{"id":1060,"date":"2021-01-27T20:21:00","date_gmt":"2021-01-27T20:21:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1060"},"modified":"2021-01-27T20:21:00","modified_gmt":"2021-01-27T20:21:00","slug":"business-growth-and-value-the-holographic-universe","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1060","title":{"rendered":"Business, growth and Value-The Holographic universe"},"content":{"rendered":"

Dear All, this study report is part of Monthly Newsletter of this Blog. I am sharing some samples from the report.
\nOne article I have already shared last month at this Blog. Anybody who is
\ninterested in reading the full report may please send an email at the ID of
\nthis blog: <\/span>oscillationss@yahoo.in<\/u><\/b><\/p>\n

\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
\n

CONTENTS<\/span><\/b><\/p>\n<\/td>\n<\/tr>\n

\n

Description<\/span><\/b><\/p>\n<\/td>\n

\n

Page
\n no.<\/span><\/b><\/p>\n<\/td>\n<\/tr>\n

\n

A Summary of Stock Valuation under
\n traditional value investing<\/span><\/span><\/p>\n<\/td>\n

\n

1-2<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Valuation: Intrinsic or Subjective<\/span><\/p>\n<\/td>\n

\n

3-6<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Business, Growth and Value-The
\n Holographic universe<\/span><\/p>\n<\/td>\n

\n

7-16<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Three levels in Business analysis<\/i><\/p>\n<\/td>\n

\n

12-16<\/span><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

Stock Ideas:<\/span><\/u><\/b><\/p>\n<\/td>\n

\n

<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Tata Coffee Ltd (CMP 110, TIER 1)<\/span><\/p>\n<\/td>\n

\n

17-27<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

TTK Healthcare Ltd ( CMP
\n 562 TIER 3)<\/span><\/p>\n<\/td>\n

\n

28-33<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

D-Link India Ltd (
\n CMP 110 TIER 3)<\/span><\/p>\n<\/td>\n

\n

34-35 <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Redington India ( CMP 135 TIER 1)<\/span><\/p>\n<\/td>\n

\n

36-39 <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

UTI AMC (CMP 550
\n TIER 2)<\/span><\/p>\n<\/td>\n

\n

40-43<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Mahindra EPC (CMP 150 TIER 3)<\/span><\/p>\n<\/td>\n

\n

44-45<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\n

Sample:<\/u><\/b><\/p>\n

\n

A Summary of Stock
\nValuation under traditional value investing<\/span><\/u><\/b><\/p>\n

Traditional value investing tries
\nto calculate the intrinsic value of a stock\/business. To calculate the same, it
\nmainly undertake two approaches- first one is fundamental valuation where
\nvaluation is done purely on the basis of direct cash flows generated by the
\nbusiness and second approach is relative valuation where valuation is estimated
\nwith reference to valuation and fundamentals of peer companies. First approach
\nmainly uses Discounted cash flows (DCF)<\/u><\/b> and second one uses
\nmethods such as PE ratio or EBITDA times ratio<\/u><\/b> etc.<\/p>\n

Benjamin Graham who is regarded
\nas father of Value investing used a formula in his famous book \u201cSecurity
\nAnalysis\u201d. This formula is widely used for calculating intrinsic value of a
\nstock.<\/p>\n

Let me first come to DCF- in
\nDCF a security or a business is valued based on the present value of its expected
\nfuture cash flows. <\/b>Present value of future cash flows<\/u><\/b> is
\ncalculated by using an appropriate discount rate<\/u><\/b>. Appropriate
\ndiscount rate is cost of financing or opportunity cost<\/b> of any other alternative
\ninvestment options available to the investor<\/b>. I have seen DCF being
\nadored by many as being superior to any other valuation methods. But I think
\nthis at the most is a good point of reference because I find this one a very
\nconfused attempt to find \u201cintrinsic value\u201d. First indicator of this confusion
\nis \u2013 taking opportunity cost of the Investor<\/b> (not business) as discount
\nrate for calculating the present value of future cash flows. <\/span>DCF proposes to calculate the intrinsic value
\nof the stock\/business but then instead of taking the cost of capital of
\nbusiness it uses the cost of capital of the potential<\/b> Investor <\/b>which
\nis not at all related to the expected future cash flows of the business. It
\nfails to understand that just as future cash flows are related to
\nbusiness\/stock similarly cost of capital is also directly related to the
\nbusiness\/stock not to a third party investor. Cost of capital is a feature of
\nbusiness just like future cash flows.<\/p>\n

