11 – Current temptation, future frustration

Posted on by under Current temptation, future frustration

The eleventh 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 providing IT Consulting and Software Development Services has a 52 weeks low price of Rs.1.68 and LTP is Rs.7.59. This company has rewarded ~4.52x of return in a year.

Let’s start looking at the numbers.

We can see that sales of the company keeps falling losses at the operating level and not earning profits.

We can see that higher receivable days and lower payable days where we can say that almost 3.96 years of receivables.

The company has ~87% & 89% of other current assets to staff advances in FY21 & FY20 respectively. These advances keep growing and do not get repaid.

We can see that lower return ratio and worsen over a period as financial worsening. Also, the company has worsened with the worst performance.

We can see that majority of borrowings from related parties and interest expenses are very lower still the company cannot able to perform well.

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.

WHEN YOU HEAR HOOFBEATS, DON’T EXPECT A ZEBRA Base-Rate Neglect

Posted on by under Behavioral Finance

Base-rate neglect: a disregard of fundamental distribution levels. The majority of the people ignore statistical data to conclude.

Representativeness—ignoring both the base rates and the doubts about the veracity of the description.

We focus on the other aspects rather than statistics for making a decision. For example, selecting a player based on his build and look rather than his past performance statistics.

Selection of investment by story prevailing at street rather than the past performance of the company. This falls under this bias.

When the stereotypes are false and the representativeness heuristic will mislead, especially if it causes people to neglect base-rate information that points in another direction. Even when the heuristic has some validity, exclusive reliance on it is associated with grave sins against statistical logic.

Investment – We know that very few companies survive after 10 years of operations. So, when we have seen any companies that come as a next google, Facebook, Amazon, Infosys, Dmart, etc. then we should have data which suggests that if the company has not seen 10 years of journey, then we should stay away from it.

When we make any decisions, we should not avoid statistical data. Because avoiding such data can misguided us and we ended up taking miserable decisions.

It is also logical that low return ratio companies will not be going to give a higher return to us (else we have bought it at deep discount-then also the lower probability to give multifold returns), then also when we have any good narrative about the company, we start chasing it. Never avoid the voice of numbers because it can tell us a real story.

We focus on the stories of management, industry, economic growth potential but forget to focus on the past performance of the company. If past performance says that the company is not strong enough to perform then enough external opportunities also cannot do anything. But people follow stories and avoid base rates or probabilities and end up with blunders.

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

Becoming Who You Are

Posted on by under Bibliophile: Cashflow Quadrant

Money is like a drug. When we become addicted to work for money then it will be very difficult to change that habit (rather than an addiction). We get happy when we have money and upset when do not have it. And it is a reason why we cannot shift to the B and I quadrant easily.

An “E” works for the system.

An “S” is a system.

A “B” creates, owns, and controls the system.

An “I” invest money into the system.

Money addiction creates a fear within us. whereas our passion helps us to build a business, not our fear.

Many times, during a recession, hits the economy, few of the companies decide to cut employees’ strength and due to this decision, lower-level employees have to face major prices. So, seeking security becomes riskier. While this kind of fear does not chase B and I quadrant people. They work on improving the system, enhancing the system, and improving their financial knowledge.

Many of us trained with fears since our childhood which has created difficulties with change quadrant. When we want to achieve a bigger success then we need to have a faster processing time with higher accuracy. We can go how much fast, we want. But need to remember one thing is never taking a shortcut. Shortcuts will not lead us towards results but it will trap us in midways. Financial intelligence, not an emotional decision, and focus on numbers always help to achieve our financial goals.

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 THE LAST COOKIE IN THE JAR MAKES YOUR MOUTH WATER Scarcity Error

Posted on by under Behavioral Finance

When we see that something is different, unique, and having a shortage then we love to own it. That things attract us and we see them as more valuable than others. Rare is valuable. The scarcity error is as old as mankind.

We need to assess products and services solely based on their price and benefits. It should be of no importance if an item is disappearing fast, nor if others are also interested to buy it.

Business – Many business houses try to attract customers by creating a scarcity of their products. They show the availability of only a limited number of products which forces customers to make any impulsive decisions. When we make an impulsive decision then we scarify rational thinking. 

Investment – Few listed businesses are unique, different than others, well managed. Such businesses are few so People are attracted towards such businesses and suddenly those become more valuable and started trading at a higher valuation. This is what we have experienced about the quality companies in the recent stock market cycle.

Many times, businesses getting premium as an only listed company on the bourse but that should not be the only reason to invest in a company or to give a higher premium to the business. People mostly fear missing out (FOMO) particular opportunity and run behind it, so that float available for a particular stock starts reducing and demand for it starts increasing which will increase the price of a stock.

We should check whether the company has fundamental value compared to the price commanding on the bourse. If the company is not fundamentally stronger then it is no right way to chase uniqueness of business or only listed company or low shares floating in the market. We should have well-defined philosophy to invest in businesses and if the stock does not fall under it then we must avoid it. Also, we should not take a speedy decision, speedy decisions can be harmful. We are not going to miss any opportunity, the market has thrown opportunities before our birth and also going to throw after our death. We remain or not, opportunities in the market always are there to serve.

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