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Guidebook for Simple Investments Part II

What Investors Must Do To Get it Right? 

1) There is a huge disconnect between markets and the economic reality. Global investors should look for opportunities to find a good investment relative to their currencyas there is a huge shortage of US dollars in the financial system and shortage is  likely to inflate further. 
2) The cost of money was cheap in the last 10 years mainly because of the Central Bankers QE window. Dollar denominated debt in emerging and developed economies has exploded in the last decade. This year has been different because of suspension of global trade and fall in demand. This is likely to persist  and has led to Investors risk appetite  reduction forcing them to look for safety and recession proof business. 
3) Investors must use an efficient way that meets their asset scale and channel  them into long-term planning as well as asset allocation. 
4) Investors should evaluate to ensure the cost of services provided by companies are not way too high in the next 5 years as reduction in variable and fixed cost will be in play immediately before pricing improves. Investors will have to sharpen their focus on operating fundamentals
5)  Investors will have to ensure the borrowing costs and tenure of the money at disposal are proportionate to the investment time horizon as most of the problems erupt not because of borrowing costs but from the redemption pressure during extraordinary events/circumstances.
6) Investors with a really long term horizon should also look at assets which may not produce results immediately but are yet viable as well as sustainable  in the longer duration. 
7) The geography of the investment should be the priority as US , Europe and Asia Pacific offer varied opportunities to Investors. 
8) Internet and Tech related assets are not cheap in any geographyInvestors need special skills and capabilities to figure out the winners herein from 2020 onwards
9)  Geopolitics, Climate and Fiscal Policy are going to play important roles in the next 2 - 3 years . Investors still don’t have many options beyond Tech and software business. Investors love the stable recurring revenue streams and the ability to rapidly scale businesses to serve a wide range of customers in multiple industries. At the same time, the fixed costs for SaaS companies are  lower than for traditional software firms.
10) Investors should align with top performers and not risk with potential losers. Winners will stand out doing things differently and have the ability to scale up the value and pricing. Losers may compromise too much in value and eventually will not be able to gain in pricing. 

Guidebook for simple Investment Part I

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….

DUE DILIGENCE 2020

PRIVATE EQUITY DUE DILIGENCE  - New Era 2020


  • The era of EV/EBITDA has long been favoured instead of revenue growth or margins . The macros are affected and hence PE’s will now be lower. This makes the current environment even more challenging for VC’s , as they have to search for potential winners in a worsening economy.
  • Due Diligence which was a forgotten art in the last 10 years or so will now come back in favour. Remember it’s the hard work that pays and not cheap imitations. It takes blood  , sweat and tears to find the real diamonds. The miner always holds the key.
  • Technology itself will now be questioned for delivery. VC’s will realise that true value behind business is not just another technology but a valuable Enterprise Software product.
  • Cyber security and Payment modulation platforms  are in demand. 
  • Advanced due diligence with data and analytics will be key to identify new winners. Hence companies will need expert counsel to help them sell well to VC’s. 
  • Disrupters will be favoured. Sources of disruption will be analysed.
  • Companies will be forced to evaluate the ratio of profits -  Is it the product or the customers that are  bringing in the bulk of profits?
  • It’s impossible to chase both growth and price. Growth will win the battle and must be prioritized. Growth can be monetised in a great manner in the long term for pricing, if short term greed is overlooked. 
  • Too much competition between Investors in the last 10 years led to unreasonable price valuations. The same will now be reversed from 2020, as Due Diligence will take the driver seat and a more realistic approach will be worked in paper. 
  • Investors are not immortals to identify the next big disrupters. Sound due diligence will help to understand the value of the product in the foreseeable future. Owners are good at doing the business, but lack art to sell themselves to VC’s.
  • Companies have to come to the street and study the necessity of the bottom of the pyramid . There is no point in competing with the established businesses.  Always build a business around the bottom of the pyramid. 
  • Investors know they are not lucky with all investments. Hence a deep analysis of Due Diligence will help the evaluate the risks and disruptions.
  • Same goes for companies who don’t understand the needs of the investors and lack expertise to project the future of their own business. An expert analytical Due Diligence will help to create a biography of the business and present it to the Investors. It also means that the medium between the Investors and Companies are far more important, as they have the expertise to do ground level reality research and capture the facts in the Due Diligence report.
  • There is competition between companies to attract capital. Dearth of experts will undermine the case of raising funds. Consultants that specialize in performing proper Due diligence should be considered by owners to build and  present a case for investment in a more formal way to Investors.                                                                                                                                                Due Diligence report  is more than numbers and graphs. It is a  realistic and practical look into the future of the Company and a roadmap to bring it to the market.


