I saw a post on Twitter yesterday which showed investors lost Crores of rupees in this co. back in 2000/2001. It got me wondering what people might have been thinking while investing in this stock.
Let’s take a look at some stats for the co.
Revenues were rapidly growing.
EPS was growing rapidly too. I have taken EPS instead of PAT because the co. issued new shares during this time period. Comparing EPS growth removes the effect of dilution.
When we see such numbers our mind puts an arrow at the end of the trend line. It doesn’t think “Hey that’s not normal. The normal is going to come.” But the normal does come.
Cash flows were reasonable as compared to PAT.
Return on Equity was high.
So what went wrong?
This went wrong. The investors’ expectations. The fear of losing money, got replaced with the fear of missing out. And that is an emotion we should not take lightly. The same emotions that affect other people’s judgements affect our very own. So, one should not think he/she is immune.
Until 1998, all was fine. And then all hell broke lose. Some people must have started thinking dotcoms are going to change the world. This time is different. But it wasn’t.
And the rest is history.
- No matter how good the business or the management, at some price it becomes stupid to buy it.
- What was once a growth stock became a bubble. The people inside the bubble probably didn’t know they were inside it. Every growth stock will seduce you into believing you are gonna be a millionaire. No, doesn’t work like that.
- Growth helps only if we buy at reasonable valuations. Notice that the co. continued to grow even after the bubble burst. As Howard Marks has said, It’s not what you buy, it’s what you pay for it.
- Sell discipline matters. What was once a 20 bagger stock (1996 to 2000), lost more than 80% of it’s valuation, the subsequent year. It’s not how much you make that counts, it’s how much of it you can take home.
– Barath Mukhi