Similar issues are with the
\nestimation of future cash flows. Actually DCF concept is taken from the Bond
\nvaluation. Long time back, it was established that value of a bond is a
\nfunction of its future cash flows discounted with a rate determined by the riskiness
\nof the bond issuer (not the bond investor). But bonds are different from
\nstocks\/business and problems faced while valuing bonds are different from the
\nproblems related to business. Like, cash flows are CERTAIN<\/b> in the case
\nof bonds (we know the expected cash flows well in advance) but UNCERTAINTY<\/b>
\nis related to credit risk of the issuer. And this credit risk of the issuer
\nimpacts the discount rate (expected return keeping in view the credit riskiness
\nof the issuer). So as we can see, in case of bonds the life span and expected
\ncash flows are certain and known well in advance. The uncertainty related to
\ncredit worthiness is responsible for increase or decrease in the discount rate
\nor expected returns.<\/p>\n

However in the case of
\nstocks\/business UNCERTAINTY is related to future cash flows and to life span.
\nCash flows are highly uncertain but DCF method does not answer as to why they
\nare uncertain. Whether their uncertainty is random? Without giving any answer, DCF
\njust provides a solution (quite random) in the form of discount rate. But in
\ncase of bonds, the uncertainty of payment is not random but related to credit
\nrisk of the issuer and hence this risk of payment increases the expected
\ninterest rate. But uncertainty of business cash flows is more random and different
\nhence the solution can\u2019t be similar to bonds (Impact on discount rate). I think
\nsome other approaches like probabilistic distribution of cash flows (as the
\nproblem may be statistical) are required. (I will be taking this issue in the
\ncoming editions and will try to provide a solution). <\/p>\n

Business,
\ngrowth and Value-The Holographic universe<\/span><\/u><\/b><\/p>\n

\n

<\/a><\/div>\n

Once I was sitting with some of
\nmy friends. One fellow, who was a friend of one of my friend, was discussing
\nsomething about aim of life. He was some sort of religious preacher and claimed
\nto put people on right path. One friend asked him about the aim of life as my
\nfriend was really getting eager to understand something of this life process
\nand he was greatly impressed by that fellow. The preacher fellow told them that
\nthe aim of life is to help and serve the poor needy people; people who are in
\ngrief, saddened by the troubles of life, no food no shelter. He told that this
\nis the principle message of his religion and he made a strong emotional pitch
\nabout helping the poor people and many of my friends visualized themselves
\nhelping poor people and obviously they felt great.<\/p>\n

\n

But I asked him that his
\nperceived purpose of life (to help the poor and sad) would make things very
\ncomplex for the Almighty because in order to fulfill your (many more like him)
\npurpose of life you would always need poor and miserable people so in a way you
\nare praying for the people to be poor and saddened. For them to fulfill the
\npurpose of their lives, they would always require poverty, pain and grief. But
\nempathy and compassion are not the purpose but they are the manifestation of an
\nenlightened person. Just like a Brave fellow saving the modesty of a girl; his
\nbravery is not his purpose of life but it is the manifestation of fearlessness
\nof his being which is one of the signs of an enlightened person. So a
\nBrave\/fearless person does not want girls to be molested in order to fulfill
\nthe purpose of his life\u2026his bravery is just a manifestation of his being in
\ntime and space. I told the preacher fellow that he is just making a political
\nstatement but luckily enlightenment is very personal and individual and there
\nis no such thing as collective enlightenment.<\/p>\n

