Category: Excerpts

Let’s understand the common mistakes made by stock traders and investors, read the excerpt below.

To start with, let us understand two basic fundamental pointers to be kept in mind before buying any stock. These are the bare minimum requirements.

EPS Growth Rate: EPS is the single most important criteria while selecting a winning stock. We should look for an EPS growth rate of over 18 per cent quarter on quarter and year on year. A company can generate earnings in various ways, some not so honourable. I prefer high-quality earnings. In other words, where do the earnings come from? Did the company post better results because of stronger sales? If sales were strong, was it only because of a single product or one major customer? In that case, the growth is vulnerable. Or are the surprisingly strong results due to an industry-wide phenomenon or an influx of orders from numerous buyers? Maybe the company is slashing costs and cutting back. Earnings improvement from cost-cutting, plant closures and other so-called productivity enhancements walks on short legs. Such improvements can show up from time to time, but sustainable earnings growth requires revenue growth. So along with the EPS growth rate, we need to check the quality of the earnings as well to ensure that it is sustainable over time.

Beware of management communications as they have learnt how to manage expectations. One gimmick is to warn the public of a potential earnings problem, which will cause analysts to lower their earnings estimates. Then the company reports earnings that are better than the lowered estimate. This will result in an earnings surprise; however, it will be a surprise in the context of a lower consensus comparison. So beware of what is happening around and don’t take anything at face value. Also, beware—the company may be increasing its profits by reducing the expenses. A company can increase profits by cutting jobs, closing plants or shedding its losing operations. However, these measures have a limited lifespan. Eventually, a company will have to do something else to grow its business and increase its top line. Therefore, check the story behind the earnings growth. The ideal situation is when a company has higher sales volume with new or current products in new and existing markets as well as higher prices and reduced costs. That’s a winning combination of a winner stock.

For example, let me show you the ten biggest wealth creators from 2018 to 2023. Just check the PAT CAGR and Return on Equity (ROE) of the majority of these stocks. ROE is the measure of a company’s net income divided by its shareholders’ equity. ROE is a gauge of a corporation’s profitability and how efficiently it generates those profits.

Sales Growth Rate: The EPS growth rate is sustainable if it is combined with the sales growth rate. We look for 18 per cent CAGR sales growth rate, quarter on quarter and year on year

too. For beginners, these two can be the initial filters to look out for while selecting any stock. Stock trading is not an easy task. We all want to earn a lot of money from it but it takes a disciplined approach to do so. It is easier said than done as historically we have seen that even the best investors cannot avoid making mistakes while trading.

In this section, we will talk about the most common mistakes which are part of the trading approach of a large number of traders and investors.

1. Trying to catch the falling knife: This is probably the most common mistake. Most traders and investors are obsessed with the so-called all-time high price of a particular stock. This is why when a particular stock falls, some investors keep buying it without analysing the reasons for the fall. This generally works as a trap for investors; they keep buying at lower prices and the stock keeps falling. Investors must strictly avoid this approach and always analyse the reason why the stock is falling. Always remember, only a loser buys a losing stock. If you find yourself in a hole, stop digging.

Always set yourself a rule of maximum loss of 8 per cent in one stock position. Also, when you average down, you forget the principle of portfolio sizing and end up having 25–30 per cent++ in a single portfolio because of which now your portfolio returns will be completely dependent on the performance of a single stock.

Also, if your stock falls 20 per cent, it has to rise 25 per cent to reach its cost. If the stock falls 25 per cent, it has to rise 33 per cent to reach its cost. If a stock falls 50 per cent, you need 100 per cent returns to reach your cost. Hence, never try to catch a falling knife.

2. Not cutting your losses: As a part of the portfolio, an investor must always keep track of where he is losing and earning. Getting back to your paid price is sometimes just a game of hope; this is why most investors don’t want to cut their losses, even if they are very small. They need to understand that the capital which is stuck in the loss-making trade can be utilized for some other trade to earn better returns. Many people think that presently they just have a loss in the books and that as soon as they book it, it will be their booked loss. Our mind treats booked loss versus loss in books differently, but in reality, we need to understand that both are mathematically the same and hence should be treated in the same way.

