Guidebook for simple Investment Part I


Why Investors Don’t Get It Right Most Of The Times

  • Data, discounted cashflow, and EBITDA, have failed the analysis of investment and business since 2008. 
  •  Early stage investment based upon future projections, multiple rounds of fundraising at higher valuation, fancy numbers and complicated figures have all failed the test of time especially in the last 10 years. 
  • Multiple rounds of capital were thrown in as investments into business where no meaningful growth and revenue was visible. 
  • Too much money was chasing the same stories in the hope that they would turn out to be the next Google, Facebook, or Instagram…
  • Investors were rather gambling to identify the next Mark Zuckerberg or Larry Page…
  • Many founders simply imitate an idea hoping that they are holding the “Next Big Thing” after a Google or a Facebook. These entrepreneurs have failed themselves and their Investors.
  • Big money was spent to increase the customer database. But the money spent per customer acquisition was seldom worth the returns earned. ROCE (Return on Capital Employed) was neglected formula for years and Investors have suffered because of this ignorance.
  • Many Investors have funded businesses to acquire customers aggressively and have demanded more value for the same customer in multiple funding rounds. Owners have forgotten to leverage product to gain customers. A successful product helps to find true price value of each customer in the long run. It’s the success of the product which is more valuable than the value of customer in initial phase of the business.
  • ROA and ROE compounded with ROCE is fail proof, fool-proof and must be widely used to measure the business.
  • The key is in the quality of the business operation measured by Capital allocation, Management Ability, Corporate, Disruption, and Product Performance. All these are core competencies and extremely difficult to imitate.
  • Higher valuation boosts Investor wealth and helps increase confidence for future rounds of funding. In most cases, the investment value is in the mind which rules rather the true value of the business.
  • In a Bullish scenario, performance and competition are the name of the investment game. Investors have bet on multiple vehicles and called it a diversified portfolio. In reality, it was a gamble to spread the risks and hope that at least one or two turn out to be the multi-bagger.
  • Large Investors have typically only imitated contemporaries. Why not, when low Interest rate fund is available at disposal?  Historically, it is a proven fact that low Interest rates lead to higher prices in risk assets and fuel competition for ownership at multiple levels, further inflating prices. 
  • Asset allocation becomes key with potentially negative interest rates in the US, slowing of global trade and thus reduced supply, increasing the risk of surprise inflation markedly. 

To be Continued….

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