Avoid burning your fingers in the stock market

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 1.400 and in a few days’ time you see it at Rs 1,780 —  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. 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 the hotel 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 crore — 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 crore. 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 crore. 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 bought CG Power, so you also bought (they bought at Rs 18 and you bought it two 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 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. 

Have a vested interest in the price movement— up or down! I 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! 

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 realise 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 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.  

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. So I heard NC and bought Tata Power, Tata Motors, Titan, Tata Consumer!

I am not a fan of PSU shares but two 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 were 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, but knowing the color combination, strokes, structure, etc! Ditto for investing. 

Warning: I have a position in all the shares mentioned above.

PV subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’