We at CAPITAISE take pride in conducting Due Diligence with our wealth of research, identify the hot spots, advise the owners, dig deep to find the disruption of the business and help companies come to the street to raise capital.


START-UPS 2020: THE FUTURE IS NOT WHAT IT USED TO BE:

START-UPS 2020: THE FUTURE IS NOT WHAT IT USED TO BE:

1. Companies that have established business models, proven revenue, enviable customer database, listed and available at better valuations will be considered.

2. The ad revenue will be hampered for some quarters across all geographies. But the huge customer database will balance the equation for fresh contract rates and not impact entirely the revenues.

3. Companies with high cash reserves will have the muscle to change the business model.

4. Discretionary businesses will have to face a downward valuation ranging from 20 % or more based upon their model and necessity.

5. Business models thriving on cashback and bonus points for redemption will be more impacted on its value and face challenges ahead as traditional early-round VCs will not be generous for a considerable time going forward.

6. Multiple rounds of funding participated by the same set of investors will not be a recurring occurrence.

7. New set of investors who participate in different rounds of funding will help to get fair value in each round.

8. New valuation methods will also be used instead of traditional ones as the regular methods have failed during an event of crisis.

9. Some start-ups will even shut down due to lack of availability of new funding.

10. PE Funds usually invest in start-ups where the cash burn rate will gradually reduce with time, the earlier the better. But in these uncertain times, it is hard to estimate the period of cash burn left in the life of the start-up. Remember, your customer acquisition strategy will need to be reworked since the billing rates, contract life, and escalation clause will all be on the lower side.

11. Time gap between each funding round will increase than before as the maturity period increases naturally during recession; Plus, the cash burn run rate will have to be in control and customers acquisition T&C will be much tougher.

12. Business models will be different between June to Dec 2020 as time decay will affect the business environment on its own.

13. A prudent founder will not regret taking a fast and decisive decision for the rest of 2020.

14. Expenses go up during a crisis, as you have fixed and variable expenses against a dip in cash flow. So, the ratio becomes skewed.

15. Series A will be difficult for the next 8 months.

16. Series B, C, D will be much more difficult as liquidity crunch will force VC’s go back to the drawing board to have a more realistic and achievable valuation for the targets.

17. Start-ups are inherently risky, and statistically most do not break even. The few that do succeed must “cover” for the rest in order for the entire portfolio to provide sufficient returns.

18. VCs commonly hold 5-10 companies in their portfolio. For these reasons, the targeted RoI for early-stage companies are quite high, often reaching 10x.

19. Since the target RoI will now most likely not be achieved, VC’s will have to cover for some portfolio investments that will be devalued or shut down because of COVID-19.

20. VCs will now look to top up good portfolio companies at a discounted price or will target some companies where values have gone downward, and they had not participated in funding round earlier.

21. Any fresh target company will be difficult to pass the litmus test unless the business model is viable for another 10 years or so… remember the VCs will have a challenging 2020 to 2022.

22. Post COVID-19, restrictions and sanctions will make costs go up for another 2 years of the least.

23. Contactless businesses which rely more on AI, automation, online, ioT will be in the radar of VCs and such businesses will slowly go up the value chain.

24. Cost of money will go up and hence pressure will be upon founders to reduce costs and shore up revenue simultaneously. Remember most of the founders have started out in the last decade only and hardly have any idea as to how to operate in a bear market with prolonged recession without much cash at disposable.

25. The 2008 crisis only affected banking and to some extent large hedge funds. Business outside finance and many other sectors in fact started doing well. But 2020 is the stuttering of the economy and the reset button pushed by the authorities that has caught many businesses flat footed or ill prepared for such shocks. Forget business owners, even the VCs were not prepared at all.

26. Start-ups will have to be careful to deploy the capital properly. Venture capital firms will slash investments in money-losing start-ups. This means all the start-ups with negative cash flows and high burn rates could undergo a severe cash crunch in the near term.

27. Without proper funding, there could be a surge of companies that could start failing driving up non-performing loans for banks, and lead to the next big financial crisis

28.   wealth is best compounded by avoiding  large losses. Significant losses are best  avoided by not paying too much.  Smart investors and advisors will now be much more active in choosing the right mix of companies at the right price

29. value-based strategies will hold up much better than growth strategies.






The Birth of a Nation

The Birth of a Nation ( Part II)

2020 has awakened the giant  “ Globalisation” and has sent many countries into think tank mode. 

Does “ Globalisation “ really serve a purpose at the cost of local country growth ?

China adopted a strategy to position itself as the largest trading nation in the world , a place it officially achieved in 2009 and has never looked back since the last one decade.

So what should we learn and improvise “ the outside outlook strategy”  

“ Outside outlook strategy”  actually begins from Inside. 

