"A good decision is based on knowledge & not on numbers"
~ Plato.
While considering an investment, the basic trick is not to look at valuation as the first filter, quality should invariably be the first filter.
~ Of Long-term value & Wealth creation from equity Investing.
~ Plato.
While considering an investment, the basic trick is not to look at valuation as the first filter, quality should invariably be the first filter.
~ Of Long-term value & Wealth creation from equity Investing.
Pure cheapness is never a virtue, it's in quality available at an attractive price. The trick is not to buy an inferior business at a cheap price but to buy an outstanding business at a reasonable price (2/n)
When market in entirety are cheap, due to issues plaguing the whole market, quality may also become cheap. But, when an individual stock is looking like cheap,it requires greater scrutiny & Investor need to be careful, arithmetic cheapness (Low PE/PBV) is often a honey trap (3/n)
A 5 PE stock can be perfectly expensive & a 25 PE stock may be perfectly reasonable to buy. The pure "arithmetic" cheapness is a flawed & an overrated idea, a good investment isn't about the cheapest or an apparently cheap price (4/n)
A good investment is equally about the size of opportunity, quality of business & management, growth and long-term sustainability.
Many times, the cheapness is deserving one... coz lack of economic moats, poor ROCE, limited size of opportunity, lack of sustainable growth (5/n)
Many times, the cheapness is deserving one... coz lack of economic moats, poor ROCE, limited size of opportunity, lack of sustainable growth (5/n)
Valuation isn't simple straight equation that low PE will lead to higher Returns & vice versa. It is about judging the quality, sustainability & longevity of the earnings growth. Valuation is over the life of the business rather than just the immediacy (6/n)
The ability to understand & comprehend these factors is the art part. And once one has assigned a numbers to each element,then converting these data points into the actual value computation number is the science part, which is more mathematical (7/n)
Ability to understand what is quality of the business, the size of opportunity, compounding power of that business to grow its earnings matters & valuation isn't merely a pure mathematical number like a PE but a much more evolved & sophisticated idea - all this is art
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(end)
Value is the master, price is the servent. Investing is about pricing the value & not valuing the price.
(Bonus)
Courtesy: "Of Long-term value & Wealth creation from equity Investing" by Bharat Shah.
(Bonus)
Courtesy: "Of Long-term value & Wealth creation from equity Investing" by Bharat Shah.
