Investing: Art or Science?

Most of us would make money (or lose money) based on buying some share. Let’s say you see the end of Covid-19 scare and bet your money on Indigo and buy the share at Rs. 1400 and in a few days’ time you see it at Rs. 1780 – and feel happy about it. However, at the same time, you also bought CG Power at Rs. 54 – betting on the Murugappa group taking over a sick company belonging to the Thapar group. Suddenly you find it has only sellers at Rs. 42 and you are wondering what hit you!!

Let us look at another way of buying a share. There is a nice 40-bed hospital near your house. You have done due diligence and think it is a good buy at Rs. 10 crore – including the land, equipment, doctors’ agreements, etc. However, you are not keen to buy at the offer price of Rs. 10 crores – you are waiting for the right price.

Next week the chief doctor calls you to say he is willing to sell it to you for Rs. 20 crores. Will you buy it? Obviously, no.

Three weeks later the doctor is under stress to repay some loans so he makes a distress call and offers it to you at Rs. 9 crores. Will you buy it? Obviously, yes.

Do you notice the difference? When you bought Indigo or CG Power you were treating the shares like the chips at a casino. You had no clue of the business. You just bought the share based on price. You thought share prices of Indigo have gone up from 900 to 1400 so it will go up. It went.

You thought that if M group has bought CG Power, so you also bought (they bought at Rs. 18 and you bought it 2 months later at Rs. 54 – 3x of the price they paid) – and lost money!

When you buy an equity share – buy it like a business. Let us say you have evaluated the Hospital business of Fortis Healthcare at Rs. 145 per share. The market does well of valuing a business – however it swings between super pessimism (Rs. 129) as well as super optimism (Rs. 155). Fairly obviously you trust your evaluation and when the market announces Rs. 129 you buy and at Rs. 155 you are happy to sell. If it was a share in Futures and Options, you could go long at 129 by buying calls and if it was at Rs. 155 you could buy “puts”. This is of course assuming that you are very sure about your valuation skills.

Please note I am using these names just as examples and it would be right for you to assume that I own all these shares – and could have a vested interest in the price movement – up or down!

I have taught valuation at a business school long ago. I was also very naive in the 1980s when I used to make a “Project Report” for getting loans for various projects. I now realize how many mistakes I used to make. I am not saying that valuation by plugging in the numbers is wrong, but it is just a beginning. For example, I had only seen the US $ strengthen against the Rupee – by my working sheet, the US $ should be Rs. 150!! How wrong I was!

Today I would do the valuation and ask myself the following questions too –

Will Fortis have the ability to attract good quality doctors?

Will Fortis set up medical schools to train doctors, nurses, and paramedics?

Will, they set up diagnostic centres in various locations?

Will their hospitals be able to compete against the local hospitals and Apollo in terms of service and pricing?

Do they have a good management team?

Does Apollo have such a deep moat that Fortis can’t compete?

Will Fortis develop a good moat?

How will Apollo perform when the promoter changes hands (if at all)?

As a 30-year-old ‘valuation’ expert I may not have been able to answer all these questions. Now as a 60-year-old, I realize that I need to keep seeking these answers – and even if I do hold a position if I get a negative answer to any of these questions, I will just sell and run away!

For me investing has moved from being a science (see how LTCM screwed up) to a mixture of science (numbers) and art (asking questions about the business and management). No, it is not easy, but it has to be learnt. Over the past so many years of investing (I started in 1979 at age 17, and now I am 59) it has been a long journey of learning. I still make mistakes – because I let fear, greed, FOMO, take over. I also learnt that conquering the Behavioral Finance part of life is not easy. However, I have provided for all my goals and hence can afford to fool around with my investments – at least a little bit, and so I do.

So what do I do differently? I read the reports – and more importantly, try talking to the analysts who are seeing the company on a monthly basis at least. I put a lot of value to statements by N Chandra (Tata Sons) talking about debt reduction (talking like a Marwari) and less to the statements of Ratan Tata (who is allowed his idiosyncrasies). So I heard NC and bought Tata Power, Tata Motors, Titan, Tata Consumer – even though I am not a big fan of this group. I try talking to people who love this group.

I am not a fan of PSU shares but 2 of India’s top managers bought it and I changed my mind. I have benefitted by taking a position in their funds and by buying the shares in which they have a position. Yes, it is a tactical move and I may just dump it once I get my pound of flesh – but let’s admit the PSU was beaten down way below its intrinsic price.

Like photography and painting – there is a lot of guessing, and you get a lot of bad pictures, but you just keep at it. Your talent is not about just the art of strokes – it is about knowing the colour combination, strokes, structure, etc!


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