The country has to find ways to increase trade amongst its own vast resources of people i.e people in order by looking after themselves inadvertently look after the others in the society by way of a chain reaction. When the system is infiltrated by outside sources ( imports) then the chain becomes a victim of outside greedy sources which will invariably ensure the wealth distribution is skewed. 

Technology should play a role to improve the production output and rather not displace the producers of the output. 

Superior human  skills combined with latest technology will be a far better successful model of productivity rather than replacing human skills with newer technology , these can be disastrous in the long run of creating a skewed wealth model. 

So the technology owners become wealthy at the expense of the people who have been replaced and ousted. 

Any country which has a relatively lower cost of production will always succeed in International trade even if they don’t have absolute advantage in production of that goods. 

Lower working class are living in paltry conditions in many of the counties because the system of labour wages is faulty across the board. Most get paid for long duration of hours discounting the per capita output and in some areas of production they get wages based on per capita output discounting the long working hours. 

This skewed system is deliberately favouring the upper class of owners , who don’t want to combine the working hours and per capita output to arrive at a fair wage. 

Unless the lower working class are not paid taking into consideration total real cost of production i.e Time plus Labour , the compensation package is hugely irrational and creates a disoriented wealth. 

Globalization is about the interconnectedness of people and businesses across the world that eventually leads to global cultural, political and economic integration , but the very basic definition has been killed because of policies favouring a wrong method of increasing GDP. 

The lure of easy customs duty to be imposed and collected at source is good income for the local Government , but creditors have put more debt in hands of the consumer and persuade them to avail these products without realising that the real income needed for affording such goods may be likely absent , so in the long run it’s the foreign manufacturers , authorities , creditors who benefit without realising if there was ever a genuine demand for the goods , instead the local manufacturing growth is sacrificed in the long run. What the authorities fail to understand is that the demand has been created for these goods at the cost of huge debt burden on the working class. On the other hand unwanted debt levels have been accommodated by the creditors. 

This economic crisis is a grave threat to individuals, as well as to the stability and future of the country. 

A flood of cheap foreign manufactured imports sold cheaper than comparable local goods during the height of globalisation can be now dislodged to favour local manufacturing. 

Globalisation should have been cultures in succession hand to each other that  flame the torch of human advancement. 

We should learn from the History of the past and shape the future.

It is the lack of faith, the fear of the future, which makes countries turn toward the past. 

Modern” democracies are anything but modern.
To a world desperately in need of change, their forceful stand for status quo gives no other alternative than the acceptance of what they have tried to destroy.

The sincere and bold effort to disconnect from the past mistakes and create a new external approach can only be achieved from internal growth. 


The Birth of a Nation

The Birth of a Nation ( Part I)

The world has seen tremendous changes since 1970  to 2020. That’s a full 50 year cycle which has seen the Gold standard disconnected to  USD , Interest rates being raised by the FED , crash of 1987 , dot com bubble of 1990 , emerging market crisis 1997 , 2008 financial crisis , 2020 Covid 19 crisis and lots more. 

The entire 50 year cycle has witnessed more pain to the local population of the country when the  only focus has been to raise GDP statistics. 

Real economy is all about upliftment of the people and allowing the entire population to grow rather than just focus on increasing GDP to avail more debts.

But remember everything is good till it’s good… it is beyond human to think what can happen if you keep devising plans without realising the consequences.

Every Government ends up being puppets of the craze to increase GDP by way of taking more debts , allowing exploitation of their natural resources by foreign agencies , undermining its own assets, falling prey to cheap external loans , and other standard non variable efforts by simply and blindly copying some other large nations. 

Every country has to build cities , ports , airports , bridges , highways , etc in order to increase consumption which in turn will lead to more consumption i.e increase in consumption of electricity , automobiles , commodities viz Oil , aluminium, copper , steel , etc.

In a second thought all this will help to improve GDP statistics and the countries will have to issue bonds to take care of these expenses. 

Financial institutions, Banks are mandatorily made to buy these bonds. 

Let’s assume all the consumption pauses due to some major events like a covid 19 or some country unable to honour its debt or some major bank engaged in some frauds and unable to repay its customers. All this will lead to fall in consumption and followed by fall in GDP numbers. 

Once this happens, the rating agencies will rush to revise  the outlook of the bonds and its viability. 

So the price of the bonds starts to fall and yields starts going up , so where does all this artificial colouring of your GDP leads to … actually it leads to nothing and the country is saddled with more debts ,potential defaults , falling currency, and more pain in the real economy , when it’s left to look after a large section of ignored rural lower class and working middle class , which faces the brunt of rising inflation during the country’s quest for higher GDP and are victims of the subsequent crisis when consumption reduces and leads to loss of jobs , less savings , more debts , inability to service fixed interest borrowings , etc. 

