Previously I wrote learning investment lessons from movie “3Idiots” and “Rajneeti”. Now, I am going to write few investment lessons from another super-hit movie “Dangal”. Dangal movie having a very inspirational story and as well as many lessons which we can implement in our life & in an investment.

• Investment journey is also full with struggle

Wrestling can give medals and fame but doesn’t provide intermediate cash inflow which is required for living life. This has affected the game of Amir Khan, his wrestling career and he has to start doing a job.

At the initial stage, Investment journey is also as difficult as wrestling show in a movie. When we are constructing our portfolio at that time our portfolio is smaller in size. So, that it will not help us with huge dividend as intermediate cash inflow which can helpful for living our life.

• Events are not always as per our expectations

In the movie, it shows that Amir Khan wants a son for fulfilling his dream, but actually, he got 4 daughters. So, that every time events don’t occur as we want it to occur.

As similarly in investments, events don’t always occur as per our expectations. For example, if we have made position in any logistic stock by focusing on GST then we expect that GST gets passed and get implemented. But as we have seen GST get postpone many times. So, that we also have to face for the unexpected events can occur in our life and also in the investment field.

• Har woh cheej joh inka pehelwani se inka dhyaan hatavegi… main usse hata diyon (I will eliminate anything that deflects their attention from wrestling.)” Avoid noise

When 1st time Amir Khan doesn’t get son as per his expectations, all villagers had started providing advice to him. But he realizes that nothing has happened after following all pieces of advice of different people. Also, many a time, Geeta and Babita had argued regarding their long hair, tiredness, body pain, cannot able to focus on study, etc. but Amir Khan has always found ways from it. We should not stop our journey though obstacles keep on coming.

The same happens with our investment field. When we start building a portfolio or researching on any of the business, people start providing an advice. We should differentiate between noise and a true information. If we keep focusing on noise and get trapped, then, at last, we also don’t get anything as per our expectations.

• Don’t lose hope

Amir Khan disappointed when his wife gives birth to four daughters. He gives up his dream thinking that girls cannot wrestle and lose hope of fulfilling his dream to win gold (Award) for the country. But one unexpected incidence – when his older daughters, Geeta and Babita come home after beating up two boys, help him to realize that girls also can become a wrestler.

As similar, whenever we don’t get the stock for investment, then we also get disappointed. But actually, we should not lose our hope and keep researching on the businesses, we might get one good investment opportunity after studying numbers of businesses. Also, when we have made position in the stock with some assumptions and those assumptions turn out into reality but might be at a lower speed. Then also we should not lose our hope any hurry to exit from our position; one moment can able to change the entire result.

• “Medalist pedh pe nahi ughte … unhe banana padta hai … pyar se, mehnat se, lagan se (Medalist don’t grow on trees … you have to nurture them … with love, with hard work, with dedication)”

Since becoming a wrestler, Geeta and Bbita have to do a strong exercise and hard work. They regularly wake up at 5:00 o’clock in a morning and start doing exercise. Their regular efforts make them successful.

Same happens with investment field also. We also need to put a continuous effort, continuous reading of Annual Reports, business/ industrial magazines, etc. our regular efforts with discipline only help us to become a successful investor. We also need to make an effort in developing our investment process and philosophy.

• Don’t focus on what people think

We have seen in the movie that people have started talking regarding Amir Khan when he had started coaching Geeta and Babita in wrestling. Many a time people laugh at him and also Geeta & Babita has to face such teasing from people.

When we pick up any stock for research or make position in any of the stock than many people start to laugh at us; might be start teasing us. But we have to stick towards our process and philosophy without getting disappointed from the comments of people. We should know that what we are doing and having a full understanding of it.

• Dangal ladne se pehle dar se ladna padta hai (Before you fight you need to fight with your fear) and Practice brings confidence

Initially, Geeta and Babita feel fear for wrestling and not ready for a fight. Geeta loses her 1st wrestling match also. But after that, she gets motivated and asks her father for the next match. Geeta won many matches with confidence. Continuous practice brings such confidence to her.

Initially, we also feel the fear that what happens to our investment? If stocks fall from our buying, then what happens? Am I ready for making an investment? We also need to stick to our process and philosophy. It might be possible that our initial investment ideas could be our biggest mistakes, but continuous practice can bring confidence under us. And confidence can push us to become a successful investor.

• Never be overconfident

After winning a national championship, Geeta went to institute and she begins to disregard the discipline she has been brought up with. When Geeta visited her home, she is determined to show her father, she can wrestle well without his techniques. Geeta finds herself losing every match as she is not following her father’s techniques or she is not fully focused on wrestling (painting her nails and growing her hair long).

