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”.

 

#RidingTheRollerCoaster – 168

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Unicorns, cockroaches and investment decisions

Forget unicorns – Investors are looking for ‘cockroach’ startups now

The title of the above article is very interesting and enticing. Most people would be interested in reading what a cockroach startup is.

 

I have two observations to offer here:

  1. We love to coin new terms, sometimes only to explain the old. Nifty Fifties, Asian tigers, ICE, TMT, BRICs, BRICS, BRIICS, emerging markets, frontier economies, PIGS, PIIGS, the Fragile Five … the list goes on. Unicorns, cockroaches are also products of such thinking. Read the article and you understand that a unicorn startup is one that guzzles investors’ money in the initial years to achieve very fast growth and scale up to a very large firm, gaining market share in the process. These firms do not make money in the beginning. However, they hold the promise to reward the investors in the long run when it has acquired the lion’s share of the market. On the other hand, a cockroach startup is one that is making money – it is making profit – this is the good old way of doing business. There is a downside to grouping firms or investment opportunities. This is a mental short cut. Many times, money is thrown to a firm belonging to a group simply because, well, it belongs to the particular group. Not every investment opportunity may turn out to be a winner. Investors later discover that many firms that were part of a “so-called elite” group, turned out to be dud investments.
  2. Taking from where we left in the previous bullet point, it seems better sense is prevailing. “In a bull market, everyone becomes an expert. In a bear market, everyone becomes wise.” In 2015, when there was too much money and investors did not know what to do, they threw money at unicorns. Now that capital is getting costlier and scarcer, the question is asked to the same unicorns, “Show me the money”. New money seems to have found a new love – companies that make profits. Very often, when there is too much money at hand, one needs to exercise caution, since this is the time when emotions take over – one feels overconfident, wealthy, safe and tends to take unnecessary risks. Sometimes caution is thrown to the winds and some risks are taken without proper understanding.

Be careful when you see shortcuts, or when there is too much money in your own hands.

#RidingTheRollerCoaster –

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.

#RidingTheRollerCoaster – 109

 

Too much money, where to invest? Don’t invite the Pied Piper

In bullish phases, often there is too much money in hand and the question is, “Where to invest?”. This is the time when a Ponzi operator appears on the scene and people follow him like the children in the story of the Pied Piper of Hameln.

Read more on this in “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

#RidingTheRollerCoaster – 105

When the price appears to be high

When the price “appears” to be high or it “feels” high, investors start looking at “cheaper” or “low-priced” alternatives

Too much money, what to do?

With too much money in hand, the question is “What to do with so much money?” And thus begins buying of low quality assets.

This is the time to be cautious, but caution is thrown to the winds, often.

#RidingTheRollerCoaster – 34