Hi,
This is Vikaas here, Investment Advisor and Founder of www.jaagrav.com. Today I am going to talk about whether Stock price is a function of story or reality; By the way, what’s your take?
It is known that stock price is the discounted value of earnings, more importantly cash flows. While earnings or cash flows stem from the reality, i.e. the financials of the company, often, it’s the story behind the numbers which determines the stock price.
When Story is more dominating than the financials, you run the risk of having miniscule margin of safety, in simple terms, over-paying. The risk gets undertaken because:
- First, You believe that the now, weaker financials as compared to the story will eventually catch-up!!
Start-up world is a classic example, wherein many VCs resort to “spray and pray model”, i.e. pour money on multiple start-ups primarily based on their story(ies), while only a miniscule of their investments end up becoming winners.
Can you believe that one of the start-ups which helps users to pay their credit card bills is valued closed to USD 2.2 bln. The company generated revenue of a mere 52 lacs and an additional INR 17.5 lacs coming from interest on deposits. Hopefully the financials catch up!! Its obviously going to be quite a task!
- Second, You believe that your chosen company’s management with their blinding persona will wave a magic wand in a difficult industry whose business economics have been historically dismal – most industry players facing extreme competition, no pricing power, capital intensive, sub-par return on capital/equity, increasing leverage, and high equity dilution.
Think of some of the flashy promoters in the airline industry, steel industry, some of whom went insolvent!
All this story(ies) works out great till it holds up – it is like Cinderella’s ball before it strikes 12 o’ clock – everything is hunky dory!! You only realize who has been swimming naked when the tide runs out, i.e. when the story does not play out as per the reality.
Focus on Reality my friend, most stories eventually fade away!!
Hope you enjoyed listening to this!!
For more interesting topics, you may check out my website, www.jaagrav.com. If you want to reach out to me, you may email me at vikas@jaagrav.com
Thanks!