Inefficiencies of others can\u2019t
\nmake me an efficient person\u2026I can\u2019t strive for the supreme by following the
\nimperfection. Life principles are not made upon inefficient acts of others.
\nPath to the supreme (value) is not directed by mistakes of others. Ignorant
\nexplorers can leave diamonds on road taking them as stones\/glass but wise men
\ndo not follow these ignorant explorers in the hope that they will throw away
\nmore such diamonds because they know that by drawing a MAP to follow these
\nignorant fellows will only result in them losing the path\/direction where vast
\nquantum of valuable diamonds are trapped under earth. So they draw a MAP for
\nplaces where there are Kimberlitic rocks (for diamonds)\u2026their hunt for the
\nVALUE is not dictated by the mistakes of foolish explorers but devising a plan
\nfor hunting the valuable gems.<\/p>\n

Sometimes I feel, Value investing
\nin essence tries to follow the ignorant explorers and in this quest of checking
\nstones thrown by them it leaves some of the most valuable diamonds because it
\nhas not drawn a plan to hunt for these precious diamonds. It does need to
\nunderstand that the value is not created by the mistakes of ignorant fellows
\nbut the wisdom, strategy and efficient decision making of the businessmen. So
\nvalue investing is about finding the Kimberlite rocks- a business with vast
\nscope of scale and a businessman with wisdom and vision for creating value. A
\ntrue value investor looks for the kimberlite rock where diamond is not shining
\non the surface but it is hidden inside and rough. He knows that maximum value
\nis created by finding these rough diamonds because a large crowd is following
\nand looking for the final cut diamonds on the roadside which are far and few.<\/p>\n

In its present avatar, Value
\ninvesting finds stocks like ITC, ICICI bank, HCL, Dabur, Godrej Consumer or
\nTitan in 2014-15 and these stocks have also given good returns after this
\nperiod (Hindalco is a value buy for the last 15 years and ITC for the last 10
\nyears). But this Value Investing misses stocks like Tata Elxsi (40 bagger),
\nAvanti feeds (200 bagger), Borosil renewables (30 bagger), Biocon (15 bagger),
\nKRBL (40 bagger), Cera (40 bagger), Garware technical (50 bagger), Info edge
\n(15 bagger) and many more. I remember when I was buying Borosil Re (earlier Gujarat
\nBorosil) in 2015 there was skepticism about its business plan- about the
\nchinese import threats or no demand for solar power. But I was of the opinion
\nthat Indian solar story couldn\u2019t happen on imports; it has to be local and
\nsolar glass is going to have regional markets (Full study of Borosil Re is at
\nmy blog). So I started buying from 10 (adjusted for Borosil consumer stocks
\nafter recent merger\/demerger) and made last entry this June at 35. I sent another
\nbuy call for Borosil Re at 40 in the Blog post related to Value investing in
\nJuly-2020. And it just blasted after that rising to 300 in no time.<\/p>\n

In 2015, Borosil Re should have
\nbeen discarded by Value investing because it had nothing to prove its worth
\nagainst the stringent benchmarks of value investing formula. Same was the case
\nwith Tata Elxsi or Garware or Biocon. But maximum value is created by these
\nstocks not by the generic value investing stocks. The reason is- these no
\nmetrics stocks are just like Kimberlite rock (raw diamond) which does not shine
\nin the sunlight. Only a person with experience of ages and having an eye for
\ndetails can recognize the hidden diamond in the giant rocks. So in its current
\nAvatar value investing finds few discarded diamonds but fails to recognize the
\nlarge number of rough diamonds. These rough diamonds stocks\/businesses create
\nvalue just like the real value is created- sheer hard work, wisdom, innovation,
\nstrategy, risk and tough decision making. Value investing thrives on the
\nirrational choices\/decisions made by the incompetent market but what if market
\nis not irrational? What if market is not ignoring a great stock like TCS by
\nmaking it trade at a PE of 10- I fear Value Investing will lost in darkened
\ncorners of the city.<\/p>\n