3. Afraid of buying at a higher price: If you study the charts well, you will understand that there is something called a breakout. Sometimes, a stock performs well and goes up with huge volumes because it is about to give a breakout which will take it even higher. Investors don’t understand this properly and think that the stock is going to fall soon. But actually the opposite happens. As the stock has given a breakout, it will continue to rise and the investor will lose an opportunity. The biggest psychological reason for the same is recency bias. We feel that a stock which was available at Rs 300 is now available at Rs 330, so there is no use buying it and we keep waiting for the price to come back to Rs 300. Usually if it’s a good breakout, it will never reach that level. And when it does, then probably the trend has reversed already and the juice in the fruit is drained.

4. Selecting stock due to lower valuations: In a universe of more than 4000 stocks listed in India, you will find at least 200 stocks which are trading at less than 10 Price to Earnings Ratio (PE) which makes them very attractive to invest in theoretically. Before putting any money in those stocks, we need to understand why these stocks are trading at lower valuations. The reason is simple: it is because of the company’s performance. The company does not have the potential to perform well in future. The market is not ready to give a better valuation to them. Ask yourself: Is a particular stock available at a cheap PE or is it a cheap stock in itself? If you pay too much heed to the PE of a stock, you can never be a growth investor or trader. Although it may come as a surprise to you, historical analyses of superperformance stocks suggest that by themselves, P/E ratios rank among the most useless statistics. The standard P/E ratio reflects historical results and does not take into account the most important element for stock price appreciation: the future. Sure, it’s possible to use earnings estimates to calculate a forward-looking P/E ratio, but if you do, you’re relying on estimates that are opinions that often turn out to be wrong. If a company reports disappointing earnings that fail to meet or beat the estimates, analysts will revise their earnings projections downward. As a result, the forward- looking denominator—the E in P/E—will shrink and, assuming the P remains constant, the ratio will rise.

This is why it is important to concentrate on companies that are reporting strong earnings, which then trigger upward revisions in earnings estimates. Strong earnings growth will make a stock a better value.

From Luxury to Necessity- How Prepaid and Celebs Drove India’s Mobile Revolution. Read Below!

Hong Kong-based Hutchison was an ideal partner for an Indian telecom company. It was at close quarters to India making travel, time zone and general liaison easy. Its management was aware of Asian cultures, but since Hong Kong was still a British colony, Hutchison’s best practices reflected European openness and social structure.

Analjit Singh’s team, led by Ashwini Windlass and Sandip Das, designated head of cellular from heading the pager business, had proven their efficacy as they began to run the Mumbai operations in competition with BPL Mobile. Their logical partners for the equipment were Motorola and Ericsson. Singh considered the venture a success even though, from its inception, he believed it was cash-crunched, especially in contrast with the competition. Singh’s Hutch Max spent Rs 15 crore on marketing. In Singh’s opinion, BPL was spending several times that amount and therefore captured a larger chunk of the market share.

To compete with a moneyed opponent, Singh and Windlass decided to take a different path to network planning. Max launched the cellular service in Mumbai with around 65 base stations or points of signal emission and reception (Delhi’s Airtel started with 108 and ramped up quickly). The network covered only the posh South Mumbai up to a fairly central suburb, Santacruz.

Hutch Max, the joint venture between Analjit Singh and Hong Kong-based Hutchison, launched a service under the brand Max Touch in a campaign titled “Hello Bombay”. From there, instead of focusing on expanded coverage, the company brought its attention to indoor coverage.

The move was designed to attract more high-paying corporate users. They required network inside the building in fixed locations rather than long distances in the outdoors. The capital expenditure on it was higher to cover a smaller footprint compared with outdoor coverage. Hutch charged a premium for the service. It was successful in capturing its target market but later came under pressure when competitors started adopting predatory pricing, meaning they were offering customers call rates below the cost of carrying one to stem the cash deficit from licence payments rather than aim for profitability.

The uptake from the urban rich peaked within a couple of years, and the middle class was still too conservative to spend on mobile phones. Airtel in Delhi, for instance, had a static customer base of around 1,00,000 for a year with no additions and high churn. The back debts, too, ballooned because people would not pay. In Mumbai, Hutch Max was watching the growing trend with trepidation even though it enjoyed a significantly higher per-customer revenue each month than its competitors. Singh felt the company was falling behind the competition from BPL Mobile. Hutch Max saw the need to unlock a bigger market.

As the team discussed the country’s advantages, it awakened to the micro economy of India’s mega population. This was a market for shampoo sachets and single cigarette sticks sold by the corner store to daily wagers at a price of Re 1, much like the chocolate eclair toffee, for which there were many takers. How could Hutch unlock this segment of subscribers?

