The ninth 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 textiles has a 52 weeks low price of Rs.2.13 and an LTP is Rs.46.90, 52-week high price of Rs.52. This company has rewarded ~22.02x of return in a year.
Let’s start looking at the numbers.
We can see that the company has high volatile sales, OP Margin%.
We can see that higher receivable days and payable days where we can say that almost 5 years of receivables and 7 years of payable. Shocking…..
We can see that the entire receivable and payable are from a single entity.
The company does not have a good return ratio.
When we look at the shareholding pattern then promoters hold only 1.03% in March-2018 which is ZERO now and all hold by the public. If the promoters have trust in the performance of the company then they have to hold higher holding.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
When we work in a group than as social animals, our thinking and decision get influence by the thinking of the group. Slowly we start losing our own identity of thought process. People who are opposed to the decisions or overriding opinions of the group as a whole frequently remain quiet, preferring to keep the peace rather than disrupt the uniformity of the crowd. Those who question the group are often seen as disloyal or traitorous.
If you ever find yourself in a tight, unanimous group, you must speak your mind, even if your team does not like it. Question tacit assumptions, even if you risk expulsion from the warm nest. And, if you lead a group, appoint someone as devil’s advocate. He will not be the most popular member of the team, but he might be the most important.
Business – When a team member / BOD expresses an opposing opinion or questions the rationale behind a decision, the rest of the team members work together to pressure or penalize that person. This will lead to a lack of innovation or lack of avoidance of risk. Businesses will follow what the industry is doing. Businesses should appoint a person who acts as an opponent of any view which can help to generate different perspectives and better decision making. The company also has to work towards protecting that person. Because uniform group sees different opinion and a person as an inferior, also treat him differently. They need to allows team members to contribute individually, with no knowledge of a group view, and with little or no penalty for disagreement. This can be very difficult in today’s era of technology. But one can keep a penalty for similar views which can invite different opinions.
Investment – When everyone comes to us for investing in a particular company, we have to work as a devil advocate to counter that investment idea. Because that will help us to see positive as well as the negative side of the company. If we get to agree with what the group has decided then it may be possible that we ended up with huge losses. And only seeing one positive or negative side of an investment can be harmful to us in the longer term. We need to see both the side properly with all supported data without getting biased on one side. If we like any investment then have to prepare a document which says why we should avoid investment. And if we dislike any investment then have to prepare a document which says why we should invest in that, what lead to miss out of the opportunity.
Being Financially uneducated is riskier rather invest.
Learning investment is more essential than any other profession. Because other professions teach us to work for money and investment teaches us how money works for us.
We have to learn financial knowledge by ourselves because if you go for the insurance salesman and ask that insurance is essential or not then he sells you his product. If we want to learn about investment then go with the advisor who is investing their fund, not to them who just sell advice. Also, we need to keep in mind that there is not a single assets class that is responsible to create wealth.
Success or failure, wealth or poverty, depends solely on how smart the investor is. A smart investor will make millions in the stock market. An amateur will lose millions.
Different levels of investors
The Zero-Financial-Intelligence Level
These are people who do not have any financial intelligence, they spend more than they earn. They believe in looks like rich rather be rich. Though they are earning well, they will reach zero due to their zero financial intelligence. If we do not have any savings, have liabilities, no income generation from the assets column then we need to first focus on repayment of liabilities. These will help us to come out from these levels.
The Savers-Are-Losers Level
These people know that savings are essential for future unforeseen events. But they keep saving money either into a saving account or into the government bond / FD. These all instruments are considered safer but when we compared them with inflation, these instruments do not provide us with protection against inflation. Due to its nature of not protecting against inflation, it even becomes riskier. In general, savers are losers.
The I’m-Too-Busy Level
These people are busy with their careers, family, other interests, and vacation. And due to such a busy schedule, they do not have time to become financially intelligent. So that they deliver their money to the expert to manage on behalf of them. They consider experts have expertise. When the market is into the bull phase, everyone is an expert but we can come to know about the real expert during the bear phase of the market. They invest in many of the avenues but if the market phase changes to the bear then they will also lose everything.
The I’m-a-Professional Level
This is the do-it-yourself investor. This investor may buy and sell a few stocks, often from a discount broker. They think that why should pay a broker when they can do investment by themselves. These people spend their lives in a small area of assets class but we have to understand that investment is a huge subject and we should keep learning about the wider area of it. Those who understand this concept and invest time in learning about investment can able to move to level five. Level-4 investors take control of their lives, knowing that their mistakes are their opportunities to learn and to grow. The fear of investing does not frighten them. It challenges them.
The Capitalist Level
These can be rich people, businessmen, or moves from level 4 to level 5.
These people know that they have to give more to receive more. They focus on raising more money which requires them to focus on their skills, business systems, and people.
We have seen in the first article of the series that the author did not have money and from zero, he has created wealth. So we also can create wealth from zero. Thus, we stop giving the excuse of not having money.
We have to perform a self-analysis about where we stand today? What is our level?
The “I” quadrant is the most important quadrant for our future. If we do not focus on it then we cannot have a good financial future.
The eighth 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 save our wealth.
I am starting this article with one of the company which is engaged in consultancy and advisory services in the field of management, IT, technical, industrial, personnel and labour, legal and taxation, financial, commercial and investment, capital market, consulting engineers, operational research consultants, computer service, and marketing services has a 52 weeks low price of Rs.5.26 and LTP is Rs.93.6, 52-week high price – Rs.99.5. This company has rewarded ~17.79x of return in a year.
Let’s start looking at the numbers.
We can see that the company has a high volatile OP Margin%, the company has achieved the highest ever profit in FY20. So this matrix seems good.
When we look at the common size balance sheet, then we come to know that the highest assets side item is other assets. Now, a consultancy company can have such an item but still, we have to do further digging.
The majority of assets account for loans and advances which nearly 85% of the total balance sheet. The company has not given any detailed breakup of loans. But when we read further notes then
The above note put seeds of doubt in our mind.
The company has major expenses are recorded as per bad debts which is 13.66x and 75.48x of net profit in FY20 and FY19 respectively. This will create trouble for the company.
The company does not have a good return ratio.
When we look at the shareholding pattern then promoters hold only 1.40% 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.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