Same happens with our investment field. We easily get overconfident in the market. When we invested, stocks start running, we should always analyze the reason for such run up; rather think that stock runs because we have a position. The stock never knows that we are holding it or not. We always need to stay humble and stay focused towards our process.

• “Geeta ka natural game attacking hai, apne technique ke chakkar me fasake uska game hi ulta kar diya. Yu to wohi baat ho gayi ke Sehwag ko bola jaye bhai tu Dravid ki tariyah khel. Na Sehwag reh jawega aur na Dravid ban pawaga. (Focus on our natural game)”

Geeta’s coach’s training differs significantly from her father’s techniques. Geeta believes her coaches’ techniques are better and that her father’s techniques are outdated. But those new techniques have changed the natural game of Geeta. And Geeta lost matches.

Similar to the investment, as and when we get diluted our focus from our original philosophy and investment style which is suitable for us; from that time, onwards our investment career also having a tough period started. We should focus on investment style suitable to us rather try to copying style of others.

(Source: SafalNiveshak: The Wisdom of Intelligent Investors (Special E-Book))

• “Kehne ko toh ek round sirf do minute ka hota hai … par socha jaave toh do minute mein 120 second hote hai … us ek second ka intezar kar jab samne wala galati kare (To say, there are only two minutes in a single round … but if you come to think of it, there are 120 seconds in two minutes … wait for that one second when your opponent makes a mistake)”

By this dialogue, Amir Khan wants to say that Geeta should focus on the game and do attack when the opponent makes a mistake. She cannot able to get points in every second, but she should attack a right time.

As similar to this, we should always wait for the right opportunity to come, rather run for catching up all opportunities around us. We should keep in mind that we cannot able to catch each and every opportunity around us so that we should wait for the right opportunity to come toward us.

(Source: The Most Important Thing by Howard Marks)

Dear Friends, capital dilution is one of the most crucial parameter to analyze any company. And also shows the ability of management to run business. So it is essential for us to understand what is capital dilution.

“Dilution is a reduction in the ownership percentage of a share of stock caused by the issuance of new stock.” – Investopedia

As per above definition, we can say that if we holding 1% of ownership in any company then that will reduce by dilution of capital.

So that due to dilution, partners in business will raise and ownership in business will falls.

Business which needs frequent capital to invest in the business then management having only 2 alternatives to raise fund; one is bringing debt and dilute capital.

Dilution of capital can provide good advantage to business in a good time but that dilution becomes curse for the business in a worst situation.

As we have seen in above example that company generated additional Rs.5 cr of profit but due to dilution that profit share got reduced. So for getting additional profit share, business need to generate above average profit. Due to increase in number of partner per share profit (EPS) will falls, which is negative for the owners of the business. In listed company, we as minority shareholders are an owner of the company. And dilution (increase number of partners) are negative for us.

By studying Cash flow statement, we can come to know about issuance of new capital.

Also when we check notes on share capital then also we can come to know the number of shares issued by the company.

Also Earning Per Share (EPS) gets diluted by issuance of new capital.

Thus, we have to be very careful with the business and management who frequently dilute capital for any purpose.

As we seen few learning from movie “Rajneeti”. Now, we try to learn some learning from movie “3 Idiot” which is one of my another most favorite movie. This movie, many dialogues and scenes from movie has help me to learn many lessons. For me, this movie is full of learning and enjoyment.

• “Mera beta engineer banega” (My son will become an engineer) and Character of Virus

We are treating ourselves as a participant of Race and always keep on running for coming 1^st.

In our investment field also, investors running for identifying multibagger stocks ideas rather than focusing on safety of principal. Also everyone tries for outperforming index and as well as other investors. If any other investor or index outperform by 1% also then many “so called investors” gets upset. Many forget definition of Graham and then also calling themselves as an investor.

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” — Ben Graham

• Padhne k liye uniform chahiye (For learning, we just need uniform of any school)

We can able to learn from everywhere in the world. If we want to learn then it’s not always be a requirement of formal education. We can learn by any sources.

It’s not necessary that for making investment decisions, we need to study regarding financial field. Many of my friends who doesn’t having formal financial field education but making very good investment decisions and also outperforming persons who having formal financial field educations.

• Definition of Machine – Machine is anything that reduces human efforts

In this scene, we have seen that simple definition given by Amir khan was not accepted by professor at classroom.

Same with our investment field. People and even also many “so called investors” attracted towards difficult jargon and like to make difficult ideas. Make forecasting of coming 3-4-5 years of earnings, forward EPS, forward P/E, etc. But not like to focus on what currently business having.

We all believe that difficult investment idea only will provide us a good return rather focusing on simple understanding.  We try to understand and try to apply the whole process of making and investment rather memorizing everything. If we have memorized all concepts but can’t able to apply it then we will not able to create good portfolio.

