Lessons we forget? Or we refuse to learn?

Couple of months back, we wrote about how past performance is (mis)represented by those who write in mass media. Very often, a single period data is taken to arrive at a conclusion. One feels sad for the readers.

Here is an article I had written in Mint in March 2016. Just a day later, a leading financial daily, Economic Times repeated the mistake I had referred to. I wrote a blog post about it, too. A couple of days ago, once again I came a cross a similar piece of reporting.

The reporter seems only to be interested in sensationalisation, for which he probably imagined a story and then found the data to justify. The problem with such reports are that they only does disservice to even the customers (readers, in this case) of the newspaper this reporter is representing. This is irresponsible behaviour.

It also appears the reporters do not want to learn. My book’s subtitle aptly captures a particular behaviour of most – “Lessons … we repeatedly forget.” In this case, it is more like “Lessons … we refuse to learn”.

Upton Sinclair has wonderfully said, It is difficult to get a man to understand something when his salary depends upon his not understanding it.God bless the readers!

 

#RidingTheRollerCoaster – 170

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Hope is a very bad investment strategy

This looks like an interesting development. Another “new” thing has cropped up. Some regional language movies are doing great – low cost and high revenues – amazing success stories and very high RoI (I mean, return on investment). Many investors are looking at the “alternative” investment to “diversify” their portfolios and at the same time earn very high returns.

Even start ups have come up to help people channelise their money into such ventures.

Regional movies are the buzz at crowd-funding startups

This seems to be great for regional movies, at least. There are many talented movie-makers, who could not compete against the mega-star, big-banner movies with deep pockets. Now, they seem to have found their source of funding.

Well, here is the caveat for the investors. This seems to be another case of “too much money, where to invest?” for the investors. Once one has run out of investment options (psychologically, at least), we start searching for newer options.

If you get success in some early investments, please be even more careful. The chances are that you might simply be lucky. However, we love to attribute all the success to our superior abilities – that is a human tendency. This would build your confidence, which eventually turns into overconfidence.

This overconfidence in one’s abilities leads to the search for even more risks. One tends to start looking at something that nobody is looking at – the spirit of adventure in us wants to seize this opportunity. And we leave the shores and dive into the deep seas.

Just as a side note, please check why did you think  of investing in movies? Is it because nobody else was doing it and you wanted to take the early-mover advantage? Or is it just that someone told you this was “exclusive”?

The combination of overconfidence, exclusivity and greed lead us to take interesting decisions.

Let us analyse this option from an investment point of view. Do regional movies make money? Well, yes they do. Do all regional movies make money? No. If we are clear on these two answers, any prudent investor should ask the next question: “How can one identify the next many-making movie? Do I have the capability? Or can I hire someone who has the capability?”

If I cannot identify the next money-spinner or if I do not know someone who can, it is imprudent to put my money on the block. That is not an investment, then. It is hope – a really bad investment strategy.

In the event of an investor recognising one’s inabilities to spot the right investments, the tendency is to look for what is cheap. This could be another trap.

Be careful. Understand the economics of the business before investing your money. If you don’t, stay away. Warren Buffett has famously said, “Invest within your circle of competence. It is not how big the circle is, it is how you define the parameters”.

 

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Crazy valuations

Do you know that at the peak of the market boom in 2008, DLF’s valuation was more than the sum total of all listed companies from the healthcare sector in India?

As per the Economic Times dated 9th January 2008, the market capitalisations were as under:

  • DLF Ltd – Rs. 1,96,160 cr
  • ET Lifex Stocks: Rs. 1,60,822 cr

In other words, all the shareholders together could buy the entire Healthcare sector by selling roughly 82% of their DLF stocks.

This was the time of euphoria for real estate stocks. What happened afterwards – as they say, “the rest is history”

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Understand the risk you are taking

Recently, we came across this news item involving two cricketers’ and their investment in a “assured return” real estate scheme. Yes, we are talking about the news involving the Pathan (Irfan and Yusuf) brothers. (Read the news article here).

We will not get into the specific case of what happened here. However, there is a clear lesson to be learnt. The Pathan brothers and many other cricketers have seen a lot of money through their cricketing skills – thanks to their success at the international stage as well as the IPL. When so much money becomes available, the question is, “Where to invest?” This is the time to exercise caution (Too much money, where to invest? Don’t invite the Pied Piper), but usually we tend to become more aggressive as the amount of money makes us feel comfortable and safe.

Some numbers from the said article give us some wonderful insights. Read the last two paragraphs about the price at which Irfan Pathan was picked up by various IPL franchises.

Year              IPL franchisee                       Price for Irfan Pathan

2011              Delhi Daredevils                                  Rs. 8.74 cr

2014             Sunrisers Hyderabad                          Rs. 2.40 cr

2015             Chennai Super Kings                          Rs. 1.50 cr

2016             Rising Pune Supergiants                   Rs. 1.00 cr

As you can see, this is a case of falling income. Some things happen (though I do not know for sure if that was the case; I am only assuming) in such cases:

  1. You anchor your earnings at the highest level and assume continuation of the same. So if Irfan Pathan might have thought in 2011-12 that his base price would keep going up or at least stay there. Did not happen, at least in this case.
  2. When you see the fall in income or anticipate the same, you want to take some chances to increase the income through some other source. This could be the possible thinking in 2013 when the investment was considered.

Whatever the reason behind the thinking, 12% assured return must have looked a mouthwatering opportunity in 2013, especially considering what all happened in that year. (Read our article as a reminder of what happened in that year:  Here are events that shook world in 2013). This was a very interesting combination – a lot of money at hand and the world looked scarier than ever. We seek guarantees in such cases. However, is the guarantee good enough?

Please understand the investment these brothers made was a credit risk taken on the builders. When someone guarantees some return, we are taking credit risk – we are taking the risk that the guarantees would be honoured. We are assuming that both the ability and the willingness are sound. However, we tend to forget the word “risk” when we hear the word “guarantee”.

Be careful. Understand the risk that you are taking. There is nothing wrong in taking risks, but everything wrong in taking it without understanding it.

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