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Here's Why Many Investors land up with Dud Investments

Dec 17, 2015

In this issue:
» Small Cap superstars of 2015
» Next US recession only 12 months away?
» ...and more!
0.00
Rahul Shah, Co-Head of Research

The customer is king, says the old adage. But what if a business' customers are kings? Every businesses' biggest mantra for success is having key customers. So if it is able to count reputed, big-name companies as its list of regular patrons, you know you have a successful business on your hands, right?

A recent article in Mint reminds us that Italian car designer Pininfarina 'has designed cars for Ferrari, Maserati, Rolls-Royce, and Cadillac'.

If a car-designer can count legendary car-markers as clients, business must be blooming right?

Wrong. Here's the next line from the Mint article: 'The Cambiano-based firm has been unprofitable for 10 of the past 11 years and has been battling high levels of debt.'

How can that be?

Well, in the world of business, looks can be deceiving; the surface can be radically different from what lies beneath.

Big-name clients (Pininfarina), big-name promoters (Vijay Mallya), big-name brands (Nokia), marquee properties (Taj Hotels) - despite these outward symbols of success, you could still have an unsuccessful business.

Businesses are made up of many moving parts. From customer acquisition, asset acquisition, marketing, pricing, operating efficiency, a long-term sustainable product, a management that emphasises profitable growth, financing...the list is long. It is the seamless coming together of all of these factors that makes a successful, wealth-creating business. An overdependence on one factor does not.

In the heat of the moment, stock market investors often forget this most basic of business tenets. They run with a very simplistic view of the business and obsess over a single feature...all the while bidding up its stock price.

The company might be part of the 'ecommerce revolution', or have the 'biggest market share', or 'tremendous growth potential', or some 'new product' with 'huge demand'. It can be anything, but investors tend to latch onto a single factor about the business that sounds exciting at that point in time. And before long, they're willing to pay anything for the business. That's when PE ratios go through the roof.

In their single-minded focus, investors neglect to take a deeper look at the other aspects of the business. They don't even pop the hood. In such cases, unless they're lucky, it's just a matter of time before they burn their fingers.

Speaking to a US audience in 2000, Sergio Pininfarina, head of Pininfarina said, 'If it looks right, it will work right.'

Sadly, while this may be true in the world of car design, it is not in the world of businesses. There is always a need to look deeper. There is always a need to look at the whole picture.

Have you ever ended up with a losing investment because focused too much on a single strong aspect of the business? Let us know your comments or share your views in the Equitymaster Club.

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2.35 Chart of the day

With the Modi Euphoria taking a back seat, the benchmark indices painted a sorry picture for the year 2015. The Sensex is down 7% for the year so far and barring a miracle, looks set to remain this way by the time the year comes to a close. However, this doesn't mean individual stocks haven't performed. A lot of stocks in Small Cap space have bucked the trend, ending up higher by as much as 600%. Yes, that's right. As today's chart of the day highlights, Intrasoft Technology has been the best performing small cap stock this year, going up a fabulous 7x. In fact, there are others that have gone up anywhere between 4 to 5 times.

A word of caution here. These stocks going up doesn't mean all come equipped with rock solid fundamentals. Do understand that markets in the short term tend to be voting machines where prices are more sentiment driven than facts driven. Consequently, the focus should be more on things like the company's business model, its financials and valuations. And if these don't point in the right direction, one should stay away no matter how high the stock prices go.

The Small Cap superstars of 2015

3.45

Is the next US recession only 12 months away? At least this is what Billionaire investor Sam Zell believes is likely to happen. As you would be aware, a big day in financial history has come and gone. Janet Yellen, the US Fed Chairperson, has finally pulled the plug on the so called Zero Interest Rate Policy (ZIRP) and has raised benchmark rate for the first time in nearly a decade. However, Zell is of the view that the increase has come at least six months too late. There are already a lot of other headwinds facing the global economy. And throwing one more into the mix could make things dangerous for the US economy as per him.

To be honest, the Fed had been stuck between the devil and the deep sea for quite some time now. Raising rates earlier would have meant exposing a fragile economic recovery and keeping it for too late amounts to letting asset bubbles build up to dangerous levels. And therefore while the Fed may be thinking that the hike has come at the right time, we are not so sure. There are a lot of places where asset bubbles are clearly visible and deflating them without a huge domino effect will really take some serious balancing skills.

4.48

Meanwhile, Indian markets seem to have taken the rate hike in their stride, the benchmark indices were nearly flat at the time of writing. The Sensex was trading lower by 13 points while the Nifty around 3 points lower. Amongst sector stocks, FMCG and Auto were trading marginally lower.

4.56 Today's Investing mantra

"Know what you own, and know why you own it." - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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1 Responses to "Here's Why Many Investors land up with Dud Investments"

Ravi shah

Dec 18, 2015

yes Mr Rahul,you have rightly mentioned many factors which make the business successful apart from just good luck.It is 99% perspiration and 1% inspiration or luck.Thanks for good aticle

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