Don’t be a fool | Value Research There is a special breed of investors in the financial world - those who behave like fools in the hope of finding even greater fools later
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Don't be a fool

There is a special breed of investors in the financial world - those who behave like fools in the hope of finding even greater fools later

Don’t be a fool

As the Indian stock markets zoom up, their divergence from the sad state of last year's star digital IPOs gets wider and wider. Nothing strange in this because what happens in the financial markets is just a reflection of what's happening (or is going to happen) in the real world of business. Since late June, when the Indian stock markets turned a corner, the Sensex is up about 21 per cent. However, Nykaa is down 24 per cent, Paytm is down 13 per cent, Zomato is down 9 per cent, Policybazaar is down 22 per cent and so on. This is on top of the large declines these stocks had already suffered till this point. However, the stock market is not the real story here. Let's look at what's happening from a different perspective.

It's a bit scary becoming dependent on a product or a service from a company that might disappear. Once upon a time, this wasn't much of a worry because companies doing badly enough to go out of business was rare. Moreover, it was unlikely that this would happen to too many of them.

Now, we live in a different world. At Value Research, we are quite dependent on a couple of vendors of technology services that do not look financially stable. The strange thing is that these businesses are not small fly-by-night outfits but large companies that dominate the global market in their area. And yet, they have never made a profit and with every additional customer they get, they lose more money. What happens if they have to shut down? As a CEO, I've taken care to ensure that my business has fallback plans for such an eventuality but as individuals, we cannot do the same.

Think of a stereotypical urban Indian's daily interactions with businesses. Start the day with breakfast made by groceries ordered from Blinkit or Zepto, or Instamart. Then get ready for the day, wearing clothes bought from Myntra. Travel to the office on an Ola or Uber cab. Order lunch on Zomato or Swiggy. Pay for it through Paytm or PhonePe. Plan a holiday on MakeMyTrip. Come back home and do some shopping on Flipkart. Order some medicines from 1mg. Browse Carwale or some such site for the new car you want.

What's common amongst all these companies? That they are new age 'digital' businesses? Well, yes, but for me, as an investment analyst, the most remarkable thing is that none of them makes any profit at all. Not just that, some of them are in businesses in which no one in the world has ever made any profit. It sounds strange but to me, this raises the question of whether these activities can be called businesses at all.

Profits are central to a business; without profits, there is no survival. I've been analysing stocks since 1991, and I find it unbelievable that in 2022, I have had to actually write that previous sentence. It's like a doctor explaining that if someone stops breathing, they will die.

For as long as people have done any kind of business and invested in them, the following statements have been axiomatic: Profits are a must for survival. More profits with fewer inputs (capital and other resources) are better. Growing profits is better. The sooner a business becomes profitable, the better it is. In the digital world, we now hear all kinds of metrics which are all based on revenue, or even worse, on just customer activity. Make no mistake, these make sense only for investors whose only goal is to be a fool - invest in financially unviable businesses and then hope that they will eventually find a greater fool.

However, I think the tide is turning now. This endless chase of profitless businesses is ending, and that's great news for investors like you and me.

Suggested read: Profits are profits

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