Was wondering the other day, sipping tea and gazing lazily into the cupboards in front, about how when we go deeper into subjects the ‘dots begin to connect’ and the out of sheer chaos how order becomes visible. Been watching a Sitcom a lot of late. ‘ED’ is about Edwards J Stevens a lawyer who owns a bowling alley and prefers not to be called the ‘Bowling alley lawyer’ 😀
In one of his episodes a character gives a message that when things go really wrong and nothing seems to be working our way, one should hang on and stay put. Bad times will pass. Should not indulge in self-doubt or loose faith in one self. I am not new to this concept and might add a few lines to that; one should never ‘short’ his dreams or ‘long’ a compromise solution. In layman’s terms that would be translated (somewhat fancifully) as “Don’t give up, Don’t Give in“. Our Grandma’s never tire of sermonizing the fact we can rarely come across someone who fulfilled his dreams or became anything of worth without having made to sweat-out for it.
Paul Cohelo in his revolutionary book ‘The Alchemist’ says that once we have made our intentions clear that we want what we want and will not stop till we get what we want, the whole worlds starts to conspire to help us achieve that. But what he does not talk about is the intermediary period when the world goes about testing the intensity of our desire to have it and for what its worth makes us literally bleed through the nose to have it. Steve Jobs talked about connecting the dots and the fact that while connecting them we aren’t really able to see through to our destination. We are only guided by our Karma or intense desire or that sacred inner voice in our actions. However when the picture is complete, it all comes back to us as how obviously it was a part of our destiny that we would have connected that dot. How else would the picture have come out in all its glory. What he does warn us though that it’s not all rosy, and the road to such perdition will ask and call for immense sacrifices and will test the will, spirit and soul of the person so desirous.
So, what’s so great about this, one might be tempted to ask. What is so great about dreaming and then believing in your dream and working at it even if the whole world thinks you are crazy to finally live out your dream! Further what has Present Value (PV) calculations got to do with any of this. In case you have read so far of this blog post, I an sure you would have scratched your beard at least once or raised an eyebrow or two or if nothing else twitched inadvertently at the berserk contextual fallacy of this post.
In Warren Buffet’s words investment is ALWAYS for the long term and when we buy shares of a company the way to look at it is not like we are buying some shares of it but we are buying a partnership in the business of the firm. As someone has rightly said (& Prof. Uday Damodaran elegantly pointed out at his SAPM class) A Pessimist is someone who knows the PRICE of everything but the VALUE of nothing. Price has little to do with the fundamental value associated with an object. Valuation of any business thus has to do a lot with these contextual framework and philosophical backbone.
If we sit back and think how does an astute investor make money in the equity markets without retorting to market manipulation. It is by realizing the Hidden Value of a Business. The value of a business which is not recognized by the market yet but is evident to the investor. In other words the dreams of the promoters and the prospects of it coming through not being gauged accurately enough by the investor community in general. The two words in this phrase are of equal importance, ‘Hidden’ and ‘Value’. If the vision of growth and prosperity of any firm is evident to the general community then the current price of the stock would have already factored that in. It needs to be something which has slipped accidentally or more commonly disregarded naively as an achievable and actionable objective. Moreover the Vision of Growth must lead to Value generation. In keeping with the maxims of Shareholder Wealth Maximization (SWM) the new projects undertaken by the firm must be because the management believes it will generate positive Net Present Value (NPV) for the shareholders and not because it is a ‘Pet’ project of the executives. The Present Value (PV) factors in the time weightage of the returns a $100 bill today is more precious than $100 bill bill a 100 years later.
I am sure the mathematics above is not at all pleasing to read, being banal and trivial to say the least. Let’s move into the more interesting aspect of this. The Philosophy side of it. What it essentially means is that the number crunching MBA investor managing wealth should be able to connect to the dreams and aspirations of the entrepreneurial promoter sweating in some remote area across the globe. What it means is that he should be able to gauge the intensity of this man’s psyche towards not letting go of his goals and his dreams midway. (He of course would also need to analyze the reality elements of his dreams, but considering the stock is actually being traded, it does have a decent chance of making it through. What is really in question is how much is the chance!). So while people going about their daily chores need to keep believing in themselves, an Investment Manager will need to believe in other people. He would need to access the chances that the promoter would not chicken out when the market is sloppy or when the tides suddenly turn unfavorable. Because if really has to jettison out from the firm when its going through a rough patch his investment would have been severely impaired.
Add to it the fact that the promoters are mostly over critical of poking investors and aren’t really forthcoming with the true state of the difficulties they might be facing in implementation of the projects and we really have a very difficult job for that ‘Astute Investor’! No wonder then that we just have one Warren Buffet!