Call it a mistake of our education system or how we learn things, we make a big mistake while investing in equities…and generally in life.

Take the case of a person working in a lousy company with no vision, no future, no present and a pathetic past. He/she will call and say “I have an offer from XyZ ..should I go” and the conversation goes on like this..

Subra, i have this offer, should I take it?

Me: What’s your question?

Other person: I am asking “Is that a good company” and she will pause.

Me: Compared to what? Microsoft? Apple? TCS?…

Other person: Well, I got the answer!

Now let us say I am looking to invest in a company called Fortis Healthcare. What are the questions that I am asking myself:

Is it a good sector which will grow at a good pace?

Does it have decent Operating margins?

Will it grow at a good rate?

Will the management share the profits with the shareholders?

Now I can see the Operating margins and conclude that as the size increases, the margins will only improve, so that is fine.

I do think that healthcare will grow at a good pace, – box ticked.

Management – my question is actually – “is it better than the other 39 companies that I own in my portfolio?”

2. In this industry is there a squeaky clean company AT ALL. For example in construction, and contracting companies, the cleanest also fudge, so I will have to make a compromise. – SO I AM ASKING “CAN I Stay away from this industry? totally or partially.

Answers are difficult to get. Let’s say there is a manager in a PSU bank. I find out that he is NOT DISHONEST. Is that good enough?

NO. In a Psu bank, I found a man who is honest, but he used to REJECT ALL applications for loans. Size did not matter. His answer was simple “If I give a loan and it goes bad, I get blamed! So for 12 years (repeat 12 ) he did no work at all. Of course, he did not get sacked. Another PSU bank manager said “I would happily give money to a Tata group company BELOW my cost of funds rather than allow my boss to give money to some thief who will not return the money”

Both these employees are NOT DISHONEST, but both of them suck the EPS dry. Such an attitude will never be known unless you do detailed audit of branches of banks. No research guy will ever find out what “drives” such employees. Nothing wrong? I am not sure, but the Psu bank will never, ever make money because of such employees! That’s the problem.

When I look at a new company I also need to ask myself “Is the management at least as good (or bad) as the other companies in my portfolio”.

I actually keep a higher standard for an Mnc than for an Indian promoter! So when I look at Castrol I am asking “is it as good as Colgate” but when I look at Nirma I am asking “is it as good as Dabur” or “Coromandel International”. Funny is it not?

I have to work on my ability to understand ambiguity and probability instead of asking “Is this squeaky clean” ! I realize that there is no way of knowing the correct answer. Far more importantly, it does not matter!

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  1. Sir,
    Apparent question : Should I invest in Reliance or Colgate ?
    Read between the lines : Should I invest[buy] Reliance [lottery ticket] or Colgate [lottery ticket] ?

    Because: For a Colgate’s 30 Rs EPS, (CMP: 1400) and Reliance 45 Rs EPS (CMP: 2000) are the P/E ratios, DCF methods to share valuation etc justified? Even at 6% Returns (max bank FD rate) rate, the valuations are 30/0.06=500 and 45/0.06=750. Ditto for Asian paints. If we vary for higher returns like 10% etc, the price/share calculations fall further. How much of extra premium would one pay for the moat based on popularity, and is it sustainable ? -> Yes, perhaps. It has done so for 20+ years. Something wrong with our calculations and beliefs.(?). What is the basis of the long-term investment principle here, if these fall at some point, what will happen to the ‘lesser mortal’ stocks ?

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