Hutch Max decided to launch a service called prepaid, which would be sold for a nominal charge, but receive cash up front, and when the amount ran out, while its owner could not make or receive calls, a ring would land on the instrument – a missed call. There were scant studies to suggest the use of the prepaid internationally; none that had sustainably or successfully worked. The Indian market proved unlike others.

The early adopters of prepaid mobile technology were small and medium companies with large field staff. The offering capped bill shocks and still delivered the connectivity. This was the turning point of mobile connection sales to the fast-moving consumer goods model.

The operator faced a dilemma: What would offering the phone service to a low-income group mean for the premium customers who saw social status in their mobile phones? Moreover, the cost structure of a high-end marketing organisation would never justify a low-revenue product.

Windlass and Das elected to distinguish the services in both brand and technology back-end. Hutch Max prided itself in its Motorola and Ericsson network, but the company bought a system from Nokia for prepaid. At the time, Nokia’s representative for Hutch Max was Rajeev Suri, who later ascended to the global CEO position of the Finnish equipment maker. Nokia agreed to a low-cost, per-customer billing structure so that Hutch Max paid a revenue share from the subscribers using the system instead of an upfront capital cost. Its concern now was how to lure the customers.

The company created a twin structure with a parallel marketing outfit. It rented a new office in Prabhadevi, Mumbai. It was close to the existing one, but not in the same building. “We didn’t want the cultures to mix at all,” Das recalls. No high-end marketing budgets, no high-profile hires, and staff in the new office comprised largely of an on-ground sales force with the ability to get its hands dirty. Salaries that were rich and fixed for the Hutch Max post-paid service offering were commission-based for the new team onboarded for prepaid card selling. Nearly three-fourths of the wage bill here was success-based with very low fixed salaries. For the team selling post-paid connections, this would have been blasphemous because the industry was already stagnating, and sales for some months ran in the hundreds and not more.

The new sales team was selling a distinctly different product under a new brand name – “Ace”. It was intentionally designed to avoid any correlation between the premium post-paid service. Hutch Max, the post-paid service, bore an orange-and-black logo, while Ace had a green one.

The eight metro city operators had formed a cosy group, knowing that none was truly competing with the other and joining forces made them stronger as part of an industry voice when dealing with the regulator. It had become common for founders to exchange ideas, and good relations between Sunil Mittal and Analjit Singh pre-dated even the licence applications.

When Bharti Airtel realised Hutch had already launched a prepaid service, Bharti Airtel’s Sanjay Kapoor along with his colleague Deepak Gulati travelled to the Mumbai headquarters of Hutch Max to learn from its prepaid strategy and experience. Then, Bharti replicated a similar model for Delhi under the brand name “Magic”.

With low-budget billboard advertising, Ace SIM cards were distributed in a van that would set out from the southern end of Mumbai and drop them off point by point as it travelled northward. Hutch offered credit to distributors to stock and push the SIM cards, and soon stockists began to see the value. If they were able to sell the SIMs before the next stocking, they could create a cash flow and profit without putting any of their own money on the line. A new market opened and brought a fresh boost to mobile sales.

Hutch Max then elected to use the distributors of Cadbury, India’s most popular chocolate brand by multinational Fast Moving Consumer Goods (FMCG) company Unilever, called Hindustan Unilever at the time. They also onboarded the Colgate Toothpaste distribution channel. Sellers of these products were well penetrated in every corner of India, and their supply chain was already in place. Since SIM cards were low-volume items, tagging them along with the remaining goods being moved was a win-win for all parties involved. It helped the telecom company that sellers of these goods were typically respected and had personal connections with the local clientele.

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Get your copy of Telecom Wars on Amazon or wherever books are sold.

An exciting recount of a Christmas spent backpacking. Read Below!

Today’s plan was simple and sorted: hike to Paradise Beach, pitch my tent there and spend Christmas Eve camping solo!

Anyone who has been to Gokarna cannot stop going gaga over Paradise Beach. They say it is so secluded that at night glowing phytoplankton make the shore look exactly like the starry sky. Covered with forested hills on all three sides, Paradise Beach is cut off from the nearby villages, Gokarna and Belekan, by dense shrubs. This makes the beach inaccessible by vehicles, and the only way to get there is to either hike all the way through the woods over the hills or take a boat from any of the adjoining beaches.