Sample:<\/u><\/b><\/p>\n

Value analysis tries to divide
\nthe whole business into various parts and by evaluating and comparing some of
\nthese parts it tries to find a figure which can be used as a representative of
\nthe \u201centire\u201d business. So they grade certain parts- Price to book value,
\nDebt-equity ratio, ROE etc. and assign a figure which they take as a \u201cvalue of
\nthe business\u201d which it is not. And in its attempt to focus on the body it
\nmisses the soul which in fact is the essence of existence and growth. Business
\nconsciousness is the essence of the existence and growth of a business;
\nfinancial figures are just the physical manifestations. Physical manifestations
\nhappen in time and space but consciousness is the truth, the source which is
\nun-manifested and unobservable by analysis<\/b>. Some phenomenon can\u2019t be
\ncomprehended by analysis<\/b> or by breaking them into their finer particles.
\nOur life and existence is one of them and comprehending business growth is
\nanother one.<\/p>\n

Sample:<\/b><\/u><\/p>\n

Value investing appears more like classical
\nphysics which tries to define the growth phenomenon by capturing the \u201cmolecular
\nor Atom level motions\u201d. But just like cosmos, business consciousness follows
\nHolographic laws and so business growth can beat the barrier of speed of light
\n(when Financial valuation (Value investing) tries to evaluate Growth motion by
\ncapturing the financial and other external parts). Growth is a sub-atomic
\nphenomenon and the same can break all the physical boundaries. Business
\nconsciousness operates at sub-atomic level (through strategy, timing and risk)
\nand is multi-dimensional. It is multi-dimensional because it is
\nimpacted\/directed by Industry level, economy level and most importantly firm
\nlevel (Business strategy) actions. Financial and mathematical tools are one
\ndimensional so they are unable to capture the sub-atomic level growth motion of
\na business operating under a superior business consciousness. A superior
\nbusiness consciousness is able to outpacing competitors when Industry and
\neconomy is doing good and it withstands tough times better so it is able to
\ncapture much higher market share beating the industry level growth and that\u2019s
\nwhy growth is Multi-dimensional while financial data is one dimensional. Value
\ninvesting tries to cut the business into various parts to evaluate the same but
\nit fails to comprehend the source of all parts of business- Business
\nconsciousness.<\/span><\/p>\n

Sample:<\/u><\/b><\/p>\n

In my terminology there are three
\nlevels in the Value investing process.<\/p>\n

Level 1 (Entry level\/Evaluation
\nof Financial Data and Relative valuation):<\/u><\/b> This level is what our
\ntraditional value investing is all about- to capture, assess and evaluate the
\nfinancial data to arrive at meaningful interpretations, inferences and relative
\nvaluation. Here, the analyst primarily is capable of finding the businesses
\navailable at relatively cheaper valuation, margin of safety where firms are
\ntrading at or below the market value of its assets (land and other assets),
\ninvestments and cash. His perceived valuation gap is primarily due to these
\nhistorical material aspects (not futuristic qualitative aspects). This as we
\ncan see involves simplest calculations and evaluations\u2026level of insights and
\ndecision making involved is not very complex but very straight forward.<\/p>\n

Level 2 (
\nIntermediate\/Industry level Insights and forecasts):<\/u><\/b><\/p>\n

Level 3 (Advanced\/Company
\nmanagement decision assessment):<\/u><\/b><\/p>\n

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Dear All, this study report is part of Monthly Newsletter of this Blog. I am sharing some samples from the report. One article I have already shared last month at this Blog. Anybody who is interested in reading the full report may please send an email at the ID of this blog: oscillationss@yahoo.in CONTENTS Description Page no. A Summary of Stock Valuation under traditional value investing 1-2 Valuation: Intrinsic or Subjective 3-6 Business, Growth and Value-The Holographic universe 7-16 Three levels in Business analysis 12-16 Stock Ideas: Tata Coffee Ltd (CMP 110, TIER 1) 17-27 TTK Healthcare Ltd ( CMP…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1060","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1060","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1060"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1060\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1060"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1060"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1060"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}