I got the following comment recently

If I take u back to 1994, how would u have spotted Infosys. The only way one could spot it could be through the market opportunity, good results and good management.or u may enlighten if there was any other way. So it could have been a kind of recurring deposit wherein one wud have seen good results and put money in that company every quarter.

I agree there could have been companies where the growth wud have stopped, but then its like finding out 20 horses in a race of 5000 and then slowly and steadily identifying the best horse through results only. When I say results I mean higher EPS also and not just a company like Teledata or any other which diluted its equity too.

Thats what big companies like GE, Tatas do. Hire gud people and then thru performance weed out the non performers.

Agreed that Educomp is richly valued or investing in Infosys in 2000 wud have been burning fingers. What I am saying is that implmenting the value investing approach with growth companies.

Take micro technologies for instance. It has been growing at CAGR of >50% for last 4 years. It has a book value of 206 approx. It trades at 220. EPS of around 50. Almost no debt. Mcap of <250 crore at a sales of 170 crores.or we take a company like Geodesic. growing at >60% CAGR for last few years. These companies are not richly valued at all.

Thru Value Investing combined with Growth, I could see huge returns. Unfortunately I did not put a lot for money. e.g Rajesh Exports in a single year increased its sales from 200 to 2200 crore somewhere around 2003. That time the stock did not appreciate and had excellent value(128 book value, eps around 40, Price around 150. It gave 25 times returns since then), That was the time to enter and make huge money. and I did but with a small amount as I was learning then.

Following is my response :

Hi anonymous
There is a book, The gorrila game, which talks about an approach on how to invest in tech companies.

Approach is similar to the one you mention ..buy the whole basket ..and then follow the results of each. sell the poor performers and invest the cash into the good performers. That could have been a way to make money in infosys.

However it would have been diffcult to have the foresight in 1994 that infosys would do so well. even employees working in infosys did not recognise that (employees who were given options then thought the options were worthless).

I think growth is compatible with valueinvesting. Growth in the end, is a variable in the valuation process. As long as your are paying less than the growth implied intrinsic value, you will do well. So microtechnologies and Geodesic may fall in that bucket. They maybe insanely undervalued due to the excellent prospects. I have however not looked at these companies and hence cannot comment. However I would definitely look at them now.

Regarding your experience with rajesh exports, I can understand what happened as I have gone through similar experiences several times – namely how do you know beforehand that you are right on a company. I think as one gains experience, one learns to identify and benefit from such opporunities.

A correction
In the valuation of several companies I have used the following formulae to check the valuation

Mcap – cash on hand = Net Mcap
Net Mcap / Net profit = effective PE.

There is an error in the above approach. Typically the above cash earns 8-10% as part of the other income. The net profit should be adjusted with this non core income to arrive at the effective PE, otherwise you end up double counting the cash.

The error, lucklily has not changed most of the valuations I have done, but it is an error all the same and has a bigger impact if the cash as a % of market cap (mcap) is high. It is such an obvious error, but I have missed it till now. Well, better late than never.

A quote
I saw this quote from Keynes (A famous economist)

When the facts change, I change my mind. What do you do, sir?

Reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in Lost Prophets: An Insider’s History of the Modern Eonomists (1994) by Alfred L. Malabre, p. 220

This quote is very apt in investing. One analyses companies based on present facts and a set of assumptions. Valuation is finally an exercise of projecting the future. By being conservative, you can reduce the possiblity of an error. However when facts change dramatically, I am reminded of the above quote and find it prudent to change my mind – nothing wrong with that. Even a 60-70% success rate in picking stocks (being right 6-7 times out of 10) can give very good results in the long run.

Misc thoughts
I am reading through the Annual reports of several companies which I follow. I will be posting my analysis on the same. The market seems to be going one step forward and one step back. There are problems developing in the US and the markets may start weakening in the US. In india, inflation seems to be high and somehow the policy response has still not been strong enough. I think the RBI thinks that this inflation is temporary and it will cool on its own.

I hope they are right for everyone’s sake. If however they are wrong and they forced to hike the rates further to kill inflation, then we could have nasty times ahead of us in the market.

2 Comments

  1. bahri says:

    I have been an investor for the past 20 years and every time i thought I had it right , the was a slight tweak in the rules of the game. Have’nt done too badly though, still not there.

    What I learnt this time around was, you need to identify what you would like to accumulate over the next business cycle and do just that esp in times like these, probably another 30% down from these levels would leave me a bit gutless but I hope not cashless, because if I have cash in the bank spread over the next three years, I can still go about my accumulation.

    Sure valuations matter, and that is why I did not buy Bharti when it was at 200 odd back in 2003-04.

    One won’t lose money by following the valuations, that is for sure.

    The one thing I know is a good asset be it stock or land is always a little more expensive than it is actually worth, have a heart and give a little more, you will always get back a little more than you would have thought.

  2. admin says:

    Hi
    i agree valuations are crucial, and paying up for quality works out in the long run. however it is diffcult sometimes to see in advance which company is worth paying and which is not

    A 30% drop from here could leave a lot of people gutless ..lets hope some of us can take advantage of the drop

    regards
    rohit

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