Hiring a boat was out of question as it would eat up a good chunk of my given budget, so the only option left was to hike. Buckling up my backpack with high enthusiasm, I filled my water bottle and stocked up on four bananas for dinner. I first hitchhiked my way to Om Beach and then started hiking at around 5 pm. My aim was to reach there before it got dark. Acting all cool, I would occasionally track my route on Google Maps as the trail appeared to have faded in some parts. Slowly, the trail started to fade for a few metres and eventually vanished completely. I realised that it was taking a bit longer than I had calculated to reach my destination. Dubiously, I pulled out my phone to check the GPS and realised that I had been hiking in the wrong direction the whole time! The bloody GPS had lost its signal 500 metres back! “NOT AGAIN!” an instant bout of panic rushed through my body. I could see the sun going down, which made me even more anxious. I had no time to process any of this. I was in no mood to die in a forest without ever having sex or tasting baklava or even seeing a whale, just because I had lost the damned GPS signal!

My brain was whizzing away, trying to find a way out: “What options do I have? I could cry for help, but it was probably going to be futile because there was absolutely nobody around. Maybe I could camp in the forest? No way! Or…could I go back to the point where I lost the signal and start from there? Yes!”

I started running back as fast as I could, but the GPS still couldn’t latch onto a signal. By this point, I had totally forgotten about filming the vlog. I needed to find a way out of this mess urgently. Compelling my brain to not assume extreme scenarios, I started to think of a way out of the forest. Mindlessly, I started following the sound of the waves and began descending from the woods onto the rocks, hoping to find a path that parallelly ran to the rocky shore. It was a tough walk, especially with the heavy backpack on. There were times when the rocks were so steep that I had to ascend, fixing my toes and fingers in the cracks, while the gigantic waves crashed just a few feet apart. I didn’t know if that was the right way or the wrong one, but at that moment, I was operating solely on instinct. The red wash of the sky melting down into the ocean at the horizon strangely helped calm my racing heart.

There it finally was! Not more than 100 metres away, in the dark, this fine patch of sand nestled in a nook between the mountains. A grove of coconut trees swayed between the beach and the cliff. It would have made the perfect spot for hanging up a hammock and listening to some light Hindustani melodies. There were no shops or cafes here, but just one man, setting up some fruit on a tiny table. Paradise Beach was just like its name – nirvana, totally cut off from the rest of the world. How could anything be so perfect?

My wonderment was instantly ruined when I heard someone yell, “Abey chutiye, apna tent yahaan hain!” (Our tent is over here, you asshole!) a few metres away, to which another voice replied, “Susu karne ja raha hu! Aaega?” (I am going to take a leak; want to join?) It was a group of IT engineers from Bengaluru, occupying the coconut grove with twenty to thirty tents! My idea of solace broke into pieces. This was the last place I wished to see an engineer, and there they were in abundance, calling each other in slang, flashing torches, playing Bollywood music and peeing in corners.

There is no recreational activity left unexploited by the IT people as compensation to their presumably miserable jobs. I had seen the worst of them when I used to volunteer as a trek leader in 2016. You suppress a kid for years and leave them in a new city with a decent package. What else are they going to do? I really wanted to empathise with them, but when you trek for three hours carrying a heavy tent on your back, cross forests and climb rocks and see this, it becomes really hard to do that.

I walked to the other end of the beach, as far from the crowd as possible, at an elevated part of the cliff. As I started to unpack, the lamplight attracted many moths. To make matters worse, the bananas I had carried all this way had turned soggy. Sweaty and irritated, I managed to set up my campsite in whatever minimal light my head torch provided.

“Are you with them?” a guy asked as he collected dry wood a few feet apart, near his tent.

“Nope, camping solo,” I replied, as I pitched mine.

“Amazing, I am travelling solo too. I am from Kerala,” he said, and we shook hands. “Where are you from?”

“Mumbai,” I replied.

“Cool, let me know if you need anything, bro,” he said, as he continued collecting dry wood. We had the same tents – Quechua Arpenaz 100.

As I sat by the bonfire with the Kerala guy, we bonded over our shared disdain for the IT crowd who earned twice our salaries – myself with none. I recalled being taught that “man is a social animal” but the more I observed, the more I was puzzled by what happens when people gather. Individually, people are sharp and full of independent thought, but together, their collective intelligence seems to dilute into a less insightful version of itself. Their actions become something none of them would choose alone. It makes me wonder about the nature of group dynamics that blurs individual clarity—be it society meetings, religious gatherings, commuters, politicians, college reunions, kitty parties, corporate conventions or the neighbouring IT squad.

The Kerala guy pulled out his pouch and rolled a joint. We sat in silence, each on our own journey. It was 25 December. Merry Christmas to us.