Cashflow Quadrant: Guide to Financial Freedom

I am grateful to Mr.Meihol Jhaveri (Founder of Gatisofttech) for the development of the Lucky Idiot website.

WHY EVIL STRIKES HARDER THAN GOOD Loss Aversion

Many of the time, we have to make decisions from options, there is a risk of loss and an opportunity for gain, and we must decide whether to accept the gamble or reject it.

It has been proven that, emotionally, a loss ‘weighs’ about twice that of a similar gain. Social scientists call this loss aversion. “Losses loom larger than gains” and that people are loss averse.

Business – When we show fear of loss to people and sell our products then it will become easy to sell our products to them. The firm has its own entitlement, which is to retain its current profit. If it faces a threat of loss, it is allowed to transfer the loss to others.

Investment – When there is an increase in a stake, our loss aversion also increases with it. When we have invested in stocks and the price of it falls and we know that we have incurred loss but we do not book it. So, we sit on the stock, even if the chance of recovery is small and the probability of further decline is large. If we book loss then it becomes real and that is more painful. Fear of loss stops us from booking loss though it has already been incurred.

We should make a basic calculation of what would be future cash flow generation from the company and what if our assumption get fails. These basic calculations help to understand the risk and return scenario so that we can make a rational decision. And also, can use the margin of safety concept properly. We should be ready with a calculation that mentioned what can be a probability of losing some % of our current net worth if an investment does not work according to our plan so that we get mentally prepared in advance and also make a decision accordingly.

This entire series will be review with various examples from books which are Thinking, Fast and Slow and The Art of Thinking Clearly.

WHY YOU’LL SOON BE PLAYING MEGATRILLIONS Neglect of Probability and Prospect Theory

Problem 1: Which do you choose?

Get Rs.900 for sure OR 90% chance to get Rs.1,000

Problem 2: Which do you choose?

Lose Rs.900 for sure OR 90% chance to lose Rs.1,000

What we will choose in problem 1 and problem 2?

When this is asked, the majority of us choose sure Rs.900 in problem 1 and second option while it comes to problem 2. We performed risk-averse behavior during problem 1 but risk-taker during problem 2. Here, also we neglect probabilities, we get fearless when we have the option to zero loss. And above zero, we will have fear.

The (negative) value of losing Rs.900 is much more than 90% of the (negative) value of losing Rs.1,000. The sure loss is very aversive, and this drives you to take the risk.

But when we do mathematics then only, we can understand that both options in both the problems are similar.

Getting Rs.900 for sure or Rs.900 which is 90% of Rs.1000. And a loss of Rs.900 or Rs.900 which is 90% of Rs.1000.

Our psychological factors affect us for making such decisions. We differently behave to profit and loss. Here, counter to the utility theory is, – our risk behavior does not get changed with our net worth. we also know that our attitudes to gains and losses are not derived from our evaluation of wealth.

Investment – When we have uncertainty, people fear to invest. But when things start becoming certain everyone rushes for investment. This is a reason why people come to invest when the market is near an all-time high because they get sure that they will not face loss now.

If we focus on probabilities then we can make a wise and rational decision that helps us to progress further. We should assign probabilities to the occurrence of different events so that we have statistical support to make a wise decision rather than just make it with support from emotions.

This entire series will be review with various examples from books which are Thinking, Fast and Slow and The Art of Thinking Clearly.

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