I have been attending the MOST wealth study meets on and off. This was the first time I was attending in their brilliant atrium. I had seen the atrium of course, but had not attended any session there. The talk was good, the discussion even better.

I will hopefully being writing more about the study, so this can be part 1 of my reporting. No, I do not get paid to report about this event. Just a clarification!

I like wealth studies – even the ones with which I do not agree. I am also too lazy to prove my point, so will stay with some of my beliefs and will happily copy somethings which Ramdeo, Aakash Prakash, Ramesh Damani, and Sanjoy Bhattacharyya have to say or had to say at the meet.

What happens at such meets is many OBVIOUS things are said. When i say obvious, I do not mean EVERYBODY knows the right answers. In fact many of us have to be kicked on our backside to be reminded of this. For example the rate of growth of a company does not matter if you have paid an obscene price to buy the underlying stock. So if you bought Infosys at a PE of 200, and then there is mean reversion to 15, chances are that you did not earn much return. However in the same period if you had bought Dabur at a pe of 10, and saw the pe expand to 55, it is fairly obvious that your wealth journey was well aided.

Wealth creation is a function of PE expansion, growth, and RoE. Of course only if RoE is good will the PE expand. A lot of healthy discussion on growth. Hdfc bank of course an exception to the norm that a company cannot grow at 24% for 25 years! HUL another example of amazing growth. The problem is when do you call and say “that is it now it cannot grow”. I do not know.

Of course for an individual 3 things matter – PE expansion, starting price, RoE, and of course growth. So if you start at a bad price, you have had it! It also comes back to RoE. If a company gets an RoE less than 13, the company is likely to be a wealth destroyer.

My note: You should see these ratios over a long period of time, and for companies growing rapidly, there could be times when RoE dipping should not worry you too much. Look at Indigo. I am impressed with the market share that they are building up. With say 45% market share, I am sure they will worry about RoE, RoA, RoNw, after some time. Currently the numbers may not look good. So it is necessary to read the numbers, and between the numbers too.

Growth: this is not really exaggerated. Market gives a lot of importance to future cash flows.

The problem is NONE of us can predict. We do not know that we cannot predict. So like monkeys we keep fidgeting.

The problem with us is our EGO. We will not accept that we do not understand many of these things.

Sigh. My journey started in 1979. Every time I meet these people…I realize how less I have learnt in 40 years.

Phew.

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  1. So true. EGO is the showstopper: ‘Don’t overlook the ‘unknown unknowns’. “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”
    – Donald Rumsfeld

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