Countries have all gone out to invite FDI , FPI to increase its foreign reserves, build better infrastructure, increase consumption, increase inflation, increase GDP , and all these only to avail more debts at better interest rates so as to compete with other countries. 

No single country can boast about focusing to improve its real wealth of the local population i.e  to improve the lives of its people by focusing on developing agriculture through technology , taking steps to reduce the deficit in monsoon , and improve its rural economy. All these will lead to a permanent rise in consumption which will last for years to come. 

Large emerging economies like China and India have more than 60 % of its people living in rural areas.

Just focus on improving this side of your economy and the real permanent benefits will be visible. Give this majority of the 60 % population means to increase its earnings and improve savings and then put genuine consumption into their hands , and this will lead to raise in sustainable growth and permanent benefits with long lasting effects. 

Once you have taken care of the majority of your people , countries will no longer need to roll out red carpet welcome to FDI and FPI. These are guests waiting to participate in your growth story. 

But unfortunately FDI and FPI persuades the Governments to improve urban infrastructure so as GDP can improve and the country can avail cheaper debt from superior foreign agencies and this influencing FDI and FPI can juice the country at the expense of its real economy. 

The consumption of the rural economy can prosper and have better long term effects as better agriculture , rural infrastructure growth will lead to an increase in earnings which itself will feed the consumption of this larger population and national debts can be contained in a larger way. 

The story will continue in Part II. 



Stock Opportunities during Crisis

massive opportunities in the stock market will arise because of a major shift in the post-coronavirus economy.

I do really think this is an opportunity to take advantage of the volatility, and take advantage of the market,

I don’t mean to put all your capital at once but I do think layering it in right now is the way to approach.”

This is a great buying opportunity since 2008 -2009 , remember historic opportunities were mainly event-driven,

Legendary investor Sir John Templeton famously said "buy when there's maximum pessimism," which is how some view the experts view the current market amid a wave of selling.

The covid 19 is taking a terrible toll on the global economy, but for stock investors, this crisis is an opportunity to increase the long-term return of your portfolio.

We have to position our portfolio not as virus proof  but as recession proof ; and since this virus will cause a recession. 

Maintaining a long-term time horizon is paramount: Every investment decision we make is from the perspective not of tomorrow but three- to five years from now.

Position sizing:. We are in the early innings of a recession. But since we don’t know how long this will last, we should  diversify across time by employing a micro-focused investment strategy.

Keep in mind that risk for us is not volatility but permanent loss of capital. 

Let’s see a few examples of the affected companies in this crisis ….

Global technology giant Apple has been hit hard from multiple angles thanks to the covid 19 outbreak.

At first, when it was isolated to China, Apple had to close all of its corporate offices, stores, and contact centers in China. Many of the factories from which Apple sources its hardware products were shut down, too. That created huge demand and supply chain disruptions for Apple.

Now, though, the virus has gone global — and the shutdowns that were isolated to China, are happening everywhere. Across the globe, Apple has closed its stores, and its supply chain is being disrupted.

These are big issues for Apple. But they are also temporary issues.

Just look at China. Spread of the virus has died down over there. Apple has re-opened all of its stores. Most of its supply chain has come back online, too.

The rest of the world will follow suit within the next few months. By summer, most countries across the globe will have fully contained coronavirus. Apple will re-open stores. Factories will ramp up production. And the Apple growth narrative will start to fire on all cylinders again, just in time for its big 5G iPhone launch in the back-half of the year.

Cloud technology giant Microsoft has tumbled over the past few weeks on concerns that the rapidly spreading outbreak of coronavirus will kill demand for the company’s cloud computing products.

But, will that actually happen?

Yes , But such pain will be temporary. And, once the virus passes through, companies will continue on their enterprise cloud migrations, and demand for Microsoft’s suite of cloud computing tools will re-accelerate.

Microsoft’s number may get slightly damaged in the first quarter. There will probably also be some damage in the second quarter. But, in the third and fourth quarters, the numbers will be great 👍 (as they usually are).

From this perspective, any and all near term weakness in Microsoft stock is a golden buying opportunity into a company which, thanks to cloud computing tailwinds, is set to be a winner for the next several years.

Remember stock market works on opportunities which are spotted in difficult times , sometimes it takes months and years for the opportunity to be found. 
The greatest returns and outperformance of a portfolio happens if only the stocks are purchased at the right prices. 
So the right price may not be the bottom , but it will be your ticket to long term profits.
History has witnessed that large Fund houses and Investors don’t outperform all the time. But only in subsequent years after a mega event which allows for great buying opportunities.