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Hard-headed investing

Serious equity investors should stay focused on hard numbers and proven track records

Hard-headed investing

Are there still buying opportunities for serious equity investors in today's markets? Surely there are, in the sense that there would definitely be stocks out there which are good buys at the current prices. However, that's not the point at all - those are not opportunities by themselves. They become opportunities only if we can actually identify these stocks today with any degree of certainty. That's the problem that has to be solved, and that's what our analyst team has worked on for the cover story of Wealth Insight November 2021 issue.

'You can't run; neither can you hide'. That's not a tagline from an action-thriller movie, but what the equity markets are doing even to seasoned investors nowadays. Stock prices are high, valuations range from stretch-ish to overstretched and despite all the good news, the Chinese virus is not exactly gone from around the world. Moreover, it's no longer about the virus itself but the side-effects of the measures that governments are taking.

And yet, despite the uncertainties, it's hard to let go of possible opportunities. After all, all of us who are equity investors are inherently optimistic in our outlook - if we weren't, why would we be investing in equities at all? We would have kept our money in fixed deposits in public-sector banks. For most equity investors, it's hard to sit on the sidelines when there are good stocks to be bought and money to be made. Our cover story of Wealth Insight November 2021 issue is part of the continuous opportunity-spotting exercise that we all do.

Of course, that cover story is based on numbers and not on any subjective, arbitrary factors. Moreover, the numbers are financial numbers centred around how much money companies make, and not on any hand-waving potentials or projections. That's the way it always is with us. It's strange that I have to emphasise this because this is the only way that investment analysis should be done. However, if you just consume headline news nowadays, you might feel that the world has changed.

As I'm writing this, the big stock market news is that the long-awaited Paytm IPO is coming. The company is going to collect Rs 16,600 crore from the public, which will be India's biggest IPO ever. Roughly half of this comes as fresh funding into the company while the other half is a cash-out for existing shareholders. Queued up right behind Paytm are a slew of similar businesses. This is hardly a surprise. Once Zomato happened, this string of IPOs was only to be expected.

Regular readers will already know exactly what I think of these IPOs. Unlike the kind of stocks that you will find in our analyses and recommendations, I have zero enthusiasm for chronically loss-making companies coming to collect public money on the basis of an endless hype cycle. Don't think that I'm saying anything against companies that are innovating and creating new businesses and new business models.

Internet businesses are capable of generating gigantic amounts of money. In its latest quarterly results, Alphabet, Google's parent company, posted sales of $61.9 billion and net profit of $18.5 billion. That's a growth of 62 per cent in sales, and 166 per cent in net profit. Leveraged by technology, even very large tech-based companies can post huge profitability and growth. In that sense, one should, in theory, give a lot of leeway to the Zomatos and Paytms of the world. However...there are too many howevers to list here. We'll go into that story in detail another time.

As things stand, all of us who are serious equity investors should stay focused on hard numbers and proven track records. In a time like this, when stocks are being sold on dreams, it's easy to get swayed by improbable stories of an impossible future.

This editorial appeared in Wealth Insight November 2021 issue. To read the cover story and other insightful analyses, columns and articles

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