Memorized concepts and using difficult jargon can able create impression on mind of people but might not help you for getting a good return from the portfolio.

• Chabuk ke darr se toh circus ka sher bhi uchhalkar kurasee par bethna sikh jata hai; lekin aese sher ko hum “well trained” kahte hai, “well educated” nahi. (Even a circus lion learns to sit on a chair in fear of the whip, but we call such a lion as a “well trained”, not “well educated”)

This is one of the most popular dialogue from movie. That means we should try for getting well educated rather just being well trained person.

Market ke support se toh koi bhi returns earn kar dega, use hum lucky kahege, investor nahi.

People focusing on chasing returns but not focus on real process. Many gets more returns due to support from market, not due to their own skill but they try believing that those returns because of their own skill. We should try to focus on understanding real process and philosophy of investment rather focusing on return.

• kamyab hone ke liye nahi, kabil hone ke liye padho. kamyabhi jhak.. Mar ke piche ayegi… (Study for become a capable, not affluent. Follow excellence, and success will follow you.)

This means learns for real development, not just for achieving short-term targets. If we working for our own development, then all success comes directly to us.

Same with investment, we should not make investment for getting multibagger returns but focus on safety of principle, returns comes automatically. We try to understand process and need to apply it.

• Chatur’s speech

This scene teaches us that don’t memorized books, try to understand concepts. If we keep on memorizing without understanding, then many times we may have to face embarrassing situation.

Same with investment, if we buy without understanding what we are buying then many a times we have to pay a high amount for it. Many people try to copy portfolio of legends (RK Damani, Ramesh Damani, Rakesh Jhunjhunwala, Porinju, Prof. Bakshi etc.) without understanding why they are buying, then many times we might have to face very embarrassing situation (Portfolio ka balatkaar hota rahega).

• Results announcement day

When result announcement date comes then many students started fearing and also started praying to God for getting good marks.

Many investors also behave in similar manner. Also started fearing and praying for good quarterly and annual results of companies are in their portfolio. If we have make good homework before making any investment decision, then we need not to be worry about the outcomes.

• Do whatever you like

Many are not knowing what really they like. Means many people don’t know that what they really like making an investment or doing trading. So we need to understand what we like and what is our philosophy for making an investment decision. And most important is to always stick with it rather getting influence by others.

Watch movie “3 idiots” for better understanding above article.

This post is the extension of one of my previous post on RoE. I discussed about RoE and how debt can show higher RoE and sometimes misleads us.

We have seen that when there is a debt on the books of the company then RoE will show much higher number. Because calculations of RoE not consider debt portion which is there on the book of company. So that we need to check RoCE.

So let’s try to understand RoCE in a simple manner.

What is RoCE (Return on Capital Employed)?

“Return on capital employed (RoCE) is a financial ratio that measures a company’s profitability and the efficiency with which its capital is employed.”

ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed

“Capital Employed” as shown in the denominator is the sum of shareholders’ equity and debt liabilities; it can be simplified as (Total Assets – Current Liabilities).  – Investopedia

RoCE stands for Return on Capital Employed that means calculating returns on all capital (Equity + Debt) used for generating profits. So RoCE having consideration of debt which is not in RoE calculations.

In calculation of RoE, we took Net profit and shareholders’ equity but for the calculation of RoCE, we took Earnings Before Interest and Tax (EBIT) and Capital Employed (Equity + Debt).

We can see that if we are having debt on our book then RoE (%) shows higher because of not consideration of debt portion. Thus, RoCE (%) also we need to check for getting better understanding.

Debt can magnify returns in good situation but as a when situations start worsening it creates problems. So that company need to take debt very carefully. Generally, we can find that if company having higher RoE (%) compare to RoCE (%) then that because of debt portion.

As debt portion increases on balance sheet then difference between RoE (%) and RoCE (%) also start increasing.

We always focus on higher RoE (%) but with that also we need to check debt level and RoCE (%) so that we can able to get better understanding about the business situations. If RoE (%) magnify due to higher level of debt then we must have to be careful because debt always help in favorable situations and as a situation starts worsening, debt first in queue for giving pain.

Not only RoE (%) or RoCE (%) help us, we need to check both together. Sometimes RoCE (%) shows positive return but due to higher debt and worsening situations RoE (%) give us a prior signal. And as RoE (%) is lower compared RoCE (%) then we can say that company facing problem due to debt burden. When RoCE (%) falls below interest rate (%) from then problems for the company starts arising.

Bonus

We need to check both RoE (%) and RoCE (%) together because sometimes RoE (%) provide us a prior signal of worst situations and sometimes RoCE (%) help us to protect us from getting attracted towards higher RoE (%). And never gets attracted with higher RoE (%) that can mislead us sometimes.