A slightly edited version of this post was originally published in Morningstar.
The price to earnings ratio, or P/E ratio, is probably the most commonly used valuation metric in the stock market. It is a mathematical expression calculated by dividing a company’s current market value by the net profits of the current year.
While studying any business, we come across both positives and negatives about it. And our mind plays tricks with us. It never lets us process all the points together. Often we end up focussing more on one or two points and ignore the rest. Hence, as investors, we are always biased. And our job is to work hard towards reducing that bias.
On further reading, we at SSS found that it is a problem which not only disturbs normal people like you and us but also some great minds of the world.
One such person is Benjamin Franklin.
Benjamin Franklin was an American polymath and one of the “Founding Fathers of the United States”. Franklin was a leading writer, printer, political philosopher, politician, Freemason, postmaster, scientist, inventor, humorist, civic activist, statesman, and diplomat.
Franklin also had the same problem which we discussed above. And he came up with an idea:
When most businesses in India are focused on surviving Covid-19, it is a good time to invert the situation and think about companies that are still managing to proceed with their CapEx plans.
Companies that can invest in CapEx today get better bargains as prices are depressed due to low economic activity, creating a sustainable advantage for them over time.
Investopedia defines Capex as follows:
Capital expenditures, commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment. CapEx is often used to undertake new projects or investments by the firm. Making capital expenditures on fixed assets can include everything from repairing a roof to building, to purchasing a piece of equipment, to building a brand new factory. This type of financial outlay is also made by companies to maintain or increase the scope of their operations. Put differently, CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment, rather than on its income statement as an expenditure.
This 2-minute video of the legendary investor Parag Parikh has been watched by many of us.
There are certain universal principles in life which don’t change even if people change, times change, technology changes, geography changes. There is one thing, like the law of the farm. You cannot sow something today and reap tomorrow. Every seed which is sown will have to go through different seasons. It will take time before the seed becomes a fully grown tree.
While Mr. Parikh has made a very important point about the law of the farm, I believe most investors make the mistake of taking the wrong lesson from it. And I have no shame in admitting that I have been one of them in the past. Read More
When my friend and colleague, Kartik read my old post, Survive to Thrive, he made some interesting observations.
Kartik: Ankit, while you have written about the art of survival in detail, you have not touched upon the thriving part at all in your post. Do you really want to say that only survival is necessary for achieving success as an investor or as a human being? Don’t you think there is more to it?
Me: That’s an interesting observation, Kartik. Survival is indeed the biggest requisite for any investor or for any human being, for that matter. But is survival really enough? Never gave it a serious thought. Maybe, to boost myself in times of adversity I focus on the one thing and that is survival. And I still feel that maybe that’s right for that moment. But I think you have brought out an important point. Let me think a little more about this.
Kartik: Yes, Ankit! That’s precisely what I meant. I would have loved to read something more on the thriving part in your post even though I enjoyed the part of surviving. Read More